Joe Biden Could Use Gold to Solve the Debt Ceiling Crisis

The impasse between the Biden administration and Congress over raising the debt ceiling has been ongoing for months now, with no immediate sign that the situation is going to be unlocked any time soon. But some economists believe that a temporary solution could be found in the Treasury's gold holding.

Economists Paul H. Kupiec and Alex J. Pollock recently published an article advocating for Congress to "simply direct the U.S. Treasury to value its gold holdings, which are real, at real market prices."

At the moment, the current market price of gold is a little over $1,875 per ounce. The Treasury owns some 261.5 million ounces of gold—equal to more than eight tons. But because of a 1934 law last amended in 1973—the Gold Reserve Act—the Treasury is required to value its gold at $42.22 per ounce, which makes its holdings valued at $11 billion instead of the $490 billion it would be worth considering gold's true market value.

"If Congress were to make a simple, financially sound amendment to the Gold Reserve Act, it would free up nearly $480 billion in new Treasury cash without raising the debt limit," wrote Kupiec and Pollock in their piece.

"These funds would allow the Treasury to pay all its bills past the end of fiscal 2023, thereby giving Congress an entire session to debate, negotiate budgets, reduce deficits, and set the debt ceiling accordingly, all in bills passed under regular order—something that has not happened in years."

For this to work, write Kupiec and Pollock, Congress would need to change just five words of the Gold Reserve Act.

What Is The Gold Reserve Act?

The Gold Reserve Act is a 1934 measure that prohibits private ownership of monetary gold while allowing the federal government to raise the price of gold, control the value of the dollar, and boost the U.S. economy.

The act was passed under Franklin D. Roosevelt and it was the culmination of the then-president's efforts to abandon the gold standard in order to better control the value of the dollar at a time when the economy was still suffering in the midst of the Great Depression. While the gold standard prevented the country from expanding its nation's supply as the dollar was tied to supply of gold, getting rid of it would have allowed the federal government to manipulate the currency and help the U.S. economy recover.

The Gold Reserve Act didn't quite get rid of the gold standard—something that would only happen, definitively, in 1971—but it achieved a similar result by giving the federal government more control over the domestic money supply.

Under the Gold Reserve Act of 1934, the government's gold holdings were officially transferred from the Federal Reserve to the U.S. Treasury at a discount. Gold became a commodity, rather than a currency. The Treasury also holds the book value of the gold, which determines the statutory price of the precious metal.

The Gold Reserve Act was amended for the last time in 1973—50 years ago. The statutory price of gold, set by law, hasn't changed since then, remaining at $42.2222 per ounce.

Time For A Change?

For Pollock, 50 years is too long for the statutory price of gold and the Gold Reserve Act to have remained unchanged.

"The government can fund itself past the end of the fiscal year if Congress merely recognizes that the Treasury's gold is a real massively undervalued monetary asset," Kupiec and Pollock wrote.

"Unlike the phony idea of the Treasury issuing a trillion-dollar platinum coin [a solution that was first floated in 2011], the Treasury already has the legal authority to monetize its gold holdings without creating new government debt. It is only because Congress has failed to amend a woefully outdated law that the Treasury values its gold at an absurdly low price."

They add: "To monetize the market value of the Treasury's gold holding, the Congress need only replace five words in the Gold Reserve Act. Replacing '42 and two-ninths dollars' with 'the current market value (as determined by the Secretary at the time of issuance),' would allow the Treasury to use nearly $480 billion in spendable dollars without raising the current debt limit."

How Would Amending It Help Solve The Debt Ceiling Crisis?

"It's already been done in history, it was done under President Eisenhower in the 1950s," Pollock told Newsweek. "It can be done. It does take an act of Congress to do it," he added.

Neither Kupiec nor Pollock see amending the Gold Reserve Act as a definite solution to the debt ceiling crisis—but as an available alternative.

"​​Government officials say there are no options other than raising the debt limit and that is simply not true. We merely explain the very real gold certificate option," Kupiec told Newsweek. "A legislative solution to the debt limit standoff is the preferred outcome. Either side might find this option useful to forestall a default if they cannot reach a compromise to raise the debt limit."

"Of course, that's not a permanent solution," said Pollock. "It's a way for them to create space, to have a serious negotiation of expenses and deficits without raising the debt limit. That's what's so intriguing about it, since there's no debt involved in this transaction. You don't have to raise the debt limit."

In the current standoff between Congress and the Biden administration, the Treasury's gold could buy both some time. "Here we have the most classic of all monetary assets, and it's sitting there and it could be used exactly in the fashion that we discussed. It would be much better than doing something completely false and phony, like the so-called trillion-dollar coin idea. This is real gold and it's got a real market value of $20 an ounce. There is no debt involved because it's a U.S. asset that exists."

Would It Actually Work?

While the solution suggested by Kupiec and Pollock is legal and could technically work, others are skeptical that it would actually help the current situation.

"Legal workarounds are smart and cute, but a serious country issuing the largest, safest, most liquid asset in financial markets, and earning an 'exorbitant privilege' for it, should not be resorting to tricks but just raise the debt ceiling (or eliminate it entirely)," Ricardo Reis, professor of economics at the London School of Economics and Political Science, told Newsweek.

"For the life of me, I don't know how amendments to the Gold Reserve Act of 1934 would allow for a workaround on the political arm-wrestling connected to the U.S. debt ceiling," Steve H. Hanke, a professor of applied economics at the Johns Hopkins University, told Newsweek.

"The real problem the U.S. faces is that there are no effective fiscal rules. What should be done is to adopt something like a Swiss fiscal brake. The Swiss debt brake requires that expenditures be brought into balance with revenues," added Hanke, who served on President Ronald Reagan's Council of Economic Advisers.

"A cap is imposed on spending based on expected revenue, and revenue is projected based on long-term trends in the real growth of national income. Expenditures may exceed the cap in response to extraordinary events such as war, but if that's the case, eventually, revenues from budget surpluses must be generated and set aside to offset this excess expenditure."

He added: "The Swiss debt brake was introduced as a constitutional amendment following a referendum in 2001, in which the measure earned the support of a whopping 85 percent of the Swiss vote."

As things stand at the moment, Treasury Secretary Janet Yellen warned that a default is imminent and could lead to a "very substantial downturn" for the U.S. economy.

Newsweek has contacted the White House and the Treasury for comment.