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By Root 865 0

amount of weight is compressed into a small space relative to other metals that could be used as a monetary base. Gold is also of uniform grade, an element with fixed properties, atomic number 79 in the periodic table. Commodities such as oil or wheat that might be used to support a money supply come in many different grades, making their use far more complicated. Gold does not rust or tarnish and is practically impossible to destroy, except with special acids or explosives. It is malleable and therefore easily shaped into coins and bars. Finally, it has a longer track record as money—over five thousand years—than any rival, which shows its utility to many civilizations and cultures in varied circumstances.

Given these properties of scarcity, durability, uniformity and the rest, the case for gold as money seems strong. Yet modern central bankers and economists do not take gold seriously as a form of money. The reasons go back to CWI and CWII, to the causes of the Great Depression and the crack-up of Bretton Woods. A leading scholar of the Great Depression, Ben Bernanke, now the chairman of the Federal Reserve, is one of the most powerful intellectual opponents of gold as a monetary standard. His arguments need to be considered by advocates for gold, and ultimately refuted, if the debate is to move forward.

Bernanke’s work on gold and the Great Depression draws in the first instance on a large body of work by Peter Temin, one of the leading scholars of the Great Depression, Barry Eichengreen and others that showed the linkages between the operation of the gold exchange standard from 1924 to 1936 and the world economy as a whole. Bernanke summarizes this work as follows:

Countries that left gold were able to reflate their money supplies and price levels, and did so after some delay; countries remaining on gold were forced into further deflation. To an overwhelming degree, the evidence shows that countries that left the gold standard recovered from the Depression more quickly than countries that remained on gold. Indeed, no country exhibited significant economic recovery while remaining on the gold standard.

Empirical evidence bears out Bernanke’s conclusions, but that evidence is just illustrative of the beggar-thy-neighbor dynamic at the heart of all currency wars. It is no different than saying if one country invades and loots another, it will be richer and the victim poorer—something that is also true. The question is whether it is a desirable economic model.

If France had gone off the gold standard in 1931 at the same time as England, the English advantage relative to France would have been negated. In fact, France waited until 1936 to devalue, allowing England to steal growth from France in the meantime. There is nothing remarkable about that result—in fact, it should be expected.

Today, under Bernanke’s guidance, the United States is trying to do what England did in 1931—devalue. Bernanke has succeeded in devaluing the dollar on an absolute basis, as evidenced by the multiyear rise in the price of gold. Yet his effort to devalue the dollar on a relative basis against other currencies has been more protracted. The dollar fluctuates against other currencies but has not devalued significantly and consistently against all of them. What is happening instead is that all the major currencies are devaluing against gold at once. The result is global commodity inflation, so that beggar-thy-neighbor has been replaced with beggar-the-world.

In support of his thesis that gold is in part to blame for the severity and protracted nature of the Great Depression, Bernanke developed a useful six-factor model showing the relationships among a country’s monetary base created by the central bank, the larger money supply created by the banking system, gold reserves broken down by quantity and price, and foreign exchange reserves.

Bernanke’s model works like an upside-down pyramid, with some gold and foreign exchange on the bottom, money created by the Fed on top of the gold, and even more money created by banks on top of that.