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Should the Federal Reserve Gold Supply Be Audited?

(Photo by Andrew Burton/Getty Images)

I guess the easy answer is… yes. In fact the Federal Reserve and all its member banks are audited yearly by several government watchdog agencies. Texas Representative Ron Paul (R) is the ranking member of the U.S. House Financial Services Subcommittee on Domestic Monetary Policy and Technology that has some jurisdiction over the Federal Reserve.

Before delving into the current news reports on the gold audit of the Federal Reserve, we should first examine what things were like before there was a Federal Reserve. Ninety-nine percent of people reading this have not lived without a federal reserve, so here’s a short history reference.

Before the Fed

If you think it’s tough doing business in today’s financial community, try doing it with over 30,000 different currencies across the country. Your local drug store was just as likely to have it’s own currency as your local bank. In addition to that, no two had the same value. The shoe store might take your “drug store bucks,” but they might only have half the value at the shoe store that they did at the drug store.

Some currencies were backed by gold or silver, others by government bonds or other commodities, and some by the issuing business. The chances of your savings being in your local bank when you went to get it might be 50-50. Before the Fed, banks were unstable and collapsed on a regular basis. This caused wild fluctuations in the economy and greatly hindered the capitalistic system.

Enter The Fed

In order for business and banking to survive, the Fed had to do two things. First, it had to create “liquidity” in the monetary system. If you went to the bank your money had to be there when you wanted to take it out and spend it.

Secondly, it had to create “elasticity” in the monetary system. It had to maintain a fine line between inflation and deflation. Inflation, being too much money in the system chasing to few goods, and deflation being the opposite. The Fed managed this by controlling interest rates for borrowing banks and by either increasing or decreasing the amount of actually money circulating through the economy.

Audit The Gold

For years, the “tinfoil hat” crowd has been convinced that the Federal government is lying about the gold in Fort Knox, the Denver mint and the Federal Reserve Bank of New York. In January of this year the US Treasury began auditing the amount of gold and also drilling small holes in several bars to test purity.

The ironic part of this whole story is who is doing the audit. The US Treasury controls the gold and the US Treasury is conducting the audit. Sounds honest to me. I guess we’ll know more when they issue a report somewhere down the road. I hope they are keeping track of the shavings from the drilling.

Who’s Gold Is It?

The largest supply of US gold is in Fort Knox, Kentucky. The largest storage of gold in the world is 80 feet beneath the streets of Manhattan in the Federal Reserve Bank of New York’s vault. More on this remarkable vault in a minute.

A very small amount of the gold in the Federal Reserve of New York is US gold. The bulk is gold from other countries that we safely store for them.

Opening The Federal Reserve

The official opening of the bank in 1924 must have been an amazing sight. The secret service used 45 armored cars to move over 700 tons of gold, silver and paper currency to the bank. Over 150 policemen lined the streets, secret service everywhere, snipers and riflemen on rooftops, all kept watchful guard over the trillion-dollar convoy.

The Vault

The Federal Reserve vault is a true marvel of engineering. Consider that there were barely trucks in 1922 when construction was completed. Horse and wagons hauled the construction supplies at that time. Digging and excavation for the vault was done mostly by hundreds of men with shovels before the building was built around and over it. The vault was built on the island’s bedrock that engineers of the day felt could handle the enormous weight that would be placed upon it.

The main vault has no doors. The only access to the vault is through a 10-foot tunnel cut into a 90-ton steel cylinder that revolves in a 140-ton steel and concrete frame. To enter the vault, the cylinder must be rotated 90 degrees after a gauntlet of various time and combination locks. A 1931 issue of Popular Mechanics showed a drawing of how the vault works.

But Wait… There’s More

The cash vault is even more impressive. Try to visualize a vault, 3 stories high, and the size of a football field, capable of holding $350 billion dollars worth of US currency. Robots handle the moving of cash that is worth more than the total market value of the gold.

Some Final Thoughts

It’s no accident that there’s a plan to drill holes in the gold bars to test for purity. Color of gold does tell a story. You might have had a ring at one time that turned your finger green. That would indicate a lot more iron than gold in the ring. Copper would exhibit a reddish color. If it looks more white than gold you might have some silver or platinum contamination. Black gold would be a result of too much bismuth, a metal found in magnets or alloys.

Throughout history we’ve always had a fascination with gold. The gold rush of the old west. Spanish merchant ships and pirates buried treasure. It’s not so much what gold will buy but how you feel when you have some of it. There is a value worth more than mere money.

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