Why selling our gold reserves is fiscally sound and environmentally correct
PICTURE YOURSELF AT THE BOTTOM of a pit the size of the Grand Canyon. Huge trucks rumble past taking 40-ton loads of rock to a mill. There, the rock is crushed into a fine powder, piled into a pyramid and sprayed with a cyanide solution--the same sort of poison that was used to kill people at San Quentin until the mid-1990s. The run-off is collected and strained for tiny flakes of gold--they are literally microscopic--and the mound of crushed earth is left there. A handful of men operate the machines, and the ore body of this mine will be depleted in a few years, forcing the company to move on to excavate another site. Welcome to the goldmining industry--one of the most environmentally damaging and wasteful businesses in the world.
Now, teleport yourself across the country to a vault under the streets of Manhattan. Here the U.S. Federal Reserve holds more than 8,000 tons of gold--around four times annual global production and more gold than is thought to be in all the mines of the United States. Most of this gold belongs to the Federal Reserve--the rest of our holdings are in Fort Knox and other safe places--some is kept in trust for governments around the world. So when you read about France selling Switzerland some bullion, there's a New Yorker with a hand trolley carting gold bars across a room under Wall Street.
Why hold all this gold? The reason is partly historical. Until 1971, the U.S. government was at the hub of an international gold exchange system. Central banks that held dollars in their reserves could present them to Uncle Sam and walk away with gold at $35 an ounce. But in the late 1960s and early 1970s, the U.S. hit an inflationary patch and Richard Nixon feared a run on our gold stocks--so he put an end to the exchange system. He didn't get rid of the gold though, and even now it constitutes 54 percent of our nation's foreign exchange reserves. Gold has not been the greatest investment: It hasn't done as well as, say, the stock market--and it might have been put to better financial use buying back government debt. Yet the mandarins of the Federal Reserve cling to it for fear of offending supply-side economists, an ambiguous concern for how financial markets will react, and other "quasi-religious reasons," according to Yale University economist William Nordhaus. And perhaps more important, it is also a hedge against doomsday. As Alan Greenspan testified to Congress in 1999: "Gold still represents the ultimate form of payment in the world. Germany in 1944 could buy materials only with gold. Gold is always accepted."
Although this suggests that it may be good to have some gold around, it's pretty thin reasoning for holding a majority of the country's foreign exchange reserves in an underperforming asset. And it's downright …