The True Gold Standard (Second Edition)
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?
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:
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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Why the Gold Standard?