A Former Central Banker vs. Actual Economic History

It’s no secret that the Wall Street Journal is filled with Federal Reserve lackeys, always craving to lick the boots of the sacred central planning agency. Especially important is the reoccurring theme of “Fed independence” where the Federal Reserve has unique permission from God to control much of the economy and maintain a banking cartel without the threat of political discourse. “Fed independence” is code for “We’re going to erode your purchasing power and even the elected portion of government can’t help you.” 

The latest defender of Fed power is Alan Blinder, a Princeton economist and former Federal Reserve vice-chair. In a recent Wall Street Journal op-ed, A New Tactic in Trump’s War on the Fed, Blinder discusses independence with other various topics, including Trump’s Fed picks and a few thoughts about the gold standard. Instantly, it should be suspicious when a member of a powerful interest group has self-serving opinions on economic matters (and yes, members of government and government-sponsored cartels have self-interest too via public choice theory). Nevertheless, we would assume Blinder wants us to take him seriously on his comments about the gold standard.

“Low rates made far more economic sense in the Obama years than now. But it gets worse: Ms. Shelton advocates a return to the gold standard.”

Yes, I know she isn’t alone, but the Flat Earth Society has members, too. A few libertarians look back longingly on the gold-standard period, when governments allegedly, but not actually, kept their hands off interest rates and let the supply of gold rule the roost. But we don’t put people like that on the Federal Reserve Board.”

“Why not? Because the gold standard is a bad means to a bad end. The bad end is fixing exchange rates, which need flexibility when things change. The bad means is doing that by tying currency values to what Keynes called ‘a barbarous relic’ almost a century ago. As an extra, added attraction, a return to gold could put the world’s money supply at the mercy of gold mining in such friendly places as China and Russia. Vladimir Putin has already tried to manipulate a national election. Should we also invite him to meddle in the economy?”

We can excuse Blinder’s appeal to ridicule remark about the Flat Earth Society because there is nothing to say other than that its a fallacy, and really the Statist Central Bank Propaganda society clearly has members as well. Taking his opinion word for word, there are two important factors: 1. He is viewing the negative implications of the gold standard as a time when governments allowed free-market interest rates and a money supply determined by gold, yet admits this is historically not the case. 2. The gold standard has the bad end of fixed exchange rates, which need flexibility when things change.

Blinder is correct in noting that governments under a gold standard, from 1913 to 1933, did not allow laissez-faire money supplies and indeed manipulated credit. Although USD was redeemable in gold during this period, the Federal Reserve pyramided reserves on top of gold reserves, lowering interest rates and igniting artificial booms and busts. Most notable is the massive credit expansion during the 1920s, after the recession of 1920-21, which led to the stock market crash of 1929. This period is well documented in Murray Rothbard’s America’s Great Depression. 

So criticizing the gold standard for leaving monetary policy to the free market after the founding of the Federal Reserve holds no historical reality since the central bank still expanded credit as it does now. If dollars are backed by gold and the central bank practices fractional reserve banking, thereby pyramiding more notes on limited gold reserves, the outcome in no way resembles a system of free banking. But Blinder admits that his characterization of the gold standard where market forces determine interest rates did not exist, so what is he criticizing? 

If we are trying to criticize the “free banking era” in the United States, when no central bank existed, although states regulated banking as well as passed state-chartered banks, this era was between 1837 and 1863. But this is clearly not the era Blinder is citing that “a few libertarians look back longingly on.” We know this because he states his biggest problem with the idea of the gold standard writing, “Because the gold standard is a bad means to a bad end. The bad end is fixing exchange rates, which need flexibility when things change”. The problem here is that the government action of fixing exchange rates has nothing inherently to do with free-market money and banking. 

The period of fixed exchange rates in the US existed under the Bretton Woods system from 1944 to 1971. Bretton Woods was a “gold exchange standard” where individuals that held USD could not redeem their notes in gold. The Federal Reserve still ruled and expanded credit during this period, and although Bretton Woods is used as a caricature of the gold standard by statists, it was a monetary policy twisted and contorted by central banking to resemble nothing of free banking. The more well-known piece of the system was fixed exchange rates, which Blinder notes. It is true that fixed exchange rates are a bad end, as is the arbitrary fixing of any price in the market economy, but if bad ends are the result of fixed exchange rates, the problem is with that very action by the state, not with gold! 

The end of the piece attempts to make readers believe that poor conditions under fixed exchange rates had something to do with gold and the free market when was a lack of rather. We might as well argue that America already tried a system of private property, and the bad end was the Civil War, so we, therefore, must end the institution of private property.  

Overall, what Blinder is doing is confusing the various periods of monetary policies throughout American history and compiling them all; the Free Banking Era, the 1920s, and the Bretton Woods system, into one giant blob for another episode of “we tried the gold standard already and it failed. If we mix and match with unstable economics from one period and attribute it to a bad policy from another, we get a fake argument. He first correlates a history of instability and massive recessions to a generic period known as the “gold standard” without specifying the era. Then, he attributes the “gold standard” to be a policy of free-market money and banking, when the period he is thinking of clearly did not have these qualities. Lastly, he connects all of this to the fixed exchange rates under the Bretton Woods system. 

This mismatching of economic policy history is nothing but a slippery way to mislead the public straight from a former Federal Reserve vice-chair. On a final note, Blinder adds, “But we don’t put people [gold standard supporters] like that on the Federal Reserve Board.” Correct, advocates of economic liberty generally do not show up in central planning agencies and politicians have an inherent interest in not appointing them. 

Image: Rafael Saldaña | Flickr

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