November 22, 2012, 11:02 a.m. ET
Treasury Owns the U.S. Gold Reserve
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In regard to John F. Prusiecki's Nov. 9 letter "Deleveraging the Fed With a Golden Plan": Reasonable people apparently still believe that the Federal Reserve can escape the eventual accounting consequences of its quantitative easings (total assets now worth about $2.832 trillion versus capital of $54.8 billion) simply by marking up the value of the U.S. gold reserve GRZ.V -3.47% from the official price of $42.22 per ounce to current market value.
The gold reserve is about 261.5 million ounces, and the total spot market value is $453.5 billion. At the official price, however, the reserve is worth about $11.041 billion. Such a markup would create a bookkeeping profit of about $442 billion and would reduce the Fed's leverage ratio to a more acceptable level (about 6 to 1) from the current level of about 52 to 1. Unfortunately for this line of argument, the Gold Reserve Act of Jan. 30, 1934, transferred legal title to the Fed's former gold holdings to the Treasury.
That fact cuts off the Fed's bookkeeping escape route by using the gold reserve. To pay for the 1934 gold transfer, the Treasury issued non-transferable gold certificates to the Fed. But now, if the Treasury sold all its gold holdings, for example, it could satisfy its obligations under current law by tendering about $11.041 billion to the Fed and keeping the remaining $442 billion for itself. That is because, under the gold-clause cases that the U.S. Supreme Court decided in the 1930s, the Fed would be barred from claiming more than $11.041 billion (the official price value of 261.5 million ounces) from the Treasury. Congress would have to appropriate any additional transfer of gold or dollars to the Fed.
I am a former Federal Reserve Bank attorney and I have no current authority to speak for the Federal Reserve System or the Treasury. Still, I doubt that the current general counsel of either the board of governors or the Treasury would disagree in public with the conclusions stated here about who really owns the U.S. gold reserve. I think it is the Treasury Department, not the Federal Reserve.
Walker F. Todd
Research Fellow
American Institute for Economic Research
Chagrin Falls, Ohio
In regard to John F. Prusiecki's Nov. 9 letter "Deleveraging the Fed With a Golden Plan": Reasonable people apparently still believe that the Federal Reserve can escape the eventual accounting consequences of its quantitative easings (total assets now worth about $2.832 trillion versus capital of $54.8 billion) simply by marking up the value of the U.S. gold reserve GRZ.V -3.47% from the official price of $42.22 per ounce to current market value.
The gold reserve is about 261.5 million ounces, and the total spot market value is $453.5 billion. At the official price, however, the reserve is worth about $11.041 billion. Such a markup would create a bookkeeping profit of about $442 billion and would reduce the Fed's leverage ratio to a more acceptable level (about 6 to 1) from the current level of about 52 to 1. Unfortunately for this line of argument, the Gold Reserve Act of Jan. 30, 1934, transferred legal title to the Fed's former gold holdings to the Treasury.
That fact cuts off the Fed's bookkeeping escape route by using the gold reserve. To pay for the 1934 gold transfer, the Treasury issued non-transferable gold certificates to the Fed. But now, if the Treasury sold all its gold holdings, for example, it could satisfy its obligations under current law by tendering about $11.041 billion to the Fed and keeping the remaining $442 billion for itself. That is because, under the gold-clause cases that the U.S. Supreme Court decided in the 1930s, the Fed would be barred from claiming more than $11.041 billion (the official price value of 261.5 million ounces) from the Treasury. Congress would have to appropriate any additional transfer of gold or dollars to the Fed.
I am a former Federal Reserve Bank attorney and I have no current authority to speak for the Federal Reserve System or the Treasury. Still, I doubt that the current general counsel of either the board of governors or the Treasury would disagree in public with the conclusions stated here about who really owns the U.S. gold reserve. I think it is the Treasury Department, not the Federal Reserve.
Walker F. Todd
Research Fellow
American Institute for Economic Research
Chagrin Falls, Ohio
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