If the USD isn't backed by gold, then what is the purpose of Fort Knox?

My dad and I discussed the Bretton Woods meetings the other day. As you know, there were 2 Bretton Woods meetings: One in '33, and the other in '71. I’m not sure what the outcomes of these meetings were, but I do know that by '71, the USD was not backed by anything, and that furthermore, it was considered as good as gold. Prior to '33, the USD was backed by gold. Hence, the very low inflation rate prior to this time. Anyways, if the USD is not backed by gold, then why do we have so much gold at Fort Knox? Also, what were the outcomes of BW’33 and BW’71?

Have you checked e.g. http://en.wikipedia.org/wiki/Bretton_Woods_system ? http://en.wikipedia.org/wiki/United_States_Bullion_Depository ?

There is only one Bretton Woods agreement as far as I know and it happened in 1944 not 1971 or 1933. In 1971, the Bretton Woods agreement finally collapsed after being sick for at least 10 years. In 1933, the US govt formally abandoned the gold standard in which holders of currency (your grandparents) could convert dollars to gold. Bretton Woods made it possible for countries to convert dollars to gold. And of course having a standard of currency valuation fixed to gold is now quite ridiculous because there is vastly more money than available gold and it’s really hard to conduct monetary policy with fixed gold reserves. The gold in Fort Knox is there because gold is still a valuable commodity and part of our national reserves. The gold is also “valued” at $50/oz or something and can’t be sold on the open market by IMF participants per some agreement that I can’t remember. At the fringes, there is even a debate about whether the gold is owned by the US govt or the IMF. Anyway, the US doesn’t hold nearly as much gold as it once did (probably 20% or so). Keynes said that the most useless of mankind’s endeavors is to dig up gold from one part of the Earth, ship it half way around the world, and then put it back underground again. Edit: And DarienHacker has a good plan there too since whoever wrote those is certainly more of an authority on this than me.

The wiki article on Bretton Woods System was a little too comprehensive for me. The other one about Fort Knox, KY, was short/succinct. Thanks. I’ve actually read the BW article before. So basically, prior to '71, the US along with many of our allies, had a pegged currency exchange mechanism. This, for sure, had many weaknesses, I would think. Then, after '71, all these currencies were allowed to float, I think. Prior to '44, all these same currencies were floating as well. So, in a nutshell: 1. prior to '44, all these currencies were allowed to float. 2. From '44-'71, there was a peg (+/- 1%). 3. After '71, the peg was gone. Q1: However, I’m not so sure what are the advantages/disadvantages of each mechanism (peg/no peg)? Q2: What part did gold have to do with the policies in '44 and in '71? Q3: What is the gold backing up in Fort Knox, Kentucky?

Read the Bretton Woods article on Wikipedia. It’s not long. Q1: Response to depression era “beggar your neighbor” problems where everyone devalued their currency to steal business from other countries. It contributed to global deflation and the Depression Q2: The dollar was pegged to gold in '44 and then all currencies were essentially tied to the dollar. By the late '60’s the Great Society and Vietnam made US efforts to support the dollar/gold peg too expensive. Others atrted arb-ing the official price vs street price for gold so it collapsed in '71 Q3: Nothing explicitly, but its part of the monetary base of the US.

Good discussion.

Except it’s a beautiful story that everyone should know and this just isn’t the place for it.

Joey: Where is the place to discuss this?