Rand Paul, Elon Musk, and several others, have recently called for an audit of the US government’s gold holdings. This has reminded many Americans that the US government owns a hoard of gold—of 261 million ounces—at Fort Knox and other places. On the other hand, the debate will be news for some who have never given the topic much thought at all to the fact that the federal government owns approximately $750 billion in gold.
Whatever one’s impressions may be about the status of the US’s gold reserve, the fact remains, of course that the dollar is not backed by gold or anything else. That is, the gold reserve is an entirely separate issue from the supply of US dollars. Moreover, the gold isn’t even relevant to the US’s central bank, the Federal Reserve. Contrary to some popular misconceptions, the Federal Reserve does not own any gold, and the gold reserve is quite explicitly under the control of the US Treasury Department. (It’s not even clear if the Federal Reserve can buy gold.)
So, since the dollar is not tied to a gold standard of any kind in the United States, and is not even tied to monetary policy, this raises the question of whether or not the United States government needs its 261 million ounces of gold.
The short answer to this is “no.”
First of all, the US government is not even entitled to own this gold, which the US regime mostly stole from private citizens and War Bond creditors in the 1930s. But, even if the US government had acquired that gold in some moral and legal fashion, there is no justification for the Treasury to keep it locked up until some future date when American politicians decide that they want to use the gold for whatever new plan they might dream up.
The US government doesn’t “need” its gold reserve any more than it “needs” the 640 million acres of land that the federal government hoards. Put another way, a state-owned gold reserve is not necessary for the well being or freedom of anyone in the private sector. Rather, these gold reserves primarily exist to augment state power and to ensure that states can preserve themselves and exercise greater coercive power on their subject populations. From the state’s perspective, gold reserves are certainly “necessary,” but state-owned gold reserves are decidedly unnecessarily and undesirable from the perspective of those who seek to limit state power or increase human freedom.
Reasons Governments Give to Justify Their Gold Hoards
Many national governments—mostly through their central banks—hold large amounts of gold. In none of these cases is the government’s currency backed by gold.
But if central banks and national currencies are not on any sort of gold standard, why own gold? The reasons given for this are varied. Some central banks claim they own gold for the same reasons as investors in the private sector. A study from the BIS puts it this way:
- First, gold is an asset viewed by many as durable and largely imperishable ... which renders it free of default risk. The [The International Monetary Fund’s Balance of Payments Manual] clearly establishes that gold bullion is the only case of a financial asset with no counterpart liability.
- Second, unlike currencies and debt – which are claims on foreign governments or institutions – gold kept at home is not subject to political manipulation
- Third, gold has been empirically proven to serve as an inflation hedge, at least over longer periods of time...
Much of the discussion in the literature about the gold hoards of national states is couched in terms of good stewardship of the nation’s currency and banking system, as if the general public were the target of “responsible” management of gold reserves. This rather naïve framing of states and their motivations must be viewed with skepticism, however. States always and everywhere work primarily to advance their own interests, so the key question we must ask ourselves is this: how does owning gold help the regime that owns it?
Gold Ownership as a Means of Augmenting State Power
Remembering Charles Tilly’s groundbreaking work on the nature of the state, we recall that a state’s power is based primarily on its ability to accumulate capital by extracting it from the private sector. This power of “extraction” is, in turn, used to fund war making, which is the most important use of the state’s wealth. The entire central bank apparatus in the US and elsewhere exists to enhance the states’ extraction capabilities.
So, when we read that a national government or a central bank is acquiring or maintaining X amount of gold, it’s a safe bet that the state in question is doing this because it will help augment the state’s ability to further engage in extraction and war making. For example, a state can use gold to defend its currency during times of instability and devaluation fueled by monetary inflation. States could simply choose to stabilize their currencies by ending monetary inflation and deficit spending, of course. But, states eschew this honest and responsible approach in favor of using gold reserves for temporary efforts at monetary manipulation. From the state’s perspective, this helps prop up confidence in the regime and ensure that the state’s currency survives various crises in the short term. In the medium-term, this allows the regime to kick the monetary can down the road and continue extracting wealth from the private sector through the inflation tax.
It’s an Emergency Fund for the Elites
The ability to manipulate currency markets is not the most important reason for gold reserves, however. The BIS notes that the “most widely recognised feature” of a gold reserve is “its potential value in highly adverse scenarios. This is the so-called ‘war chest’ argument.” Furthermore, John Nugée writes: “gold is seen as the ultimate asset to hold in an emergency and in the past has often appreciated in value in times of financial instability or uncertainty”
It is gold’s geopolitical value that is most valuable to the state. Gold reserves essentially provide a nest-egg for regimes to spend on war in times of extreme crisis.
In the American context, conservatives, militarists and other knee-jerk supporters of the state’s military power might view this as a good thing. Shouldn’t we want the US government to always have enough power to wage war against enemies? The problem with this argument is that the “enemy” in question may be the domestic population.
After all, in practice, the US state does not need a gold reserve to wage war if the enemy is a foreign adversary and if the state retains legitimacy. When the regime enjoys legitimacy, and when the public agrees with the war in question, the state can rather easily raise the necessary funds for war making. Moreover, in this case, wartime taxes offer far more revenue than a gold reserve could, so the state’s taxation power—that is, the state’s extraction power—is far more lucrative than the regime’s gold reserve.
The problem with a gold reserve is that it allows the regime to wage war even when the taxpaying population is vehemently against the conflict and even when the regime loses legitimacy. Unlike what happens with popular wars against foreigners, if any sizable portion of population withdraws its consent over questions of regime legitimacy, this makes the extraction process far more costly for the regime. An illegitimate state’s ability to wage war on its own population is therefore limited.
If the state in question has a large gold reserve, however, this enhances the state’s ability to prolong wars in the face of domestic resistance. In other words, a gold reserve provides for the elites an easy-to-access “emergency fund” for use against the population.
Fundamentally, there is nothing a gold reserve offers that cannot be better offered by simple monetary and fiscal sanity. If our goal is greater freedom for ordinary people, there is no reason for us to support the continued existence of the US gold reserve. It is fundamentally little more than a back-up slush fund for the regime.
Rather, our goal for the US gold reserve needs to be its privatization, after having been largely stolen from the private sector decades ago. A crude way of doing this would be to simply divide up the gold reserve among all US taxpayers. Another more nuanced method would be to redefine the dollar as some fixed amount of gold, taking into account the total number of dollars in the money supply, and the total size of the federal gold hoard. Naturally, these new dollars would all be redeemable in gold—a very, very small amount of it per dollar, to be sure—meaning the gold would again flow into private hands.
Whatever method of privatization is chosen, it would result in depriving the US regime of its stolen gold hoard. This is long overdue.
