Bernanke comments on idea - moving central bank to gold standard

Proponents of the gold standard won't like hearing Ben Bernanke's recent comments where he panned the idea as a handicap on the government. 

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WASHINGTON, DC (Catholic Online) - Bernanke spoke in a series of public lectures at George Washington University in an attempt to deflect criticism that the central bank's handling of the fiscal crisis has been weak.

Bernanke explained why he felt the gold standard would be a poor choice. "Since the gold standard determines the money supply, there is not much scope for the central bank to use monetary policy to stabilize the economy. Under a gold standard, typically the money supply goes up and interest rates go down in a period of strong economic activity - so that's the reverse of what a central bank would normally do today."

Proponents of the gold standard, such as presidential hopeful, Ron Paul, say it would force fiscal discipline in government and guarantee the value of the dollar. However, critics claim such a policy would be too rigid, preventing the central bank from doing anything to mitigate extremes in the business cycle, which can lead to extreme growth and inflation, to recession and deflation. 

Indeed, this is the point that many gold standards proponents make. With the gold standard, the central bank could be restricted or even abolished. 

But supporters of the central bank will argue that if the bank is unable to add or subtract from the money supply via fiscal policy, then the economy would be subject to the vagaries of the world economy and fluctuations in gold prices - prices that will not go up forever.

Bernanke has been under fire for the easy money policy  of the central bank, which has bought $2.3 trillion in bonds and held interest rates near zero since late 2008. With cash plentiful, in the hopes of stimulating the economy, some fear the quick return of inflation. So far, however, with the exception of energy, prices have remained low.

While Bernanke did not make any direct remarks regarding current policy, he did urge caution and that there should be no rush to raise rates. "You need to be attentive to where the economy is and not move too quickly to reverse the policies that are helping the recovery," he explained.

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