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Monetizing
the Gold Stock


The U.S. Treasury holds about 261.6 million fine troy ounces of gold. At its current statutory value of $42.22 per fine troy ounce, that's equivalent to about $11 billion. The Treasury has monetized all of the gold by issuing certificates to the Federal Reserve in that amount. In return it received an equal-valued credit in its account at the Fed. Of course that credit has long since been used for government expenditures.
Options for Upgrading to Fair Market Value

Why doesn't the government monetize its gold stock at the fair market value? In fact it could do so if Congress passed authorizing legislation. We will examine two possible courses of action:

(1) Change the statutory value to say $400 per ounce, the assumed current market value, and thus define the value of the gold stock certificates to be $105 billion. That would create an additional credit at the Fed for the Treasury of about $94 billion.

(2) Redeem the gold certificates held by the Fed at the original value of $11 billion. Then sell the gold on the open market for an assumed average price of $400 per ounce. The net gain in Treasury balances would be the same, $94 billion.

How Options Compare

Even though the dollar amounts are the same, there are significant differences between these two options. Option (1) creates a new credit at the Fed for the Treasury by the stroke of a pen. Option (2) exchanges a tangible asset, gold, for the same amount of credit. What happens if the Treasury uses the credit to redeem maturing bonds and thus pay down the debt? Surprisingly we will find that Option (2) provides a better outcome for the Treasury.

In Option (1), total banking system reserves would increase as $94 billion in maturing bonds are paid off. But the Fed must 'sterilize' those reserves in order to maintain control of overnight interest rates, i.e. the Fed funds rate. It would do so by selling an equivalent amount of Treasury bonds from its own portfolio to the public, thereby soaking up the excess reserves. The result is that the public ends up holding the same value in bonds it had before the redemptions. That means that the interest burden on the Treasury debt remains unchanged.

In Option (2) the Treasury first receives $94 billion from the private sector from the sale of gold, and then uses the proceeds to pay off maturing bonds. That leaves the banking system reserves unchanged. Thus no action is required by the Fed. However the Treasury has eliminated the interest burden on $94 billion of debt in exchange for its gold. At current interest rates, that would save the Treasury about $5 billion a year in interest payments.

Total government debt is reduced by the same amount in both options, but it is distributed differently. In option (1) the reduction comes out of the Fed's portfolio. In option (2) it comes out of the public's holding. But it matters where the reduction comes from. The Fed returns most of the interest earned on its T-bond portfolio to the Treasury, while the public retains its earnings.

Only One Viable Option

Option (1) is equivalent to 'printing money' by the government. That results in an increase in the banking system reserves which would lead to loss of control of short term interest rates unless sterilized by the Fed. Thus option (1) is not a viable method for paying down the Federal debt.