Contra Ben Bernanke, The Gold Standard Promotes Economic Stability – Analysis – Eurasia Review

By Frank Shostak*

Currently, the world uses a fiat currency standard, a government-issued currency that is not backed by a commodity such as gold. The fiat standard is the main cause of the current economic instability and is tempted to suggest that a gold standard would reduce instability. The majority of experts, however, oppose this idea on the grounds that the gold standard is in fact a factor of instability.

For example, former Federal Reserve Board Chairman Ben Bernanke echoed this opposition in his lecture at George Washington University on March 20, 2012. According to Bernanke, the gold standard prevents the central bank from Engage in policies aimed at stabilizing the economy from sudden shocks. This, in turn, according Bernanke, could cause serious economic upheaval:

Since the gold standard determines the money supply, there is not much room for the central bank to use monetary policy to stabilize the economy…. Because you had a gold standard that tied the money supply to gold, the central bank had no leeway to lower interest rates in a recession or raise interest rates in a downturn. inflation.

A great merit of the gold standard is that it stop authorities to continue the reckless pumping of money. Additionally, in his speech, Bernanke argued that due to the relatively low growth rate of gold supply, this could lead to a general decline in the prices of goods and services, which could seriously harm the market. ‘economy.

What matters is not the growth rate of money as such but its purchasing power. With an expansion of wealth, all things being equal, the purchasing power of dollars will increase and each dollar holder will command more wealth.

Bernanke also argued that another major drawback of the gold standard is that it creates a system of fixed exchange rates between the currencies of countries that are on the gold standard.

There is no such variability as we have today, argued Bernanke: “If there are shocks or changes in the money supply in one country and maybe even the wrong set of policies, other countries that are tied to that country’s currency will also suffer some of the effects .”

It seems that Bernanke was arguing in favor of the floating currency system. He fails to understand that in a free market money is a commodity and that a dollar or other currencies are not independent entities.

Prior to 1933, the name “dollar” was used to refer to a unit of gold weighing 23.22 grains. Since there are 480 grains in an ounce, that means the name dollar also stood for 0.04838 ounces of gold. This in turn means that one ounce of gold refers to $20.67. Please note that $20.67 is not the price of an ounce of gold in dollars as Bernanke and other experts say. The dollar is just a name for 0.04838 ounces of gold.

According Murray N. Rothbard, “No one prints dollars in the purely free market because there are, in fact, no dollars; there are only commodities, like wheat, cars and gold.

Similarly, the names of other currencies represented a fixed amount of gold. Unlike Bernanke, in a free market currencies do not float against each other. They are traded according to a fixed definition. For example, if the pound sterling represents 0.25 ounces of gold and the dollar represents 0.048 ounces of gold, then one pound sterling will be exchanged for approximately five dollars, as Rothbard show.

Increases in Gold Supply Do Not Cause Boom and Bust Cycles

According to Rothbard, increases in gold supply do not trigger boom and bust cycles. For Rothbard, the primary reason for boom and bust cycles is the act of embezzlement caused by central bank monetary policies.

Rothbard believed that the business cycle was unlikely to emerge in a market economy where money is gold and there is no central bank.

According Rothbard, “Inflation, in this work, is explicitly defined to exclude increases in the stock of cash. Although these increases have effects as similar as increases in the prices of goods, they also differ markedly in other effects: (a) mere cash increases do not constitute free market intervention, penalizing one group and subsidizing another; and B) they do not lead to business cycle processes. (bold added) »

To better explain this point, we start with a barter economy in which John the miner produces ten ounces of gold. The reason he mines for gold is that there is a market for it. John then exchanges his ten ounces of gold for various goods and services.

Over time, individuals have discovered that gold – originally being useful in making jewelry – is also useful for other uses such as a medium of exchange. They are now beginning to assign a much greater exchange value to gold than before. As a result, John the Miner can exchange his ten ounces of gold for more goods and services than before.

Observe that gold is part of the wealth pool and promotes the life and well-being of the individual. Every time John the Miner trades gold for commodities, he is engaging in an exchange of something for something. He exchanges wealth for wealth.

Compare this with paper receipts which are used as a medium of exchange. These receipts are issued without the corresponding gold being deposited in a safe place. This establishes a platform for consumption without contributing to the wealth pool.

Printing receipts not backed by gold establishes the exchange of nothing for something. This in turn triggers the process of diversion of resources from wealth generating activities to unsecured revenue holders. This leads to the so-called economic boom.

Stopping the issuance of unsecured receipts stops the diversion of resources to activities that have emerged due to unsecured receipts with gold. As a result, non-wealth generating activities are under pressure – an economic collapse is emerging.

To further clarify this point, consider counterfeit money generated by a counterfeiter. No goods were exchanged to obtain counterfeit money. (The counterfeiter just printed the money, hence the counterfeit money that came out of “thin air”.) Once counterfeit money is exchanged for goods, it follows that nothing is exchanged for something, which leads to the flow of goods from individuals who produced goods to the counterfeiter.

However, a counterfeiter by embarking on the purchase of various goods in fact provides support for the production of these goods. Observe that the increased production of goods would not occur in the absence of counterfeit money. Resources are now directed towards the production of goods supported by the counterfeiter.

Once the support for goods emerging from counterfeiting activities slows down or stops, the demand for those goods also slows down or disappears. Consequently, the production of these goods slows down or stops. Observe that due to the increase in money without collateral, an increase in the production of goods arises. A decline in the money created out of nothing leads to a decline in the production of these goods. Therefore, what we have here is a boom in activity that emerged as a result of money coming out of “thin air” and collapsing due to a decline in the supply of unsecured money.

While increases in the supply of gold (when used as money) are likely to cause fluctuations in economic activity, these fluctuations do not occur due to free market intervention. Thus, these fluctuations do not cause the impoverishment of wealth generators. A gold miner (wealth producer) exchanges gold for other useful goods. He doesn’t need empty money to divert wealth to himself.

Summary and conclusion

Boom and bust cycles are the result of central bank policies aimed at stabilizing the economy. In the past, the alleged instability of economies on the gold standard occurred because authorities issued unsecured gold currency, which undermined the gold standard. Contrary to popular thought, the gold standard, if not abused by the central bank, does not cause instability.

*About the Author: Frank ShostakApplied Austrian School Economics’ consulting firm provides in-depth assessments of financial markets and global economies. Contact email.

Source: This article was published by the MISES Institute

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