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Bernanke vs the Gold Standard

Posted By Barry Ritholtz On March 22, 2012 @ 10:45 am In Federal Reserve,Gold & Precious Metals | Comments Disabled

In a speech this week, Federal Reserve Chief Ben Bernanke laid out a very reasoned argument as to why going back to the Gold standard is a nonstarter [1].

You can see his full presentation here, but I wanted to direct you to a summary from Business Insider’s Joe Wiesnthal [2], by way of UBS’s Art Cashin:

• The gold standard requires digging up gold in South Africa and storing it in a basement in New York. (Nonsensical)

• Everyone’s currencies become linked. This causes policy in one country to effect another country (see how U.S. policy is transmitted to China, because of the Yuan/Dollar fix).

• William Jennings Bryan observed that the gold standard causes deflation. His “cross of gold” speech: Because farmers had debts fixed in gold, loss of pricing power in commodities were very damaging.

• Gold standard cause interest rates to rise during downturns and rates to fall during good times — the opposite of what monetary policy should be doing.

• The economy was far more volatile under the gold standard (all the depressions and recessions back in the pre-Fed days).

• The were far more bank runs and closings during the pre-Fed, Gold standard era. Bank failures were all too common.

• The only way the gold standard works is if people are convinced that the central bank ONLY cares about maintaining the gold standard. The moment there’s a hint of another priority (like inflation or unemployment) it falls apart.

• Gold standards leave central banks open to speculative runs, since they don’t hold all the gold.

I am sure none of TBP readers have much to say about either the Fed or a return to a Gold standard…

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2012/03/bernanke-vs-the-gold-statndard/

URLs in this post:

[1] Gold standard is a nonstarter: http://www.ritholtz.com/blog/2012/03/bernanke-explains-his-problem-with-the-gold-standard/

[2] Joe Wiesnthal: http://www.businessinsider.com/ben-bernanke-murders-the-gold-standard-2012-3

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