Defense of the Federal Reserve Bank and fiat currency

Ben Bernanke, who is currently the Chairman of the Federal Reserve, gave a speech in 2004 explaining how the gold standard caused the Great Depression.

To make a long story short, under a gold standard, there’s no way to fight deflation. Bernanke says that cross-country studies show that the first countries to abandon the gold standard were the first countries to recover from the Great Depression.

One of the reasons to be very afraid of a Ron Paul presidency is that he would do something really stupid involving monetary policy that would lead to the next Great Depression.

Comments

[Republican Patriot]

Agreed that the "gold standard" is an economically incoherent and dangerous idea. On the other hand, if the Fed acts too promiscuously to expand the money supply as a "boost" to the economy, then we'll end up with 1970s era inflation. Inflation does not appear to be much of a problem right now. But I am very concerned by the knee jerk reaction of the Fed to cut interest rates every time Wall Street sneezes.

[Days of Broken Arrows]

"One of the reasons to be very afraid of a Ron Paul presidency is that he would do something really stupid involving monetary policy that would lead to the next Great Depression."

First of all, Bernanke's speech is HIS view of history, which may or may not be correct. College's pass off feminist lies as "scholarship," so there is little reason to believe Bernanke's account of the drpession.

Second, why is a Depression necessarily bad? If you're intelligent, you've already paid off your house and have enough money to live off for the next decade. It's not my problem if most people can't save a dime and live off credit.

I don't think it would be a bad thing to see useless bankers jumping from windows and pompous Lexus-renting suburbanites in soup lines. I think the US deserves a depression.

[CC]

How? And what?

[miles]

"Days of Broken Arrows" wrote: ' I think the US deserves a depression.'

Can any of you see why Paul's supporters have turned off alot of the GOP that might have gave the man a listen way back?

Days of Broken Arrows...............I could pay off my house tommorow if I wanted to. I only owe about 7 years on it, but Ive elected to keep some money liquid (might be gemming up a business with a pal). However, I dont HOPE bad things happen to over-financed suburbanites. I wish they were a bit more conservative with their money just like I wish the government was a bit more conservative with all our money, but I dont wish some horrible occurence on all of us just "to teach them a lesson". Damn dude, where is your love of your fellow countrymen?

I wish the FED was owned by the public (all of us), and we set private money managers over it not beholden to us, as political apointees. I wish we had congressionally-passed laws against printing money that we dont have backing for (deliberate inflation to bail us out) because of the economic havoc it would wreck. I wish the fractional reserve was higher than what it is now also and we had a tighter money supply and less artifically low interest rates that lead people to take on too much debt.
If WE ALL owned the FED, we could have the enonomy professionally managed, and not have to worry about the FED's owners not necessarily having our best interests at heart.

[Mencius]

The principal problem with the interwar gold standard was that central banks issued far more redeemable notes for gold than they had gold. Ordinary banks then pyramided this expansion. When you have X gold and 10X or 20X instruments promising gold instantly on demand, you don't need a Ph.D to see that you're cruising for a bruising.

Bernanke comes closest to acknowledging this when he writes:

As with any system of fixed exchange rates, the gold standard was subject to speculative attack if investors doubted the ability of a country to maintain the value of its currency at the legally specified parity. In September 1931, following a period of financial upheaval in Europe that created concerns about British investments on the Continent, speculators attacked the British pound, presenting pounds to the Bank of England and demanding gold in return. Faced with the heavy demands of speculators for gold and a widespread loss of confidence in the pound, the Bank of England quickly depleted its gold reserves.

In other words, it's pretty hard to peg A to B at 1:1 when you've issued a billion A and you only have a 100 million B. D'oh! Darn those nasty "speculators."

While the prewar ("classical") gold standard also pyramided reserves (read Bagehot), WWI paper expansion simply overstretched this already unstable structure. In retrospect, the right thing for the CBs to do would have been to devalue their currencies to match their actual gold reserves. Instead the lure of inflationism proved too great.

So blaming the "gold standard" for the Great Depression is technically accurate. But it's rather like blaming a gun for shooting you in the head when you play Russian roulette. Moreover, this problem has little to do with a restoration of the gold standard, at least from the Ron Paul perspective. Paul's advisors are all Austrians, for whom a "gold standard" means 100% reserve, not the unstable Bagehotian design.

As I think I've said before, John Stuart Mill is your friend on this one. "Everyone, with a few ridiculous exceptions..." indeed.

We now return you to your regularly scheduled Ezra Pound economics.

[Rain And]

The Jewish Telegraphic Agency has an article about Jews for Ron Paul. Contra Siggy, the quotes from Paul in the article are the opposite of conspiratorial ZOG-speak:

"Our foreign military aid to Israel is actually more like corporate welfare to the U.S. military industrial complex, as Israel is forced to purchase only U.S. products with the assistance... We have adopted a foreign policy that has left Israel surrounded by militaristic nations while undermining Israel's sovereignty by demanding that its foreign and defense policies be essentially pre-approved in Washington"

In other words, the US controls Israel, not the other way around.

[Bill]

I read Bernanke’s paper. His objection to the gold standard seems to be that, after World War One, countries started cheated by printing more money than they had real gold reserves, and the speculators called them on it.

He argues that not having a gold standard is a preferred system because it allows a Country to simply print money when it gets in trouble:

“For example, the Fed could have been more aggressive in lending cash to banks (taking their loans and other investments as collateral), or it could have simply put more cash in circulation. Either action would have made it easier for banks to obtain the cash necessary to pay off depositors, which might have stopped bank runs before they resulted in bank closings and failures.”

Printing money, of course, is exactly what he is doing today. It is keeping the banks afloat, but the value of our savings in those banks is down by a third. And the housing bubble has set precedent to just print more money when the entitlement bubble sets in.

I now see why President Bush nominated this guy. It looks like things, with the exception of the value of our dollars, will stay afloat through 2008.

[David Alexander]

It is keeping the banks afloat, but the value of our savings in those banks is down by a third.

I may be a low IQ, illiterate black guy, but I'd rather have an devalued currency than a banking crisis with the prospect of large banks failing, and the public pulling their money from banks in fear of losing it and causing more banks to fail.

And the housing bubble has set precedent to just print more money when the entitlement bubble sets in.

A good old fashioned inflationary spiral with wages going up in tandem to compensate should make home owners with large fixed-rate mortgage payments feel happy eventually. OTOH, god forbid you have to borrow money or have variable rate mortgages in that environment...

[Vim]

Bill:

Printing money causes inflation. The Fed's job is to reduce inflation. So what you are saying about printing money doesn't make sense. There would have to be something a lot worse than inflation in store for the Fed to advocate printing money as a way out of it. It's one of the worse things a government can do in terms of the economy. (You can read up on the current state of affairs in Zimbabwe or Germany just before the 2nd World War.)

I think you are confusing the decline in the US dollar due to external demand (which comes from foreign demand for American dollars which has to do with the other billions of people in the world who are certainly out of the Feds control) and the decline in value due to inflation (which would result from printing money).

[Bill]

Vim;

With respect, the banks are in trouble, which is worse than inflation. Nobody’s printing money these days, they are only providing ‘liquidity’ for banks. We’ve created more ‘liquidity’ in the last year than has been spent in Iraq and Afghanistan since 2001.

Goldman Sachs puts the mortgage price tag at $300 billion, which correlates to an average drop in real estate prices from the peak of 3% (assuming a 50-50 mortgage debt/homeowner equity ratio). The reality is at least five times that, probably ten.

None of these games would be conceivable if our currency was backed by gold. Compare the value of our dollar vs. corn, silver, oil, gold, or any other commodity over the past two years.

Here’s some British link (it's late):

http://www.marketoracle.co.uk/Article1812.html

[mith]

I think you're drawing a conclusion here that's not entirely valid. Ron Paul doesn't want to put us back on the gold standard. He wants to establish gold and silver as currencies capable of competing with the fiat dollar. A system like that would be fluid enough that it could avoid the deflationary effects of a true gold standard while at the same time avoiding the inflationary aspects of a fiat currency system.

[Gamma Man]

We know the system is broken so why not fix it?

Days of Broken Arrows:
I don't think it would be a bad thing to see useless bankers jumping from windows and pompous Lexus-renting suburbanites in soup lines. I think the US deserves a depression.

I agree with the former but not with the latter. Don't throw the baby out with the bath water!

While fighting the inflation machine called Fed and the enemy class known as the managerial elite is fine, I see no need to destroy the country. It's bad enough as it is.

[Ned Ludd]

"I don't think it would be a bad thing to see useless bankers jumping from windows and pompous Lexus-renting suburbanites in soup lines. I think the US deserves a depression."

"I agree with the former but not with the latter. Don't throw the baby out with the bath water!".....

I'm guessing here that "useless banker" would be defined as one you don't intend to borrow money from...Since they're probably unaware of your future plans, should they call, or email you before jumping?

[Ned Ludd]

mith,

"I think you're drawing a conclusion here that's not entirely valid. Ron Paul doesn't want to put us back on the gold standard. He wants to establish gold and silver as currencies capable of competing with the fiat dollar."

I'm still trying to figure out why the Ronulans and many of the Paleos & Libertarians want create, as you say a "competing" gold standard, or to force an officially sanctioned gold standard onto the rest of us...

If you want to put all of your assets into gold there is no problem doing that today...

It's true that prior to 1974 it was largely illegal to own privately gold...But Gerald Ford lifted that ban along time ago...

More recently, Gold and Silver became available to trade on the exchanges. Anyone can buy GLD and SLV in their brokerage accounts, which effectively allows you to keep Gold and Silver assets in a convenient, safe, divisable and readily available form, with very low transaction costs.

So today, pretty much, anyone, even a Ronulan, can create their very own personal Gold standard. (or Silver, or Oil standard for that matter.)

I believe the only thing you currently cannot do is demand payment for contracts in Gold...Which would be pretty easy to hedge around if this was really a problem.

Is there a Paul supporter who can explain Libertarian objections to paper money now that we can each now chose the monetary standard that most appeals to us and yet still be able to conduct basic commerce by converting our favorite assets into dollars just at the time they're needed? Isn't that a reasonable and satisfactory free market solution?

[Gil]

I have said elsewhere to gold standard weirdos that if we had to go back to a gold (and silver?) standard then I want the money to be in the form of gold coins (and silver coins?) not a piece of paper with 'it's backed by gold' printed on it. For some reason some goldbugs whinge on about how "fiat currency is monopoly money" and "the printers are churning out paper money around the clock", etc., yet many are quite happy to still have paper money on the assumption banks really would have the bill redeemable for x amount of gold and banks wouldn't engage in (even illegally) fractional reserve banking despite the fact that history show banks will and did. Even worse, is the notion of private currency issuers! Unless they're issuing gold and silver coins at standard weight increments - I don't want hear of it!

[SFG]

Wouldn't getting rid of fractional reserve banking cause a major economic collapse and massive deflation?

[Jeff Albert]

Broken Arrows is right on - Unless you own stock in Goldman, why should you give a shit if it collapsed. We're screwed when they manipulate the interest rate, blued when they inflate the money supply and tattood when they bail out the (supposedly) private institutions that fail, and if you don't like it - "Dude, don't you love your fellow countryman?" That's the real reason the GOP hates us Paultards; nobody likes a smart-ass, especially when he's right about every goddam detail
The Fed was sold to us as a way to prevent bank panics; depositors not being able to get their savings out. What savings? We have net negative savings because we already earn less in interest than inflation and the entire system depends on the government loaning money to the banks at even lower rates. Why shouldn't we eliminate the middle man and just borrow directly from the government? Better yet, why shouldn't we all just have government jobs and pensions with free healthcare and broadband so we can can telecommute, and then get bailed out if we still can't make ends meet after we get our stimulus rebate and mortgage moratorium?
What's really mystifying is that there enough Americans smart enough to fill out the loan forms.
Schmucks

[t-rex]

Bankers don't like the gold standard 'cause they like to create massive amounts of money out of thin air and loan it out to businesees, individuals, and governments, and then collect interest on it. Nice scam if you can get away with it. It doesn't matter if we have a gold standard or not when it comes to deflation. Either you get a decline in asset prices big time with a steady dollar, or you get steady asset prices and massive devaluation of the dollar itself. Great choice! Either way, the regular Joe ends up lots poorer, while the money printers make out like bandits. A central bank is just licensed thievery. They create credit booms and busts, then profit on the upswing and downswing, where they buy up asssets in distress for pennies on the dollar.

Of course, the real beneficiaries of the inflation machine are the bankers, government, and Wall St. Say you get a 4% return on your money with a gold standard, and an 8% return on fiat money with a 4% inflation rate. Same difference? Not quite. Wall St. will want 1% on your 8%, then he government will come along and tax you at your regular income tax rate when you are actually ready to spend the money (say 30%, or 3/8 of our 8% above, for another 3% out of the 8%). You think you made out, when in reality the government and Wall St. just got every red penny of your true gain. This is how they rob people with inflation.

No way would Wall St. be able to take 1% of your 4% return (more like 1/2%, tops) with real money. And the government's take would be only 3/8 of 4%, or 1.5%. You might actually get to keep 2% on your money with that setup. So its time to rev up the printing press and throw away the gold--there's pockets to be picked!

[t-rex]

PS, I disagree that anybody can create their own gold standard. Yes, you can save in gold and silver, but under a true gold standard, the notes in circulation are as good as gold or silver, so, de-facto, gold and silver circulate as money. Unless gold and silver can circulate and be used as money again, a true gold standard does not exist.

[bbartlog]

Gerald Ford lifted that ban along time ago

By signing the Helms-Paul (Ron Paul, that is...) bill. Not on his own initiative.

Bernanke's attempt to blame the depression and its prolongation on the gold standard is weak. The depression took place after the Fed had already begun inflating the money supply, and its prolongation was due to the Fed's overreaction in the other direction. Milton Friedman covered this.

[Joe]

If the gold standard was so goddamn great, why did every country using it suffer repeated recessions and depressions? There is a bizarre illusion that gold has intrinsic value. It doesn't. It's valuable because we think it is.

[bbartlog]

why did every country using it suffer repeated recessions and depressions

Unlike countries off the gold standard, which... also suffer recessions and depressions. Actually I would agree with the idea that the gold standard may make the busts and booms of the business cycle worse than a theoretical well-managed central bank. But in the end the managers of fiat money always seem to succumb to inflationary temptations in their futile endeavor to stave off the downswings. Sort of like now (or do you think inflation is going to stay in check after the latest rate cuts?).

[mith]

Ned:

"So today, pretty much, anyone, even a Ronulan, can create their very own personal Gold standard. (or Silver, or Oil standard for that matter.)"

Not necessarily. Liberty Dollar tried: they produced gold coins, and allowed people to purchase them and trade them with other Liberty Dollar supporters. Right up until they were raided and their assets were seized by our central government about 3 months ago.

I don't disagree that the potential exists for private companies to use a standard exchange rate for precious metals. The functionality of that model is called into question when the government steps in to prevent such a business from doing so.

So far as I can tell from Ron Paul's discussion of competing currencies, he just wants to make it legal for companies like Liberty Dollar to operate without the threat of having their assets (and the inventory they've sold to customers) confiscated on a whim.