James Bond, Buffett’s Martian, and Europe’s Gold Standard

Using gold to collateralize a sovreign country's debt might have merit

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“In the 1970s, for instance, Italy and Portugal employed their gold reserves as collateral to loans from the Bundesbank, the Bank for International Settlements (BIS) and other institutions like the Swiss National Bank. Italy, for instance, received a $2 billion bail-out from the Bundesbank in 1974 and put up its gold as collateral. More recently, in 1991, India applied its gold as collateral for a loan with the Bank of Japan and others. And in 2008, Sweden’s Riksbank used its gold to raise some cash and provide additional liquidity to the Scandinavian banking system.”

Yes, contrary to common wisdom and current eurozone practice, governments can and have put gold to good use. And they’ve done it long after the demise of the classical Gold Standard seemed to mean Auric Goldfinger had beaten James Bond, effectively irradiating the world’s official gold reserves, putting them beyond use (his plan in the movie, not the book). Nor do governments need to sell and so lose their gold, as they did a decade ago – back when history had ended, and the risk of crisis seemed as remote as, say, a Greek eurozone exit.

Part-backing debt with a chunk of gold has a much longer history than the 1970s too. Under the high Victorian Gold Standard, the Bank of England was allowed to issue banknotes over and above the actual gold-backing held in its vaults. Over the next 80 years – the zenith of international trade enabled by that London clearing house – the Bank of England’s requirement was safely cut to just one ounce of gold for every 3 ounces’ worth of paper Pounds Sterling. So two thirds of Great Britain’s gold-backed money was unbacked, in short, with the “promise to pay” still stamped on all banknotes regardless.

To anyone watching from Mars, part-backing a debt issue today would look awfully similar.

 

 

 

 

 

 


Article printed from InvestorPlace Media, http://investorplace.com/2012/10/james-bond-buffetts-martian-and-europes-gold-standard/.

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