The Corner

Why Is Germany Repatriating Its Gold?

Why is the German central bank repatriating billions of euros worth of its gold reserves held in overseas central banks — including all of the gold stored in Paris and a great deal of the gold stored in New York?

The point of the move, says the Bundesbank’s Carl-Ludwig Thiele, is to “build trust at home and have the possibility to exchange gold at short notice into foreign currency abroad.” In the days of the mighty Deutsche mark, the idea that the credibility of the Bundesbank needed to be bolstered would have seemed odd to many — it is one of the most respected institutions in German life. Many central banks inspire confidence; the Bundesbank inspired patriotism. 

There are several reasons why the Bundesbank might prefer to keep its gold in Germany rather than abroad. For one thing, there is no more Soviet Union, the pillaging habits of which provided the reason for keeping German gold abroad in the first place. But the Soviet Union has been gone for a good long while now. German authorities have said that with both France and Germany using the same currency, there is no advantage to keeping gold in Paris for foreign-exchange transactions. But the euro has been in place for a long time, too.

It has been suggested that the overseas custodians of German gold were doing a poor job, that oversight and inspections were lax. The Bundesbank’s Andreas Dobret attempted to squash such speculation during a speech at the New York Fed late last year, saying: “Throughout these 60 years, we have never encountered the slightest problem, let alone had any doubts concerning the credibility of the Fed.” But he was speaking to real (if unjustified) fears, responding to what he called a “bizarre public discussion we are currently facing in Germany on the safety of our gold deposits outside Germany.” But given the politicization of the Fed in the bailout era and the expansion of its powers, it is not unreasonable that the German people would prefer the Bundesbank’s custodianship to Ben Bernanke’s.

Central banks, investment funds, and individuals hold gold mainly as a hedge against volatility in currencies or in financial markets. Lately, the principal interest in gold has been as a hedge against inflation. But it is also useful for other things: For instance, having very large gold reserves is a handy thing indeed if you should need to construct an entirely new currency from scratch, as Germany may very well be obliged to do should the euro disintegrate. France could have to do so as well — which the cynical mind might see as a good argument for Germans to keep German gold in Germany rather than in France. It is worth keeping in mind that while we are all good liberal democrats now, Germany and France have been at war within Mick Jagger’s lifetime and twice in John Gielgud’s. Ancestral mistrust does not evaporate in one or two generations.

As the endless euro crisis continues to inflict damage on the German economy, the Germans must certainly be asking themselves what exactly they get out of the euro, and out of “Europe.” While there are some appreciable efficiencies from the reduction of foreign-exchange costs and trade benefits from the reduction of exchange-rate uncertainty, most of the economic benefits Germany derives from European economic and political integration could be had with nothing more exotic than free trade and liberal immigration rules. During the lead-up to the euro’s debut, there was endless discussion of the single currency’s benefits. And there have been benefits. But there have been costs, too: very high costs. If the Germans should decide that those costs are too great to bear, Berlin is going to want those gold reserves at hand.

If there were more intelligent leadership in Brussels and Washington, we would be taking this crisis as an opportunity to negotiate a U.S.-EU free-trade pact. Maybe we can negotiate a bilateral deal with the Germans if ever they extricate themselves from their current entanglements.

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