Will Stanley Fischer succeed Ben Bernanke?

Monetary policy has become a "rule of men and not of law."  There is no "golden rule" that, classically and, according to then-governor Ben Bernanke, in a 2004 speech at Washington and Lee University, worked well:

“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.”

Now that the Federal Reserve bases monetary policy on the discretion of elite civil servants the identity of the Chairman of the Federal Reserve takes on a certain kind of transcendent importance.  Hence it was of keen interest to see the Washington Post's "Wonkblog," by Dylan Matthews, devote itself to an adulatory profile of Prof. Stanley Fischer, Stan Fischer saved Israel's economy.  Can he save America's?


Stanley Fischer, photo courtesy of the Wikipedia


Every August, central bankers from across the globe, who collectively pull the levers of the world economy, descend on Grand Teton National Park in Wyoming. They enjoy a symposium of big economic ideas and strenuous afternoon hikes. At one of their dinners a few years ago, Federal Reserve Chairman Ben S. Bernanke looked around at some fellow titans of finance.

“Do you know what everyone at this table has in common?” he mused. “They all had Stan Fischer as their thesis adviser.”

Stanley Fischer, who this month announced that he will step down as governor of the Bank of Israel, is one of the most accomplished economists alive. Any one of his past jobs would be a crowning achievement in an economist’s career.

As a professor at MIT — arguably the best economics department in the world — he helped found a school of economic thought that has come to dominate departments across the country. He also advised an all-star crew of grad students who went on top jobs in the policy world, including Bernanke, European Central Bank President Mario Draghi and former chief White House economist Greg Mankiw.

As the No. 2 official at the International Monetary Fund, he helped contain the Asian economic crisis of 1998. As a vice chairman at Citigroup, he ran all work for public-sector clients at what was at the time the world’s largest bank.

And in 2005, Israeli Prime Minister Ariel Sharon and Finance Minister Benjamin Netanyahu picked him to lead the central bank of a country he had previously only visited. No matter — Fischer’s results were more than enough to assuage any doubts. No Western country weathered the 2008-09 financial crisis better. For only one quarter — the second of 2009 — did the Israeli economy shrink, by a puny annual rate of 0.2 percent. That same period, the U.S. economy shrank by an annual rate of 4.6 percent. Many countries, including Britain and Germany, fared even worse. While they were languishing, by September 2009 Fischer was raising interest rates, all but declaring the recession defeated.

This blogger naturally is respectful of Governor Fischer's extraordinary intellect and impressive track record.  Notwithstanding, however, his sterling credentials, America and the world have been disappointed before, and not rarely.   Reposing the people's trust in even the most distinguished and civic spirited central bankers who must operate according to discretion rather than a clear, organic, and sensible rule -- such as that conveyed by defining currencies as a fixed weight of gold -- repeatedly has not worked out very well.  

As Prof. Robert Mundell wrote in his Nobel Prize in Economics acceptance speech, in 1999:

The twentieth century began with a highly efficient international monetary system that was destroyed in World War I, and its bungled recreation in the inter-war period brought on the great depression, Hitler, and World War II>  The new arrangements that succeeded it depended more on the dollar policies of the Federal Reserve System than on the discipline of gold itself.  When the link to gold was finally severed, the Federal Reserve System was implicated in the greatest inflation the United States has yet known, at least since the days of the Revolutionary War.  Even so, as the century ends, a relearning process has created an entirely new framework for capturing some of the advantages of the system with which the century began.

Rather than asking the American people, once again, to trust the experts it would be more prudent to consider "capturing some of the advantages of the system with which the century began."  Or even, perhaps, capturing all of them by restoring, and placing someone of the superb quality of Prof. Fischer in charge of administering, the classical international gold standard.

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Today’s economic conditions reflect a fiat monetary system held together by many tricks and luck over the past 40 years. The world has been awash in paper money since removal of the last vestige of the gold standard by Richard Nixon when he buried the Bretton Woods agreement — the gold exchange standard — on August 15, 1971.

Since then we’ve been on a worldwide paper dollar standard. Quite possibly we are seeing the beginning of the end of that system. If so, tough times are ahead for the United States and the world economy.

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Publisher's Note: Originally released in June/July of 1991, this detailed report discusses Jacques Rueff's economic theories and applies them to modern economic events.

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... Trained in science and mathematics at the Ecole Polytechnique, Rueff devoted his first theoretical work to showing that the same scientific method applies to “moral” or “social” sciences like economics as to the physical sciences (Des Sciences Physiques aux Sciences Morales, 1922). In both cases, he pointed out, individual acts can be “indeterminate,” but the pattern of large numbers of individual acts can be predicted as a matter of probability. And so in economics no less than physics, as he later wrote, “A scientific theory is considered correct only if it makes forecasting possible.”

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"Forerunners of man lived upon the planet several million years ago. But the unique, modern, social order of man – civilization – emerged only four to five thousand years ago. Historical and archaeological evidence suggests that the institution of money evolved coterminously with civilization. From the standpoint of the 100,000-year history of Homo sapiens, civilization and money are but young and fragile reeds. Today their very existence is threatened by financial disorder."

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There is a lot of bad behavior in the global political and monetary world. Much of it comes in countries that should know better. Recep Tayyip Erdogan’s Justice and Development Party (AKP) easily won municipal electons in Turkey but the party’s candidates won far short of the nation’s votes. The Wall...
Hostility toward gold has a long pedigree.  19th century depiction of Pliny the Elder courtesy of the Library of Congress Gaius Plinius Secundus, commonly known as Pliny the Elder, in his The Natural History, Book 33, section 3, writes: Would that gold could have been banished for ever from the earth, accursed by...
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