gold and saving the banking system

Three months ago the Bundesbank was holding over $300 billion in gold reserves. In recent weeks as I watched the German banks struggle with liquidity stress, I found myself wondering whether the Bundesbank and the German government would let that those gold reserves lie idle while German banks collapsed? Would the German government liquidate its gold reserves and use the funds to save the German banking system in the last resort?

Many would object to such a strategy saying that the profligate "banksters" deserve their fate and should be allowed to crash. In strictly moral terms they may be right. But moral considerations rarely guide the actions of governments, so I think we should consider the practical implications of systemic banking failure, particularly from the point of view of the governments who hold gold reserves.

In the modern world there can be no government without banks. Banks provide the mechanism for financial interaction between the private and the public sector, payment of taxes, paying civil servants, maintaining public infrastructure, paying for all the things that governments do. Without a financial conduit to the public sector all this is impossible.

Governments and banks are inextricably bound together. One cannot exist without the other. I think that it is reasonable to assume that governments would do anything and everything to save the banks in their jurisdiction, including selling their gold reserves, rather than risk a collapse in government, let alone risk a collapse in the broad economy that provides funding for that government.

This is the scenario where the prospect of systemic banking failure and a rapid fall in the price of gold are positively correlated.


I invite comments that critically address specific points made in this post.