Conventional academic economists don’t treat gold as the real money it once was. It is relegated to a past era in human history. So why do all central banks, including the Federal Reserve, keep gold bars stored in vaults? Why don’t they just stockpile their own currency? Don’t they trust their own paper?
Central banks own gold, as well as government and private securities, and a host of other assets to perform what are called "open market activities." By buying and selling assets and debts, the central bank can affect the amount of money in the economy, and by extension interest rates.
For example, suppose the Fed wanted to reduce the number of dollars there were. One way would be to go into the market and sell some of its gold. This gold would then enter the market, and cash would leave the market. The fed would then destroy the money it was paid, and there would be fewer dollars. If the Fed wanted there to be more money, it could create some dollars out of thin air, and go buy some gold (or bonds, or whatever), thereby taking those assets out of the economy, and adding cash.
3 Responses to “If paper fiat money is safe, stable and reliable, then why do all the central banks keep stockpiles of gold?”
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I’m not that well-informed, but I can try.
Paper money is just paper. The Fed can print a trillion (they are doing this) and it’ll practically cost and be worth nothing. Paper money isn’t reliable, stable, or safe, but rather an easier medium of exchange. Try exchanging gold coins for a bottle of Coke. Or silver/shells for clothes.
The government backs up paper money, but needs something very valuable to keep the value of money. Here’s where gold comes in. Gold is a commodity that won’t become meaningless. It’s priced pretty consistently high, and adds some backbone in case paper money falls apart. When a commodity is rare, prices go up.
References :
http://mystikegg.com/?p=113
Paper money is safe, stable and reliable because it is backed up by the gold.
A government can print as much money as it wants but the sum of the money will still only equal the sum of the commodity held for it.
References :
Central banks own gold, as well as government and private securities, and a host of other assets to perform what are called "open market activities." By buying and selling assets and debts, the central bank can affect the amount of money in the economy, and by extension interest rates.
For example, suppose the Fed wanted to reduce the number of dollars there were. One way would be to go into the market and sell some of its gold. This gold would then enter the market, and cash would leave the market. The fed would then destroy the money it was paid, and there would be fewer dollars. If the Fed wanted there to be more money, it could create some dollars out of thin air, and go buy some gold (or bonds, or whatever), thereby taking those assets out of the economy, and adding cash.
References :