PIMCO Economist: Fed Should Do Gold QE

April 22nd, 2016 by

While fringe news sources will often talk about the odds that we see a replay of the “Gold Confiscation Act” of 1933 (really, it was an executive order), this has now finally been suggested by a well-respected mainstream economist.

What’s crazier is that the more you consider his argument, the more sense it seems to make.

Should the Fed Play Rumpelstiltskin?

gold demandIn a piece playfully titled, “Rumpelstiltskin at the Fed,” Pacific Investment Management Company (commonly PIMCO) economist Harley Bassman acknowledges that his idea is pretty strange—more the stuff of fairy tales than serious monetary policy. However, he challenges us to consider, is it any stranger than the negative interest rates now being used around the world?

Bassman essentially calls for “QE (quantitative easing) for Gold.” Instead of buying more and more bonds and fiat assets as has been done under QE, his premise is that the Federal Reserve could instead purchase vast amounts of gold bullion. In order to entice the smart investors and private citizens who hold gold to cooperate, he says the Fed could offer to pay well above market price, perhaps $5,000 per ounce of gold.

PIMCO is one of the biggest names in the wealth management sphere. This may show that the monetary appeal of gold is finally reaching the mainstream. Yet, how would “QE for Gold” actually work?

Replay of Gold Confiscation

Mr. Bassman cites a similar situation in the midst of the Great Depression as an historical precedent for the kind of new measure he’s advocating. In 1933, President Roosevelt issued a decree that is often mistakenly referred to as the “Gold Confiscation Act.” Although this accurately portrays when was done, it was actually Executive Order 6102, not an Act of Congress.

Executive_Order_6102The decree made it illegal for U.S. citizens to privately hold gold, effectively revoking the gold specie standard. Keep in mind what an extreme undertaking this was: at the time, gold coins of various denominations ($2.50, $5, $10, and $20) were still circulating as legal tender. Granted, very few people ever spent a gold coin. They were more commonly used as a means of transferring value between banks due to their high face value. Nonetheless, the president was essentially ordering everyone to turn in their gold coins in exchange for market value.

Some people instead hoarded the gold coins, of course. This led to a few disputes with the feds, but had greater implications in the numismatic community rather than the economy. By and large, people cooperated and turned in their gold, which was summarily melted down into gold bars and stored at Fort Knox. In addition, the price of an ounce of gold was raised (i.e. the dollar was devalued) from $20.67/oz to $35/oz.

Bassman judges the executive order confiscating gold to have been a great success at lifting the economy into recovery. He says “positive results were almost immediate. Over the three years from January 1934 to December 1936, GDP increased by 48%, the Dow Jones stock index rose by nearly 80%, and most salient to our topic, inflation averaged a positive 2% annually, despite a national unemployment rate hovering around 18%.”

Gold as Money

gold-priceWhile there are surely fair criticisms of Mr. Bassman’s proposal, it at least brings up another important point: Gold is money! Unlike other commodities, the yellow metal has unique monetary properties. He explains:

Pundits often describe the five factors that define ‘money’:

  1. Its supply is controlled or limited,
  2. It is fungible/uniform – this is why diamonds cannot qualify,
  3. It is portable – this is why land cannot qualify,
  4. It is divisible – thus art cannot be money, and
  5. It is liquid – this means people will readily accept it in exchange.

By this definition, gold is certainly a form of money[.]

As far as this point is concerned, it does seem plausible that the Federal Reserve could embark on a massive gold-buying program in order to stabilize the economy. The one catch is whether or not people would accept another government decree requiring the confiscation of private gold. At any rate, a Fed policy based in sound money like gold is far preferable to the reliance upon massive asset purchases (basically money-printing) and artificially low interest rates.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

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