For those of you who did not watch yesterday’s monetary policy hearing in the house of representatives, you most likely missed this bombshell exchange between Federal Reserve lawyer Scott Alvarez and committee chairman Dr. Ron Paul. My jaw literally dropped when I heard the Fed’s general counsel declare that the Federal Reserve owns no gold. After 1934, Alvarez explains that the Fed handed its gold over to the Treasury in exchange for gold certificates. When pressed further, Alvarez noted that the gold certificates do not represent any interest whatsoever in the gold itself. He explained the gold certificate listings on the Fed balance sheet, not as a claim to gold, but at most a claim to dollars from the Treasury. See the quotes here (and watch the videos at the bottom of the post):

This issue is even more complicated than may appear and after doing some research we seem to have settled some of the quirks in this odd Treasury-Fed scheme. Bare with us when reading through this.

What appears to have happened under the Gold Reserve Act of 1934 is the Treasury seized the Fed’s gold, taking full ownership and claim to its proceeds. The Treasury as an aside transferred a sum of special 1934 series gold certificates to the Fed amounting to the statutory value of gold ($20.67 per ounce) times the quantity of gold transfered from the Fed to the Treasury. The official gold price was later revalued to $35 an ounce, an effective devaluation of the currency, but the quantity of gold certificates issued to the Fed was not amended to reflect revaluation until the passing of the Par Value Modification Act of 1972. Under this act, gold was revalued again, this time to $38 an oz, and the Fed’s gold certificate account was credited upwards by $822 million worth of certificates to reflect the change in the gold price from $35 to $38. The gold was revalued one last time in 1973 to $42.22 and again the Federal Reserve was credited with more gold certificates, $1.157 billion to be exact, to account for this. After everything, the Federal Reserve was left with $11.16 billion dollars worth of gold certificates.

So what exactly are the gold certificates the Fed holds? For one, the Fed’s gold certificates are unlike previous gold certificate issues, and are not publicly trade-able. They are also not direct claims to gold, but rather reflect claims only to US issued currency or coin held by the Treasury. The Fed can take claim to this currency on demand, and their certificates are an accounted for liability of the Treasury as listed in Note 19. Treasury’s “Other Liabilities”. In addition, if the Treasury is unable to satisfy a demand by the Fed for the funds, the Fed is able to gain access to the gold, since the gold stands as collateral for the gold certificates issued by the Treasury. This fact is taken from this statement in Note 2, from the Treasury’s balance sheet:

Given that the Fed has an indirect claim to the Treasury’s gold, it is questionable what line of reasoning the Fed’s general counsel was using when stating so broadly that the Fed has “no interest in the gold that is owned by the treasury”.

In any case, we can analyze the implications of the basic facts and come to a couple of conclusions:

1) The widespread notion that the Fed owns gold is false. The corollary to this is the mistaken belief that the Fed understates its gold holdings on its balance sheet by only reporting certificates based on the $42.22 statutory gold value. The Fed does not in fact own the US gold stock multiplied by the market price of gold, unless the Treasury defaults and even then its not clear. The Fed does, however, own a claim to currency totaling $11.1 billion and this value has a remote chance of going up significantly if the Treasury revalues its gold and maintains the practice initiated in the Par Value Modification Act.

2) The fact that the Fed owns no gold, nor claims to any gold, means the fundamental value of the dollar lacks any backing besides dollars themselves, not including Fed building and equipment. Dollars are in essence worth a lot less than many people thought, and the Fed is much more impotent in using the prowess of their assets, and conducting monetary policy in general, than many believed. In all, Alvarez’s clarification strengthens the case for gold’s high dollar value immensely.