Here are five reasons why Federal Reserve Chairman Ben Bernanke hates the idea of moving the U.S. off its fiat currency:
1) The gold standard helped create the Great Depression. Pegging the dollar to gold led to financial panics during the Great Depression Bernanke argued during a recent speech at George Washington University (per Politico).
“The gold standard would not be feasible for both practical reasons and policy reasons,” he said. “I understand the impulse, but I think if you look at actual history the gold standard didn’t work well.”
I disagree as much of the world operated on some form of precious metals-based monetary standards between the late 1700s and the 1970s. Financial panics occur when the public loses faith in a government’s ability to meet it debt obligations (and it doesn’t matter if that country’s operating with a gold standard or a fiat currency). Rather than a history of failed gold standards, I think it’s more likely that the world will look back on fiat currencies as something that “didn’t work well.”
2) There’s not enough gold to go around. Bernanke claims this is one of the biggest problems with a return to the gold standard. In fact, the move would just require valuing gold at a much higher level. The often-quoted figure is $10,000 per ounce.
3) Less control over the economy. It’s no secret that the Fed uses the dollar as way to manipulate the economy. It gooses a tough economy with easy cash or it caps off a good economy with higher interest rates when it shows signs of overheating. If the U.S. returned to a gold standard, the Fed would no longer have that control.
4) Fiscal discipline would be imposed. Washington’s putting lots of pressure on the Fed to ensure the country can continue offering touch-point social programs: things like Medicare and Social Security. So long as Washington is unwilling to make cuts to those programs, the Fed will have little choice but to keep printing money to pay for them.
5) Gold standards benefit creditors. Gold standards inject price stability into an economy. That means governments can’t “inflate” their way out of debt by printing more “cheap” cash to pay off long-standing bills. Putting the U.S. on a gold standard with a national debt north of $15 trillion would be a form of financial suicide. Bernanke knows that, and the rest of Washington does, too. That’s why they’re publicly lobbying against a gold standard. If another country moves to it first, though, we may not have any choice but to follow.
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Tags: Ben Bernanke, gold standard, inflation
