Gold and the federal reserve system

The largest concentration of refined gold lies in the vault of the Federal Reserve Bank of New York (FRBNY). It is held there in safekeeping mainly for foreign monetary institutions which make extensive use of it in market transactions. It now amounts to some 300 million oz.

The FRBNY began holding gold for foreign monetary institutions, known as “earmarked” gold, in 1914. The earmarked reserves increased significantly during Second World War and continued to grow thereafter, peaking around 1975. Since that time, earmarked gold has declined as foreign authorities accelerated their tendency to ship gold from the FRBNY’s vault to other repositories (mainly London, England) where the metal can be more readily mobilized.

A major factor contributing to the decline in foreign holdings lies in the FRBNY’s antiquated gold vault procedures, which are an impediment to gold transactions and to the development of a U.S. market in official gold. For the FRBNY to maintain its last remaining important link to gold, its custody service must be modified. This would benefit foreign monetary authorities, help in the development of a U.S. market in official gold and provide the FRBNY with improved market information.

The FRBNY could change its procedures without great difficulty. The first step should be to relax title transfer requirements to ensure that transfers are timely. Another step would be to offer a weighing and stamping service in place of the cumbersome procedure now in place.

A third step would be for the FRBNY to institute dealer accounts. Title to official gold bars could then be passed to a dealer without immediate physical movement, and the dealer would be able to conduct transactions in the gold to which it has title. In some cases, the use of accounts might eliminate the need for shipment from the vault. With dealer accounts, a market for official gold could develop.

— This is a summary of discussions held at the Central Bank Workshop on Jan. 20 in New York and sponsored by the World Gold Council. H.D. Willey is an adviser with Morgan Stanley & Co., where he concentrates on relations with central banks and other institutions.