New Austrian School of Economics
Gold Standard Institute
M. Benjamin Bernanke
Chairman of the Federal Reserve
Re: Open Letter to Discuss Your Misunderstandings
Dear M. Bernanke:
You have publicly gone on record with some
off-the-wall assertions about the gold standard. What made you think you could get away
with it? Your best strategy would
have been to ignore gold.
Although I concede that with the endgame of the regime of irredeemable
paper money near, you might not be able to pretend that people aren’t
talking and thinking about gold.
In this letter I will address your claims and explain your errors so
that the whole world can see them, even if you cannot.
Before I get into your claims, I want to point out
two of important facts. First,
the gold standard exists when people are free to choose what they wish to use
for money. Gold has won this
market competition over thousands of years, but the key is that when people
are not forced to use government-issued scrip they choose gold. And that’s the shabby little
secret of your irredeemable paper money, M. Bernanke. You have legal tender laws to force
creditors to accept it, whether they would or not. Will
you please let people be free?
Second, central planning does not work. The Politburo in the since-collapsed
Soviet Union did not know how many shoes to make of what sizes. And you don’t know what rate of
interest to set. Central planning
has always led to the collapse of the specialization of labor and the economy
with it, to the degree that it is attempted. The Federal Reserve, the central bank
of the USA, is the central planner for money, credit, interest, and discount. Given the importance of money to every
single aspect of the economy, it is no exaggeration to say that there is no
such thing as a free market built on top of a centrally planned monetary
In your speech at George Washington University, you
made several claims. I will take them in order.
1. The gold standard hasn't really worked since the
end of WWI.
This is true.
Just prior to Christmas in 1913 (which is before the beginning of the
war, by the way) the Federal Reserve Act was passed into law. Ever since, the Fed has taken for
itself and been granted more and more power to try to centrally plan money
and credit. You and your
predecessors have been in power for a century, but this fact is in no way an
argument against the gold standard.
2. 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 fact is that for thousands of years, people have
been digging gold up and putting it in basements. To call the behavior of so many people
over so many years “nonsense” is arrogant. A free country has room for arrogant
men, but no place for arrogant men to back their whims with a gun. From 1933 until 1975, one could be
imprisoned for the “crime” of possessing gold. To this day, it is not legal for a
creditor to demand payment in gold.
If you are so confident that you are right and all good men should be
happy that you print dollars at your discretion, can we agree on an
experiment? Let’s repeal
the laws that force creditors to accept paper, and the laws that nullify gold
clauses in contracts, and the taxes on the “gains” in gold, and
the laws that force taxpayers to use dollars as their unit of account for
bookkeeping purposes, and see what people choose when the gun is not
compelling them. I will wager one
ounce of good gold against a frayed old dollar bill that people will choose
gold if you let them. Should I
book my flight to Washington to pinky-shake on our bet?
3. The gold standard links the currencies of every
country, causing policy in one country to transmit to another. 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
Actually, M. Bernanke, you are describing the gold
exchange standard that prevailed from the treaty at Bretton Woods until it
collapsed in 1971 with Nixon’s default. The choice is not between price fixing
vs. excluding gold altogether.
The choice is between the freedom for people
to choose gold vs. central planning.
4. 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.
By the way, M. Bernanke, the Coinage Act of 1792
fixed the price of silver in terms of gold at (15:1). Like every instance of laws that
attempt to interfere with the markets, this provision was an unmitigated
disaster. Whichever metal is
officially valued at less than its market value will be pulled out of
circulation and sent elsewhere for its market price. Whichever metal is overvalued will be
imported from every corner of the earth and come flooding into the country.
In 1873, the government was ready to open the US
Mint again. But when they wrote
the list of which coins the Mint was authorized to coin, they somehow
“forgot” to include the one ounce silver coin. Silver was demonetized.
Demonetizing silver destroyed enormous amounts of
capital, M. Bernanke. Just
imagine that a farmer, to use your example, has been working hard and saving
all his life. And then the
government, in callous and cavalier fashion, passes a law that destroys the
value of his savings.
5. 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.
You have pushed interest rates down to zero on the
short end. This has achieved
nothing good, and yet you are unwilling to consider that, just maybe, your
theory is wrong?
We should pause for a moment to reflect on the
nature of downturns. The original
promise of the central bank was that it would prevent downturns! As recently as the “Great
Moderation” which abruptly ended in 2001, this myth was widely
believed. But we see that
downturns are not prevented by the central bank. Instead, much larger downturns (such
as the one which began in 2008) are caused by the central bank.
Let us look at the nature of these downturns. For a while, the bank encourages
credit expansion by various means.
The bond speculators (which did not exist under the gold standard)
jump onto the bandwagon and the result is that interest rates have fallen for
more than 30 years in a row.
During this long period, as you can imagine, much
counterfeit credit is created. By
counterfeit credit, I mean where either the saver is unwilling to lend or
even unknowing (such as anyone who deposits in a bank nowadays) or when the
borrower lacks either the means or intent to repay (such as the government,
or many bond issuers and banks).
Sooner or later, the game is up.
The borrower can no longer keep current on the interest payments. Not even by “rolling” the
debt. As an aside, M. Bernanke,
this is another dirty secret of the irredeemable currency: there is no way
for any debt, ever, to be repaid; it only moves from one debtor to another
and ultimately ends up at the Fed or the Treasury.
So what you blithely call a “downturn”
is the painful process of writing off bad loans. Capital has been destroyed, and everyone
who made bad loans must write it off.
You are correct that interest rates should rise as a result! Capital is far more
scarce than people believed during the boom.
6. The economy was far more volatile under the gold
I don’t think even you believe this, so I will
not comment further except to note that the 1929 crash occurred under the
tender ministrations and brilliant central planning of the Fed.
7. 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.
8. Gold standards leave central banks open to
speculative runs, since they usually don't hold all the gold.
No, M. Bernanke. I will address these points together:
a gold standard is when there is no central bank. What you are substituting in your
confusion is if the Fed were to somehow try to centrally plan gold. But you know that doesn’t work,
so I need not spend time arguing against it.
Speaking of unemployment, as you know, if the
portion of the population who is deemed to be “in the workforce”
hadn’t been shrinking so much, the unemployment rate right now would be
just below “staggering.”
And this is despite (or perhaps because of) your central planning
9. The gold standard is based on the "desire to
maintain the value of the dollar"—implying a "desire to have
very low price stability.”
The gold standard is about many things. Speaking of the value of the dollar,
you are aware, I am sure, that it has lost about 98% of its value in the 100
years since your organization began centrally planning. Under gold, prices do not remain
constant. That kind of stasis is
neither possible nor desirable.
Prices, and more importantly changes in prices, signal to consumers
and entrepreneurs what is scarce and what is in demand. No, what remains stable is the rate of
interest. And it is this rate
that is manifestly unstable under the Fed’s careful designs. As recently as 30 years ago, the rate
on the 10-year US Treasury was almost 16%. Today it is 2.2%, having recently hit
a low under 1.8% (and this rise of more than 22% in a short period of time is
both staggering and revealing).
Changes in the rate of interest cause enormous
destruction to industry. A rising
rate destroys businesses one by one as each looks at financing new capital
projects, or replacement for worn plant.
But at each higher interest rate, fewer and fewer capital projects
make any sense. So factories shut
down, and ever more workers join the unemployment line. Does this strike a note, M. Bernanke?
Falling interest rates cause a more pernicious and
subtle damage. Bond speculators
make risk-free gains on their bonds.
This money does not come out of thin air, however. Each bond issuer now has a higher
present value of their liabilities.
Good thing that FASB does not require them to mark liabilities to
market when the bond price rises, or else there would be a serious
problem! Actually, there is a
serious problem even if we all close our eyes and pretend otherwise. Is that a fair characterization, M.
Bernanke: that the purpose of the Fed is to help everyone play make-believe?
Under paper, neither prices nor interest rates have
been stable. Have you taken a
look at the chart for crude oil or most other commodities, M. Bernanke?
10. The gold standard is based on an aversion to
allowing the central bank to respond with monetary policy to booms and busts,
and a desire not to give the central bank that power.
Here you are correct, M. Bernanke. You should not have that power. No one should have that power. A brilliant author by the name of JRR
Tolkien wrote a story about power.
Have you ever read The Lord of the Rings or seen the version
Peter Jackson made into film?
11. There's simply not “enough” gold
How much gold do you think there is, M. Bernanke? How much gold do you think a gold
standard would need? You
don’t know either number, of course. This is just an old wives’
12. The commitment to the gold standard is that no
matter how bad the economy gets, we're going to stick to the gold standard.
This is an interesting logical fallacy. You are lumping together commitment to
gold with bad economy. This called
“begging the question”.
You are presuming what you ought to be asking.
13. The gold standard was one of the main reasons
the Great Depression was so bad and so long.
So you think that the disastrous adventure that
combined both taxes and protectionism that led to a trade war and thence to
collapsing trade had nothing to do with it? Or FDR’s constant threats to
change the rules of the game, thus rendering investments previously made
worthless (there’s that problem again)? What about the various other central
planning interventions of both Hoover and the New Deal?
Or how about the falling interest rate structure
that I mentioned above? When the
government outlawed the ownership of gold, that
herded people into the next-best choice: US Treasurys.
This caused the interest rate to
fall. Have you ever stopped to
think what this does to savers, such as the small farmer ?
M. Bernanke, I wrote a paper entitled “Gold
Bonds: Averting Financial Armageddon” (http://keithweiner.posterous.com/gold-bonds-to-avert-financial-armageddon)
because I am convinced that the regime of irredeemable paper money and hence
the Fed is going to come to a sudden and catastrophic end. One way or the other, your power and
the power of the Fed will be ended.
I would prefer that it be ended without also ending western
civilization, which is the course we’re headed on right now. You remember that bit earlier about
capital being rare and precious?
Your policies are helping accelerate an unprecedented destruction of
capital. When the capital is gone
(if not sooner) the game will be up.
I would like to avoid plunging into a new Dark
Age. Can we agree at least on
this, M. Bernanke?
© Keith Weiner 2012