Tuesday, October 30, 2012

Bernanke Dutifully (or Ignorantly) Attacks Gold

Bernanke Dutifully (or Ignorantly) Attacks Gold (via http://www.economicnoise.com)
Ben Bernanke spoke out against gold this week. According to Joe Wiesenthal he destroyed the idea of gold returning as a form of money or primary part of a monetary regime:
Ben Bernanke just gave the first lecture of his 4-part series on the origins of the Fed.
… one thing really stood out …
He spent a lot of time talking about the gold standard, and he just murdered it.
Mr. Bernanke’s position should surprise no one who has studied the role of the Federal Reserve. If money were backed by gold, the Federal Reserve would become just another, unimportant Federal agency. Gold would obsolete Mr. Bernanke and his agency. It would also change government, at least as we have known it for the last four decades. Three things that would not have happened had gold remained a part of the monetary system:
  1. Government could not have continuously run the massive deficits that threaten to bankrupt the nation.
  2. Government would be much smaller and less intrusive.
  3. The current financial crisis could not have developed.
Gold is not a perfect solution. It has positives and negatives in terms of playing a role in the monetary system. Clearly, it introduces some inefficiencies as pointed out by Mr. Bernanke and described by Mr. Wiesenthal:
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.
When discussed in this fashion, gold does appear rather nonsensical. However when the alternative is putting the political class in charge of the value of money, a gold standard appears sensible in spite of this “inconvenience.” In support of that point are the three points enumerated above and an important fourth point: since the Federal Reserve took over management of the currency, the dollar has lost 96% of its value. Most of that loss has occurred since 1971 when gold was fully removed from any constraints against political monetary debauchery.
An entirely different perspective on Mr. Bernanke and gold was provided by Mish (Mike Shedlock). Rather than making the case against gold, Mish argues that Bernanke slandered it and in the process revealed a lot about himself. According to Mish, gold was not the problem but these elements were:
All of the problems allegedly caused by the gold standard are in fact properly attributed to one of the following four things:
  1. Central banks and their inept Soviet-style central planning
  2. Fractional reserve lending
  3. Fed manipulation of interest rates
  4. Government sponsored monetary printing, frequently but not always to fight absurd wars that have no justified explanation. The War in Vietnam and the War in Iraq are recent examples.
Gold is to the State as sunlight was to Dracula. Gold is the State’s biggest enemy. If it were to become a meaningful part of the monetary system, government as we know it today would cease to exist. States would be forced to shrink back to the duties for which they were originally intended. The political class has no intention of allowing that to happen. That is why allowing gold to regain credibility must not be allowed.
As an agent of the State, Mr. Bernanke cannot afford to be truthful about the role of gold and its necessity as a political constraint. His predecessor, Mr. Greenspan proved that when you enter the employ of the Devil you leave your principles at the door. We know what Mr. Greenspan believed prior to his role as Fed Chairman.
In 1966 in an article entitled Gold and Economic Freedom Greenspan explained Statists antagonism toward gold:
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.
Mr. Greenspan concluded (my emboldening):
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
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.
I am unaware of Mr. Bernanke’s prior beliefs, but suspect they were not too different from those of the pre-political Greenspan. To assume Bernanke did not understand gold as a constraint against political exploitation is to question his intelligence. To assume otherwise is not flattering either, for it is to question his principles. As an aside, these two possibilities are hardly mutually exclusive.

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