Mr. Bernanke also remarked that the modern world could not re-adopt gold as its currency standard for one simple reason: there just is not enough gold in the world to effectively support the U.S. money supply. Of course, that’s the same reason for which Rep. Ron Paul has not only called for the abolishment of the Fed, but also for the return to the gold standard. While that debate goes on, what follow, are excerpts from our previous (in collaboration with the CPM Group) study “That was then, this is now” on the topic of said standard, monetary policy, and the prospects for gold’s return as currency:
“The issue of gold's role in a monetary system has been resurrected in U.S. political discussions this past year, after having been dormant for more than two decades. Two developments have led to this. One has been the seemingly relentless decline of the dollar's exchange rate in currency markets. The other has been the candidacy of Ron Paul as a Republican candidate for President of the United States. While Rep. Ron Paul was seen as having little chance of garnering the candidacy let alone the Presidency, he tapped into a wellspring of conservative discontent over financial management of the U.S. economy.
“This was the first time that gold has played a role in U.S. Presidential politics since the Republican platform on which Ronald Reagan ran in 1980 carried a platform calling for a return to a watered-down gold standard for the dollar. That cynical proposal did not become a major issue during the campaign, and silently disappeared after the election.
“The position of many advocates of a gold standard is that the Federal Reserve System ought to be abolished, that the U.S. government should allow private banks to issue currency as they see fit, and that the U.S. government should extract itself from the control of money supply in the United States. The problem is that the “good old days” never really existed. In the 65 years between the U.S. Civil War and World War One there were 16 recessions in the United States.
“The concept and history of money and monetary policy in the United States always has been a point of strong opinions. When people have strong opinions about a topic, they often feel that it is acceptable to distort history and reality in order to justify their point. Thus, advocates of private banks issuing private money sometimes misquote Thomas Jefferson. Jefferson famously said: ‘I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation and then by deflation, the banks and the corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.’
“In order to try to distort history and misrepresent one of the most knowledgeable American forefathers, people omit the word "private" from the preceding quotation, attempting to convince would-be supporters that Mr. Jefferson was opposed to the concept of a federally organized banking system, as outlined in the U.S. Constitution and envisioned by the founders of the nation. In fact, he was opposed to private banks having unrestrained capacity to issue money and build up debt, the very thing that caused much economic destruction in the period before the Civil War.
“Anyone suggesting a return to the old ways of organizing and regulating a banking system and financial markets owes it to themselves and to those to whom they speak to know better the historical record of economic dislocations generated during such systems' operations. The free banking period in U.S. history was an era of massive swings in economic volatility, far greater than those experienced since the 1940s, incorporating periods of massive depressions and recessions; hyper-inflation and massive deflations; economic destruction that destroyed humans, companies, and communities; and lightly to totally unregulated financial markets that make the villainy of recent banking scoundrels seem like misdemeanors.”
Have a pleasant weekend, whatever standard you might prefer to be on.
Jon Nadler is a Senior Analyst at Kitco Metals Inc.