Fed Chairman Condemns Gold Standard

In mid-March, Federal Reserve Board Chairman Ben Bernanke delivered the first of four lectures designed to justify the existence of the federal reserve in the face of mounting criticism against centralized banking.  For the first time, Bernanke spent a considerable amount of time explaining why he believed the Federal Reserve superior to a gold standard.

He described the federal reserve not as a bank, as the fed has claimed in litigation, but as “a government agency.”  “In normal times,” he explained, “central banks adjust the level of short-term interest rates to influence spending, production, employment, and inflation” and “provide liquidity (short-term loans) to financial institutions or markets to help calm financial panics, serving as the ‘lender of last resort.’”

Comparing the gold standard to central banking, he thought the former a victim of the following problems: (1) an inability to adjust the money supply in response to changing economic conditions (in other words, the gold standard achieves a fixed money supply and price level); (2) the necessity for countries on the gold standard to have fixed exchange rates (in other words, the gold standard stabilizes currencies and creates a basis for fixed rates of exchange); (3) an incentive for people to exchange paper currency for gold, resulting in dangerous speculation (in other words, people turn to gold when paper currency becomes inflationary); and (4) financial panics exist despite the gold standard; (5) inflation and deflation exist under a gold standard.  We supply a complete transcript of the Bernanke speech here.

Until 1971, most industrialized countries depended on a gold standard and many also had a central banking system in place at the same time.  The great benefit of the gold standard was its reliability.  When people comprehend that their currency is backed by gold, it inspires confidence.  Confidence in the backing of a currency encourages low interest rates and investment.  Under a central banking system, such as that created by the federal reserve, where there is no specie backing to the currency, there is no fixed standard against which lenders, borrowers, savers, and investors may turn.  Instead, the fed adjusts interest rates in a month by month second guessing of the market’s direction, attempting to manipulate the currency in ways that will alter spending, production, employment, and inflation.  Human manipulation of the currency invites uncertainty, encourages higher interest rates, and discourages investment.

Under the 2010 Dodd-Frank Wall Street reform law, the Federal Reserve was forced to reveal previously secret loans it made during the financial crisis between December 1, 2007 and July 21, 2010.  Under Section 13(3) of the Federal Reserve Act, which permits the Fed to make loans to banks in “exigent circumstances” (a provision rarely invoked by the Fed prior to 2008), the Federal Reserve gave the nation’s top banks $16.1 trillion in loans at preferred rates of interest, a sum nearly double the national debt at that time.  Those funds were supplied atop the Wall Street bail-out bills passed by Congress.

The loans are revealed on page 131 of the GAO audit report which you may read here (http://www.gao.gov/products/GAO-11-696).  The following institutions received the preferred loans:

  • Citigroup–$2.513 trillion
  • Morgan Stanley–$2.041 trillion
  • Merrill Lynch–$1.949 trillion
  • Bank of America–$1.344 trillion
  • Barclays PLC–$868 billion
  • Bear Sterns–$853 billion
  • Goldman Sachs–$814 billion
  • Royal Bank of Scotland–$541 billion
  • JP Morgan Chase — $391 billion
  • Deutsche Bank–$354 billion
  • UBS–$287 billion
  • Credit Suisse–$262 billion
  • Lehman Brothers–$183 billion
  • Bank of Scotland–$181 billion
  • BNP Paribas–$175 billion
  • Wells Fargo–$159 billion
  • Dexia–$159 billion
  • Wachovia–$142 billion
  • Dresdner Bank–$135 billion
  • Societe Generale–$124 billion
  • All Other Borrowers–$2.639 trillion

The GAO audit uncovered, among other irregularities, conflicts of interest between officials and employees of the federal reserve and institutions receiving the emergency loans.   Those officials and employees held stock in the banking institutions receiving fed largesse.

See also: 

Fed Reseve and Financial Crisis, By Ben Bernanke

George Selgin, “Ludwig von Mises and the Case for Gold,” Cato Journal, Vol. 19, No. 2 (Fall 1999)

 

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