Monetary Effeets of the Treasury Sale of GoldALBERT E. BURGER

/t14 T TFIE beginning of 1975, it became legal for

U. S. residents to hold gold for the first time in 41years. In early December, the U. S. Government an-

nonilced its intei~tion to offer 2 million ounces ofgold for sale to the public early in Jalluary 1975 fromits holdings of 276 million ounces. The Treasury re-ceived bids for oniy about one million ounces of goldand accepted bids for oniy 753,600 ounces. The goldwas soM at an average price of $165.65 per ounce,hence the sale added about $125 million to therevenues of the Treasury.

This note illustrates the monetary implications ofthis sale of gold to the public. It is assumed that theGovernment did not alter its spending plans as a re~suit of the sale of gold. It is assumed that the Treasuryused the proceeds from the sale of gold to makeexpenditures rather than using tax revenues or usingthe receipts from the sale of bonds to the public. Theeffects of the transactions between the Treasury andthe Federal Reserve are illustrated, and their effectson the monetary base are discussed. The sources ofthe monetary base are shown in Table I.

in the following analysis it does not matter whethera U. S. resident or a resident of a foreign countrypurchased gold sold by the Treasury. In order topurchase gold at the auction, a foreign individualmust have dollars. Hence, when lie pays for the gold,demand deposits of foreigners at U. S. commercialbanks decrease. Since these deposits are part of theU. S. money stock, the analysis would be the sameas when demand deposits of U. S. residents decline.

.1 re~sttruS:hmet~zesUOlt.L

In early December the U. S. Treasury held about276 million ounces of gold. Of this total amount, 274million ounces were held in the General Account ofthe Treasury and 2 million ounces were held in theExchange Stabilization Fund. Only the 274 millionounces held in the General Account were counted inthe monetary base. The Treasury had issued goldcertificates to the Federal Reserve Banks againstabout 271.5 million ounces of gold, valued at $11.5

Tabl

SOURCES OF THE MONETARY BASE

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torn,R~erv~Ppø

st# pW SpecFe~ D ~wrn~ ~tgM rS Glecc *~

Irds crr}iyats~fitUpg

Ohs PtdtetRne~ve*s t

?cscf*r, Absottrnt Monetttry S*se7 cos~th4tdutg~Dej~osifswst~tedeS Reserve Bwtks

tr wyft &‘0th.

ther Eedo at let rv b*bthN ctad cupr~&

esey *diutm t~s

N Mc~tiarySt*s~ U

p hd0 ~*r~ an 1

S miLkc~ e e t B h C flR rob for jo T~ ufb gh -

h~ tad u 0 1 -~ ~n U g rean~OU mill S $fl Ii Feder R Ran and rn~

sti n ha bi nFun tt N r I Ba hh~~eh

44 he~

do~

OmU t~fl itt ni c~ rv qient ban n ~bt z h d~ ntr rv

re Ut appi

billion at the official U S price of $42.22 per ounce.1

The remaining 4.5 million oimces of gold was heldin th Exchange Stabilization Fund1 and in TreasurycasW (2 and 2 5 million ounces, respectively)

~A the I reasury purchas d gold h hc pa t and when theofficial ( . S. pn c of gold n as than ret!, the I reasury hadmor etizcd th gold b Issuing gold cx rtificate to thc

F~deraIRese e Bank . In return the Trea ur~ r~~‘~ed clmand deposit at th I .d ~ral H ~scr’c Ba~k~,. S klbert 1Burger, ‘The \iooetarv Leoi~omic of Gold” this R ~kw(Jarnzai 1)74) pp. -a.

~The Exchange Stab Ii ation Fund admini t red b thc [na -

ury held 2 019,7o1 ounecs of ~,oId a’ ed at 853 milho~This gold had b ~i acquircd by the 1 i ~n or to Au in t 1519 1 when thc I mid u~a~,d f om time to tim In gokitran action. ~ ith foi& i ft flum tar> authontic and t~ith thmarket for th . pin po~c.of stabilizing the ~aInc of thc dollarrcLiti~e to gold.

Frea un a~h o dings ipi c ent the fund thaL the Frea unt ‘chmcally ha~at it di P0 al n ithoot d a~sing on it. il ~posits

Page 18

FEDERAL RESERVE BANK OF ST. LOUIS JANUARY 1975

fRuflrabor~ I

Treasury Monetizes Previousty Nanmoneti e Gold(Mithon ef Do tars)

Mo e DryTreate~y Federnt Rtserve Sources U es

$707 $107 got~ $w7 gold F $107 Trea ~ry 3 S~O7~fica~es cort7fi ttt~i Yr aswy- depa th Ca Ii

t07 t 3*107Tressury Treas ry denmad Mn cSnge

wsh (non dept rt at F Rm*ne~ze4gdd)107 demand

4eposds

lSIk flbflk~fl~IMe~tretOflO if affloAtaryb ~k’or ~ U o n as l~ as

In December the Treasuty monetized the remaining Treasu’y monetized the gold, is a factor increasing45 million ounces of gold held in its accounts by the monetary base; the rise in demand depositspurchasing 2 million ounces from the Exchange of the Treasury at Federal Reserve Banks is a factorStabilization Fund and issuing gold certificates decreasing the monetary base. Therefore, the Treasuryagainst the entire 4.5 million ounces of gold. In action of issuing gold certificates against the 2.5 mu-return, it received deposits at the Federal Reserve lion ounces of nonmonetized gold in December hadBanks equal to $192 million, no effect on the monetary base.

The 2 million ounces of gold held in the ExchangeStabiizalion Fund (ESF), however, was not pre-viously included in the gold component of the mone-tary base, In the sources of the monetary base, “otherdeposits” at Federal Reserve Banks included a specialgold account of the Secretary of the Treasury whichincluded the gold held by the Federal Reserve Bankof New York for the Exchange Stabilization Fund.Other deposits also included the special checkingaccount of the Exchange Stabilization Fund. There-fore, when the Treasury purchased the 2 millioHounces of gold from the Exchange Stabilization Fund

Illustration I shows the effects of the Treasury and issued gold certificates against this amount to themonetizing the 2.5 million ounces of previously uI~- Federal Reserve Banks, the value of the gold stock inmonetized gold in Treasury cash valued at $107 the monetary base rose by 885 million. In the weekmi1Iion.~In the process of monetizing gold, the Treas- ended December 11 the gold stock of the monetaryury issued gold certificates to the Federal Reserve base rose by $36 million and then rose by an addi-Banks, in return for which the Federal Reserve Baiiks tional $49 million in the week ended December 18.credited the demand deposits of the Treasury. The -,

W hen the I i-easury purchased gold from the I~SF,decrease in Treasury cash, which occured as the . -,

deposits of the LSF at the Federal Reserve rose andTreasury deposits fell. The gold from the ESF account

at the Fec1era~ Reserve or Tax and Loan aecowits at corn- was initially transferred into the Treasury’s Generalmeremi banks. This account mdudes any currency and cornheld by the Treasury in its own vaults plus nonmonetized Account holdings oi nonmonehzed gold, hence thegold and sliver bullion, SilVer dollars, and nonsilver cwnage item Ti-easury cash rose. When the Treasury issuedmetal. See Federal Reserve Bank of New York, Glossary:Weekly Federal Reserve Statements, Factors Affecting Bank gold certificates agamst the gold it had acquired fromReserves” (September 1972), p. 20. the ESF, the gold became classified as monetized

~The Treasury held 2,518,006 ounces of nonnionetized gold gold, Treasury cash decreased, and Treasury demandwhit ~.a1ued at

11th tc.iaiPnccof ~12

22an~unce was deposits increased These trans ~ctioi~s aie shown in

has been rounded up to $107 million. Illustration II.

Page 19

The “monetary” or Treasury gold stock of theUnited States ecmsists of both the amount of goldagainst which gold certificates have been issued andgold against which no gold certificates have beenissued (nonmonetized gold). Nonmonetized gold isincluded in the account “Treasury cash holdings”which appears as a factor affecting bank reservesand is included on the sources side of the monetarybase. An increase (decrease) in Treasury cash ab-sorbs (releases) bank reserves and hence reduces(increases) the monetary base.

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FEDERAL RESERVE SANK OF ST. LOUIS JANUARY 1975

lttustrotirni IV

Effect 4~1Money Stock ~f treasurySole of Gold

(Mtttsoas of Defter

Stage I Stage UTreasury $ Us Gold i usieansry Makes Pay.m ml,

to the P~btsc

Federat ~eserve Federal Rose a

$125 $175tteasury Ir a ‘Wy

4epeslt at d 5ot’ts atdestt Reserve I kd rat R~erve

Sank Bak

ember b nit I snethb r boric4e a ~tsat depesits atF derel ?adera~Reeserye Rank Banks

$125 $125 $t75member bank 4ent ad m inbe bank 4 mend4epossts at deposits epat’ts at tpts itthe edarat 4f the pubksc th Federal of the publicRot rye Reserve

Banks

transactions will be reveised shortly. The Treasurymakes payments for goods and services and makcstransfer payments by wiiting checks drawn on itsdepostts at the Federal Resene Banks. Therefore, asthe Treasury makes expenditures Treasury depositsat the Federal Reserve Banks decrease, demand de-posits of the public rise, and bank reservcs mere mc.

These effects are shown in Stage II of IllustrationIV. The money stock returns to its level prior to thesale of gold.

The effects of the Treasury sale of gold on themonetary base are shown in Illustration V. Atthe end of December the Treasury held gold inonly one account, 276 million ounces against allof which gold certificates had been issued. As theTreasury sold gold to the public in early January,it had to redeem gold certificates from the FederalReserve representing claims of an equal amount.These gold certificates were redeemed at the officialU. S. price of gold ($42.22 an ounce). Hence, theTreasury paid the Federal Reserve about $32 millionto redeem gold certificates representing claims on753,600 ounces of gold. This transaction had no effecton the money stock or the monetary base. Treasurydeposits at Federal Reserve Banks decreased by $32million and the amount of gold in the monetary base(which is valued at the official U. S. price of gold)declined by $32 million. These effects are shown inthe upper third of Illustration V.

As the Treasury received payment from the publicfor the gold, Treasury deposits at Federal ReserveBanks rose by $125 million. These effects are shownin the middle of Illustration V. When the Treas-ury spent the proceeds from the sale of gold, thesetransactions were reves-sed; demand deposits of theTreasury at Federal Reserve Banks fell by $125

III U sirotiors V

Treasury Selk Gold to the Public and RedeemsGold Certificates at Federal Reserve Banks

(Miim:ons ot Dollo’ siMonetary Base’

- Treasu.y , Federal Rrie”vc , Soirces discs

Peasury Redeems ‘ $32 rrone $32 qolo $32 gold ~32 ‘reosury $32 gold

Gold Crrt’9cc,t,,s J tzed gold certificates c,’rtificates demand deposi!,32 demand 32 net ‘ ) 32 Treosury No ctsonge

deposits v,arth demand depositsat F R.

T.easry R”ceives 125 demand 125 ns~t No ctsonge 125 I’eosery I 1 25 Treasury 125 membc,

Poyrnert fo- Gold ‘ deposits worth derrond ocisond deposits bank deposits— deposits at FR. at FR.

125 memberborsk deposits

Ti easisry Purchoses 1 1 25 demand 125 Is eosjry ) 125 Ircosury 125 memberGoods ord Sorvics’s . deposits desnar~deposits demand deposits bank dcpositsNo change No O’o ngsw ‘h P’ocrs.’ds of at FR at P.R.125 goods 125 demandGold Salt—— — oisd serysces depossis of

member banks

Is, lsr.e’k,’. irOn.’ ‘. ‘er_u.n i.f ,.:C..c,,.s sts’fl”5

I’a,!s.’ 21

FEDERAL RESERVE SANK OF ST. LOUIS JANUARY 1975

I 4*trette VI

Suet#nory cit Effects of Goki I up ~tcttons ems he Monete y Ba~Mdon a Dot s~

Meretery Eeoc’

rearntry eden, * se $eu Ce Lisa

$TtbmerStrd IdOgetd $t gaS 7 Ira ry ~3g*tdgad rt*cetes Ce iron e dma 4 las

54 mae demo 4 depast~deposIt S F atFE

iou rea depo I ~ ~ Na heegecash Dli

I goads D3net In SFS e as Gr~ 4e~ioits

t tO

million and d posits of mcmber banks at tIn. FederalReserve Banks rose by $125 million as shown in thelower third of Illustration \~

Illustration VI depicts the final effect on thmonetary base after the Tr asury had monetized4.5 m’lliou ounces of gold sold about 75(1000 ouncesof gold to tIn, public and spent the pioced fromthe sale of gold ($125 million). Gold in the monetary base ro ‘e by $a3 million equal to the transferof gold from the ESF ($85 million) lcss the officialdollar amount sold to the public ($32 million).Treasury cash dccrea ed by $107 million reflectingthe decrease in nonmonetizcd gold. ESF deposits(included in ‘other deposits”) ose by $85 millionreflecting the purchase of gold from the ESI’ by theTreisury.

One important item to note in the final result fortile monetary base is that Treasury demand depositsat the Federal Reserve Banks are $75 million highereven after it has spent the proceeds from the sale ofgold. The Treasury received $192 million in depositsat Federal Reserve Banks asa result of monetizing4.5 million ounces of gold. It spent $85 million to payfor the gold it acquired from the Exchange Stabiliza-tion Fund and $32 million to retire gold certificatesas a result of the sale of gold. When the Treasuryspends the balance of the proceeds from monetizing

The Treasury experienced an increase in net worth gold ($75 million) the monetary base will increasebecause it sold gold, valued on its accounts at $42.22 by this amount,

an ounce, to the public at an average price of $165.65an ounce. Gold holdings of the Treasury, as valuedin Treasury accounts, decreased by $32 milhon, butthe Treasury received $125 million from the public.I-lence, the Treasury had a gain in net worth of $93million.

Page 22