Ben Bernanke's Paper Dollar Embodies Systemic Risk

The paper dollar is now the single most important source of systemic risk to the financial system, the world economy, and the security of the American people.

That is the lesson of the past 100 years that Federal Reserve Chairman Ben Bernanke did not teach during his four lectures at George Washington University’s Graduate School of Business. Instead, he celebrated the importance of the extraordinary powers he and his fellow governors have to manipulate interest rates and the value of the dollar in the name of economic growth and stability.

In so doing, he ignored completely that the ever growing need for heroic interventions by the Fed is itself being created by the paper dollar system he celebrates.

This failure is all the more telling because Mr. Bernanke states up front that central banks perform two critical functions: The first is to “achieve macroeconomic stability.” By that, he generally means “stable growth in the economy, avoiding big swings, recessions and the like, and keeping inflation low and stable.” The second is to provide “financial stability” by either trying to prevent or mitigate financial panics or financial crises.

On both counts, the paper dollar system in effect since the final link between the dollar and gold was broken in 1971 has failed and failed miserably when compared to the results produced under the gold standard.

Let’s begin by stipulating that we agree with Chairman Bernanke’s point that the gold standard is not a perfect monetary system. What is?

The more important question is which system, the gold standard or the paper dollar, provides more macroeconomic stability and fewer financial crises.

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