Auditing the FED's Gold
by Gary North: Did
Romney and Bain Capital Profit at the Expense of Bain's Employees?
I have posted
a video of something I thought I would never see: all five of the
Republican candidates for the U.S. Senate verbally demanding an
audit of the Federal Reserve System. You
can see it here.
facing what no Federal Reserve chairman has ever faced: public awareness
of the Federal Reserve System. From late December 1913, when an
almost deserted Senate voted for the Federal Reserve Act, until
2008, when the recession confirmed Ron Paul's warning in late 2007,
there was almost no public awareness or even a vague understanding
of the Federal Reserve System. The genie is now out of the bottle,
where it had been corked since 1913. Ron Paul has uncorked it.
From the November
1910 secret meeting at Georgia's Jekyll Island until Ron Paul's
2007 candidacy for the Republican nomination for President, The
Federal Reserve had received a free ride from Congress. There had
never been much oversight. That's because FED regulation was an
oversight. (The same word is used to convey opposite meanings.)
The Texas Leftist-populist
Democrat Wright Patman had been a critic. He had been the chairman
of the House Banking Committee until 1975, a year before Paul arrived
in Congress. He was a Greenbacker: a believer in a zero-interest
economy that achieves this Utopian goal through the use of fiat
paper money. Patman was not able to generate much interest in the
inflict one major wound on the FED. He and California Congressman
Jerry Voorhis, another Greenbacker, in the early 1940s persuaded
Congress to pass a bill, which Roosevelt signed, that forbids the
Federal Reserve from keeping the interest payments from the government
bonds it has counterfeited fiat money to purchase. Today, the FED
must return to the Treasury all of this money beyond its operating
2011, the FED will pay back $77 billion.
audit of the FED, if it ever comes, must include an audit of the
gold every year. The auditors must see if the gold is in the two
vaults. The first vault, at Ft. Knox, is more famous. The more important
vault is located at 33 Liberty Street, New York City: the privately
owned Federal Reserve Bank of New York. This is the "Die Hard III"
must do two things. First, they must determine whether there is
the same amount of gold as is listed on the FED's books at the fake
price of $42.22 per ounce. Second, the auditors must follow the
paper trail of ownership. They must make sure that the gold in the
vaults is still legally in the possession of the FED.
There is a
possibility that the FED has transferred ownership of this gold,
through swaps, to European central banks, which have in turn leased
sold their gold to private buyers. It is not enough
to determine that the physical gold is in the two vaults. It is
also mandatory to determine whether the FED has indirectly sold
the government's gold, which it has held in trust for the government
to auditors: pursue this phrase in the FED's statements: "deep storage
gold." As to why, read this.]
VS. A FULL-SCALE GOVERNMENT AUDIT
Every FED chairman
has resisted any attempt by the Congress to mandate an independent
audit of the FED by the General Accountability Office of the U.S.
government. Bernanke was adamantly opposed in 2009. He of course
did not mention what I regard as the main reason for his opposition
to an audit: the missing gold. For all FED chairman, gold is a four-letter
word. He mentioned only monetary policy, as if Congress has no authority
over monetary policy, despite that ancient "barbarous relic," the
Congress has recently discussed proposals to expand the audit authority
of the Government Accountability Office (GAO) over the Federal Reserve.
As you know, the Federal Reserve is already subject to frequent
reviews by the GAO. The GAO has broad authority to audit our operations
This of course
was deceptive. First, the FED is audited by a rotating group of
private auditing firms, which are appointed by the Office of Inspector
General. This rotation system makes long-term accounting continuity
far more difficult to achieve. The FED forbids the auditing firm
to inspect all of the FED's operations. According to the Federal
Reserve Bank of New York,
at each Federal Reserve Bank also are subject to review by the Government
Accountability Office (GAO), the audit arm of the U.S. Congress.
However, GAO auditors are restricted by law from reviewing monetary
policy operations and transactions carried out by the Federal Reserve
on behalf of foreign central banks. This restriction was imposed
by Congress to assure the independence of the Federal Reserve from
influence." There is another term for "political influence." That
term is "the United States government."
The FED defends
this principle: "Monetary policy is far too important to be audited
by the government." After all, what claim to such authority does
the government have, other than the fact that it created the Federal
a full-scale audit would require Congress to abandon the limitation
on its own authority which the banking industry persuaded Congress
to impose on itself. This is why Bernanke opposes an audit. He added
this in 2009.
Congress recently granted the GAO new authority to conduct audits
of the credit facilities extended by the Federal Reserve to "single
and specific" companies under the authority provided by section
13(3) of the Federal Reserve Act, including the loan facilities
provided to, or created for, American International Group and Bear
Stearns. The GAO and the Special Inspector General have the right
to audit our TALF program, which uses funds from the Troubled Assets
As he was giving
this testimony, the FED was involved in a court dispute involving
a Freedom of Information Act request by Bloomberg News to find out
who got the TALF money. Bloomberg
News had initiated this lawsuit in November 2008, after the
FED had stonewalled on Bloomberg's its May FOIA request. It took
U.S. Supreme Court decision in 2011 to pry this information
out of the FED.
Congress, however, purposefully and for good reason
excluded from the scope of potential GAO reviews some highly sensitive
areas, notably monetary policy deliberations and operations, including
open market and discount window operations. In doing so, the Congress
carefully balanced the need for public accountability with the strong
public policy benefits that flow from maintaining an appropriate
degree of independence for the central bank in the making and execution
of monetary policy.
"balanced the need" is a code phrase for "abdicated Congressional
markets, in particular, likely would see a grant of review authority
in these areas to the GAO as a serious weakening of monetary policy
independence. Because GAO reviews may be initiated at the request
of members of Congress, reviews or the threat of reviews in these
areas could be seen as efforts to try to influence monetary policy
decisions. A perceived loss of monetary policy independence could
raise fears about future inflation, leading to higher long-term
interest rates and reduced economic and financial stability. We
will continue to work with the Congress to provide the information
it needs to oversee our activities effectively, yet in a way that
does not compromise monetary policy independence.
Or, as he might
have said, "Butt out, you twits." Guess what? The twits butted out.
about this at the time.
But now the
twits are facing signs of a political rebellion. Millions of voters
have figured out that the FED is a scam that is run for the benefit
of the largest commercial banks, including foreign central banks.
Ron Paul represents this view. A new generation of candidates for
Congress is finding that there is no broad constituency in the electorate
that comes to the defense of the FED. Most voters still don't have
any opinion, but among those who do, the opinion is negative.
The FED has
relied on secrecy and obscurity to protect it from criticism for
almost a century. That strategy worked until 2008. But Ron Paul
was like the little boy at the emperor's parade. "The emperor has
is Bernanke, a bland academic who surely could use a charisma implant.
is a major break from the past. William McChesney Martin lasted
for over 18 years, from Truman to Nixon. He was unassailable. Arthur
Burns followed. He smoked a pipe at Congress, and seemed so wise.
G. William Miller was a monetary neophyte, but he only lasted 18
months. Carter somehow persuaded him to resign to become Secretary
of the Treasury, where he could do no more damage. Then came Paul
Volcker, 6 feet 8 and a cigar smoker. He overpowered any critics.
Then came Greenspan, the seeming wizard, whose FedSpeak befuddled
Congress, and whose policy of inflate and inflate, obfuscate and
obfuscate, and warn about inflation worked just fine for 18 years.
He departed just in time.
Then came the
hapless Bernanke, George W. Bush's gift to the world in 2006. Obama
re-appointed him in 2009.He will serve until February 1, 2014. This
is good for FED-bashers. He will go down in history as the footnoting
scholar who was in charge when the tide of public opinion went from
"What's the FED?" to "audit the FED!"
If the FED
is fully audited, it is likely that the audit will reveal that the
gold is encumbered. Foreign central banks have leased their gold.
This is a phrase for "sold the gold," since the people who borrowed
it at 1% per annum then sold it for money and bought government
bonds paying 5% or more. They cannot sell these bonds at face value;
the bonds have fallen in value. They cannot afford to buy gold in
the open market to return the gold to the central banks. The price
is already far above what they sold it for.
banks dare not demand a return of this gold. The gold is still on
their books. The IOUs they received from the borrowers are counted
as being as good as gold. The voters do not know that the gold is
2004, an obscure committee with the International Monetary Fund
submitted a report on swaps and gold leasing. With respect to accounting
for gold leasing, the report admitted that there are no standards.
"The statistical implications of gold swaps and gold loans/ deposits
are complex and have not been fully worked through. Work is still
being undertaken by the Committee to address the implications."
What implications? One of them is the issue of double counting.
particular, gold may be double counted with either a gold swap or
gold loan/deposit if the party acquiring the gold were to on-sell
it outright, because both the original owner and the outright purchaser
would report ownership of the gold. In addition, there is the difficulty
of having monetary gold being used in these transactions for purposes
other than for reserve assets, and how (de)monetization would apply
if the gold is sold for industrial purposes. Moreover, there is
a proposal to treat (some) nonmonetary gold as a financial asset,
rather than a commodity, and the outcome of that discussion may
have further implications on the treatment of gold swaps and gold
loans/deposits. Finally, how the "fee" for gold swaps and gold loans/deposits
should be treated has yet to be resolved. All these matters are
being considered by the Committee and a report will be taken to
the AEG in due course.
Reserve has always denied that it has leased the gold, meaning the
government's gold. But the FED is involved in all kinds of swaps
with foreign central banks. And remember, quoting the Federal Reserve
Bank of New York,
. . GAO auditors are restricted by law from reviewing monetary policy
operations and transactions carried out by the Federal Reserve on
behalf of foreign central banks.
political fallout if it should be revealed that the physical gold
in the vault of the Federal Reserve Bank of New York has claims
against it. What if it should turn out that the Federal Reserve
Bank of New York, which is a privately owned organization, has in
some way compromised the government's ownership of its gold?
What kind of
pressure would be brought on the assembly of twits by the voters
to "get our gold back"? What kind of response from the twits would
dutifully go to Congress to present his footnotes showing that this
was good for the world economy. He would find a warm reception:
He really does
think that providing footnotes will protect him. This is what he
learned in academia. But politicians pay no attention to footnotes.
credibility is nothing like the credibility possessed by all FED
chairman except Miller, who is long forgotten. He has been able
to fend off calls to audit the FED for four years. But Ron Paul
is now a serious contender for the Republican nomination. He keeps
returning to one theme above all others: the incompetence of the
Federal Reserve. No serious Presidential candidate in history so
much as mentioned the Federal Reserve in his campaign speeches.
The media keep
brushing off Paul because of this. They keep saying that this issue
has no traction with normal voters. But the issue has traction with
at least 20% of the voters in the Republican primaries so far. That
is more voters than the bureaucrats at the Federal Reserve have
ever encountered. They have no idea what to do about this.
candidacy will continue for months. He will continue to hammer on
this theme: the Federal Reserve is incompetent. This message will
stick, whether or not he gets the nomination. His supporters are
like Bruce Willis: die hards.
Reserve will never again be able to hide from the voters behind
a curtain of secrecy. Bernanke is the Wizard of Oz, and Ron Paul
is Toto. He has pulled back the curtain. From this time on, whenever
you read a report on his testimony before Congress, think
of this scene.
The main difference
between this scene and a Bernanke speech is footnotes.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2012 Gary North
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