In our last article, Fed Lawyer Alvarez: “The Federal Reserve Does NOT Own Any Gold at All”, we explained why the widespread belief that the Fed owns any gold is false and that the Fed’s reported holdings of gold certificates are actually a misnomer and really represent claims to cash, not gold, from the Treasury. The story does not end here, however.
Summary
As already noted in Part 1, the Fed was forced to give up their gold holdings at a rate of $20.67/oz in 1934 in exchange for gold certificates worth ~$3.617 billion. After this transaction, the dollar was devalued by revaluing the gold price to $35 and the Fed, along with all other Americans whose gold was forced away from them, absorbed a capital loss in real terms as the Treasury gained. The next gold revaluation in 1972 moved the statutory gold price from $35/oz to $38/oz and in 1973 the legal price was moved up once more to $42.22/oz where it still stands today.
Monetizing the Gold
Every time the Treasury was able to revalue their gold, they were left with an increased paper profit on their gold holdings. The Treasury however, in a desire to realize the value of the gold without selling it, used their gold as collateral against gold certificate issuance to the Fed in exchange for fresh cash for the Treasury to spend. The Treasury is able to print as many gold certificates as they choose, under one restriction from the Gold Reserve Act [1]: the amount of gold certificates outstanding shall at no time exceed the value of gold held by the Treasury, priced at the statutory rate. This meant any increase in the value of the Treasury’s gold could be matched by printing gold certificates and those certificates could be used to acquire new Federal Reserve Notes (dollars) from the Fed.
Gold Production Surplus
Despite the fact the US government under Presidential order from FDR had outlawed the ownership of gold in 1933, gold production and mining was still a legal and productive industry. See the historical gold output production in the US:
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During the abolishment of gold ownership between 1933 and 1974, when Gerald Ford repealed FDR’s order[2], gold ownership was exempted for some industry use, mainly dentistry and jewelery making. Whatever gold supply from production was left over after the minimal industry demands would get purchased by the US Treasury via chequing against their Federal Reserve account. This led to the Treasury accumulating large amounts of gold while also leaking out large amounts of dollars. Since the US Treasury’s gold reserve was growing, and their dollar account dwindling, they were then able and inclined to issue new gold certificates to the Fed to have their dollar accounts replenished.
Gold Inflows
In addition to gold production, gold inflows from foreign nations due to trade and capital movements also enriched the Treasury’s gold account with which they could then issue more gold certificates against. See the contributing factors to the net accumulation of gold which began after the passing of the Gold Reserve Act in 1934:
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Monetary Policy Run by the Treasury
From the passing of the Gold Reserve Act in 1934 up till the 70′s when the Fed’s gold certificate account stabilized, the Treasury was in effect the major influence in the direction of monetary policy, accounting for about half of the Fed’s total asset movements and the entire volatility of the gold certificate account. The Federal Reserve and their supposed pride in independence did not exist even remotely throughout this major period of Fed history[4]. Essentially anytime the Treasury wanted to expand the money supply they could have the Fed print new dollars against freshly printed gold certificates. The only thing restricting the Treasury was the quantity of gold they owned, which was the legislatively regulated base for the issuance of gold certificates. But the Treasury used their gold for almost everything they could within their allowable limit by monetizing nearly their entire gold stock in the process[5]. The only major exception to this was the gold the Fed transfered to the Treasury initially, following the seizure in 1934, and this gold accounted for the accumulation then of ~$3.617 billion worth of gold certificates by the Fed, instead of the usual transfers of Federal Reserve Notes to acquire certificates thereafter. This leaves about ~$3.617 billion of non-monetized gold certificates and 9.7 million ounces of non-monetized gold outstanding, when the initial gold seizure from the Fed and the US’ IMF account holdings are considered (possible changes to the US’ IMF gold account since the end of 1970 are not accounted for here).
http://goldnews.com/2011/06/10/the-fed-has-no-gold-part-2-a-deeper-look/
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