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The Key
To The Gold Vault Few European nations could maintain their gold standards during World War I, however, as shipments of the metal frequently were embargoed. And when the standards were restored in the late 1920s, many countries adopted a revised version called the gold exchange standard. This revision appealed to countries that wanted some sort of gold standard but also wanted to halt the drain of gold reserves. The gold exchange standard did just that by permitting the use of reserve currencies instead of gold in exchange for their currencies. At first, the United States and England countries with substantial gold reserves became issuers of the world's "reserve currencies." But in 1931, after maintaining gold parity throughout the stress of the decade following World War I, England suspended gold payments. This set off a wave of similar suspensions so that, by the first half of 1932, more than 40 nations had deserted either the gold standard or the gold exchange standard. Then, in 1933, President Roosevelt imposed a ban on U. S. citizens' buying, selling, or owning gold. While the U. S. Government continued to sell gold to foreign central banks and government institutions, the ban prevented hoarders from profiting after Congress devalued the dollar (in terms of gold) in January 1934. This action raised the official price of gold by more than 65 percent (from $20.67 to $35 per troy ounce). Gold coins and certificates considered collectors' items were exempt from the prohibition, and artistic and industrial users of gold were permitted to deal in the metal under a special Treasury license. Legal gold transactions had to be made at the official U. S. Government price until 1968, when gold regulations again were changed to prevent runs on U. S. Government gold reserves. Under the new system, the world's currencies would still be valued in terms of the dollar, but the dollar would no longer be related to gold reserves. Also, since 1968, licensed dealers have been able to buy and sell gold at market- determined prices. When the United States stopped selling gold to foreign official holders of dollars at the rate of $35 an ounce in 1971, it brought the gold exchange standard to an end. In August 1974, President Ford repealed the prohibition on the public's owning gold or engaging in gold transactions. Today, no country bans private ownership of gold. The gold stored at the Federal Reserve Bank of New York is secured in a most unusual vault. It rests on the bedrock of Manhattan Island one of the few foundations considered adequate to support the weight of the vault, its door, and the gold inside 80 feet below street level and 50 feet below sea level. In the middle of 1997, the Fed's vault contained roughly 269 million troy ounces of gold (1 troy oz. is 1.1 times as heavy as the avoirdupois ounce, with which we are more familiar), representing 25 to 30 percent of the world's official monetary gold reserves. At the time, the vault gold's value was $11 billion at the official U. S. Government price of $42.2222 per troy ounce, or about $86 billion at the market price of $319 an ounce. At the current official U. S. Government price, one of the vault's gold bars (approximately 27.4 pounds) is valued at about $17,000. At a $319 market price, the same bar is worth about $127,000. Foreign governments and official international organizations store their gold at the Federal Reserve Bank of New York because of their confidence in its safety, the convenient services the Bank offers, and its location in one of the world's leading financial capitals. Confidence results from the Bank's being part of the Federal Reserve System -- the nation's central bank and an independent governmental entity. The political stability and economic strength of the United States, as well as the physical security provided by the Bank's vault, also are important factors. Convenience comes from the fact that the Federal Reserve Bank of New York, in addition to handling foreign financial transactions for the U. S. Department of the Treasury and the Federal Reserve System, executes many other financial transactions in the United States for foreign central banks.
FOREIGN GOLD AT THE FED Foreign- owned gold valued at $26 million (at the official price at that time of $20.67 a troy ounce) was on deposit with the Federal Reserve Bank of New York when the main vault was opened in September 1924. Holdings rose to about $458 million by the end of 1931, then fell sharply during the Great Depression. The economic problems of the United States, a slump in world trade, the lack of confidence in the international monetary system, and a desire to provide a boost to their troubled economies prompted many nations to recall their gold. By 1935, foreign gold deposits had fallen to about $9 million, even though the official price of gold had been raised to $35 a troy ounce by the Gold Reserve Act of 1934. The threat of war in Europe reversed the trend of Depression- era withdrawals and brought a virtual flood of gold to the New York Fed for safekeeping. More than $1 billion poured in between 1936 and 1939, when Germany invaded Poland. By the end of the war in 1945, foreign gold reserves stored at the Federal Reserve Bank had risen to more than $4 billion. There was a slight outflow of gold from the Bank's vault in the two years immediately following World War II. During this period, many nations swapped their gold for the U. S. dollars needed to rebuild their war- ravaged economies. After that, the economies of foreign nations recovered, and their exports to the United States began to rise. As a result, there was a shift in the U. S. balance of payments toward larger deficits. As nations with trade surpluses with the United States accumulated more dollars than they needed, they often exchanged their dollars for gold. The gold coffers of these nations in the New York Fed's basement bulged. From 1947 to 1971, the year the United States suspended convertibility of dollars into gold for foreign governments, about $10 billion more was deposited in the vault, bringing the total value of gold holdings stored at the New York Fed to $14 billion at the official price of $42.2222. Since 1972, there has been a gradual, but steady, net withdrawal of gold from the vault. The value of deposits in the vault also has varied over the years because of changes in the official, as well as the market, price of gold. Today, all gold transactions occur at the market price of gold, but prior to 1971 gold transactions between nations were made at an official fixed price. The official U. S. Government price of gold has changed only four times during the past 200 years. Since the passage of the Gold Reserve Act of 1934, which raised the official price of gold to $35 a troy ounce, the price has been raised twice: to $38 in 1972, and in 1973, to its current price of $42.2222 an ounce. Because of the large disparity between the official price and the market price of gold, the official price has become irrelevant from a transactions perspective. Today, no nation is willing to sell gold at the official price, which is used by governments only for bookkeeping and reporting purposes. The Bank stores gold in the
form of bars that resemble construction bricks and stacks them
on wooden pallets like those used in warehouses. To reach the
vault, the bullion- laden pallets must be loaded into one of
the Bank's elevators and sent down five floors below street level
to the vault floor. The elevator's movements are controlled by
an operator who is in a distant room and communicates by intercom
with the armed guards Once inside the vault, the gold bars become the responsibility of a control group consisting of representatives of three Bank divisions: Auditing, Vault Services, and Protection. A member of each division must be present whenever gold is moved or whenever anyone enters the vault. (click on the key). All bars brought into the vault are inspected and weighed. These steps are critical, because the weight and purity of a bar determine its value and acceptability in International transactions. A modern electronic balance scale weighs each bar to the nearest 1/1000 of a troy ounce. The vault control group verifies the weight, serial number, and purity measure stamped on each bar against an accompanying manifest. --> next |
