Bernanke: China’s Dollar Peg Like Being on Gold Standard
"The problems of being on a gold standard can be seen in China’s decision to tie its currency to the U.S. dollar, Federal Reserve Chairman Ben Bernanke said Tuesday.
China is a modern example of the flaws similar to those of the gold standard, Bernanke said Tuesday in the first of four lectures at George Washington University. Because China ties it currency to the U.S. dollar, it could experience inflation, Bernanke said, noting that China’s currency has become more flexible lately.
“If the Fed lowers interest rates and stimulates the U.S. economy, that means also that essentially monetary policy becomes easier in China as well. Those low interest rates may not be appropriate for China,” Bernanke said. “China may experience inflation because it’s tied to U.S. monetary policy.”
Under a gold standard, paper money is tied to a fixed amount of gold. President Richard Nixon took the U.S. off the gold standard in 1971.
Bernanke said, “I understand the impulse” that makes the gold standard attractive, but contended that monetary system will never return.
“The world has changed” and there’s not enough gold out there to make such a regime feasible. Also, he argues a gold standard would not allow a central bank to do anything to help employment, and that’s no longer an acceptable way to conduct policy.
The gold standard poses both practical and policy problems, Bernanke said. On the practical side, it can be a waste of resources to secure all the gold needed to back currency, moving it from South Africa to the basement of the Federal Reserve Bank of New York, for example, or as he put it, “all this gold is being dug up and being put back into another hole.”
More significantly, a country on a gold standard will see more short-term volatility, Bernanke said.
“Since the gold standard determines the money supply, there’s not much scope for the central bank to use monetary policy to stabilize the economy,” he said. Bernanke noted the gold standard did not prevent frequent financial panics.
During the Great Depression, “policy errors” in the United States spread to other countries that were also on the gold standard, Bernanke said. Countries on the gold standard must maintain fixed exchange rates, making it easy for bad policies in one country to spread to another on the gold standard, he noted.
The gold standard can also cause both periods of deflation and inflation in the medium term, Bernanke said. If not “perfectly credible,” the gold standard can be subject to speculative attack and ultimately collapse as people try to exchange paper money for gold. However, he did acknowledge that over decades, prices are very stable for countries using the gold standard.
Part of the reason the Fed failed in its managing of the Great Depression were its attempts to stay on the gold standard, he noted. One of Franklin Delano Roosevelt‘s most successful moves as president was to begin to take the country off the gold standard, he said."
Ahhh, central bankers won’t be able to control the economy under a gold standard? Now that’s a damn shame!
My favorite part-
If not “perfectly credible,” the gold standard can be subject to speculative attack and ultimately collapse as people try to exchange paper money for gold.
That’s a real bummer, not being able to lie to people about how much gold the bank actually has.
Fiat is fraud, always has been. Without it, governments would be severely limited in their power. That WOULD be a shame, wouldn’t it?
Bernanke is either a lier or doesn’t know simple math. His point of there not being enough gold to back the currency he forgets you just raise the price of the gold. I believe James Rickards out that out.
More on Bernake’s speech on the failed gold standard, including a link to the slide show he presented:
We’ll have full transcripts and slides later, but one thing really stood out …
He spent a lot of time talking about the gold standard, and he just murdered it.
Among his points:
- To have a gold standard, you have to go dig up gold in South Africa and put it in a basement in New York. It’s nonsensical.
- The gold standard ends up linking everyone’s currencies, causing policy in one country to transmit to another country (sort of how U.S. policy now transmits to China, because they’ve fixed the yuan price to the dollar). So for example, if the U.K. fixes the number of pounds to an ounce of gold, and the U.S. fixes the number of dollars to an ounce of gold, then the pound and the U.S. dollar inadvertently become linked.
- It creates deflation, as William Jennings Bryan noted. The meaning of the “cross of gold” speech: Because farmers had debts fixed in gold, loss of pricing power in commodities killed them.
- The gold standard tends to cause interest rates to rise during downturns and interest rates to fall during good times, the exact 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 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 falling unemployment) it all falls apart.
- Gold standards leave central banks open to speculative runs, since they usually don’t hold all the gold.
Here are the key slides where he talks about gold…
Just remember that it is government that removed gold from circulating as money, not the people. Over time they removed it as backing for paper money, then eventually confiscated it, criminalized it and had it titled to the United States Treasury. All private contracts with gold clauses were invalidated by the government. (exactly who benefit from this?)
Oh they did give us $20.67 per ounce for it. Gold coins were circulating money until it was confiscated and reclassified as “capital asset” that carries capital gain tax, to this day. The competition for government money was removed . So If Bernanke really believe that the current “elastic” money supply is better, they should put their belief to the test ———return what was taken, lift the capital gains tax on them and allow it’s use. All that talk is just bs
“An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense — perhaps more clearly and subtly than many consistent defenders of laissez-faire — that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.” – Alan Greenspan, 1966
Surely, Bernanke doesn’t have ulterior motives, only our best interests. Surely…:)
“This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.” -Greenspan
Bernanke is totally decepetive when he tries to make the case that the economy was more volatile under a “gold standard”. The historical fact is, countries abandoned the gold standard whenever it was to their advantage, usually to start wars. This is simply more fiat money, NOT a gold standard. Volatility also resulted each time governments enacted trade restrictions and regulation designed to opress other countries/parties. In other words, most volatility was directly caused by government action, not some innate quality of the gold standard.
His BS about farms during the depression is amusing as well. Stupid ag practices along with the worst drought in history caused farming to fail, regardless. The credit expansion of ther 1920’s caused commodities to crash, which put another nail in the coffin. Credit expansion via, you guessed it, fractional reserve banking!
Now, anyone know what I can get for these Confederate notes?
It seems that the chief argument for the gold standard refers to price stability. Certainly, the value of fiat money is determined by the credit worthiness of the government that is printing it. Since the money supply under the gold standard is stable, prices and more to the point, inflation in the central price index remain in theory stable. Aside from that, since the time Richard Nixon took the U.S. off the gold standard in 1971, some have been pining for its return. There are a variety of reasons for and against. Generally imagined of as a fringe idea, the return of the gold standard is beginning to gain a little more traction. Perhaps, the idea of returning to gold standard may take it away from fringe. Thus, pegging our currency to a tangible source may be a good way to protect it against inflation.
What an idiot really. Does he really believe this stuff? Currency pegging is a problem when either country is inflating to the high heavens. The current situation has both US and China inflating like crazy. What hypocrisy.
A gold standard being inflationary? This is one of his most ridiculous statements yet. But it squares with his ‘gold standard tightness caused the Depression’ thesis. Thanks Milton Friedman.