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.
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