Benjamin Bernanke
Chairman of the Federal Reserve
Mar 25, 2012
Re: Open Letter to Discuss
Your Misunderstandings About Gold
Dear Ben:
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. You can't win, Ben. 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
specious 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, Ben. 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
system.
In your speech at George
Washington University, you made the following claims:
- The gold
standard hasn't really worked since the end of WWI.
- 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 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 become linked.
- 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.
- 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.
- The economy
was far more volatile under the gold standard.
- 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.
- Gold
standards leave central banks open to speculative runs, since they
usually don't hold all the gold.
- 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 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.
- There's
simply not "enough" gold
- The
commitment to the gold standard is that no matter how bad the economy
gets, we're going to stick to the gold standard.
- The gold
standard was one of the main reasons the Great Depression was so bad and
so long.
Please forgive me if my
takedown runs a little bit long. I've found that it is much easier to commit
a logical fallacy in a sound bite than it is to explain the full context. I
will take your assertions 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 become linked.
Actually, Ben, you are
describing the gold exchange standard that prevailed from the insane 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. your smart and efficient
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, Ben, 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. I am sure it had nothing
to do with lust for power by the good men who ran the government, nor with
any lobbying that might have occurred around that time. This was dubbed the
"Crime of '73".
Demonetizing silver destroyed
enormous amounts of capital, Ben. 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. But this is the power you crave, isn't it? This is the
power of central planning, to sit in an office in Washington, taking into
account your whims, pet theories, and the desires of lobbyists and casually
dispose of the income and wealth of the people without their consent.
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 pet theory is wrong? Good
thing your pet theory is enforced on the rest of us at gunpoint, eh Ben?
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, Ben, 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 standard.
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, Ben. 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 activities.
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, Ben?
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, Ben: 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, Ben?
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, Ben. 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, Ben? 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' tale. Do you
also wear copper bracelets to ward off the common cold, or is that vampires
(I forget)?
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 for whom you weep
crocodile tears?
Ben, I wrote a paper entitled
"Gold Bonds: Averting Financial Armageddon" (http://keithweiner.posterous.com/gold-bonds-t...cial-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, Ben?
Sincerely,
