The Fed Tries and Fails to Debunk the Gold Standard

Last month, the Federal Reserve Bank of St. Louis published an essay that supposedly debunks the idea that a monetary gold standard can stabilize and improve economies. The piece is blatant propaganda that returns to the same excuse central bankers always use to discredit the gold standard. Namely, that tying a currency to gold prevents a government and its central bank from quickly responding to economic problems by manipulating the money supply. This is the same argument used to defeat the “Save Our Swiss Gold” campaign back in November, which would have forced the Swiss National Bank to significantly increase its gold reserves.

Here’s the conclusion of Scott A. Wolla’s gold hit piece for the Fed:

A gold standard ties the value of money to a country’s stock of gold reserves. While some argue that a gold standard can effectively maintain price stability over long periods, governments still have the ability to change their money supply and price level simply by changing the official gold-to-money ratio. Moreover, a gold standard can be problematic because of sudden gold inflows and outflows that cause the supply of money, and therefore prices, to fluctuate. In the end, a gold standard is not needed to preserve price stability as long as a country’s central bank is independent and has a clear mandate to achieve price stability.”

You’ll notice Wolla also relies upon the idea that central banks like the Fed are independent of the government. He argues that this autonomy prevents central banks from printing money solely to “inflate away” sovereign debt for the benefit of politicians. It’s hard to read this drivel with a straight face, especially when one of the most notorious central bankers of our time – Alan Greenspan – recently and publicly declared, “I never said the central bank is independent!” Greenspan also suggested gold is a good investment, because he sees inflation coming thanks to the Fed’s policies.

Forbes has published a sharp rebuttal to this paper by Nathan Lewis, author of Gold: The Once and Future Money. Lewis walks us through a brief history of the money supply and inflation in the United States during and after the gold standard. His article neatly cuts the legs out from under the Wolla’s key points and finishes with this:

The reason we don’t have a gold standard policy today is not because it doesn’t work – the last twenty years of the gold standard era, the 1950s and 1960s, were the most prosperous of the last century – but because people forgot what it was for, and how it operated. The world gold standard era didn’t end because it was producing bad results, but because it was left in the hands of people who blew it up out of sheer ignorance and stupidity…

“I think there has been a bit of disinformation over the years. It serves some people’s interests if people don’t understand the most basic concepts of gold-based money. In any case, if we are to create a viable alternative to today’s floating-fiat madness, we need to have a strong foundation regarding these core principles.”

The fact that the Fed feels it is necessary to publish official arguments against the gold standard could be a good sign. If gold really has no purpose in modern economies, if gold is truly a “barbarous relic,” then why even bother addressing it? Perhaps the Fed is concerned that people are waking up.

Just think of all the news in the past year or two. The Swiss gold vote last year; Germany and other European nation’s gold repatriation efforts; Russia’s gold buying spree; the seeming end of the gold bear market of the past couple years; China’s liberalization of its gold markets while turning into a bigger international economy. Could all of these trends have central bankers worried that the world is getting fed up with manipulated fiat currencies? Let’s hope so.

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