Germany’s gold is on the move. For the first time since official gold transactions became more transparent, the Bundesbank has given notice that a significant portion of its holdings will be transferred home from France and the United States. Ostensibly, this is just a matter of monetary housekeeping. But why now?
One possibility is that German policymakers believe that we are approaching an every-country-for-itself scenario—and only gold guarded by one’s own police is worth anything.
But this is more than far-fetched. The world in which financial trust breaks down completely between Germany and France or Germany and the U.S. is one in which we have much bigger problems than where a country’s gold is located. International trade would collapse, and major global companies would struggle to sell their products. Having more gold at home, rather than in the vaults of the New York Fed, would be neither here nor there in such a situation.
Does Germany think that its gold will be subject to sanctions or some form of confiscation—as sometimes happens to rogue nations? Again, this is hardly plausible. Countries like Iran and Venezuela work long and hard to become international pariahs. Germany, by contrast, is a mainstay of the democratic world. That is not going to change.
Perhaps German central bankers sense a longer-term shift in international preferences away from the dollar and want to be ready in some fashion. This is plausible in terms of a future decline in the dollar’s importance as a reserve asset and safe haven. Reserve holdings of dollar assets (primarily by central banks) were worth around 2 percent of U.S. GDP in 1948 and about the same in 1968. Today, such holdings are at least 15 percent of U.S. GDP—with some estimates as high as 30 percent.
Much of this rise stems from growing prosperity and current-account surpluses in middle-income countries. When you sell more to the world than you buy, you accumulate claims on the rest of the world—and you need to decide the form in which you want to hold those claims.
At present, the world holds a lot of U.S. dollar assets, and greater diversification of portfolios in coming years would not be shocking. There is certainly much discussion of the renminbi’s increasing international role—an issue on which Arvind Subramanian, my colleague at the Peterson Institute for International Economics, continues to do the most interesting work.
But moving Germany’s gold is hardly helpful in this regard. What would help is to turn the euro around—in the sense of convincing investors that the common currency has a bright future, because it is underpinned by a stronger monetary, fiscal, financial, and political union. When seen in this light, the physical location of gold is purely a distraction.
It is as if German political elites think that they are back in the era of the gold standard. But, even back then, what mattered was the amount of gold you owned— not where it was actually stored.
The broader and more worrying trend is the politicization of central banking. Leading German political figures are becoming increasingly suspicious of the European Central Bank, while also worrying aloud about the U.S. Federal Reserve’s monetary policy.
Their motivating fear is the prospect of inflation. But the real fear is not inflation itself—that is, that prices might rise at a surprisingly fast clip this year or next. Rather, the fear is that central banks will not see inflation coming until it is too late, and that this will cause a major upward shift in inflation expectations.
Again, moving gold does nothing to keep inflation under control or change the behavior of central banks. The link between currencies and gold was irrevocably broken in 1971, when US President Richard Nixon decided to suspend the convertibility of dollars into gold for central banks. We have lived in a purely fiat money system ever since—meaning that our money’s value is not backed by gold or any other physical item. Such monetary systems can succeed only as long as the central bank can credibly commit to keeping inflation under control.
German politicians would thus seem to be suffering from some serious delusions about the importance of gold and the effects of shifting its location. But they are right to worry about the ECB’s policies: Providing unconditional credit to eurozone governments is unlikely to make these governments more careful. There is a real danger that so-called “fiscal dominance” will undermine monetary policy and make it much harder to control inflation.
The German fascination with gold is a red herring. Its fear of wayward monetary policy is not.
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