Who moved my gold?

The Financial Times reported yesterday that Germany was making an audit (*) of its gold holdings, much of which are abroad. The newspaper Suddeutsche apparentlu estimates that about 1,500 tonnes of the total 3,400 tonnes of German owned gold are held in the USA.  There has been no audit of that gold since 1980. So the German Federal Court has asked the Bundesbank (the Germany central bank) to check that it’s all where it’s supposed to be.

This story brought to mind an episode in the book Lords of Finance by Liaquat Ahamed. This wonderful book tells the story of the breakdown of the gold standard in the early 1930s and the descent of Europe and the USA into the great depression, through the characters who made it (or allowed it to) happen – the heads of the central banks of the US, UK, France and Germany. Then too, the German central bank, the Reichsbank, held some of its gold in the US, in the New York City vaults of the Federal Reserve Bank of New York. The New York Fed was then de facto the leading institution of the Federal Reserve System, unlike now when the Washington DC-based Board of Governors is firmly in control. in the mid-1920s the head of the NY Fed, Benjamin Strong, hosted a visit by his German opposite number Hjalmar Schacht. He thought it would be polite to show Herr Schacht the stack of gold in the vault which belonged to Germany. But to Strong’s great embarrassment the pallet of German bullion couldn’t be found (p.379). Schacht presumably regarded this as an administrative error though he might have wondered whether the gold really existed.

It was a curious feature of the gold standard system that the gold that notionally moved between countries, reflecting differential interest rates and changes in financial confidence, often didn’t physically move at all. For example, much of the French stock of gold was held at the Bank of England in London. So when gold “flowed” from the UK to France, which it did in large quantities during the late 1920s, what actually happened was that somebody from the Bank of England went down to the vault, re-labelled some bars of gold and went back upstairs again.

Future historians – and anthropologists – will marvel at how the international financial system of a modern and supposedly sophisticated economy depended on one group of men digging up some shiny yellow stuff and another group of men then burying it underground again, with adjustments to the notional ownership of the shiny stuff being done in handwriting.

You could always make a necklace out of it

(*) This story also reminded me of one of the most tiresome and boring jobs I have ever been asked to do, which was the annual silver audit at St. Catharine’s College. As a junior Fellow the tedious jobs fall to you – the more exciting ones like wine tasting are reserved for the more senior members of the Fellowship.

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