Currency Wars_ The Making of the Next Global Crisis - James Rickards [125]
In addition to this refutation of Bernanke’s particular historical analysis, there are a number of actions central bankers could have taken in the 1930s to alleviate the tight money situation unconstrained by gold. The Fed could have purchased foreign exchange with newly printed dollars, an operation comparable to modern central bank currency swap lines, thereby expanding both U.S. and foreign reserve positions that could have supported even more money creation. SDRs were created in the 1960s to solve exactly this problem of inadequate reserves encountered in the 1930s. Were a 1930s-style global liquidity crisis to arise again, SDRs could be issued to provide the foreign exchange base from which money creation and trade finance could flow—exactly as they were in 2009. This would be done to head off a global contraction in world trade and a global depression. Again, this kind of money creation can take place without reference to gold at all. Any failure to do so is not a failure of gold; it is a failure of policy.
Central bankers in the 1930s, especially the Fed and the Banque de France, failed to expand the money supply as much as possible even under the gold exchange standard. This was one of the primary causes of the Great Depression; however, the limiting factor was not gold but rather the lack of foresight and imagination on the part of central banks.
One suspects that Bernanke’s real objection to gold today is not that it was an actual constraint on increasing the money supply in the 1930s but that it could become so at some point today. There was a failure to use all of the money creation capacity that bankers had in the Great Depression, yet that capacity was never unlimited. Bernanke may want to preserve the ability of central bankers to create potentially unlimited amounts of money, which does require the abandonment of gold. Since 2009, Bernanke and the Fed have been able to test their policy of unlimited money creation in real-world conditions.
Blaming the Great Depression on gold is like blaming a bank robbery on the teller. The teller may have been present when the robbery took place, but she did not commit the crime. In the case of the Great Depression, the crime of tight money was not committed by gold but by the central bankers who engaged in a long series of avoidable policy blunders. In international finance, gold is not a policy; it is an instrument. Laying the tragedy of the Great Depression at the feet of the gold standard has been highly convenient for central bankers who seek unlimited money printing capacity. Central bankers, not gold, were responsible for the Great Depression and economists who continue to blame gold are merely looking for an excuse to justify fiat money without bounds.
If gold is rehabilitated from the false accusation of having caused the Great Depression, can it play a constructive role today? What would a gold standard for the twenty-first century look like?
Some of the most vociferous advocates for a gold standard on the ubiquitous blogs and chat rooms are unable to explain exactly what they mean by it. The general sense that money should be linked to something tangible and that central banks should not be able to create money without limit is clear. Turning that sentiment into a concrete monetary system that can deal with the periodic challenges of panic and depression is far more difficult.
The simplest kind of gold standard—call it the pure gold standard—is one in which the dollar is defined as a specific quantity of gold and the agency that issues dollars has enough gold to redeem the dollars outstanding on a one-for-one basis at the specified price. In this type of system, a paper dollar is really a warehouse receipt for a quantity