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.
It seems that the Fed chairman is
arguing in favor of a floating currency system. We suggest that Bernanke has
overlooked the fact that in a free market money is a
commodity, and a dollar or other similar currency as such is not an
independent entity.
Prior to 1933, the name dollar
was used to refer to a unit of gold that had a weight of 23.22 grains. Since
there are 480 grains in one ounce, this means that the name dollar also stood
for 0.048 ounce of gold. This in turn means that one ounce of gold referred
to $20.67. Please note that $20.67 is not the price of one ounce of gold in
terms of dollars as Bernanke and other experts are saying. "Dollar"
was just a name for 0.048 ounce of gold. According to Rothbard,
No one prints dollars on the purely
free market because there are, in fact, no dollars; there are only
commodities, such as wheat, cars, and gold.[1]
Likewise, the names of other
currencies stood for a fixed amount of gold. The habit of regarding these
names as a separate entity from gold emerged with the enforcement of the
paper standard. Over time, as paper money assumed a life of its own, it
became acceptable to set the price of gold in terms of dollars, francs,
pounds, etc. — the absurdity of all this reached new heights with the
introduction of the floating currency system.
Contrary to Bernanke, in a free
market, currencies do not float against each other. They are exchanged in
accordance with a fixed definition. If the British pound stands for 0.25
ounces of gold and the dollar stands for 0.05 ounces of gold, then one
British pound will be exchanged for five dollars. This rate of exchange is a
result of the fact that 0.25 of an ounce is five times larger than 0.05 of an
ounce.
A floating currency system of
commodity money is no less absurd than the idea of a fluctuating market price
for dollars in terms of cents. How many cents equal one dollar is not
something that is subject to fluctuations. It is fixed forever.[2]
Once it is realized that in a free
market money is a commodity, it is obvious that, in similarity to other goods
and services, its exchange value cannot stay still but will vary in
accordance with supply and demand.
Now, Bernanke argues that
variability in the supply of gold could lead to instability. But why should
this be the case? Does a change in the supply-demand conditions of various
goods and services produce instability? All that we will have is a change in
prices. Obviously, if the supply of gold were to increase strongly this will
lead to an increase in prices in terms of gold. This increase in prices
however, has nothing to do with inflation. (Inflation, an increase in money
"out of thin air," leads to an exchange of nothing for something
— an act of embezzlement.) If the increase in the supply of gold were
to persist, people would likely abandon gold as the medium of exchange and
adopt another commodity.
According to the Fed chairman
another problem with the gold standard is that it could trigger a speculative
attack:
Now normally, a central bank with a
gold standard only keeps a fraction of the gold necessary to back the entire
money supply.… The British Central Bank only kept a small amount of
gold, and they relied on their credibility to stand by the gold standard
under all circumstances — so that nobody ever challenged them about the
issue. But if for whatever reason, if markets lose confidence in your willingness
and your commitment to maintaining that gold standard relationship, you can
get a speculative attack.
A possible speculative attack is
not a result of a gold standard but of the central bank abusing the gold
standard by issuing paper money unbacked by gold.
In short, the authorities were issuing unbacked-by-gold
paper money, thereby undermining the gold standard.
Also in his speech Bernanke laments
that a shortage of gold could lead to a general fall in prices, which could
seriously damage the economy. For the Fed chairman, the fact that money is
not growing is a disaster.
What matters is not the amount of
money as such but its purchasing power. Hence with an expansion in real
wealth the purchasing power of dollars will increase and every holder of
dollars will be able to command more real wealth. A general fall in prices, which
is labeled deflation, therefore permits more individuals to access an
expanding pool of wealth.
Summary and Conclusion
Contrary to Bernanke, a gold
standard that is not abused by the central bank generates stability.
Boom-bust cycles are the outcome of central-bank policies that are aimed at
stabilizing the economy. The alleged instability of economies during
so-called gold standards in the past took place because the authorities were
issuing unbacked-by-gold paper money, thereby
undermining the gold standard.
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