Fed Chairman Ben Bernanke


Chairman Ben Bernanke


Early in 2012, Fed Chairman Ben Benanke launched the highest profile assault on the gold standard of the modern era.

“The gold standard would not be feasible for both practical reasons and policy reasons,” Bernanke told students at George Washington University on March 20. “I understand the impulse, but I think if you look at actual history the gold standard didn’t work well.”

The oddest aspect of this outright condemnation was that it was directly antithetical to the representation of the gold standard as “highly successful” made by noted authority and Federal Reserve Governor Ben Bernanke in a 2004 speech at Washington and Lee University.

In that speech, Bernanke said: “The gold standard appeared to be highly successful from about 1870 to the beginning of World War I in 1914. During the so-called ‘classical gold standard period,’ international trade and capital flows expanded markedly, and central banks experienced relatively few problems ensuring that their currencies retained their legal value.”

Moreover, in 1990 then-professor Ben Bernanke, in a 1990 NBER Working Paper (writing with Harold James), referred to the world monetary breakdown that resulted in the Great Depression a result not of the gold standard but of a “mismanaged international gold standard” — an allusion to the gold-exchange standard adopted in Genoa in 1922 which Professor Jacques Rueff called a “grotesque caricature” of the classical gold standard.

Bernanke’s indictment of gold is hard to decipher.  As stated in a March 26, 2012 article in Roll Call:

[T]he quality of a gold-linked dollar has become more, not less, accepted since 2004. The Bank of England published a paper titled “Financial Stability Paper No. 13 — December 2011, Reform of the International Monetary and Financial System.” It makes a startling observation:

“The paper sets out three objectives for a well-functioning IMFS: i) internal balance, ii) allocative efficiency and iii) financial stability. The IMFS has functioned under a number of different regimes over the past 150 years and each has placed different weights on these three objectives. Overall, the evidence is that today’s system has performed poorly against each of its three objectives, at least compared with the Bretton Woods System,” the paper says.

In plain English: The contemporary world dollar standard has been a great disappointment percent — a failure — compared with the very diluted form of the gold standard established under the Bretton Woods regime.

The Bank of England’s case is neatly summarized by … Forbes.com contributor Charles Kadlec. When compared to the Bretton Woods system, in which countries defined their currencies by a fixed rate of exchange to the dollar, and the United States in turn defined the dollar as one-thirty-fifth of an ounce of gold:

  • Economic growth is a full percentage point slower, with an average annual increase in real per-capita gross domestic product of only 1.8 percent.
  • World inflation of 4.8 percent a year is 1.5 points higher.
  • Downturns for the median countries have more than tripled to 13 percent of the total period.
  • The number of banking crises per year has soared to 2.6 per year, compared with only one every 10 years under Bretton Woods.

Bernanke’s astute political sense has almost immunized him from acute criticism.  But his criticism of the gold standard is by no means the first time he has appeared, in public, feckless.

Bernanke, then President Bush's Chairman of the Council of Economic Advisers presented in this July 1, 2005 interview on CNBC:

INTERVIEWER: "Ben, there's been a lot of talk about a housing bubble, particularly, you know from all sorts of places. Can you give us your view as to whether or not there is a housing bubble out there?"

BERNANKE: "Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy.

INTERVIEWER: Tell me, what is the worst-case scenario? Sir, we have so many economists coming on our air saying ‘Oh, this is a bubble, and it’s going to burst, and this is going to be a real issue for the economy.’ Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?

BERNANKE: Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s going to drive the economy too far from its full employment path, though.

RealClearMarkets.com and Forbes.com Opinion editor John Tamny described him in an August 19, 2011 column as

“easily the worst Fed Chairman in history. … Bernanke is merely hopeless at his job for his embrace of nearly every discredited economic fallacy under the sun. … Looking at the numbers, Bernanke took over in February of 2006. At the time an ounce of gold was selling for $569/ounce (notably, gold spiked from $480 upon his nomination; this jump presumably the markets pricing in what was ahead), a gallon of gas retailed for $2.24, and unemployment had fallen back down to 4.8%. Not great numbers, particularly those of gas and gold, but somewhat calm.

“Fast forward 5 ½ years later, however, and the situation is ugly. Gold, the most devaluation/inflation sensitive of all market indicators has more than tripled to over $1,800/ounce, the price of a gallon of gasoline has jumped to $3.58, and the rate of U.S. unemployment has nearly doubled to 9.1%. In the real world our blundering Fed Chairman would be gone by now, but in a Washington largely oblivious to market discipline, Bernanke has failed upward; graduating to "the world's foremost Great Depression scholar" despite economic instincts that suggest he would have felt right at home in the Hoover and FDR administrations that gave us the 1930s.”

In 2005 Tamny wrote a prescient column for National Review Online The Scary Side of Ben Bernanke, which concluded: “For his views on money, Bernanke has the potential to be very dangerous.”

When the history of the Bernanke era is written it is probable that historian Ben Bernanke will be seen as having acted in ways akin to that of Bank of England Governor Montagu Norman, who, in 1925, steered Great Britain, by misadvising then-Chancellor of the Exchequer Winston Churchill, into a disastrous monetary policy.   This caused massive unemployment.  Keynes’s assessment, in The Economic Consequences of Mr Churchill: declared “that the chancellor had acted ‘partly, perhaps, because he has no instinctive judgment to prevent him from making mistakes; partly, because, lacking this instinctive judgment, he was defeated by the clamorous voice of conventional finance; and most of all, because he was gravely misled by the experts."

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