Bernanke: Gold isn’t money
from The New York Sun
Posted July 13, 2011
The Fed Chairman and Ron Paul clash over the dollar
IF ONE WANTED TO EDIT OUR SUMMER OF QUARRELS DOWN TO ONE EXCHANGE that encapsulates our national misunderstanding, we would commend that which took place today between the chairman of the Federal Reserve governors, Ben Bernanke, and the chairman of the House Monetary Affairs subcommittee, Congressman Ron Paul. The exchange lasted five minutes, and one won’t find it flagged on the front pages of, say, the New York Times. But it was up in lights on the Drudge Report, which has mounted a picture of Mr. Bernanke under the headline “Bernanke: Gold Not Money,” and linked to a piece in Forbes.
Dr. Paul began by expressing skepticism over optimistic reports on the economy, noting our lackluster performance over the past three years despite the Congress and the Fed having injected $5.3 trilllion dollars into the economy. He noted that the national debt has grown by $5.1 trillion, while GDP has grown less than 1% and 7 million people are unemployed. The average term of unemployment, he observed, has soared to nearly 40 weeks from 17 weeks. He also expressed skepticism over claims that inflation is low, citing one definition of inflation that has prices up 34% over the three years despite the weak economy. So, he asked, why pay money to banks and corporations under a policy of too big to fail rather than giving money directly to the people?
Mr. Bernanke responded by saying that the Fed hasn’t spent any money but has, in fact, made profits that it has returned to the government. He noted that the Fed was founded to deal with financial panics. Dr. Paul interrupted, noting that his five minutes were running out, and asked about the collapse in the value of the dollar by almost 50% in the past three years to less than a 1,580th of an ounce of gold. “When you wake up in the morning, do you care about the price of gold?” he asked Mr. Bernanke.
“Well,” the chairman replied. “I pay attention to the price of gold. But I think it reflects a lot of things. It reflects global uncertainties. I think the reason people hold gold is as protection against of what we call tail risks, really, really bad outcomes. And to the extent that the last few years have made people more worried about the potential of a major crisis then they have gold as a protection.”
“Do you think gold is money?”
Here the chairman paused awkwardly, before, finally, replying.
“No, it’s not money. It’s a precious metal.”
“Even if it’s been money for the past 6,000 years, somebody reversed that, eliminated that economic law?”
“Well, it’s an asset. Would you say treasury bills are money? I don’t think they’re money, either. They’re an asset.”
“Why do central banks hold it?”
“Well, it’s a form of reserve.”
“Why don’t they hold diamonds?”
“Well, it’s tradition, long term tradition.”
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The exchange, which Dr. Paul ended by remarking that some people still think gold is money, throws into relief the disconnected nature of our dialog. In the narrow sense, it’s true that the Fed doesn’t spend money. In the broader sense, it’s true that the Fed has become the enabler of the Federal government’s binge of spending — all the while boasting of the profits from such lending. Now we are in a showdown between a House elected to halt the increases in taxes and spending and a president and Senate bent increasing both. Into this midst comes a central bank signaling its preparedness to mount yet another round of quantitative easing, while the definition of inflation undergoes the equivalent of a gerrymander to disguise the significance of the collapse in the value of the dollar, which — on cue — hit a record low even as the chairman was speaking and the Republican leadership in the Senate was maneuvering to grant the president authority to issue debt on his own say-so. In our 40 years on this beat we don’t think we’ve seen a more cynical performance — by a central bank or an administration — than that which has been on display these past few years.