Tag Archives: asian financial crisis

Guest Post – Why The RBA Sold Our Gold

31 May

Submitted by reader JMD.
A follow up to “The ‘Moneyness’ Of Debt

During 1997 the Australian government, through the central bank (RBA), ‘sold’ some two-thirds of Australia’s gold reserves. The official version of events goes that since gold is no longer important to the international monetary system, the central bank no longer needs to hold it as an asset against its liabilities, there are much better assets to hold, ones that even pay interest!1  And certainly, gold is not money now, even if it was in the olden days.

On the other hand there are many who believe that central bank gold sales – not just Australia’s – were the deliberate policy of faceless bankers to suppress the price of gold. I think that the reality is better described by applying the central tenet of the Gold Standard Institute, that money is what extinguishes all debt, which, owing to the fact that governments’ and their central bank obligations are irredeemable debt, they cannot possibly extinguish debt, which makes gold the only true money. Which means that central bank gold sales were nothing more than extinguishing debt.

Who’s debt? Ours.

As graphs 1. & 2. show, RBA gold sales were about the time of the Asian Financial Crisis.

Coincidence? Maybe but I doubt it (click images to enlarge):

Graph 3. gives the percentage change 12 months ended of M3 and Broad Money, two measures of the growth of system credit, or, the money market. From graph 4. it is clear that the increased issuance of government debt2 is a response to rapidly declining credit growth, or, economic recession. Note the peak in total holdings of government debt in 1997, about the time of the Asian Financial Crisis.

During the crisis, governments’ of the nations affected were unable to simply issue more irredeemable obligations to assuage their creditors. At its low point the Indonesian rupiah had fallen by 86% against the US dollar3 and civil strife was prevalent throughout the archipelago. In desperation Thailand even encouraged people to hand over their gold jewellery to be melted down to boost the central banks’ reserves3. In in least one case – the Solomon Islands – the no doubt weaker credit of the government failed entirely. The Solomon Islands descended into a state of murder and mayhem from – you guessed it – 1997 through to 2003. The Solomon Islands dollar was devalued by 20% in December 1997 alone.

Considering the outstanding level of Australian government debt at the time, I think it likely that the Australian government was forced to extinguish a portion of its debt, rather than roll it over – issue new debt – or face a significant devaluation of the Australian dollar (AUD), with any attendant social consequences. It did this with the only commodity that can extinguish government debt, true money…. gold. Like many Asian currencies, the AUD did depreciate against the USD from….1997. So the government did not ‘sell’ its gold at all, rather it redeemed part of its financial obligations.

The USD gold price did not rise in 1997 but rather fell, albeit slowly, until 2001. There was no financial crisis in the US in 1997 thus no pressing need to extinguish US government debt. Instead the US financial crisis began a few years later in 2001 and continues to this day, along with every other nation. In fact only the other day I read of civil strife in Indonesia, reminiscent of 1997 onwards.

Looking at the current level of outstanding government debt, it seems the Treasury has forgotten any lessons given by the Asian Financial Crisis and looking at the current gold reserves of the RBA, I have to ask, where’s the gold going to come from next time?


1. This explanation conveniently ignores the fact that the RBA had been loaning its gold reserves, according to the Australian Bureau of Statistics, since 1986. These gold loans of course accrue interest.

2. Data for Treasury note issuance is not available pre June 1989.

3. From The Economist

Disclaimer: The views expressed in the above article are the author’s own. They should not be interpreted as reflecting any views held by Senator Barnaby Joyce, The Nationals, or by the barnabyisright.com blog author.

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