Earlier this week Federal Reserve chairman Ben
Bernanke gave a lecture to students at George Washington University. It was
the first of a four-part series in a course entitled “The Federal
Reserve and Its Role in Today’s Economy.” Interestingly, ZeroHedge notes that in his lecture: “The words Gold and Standard appear
more times than Central and Bank”.
The text of the speech is not yet available on the
Fed’s website, but Business Insider provides a summary
of it. Not mincing any words, and with its extreme religious devotion to
today’s fiat currencies all too apparent, Business Insider
enthusiastically exclaimed that Mr. Bernanke “just
murdered the gold standard”.
Given that sensational headline, I thought it might
be useful to present the other side of the story. Here are Business
Insider’s comments (in italics) meant to disparage gold,
followed by my observations.
Business Insider: "To have a gold standard, you have to go dig up
gold in South Africa and put it in a basement in New York. It's
nonsensical."
We do not
live in a perfect world. If we did, we would not need police, central bankers
would make the right decisions, and politicians would know not to spend and
borrow too much money. But thieves, bad decisions and government overspending
and excessive borrowing are facts of life. So we need gold as a natural form
of money, the supply of which is determined by the economics of mining.
Fortunately, a near-perfect geographic dispersion of this mineral through the
earth’s crust prevents an excess supply of gold, with only a handful of
historic exceptions where a fleeting bonanza temporarily produced a small
surfeit. The result is that gold’s 5000-year record as money is far
superior to that of the central planners at the Federal Reserve.
Business Insider: "The gold standard ends up
linking everyone's currencies, causing policy in one country to transmit to
another country (sort of how U.S. policy now transmits to China, because
they've fixed the yuan price to the dollar). So for
example, if the U.K. fixes the number of pounds to an ounce of gold, and the
U.S. fixes the number of dollars to an ounce of gold, then the pound and the
U.S. dollar inadvertently become linked."
Yes, this
is one of the gold standard’s many benefits. In testimony before
Congress, Alan Greenspan called this feature the gold standard’s
“automaticity”. Capital flowed freely among the gold standard
countries based on prudently derived investment decisions that determined
where the owners believed their capital would be best rewarded. When the
rules of the gold standard were followed, the boom-bust cycle was mitigated.
The global financial imbalances that have ballooned over the last few decades
and the growing number of “sovereign wealth funds” created by
countries with perennial trade surpluses are the result of abandoning the
gold standard.
Business Insider: "It creates deflation, as
William Jennings Bryan noted. The meaning of the “cross of gold”
speech: Because farmers had debts fixed in gold, loss of pricing power in
commodities killed them."
Is
deflation a bad thing? We humans benefit from falling prices. Even farmers
benefit when they pay less for gasoline and other goods and services.
Bryan’s speech at the Democratic National Convention in 1896 was
politically motivated and not based on sound economics. His presidential campaign
and political aspirations were faltering, so as a sop to the nation’s
farmers, he hoped some flashy rhetoric would help his cause. It didn’t,
but anti-gold propagandists love to rally around his words anyway. By the
way, Bryan wasn’t abandoning gold nor advocating fiat currency. He was
simply arguing in favour of silver as the monetary
standard instead of gold.
Business Insider: "The gold standard tends to
cause interest rates to rise during downturns and interest rates to fall
during good times, the exact opposite of what monetary policy should be
doing."
This
comment misstates the mechanics of the gold standard. It would be more
accurate to say that interest rates rose purposefully to bring about the
downturn, i.e., to end the boom before it got out of hand and created even
more misery when the bust finally arrived. The problem of course throughout
monetary history is the recurring boom-bust cycles, which are caused by
fractional reserve banking, not gold.
Business Insider: "The economy was far more
volatile under the gold standard (all the depressions and recessions back in
the pre-Fed days)."
Did
Bernanke really say that, or is this just some fanciful interpretation by Business
Insider? We will wait for the text of the speech to be released,
but what about the Fed-engineered Great Depression, the disastrous inflation
of the 1970s and the financial collapse the world has been working its way
through for the past several years, not to mention the late-1990s stock
market bubble and the recent housing bubble? These disruptive monetary
upheavals were all worse than pre-Fed days. What’s more, average annual
economic growth during the classical gold standard was nearly twice that
achieved since 1971, when the last remnants of the gold standard were abandoned.
Business Insider: "The only way the gold
standard works is if people are convinced that the central bank ONLY cares
about maintaining the gold standard. The moment there's a hint of another
priority (like falling unemployment) it all falls apart."
This is
another unbelievable comment. The purpose of the gold standard was to make
sure that there was no other priority because it ensured sound money, which
is of critical importance to society. Sound money meant the economy would
offer a level playing field for everyone, and not one tilted toward banker or
government interests. To further emphasize this important point, here’s
what Ludwig von Mises said: “It is impossible to grasp the meaning of
sound money if one does not realize that it was devised as an instrument for
the protection of civil liberties against despotic inroads on the part of
governments. Ideologically it belongs in the same class with political
constitutions and bills of rights.” Similarly,Howard Buffett
, father of Wall Street legend Warren Buffett,
had this to say: “In a free country the monetary unit rests upon a
fixed foundation of gold or gold and silver, independent of the ruling
politicians.” In short, gold and
human liberty are inextricably interlinked.
Business Insider: "Gold standards leave central
banks open to speculative runs, since they usually don't hold all the
gold."
Exactly. So
should we blame gold for this deception that central bank money is not 100%
backed? Or should we blame central bankers?
I find it ironic Mr. Bernanke delivered his speech
at my alma mater. He is simply re-hashing the same specious rubbish that I
learned over forty years ago as I worked toward my degree in international
economics. At least he didn’t go so far to say what I was taught,
namely, that gold would drop to about $7.50 per ounce when the US government
stopped “supporting” it at $35 per ounce (the dollar was still
defined back then as 13.71 grains of fine gold).
When the gold price started rising – instead
of falling – after President Nixon broke the dollar’s fixed link to
gold, I had the presence of mind to ask myself why gold was not barrelling its way lower to $7.50. As I searched for an
answer, I fortunately stumbled across The Theory of Money & Credit by
von Mises. Because of its brilliance, I began reading his other books as well
as Hayek, Rothbard and the other great scholars of
the Austrian School, none of which I even heard of during my college days. It
is sad that none of these foundational Austrian School scholars were teaching
at GWU back then, but even sadder that statist Keynesian dogma expounded by
Mr. Bernanke is still misleading the young minds there today.
Originally published on Goldmoney
here
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