Bernanke observed that to maintain a gold standard would require the discovery of more of the metal itself; essentially that we don't have enough gold for a standard. The problem with this assertion is that in the same speech Bernanke acknowledged that the Bank of England in the 19th century defined the pound in terms of gold, and did so with gold in its vaults that was a very small percentage of total pounds in circulation.
Now, I'm no Ben Bernanke fan; but if you are going to go after him, at least do it with some brains. Ben couched the entire point about the Bank of England within the fact that there was a run on that Bank for its supposed gold backing its currency. If you are going to design a different Gold Standard from what went before, then you may say you want not to return to THE Gold Standard but to a revised Gold Standard. Then let Ben respond to that specifically, which I'm certain he'd be able to do.
To put it plainly, the U.S. Treasury or the Fed could give the dollar a stable gold definition with little to no gold backing. If the standard were thought to be credible, as was England's long ago, there would be very little demand for gold in exchange for currency. Gold can't earn interest, while currency can. Bernanke's dissembling about gold supplies existing as a barrier to the shedding of floating money comes off as dishonest in light of his own knowledge of central banking history.
Hogwash that is, which also proves my first point above. What the Hell would be a stable gold definition in light of the rest of what Ben said? Ben's point about US monetary decisions, etc., impacting China was completely valid. Also, his points about the Populists (farmers being squeezed into bankruptcy by the Gold Standard) was very well-founded. It's documented, substantiated history. Again, Ben Bernanke was not talking about a non-reserve Gold Standard. Most of the gold bugs running around advocating for returning to THE Gold Standard speak and write about 100% gold reserves and not what this John Tamny is saying. Sure, Ben can address both. Now, he should.
Regardless, the real question is that if the Federal Reserve's monetarism is not the best path, is gold? I say it most certainly is not. What would be the point in having a non-reserve Gold Standard when the supply of money can be pegged now directly and in real-time to real growth needs and desires? It makes zero sense. You're just going to arbitrarily say x amount of gold at some level of purity is worth x amount of US dollars? Then someone mines huge amounts of gold such that there's more than is demanded for whatever. Does what the dollar with buy go down? Why even tinker on such levels when there is such a clearly better alternative?
John claims Ben is dissembling while it is John who is clearly taking Ben out of context (whether you agree with Ben Bernanke or not).
Bernanke went on to acknowledge that if not perfectly credible, a gold standard is subject to speculative attack as individuals try to exchange paper money for gold. Here we can see another reason why Bernanke is so eager to tamp down excitement about a return to stable money values.
However, that's completely ignoring Ben's point that's stability over the long and not medium-to-short term. Meanwhile, people are stuck with indirectly gold-denominated mortgages, not that the Fed has handled all or any of that correctly.
Next, Bernanke contends that gold standards create deflations, though here he reveals a misunderstanding of what deflation is. To Bernanke falling prices are a signal of deflation, yet from cellphones to flat screens to Apple iPhones, prices are constantly falling. Importantly, this is not deflation. If the prices of certain goods are falling, then by definition we have more dollars to demand new goods previously out of reach, thus driving up other prices.
Wrong! What Ben said is price deflation is price deflation. Ben was speaking in the aggregate and over longer periods of time. Was the Great Depression a deflationary period or not? It was deflationary. There was a constriction of money supply due directly to, among other things, the Gold Standard. Even if technological advancements lower the costs of some technologies, that does not necessarily signal an aggregately stable dollar. It's common knowledge that one sector can be experiencing price inflation while another price deflation.
True deflation reveals itself when the value of the currency rises from a non-inflationary level. But under a gold standard whereby the monetary authorities would target a gold price, deflation would not occur. It wouldn't because assuming a gold peg at $1,000/ounce, if strong dollar demand were to drive the price downward, that would signal to the monetary authorities rising demand for money the creation of which would bring the gold price back to $1,000. Contrary to Bernanke's claims, a gold/dollar definition is precisely what would help us to avoid both inflation and deflation because gold's market price would tell fallible authorities exactly what the supply of dollars should be.
Holy Spirit, save us! This completely ignores what I wrote above concerning more physical gold being brought to bear. That could happen completely independent of food supplies, for instance, which could be simultaneously falling precipitously. So, there's more gold, so the monetary authority orders up more dollars. Then more dollars chase less food. I'll give you $10,000 for that hamburger. No thanks. Brilliant that is not.
What is it about these gold bugs? The currency can be set to quality of life regardless of rising technology. So why bother with gold? It's so antiquated. Gold has a certain practical utility, and gold merchants have managed to get people to irrationally appreciate gold; but that's no reason to peg the entire economic system to it when there are much better options.
To the above some would reply that gold isn't perfectly stable, thus making a peg at times inflationary, and other times deflationary. That may well be true, but it's also irrelevant. The greater truth is that gold is the most stable commodity known to mankind, and that's why it's been used as money for thousands of years. If it has imperfections, it has far less than any other money measure, which means it's the best we've got.
However, Ben's argument is that the Fed's monetary policy and current practices, as imperfect as they are, still out preformed what would have been the case had we still been on gold. Ben made a solid case for why FDR went off the Gold Standard (and then Nixon's final move in 1971). We did come out of the Great Depression sans gold. We have had fewer and less severe downturns sans gold. Could we devise a different Gold Standard that would do better than the current Fed? We could, but it would not be the best device. If we are going to change, let's do what would be best, not fall back on gold.
John goes on to complain about floating exchange rates. Well, that's an argument for a world currency then. If the currencies are all linked/pegged to the same value, there is no decoupling of policy. Is John arguing for a One World Government? I'm all for that provided it's good government. Different locations want to experiment with different economic systems. Is John prepared to design such that those independent attempts may be facilitated or at least not crushed by his capitalist Gold Standard?
With his assertion that a gold standard tends to cause interest rates to rise during downturns, and fall during booms, Bernanke reminds us not only of his confusion about matters economic, but that he buys into the totally discredited notion that economic growth is inflationary. Of course rising economic growth in concert with greater demand isn't inflationary given the simple truth that our demand IS our production; in order to demand we must supply something first with the net impact on the alleged price level zero.
This is jumping to conclusions. How about letting Ben answer a question rather than being sure about his view on this? Ben leans to inflation to avoid deflation, which he sees as always recessionary. I don't agree with Ben's methods. They're not necessary, but he's defending the Fed after all. Really, that last paragraph is speaking past Ben. It's a different context.
Conversely, and naturally opposite what our Fed Chairman believes, rates of interest are supposed to rise during downturns; the increase a healthy thing. The reason why is that the higher rates ensure that poorly run businesses are starved of credit so that they can't destroy any more capital than they already have. After that, the higher rates serve as a lure for those with credit to re-enter the marketplace in order to replenish the capital destroyed by faulty business practices. If we love consumers, and more importantly entrepreneurs in need of credit, we must then love savers too. Higher rates during a downturn ensure that the prudent will be properly compensated for offering up credit for the still healthy businesses that need it. In short, what Bernanke deems negative about a gold standard - low rates during an upturn, high rates during a downturn - is yet another argument for ridding us of Bernanke altogether.
Oh, this is just the heartless mind exposing itself. Ben spoke a number of times in his lecture about ordinary people and workers. There's more to the economy than businesses. In addition, poorly run businesses are what exactly? Are they businesses that avoided getting themselves into a fix due to other businesses creating toxic derivatives or robo-signing, etc.? Whose completely independent? Some people are born in better situations than are others. Is that just their tough luck?
More importantly though, credit crunches are completely unnecessary. United States Notes pegged to real productivity and legitimate desires of the whole people, locally, nationally, and globally, would not require any pegging to gold. If the supply and velocity were to be match to real demand, there would be no deflation or inflation and all without a Gold Standard. Who needs a Gold Standard? I sure don't. I don't want one. I'm against having one.
Bernanke's most pointed objection to the gold standard is that because the market price of gold determines supply of dollars, that the latter cannot be adjusted in response to changing economic conditions. Where does one begin?
For one, a dollar pegged to gold in no way constrains the money supply; instead it just ensures that the dollar's integrity as a price is maintained. For all the reasons stated earlier, this is a very good thing.
$1,000 an ounce was suggested. So, let's double the supply of dollars at $1,000 in value. Now what? What's that ounce worth? What does $1,000 buy. It buys an ounce of gold if anyone believes that the peg is real. Does it buy twice the bread? It does not. All things being equal, it buys half the bread. Bread doubled in price. That's food inflation.
Second, if under a gold standard the economy were to boom, and it would, the boom would tautologically result in skyrocketing dollar demand. Simply put, when we produce we're demanding dollars. If so rising dollar demand would drive up the value of the dollar and lower the gold price; the gold standard thus ensuring creation of more dollars for a booming economy in order to maintain the settled on market price. Conversely, if a downturn were to cause reduced dollar demand, a gold standard would ensure that dollar supply would fall to reflect the new conditions. So to be clear, a gold standard would by definition - indeed, it wouldn't be a gold standard if it didn't - force the adjustment of money supply to economic conditions.
That's assuming that people would again place the same arbitrary psychological value on gold that they did before we went off the standard. It also assumes, as mentioned before, that more physical gold isn't brought into the picture whenever. Again, what's the point of choosing gold though over silver or copper or actual, planned, democratically determined productivity? I would much rather the latter.
...were he the expert on the Great Depression that he claims to be, he would know that the Great Depression became Great precisely because hubristic politicians intervened to stop a healthy downturn, and in doing so created the Great Depression. Economies are nothing more than a collection of individuals, and the quickest way for individuals to right their economic course is to let the failure occur quickly so that they can start anew.
Then how did Adolf Hitler get unemployment to go from about 30% in 1932 to about 2% in 1938? I don't think he saw the downturn as healthy. He didn't sit around waiting for "capitalists" either. Whatever you think of Hitler, and you know that the victors write the history, what he did was possibly the most dramatic recovery ever. FDR did too little to employ people via government, not too much.
If both Germany and the US had focused on full, public employment and not in preparing for or waging war, all of this gold garbage would be completely moot, as it should be. Of course, it would have required preventing the banksters from spreading their false propaganda for mammon.
The war should not be militaristic but against environmental degradation and starvation and homelessness, etc. That sure can be a central objective of the whole of humanity. It certainly doesn't need to be left to capitalists, who hate every collective success and do everything, even wage wars, to stop them because of the self-centered, small, cold, hard hearts of those capitalists at the top -- all sociopathic to one degree or another.
Also, why have recessions been fewer and less severe? If you don't think that's good, you don't appreciate stability as much as you claim. The average blue-collar worker sure wanted to continue feeding his family. You call it healthy when those workers go jobless? We could have full employment and even greater technological innovation under the system I advocate.
Never lacking in unwarranted self-assurance, Ben Bernanke set out this week to discredit the gold standard, and in doing so, perpetuate the employment of meddling central bankers. The problem for the Chairman is that a speech meant to discredit the gold standard made the case for it in ways that true gold standard advocates have never done on their own. Thank you, Mr. Chairman.
I don't want to thing that's a disingenuous statement, but Ben Bernanke did not make the case for Gold. He made the best public statement from a high place against it given in my lifetime.
Ben Bernanke was saddled with cleaning up after the mostly libertarian Alan Greenspan. Ben covers for Alan. He should not. He covers for him to cover for the Fed.
Early in his first tour of duty at the Fed as a governor from 2002 to 2005, Bernanke gave a speech on Deflation: Making Sure 'It' Doesn't Happen Here. Alan Greenspan was pulling the strings at the time, but Bernanke was among those advocating lower rates, which provided the tinder for the housing bubble. (Source: "," by Caroline Baum, author of "Just What I Said" and a Bloomberg View columnist. The Vancouver Sun.)
Ben would do a greater service to the Fed were Ben to advocate reforming it and were Ben to admit not just the mistakes at the beginning of the Great Depression, which mistakes were to listen to the likes of John Tamny, but also the clear mistakes of Alan Greenspan, with all of Alan's deregulation, anti-Populist, nonsense speak.
I made some of my objections clear in yesterday's blog post: "Brief notes on Ben Bernanke's part 1 of 4 lecture to college students, Tuesday, March 20, 2012." I will add that I would rather Bill Black had headed up a clean-up crew. The financial system should have been nationalized, and unemployment should not have been allowed to rise at all but should have been taken to zero. That's assuming the context is the secular system we have. Of course, my ultimate objective are the Christian Commons and then Heaven on Earth. That's as far from capitalism as it gets.
Oh, while I'm thinking about it, I want to add another observation. When Ben Bernanke was speaking about gold, per se, I doubt he was speaking solely against the Gold Standard but also those who are advocating that we carry gold coins about and use only those or other forms of gold to pay for things and not use any gold-back anything, whether paper or credit or debit cards, etc. Many of those people are buying/bidding up the price of gold or trying too because they have it not as a hedge but rather for speculative appreciation and/or survivalist reasons. So, in addition to fending off the nonsense full-reserve Gold Standard bugs, he also has to fend off the gold as sole currency crowd.
You non-reserve Gold Standard bugs need to be honest about that. I'm sure some of you have taken fellow gold bugs to task. That doesn't make you right though, but it's more intellectually honest -- better than not/nothing.
Here's John's whole article: RealClearMarkets - Ben Talks Down the Gold Standard, In Favor of Bernanke.
Here are some more anti-Ben, pro-gold articles (points in them may or may not have been addressed above):
"Bernanke Decries Gold, Defends Fed's Make-It-Up System," By Nathan Lewis
This next one actually raises some interesting points. You'll find them starting with the words "My view." The comments are in blue below Ben Bernanke's green: "What Bernanke gets wrong about the gold standard": The redistribution created by the Fed's monetary pumping actually weakens the economy over time as real savings is squandered on malinvestments. With gold as money, real production and savings is stimulated. Federal Reserve chairman Ben Bernanke doesn't understand that, by Douglas French