Ron Paul has said that he wonders if there’s gold in Fort Knox and says he’ll introduce legislation demanding an independent audit of the government’s gold reserves. The audit is unnecessary and, even if it were a good idea, the entire 8,133.5 tons of gold the government keeps on hand is an anachronism. In the long term, the country should study it.
An independent audit is unnecessary because there’s simply no evidence that the government has sold any gold without disclosing it. Gold prices sit near record highs and the United States government is the largest holder of gold in the world by a significant margin. Given that the United States holds about $317 billion worth of gold valued at the current price of around $1,200 an ounce, any significant sale of the reserves would have depressed prices. Instead they’ve risen. Even if the government had somehow sold the gold, it seems nearly impossible that its physical custody could have been transferred to someone else without a lot of people noticing. (In private sales, physical custody rarely changes hands.)
In any case, the reasons for the United States to continue holding so much gold seem a little anachronistic. The country’s practice of maintaining the world’s largest gold reserves began after World War II when, under the Bretton Woods system of fixed exchange rates, the United States let other nations redeem dollars for gold at a set price. The entire system existed to establish fixed exchange rates between the world’s major currencies. But it never worked particularly well and underwent a number of revisions (most prominently in 1968, when the price of gold was allowed to float.) In 1971, the Nixon administration ended all government-backed convertibility to gold and let the dollar float freely in international markets. By the mid-1970s, all other major currencies floated as well. But the dollar remained the single largest form of foreign exchange reserves for most of the world’s economies and, therefore, a de facto world currency.
In theory, the ability of the government to redeem some outstanding dollars for gold undergirds this system and the continued (although weakening) status of the dollar as the world’s reserve currency. The dollar’s widespread holding in reserves, in turn, increases the value of dollars and lets the United States run higher budget and trade deficits than it otherwise could. But the relative strength of the U.S. economy and military has a lot more to do with this than holdings of gold: $317 billion, after all, is only about 2 percent of the U.S. GDP.
With a lagging economy, the United States probably does need to hang onto most of its gold. A flight of other countries from the use of the dollar as a reserve currency—which could happen—would simply cause too many problems. In the longer term, however, economists should look into the wisdom of keeping the gold reserve.
Gold, after all, is basically an economic sucker bet. It has only a handful of industrial applications and most of the world’s gold is in jewelry. Unlike modern currencies (which are backed by national economies) and even other commodities (oil, aluminum, coal) with industrial applications gold really has value only because people pretend that it does. It can’t be used directly to make much of anything or to buy goods. Even if the U.S. holds on to some form of commodity-based reserve, it’s unlikely that 70 percent of it should exist in the form of gold.
In short, there’s no reason to audit the U.S. gold reserves. In the long term, however, the country may want to consider getting rid of them.