Opinion Editorial | |
| Wednesday, May 12, 1999 | |
Britain Selling Gold |
Last week, Great Britain announced that it would sell more than half its official gold reserves and invest the funds in other assets. In many ways, this announcement put an end to any notion that gold will ever again play a meaningful role in the international monetary system. To be sure, gold has been officially demonetized since 1971. But Britain was the nation that made the gold standard a bedrock of the world economy for a hundred years. So for it to sell most of its remaining gold stocks carries with it important symbolism that goes beyond formal practice.
The great economist Joseph Schumpeter once explained why the gold standard was such an essential part of the world economy in the 19th century and why it fell out of favor in the 20th. Because it linked prices and interest rates of all nations together, it imposed powerful external discipline on governments. If spending were to get out of hand, for example, this might create fears of inflation, causing an outflow of gold. High taxes and trade restrictions were also circumscribed because they encouraged gold outflows. Stemming such outflows forced banks to raise interest rates and often brought on recessions and financial panics.
Gold, therefore, imposed critical restrictions on governments and bureaucracies. It was both the "badge and the guarantee of bourgeois freedom," Schumpeter wrote. For this reason, he continued, it was quite rational for people to fight vigorously to defend the gold standard even if convinced that all economic arguments against it were valid. It also explains why the gold standard had to be jettisoned to allow for the expansion of government, which grows continuously almost everywhere.
Still, vestiges of the gold standard remain. The world's governments still hold about one-fifth of the known gold stock. The United States owns about one-fourth of that, some 262 million ounces. Almost as much sits in the vaults of the Federal Reserve Bank of New York, owned by foreign governments but held in storage for them by the Fed. Historically, efforts to sell off this gold has been resisted, at least in part, by those hoping to reestablish a gold standard someday.
Nevertheless, there have been gold sales. In the 1970s, the U.S. sold some of its gold, as did the International Monetary Fund. In the 1980s, there were few sales, but in the 1990s there have been many. In 1993, the Dutch sold some 400 tons, and in 1995 the Belgians sold 175 tons of gold. Lately, the Swiss have talked about selling half their 2,590 tons, while the IMF wants to sell another 311 tons of its gold to help fund debt relief.
A key reason for these recent gold sales is that the price of gold has fallen from a high of $873 per ounce in 1980 to about $280 today, with no prospects for an increase in sight. Furthermore, gold is a non-earning asset, unlike stocks or bonds that pay dividends and interest. Gold only gathers dust. Adjusting for both lost interest and inflation, it is estimated that anyone buying gold at its peak and holding it until today has lost 99 percent of their investment.
Great Britain has said it will invest 40 percent of the proceeds of its gold sales in dollar-denominated assets, the same in euros and 20 percent in yen. These assets, unlike gold, will earn a return that will benefit British taxpayers.
With inflation in the U.S. near zero and the dollar being strong on foreign exchange markets, it makes sense for the British to do what they are doing. Whether it makes sense for the U.S. to follow their lead is a question worth asking.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, May 12, 1999.
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