NCPA - National Center for Policy Analysis

Britain Selling Gold Reserves

May 12, 1999

Great Britain plans to sell more than half its official gold reserves and invest the funds in other assets. This puts an end to any notion that gold will ever again play a meaningful role in the international monetary system. Gold has been officially demonetized since 1971. But Britain 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 is an important symbol.

Because it linked prices and interest rates in all nations together, the gold standard 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. That is why the gold standard had to be jettisoned.

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, held in storage for foreign governments.

The price of gold has fallen from a high of $873 per ounce in 1980 to about $280 today. 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 his investment.

Great Britain 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.

Source: Bruce Bartlett, Senior Fellow, National Center for Policy Analysis, May 12, 1999.


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