Should the US sell the gold in Fort Knox?

There has been some talk recently about whether the US should sell the gold it has in Fort Knox, as a way of offsetting the budget deficit.

There are reasons to suspect that the gold in Fort Knox may not be there. GATA has shown evidence of a very active program of the government leasing gold to so-called “bullion banks,” as a way of generating a return on an otherwise stagnant asset. However, in spite of that, let’s assume for the moment that the gold either is there, or can be readily recovered.

Governments and central banks have a history of holding gold, for good reasons. In World War II, a number of countries that the US government did business with would not accept dollars in payment, nor would the US accept their currencies. Many war supplies could only be purchased with gold; it was a major medium of exchange during a period of shortages and substantial uncertainty. In that sense, it is a strategic asset.

[[MORE]]Another reason central banks hold gold is in case of a currency collapse. If the dollar becomes worthless, having a large store of gold would allow a “reboot” of some kind.

In fact, I would like to suggest that the reasons central banks hold gold are the same reasons individuals should; not as an investment per se, but as a form of insurance.

This also suggests that selling the central bank’s gold would be a bad idea without other substantial changes happening first. If anything, I would argue for the reverse. Since we are clearly in the middle of a long-duration crisis, it would seem like the time to increase insurance, rather than eliminate it. However, the situation might change if the US were to adopt gold as currency again; not by backing the dollar with gold, but by repealing the legal tender laws, not taxing gains on the sale of gold, and allowing it to circulate on a by-weight basis as an alternative to the dollar. In that case, it’s possible that the resulting durable wealth of the people might be able to take the place of the central bank’s holdings – whereas if the gold is simply sold, the most likely buyer would be other central banks (as happened when central banks in Europe sold their gold).

In addition, the oft-repeated meme that the government “stole” the gold from citizens doesn’t paint the full picture. It’s true that FDR required people to turn in their gold. However, they were given paper money in exchange – money which could be spent in the same way as gold. It was the subsequent act of devaluing the dollar that was the real theft, as inflation is today.