Can Central Banks Go Broke? Not If They Have Enough Gold.

Can central banks go broke? It’s an interesting question.

For many, there’s an easy answer. People say central banks can never go broke because they can just print more money! That answer sounds good superficially, but it reveals a complete lack of understanding of how central banks work and financial accounting.

When central banks print money, they’re not creating an asset; they’re creating a liability. Money may be an asset to you when you put it in a bank account or your wallet, but it’s a liability of the central bank that prints it.

If you look at the Fed’s balance sheet (which is publicly available online), you’ll see cash, notes and other forms of money as liabilities. When dealer banks put Fed money on deposit at the Fed, it’s also a liability. If you pull a dollar bill out of your purse or wallet and actually read it, you’ll see it says “Federal Reserve Note” just over George Washington’s portrait.

A note is a liability of the party that issued it. So, no, a central bank can’t print its way to solvency.

When central banks print money, they do acquire assets. These are usually U.S. Treasury notes in the case of the Federal Reserve. The resulting asset (a Treasury note) and liability (money) both expand the balance sheet and increase leverage, but don’t do anything to insure a positive net worth. (The net worth of a central bank is just the assets minus liabilities like any other balance sheet).

The only ways to ensure the net worth of a central bank are to make money (by earning more on its assets than it pays on its liabilities), sell more shares to stockholders (which are private banks in the case of the Fed), realize capital gains due to asset appreciation, or take a bailout from the U.S. government.

A related question is: Does it matter?

I once had dinner with a member of the Board of Governors of the Federal Reserve. I told her the Fed was insolvent on a mark-to-market basis.

To be clear, the Fed does not record its accounts on a mark-to-market basis, but you can do the calculation yourself just by looking at the Fed’s Treasury note assets. When interest rates rise, the value of those assets goes down, even as the cash liabilities hold their value. That can easily drive the Fed into a negative net worth position. In fact, the Fed may be in that position today.

After catching her breath and taking another sip of wine, the Fed governor said to me, “Maybe we are insolvent, but it doesn’t matter.”

Everyday Americans might disagree, but it’s an interesting perspective. This brings us back to our original question: Is the Fed or any other major central bank actually broke?

This article points us to the answer. The article explains how the Dutch central bank says it can avoid insolvency by simply revaluing a major hidden asset – gold. The same is true at the Fed.

The Fed values its gold certificate at $42.22 per ounce. The market value of gold is $1,750 per ounce. The difference of $1,708 per ounce multiplied by 8,000 metric tonnes represented by the gold certificate is about $440 billion. There’s the answer.

The Fed may disparage gold publicly, but it has a hidden asset worth about $440 billion more than the balance sheet shows. If that amount were added to the Fed’s net worth by revaluation, the central bank would be comfortably solvent. So would most other major central banks. The Fed is not insolvent – thanks to gold.

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