Professor Bernanke Explains the Trouble With Gold

The Fed chairman is everywhere making the case for easy money
Photograph by J. Scott Applewhite/AP Photo

Now that the weather is nice, I’m half-expecting Ben Bernanke to set up a lectern outside Federal Reserve headquarters on Constitution Avenue so he can enlighten passersby about the need for easy money. He’s been delivering the message lately to anyone who will listen—including a couple dozen lucky students at the nearby George Washington University School of Business. The Fed chairman is worried that the economic recovery could stall out if the Fed yanks monetary stimulus too soon. Today he told a meeting of the National Association for Business Economics that “conditions remain far from normal.”

For my money, Bernanke’s best stuff lately was his first lecture at George Washington University on March 20, which was videotaped and posted online so it could reach a bigger audience. Ron Paul, the apostle of gold who’s running for president, has a professorial demeanor that seems to appeal to some young people, but Bernanke, who disagrees with Paul on just about everything, is the genuine academic item—he taught at both Stanford and Princeton universities and has his name on an introductory econ textbook.

Put it this way: When Bernanke stands in front of a classroom, it’s like Mick Jagger at RFK Stadium circa 1981, if Jagger were a non-strutting macroeconomist with a PowerPoint presentation.

Bernanke warmed up slowly in his March 20 lecture (the first of four to the same class at GWU), reviewing the basic notion that “to stimulate an economy, you lower interest rates.” But soon he was on to the perils of the “liquidationist” theory of Andrew Mellon, the Treasury secretary who is notorious for advising President Herbert Hoover to “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate … it will purge the rottenness out of the system.” Bernanke told the students: “Sounds pretty heartless and I think it was.”

From there, Bernanke went on to explain how the Fed helped cause the Great Depression by keeping interest rates high to defend the gold standard, and by letting banks fail. Bernanke conceded that a gold standard might keep inflation lower over the long haul, but at the cost of severe fluctuations in economic output. What’s more, he questioned whether a commitment to a gold standard would even be credible. The Bank of England stuck to a gold standard for decades because “everybody knew that their first, second, third, and fourth priority was staying on gold,” Bernanke told the students. In a modern democracy like the U.S., in contrast, the pressure to devalue the dollar to stimulate growth would be irresistible—and speculators, realizing that, would undermine the gold standard by demanding gold instead of currency.

Kind of cool to learn monetary economics straight from the chairman of the Fed. The last voice heard on the first lecture videotape, after Bernanke has left the room, says, “I think it’s safe to move now.”

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