Gold Bars from NY Fed

The Money Supply: Gold Matters

Apr 20, 2013 • Demand, Supply, and Markets, Economic Debates, Economic History, International Trade and Finance, Money and Monetary Policy • 165 Views    No Comments

In its basement, the NY Fed has a vault. A very safe place for countries or central banks or international organizations to store their gold, a shared home also makes it easy for countries to transfer bars from their pile to someone else’s when they need to.

During a recent visit, when my class was told that one country kept just one gold bar there, we asked who owned it. Our guide said he could not tell. But he did divulge that the Fed had sand bags ready if Hurricane Sandy had created an emergency. Also during a crisis, closing the airtight doors, a person probably had enough oxygen for 72 hours.

The Fed’s website says that in 2012, its vault held approximately 530,000 gold bars that weighed 6700 tons. Soon, they might have less. Or maybe they do already.

During January, the Washington Post reported that Germany wants to take its 674 tons back home. (I am not sure if Germany is taking all that it stores there.) The reason seems to relate to eurozone monetary crises. Analysts hypothesized that they just will feel better with it closer to home. Germany would not say when its $36 billion or so would be on a plane, a train or in a truck. (Remember Oceans 11? Die hard With a Vengeance?)

Meanwhile, in a recent column, NY Times financial writer Floyd Norris returned us to the gold or fiat money debate. To some, gold is the standard because they believe gold has intrinsic value. To others, the definition of money–a unit of value, a medium of exchange, a store of value-is all that matters. Then, it is okay to have central bankers use discretion to control the money supply rather than using the supply of gold that backs it.

But still, many point out that gold is just a commodity whose price tends to fluctuate because of a change in demand during financial crises. For 1980/82 and the Great Recession that started during December 2007, the price of gold soared (See below).

And that returns us to the gold vault. Should countries be using that gold to back money and thereby limit its supply?

Gold Price from Bloomberg

Sources and Resources: For more about why Germany wants its gold back, this Washington Post article was good while this Floyd Norris NY Times column on gold and the Fed’s gold vault description ideally complement each other.

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