--Federal Reserve Chairman Ben Bernanke defends country's break with gold standard
--Gold standard can cause both inflations and deflations, Bernanke says
--Practical, policy problems with gold standard
By Kristina Peterson
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--Federal Reserve Chairman Ben Bernanke, addressing calls from some politicians to have the U.S. return to the gold standard, defended the country's break with the policy Tuesday at the first of his four lectures at George Washington University.
Bernanke explained to a packed lecture hall why a gold standard harmed the global economy during the Great Depression. Some recent critics of the Fed, most notably GOP presidential candidate Rep. Ron Paul of Texas, have pushed to return to the gold standard, in which paper money is backed by gold. The U.S. was on the gold standard between the Civil War until the 1930s, and the tie was fully severed by President Richard Nixon in 1971.
The gold standard poses both practical and policy problems, Bernanke said. On the practical side, it can be a waste of resources to secure all the gold needed to back currency, moving it from South Africa to the Federal Reserve Bank of New York's basement, for example, or as he put it, "all this gold is being dug up and being put back into another hole."
More significantly, a country on a gold standard will see more short-term volatility, Bernanke said.
"Since the gold standard determines the money supply, there's not much scope for the central bank to use monetary policy to stabilize the economy," he said. Bernanke noted the gold standard did not prevent frequent financial panics.
During the Great Depression, "policy errors" in the United States spread to other countries that were also on the gold standard, Bernanke said. Countries on the gold standard must maintain fixed exchange rates, making it easy for bad policies in one country to spread to another on the gold standard, he noted.
One modern example of the inherent problems of the gold standard is China's fixed currency, Bernanke said. Because China ties its currency to that of the U.S., China could be impacted by changes the Fed makes to short-term interest rates.
"If the Fed lowers interest rates and stimulates the U.S. economy, that means also that essentially monetary policy becomes easier in China as well," Bernanke said. "China may experience inflation because it's tied to U.S. monetary policy." The central banker did say that China's currency has become "more flexible lately."
While Bernanke acknowledged that over decades, prices are very stable in countries using the gold standard, they can experience both periods of deflation and inflation in the medium run. And if not "perfectly credible," the gold standard can be subject to speculative attack and ultimately collapse as people try to exchange paper money for gold.
Part of why the Fed failed in its managing of the Great Depression was its attempts to stay on the gold standard, he noted. One of Franklin Delano Roosevelt's most successful moves as president was to begin to take the country off the gold standard, he said.
One reason that critics push to return to the gold standard is they want to remove some "discretion" from the Fed, Bernanke said in response to a question from Noah Wiviott, a senior at George Washington.
A country with a gold standard "doesn't allow the central bank to respond with monetary policy," he said.
-By Kristina Peterson, Dow Jones Newswires; 347-882-7215; firstname.lastname@example.org