Selgin reviews Bernanke on the Gold Standard

George Selgin reviews Bernanke’s course at GWU. He is not happy:

Bernanke’s discussion of the gold standard is perhaps the low point of a generally poor performance, consisting of little more than the usual catalog of anti-gold clichés: like most critics of the gold standard, Bernanke is evidently so convinced of its rottenness that it has never occurred to him to check whether the standard arguments against it have any merit. Thus he says, referring to an old Friedman essay, that the gold standard wastes resources. He neglects to tell his listeners (1) that for his calculations Friedman assumed 100% gold reserves, instead of the “paper thin” reserves that, according to Bernanke himself, were actually relied upon during the gold standard era; (2) that Friedman subsequently wrote an article on “The Resource Costs of Irredeemable Paper Money” in which he questioned his own, previous assumption that paper money was cheaper than gold; and (3) that the flow of resources to gold mining and processing is mainly a function of gold’s relative price, and that that relative price has been higher since 1971 than it was during the classical gold standard era, thanks mainly to the heightened demand for gold as a hedge against fiat-money-based inflation. Indeed, the real price of gold is higher today than it has ever been except for a brief interval during the 1980s. So, Ben: while you chuckle about how silly it would be to embrace a monetary standard that tends to enrich foreign gold miners, perhaps you should consider how no monetary standard has done so more than the one you yourself have been managing!

Read the whole thing for more.


The US would not benefit from recreating the gold standard unilateraly. And it ain't gonna happen! This has become somewhat of a religion. I think we waste resources in discussing it. Let's rather discuss the way forward with the fiat currency we have.

There is no way forward. Fiat is unstable due to the prisoners' dilemmas inherent in a political system.

.Fiat is unstable.

Name a country that has been able to stay on the gold standard. When war or other crisis hits one of the first orders to go out is to suspend convertibility into gold.

Floccina, I favor free competition among banks of all colors: green, purple, red and, yes, even gold.

How would taxes work? Can I pay my taxes in monopoly money?

Yes, just like now...

This is one of the things that amuses me most about gold standard enthusiasts. There has never been such a thing as a reliable gold standard.

Also, I can hardly fault Bernanke for not wasting the intellectual energy to engage on this question. He has actually relevant questions to focus his mind on. It is a discredit to the macroeconomic wisdom of anyone who thinks we should be debating a gold standard, much less proposing one.

Mr. Powell, if a former Princeton economist and the head of the world's most powerful central bank chooses to go before an audience of college students, and a far larger one of online viewers, and make false statements about the historical gold standard, that isn't "saving valuable intellectual energy," which he might do by simply keeping silent; and I'll be damned if it isn't appropriate for another academic to point out his mistakes. You and Euripides presume that I do so because I'm myself an advocate of returning to gold. That happens to be a wrong guess--as a matter of fact I have myself argued as Euripides does that a unilaterally adopted gold standard would not make sense.

But whether or I happen to favor a return to gold or not isn't particularly relevant. The relevant point is that what is "discreditable" to the macroeconomics profession is your suggestion that it's ever appropriate to censure mere debate on any macroeconomic topic--let alone to try and do so even when the debate is one concerning the historical record. It's perfectly transparent, moreover, that you don't mean merely to stifle "debate" so much declare a sort of technical victory for the anti-gold view--a victory that remains forever beyond the reach of argument and evidence. Now that's why I call taking a "religious" approach to the matter!

That's what is odd about the entire argument. The topic is the Gold Standard, but the argument only attacks certain points. I was expecting a clearer attack on the whole issue. I think the post had poor setup. Or maybe TC wanted the comments to be a larger discussion on the gold standard.

Daniel, I think that for "TC" you mean "AT." Anyway my original post isn't a defense of the gold standard--its a general critical review of Bernanke's lecture, which happens to include a section concerning his remarks on gold, which happened to comprise a significant part of the lecture.

Mr Selgin, you are probably correct that it would be better if Bernanke simply had nothing to say about the gold standard. His issuing remarks based on faulty priors is not helping anything. What is a discredit to the economics discipline is that Bernanke feels it necessary to even address the issue. Other academic scientific disciplines have a way of moving beyond discredited views such that they do not have to be recontested endlessly. This is not so much stifling debate as clearing the way for intellectual progress through the discussion of actual unknowns. Unfortunately, economics has not had much success in this regard. Perhaps that is because it is a relatively new discipline, or perhaps because it does not submit as easily to the kind of testing as does something like Physics. But I think at least some of the fault lies with the way the discipline goes about its work.

mpowell, you're giving the field too little credit. The mainstream has moved beyond engaging with this crap. Most of such "discussion" has been relegated to the blogosphere. Which is no different from other, more mature, fields; after all, analogous crackpot theories continue to flourish outside the mainstream discourse in physics as well.

w.k. - fair enough.

W.K., having been an equal-opportunity critic for some time now of both extreme goldbugs and of their "paperbug" critics, I can say with great conviction that the extent of irrational and ill-informed argumentation is about equal on both sides. Your own ad-hominem treatment of anyone with a good word to say about gold as a "crackpot" is a good example of what I mean. Have you any actual facts or arguments to offer, or is it the case (as I deeply suspect) that you aren't fit to tangle with anyone who does?

To repeat: I'm not an advocate of returning to gold myself. But I bristle to hear arguments that are just plain wrong used to dismiss the gold standard. If it's as bad as you and others believe, then it shoudn't be hard for anyone--and certainly not for Ben Bernanke--to stick to the truth in explaining why.

George, could you point out where I stated that proponents of the gold standard were crackpots? What I stated was that crackpot physics theories are still promulgated by blogs; and thus that economics is no worse off than physics (in fact, it might be better off) in terms of the persistence of bad theories. And in fact, to make clear that I wasn't equating crackpot physics with terrible economics, I used the term "analogous" instead of "equivalent".

You might want to take greater care in your responses in the future. This certainly does nothing to instill confidence in your Bernanke "rebuttal".

"analagous" and "equivalent" are pretty damn close.

W.K., I've reread your posts and reconsidered the context, and I can see no reason for altering my response; your post certainly does suggest that only "crackpots" still persist in arguing about gold (or "engaging in this crap," as you so delicately put it.). Perhaps you meant otherwise; but then I don't believe the misunderstanding is my fault.

While I appreciate all the discussion on the merits of gold/no gold, I think the criticism of Bernanke simply ignores context- this is an undergraduate survey course (at least, I think it is). Since the aim of a survey course is, well, surveying a subject, most professors would skim over the nuances of such issues. Obviously, they'll present a specious rendition of whatever position they feel is the strongest and move on to another topic. I don't think the question of how we base our monetary system is somehow absurd or a waste of time, but isn't a little overzealous to attack Bernanke for not providing a complete explication of the relative merits/demerits of the gold standard? Or to basically question Bernanke's intellectual ability, as some of the comments on Mr. Selgin's blog do?

cmc, I myself have been lecturing undergraduates for more than 25 years, and I have never found it necessary, much less thought it proper, to make "specious" arguments to them for the sake of making it through the syllabus. It surprises me to hear several people on this forum suggest that it is OK for Bernanke to have made false claims, even if he did so knowingly (I grant that this may not have been so in every case) and to find them not just criticizing me for pointing out where he did so, but criticizing MR for entertaining any discussion, no matter what the context, of the gold standard!

I believe that rather than gold, Selgin advocates a free banking system that uses green banks in place of gold. Banks would still issue their own currency but it would be backed in greenbacks.

sorry should have been greenbacks.

I believe that rather than gold, Selgin advocates a free banking system that uses greenbacks (or rather federal government created dollars) in place of gold. Banks would still issue their own currency but it would be backed in greenbacks.

But he is much better at explaining it than me.

Selgin himself has explained why the gold standard won't be brought back.

Let's see "while you chuckle about how silly it would be to embrace a monetary standard that tends to enrich foreign gold miners," it might be interesting to think about who the current fiat monetary system enriches. Might that include a certain Ben Bernanke?

More importantly, it would be great to start an open and honest discussion of the future of existing fiat currencies. Name a country/currency zone whose currency is not seriously in question.

Rather than "discuss(ing) the way forward with the fiat currency we have," we need to discuss the strengths and weaknesses of each type of monetary system. In my view there is a reasonable likelihood that there will be a variety of crises, that create the opportunity/necessity to dramatically improve the existing systems.

Actually, the fact that Bernanke has to attack a gold standard is probably the single most compelling argument for it.

If the current system were working, it wouldn't be a subject of discussion.

This is a very silly argument. He didn't "have to" attack the gold standard. The world has a long history of people explaining why bad ideas are, in fact, bad ideas. That doesn't make the bad ideas suddenly have merit.

Re: There has never been such a thing as a reliable gold standard.

How can anyone look at economic history pre-1930 and conclude that the gold standard was any sort of panacea? This is on par with the Young Earth Creationists ignoring reams of evidence from multiple sources against their fantasy.

The interesting and relevant arguments, of course, are the ones which conclude that the gold standard is not any sort of panacea but is nontheless better than what we have now. Bernanke's attempt at a rebuttal consists of a reasonably good list of the major costs of a gold standard, without any numbers. That's about one-quarter of a good argument, and yeah, kind of disappointing. It's not useless, though, because it does list points that proponents of a gold standard have to address and usually don't.

"The interesting and relevant arguments, of course, are the ones which conclude that the gold standard is not any sort of panacea but is nontheless better than what we have now."

I have yet to see one, care to share?

Losing about 1% value year after year.

At least it's reliable...

Oh, and no more recessions. That's nice too.

Care to count the average frequency of cycles during the bimetallic/gold standards and fiat? Also take note of cycle lengths. Why do I need to care that it does relatively better than fiat, when there are plenty of other things you can hedge even better with. I have zero cash in my wallet right now, maybe $0.50 in the car. Reallocation of my portfolio is minimally costly.

@ Jim: +1

Money, whether fiat or gold or whatever, is just a medium of exchange and a store of value. Almost anything agreed upon will do as a medium of exchange, and will do just fine.

If you don't like storing value in fiat money, you have myriad other choices including obviously gold.

So really, there's not much gained and rather a lot lost using a shiny metal as a medium of exchange.

There are enormous transactions costs to keeping most of your wealth in gold, not the least of which is 28% taxation and no inflation adjustment.

What's the big deal with a 1% tax on holding cash? That's rather low compared to the set of other taxes people pay and has the added benefit that real wages and prices can be cut without nominal cuts.

There are no other taxes on holding cash. And it's more than 1%, it's just that you can't lose more than 100% of value in the 100 years since The Fed was established so I swagged it.

But this statement of yours...

"the added benefit that real wages and prices can be cut without nominal cuts."

Shows why we'll have to just agree to disagree.

What I find interesting there is that those are arguments against the gold standard I've never even heard before.

(As Mr. Schilling says, I suppose proponents have to address them, but they have the feeling of being relatively minor compared to the other problems... and why am I supposed to even care that some miners, some of whom are foreign, will gain from it? Should I care if we bought paper for fiat currency from a foreign paper mill? Why?

The "quo bono?" argument is rarely persuasive, especially by itself.)

I'm against a return to it on the same grounds Mises and Hayek were - that it's practically impossible to arrange.

(And because while it solves the problem of deliberate inflationary policy [and deflationary, but I'm not sure that's ever been a problem], it creates what is in effect either an automatic deflationary policy or one that means we have no idea at all what's going on with the money supply; the rate of increase or relative decrease related to wealth production depends on what miners happen to extract.

I think I prefer the devil I know - fiat money - to the combination of a devil I don't, and a devil I do - the failures of metallist money in the past.)

"[T]he rate of increase or relative decrease related to wealth production depends on what miners happen to extract."

Right. If you are really concerned at keeping the government on a short leash, a simpler alternative is if the government could creditably commit to a set growth in fiat currency. (I don’t think they could.) This is even more restrictive than many forms the gold standard has taken in the past. If memory serves me correct the U.S. Gold reserve ratio was 40%. It could print as long as it didn’t go below that threshold. Of course when things got bad, no one thought that threshold was creditable, and there came the speculative attacks.

What I fail to understand about gold standard adherents (or commodity basket adherents) is why they would want the government to fix the price of gold, but not other commodities. Wouldn't it make much more sense for the market to set that instead?

When governments try to fix the price of commodities, they rather frequently break the market for those commodities. The ability to buy and sell those commodities for strictly utilitarian purposes is hindered by, e.g., hoarding and shortages. Think stores with empty shelves labeled "bread, $0.25/kg", awaiting the farmer and baker willing to sell for such a low price (or, if the farmers have the better lobbyists, warehouses full of rotting unwanted grain).

If governments and/or bankers completely botch their financial duties, it hardly matters what the underlying monetary basis is. But for lesser failures, I'd rather see a temporary disruption in the utilitarian gold market than, e.g., bread. I can postpone jewelry purchases for a few months if need be.

That said, my personal preference would be for an alloy or market-basket standard, in which the risk of market disruption (both directions) is spread over a large number of commodities. The odds of that actually happening are even smaller than for a return to the gold standard, though. And if there is serious talk of going back to a single-commodity standard, then there is something to be said for picking a luxury commodity with a strong psychological association with monetary value.

Suppose, Matthew, that you go to a fancy restaurant, check your fine cashmere coat at the cloakroom, and take a ticket for it. Later you return with the ticket for the coat, and are handed a cheap windbreaker. "What about my cashmere coat?" You say. "Why, Sir, for that you will need three tickets. After all, we are just exercising our free-market right to vary the price of our merchandise as we like!"

Does that sound fine to you? Well, "the gold standard" was originally just another name for an arrangement in which private bankers issued IOUs to gold coin that could circulate in their place as money. For the claims to maintain a fixed value in term of the gold represented by them wasn't a matter of 'price fixing" but rather one of bankers honoring their promises to pay. This is so elementary that it makes me blush to have to explain it. But don't feel bad: you are in good company, for Bernanke also treats the gold standard as a matter of "price fixing."

Of course, independent private bankers were no more free to vary the sum of gold required to redeem their promises than cloakrooms are entitled to vary the number of kinds of clothing they have to dispense when "redeeming" their claim tickets. That changed only after governments first established currency monopolies and then allowed those privileged monopolies (in return for fiscal favors, of course) to occasionally suspend payments temporarily, then to permanently devalue their IOUs, and finally to stop honoring those IOUs at all. It is in light of these later developments that the "gold standard" appears to have been nothing more than a form of "price fixing." In its origins, however, it was quite another thing altogether.

I hope this assists your understanding of why one can favor free markets and yet also favor a gold standard.

The analogy is a bit off the mark. The goldsmiths never considered the gold to be their property. The holders of the gold receipts traded them for goods and services.

To use your analogy, I would be at dinner with an acquaintance and suddenly realize I don't have cash for my dinner. I could either offer the cashmere sweater as payment to the restaurant or offer the claim check (or the sweater) to my acquaintance as collateral for a loan to pay off the dinner.

The tie up of resources becomes apparent when the restaurant holds your sweater in lieu of payment, acting like a pawn shop. You walk outside, and it's very cold. No one in the restaurant has an immediate need for the sweater, they having come prepared for cold, as you did. But you came unprepared to pay for dinner.

You are quite wrong about the goldsmiths, Willitts. Indeed, if my analogy is incorrect, it is because early bankers, unlike cloakroom attendants did become the true owners of valuables entrusted to them. But this fact didn't mean (of course) that they were not obliged to return a like amount, plus any promised income, whenever their contracts obliged them to do so.

Geoge's complaint about Bernanke's "resource using" argument is valid. But Bernanke did mention some other arguments that are much stronger, most notably the much greater macro instability the world experienced under the gold standard than off it.

Barkley, you really should read my post, where I talk about Bernanke's other arguments against gold, and also about other aspects of his lecture. You (like some other commentators here) seem to treat Alex's very brief excerpt as if it was all I had to say about the lecture!

"the much greater macro instability the world experienced under the gold standard than off it."

First, that might be completely untrue. Second, it's probably untrue in spirit. The World Wars are the height of global instability and globalization is huge driving force for global economic stability. Being off the gold standard does not get a pass for the former and credit for the latter. Different eras is not "holding all else equal."

"Read the whole thing for more." Must not have been clear enough.

Sorry, George, my job around here (unpaid thus far, hint hint) is to smack people upside the head with huge steaming piles of overlooked obviousness.

Bernanke's arguments re: macro instability are wrong, and have been refuted by Selgin, White, and Lastrapes (hope my spelling is right), George Kaufman and others. See also S. B. Saul's short book, The Myth of the Great Depression, 1873-1896.
If Bernanke had any cojones, he'd take on free banking and defend central bank planning. Then he'd have to explain why Canada outperformed the U.S. before 1935, especially during the great depression, when it had not one bank failure vs.--what?--over 800 in Uncle Sam Land; and why Scotland did the same thing vs. England during its free banking era.
But I guess it's easier to repeat old shibboleths instead of doing some research..

I just hope the students at GWU see through Comrade Bernanke's fables.

I think you typed "800" but meant to typed "8000." Anyway, thousands of U.S. banks failed.

Does the the problem involve the fact that none of us is as smart as the man who invented the gold standard?

If the gold standard were in place, statist control over the monetary system by collectivist, central planners would be impossible.

PS: Earlier today, I swapped a fist-full of worthless paper for gold bullion coins.

Since you can so easily do that, why do you need a 'gold standard'? You can keep swapping the worthless paper for gold until you die.

We don't need a gold standard. That's just the government mucking up the free market in gold with a price control on the stuff.

"Gold Standard" is lingo in the pro-freedom camp for "not what we have with The Fed/Treasury/Government/Banking nexus"

"Gold Standard" is lingo in the...status quo camp for "everything that was bad about the past" or something along those lines.

Just let us use gold for money as you seem to be implying and I'd be happy.

Also, since you seem to be so dismissive, ask yourself, if gold was no biggie, then why was it so critical that the government (and the banks) had to confiscate it and create laws against it?

Hey, what's the big deal?

msgking: It's just that . . . the GS might not be worse than the massive excrement sandwich possibly forming.
My gold investments are for diversification and "insurance", and total 6% of family assets.
My other strategic exchanges of worthless paper: whiskey and ammunition.



Why DID FDR campaign-promise that he would NOT confiscate gold, but within months executive-order confiscated gold?

I am not an economist and I have been out of school for 40 years. So, take it for what it's worth.

Gold coinage or bullion either in people's hands, or as a "standard", limits statists' and central planners' discretion in dictating over us.

Statist control over the monetary system by collectivist, central planners is really effin' easy under the gold standard. The Roman emperors did it all the time through debasement. They could also go out and decree a change in the prices of stuff with respect to gold just as easily. Or heck, they could change their mind and say something like, "We aren't on the gold standard anymore, but the palladium standard. Oh, and we've been buying up the world's palladium for the last few years. Send us your gold, and we'll tell you what it's worth."

The form of the money doesn't change the fact that ultimately, money is whatever we all say it is, and not some entity that has actual existence outside our minds.

Nice post +1

So, the paper was worthless and yet somebody was willing to trade you that precious, precious gold for it?

You keep using that word, I don't think that it what you think it means.

Selgin is just plain wrong about the real price of gold. It was not higher in the 1980s.

I was a gold analyst in the early 1970s and did a study of the long run demand and supply of gold.
The study concluded because of the growing world economy that the non-monetary demand for gold would exceed the supply. The study concluded that the real price of gold would have to rise at a 3% to 5% annual rate to balance this supply-demand imbalance.. Interestingly, that would but the current price of gold almost exactly where it is now.

If you go to the world gold council where they do a very good job of tracking the detailed demand and supply of gold you will find that demand is dominated by jewelry demand and demand from newly prosperous countries like India and China. According to them hedges against fiat currencies plays a very minor role in the demand for and/or higher gold prices.

Bernanke saying that the Fed created the depression is well known. But what he did not say was that the Fed was just doing what the gold standard called for them to do.


As a matter of historical fact, the real price of gold peaked Jan. 26, 1980.

That counts as the 1980s, so Selgin is at least in the ball park.
More importantly, you claim "that the Fed was just doing what the gold standard called for them to do." The gold standard did not dictate the the Fed, the Bank of France, and the Bank of England sterilize their gold flows, thus causing massive deflations, nor did it dictate that these non-market institutions hold the high reserve ratios that they did. What they should have done was to have monetized their gold inflows and to have held lower reserve ratios. Free banks would have held much lower reserves and avoided the delationary policies pursued by the central (socialist) banks.

Why gold as the monetary standard?

Why not aluminum?

Aluminum reflects the state of technology evolution and innovation as well as energy costs and labor. It is a metal that can be stored and incorporated in productive goods and then easily converted back to a tradeable commodity form as a monetary metal.

As the element is everywhere, no nation can obtain a monopoly, refining it requires energy which is showed onto all nations in great excess, and in refining requires only carbon as a raw material, also in abundance.

Aluminum is too easy to get a lot of. Gold is hard to get a lot of. Gold prices are dominated by already available gold, and aluminum prices are dominated by new supply.

In short, gold acts more like a money, and aluminum acts more like a commodity.

Note: I don't think the gold standard is the best idea, but I can explain why gold does behave like currency in financial markets.

"Why gold as the monetary standard?

Why not aluminum?"

Because some things operate by "how things actually work" rather than how people think they should work.

What the people want is a store of value. Gold may not be ideal, but there is always a nonzero risk of losing everything with paper money.

As I mentioned above, why does your transactional currency need to be your primary store of value? You have oodles of choices there, including obviously gold.

"why does your transactional currency need to be your primary store of value"

It creates sufficient liquidity in that currency, stabilizes prices and minimises barriers to entry for savings. Some will always be able to find other things to invest in, but for those with little money or little time, a their transactional currency would be the best option, if that currency is sound.

Seems like a smallish benefit compared to the historical and theoretical problems with a gold standard.

You're biased because you haven't lost your entire fortune due to a currency collapse.

Has that happened a lot recently in the first world? I hadn't noticed. Also, you can always keep your wealth in real things and not currency. Like gold, for example.

It isn't very smart to keep your wealth in real things like gold because you will get taxed on gains (from inflation) so you still lose purchasing power. Further, when the real things that you are using to store value aren't tied to the prices of real goods, you are taking on a lot of volatility risk. There really isn't a good store of value asset class.

Max, nice try but there is a rather large spectrum of awfulness between losing your entire life savings in a currency collapse and the horrors of paying the 15% capital gains rate (if you are a U.S. citizen or resident and hold the gold for at least a year). The latter is not really a valid reason for failing to hedge against the former. Instead, most reasonable people would simply rather hold productive investments instead of hoarding commodities.

To be fair, Ricardo, US investors pay 28% cap gains on commodities including gold. But otherwise a good point, if you are worried about currency collapses.

Agreed, Ricardo, I'd rather have farms and factories than gold.

Having the medium of exchange also be the store of value does not create sufficient liquidity. That's why from the very beginning bankers and merchants tried to get around the gold standard by creating "emergency currency" when liquidity was short or by circulating notes and bills issued by reputable merchants as if they were currency. There was often a demand for a liquid medium of exchange that was not met by the available supply of gold.

As for "barriers to entry for savings" -- such as...?

Long-term price stability is the major benefit of the gold standard but this has to be balanced against all its negatives.

For a lot of rich people, it's not.

For people in CDs...they are screwed.

It would help if people recognized that being "on the gold standard" is a matter of degree. What if gold convertibility is delayed by 2 days, 30 days, or 30 years? At what point do you say we are "off the gold standard"? What if one central bank maintains gold convertibility 90% of the time, but has low gold reserves, while another central bank has high gold reserves but maintains gold convertibility 10% of the time. Which one comes closer to being on the gold standard?

The right approach is to recognize that people value a given money according to the value of the assets backing that money, not according to the degree to which that money is convertible into gold or anything else. In fact, the problems blamed on the gold standard were usually the results of central banks trying to maintain gold convertibility at a rate their assets could not support. The result is always a bank run.

"In fact, the problems blamed on the gold standard were usually the results of central banks trying to maintain gold convertibility at a rate their assets could not support. The result is always a bank run."

While I disagree with Mike on a lot. This statement is so true.

The right approach is to recognize that people value a given money according to the value of the assets backing that money

Are the assets minus liabilities of most governments even positive?

I think for the non-economists, most of us value money because they're very convenient and moderately stable.


Government-issued money usually has a senior claim against government assets, so even if the government has negative net worth, there can still be assets backing the money. If the money was issued by the central bank, then that bank's assets back its money, even if the government itself is bankrupt. (Of course, if asset backing falls far enough, the money will lose backing and therefore lose value.)

The "convenient and stable" theory is certainly the mainstream view, aka the Quantity Theory of Money. I hold a different view: The Backing Theory of Money. This theory says that money is valued according to the assets backing it, just like any other liability. One of this theory's many virtues is that it doesn't require us to build a 'special' theory to describe the value of money, doesn't rely on silly tautologies like MV=Py, etc.

The solution is simple. Freegold. End the taxation on gold and treat is as money.

There are two groups of people in the economy, those who want hard money (savers) and those who want easy money (everyone else). Instead of fighting endless battles, put gold (and silver?) on par with the U.S. dollar as a legal tender. The market is very good at sorting out transaction costs, exchanges rates, etc.

Does no one consider the political effects of a gold standard? As I understand it, a gold standard would restrict the central government's ability to expand. Maybe the anti-gold commenters here are not libertarians, but what of the growth of government since the U.S. went off gold? Why would a libertarian not want to restrict the government, even if it were an imperfect solution?

Also, to mix politics and economics, do you prefer a global central bank unaccountable to any national government that prints SDRs, or a gold standard? How do you counteract the push to create a global central bank, or are you happy with IMF/Troika/Fed policies and want to see it go "big time."

On the question of politics, we actually have direct historical evidence on the question of how politicians act when there is a gold standard. Here is what happens: a war breaks out, lawmakers suspend gold convertibility and issue paper money. After the war is over, a big fight breaks out over whether to go back on gold or not.

So the notion that the gold standard acts as an effective constraint on government is just wrong as a factual matter. The same government that can legislate the gold standard into existence can also legislate it out of existence.

Just because governments always break their chains if we let them does not argue against chains.

The "we" here are the voters in a democratic society. Your argument is, in essence, if a majority of voters don't care for a gold standard, that won't stop you from trying.

My response is: OK, have fun. Proposing policies that consistently fail to achieve their objectives and fail to attract support in democratic societies is not something I see as a particularly valuable use of time. If you disagree, suit yourself and continue tilting at windmills.

dumbocratic is more like it.what you propose is majoritarianism and not the rule of civilized law.however, i agree however ,the gold standard may never be reinstituted.that doesnt mean paper will last.


Selgin, fan of heterodox gold standard, objects to Bernanke's mainstream criticisms of gold standard. Main objection appears to be that not enough time was spent debating gold standard minutiae in an undergraduate lecture about the "Fed's Role in Today's Economy".



But then why go into a room and debate gold standard minutiae if you are going to get it wrong?

Oh, and I should add:

"you are the GD Fed Chairman."

Hmmm. TLDR is at least misleading about my being a "fan" of the gold standard (I've indicated several times above, and often elsewhere, I don't favor a return to it); he is wrong about my claiming that Bernanke spent too little time talking about gold (I wish he'd not spent any--my complaint is that what Bernanke says about gold is simply untrue, not that it's too "sketchy" or something like that); and he's wrong about the title (and the purpose) of Bernanke's first lecture. That is, he's wrong in every single thing he says in his brief remark. Yet msgkings and Ritwik concur with him! Sad.

Sorry--I meant "Steko" for TLDR. (But if Steko "Didn't Read," why does he pretend to know what I said?)

Sorry it's an internet convention. I read it and was summarizing for others. I didn't mean to misrepresent or malign your views if I did, apologies.

If the word 'fan' doesn't fit I think it's close. Do you frequently defend the often maligned gold standard? I imagine you would say yes. Would you favor the gold standard over fiat money? It seems the answer is yes. Is it your favorite system? Clearly not. I'm not sure what the perfect word is but sometimes words don't fit perfectly and using a slightly imprecise word is better then a paragraph of hair splitting. I'm still comfortable with "fan" although "defender" seems better now that I've spent a full paragraph on it.

"he is wrong about my claiming that Bernanke spent too little time talking about gold"

This is false as I call it (and my claim was about "gold standard minutiae"). Let's review your post:

"He neglects to tell his listeners (1) that for his calculations Friedman assumed 100% gold reserves, instead of the "paper thin" reserves that, according to Bernanke himself, where actually relied upon during the gold standard era; (2) that Friedman subsequently wrote an article"

I can't see any way to interpret this except as asking for more in depth discussion. The same is repeated for each of Bernanke's criticisms where you often grudgingly acknowledge some truth and then follow up with but X/Y/Z. Why it's almost as if Bernanke was just going over the conventional wisdom instead of having a copiously footnoted high level discussion over the finer points in his ... undergrad lecture.

Do you really think it's appropriate and relevant to this undergraduate lecture that the Fed has statutory authority to suspend the gold standard in the 1930's? Is that a point in favor of the gold standard? It seems to me that it's something that may be accurate but (1) it muddles the water when you're talking to laypeople about whether the gold standard was/is a good thing or a bad thing and (2) ultimately not supportive of where you're going (X is true under Y but we didn't really have true Y does not imply ~X). This is arguing over footnotes and minutiae.

"he’s wrong about the title (and the purpose) of Bernanke’s first lecture"

This is correct. Not sure what I pasted from but it was wrong. The series is "The Federal Reserve and the Financial Crisis". I'm not sure my statement becomes any weaker substituting that in. Day 1 was "Origins and Missions of the Federal Reserve" though so perhaps more background was justified. Since most of the coverage of the lecture was about the gold standard I'll assume he didn't just skimp over it.

Steko, thanks for your considered and temperate follow up. To answer it briefly, I think you take my rhetoric too literally in assuming that in saying that Bernanke didn't "mention" this or that fact I meant to suggest that he should or could have added the extra details to his lecture: in fact, because the points in question actually contradict Bernanke's own claims, he couldn't actually have "mentioned" them without contradicting himself!

So the real point of my remarks, once again, isn't to suggest that Bernanke didn't go into enough detail w.r.t. his assertions--as if he were doing more than lecturing undergraduates. It was that the assertions were false, and that he ought therefore not to have made them at all.

Is there an RSS feed that just skips Alex's contributions?

I've been waiting for this...

Author, Academic Economist, Blogger.

Chose to partner with best blogger and economist in the world.

Alex Tabarrok: Smarter than You.

George Selgin rocks! He is one of my heroes.

Gold can work. Or any fixed money supply, once people adjust to it. There's no need to have sticky wages if people believe the printing presses will stop printing fiat money. Prices can adjust down as well as up, as any greengrocer knows.

Any Keynesianism is a fraud. A short term success (measured in months IMO) due to money illusion but long term it simply attempts to preserve the status quo by artificially pumping demand. And it fails at that. The long term cost is collapse caused by excessive debt, as Japan, Greece and eventually the USA will prove.


He Uncle Sam, if gold is no big deal, then just let it compete.

What's the problem!?!

Taxation is extremely tricky if you have more than one currency and the opportunities for tax evasion are considerable.

Is the point not to enrich gold miners? Or is the point to not let the price level be in the 'control' (deliberate, indeliberate, whatever) of gold miners?

er,it is not in anyone's control -except to the laws of supply and demand.bernanke has definitely enriched the miners thanks to his monopoly over paper.

Oh, but remember, we'd be so much worse off if they hadn't done exactly what they did [sic]

Yes, the laws of supply and demand, including, most importantly, the supply and demand of the medium of account. Which is gold, in the gold standard.

You may have in your mind relative or one-good prices, where the medium of account can be assumed (and assumed away). I am talking about the aggregate price level.

Most gold is recovered in placer operations from alluvial deposits. It's basically an exercise in earthmoving and the critical factor is the price of diesel fuel. When diesel fuel is cheap, many claims with considerable overburden and in remote locations are still economical to mine, even though many cubic yards of material must be moved. When fuel prices are high, gold prices must be very high as well and claims that are profitable in favorable economic circumstances are abandoned. It's generally a cut and dried situation.

If we could write off inflation losses, then charging capital gains on gold would make sense.

It would still screw the little guys...but then what else is new.

In 1950 a glass of beer was a dime. Now it's $4.50. Evidently beer is a lot better now than it used to be.

How much is the beer per minutes worked? Or are you still being paid 1950 wages?

In 1950 the minimum wage was 0.75 dollars an hour, now its 7.50 dollars an hour. On a minimum wage salary, he could have bought 7 beers then and not even 2 beers now. Assuming his prices are correct.

Fair enough. But beer really IS better now with all the craft and micro brews around. I'm guessing the 10 cent beer in 1950 really wasn't as good as a Samuel Adams lager today for instance.

ah the burger steak defense

The gold-backing ratio makes no difference to the resource cost of a gold standard. To see this, start with a 100 percent ratio. Then move to a 50 percent ratio. What happens? Prices double, eventually the money supply does as well, and the same amount of physical gold is required to back the outstanding money supply as before.

Jeff, you are making the wrong mental experiment. Imagine two worlds, one that uses fractional reserves from the get-go, another that doesn't. Resource costs will be higher in the second case. To satisfy any given demand for real balances, a fractional reserve system requires less gold. Adam Smith had this down pat, by the way: see WON, Book II chapter II, on Money.

Well of course gold (or whatever commodity people choose to use as money) need not (if people do not want it to) be used to "back" notes - it could be used in the form of coins (for example a small speck of gold could be in a transparent plastic coins).

However, I have no ideological objection to notes - if that is what people want to use.

Why did Milton Friedman (at first) assume 100% reserves for cheques (British spelling), drafts and so on?

Perhaps because the "old Chicago School" (basically the University of Chicago Economics Department, and their allies, before people like Milton Friedman took it over) argued for this. They did not argue that the bank lending had to be 100% backed by gold (or any commodity) - but they did argue that the bank lending had to be 100% backed by actual money (whether it was gold or government fiat money was another matter).

Milton Friedman was personally much closer to the economics of Fisher of Yale (although he never studied under him) - and the doctrine that as long as the "price level" was stable, the expansion of lending (credit) beyond real savings (i.e. a gap builidng up between the "monetary base" and "broad money" - credit).

Critics argue that Fisher was refuted, in theory, by Ludwig Von Mises and other - and, in practice, by the credit-money busts of 1920 and 1929 (which according to the Fisher theory should not have happened). However, Milton Friedman did not agree with basic Austrian School economic ideas concerning money and credit (and it was he right to disagree if he wished to do so) and interpreted that the empirical evidence differently.

By the way - that is a general rule of thumb. Two people who do not agree on economic theory to start with do not tend to agree on how to interpret emprical evidence (history). The same "data" will be looked at totally differently - people do not tend to change their minds about economic theory because of empirical experience (for example Fisher did not abandon his theories after 1920 or 1929 - and Milton Friedman continued to argue that he was a great economist, all would have been well if only the Federal Reserve had done more to maintain the credit money bubble after 1929 and.... on and on).

However, the thinking that Friedman REJECTED (the idea that lending must be from real savings - not credit-money expansion) may have influenced his view of the gold "standard" (how despise that vague word "standard" - after all it can mean just about anything).

Hence his claim that a gold "standard" would need 100% reserves of gold and would "waste resources" (as if using a commodity as money can rightly be considered "waste" anyway).

As for a gold "standard" that uses "paper thin reserves" - the alternative that George Selgin mentions.

It is hard to see what the point of switching to this would be. After all vast credit money bubbles (such as the late 1920s - the Ben Strong bubble, by the way Milton Friendman was an admirer of Mr Strong of the New York Federal Reserve and was unable to see that he was the principle creator of the boom-bust) could (and would) still occur.

So if the question is (which it should be) "would changing the present system to X have prevented the current crises" the answer is NO - not if "system X" is a gold "standard" with "paper thin reserves" (i.e. vast lending that is not from real savings).

However, George Selgin could (quite rightly) counter this by pointing out that he also favours getting rid of the Federal Reserve.

Without the Federal Reserve (i.e. without the antics of people like Ben Strong and Alan Greenspan - and B.B.) credit-money bubbles (i.e, boom-busts) would still exist - but they would be much smaller.

Just as the bust of 1907 (pre Federal Reserve) was much smaller thant he bust of 1929 - or the current bust.

By the way - "we have seen nothing yet", the monetary antics of B.B. (as I often think - if only that stood for "Bilbo Baggins") have not solved the crises - they have put off the true crash (but also made it worse).

This will be obivious rather soon - my guess it will start to be obvious in 2013.

Focusing on the resouces used to mine gold is a mistake.

"Fractional reserve" banking means that we can use lots of gold for jewelry, dentral work, and circuitry.

Relatively little of the gold that has already been mined out must be stored in vaults as "backing" for paper money or used to make coins.

By the way, suppose gold coins were minted that are about the size of the old $10 coins but denminated as $1,000,000? Now, further suppose that there is no free coinage. The mint issues these in a quanttiy sufficient to keep nominal GDP on a 3% growth path. New coins are issued to purchase outstanding government bonds that are then retired. Excess coins are withdrawn from circulation by issuing new government bonds, selling them for the coins, and retiring them.

Federal Reserve notes (and balances at the Federal Reserve banks) are redeemable in these coins.

Is it a gold standard?

Is free coinage a necessary condition for a gold standard? How much seignorage is allowed? Can the seignorage vary?

I feel like the direction this discussion has gone has kind of....missed the point. It's not really about gold's possible performance as a revived monetary standard, but instead about Bernanke abusing his position of authority in the context of a classroom to relay falsehoods to students with every reason to believe him and no capacity to mentally challenge what he's saying for themselves.

Of course, this isn't exactly a unique story: schools have always been indoctrination centers, where students are taught what some board somewhere wants them to think, with the kind of classroom environment that fosters children and young adults learning HOW to think becoming a rarer and rarer phenomenon with each passing year. Bernanke has already planted a seed of bias in the minds of these undergraduates: if any of them ever DOES come around to alternative ways of thinking about banking and currency, it will be after a much harder fought intellectual battle with themselves because they will consciously or subconsciously be thinking, "But the chairman of the FEDERAL RESERVE told me THIS! How can THIS possibly be wrong?"

The pernicious effects of this kind of thing are too many to detail -- these students will go on to become authorities themselves in the future, spreading this bias like a kind of knowledge disease -- , but this kind of thing is SO widespread it's a little bit like getting upset over the death of a single stranger in the middle of the Battle of Stalingrad.

Comments for this post are closed