Bernanke 101

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The New York Sun

Chairman Bernanke’s decision to use the first of his four lectures at George Washington University to attack the gold standard certainly puts the hay down where us mules can get to it. “Ben Bernanke’s first lesson on economics: Forget about the gold standard,” is how Politico led its story. The Fed chairman used a series of slides to guide his remarks to a bright looking group of students. The “strength of a gold standard is its greatest weakness too,” one slide said. “Because the money supply is determined by the supply of gold, it cannot be adjusted in response to changing economic conditions.” Mr. Bernanke insisted he understands “the impulse” behind the gold standard, “but I think if you look at actual history the gold standard didn’t work well.”

The way Mr. Bernanke sketches his lesson one gets the feeling that the whole scheme of the institution he heads is as an alternative to the barbarous relic. So we reached into the stack of books beside our typewriter to see what might be there. The first one we found was “An Adventure in Constructive Finance,” the memoir of Carter Glass, the congressman who led in the creation of the Fed. It turns out that as the Federal Reserve Act of 1913 was moving through the House, it was hit with what Glass calls a “feverish outbreak about an imaginary ‘assault on the gold standard’.” It seems a group of Republicans was concerned that it would rescind the Gold Standard Act of 1900, which had settled the great battle over bimetallism that erupted in the late 19th century.

It turns out that Congress reacted to the assault by adopting an amendment put forth by an Ohio Republican, Simon Fess. It declared, as Glass put it, that nothing in the bill should be construed as a repeal of the law “providing a gold parity for all forms of money.” It was only against that assurance in law that the Federal Reserve Act actually made it through the House. Why Mr. Bernanke leaves this history out of his lecture one can but surmise. He also leaves out the fact that under the Federal Reserve System the dollar has lost more than 95% of its value. Nor does he mention the sheer drama of the collapse of the dollar on his watch. A bit of value has flowed back into it in recent weeks, but it is still below a 1,600th of an ounce of gold.

None of this back-story is in Mr. Bernanke’s lecture. Nor does he dwell on the failures of the Fed itself. The whole reason he is appearing in these classes, in the first place, is that there is a rising tide of distrust of the Fed within the Congress that created it. The bill to audit the Fed started out as one of Ron Paul’s chimeras. Eventually it was passed, albeit in a watered down form, overwhelmingly in the House, and the Fed has been fighting a so-far losing battle against it in court. This has led Mr. Bernanke to begin his quarterly press conferences, and now his college lectures. It seems he is happy to appear in any place save where his testimony can be compelled.

The question is why, if the Federal Reserve and the system of fiat money are so superior to sound money, has our country been in such a pickle these past few years. The Fed has tried every trick in the book and some that aren’t in the book. Yet so far the economy seems impervious to its monetary ministrations. It has met neither of its dual mandates of stable prices and employment. The Fed chairman did acknowledge that his institution failed at crucial moments, most notably in his view in the Great Depression, when it “did not use monetary policy to prevent deflation,” as he put it yesterday. But what about its failures in the current time, when it has run the value of the dollar down to a level that was once unthinkable and millions are still out of work?

It’s always possible that Mr. Bernanke will confront these questions in the remaining three lectures he is scheduled to give at George Washington, but given the preview yesterday, it looks unlikely. The full accounting of the Fed is going to have to come from the body that created it in the first place. We are less than two years away from the centenary of the institution, and there will be plenty of legislation around which this accounting could take place. One bill, H.R. 1098, would establish a free competition in currency and end the system centered on making legal tender out of the kind of scrip that Mr. Bernanke circulates. No doubt it will be a long battle, and it wouldn’t be surprising to us were some of the bright-looking students to whom Mr. Bernanke spoke yesterday to end up in the lists.

The New York Sun

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