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Gold Reserve
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

The gold held by central banks and governments that is available for reserve basis for domestic credit expansion of the banking system; gold cover, if any, for domestic money in circulation; and international balance of payments.  In connection with balance of payments, "adequate" monetary reserves serve to absorb temporary payment deficits, thus preventing such drastic measures as currency devaluation, trade or exchange restrictions, and domestic deflation.  Growth in monetary reserves also facilitates a return to complete or partial degrees of CONVERTIBILITY of the currency internationally, if not domestically, into gold.  Since the U.S. dollar was convertible internationally by official accounts, foreign governments and their official institutions could purchase gold from the U.S. Treasury at the monetary price, thus demand deposit balances and short-term investments in the U.S., in addition to direct gold holdings or holdings under earmark at the Federal Reserve Bank of New York, were a more inclusive measure of gold reserves for such foreign governments (member nations of the INTERNATIONAL MONETARY FUND).

In the U.S., as a result of the 1933 nationalization of gold and domestic vesting of monetary gold reserves in the U.S. Treasury under the GOLD RESERVE ACT OF 1934, the Federal Reserve banks received credits redeemable in gold certificates which served as the legal reserve required equal to at least 40% of Federal Reserve notes in circulation (reserves comprising gold certificates or lawful money equal to at least 35% of deposits at Federal Reserve banks were also required), until 1945.  Act of Jun 12, 1945 (59 Stat. 237) reduced this reserve to a uniform 25%; Act of March 3, 1965 (P.L. 89-3) eliminated the 25% gold certificate requirement against Federal Reserve banks' deposit liabilities; and Act of March 18, 1968 (P.L. 90-269) eliminated the 25% gold certificate requirement against Federal Reserve notes in circulation.

In addition to the gold stock held in its general fund, the Treasury kept a relatively small amount in the working balance of the EXCHANGE STABILIZATION FUND.  At the close of December, 1970, this totalled $340 million.  When the monetary price of gold was raised from $20.67 to $35 an ounce on January 31, 1934, by Presidential Proclamation, the gold "profit" of $2.8 billion thereby created was largely ($2 billion) credited to the Exchange Stabilization Fund, of which $1.8 billion was kept inactive.  Most of this profit not credit to the stabilization fund was later used indirectly to retire NATIONAL BANK NOTES.  In 1947, $688 million of the $1.8 billion in the inactive portion of the Exchange Stabilization Fund went to pay the gold subscription of the U.S. to the International Monetary Fund (IMF), the balance being added to the general fund of the Treasury or used to cover issuance of gold certificates to the Federal Reserve banks.  In 1953, the Treasury issued $500 million in gold certificates against gold in the general fund to $500 million in gold certificates against gold in the general fund to redeem government securities held by the Federal Reserve System.  Transactions with the IMF in 1956 and 1957 involved the purchase for dollars of $200 million and $600 million of gold, respectively; and in June, 1959, the U.S. paid $344 million in gold into the IMF (25% ratio applicable to all members' 50% increase in quotas, which meant an increase in subscription of the U.S. of a total of $1,375 million; the balance of the U.S. subscription was paid in non-interest bearing special notes, due June 23, 1964, in the amount of $1,031 million).  The concurrent subscription to additional shares of stock in the International Bank for Reconstruction and Development did not involve any cash payment; instead, it increased by $3,175 million the U.S. guaranty behind obligations to be issued by the bank to investors in the U.S.

Since gold was nationalized in the U.S., all gold newly produced domestically or imported was automatically bought by the Treasury ($35 an ounce, less 0.25% handling charge), by check on the Treasury's account in each Federal Reserve bank.  To replenish this reduction in its accounts at the Fed, the Treasury issued an equivalent amount of gold certificates to the Federal Reserve bank involved, against the increase in gold.  Thus, gold stock of the Treasury, gold certificates of the Federal Reserve banks, reserve balances of the member banks, and bank deposits of the sellers of the gold were all increased.  Contrary to lay impression, therefore, the gold stock of the U.S. was not simply buried at Fort Knox, serving no useful purpose, but on the contrary importantly entered the credit system.  If the sellers of the gold imported were foreign governments or central banks, the U.S. bank deposits and reserves were not increased, as the initial credits were usually to deposits of these foreign authorities at the Federal Reserve bank, until such time as such additional deposits were drawn on for settlements in the domestic U.S. markets.

When gold was sold by the Treasury for earmark or actual export (under general Treasury license) by foreign monetary authorities, the payment therefor could be from such foreign deposits at the Federal Reserve bank or from deposits in member banks.  The Federal Reserve bank concerned turned over an equivalent amount of gold certificates in payment to the Treasury for the gold, charging the deposit account of the foreign authority or reserve balance of the member bank concerned.  In turn, the member bank, if involved, charged the deposit account of the foreign authority concerned.  Gold outflow, therefore, reduced gold stock of the Treasury, gold certificate holdings of the Federal Reserve banks, and perhaps reserve balances and deposits of the member banks if the latter handled transactions.

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