Ben Talks Down the Gold Standard, In Favor of Bernanke

Story Stream
recent articles

Facing increasing pressure from an electorate understandably skeptical about the ability of his central bank to manage the dollar, Fed Chairman Ben Bernanke used a speech at George Washington University this week to talk down the gold standard. Walter Bagehot long ago wrote that central banks attract "vain" and "grasping" men, so it's no surprise that Bernanke would decry a currency system that would happily render him and his Fed irrelevant.

The good news is that if Bernanke's speech is seen as the "gold standard" for objections against same, the path to stable money values anchored in gold free of hubristic central bankers like Bernanke is far more certain. Indeed, his objections don't stand up to the most basic of scrutiny, and in Bernanke's case, were often contradicted by Bernanke himself. Though he did so unwittingly, with his every utterance Bernanke made a wildly strong case for gold.

To begin, 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.

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.

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.

Owing to a long paper trail that reveals his skepticism about gold as a measure of money, there's quite simply no way a return to the gold standard would occur with Bernanke in the driver's seat. It wouldn't because Bernanke is the personification of floating, devalued money, which means a gold standard on his watch would have zero credibility, and would almost certainly be subject to speculative attack if he were in control. Since a gold standard would be bad for Bernanke, this most self-serious of men presumes it would be bad for us.

Of course if a gold standard were instituted by monetary authorities known to believe in currency stability above all else, it's fair to assume the markets wouldn't test these enlightened individuals. In this case, we should cheer a return to gold because it would ensure Bernanke's departure from the Fed in favor of individuals the markets could actually trust.

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.

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.

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.

Bernanke argues that if a gold standard is reinstituted, that such an action will effectively link, or more to the point fix, the world's currencies together. There the only reply is exactly.

The sole purpose of money is to facilitate the exchange of goods, and fixed, stable exchange rates ensure the greatest amount of trade between individuals.

We produce in order to consume, and when the accountant in Spokane buys shoes from a shoe factory in Shanghai, the accountant is trading the product of his labor for that of the cobbler's overseas. Money in this case is solely the facilitator of the transaction, the lubricant as it were. That we trade products for products can't be stressed enough.

But when money is unstable as the measuring stick meant to facilitate the transaction, trade is corrupted. It is because if the dollar exchanged for the shoes is rising in value, the cobbler gets more than he gave with the accountant losing, and then if the dollar is declining in value the cobbler is short-changed. We once again produce in order to consume, but when money values are unstable as is always the case under floating currencies, the most harmonious act in the world - trade - loses the latter quality. That trade disputes have soared since 1971 shouldn't surprise us with this in mind.

It's also possible that the accountant will delay the purchase of shoes in favor of saving. Basically the accountant will shift his consumptive ability to someone else in the near-term, with an eye on consumption later. But if money values are floating, this harmony too is polluted. Indeed, if dollars saved and subsequently lent fall in value, the accountant sees his savings shrink, thus creating a disincentive to capital formation; savers society's ultimate benefactors for providing capital to entrepreneurs. And then if the dollar rises in value, the borrower loses for having to pay back more than he borrowed.

And then as mentioned above, savings often morph into investment - happily so. But if money values are floating, the investment that authors our advancement is corrupted too; the value of earnings and goods distorted such that investment migrates not to the best stewards of capital, but to the investment hedges best suited to weather the monetary error. Specifically, the falling dollar since 2001 easily foretold a recessionary rush into land, housing, rare stamps and art, and commodities least vulnerable to the devaluation. More to the point, there's quite simply no real estate mania and resulting moderation (that led to a crisis thanks to Fed error of the bailout variety) absent an undefined dollar that began declining in value in 2001.

Back to fixed exchange rates among countries, they're easily one of the best attributes of a gold standard because they would foster the harmonious trade that underlies all production. And with monetary stability tautologically driving broader stability among all prices, including by definition currencies, the myriad great minds in the financial sector paid great sums to trade the chaos would quickly emerge from facilitator roles in finance in order to cure cancer and heart disease, design software that would make us more productive, and build new modes of transportation that would make today's cars and planes antique-like by comparison.

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.

Regarding Bernanke's aforementioned confusion, rates are supposed to fall during booms. That's the case because economic growth doesn't occur in a vacuum; rather the growth itself attracts renewed investment that drives down the cost of credit. And then because of the boom, businesses can more credibly access credit at low rates of interest.

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.

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.

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.

Third, in falsely suggesting that money supply is rigid under a gold standard, Bernanke is explicitly ascribing powers to money that quite simply do not exist. He's obnoxiously saying that he, or some other allegedly wise central banker, should be able to intervene during downturns through money creation and rate machinations to fine tune and fix the economy. The central bank head's arrogance here is really quite staggering.

Indeed, 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.

Bernanke feels a gold standard would hamstring central bankers, and that's precisely the point. Stating the obvious, short recessions are turned into depressions when government officials intervene to blunt natural market forces from fixing what's wrong. A gold standard would ensure that the Bernankes of the future - and there will be Bernankes of the future - will not be able to assert their arrogant, central planning visions on the economy ever again. And because they won't, recessions will once again be the healthy periods whereby economies fix themselves through the cleansing from them of all the bad businesses, the bad investment, and the misuses of labor that brought on the downturn to begin with.

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.

John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading ( He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

Show commentsHide Comments

Related Articles