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Don't store, use Fort Knox gold

With Fort Knox gold and the U.S. national debt ceiling in the headlines, it makes me wonder what Alexander Hamilton would do in tumultuous times like these.

As every coin collector knows, he was the first secretary of the Treasury for the federal government set up by the Constitution.

Whatever Hamilton would do, it would be bold. It probably would also at first mystify.

When the early Congress of the United States wrestled with its debt problem, Hamilton urged that the federal government also take on the debts of the 13 states incurred in securing their independence from England.

In other words, he made the debt larger, something that seemed awfully strange when the Congress didn’t know how it was going to pay off a smaller sum.

But Hamilton offered a plan that worked.

How about today? There is a federal debt of $14.3 trillion. There are 261 million troy ounces of gold at Fort Knox and three other secure sites.

Why not issue bonds that use the gold as interest?

Issue a 20-year bond. Each year the interest would be paid with a freshly minted one-ounce American Eagle gold coin.

Twenty years of interest would break down as 13 million troy ounces each year turned into 13 million American Eagles. There would be exactly one million ounces left in the reserve at the end of the 20-year period.

How much money could be raised today? That’s what the politicians would want to know.

Buyers in the financial markets who know that the interest on these federal bonds is a guaranteed one ounce of gold would likely pay generously for it.

At an interest rate of a half a percent a year using a gold price of $1,500 an ounce, it works out to $300,000 per bond.

13 million bonds in the amount of $300,000 each works out to $3.9 trillion. 

That would anchor a significant portion of U.S. debt with gold. The interest cost would no longer be in the budget for 20 years because it would be coming from the gold reserve.

What happened during the Civil War and its immediate aftermath was that once the federal government began linking the national debt to gold, even the portions that were not gold backed became more desirable to own.

Should that financial phenomenon occur again, the trading prices of the rest of the issued national debt would be bid higher by investors and interest rates would fall, allowing the federal government to turn over more debt for less money.

Who would buy the bonds?

Anybody who thinks gold is going up in price would have a guaranteed 20 gold coins plus get the $300,000 in cash back in 20 years.

After 20 years of gold payments, an awful lot of people would be used to the idea. It might continue. It might even turn into a gold standard.

But that’s an issue for another time. Today’s politicians would simply see 3.9 trillion reasons to act now.

That’s what I think Hamilton would do.