This context undermines Bernanke’s blame of late 19th century financial panics on the gold standard. The U.S. did not have a national bank to administer the money supply, combat season panics, or act as a lender of last resort. The Panic of 1907, resolved by financial genius J.P. Morgan playing the lender of last resort, prompted the Republican Congress the next year to establish the commission that spawned the Fed in 1913. That system was established to organize the banking system, not determine the value of the dollar. The gold standard already did this.
Bernanke goes on to express his cruder interpretation in the next slide: “Because the money supply is determined by the supply of gold, it cannot be adjusted to changing economic conditions.” Actually, the money supply under the gold standard automatically adjusts to changing economic conditions. Money supply isn’t determined by the supply of gold, but by the market’s demand for money. The ability to hold and exchange gold, a form of money that the central bank can’t print, allows the market to enforce that demand.
Bernanke continues with his critique of the classical gold standard record with fuzzy details. “Although the gold standard promoted price stability over the very long run, over the medium run it sometimes caused periods of inflation and deflation,” his PowerPoint states. He concludes this part of his presentation with the claim that “in the second half of the 19th century, a global shortage of gold reduced the U.S. money supply and caused deflation,” and a nod to William Jennings Bryan’s “Cross of Gold” speech in 1896.
Bernanke glides over the determining event in U.S. monetary policy in the second half of the 19th century: fiat money. In December 1861, the U.S. went off the gold standard as it fell into civil war. Congress began issuing “greenbacks” a few months later, flooding the economy with this new unredeemable currency. The U.S. did not get back on the gold standard until 1879, and did so at the dollar-gold ratio in effect before the war and the inflation used to finance it.
This was the cause of the deflation, not a global gold shortage. During the gold standard era of 1879-1913, global gold supply increased at an average of 2.07 percent and stayed between a band of 1.27 and 3.35 percent, according to the U.S Gold Commission’s report to Congress in 1982. America’s gold stock grew at an average of 2.00 percent during that period. Even when global gold production surged later in the 19th century with new discoveries, prices remained steady with the demand for money.
Inflation and deflation “on a year to year basis” were facts of life in the late 19th century, just as they are in today’s world, as the economy absorbed real shocks like rapid changes in technology. But unlike today, what didn’t change was the value of the dollar: just over 1/20th of an ounce of gold during the gold standard era. This explains the overall price stability success that Bernanke acknowledges. In his recently-published book "Redeeming Economics," Ethics and Public Policy Center fellow John Mueller evaluates the record of the five U.S. monetary systems based on consumer price long-run stability and short-run volatility and found that the 1879-1914 gold standard period was the most successful.
Bernanke notes that farmers bore the brunt of price changes in the late 19th century as crop prices fell but the gold standard afforded them no relief through inflation. Bryan’s call to monetize silver and resurrect bimetallism, the short-lived monetary policy of early America, won him the Democratic nomination but not the election. What was not in dispute in that debate was the necessity of hard money. Even Bryan, a populist riding to electoral success on the backs of disgruntled farmers, did not reject gold altogether.
Bernanke goes to great lengths and corners of history to put down the gold standard because it comprises the historically credible and increasingly popular alternative to the status quo, which is his own authority over U.S. monetary policy. That authority has been taken to its logical extreme with three years of suppressed interest rates and large-scale money injections. As this singular control over the nation’s financial system continues with no end in sight, Bernanke will face more questions about gold on college campuses and elsewhere from American voters.
Danker is economics director for American Principles Project, a Washington policy organization that promotes gold-backed monetary reform.