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During his lecture, Prof. Bernanke said there isn’t enough gold in circulation to maintain a gold standard.

Jim Bourg/Reuters/Jim Bourg/Reuters

Course: The Federal Reserve and Its Role in Today's Economy, George Washington University (Washington)

Guest Lecturer: Ben S. Bernanke

Lecture title: "Origins and Mission of the Federal Reserve"

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Date: March 20, 2012


– Teacher enters the room to polite applause. He seems excited to be here. "This is what I used to do before I got into this line of work."

– Prof. Bernanke promises three more lectures. One on Thursday, one on March 27 and one on March 29. (Phew! Still time to get through Lords of Finance – and the rest of the reading list.)

– Central banking goes back hundreds of years; the Bank of England created in 1694. (And they have been making a mess of things ever since! Ha! Joking! Too many Ron Paul rallies. Prof. Bernanke didn't say that.)

– To understand the role of central banks, consider the movie It's a Wonderful Life (Surely you mean Wall Street: Money Never Sleeps?! How could the Fed have helped Jimmy Stewart? If the Fed was on the job, Jimmy Stewart could have used his good collateral to get a cash loan to stop the run on his bank. The Bank of England figured this out early – a journalist called Walter Bagehot –theorized that a central bank could stem panics by lending to just about anyone who needed the money, although at a premium to discourage banks from taking advantage of the situation. The U.S. was slow to coming around to Bagehot's way of thinking. As a result, the U.S. had banking panics in 1873, 1884, 1890, 1893 and 1907. In 1883, 500 banks failed!


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New topic: the Gold Standard. (Prof. Bernanke has a lot to say on this subject for some reason.)

– To a significant extent, gold standards are automatic, reducing dramatically the role of central banks. "Unfortunately, gold standards are far from perfect monetary systems," Prof. Bernanke says. Why? They represent an "awfully big waste of resources," he says. You have to go to South Africa or some place and dig it out of the ground, and then take it all back to the New York Fed and store it in the basement. "All this gold was being dug up and put in another hole," Prof. Bernanke says. (Note to self: must run that by the folks at

– No scope for central banks to use monetary policy under a gold standard. Also, gold standards require fixed currencies, requiring other countries to accept the Fed's monetary policy. (Contemporary example: China fixes its currency to the dollar, and therefore must accept easier monetary policy set for the weaker U.S. economy. "Those low interest rates may not be appropriate for China," Prof. Bernanke says.) And another reason gold standards are bad: they open up central banks for speculative attacks like what happened to the Bank of England in the early 1930s. And yet another reason to hate the gold standard: it tends to create deflation. William Jennings Bryan recognized this. He was the Democratic nominee for president in 1896, 1900 and 1908. His main message was to weaken the gold standard. He lost each election.

Fast forward to 1914. The Fed is created. Things went pretty well for a while; that is until the 1920s came to a roaring end with the Great Depression. A third of gross domestic product was lost and the unemployment rate was 13 per cent when the Second World War broke out.

– Prof. Bernanke is pretty harsh on the Fed's role in the Depression. The Fed was taken by "liquidationist theory," which held that the only way out of a downturn was to purge the economy of "excesses." That kept the Fed from fulfilling its responsibility as lender of last resort. The U.S.'s gold standard didn't help matters, either. "When you see a 10-per-cent decline in the price level, you know that monetary policy is too tight," Prof. Bernanke says. But the Fed was worried about a speculative attack on the dollar, so policy makers raised interest rates. "That was the wrong thing to do," Prof. Bernanke says.

– To sum up, the Fed "failed" to deliver on its two primary missions: price stability (it allowed deflation) and as lender of last resort. (It refused to lend.) "We want to keep this in mind as we consider how the Fed responded to the 2009 crisis," Prof. Bernanke says.

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One kid wanted to know why, if it's such a disaster, there still is so much talk of a gold standard? Prof. Bernanke says supporters of the gold standard believe paper money is inherently inflationary, which he concedes is true over a long time horizon, but untrue year to year. Gold bugs also believe that central banks shouldn't have the flexibility to adjust monetary policy. Prof. Bernanke, er, disagrees with both these arguments. He says there isn't enough gold in circulation to maintain a gold standard. Also, the world has become too complicated, he says.

Another kid asked about the lessons the Great Depression held for the current recovery. Prof. Bernanke notes that the Depression actually was two recessions. He said many historians think the second recession was caused by the Fed raising interest rates too soon. "If you accept that, you need to be attentive of where the economy is, and not move too quickly to reverse policies," Prof. Bernanke says. (Note to self: That sounds important.)

"Thanks. This has been great. I'll be back on Thursday."

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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