The gold stored in these central banks was at one time used to back all western currencies. However the sole purpose for gold being held in western banks today is for repayment of debt. History shows us that about every 30 to 40 years the world creates a new monetary system. Previous monetary systems continually have failed due to poor fiscal policy, planning and manipulations. Before WWI most countries kept a specific amount of gold in their treasuries. The treasuries would then issue out currency notes into circulation in amounts that equaled the equivalent value of the gold held in their treasuries. So the currency issued was always backed by 100% gold.
When WWI came around war costs for western nations rapidly began to rise. In Europe all the countries stopped currency redemption rights. This took away the ability for an individual to turn in their national currency to a bank, to exchange for an equal amount of gold. At the same time all the various government printing presses in Europe were split up. At the time between the WWI and WWII the world's monetary system changed, into what was called the Gold Exchange Standard. An example with the United States Federal Reserve Act now in place, currency was to be backed not by 100 percent gold as before, now it was only to be backed by 40 percent gold.
Therefore the Federal Reserve would be able to place $50.00 of currency into circulation for every $20.00 worth of real gold held in the vaults. Each $50 dollars of currency in circulation was guaranteed to be paid back to the bearer upon demand and redeemable in gold. So now there were more receipts or promises to pay back in circulation, than the real amount of gold held in the vaults. The currency was actually the paper being circulated, while the money or real stuff was stored in the vaults. Finally during the 1930's, the Great Depression saw this monetary system implode, as it was poorly designed and structured.
The next monetary system came into existence at the end of WWII. The Bretton Woods Agreement, which existed from 1944 through 1971. This new system had no reserve requirements, allowing the Federal Reserve to print money almost at will. At that time gold was pegged to $35.00 per ounce. The requirement for the Bretton Woods system was that for every $100.00 of currency printed, ten percent or $10.00 worth of actual gold was to be held at the Federal Reserve, to back printed dollars. During this time the US dollar also became the world's reserve currency. US dollars were now used in all the major nations central banks to back their own currencies while the US dollar itself, was backed by 10 percent gold.
In 1971 President Nixon removed the Bretton Woods Standard and decoupled the dollar from its 10 percent gold requirement. From 1971 up until today, the United States and world have been on the Dollar Standard. The dollar standard is not backed by 100 percent gold, or forty percent, or even ten percent gold, in-fact it is backed by nothing at all. From times prior to WWI, the world has seen many small steps that eventually devalued the true value of money. Sound money that had once started on a solid footing with a 1:1 ratio backed by 100 percent gold, eventually turned into a fiat currency intrinsically worth zero. This currency was backed only by I.O.U's comprised of government bonds, being nothing more than government backed debt.
The various monetary systems previously in-place, lasted on average 30 to 40 years. It is apparent the current dollar system is breaking down. Therefore the world will again have to find a new system that currently stems from nothing. If the Federal Reserve Bank and its brother central banks around the western part of the world continue being in the business of using their gold reserves to back more and more debt, what will they all have left when the dollar system itself finally collapses? It seems only logical all the countries continuing to do this, will finally go broke.
The countries that are in the business of accumulating gold instead of paying off debt with it will become very rich. This is the main reason we now are seeing a major shift of gold coming from the west and going to the east. Apparently, the eastern part of the world has become infinitely smarter understanding that gold's value will only increase overtime, as the economies of the west continue struggling just to keep their heads above water.
Tom Genot -
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