View Full Version : Bernanke 101

03-24-2012, 06:52 PM
Chairman Bernanke’s decision to use the first of his four lectures at George Washington University to attack the gold standard certainly puts the hay down where us mules can get to it. “Ben Bernanke’s first lesson on economics: Forget about the gold standard,” is how Politico led its story. The Fed chairman used a series of slides to guide his remarks to a bright looking group of students. The “strength of a gold standard is its greatest weakness too,” one slide said. “Because the money supply is determined by the supply of gold, it cannot be adjusted in response to changing economic conditions.” Mr. Bernanke insisted he understands “the impulse” behind the gold standard, “but I think if you look at actual history the gold standard didn’t work well.”

The way Mr. Bernanke sketches his lesson one gets the feeling that the whole scheme of the institution he heads is as an alternative to the barbarous relic. So we reached into the stack of books beside our typewriter to see what might be there. The first one we found was “An Adventure in Constructive Finance,” the memoir of Carter Glass, the congressman who led in the creation of the Fed. It turns out that as the Federal Reserve Act of 1913 was moving through the House, it was hit with what Glass calls a “feverish outbreak about an imaginary ‘assault on the gold standard’.” It seems a group of Republicans was concerned that it would rescind the Gold Standard Act of 1900, which had settled the great battle over bimetallism that erupted in the late 19th century.

It turns out that Congress reacted to the assault by adopting an amendment put forth by an Ohio Republican, Simon Fess. It declared, as Glass put it, that nothing in the bill should be construed as a repeal of the law “providing a gold parity for all forms of money.” It was only against that assurance in law that the Federal Reserve Act actually made it through the House. Why Mr. Bernanke leaves this history out of his lecture one can but surmise. He also leaves out the fact that under the Federal Reserve System the dollar has lost more than 95% of its value. Nor does he mention the sheer drama of the collapse of the dollar on his watch. A bit of value has flowed back into it in recent weeks, but it is still below a 1,600th of an ounce of gold.

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