Gold Bullion as Money; 5,000 Years vs. the Fed

By Danny Esposito for Investment Contrarians | Jul 26, 2012

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There was quite the stir last year when Ronald Paul asked Ben Bernanke if gold bullion was money, to which the Federal Reserve Chairman replied that gold bullion wasn’t money.

Since then, the debate has raged as those for gold bullion being money claim that the Federal Reserve cannot erase 5,000 years of history throughout which gold bullion has been used as money. Those against have claimed that we need to move on, and that we have evolved to the point where gold bullion is not reflective of the monetary system but is a commodity that should be grouped with other commodities.

For the sake of full disclosure, I fall into the camp that believes gold bullion is money.

Despite the debate, it is assumed that the Federal Reserve falls on the side that gold bullion is not money, especially after Bernanke’s comments. However, in its latest report, The Key to the Gold Vault, the Federal Reserve Bank of New York describes the history of gold bullion and details the bank’s role as keeper of the gold bullion in its vaults for 36 foreign governments, central banks, and official international organizations.

In the section “The Gold Standard,” the Federal Reserve Bank of New York has this to say about gold bullion:

The gold bullion in the Federal Reserve Bank of New York’s vault is part of the monetary reserves of foreign governments, central banks and official international organizations around the world. It is largely a relic of an era when the gold standard and gold exchange standard were used to establish the relative values of national currencies, and gold itself was used to meet international payments.

It describes the age of the gold standard and the gold exchange as a “relic,” yet the Federal Reserve has not sold one ounce of its gold bullion. If it is such a relic and prices are high, why not sell it?

A little later in the report, under the section of “Power and Worth,” the Federal Reserve Bank of New York describes how much it owns: “The United States owns approximately 27 percent of the monetary gold.” Notice how it describes gold bullion and the amount it owns as “monetary” and not a commodity or asset.

Finally, the Federal Reserve Bank of New York ends its 22-page presentation on this note:

For centuries, gold had a profound impact on history, as a symbol and a storehouse of wealth accepted universally around the world. Gold functions as a medium of exchange, particularly in areas where currencies are distrusted… Clearly, this precious metal has aroused great passion. It undoubtedly will continue to do so long into the future.

The Federal Reserve Bank of New York is admitting that gold bullion is “accepted universally around the world” and that gold bullion “functions as a medium of exchange,” which is another way of classifying gold bullion as money. It also defines gold bullion as a precious metal and not a commodity.

So as the debate rages on, the Federal Reserve Bank of New York may be wondering what the fuss is all about. Clearly, gold bullion is money.

Tags: Federal Reserve, gold bullion