Federal Reserve Chairman Ben Bernanke recently launched the highest profile assault on the gold standard since President Richard Nixon closed the gold window in 1971. The Wall Street Journal headlined its report “Bernanke Defends Country’s Break With the Gold Standard.”
“The gold standard would not be feasible for both practical reasons and policy reasons,” Bernanke told students at George Washington University on March 20. “I understand the impulse, but I think if you look at actual history the gold standard didn’t work well.”
One wishes that Bernanke would have taken a moment to make a clear distinction between “didn’t work well” and the characterization of it as “highly successful” made by noted authority and Federal Reserve Governor Ben Bernanke in a 2004 speech at Washington and Lee University.
“The gold standard appeared to be highly successful from about 1870 to the beginning of World War I in 1914. During the so-called ‘classical gold standard period,’ international trade and capital flows expanded markedly, and central banks experienced relatively few problems ensuring that their currencies retained their legal value,” he said then.
And the quality of a gold-linked dollar has become more, not less, accepted since 2004. The Bank of England published a paper titled “Financial Stability Paper No. 13 — December 2011, Reform of the International Monetary and Financial System.” It makes a startling observation:
“The paper sets out three objectives for a well-functioning IMFS: i) internal balance, ii) allocative efficiency and iii) financial stability. The IMFS has functioned under a number of different regimes over the past 150 years and each has placed different weights on these three objectives. Overall, the evidence is that today’s system has performed poorly against each of its three objectives, at least compared with the Bretton Woods System,” the paper says.
In plain English: The contemporary world dollar standard has been a great disappointment percent — a failure — compared with the very diluted form of the gold standard established under the Bretton Woods regime.
The Bank of England’s case is neatly summarized by a colleague of this writer, Forbes.com contributor Charles Kadlec. When compared to the Bretton Woods system, in which countries defined their currencies by a fixed rate of exchange to the dollar, and the United States in turn defined the dollar as one-thirty-fifth of an ounce of gold:
• Economic growth is a full percentage point slower, with an average annual increase in real per-capita gross domestic product of only 1.8 percent.
• World inflation of 4.8 percent a year is 1.5 points higher.
• Downturns for the median countries have more than tripled to 13 percent of the total period.
• The number of banking crises per year has soared to 2.6 per year, compared with only one every 10 years under Bretton Woods.
The gold standard has empirical, rather than romantic, appeal. And its modern proponents — many with Ph.D.s of their own or distinguished achievements in the realms of finance, philanthropy and public service — are actively engaged in a discussion of the gold standard’s practical utility — not academic theory.
The gold standard has its flaws as well as advantages.
Financier, philanthropist and Reagan Gold Commissioner Lewis E. Lehrman called the policy, in testimony one year ago before the House Financial Services Subcommittee on Domestic Monetary Policy, “the least imperfect monetary system tested in the only laboratory we human beings have available to us: the laboratory of human history.”
It certainly is enjoyable to watch Bernanke publicly debating Bernanke. Yet opposition to the gold standard based on artifacts of what then-professor Ben Bernanke, in a 1990 NBER Working Paper (writing with Harold James), called a “mismanaged international gold standard” no longer is intellectually sustainable.
It would be more edifying to get the powerful Bernanke intellect focused on why the world dollar standard has performed, in the view of the most venerable central bank in the world, so poorly respecting each of the objectives of a world monetary system — and to learn what Bernanke thinks about how we might replace the dollar as a reserve asset?
What does the chairman think about the fairly recent suggestion by Nobel prize laureate in economics and Columbia University professor Robert Mundell, of a neutral reserve asset that is “nobody’s liability and … can’t be printed. So it has a strength and confidence that people trust.” Mundell, of course, was describing gold, a la Bretton Woods.
While we are engaging Bernanke in this discussion, let’s be sure to cover the Bretton Woods institutions — and to take the discourse up a notch by fully including a reappraisal of the classical gold standard option — the one contemplated by the Constitution after the trauma of the paper Continental dollar. The monetary system termed by one Gov. Ben Bernanke “highly successful.”
Ralph Benko, a weekly contributor to Forbes.com, is the senior adviser on economics to American Principles in Action and the editor of the Lehrman Institute’s monetary policy website.