The Use of Gold and Gold Reserves in Modern Banking
I suppose that most people today, and I'm speaking now in 1970, are aware of the fact that there has been something in the nature of a gold crisis.
And I suspect that this gold crisis has been something of a mystery to many people, because
most of them, I presume, are aware of the fact that insofar as gold being used as money
is concerned, this country got off the gold standard back in 1933. So I presume that there
is a little bit of a mystery here that perhaps would bear the spotlight for a few moments.
So let's go into this area. When our system of money was established, it was established
first of all on a bimetal system with both gold and silver being constitutionally approved
as legal tender. That is the only constitutionally approved legal tender that we have. That part
of the constitution has never been amended nor changed. Now basing our money system on
On gold and silver meant that although the Congress passed laws relating to how much
money would be in existence or what the ratio between gold and silver would be and so on,
there was a basic recognition that if the government printed a piece of paper, that
the paper was merely an evidence of credit and that there was on deposit a certain amount
of Gold and Silver to redeem the credit money that had been put out into use.
Actually, there never was a one-to-one ratio used. Basically, insofar as the issuance of
credit money is concerned, although private banks sometimes did it on a one-to-one basis
or a two-to-one basis, the standard in government was to do it on a four-to-one basis. That is,
When the government issued a paper certificate that said,
we have on deposit one dollar in silver, what they actually had on deposit was one twenty-five
cent piece in silver. There was a four to one ratio, usually. It fluctuated from time to time,
but that was basically the idea. And of course, with gold, it was the same. There was never
an attempt on the part of the government to issue paper limited on a one-to-one basis to the amount
held in reserve. However, we got along fairly well with this system, especially during the 20s,
and then we began to run into a situation in this country which we have later called the Great
Depression. Beginning with the stock market collapse of 1929, and then the other things
that seemed to stem out and broaden from that collapse, we had apparently a great dearth of
of Money, the amount of money in circulation. If your money is related to gold or silver
on deposit, it follows that in order to increase the amount of money in circulation, you have
to increase the amount of gold and silver on deposit. You can't increase the amount
of Gold and Silver on Deposit, unless you have the gold and silver on hand. And we didn't.
So here we were facing a dilemma. This was a dilemma that was met in various ways by
President Hoover, and then President Roosevelt, who followed him, met it in a rather unique
way. He decided that the way to free up the government printing presses so they could
print all the money they needed was to go off the gold standard. And then you wouldn't
If you could have to print just four dollars for every say silver or gold dollar on deposit,
you could print as many paper dollars as you wanted to. The only thing is you would have
to stop saying that there is so much on deposit because obviously there wouldn't be that
much on deposit. So this became a program of the American government in 1933 and we
unmoored our economy from a gold base fundamentally. That is, in so far as the private sector was
concerned, gold became only a commodity. You could get gold if you were in the jewelry
business or if you were a dentist or had other commercial use for gold. Fine, you could obtain
it. But gold stopped being money by governmental decree. In fact, there hasn't been any minting
of Gold Coins from that time or from before that time. I think the last minting was about
1932 or possibly it wasn't 28. I haven't checked that out but we haven't minted anything
certainly since 1933 in the way of a gold coin. The effect of this was rationalized
This way by the politicians. They took exactly the same position that the early bankers had taken.
Why do we have to have gold behind the currency? People don't come in and take the gold out.
They don't use the gold. It's really useless. The thing that sustains the money is the faith
that people have in the money. So people don't need the gold. They don't want the gold. They
They don't use the gold, so why fuss with it? Why delude ourselves? We don't need
the gold behind the currency. We'll simply put the credit of the United States government
behind the currency. And what is the credit of the United States government? Well, that
is the credit of the taxpayers that support the United States government. So in essence,
and it became a slogan at that time, we don't have to worry about the money because any
debt that is involved is merely a debt that we owe to ourselves. We simply take it out
Gold was something we didn't need. And on the basis of taking us off the gold standard, Mr. Roosevelt then turned around and was enabled to print a great number of Federal Reserve notes.
Now that's what they began to be called at that time.
They were Federal Reserve notes, and in order to convince the people that these notes were good,
even though they no longer said on them that this is a certificate backed by so much gold or silver,
instead they said on them, this note is legal tender and is good for all debts public and private,
but it is redeemable in lawful money. And that's the way these first notes came out of the Federal
at a Reserve Bank. In other words, they appeared to be redeemable currency because the word
redemption or redeemable appeared on the face of the note. In actual fact, the notes were
redeemable only in terms of other notes that were redeemable, in terms of other notes that
were redeemable and so on back into the woodwork. There was no place here for this money tied
The market makes good on the government's promises, and that is exactly what we have
have had, in essence, from that day to this. So we went off the gold standard. In fact,
the certificates that had been issued by the government in which they had said, this certificate
is redeemable in gold, the government repudiated these. The people that had those certificates
and went down to the treasury or the various banks to get those cashed out in gold were
were not given gold. This became illegal. The government passed a law against it. Instead,
these certificates that were redeemable in gold, according to the government's promise,
were instead redeemed in Federal Reserve notes. So the people were defrauded. They were not
given what the government had promised to give them. It's an important point to keep
in mind. Your own government can defraud you legally. It's just a matter of how you write
by the law. So that happened at that time. Now another very interesting thing occurred.
When this began, the government began to feel, I suppose, the same way that the government
of England had felt when Henry VIII decided to get into the minting of spurious coinage.
There's a fear that the public will catch on. And when they catch on, they may repudiate
the whole currency and if they do the government would collapse.
And so as a hedge against that happening the government took what was called a 25% blanket
cover in gold and they earmarked it for redemption of the American currency in the event repudiation
should occur.
And that money was earmarked and kept at Fort Knox, that is that gold was kept there.
It wasn't to come out of Fort Knox unless this happened.
If the public in general stood up and said, this is just paper, there's nothing to it
and we won't use it, then the government could redeem it, not to give the money, that
is the gold, to the people, but the government would then use this 25% gold cover to become
the base of a new currency which would be backed by gold and that way they could perhaps
retain their positions of power and influence.
So that was the purpose of it. Now the minute they passed that law granting the government
a 25% cover, the bankers came in on it and they said, wait a minute, we're the fellows
that handle this stuff. And if there is a general repudiation, we are the boys that
are going to get our fingers burned. If the government can have a 25% cover, so can we.
And this was approved. So the bankers also got a 25% cover. You understand, none of this
This gold now, in the event of repudiation, would flow into the hands of people like you
and me. It would flow into the hands of the bankers or the government or both in the event
of repudiation. And that's the way it was set up.
So insofar as you and I were concerned, we could not get our hands on gold coins unless
Yes, we were numismatists or engaged in collecting coins or something of this sort.
Insofar as gold was concerned, it was banned as money from public use in this country.
So here we have a 25% gold cover reserved to protect the government, another 25% gold
cover to protect the bankers, and we've got a lot of gold besides that.
So the government decided that they would not repudiate gold redemption in European countries
or elsewhere in the world.
Only the American people were to be defrauded.
Everybody else could get gold if they wanted to.
So we had the interesting situation of having an American able to go abroad and redeem American
currency for gold and use gold as money abroad.
But when he came back here, the law forbids him to use gold as money and he cannot redeem
American paper money for gold in this country.
So that was the system that developed following 1933 and it continued this way for a number
of years.
Actually we got up to about 1940-41 and as you know World War II began in this period
of Time.
We usually date it with 1939 and the advance of Hitler into Poland, although actually,
if you want to be accurate, World War II really began in China in 1936 with the incident of
Muktin.
But usually we in the Western world think of the World War beginning in September of
1939.
And then of course we were involved after Pearl Harbor in December of 41.
So we tend to think around 1940 as the beginning of this whole period. Now at that time, getting
back to the gold question, we had on deposit in the Federal Reserve Bank and in the Treasury
approximately $14 billion in gold reserves, a portion of which was earmarked to redeem
the government, a portion was earmarked to redeem the banks, and the rest was available
for foreign redemption. Nothing was available here. Well, this meant that there was about
a total of 8 billion that was reserved to redeem federal and banking practices in this
country and the balance of the 14 billion was available for redemption of foreign claims.
And that's the way it was in 1940, just before we entered World War II.
Now, this helps to explain the political view relating to loans and grants to Europeans
to help them insofar as the war economy was concerned. Keep in mind now that the political
view which had been sustained by such economists as John Maynard Keynes and other very noteworthy
and very well-known economists was that gold isn't needed. You don't need it. So here
Here we have a stockpile of fourteen billion dollars worth of gold that is just so much
useless material you're not using it commercially, you're not using it for money and there it
sits and it's expensive even to keep it there.
So the government took a very liberal view of gold and so when the pressures began to
mount in Europe the government turned around and granted loans on a very open-handed base
To every one of our allies or potential allies in Europe, we gave them what we call the first
lend-lease. That is, we lent them things, money, we leased them things, and we didn't
even ask for a payment. And when we put out credits over there, these credits were redeemable
in gold because the politicians took the view, why not redeem it in gold? Gold isn't worth
with anything anyway. So, fine, if this pleases the European governments, great. We're winning
their friendship with some worthless stuff that we've got over here in surplus, and isn't
that wonderful that we can do it? This was the political attitude, you see. And so we
became open-handed and we began this process of lending and loaning to various European
and some Asiatic powers, directly or indirectly, and then suddenly we were involved in the
war. Well now when this happened we became even more open-handed. We not only lent and
leased but now we gave outright in an effort to spur and bolster our allies. Now the way
we do it, I mean the physical method is one like this. We appropriate a sum of money,
Congress passes a law that says we will offer so much economic aid to a foreign country.
A slip of paper is drawn up and sent to the appropriate authorities of the foreign country,
and it simply states on it that so many dollars have been appropriated for their use.
And all they have to do is to take this paper, which becomes a negotiable instrument, you see,
and they can go to the bank and they could redeem it in terms of other letters of credit
so that they could purchase our material or if they wanted to, they could merely convert it into gold.
Now the gold wouldn't leave the country and be shipped over to Europe.
It would simply be transferred from one account, ours, into a foreign government's account.
The gold wouldn't even be moved at Fort Knox probably or wherever it was.
was that it would stay in the same vault. It's just a bookkeeping entry that's made. This
gold is no longer ours. It's been redeemed, and France has it, or England has it, or whoever
has it, you see. It's just moved over in the bookkeeping process. So physically, the gold
remained right where it was.
But here is an interesting thing that happened. During World War II, about the only place
in what we call then the free world where the manufacture of heavy military hardware
could occur was the United States. Britain was under heavy attack and bombardment and
the V1s and V2s were dropping and there wasn't very much armament production there. France
as far as armament production was concerned had virtually been wiped out. Italy was on
on the other side and wasn't doing much that way. Germany of course was our opponent and
Germany was a very productive area producing all kinds of heavy armaments and equipment
for their side of the contest. Russia didn't have any heavy equipment to produce heavy
armaments and so on, they had some but not much. The allied forces including China had
no real manufacturing center except the United States and so we became in essence the arsenal
for the military hardware that went to the Allies.
And we had a very cute little device here.
Any time a foreign country was to buy military goods, we wanted to sell it to them for gold.
Now, why did we do that?
Well, we did it because we didn't think the gold was valuable.
You see, what we wanted to do was to get these arms into their hands as quickly as possible
and we didn't want to have a drain on them to get it and so we said well we'll
take your gold because in our judgment this was the most useless thing they had
anyway and we could just store it and in the meantime we are giving them paper
letters of credit which can be redeemed in gold which they can then use to buy
our military stuff with and it doesn't cost them anything and we're using in
In our political judgment, the least valuable thing we've got in order to move heavy armaments
into the hands of our quote-un-unquote allies. So that's how we did it. And so during World
War II this interesting phenomenon occurred. While we began in 1940 with approximately
14 billion dollars of gold in reserve, in the U.S. Treasury and in Fort Knox. We ended
World War II with a deposit of better than 46 billion dollars' worth of gold, on deposit,
because during that time the golds in the world, in the hands of Britain, France and
and the other allied countries had flowed into our coffers in exchange for arms.
And we had armed that part of the world for gold.
So now we had even more gold than we had before.
And we had adopted a liberal policy of getting rid of it, and now it had trebled in supply.
So what were we to do?
Well following the war, we took an even more liberal attitude in respect to it.
We became just absolutely generous to a fault.
We decided we had to rebuild the countries that had been damaged in the war, whether
they had been damaged by our friends or our foes, it didn't matter, we have to now rebuild
the world.
And so we now began foreign aid on a grand scale.
We began pouring out these letters of credit to the various governments involved, and these
These letters of credit are backed by gold and, of course, to begin with, foreign powers
avidly use these letters of credit to buy our equipment.
They didn't want the gold either, so they didn't redeem in gold.
They redeemed in the purchase of wheat and of motor cars and of heavy manufacturing tools
of production and canned goods and things of this sort because their economies had simply
for the credits that we issued to them.
But now, with the passing of time, this happened.
These various countries began to get back on their feet.
They began to establish heavy industry.
They began to have economies of their own.
And we continued our very open-handed way of giving foreign aid that would run into
multiple billions of dollars every year.
As a matter of fact, since the end of World War II, since the end of World War II, we
have given approximately $300 billion away. And this, of course, has been backed by gold.
But as I say, at the outset, people weren't interested in that fact. They were interested
in the tools of production and the other goods and services that people want to use. As European
When an industry is reestablished, then when a country began to get these large payments,
these large credits from us, they began to hedge against the future. And so they began
to redeem in gold. And thus, instead of having 46 billion, which we had in 1945, the amount
of gold reserves began to shrink because now the foreign powers were more interested in
in France.
We had been giving France a billion dollars a year or more ever since 1945.
This is 1965. This is 20 years after World War II was over. We're still handing it out on the basis of at least a billion dollars a year to France.
Now, France was not, they didn't get the lion's share. Actually, Great Britain got the lion's share.
Western Germany got the lioness' share, I guess, and France was about third in the great American giveaway.
Anyway, about this time we were giving Charlie a billion a year, and in 1965 we took a good
look at the reserves that we had, and you know we didn't have as much as we'd started
with.
Not only had France been redeeming gold and taking it when other things were no longer
of Money, The Theory of Money and State, The Theory of Money and State, The Theory of Money
He said, I'll take about $200 million in materiel. I'd like some canned goods and some wheat and some automobiles up to $200 million, and I'll take the other $800 million in gold.
And we confronted Charlie, and we said, Charlie, that's not very high-type and friendly. You know that our gold reserves are getting a little skimpy.
Why don't you take some more canned goods and some more cars and some more wheat?
and he said no I don't want it because if I take those things I'm going to put
French production out of line I'm going to dislocate our own ability to produce
and look after ourselves and I don't think you want that so just let me have
the 1 billion and I'll take 200 million in materials various types and then I'll
take the other 800 million in gold and we said okay Charlie if you insist on it
we'll do it because we've promised to do it and we want to keep our promise so
Charlie said, Well now wait just a minute, fellas. I've been doing a little checking on what you've been up to, and it so happens that you have issued letters of credit, something to the tune of around $36 billion, and these are unredeemed, and they are in Europe and Asia at the present time.
So, if you get tough with me and tell me that I'm not going to get any more foreign aid,
I'm going to tip off all my fellow politicians in Europe and Asia.
And they will discover that they're not going to get any more foreign aid either.
And the result of that is going to be that they're going to take those letters of credit that they have
and they're going to demand gold redemption.
Well, here was a pretty picklement that we'd gotten ourselves into.
And so we compromised with Charlie.
We did it his way.
We continued to give him the money so that he wouldn't ask for all of it in terms of
gold.
And so from that time up till now, and this is five years since this confrontation occurred,
our gold supplies have been reducing more gradually.
We have reduced the number of claims against us until overseas now they're only about
32 billion against us.
Meantime, no wait a minute, it's down from that.
It's about maybe perhaps 30 billion against us now overseas as of this moment when I'm
In terms of our gold reserves, we now have right around $10 billion, according to the last report.
So we still cannot meet the claims against us that we ourselves have issued.
And so we continue to operate on the basis of the goodwill of other people as they consider us
Thanks very much.