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Episode 4 - An Update & Gold

Intro

I’m Alexander Bagehot, and welcome to The Bankster Podcast. A show about the Centralverse, which is the deep, the fascinating, the ever changing, and the incredibly consequential world of central bankers and the economies they attempt to support. I'm doing a mini episode today to give you an update on what the schedule of the podcast will look like from here on out. For the news and history sections I’ll describe a really interesting, and relatively unknown role of the Federal Reserve Bank of New York that I alluded to in Episode 3. But first the update.

Update

See, I’ve been working on The Bankster Podcast for a little over a month, and I now know what it takes to produce an episode. So starting today each new episode will be published every other Friday at 8:00 am Eastern time. The next episode (Episode 4: The Committee Part II) will be published two weeks from today on Friday, May 27th.

When making this decision there were three main factors that I took into consideration. The first was consistency. The leading three episode were released the moment the research, writing, recording, and editing were finished. One came at one in the morning on a Monday. Another one came in at 9:00pm on a Friday. Responding to feedback from listeners I’ve decided to stick with a predictable schedule - every other Friday.

The second factor was the quality of the podcast. I was afraid that if I committed to a weekly episode I wouldn’t be able to dedicate the time that each episode deserves. And this leads to the third and final factor: my personal life balance-I have a regular, full time job; relationships; and I’m new to a big city with lots of fun distractions. So producing a consistent, high quality podcast on a biweekly basis is the best move for me.

Going forward you’ll find The Bankster Podcast waiting in your feed every other Friday morning. And as always, feel free to send in your comments and feedback to alexander@thebanksterpodcast.com. They really do affect how I prepare and plan the podcast. But that’s enough of that, let’s move on to the fascinating news and history of the week.

The Report

Every Thursday the Federal Reserve releases a somewhat obscure statistical report, with an even more obscure name, “H.4.1.”  And subtitle? “Factors Affecting Reserve Balances”. I’m not sure who looks at this report. In fact if you're listening to the podcast and you keep up with this report, write in and let me know what you're looking at here.

For me, there is one number on the report I find especially interesting. It is found on line 23 and is called, “Gold Stock”. This is a measure of the amount of gold for which the Federal Reserve serves as custodian. And with over 500,000 gold bars the largest known depository of monetary gold in the entire world is held at the Federal Reserve Bank in New York. So how did this happen? Well, let’s wind the clocks back - way back to 1913.

Gold

The Federal Reserve Act was signed in December of that year, but it would take over a decade before the Fed in New York would finish their main building on the corner of Maiden Lane and Liberty Street. They had been operating since 1914 in various locations throughout the city and when the new building was completed in 1924 they had to transport all of the cash and holdings that they had amassed over the previous decade (we’re not talking about the gold yet, just the valuable papers like cash and securities). It was an amount worth over $3 Billion. The transportation would require, “a fleet of 37 armored cars, 150 New York Police Department officers, 50 detectives, 15 bomb squad members, 60 agents from the Secret Service and 40 Federal Reserve guards armed with Thompson automatic rifles” (the kind you see in the old gangster movies). With that kind of force it’s unsurprising that they successfully moved the $3 Billion on a quiet, Fall, Sunday morning of that year.

The big transfer of cash into the new Federal Reserve building in New York

The vaults in the new bank building were built upon the “bedrock of Manhattan Island, 80 feet below street level and 50 feet below sea level...Massive steel reinforced walls surround the vault…and a 90-ton steel cylinder protects the only entry into the vault. The nine-foot-tall cylinder is set within a 140-ton steel-and-concrete frame that, when closed, creates an airtight and watertight seal. Also, once closed, four steel rods are inserted into holes in the cylinder and time clocks are engaged, locking the vault until the next business day.” This solid, rock foundation and fortified vault would be crucial to the functioning of the new bank building because soon it would be guarding much more than cash and securities, something much heavier - gold.

Over the following decades the quantity of gold at the Federal Reserve Bank of New York would steadily rise. As I mentioned in Episode 3, a large quantity of gold was shipped over to the United States during both of the World Wars. The amount of gold would continue to rise until 1973. At that point there were over 12,000 tons. However, over the past forty years the gold reserves have slowly been withdrawn and the amount today sits at over 6,300 tons. This is still 1.5 times as much gold is held at the US Treasury facility in Fort Knox.

Now, it’s important to clarify that none of the gold at the New York Fed belongs to the Federal Reserve. It also does not belong to any individual or private sector organization. No taking your fine, golden trophies and storing them at the Fed. The only institutions permitted to store their gold at the New York Fed are: foreign governments, other central banks, official international organizations, and the US government. And even the US Government only stores about 5% of their total gold reserves at the New York Fed. The rest of the US gold is guarded at Fort Knox, TX (75%) and the remaining 20% is split evenly between Denver, CO and West Point, NY. So the vast majority of the gold in those underground vaults at the New York Fed is international gold.

And the gold is not fungible. This is a new word for the day. For example this means that the gold bars the German government deposits at their account at the New York Fed are actually German bars. This is unlike a checking or savings account that you or I might have. If you deposit $20 at your bank on Thursday, then come back in on Friday and withdraw $20 from your account, the note that they give you will not be the same one you deposited originally. Or in other words, cash, like your $20 is fungible. The gold at the Federal Reserve bank of New York is not fungible. There are 122 separate compartments for all of the institutions that hold gold at the Fed. When they come to pick up their gold bars they are in fact receiving the very bars that they dropped off. The institutions are charged handling fees for moving, depositing or withdrawing the gold; however, they pay no recurring fee for storing their gold at the Fed.

As I mentioned earlier, most of the gold came into the hands of the New York Fed during the World Wars. These European countries expected to withdraw their gold after the wars ended. However, gold is very heavy and expensive to move. Also, during this time countries were one by one dropping their gold standard based currency. Under the gold standard, central banks were required to exchange the paper money that was used in the economy for the appropriate amount in gold if asked. So when the central banks were no longer required to exchange the paper for gold, they could comfortably leave the gold across the ocean.

So if you live in New York or next time you plan to make a trip to the Big Apple, I highly recommend making an appointment to go down and see the gold vaults. The tour is just an hour long and it is free. Registration opens 30 days in advance but the spots fill up fast, so prepare wisely.                         

Conclusion

That’s all for today’s mini episode. The main source, and all citations, from today’s episode came from two (1) (2) great articles on the New York Fed’s website. As always, I’ll have links to these articles on the transcript of today’s episode. Also, I have a lot of incredible pictures of the vaults, the original money transfer back in 1924, and more on my website. Check them out at www.thebanksterpodcast.com.

Today’s episode was written, edited, and produced by me, Alexander Bagehot. I dedicate this episode to David Stein, who introduced me to the world of finance at a pivotal time in my life and has been a great mentor ever since. And to all of you, thanks for listening. I’m Alexander Bagehot, and I’ll see you in two weeks for another episode of The Bankster Podcast!



 

Episode 5 - The Committee, Part II

Episode 5 - The Committee, Part II

Episode 3 - The Committee, Part I

Episode 3 - The Committee, Part I