U.S. Gold Reserve Capital Access Plan: The GROCAP Solution

By David C. Case

[Article Revised: February 28, 2012]

The Gold Reserve Capital Access Plan (GROCAP) summary sets forth the basic model of a proposed U.S. Treasury-sponsored initiative, which is designed to catalyze sustainable economic growth and job creation by reviving the commercial credit cycle through broad-based small business lending support.

Most all economic plans being posited outside of the FRB (e.g., by presidential candidates, corporate execs, econ academics, the political class, etc.) are centered in fiscal policy tweaking or reform; however, the most effective and expeditious response to our current economic maladies will require the implementation of responsible, pro-growth monetary policies – and, more specifically, monetary policies that result in greater money velocity, rather than those that merely supply liquidity to selective financial sectors.

And, no one has put forth any well-defined monetary policy initiative to address declining middle class income and the increasing wealth gap caused by the large financial institution bias of previous and ongoing Federal Reserve monetary policies.

GROCAP is an innovative form of monetary policy in that it provides the mechanism whereby a portion of US gold reserves can be systematically and prudentially allocated to benefit the broader domestic economy by qualified intermediation through community and regional banks.

GROCAP will be to non-TBTF banks and small businesses what TARP, QE-1, QE-2 and “Operation Twist” were to the TBTF banks and large corporations. The difference will be that GROCAP will vitalize the real economy and result in sustainable job growth, whereas most Treasury and FRB initiatives have been aimed at propping up money market funds, the equity and bond markets, and the largest banks within our increasingly bifurcated financial system.

Since the fall of 2008, traditional financial intermediation has stalled – and with it, economic growth. The “top-down” approach, underlying Federal Reserve monetary policies, has failed to foster meaningful economic growth. Neither the intended “wealth effect” nor the “risk-on” incentives ever “trickled down” to the real economy. Our economy appears destined for a very long period of anemic growth, which will continue to corrode the quality of life for middle-income America.

GROCAP would ignite the financial intermediation process from the “bottom-up,” utilizing community and regional banks, and would organically stimulate the demand necessary to invigorate economic growth. GROCAP would result in the sustainable job creation and real economic growth that Federal Reserve intervention, stimulus programs, various Treasury initiatives and fiscal policy adjustments have collectively failed to produce; and, it would do so without increasing federal spending.

Current US Treasury policy neglects to utilize our gold reserves for maximum public benefit. Just as the Economic Stabilization Fund was used to backstop corporate debt instruments (money market funds) in 2008, a small portion of U.S. gold reserves should also be utilized in a responsible way to support the broader economy.

Through the implementation of GROCAP, U.S. gold reserves would be deployed to provide a broad base of capital throughout every commercial sector of the U.S. economy.

Phase-I GROCAP would utilize only 10% of the U.S. gold reserves, with a notional gold value of $26 billion after revaluation at $1,000/oz (approx. production cost). When processed through GROCAP, 10% of the U.S. gold reserves would yield an effective value of about $327 billion, before attributing any derivative value from translation throughout the broader economy.

Essentially, GROCAP provides the mechanism for the augmentation of small business loan collateral by allowing those loans to be originated and refinanced utilizing leveraged Gold Certificates (GCs) issued by Treasury to participating banks.

Under GROCAP, Treasury would assign gold allocations, via Treasury-issued GCs, to participating banks to support qualified small business loans that may not otherwise receive funding due to inadequate collateral. Participating banks would, in turn, assign the GCs to the Federal Reserve Bank in exchange for USTs at a ratio of 12.5:1; e.g., $12,500 USTs to $1,000 GCs. (The 12.5:1 ratio is the inverted 8% risk-based bank capital ratio for the commercial loan asset class pursuant to Basel III capital standards.) The USTs would be lent by the FRB to the participant bank to hold as additional collateral support for small business loans underwritten through GROCAP. (FRB-held MBS could also be included in the GC swap transactions.)

Treasury could use the fees generated from GROCAP to support hedge positions through which to more efficiently manage US gold reserve resources. The banks could hedge USTs held as collateral, when necessary, to match loan maturities. U.S. gold stocks could be restored to Treasury and the USTs could be redeemed by the FRB as GROCAP loans are ultimately repaid, and conventional collateral (primarily commercial real estate) values are stabilized, and economic conditions improve on a more sustainable basis.

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A productive credit cycle is critical to any meaningful economic recovery, and can only be achieved through an initiative with the scope, magnitude and participation level of GROCAP to produce the necessary synergistic and aggregate demand-creation effect upon an economy the size of that of the United States. Small businesses obtain financing not otherwise available to sustain or grow their operations; community and regional banks will increase sustainable earnings capacity through higher quality loan volumes; the FRB will more effectively promote employment consistent with its mandate; and, Treasury will benefit from substantially higher tax revenues generated by increased economic activity.

GROCAP would provide the economic underpinning necessary for major tax reform, financial institution reform and sound money policies to be implemented with minimal transitional disruption to our economy. GROCAP would also effectively address the expanding wealth gap caused by the large financial institution bias of conventional Federal Reserve monetary policy.

By providing meaningful capital support to small businesses on such a broad scale and by expanding the capacity of banking system intermediation to promote sustainable economic growth, GROCAP offers “last-resort” government intervention within the marketplace without presenting an unacceptable moral hazard and without the need for Federal funding. As such, GROCAP offers a more effective and balanced solution to the anemic condition of our economy than any other plan or program which has been publicly proposed since the “fall” of 2008.

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