The Case Against Gold as a Central Bank Asset

What I’m about to write here, I have believed for close to 40 years. I wrote about it decades ago in Remnant Review. I’m not going to look through all of the published issues to find when I wrote it.

What good is gold in the vaults of any central bank? I understand why it’s a good idea to have bullion gold coins in your “vault.” I don’t understand why it’s a good idea for central bankers to put gold bullion bars in their vaults.

Central banks buy gold from the general public. They also buy gold from each other. Why do central bankers buy gold? They have to pay good money for it, meaning bad central bank fiat money.

They can buy any financial asset. Why do they buy gold bullion? They never intend to sell gold to the public. So, they don’t intend to make a profit on their holdings of gold. It just sits there.

Central bankers don’t own the assets that the banks hold. It doesn’t matter to them personally whether it’s gold or government bonds.

Time to buy old US gold coins


In the era of the gold coin standard, when citizens could bring in paper money and demand gold coins from a local bank, this transferred tremendous authority into the hands of the general public. The public could participate in a run on a local bank’s gold. If this took place nationally, this would cause a run on the central bank’s gold. This would force the central bank to stop inflating through fiat money. That was the great advantage of the gold coin standard. It transferred power into the hands of the general public. The general public could veto central bank policies of monetary inflation.

This is why all the governments of Western Europe outlawed the gold coin standard soon after World War I began in August 1914. Commercial bank runs began almost immediately. So, central banks and governments allowed commercial banks to break their gold contracts with their depositors. Then the central banks confiscated the gold in the commercial banks. They wound up with the public’s gold. It was a gigantic act of theft. It was the end of the gold coin standard. There was a huge loss of liberty.

This happened in the United States on Monday, March 6, 1933, at 1 AM. President Roosevelt unilaterally allowed the federal government to steal the public’s gold at $20 an ounce. Then, when the government had a lot of the gold, Congress hiked the price to $35 an ounce, thereby enriching the federal government by 75% on the stolen gold. This was a gigantic act of theft. The public did not care. Most of the economists did not care.

The only logical case for having government ownership of gold was under a gold standard. The government had to sell its gold at a fixed price. Because the government always asserts a monopoly over the monetary system, and because the gold coin standard did allow a veto of central bank policies, there was a case — weak — for a central bank’s vault full of gold.

It would have been far better if the governments of the world had never been allowed to exercise any control at all over the monetary systems. Money is like anything else of value. It is best managed under liberty. It is best managed by private ownership of the means of production. Government monopolies over money always lead to inflation, and the inflation creates the boom bust business cycle. But economists, other than Austrian School economists, do not believe this.

As soon as the gold coin standard is abolished, there is no further economic case for letting the government hold gold. If the public cannot veto central bank policies of monetary inflation by joining bank runs across the country, then there is no free market case in favor of the government ownership of gold. There is no free market case for the government ownership of any of the means of production.

Calling for the government ownership of gold is, in principle, the same as calling for the government ownership of the railroads, the airline industry, and the housing mortgage markets. Oh, I forgot. That is what we have today: Fannie Mae, Freddie Mac, and VA loans. The public loves it. The public loves government-subsidized mortgages. Does this come as a surprise?

Similarly, gold bugs love government-subsidized gold prices.


The argument in favor of large amounts of gold in government vaults goes back to mercantilism in the 17th century and 18th century.

Mercantilists believed that it was a good policy for the government to build up gold reserves. They believed this was a mark of the wealth of the nation. In order to build up these reserves, governments were supposed to pursue policies that would lead to more exports then imports. Mercantlists discouraged imported goods. They encouraged subsidies to exports. This would lead to an inflow of gold into the country, they argued. Then the government could tax businesses and stick more gold in the government’s vault.

The great opponent of this argument was Adam Smith. Smith argued that the government should not interfere with trade. It should not subsidize exports. It should not restrict imports. It should let the free market work.

Smith argued that the basis of national wealth is the nation’s economic output, not the amount of gold held in a government vault. Free trade leads to increased output. Therefore, interventionist policies that are designed to increase the amount of gold in a government vault should not be implemented. Here is a summary of Smith’s position by Eamonn Butler, head of Britain’s Adam Smith Institute.

The first theme in The Wealth of Nations is that regulations on commerce are ill-founded and counter-productive. The prevailing view was that gold and silver was wealth, and that countries should boost exports and resist imports in order to maximize this metal wealth. Smith’s radical insight was that a nation’s wealth is really the stream of goods and services that it creates. Today, we would call it gross national product. And the way to maximise it, he argued, was not to restrict the nation’s productive capacity, but to set it free.

Smith also said that the gold will not do the government much good. In a war, the gold would be depleted rapidly. The only way for governments to build up their own wealth is to encourage freedom of exchange. Let the economy grow. Then, if the government needs money, it taxes a growing economy instead of a stagnant or shrinking economy.

How can the government do this? By abandoning its programs of intervention.

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