Contra Bernanke on the Gold Standard []



In his lecture at George Washington University on March 20, 2012, Federal Reserve chairman Ben Bernanke said that under a gold standard the authorities’ ability to address economic conditions is significantly curtailed. The Fed chairman holds that the gold standard prevents the central bank from engaging in policies aimed at stabilizing the economy after sudden shocks. This in turn, holds the Fed chairman, could lead to severe economic upheavals. According to Bernanke,

Since the gold standard determines the money supply, there’s not much scope for the central bank to use monetary policy to stabilize the economy.… Because you had a gold standard which tied the money supply to gold, there was no flexibility for the central bank to lower interest rates in recession or raise interest rates in an inflation.

This is precisely why the gold standard is so good: it prevents the authorities from engaging in reckless money pumping of the sort Bernanke has been engaging in since the end of 2007 by pushing over $2 trillion in new money into the banking system.

The Federal Reserve balance sheet jumped from $0.889 trillion in December 2007 to $2.247 trillion in December 2008. The yearly rate of growth of the balance sheet climbed from 2.6 percent in December 2007 to 152.8 percent by December 2008. Additionally the Fed has aggressively lowered the federal-funds rate target from 5.25 percent in August 2007 to almost nil by December 2008.

Consequently the yearly rate of growth of the AMS measure[3] of the US money supply climbed from 1.5 percent in April 2008 to 14.3 percent by August 2009.

Contrary to Bernanke and most mainstream thinkers, such pumping has inflicted severe damage to the process of real wealth generation. It has severely impoverished wealth generators and laid the foundation for serious economic troubles ahead.

Allowing the money supply to be determined by the production of gold leads to stability and not chaos as Bernanke suggests. In an environment where money is gold and no one is engaged in the act of money printing, economic swings, i.e., boom-bust cycles, cannot emerge. (Note that money printing sets in motion an exchange of nothing for something, i.e., an act of embezzlement.) Contrary to Bernanke, it is policies that aim at stabilizing the economy that result in instability and economic chaos.

Bernanke holds that another major negative of a gold standard is that it creates a system of fixed exchange rates between the currencies of countries that are on a gold standard. There is no variability as we have it today, he argues:

If there are shocks or changes in the money supply in one country and perhaps even a bad set of policies, other countries that are tied to the currency of that country will also experience some of the effects of that.

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