Inflation - Before and After the Federal Reserve

By Tim on 03/21/2012 in Currencies, Economy

In a lecture yesterday, Federal Reserve Chairman Ben Bernanke made the mistake of talking about inflation during his critique of the gold standard, going so far as to say that when the barbarous relic was used as the foundation of our monetary system “over the medium run, it sometimes caused periods of inflation and deflation” (see this item from earlier in the day for links and other specifics).

That struck me as a particularly odd way of addressing a subject that probably shouldn’t have been addressed at all and that prompted the creation of the chart shown below using data from … the Federal Reserve.

Maybe it’s just me (after all, my background is as an engineer, not as an economist), but, the hard money days prior to the formation of the Federal Reserve sure seem to be a better alternative to what we’ve had over the last hundred years, inflation-wise, especially when looking at the slope of that red curve since the last vestiges of sound money were abandoned back in 1971.

When you think about it, any sensible central bank chief serving decades after the launch of another experiment with pure fiat money really shouldn’t be talking about the gold standard at all. History shows that these pure paper money systems usually run their course after a few decades (sometime much sooner) and, depending upon how many terms Bernanke serves as Fed Chairman, that could occur on his watch.

I mean, what’s the possible upside in calling attention to the gold standard in general and, in particular, to the inflation data under that system as compared to what we’ve got now?

Former Fed Chief Alan Greenspan was careful to only make substantive comments about the yellow metal before (Gold and Economic Freedom) and after (Stunner: Gold Standard Fully Supported By… Alan Greenspan!?) he ran the world’s most powerful central bank and Bernanke would do well to follow that lead.

But, if our current Fed Chief feels as though he must talk about how returning to a gold standard would be problematic today (probably as a result of increasing calls from the public as they see rising prices everywhere but in the government’s statistics), he should probably just leave out the part about inflation.

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13 Responses to Inflation - Before and After the Federal Reserve

  1. DLP March 21, 2012 at 1:42 PM #

    I think Hoover put it best when he said:

    “We have a gold standard because we cannot trust governments”.

  2. Jim Beam March 21, 2012 at 2:18 PM #

    According to a New York Times report, Bernanke said “Tying the supply of money to the supply of a precious metal limits a government’s ability to address economic problems”.

    What many people thought he should say was “Tying the supply of money to the supply of a precious metal limits a government’s ability to CAUSE economic problems”.

    • Frank H March 25, 2012 at 2:02 PM #

      well said!

  3. Tim March 21, 2012 at 3:07 PM #

    So, I just finished reading the back end of Bernanke’s presentation about the causes of the Great Depression and monetary policy at the time. Not surprisingly, there’s no mention of anything like this:

    2. The Fed’s role in sowing the seeds of destruction is under-appreciated

    While the Federal Reserve isn’t credited with doing all that much from the time that it was founded in 1913 until after World War I, that changed in a big way in the 1920s. As recounted in great detail by Rothbard, continuous “inflationary” policies by Chairman Benjamin Strong from the early-1920s up until about 1928 played a key role in the crash.

    Money and credit were simply allowed to expand too quickly - faster than ever before with the exception of periods when the nation was at war - and, when masked by productivity gains that kept consumer prices from rising, this “stimulated” other parts of the economy to inflate asset bubbles of one sort or another, like real estate in Florida or stocks in New York. Another major reason for the inflationary policies of the U.S. central bank in the 1920s was that it was helping Great Britain to get back onto the gold standard in the aftermath of the first world war.

    It shouldn’t come as too big of a surprise that a focus on stable consumer prices rather than the growth of money supply and credit first became popular amongst economists during this decade. Of course, to anyone looking back at the era now, the results are seen to be both unsurprising and disastrous, but, what is even more astonishing today is that most economists still view the Great Depression as almost materializing out of thin air with the October 1929 stock market crash. You’ll hear a few comment on ill-advised tightening by the Fed in 1928 and early-1929, but it was the expansion that ran from 1923 to 1927 that did the real damage.

    This is from the old blog a couple years ago:
    http://themessthatgreenspanmade.blogspot.com/2010/01/few-points-on-great-depression.html

  4. Bron Suchecki March 21, 2012 at 7:59 PM #

    I find it interesting that he did cover the gold standard so much. I think it must be reflecting the fact that talk of a gold standard is now becoming more public (Gingrich calling for a gold commission) and he feels it necessary to counter that. The fact that he feels necessary to respond indicates the calls for a gold standard must be gaining some ground.

    • JamesThomas March 22, 2012 at 8:00 AM #

      Bron

      My thoughts, exactly.

      BB is used to getting an intellectual ass-kicking from Ron Paul on a regular basis so it seems unlikely that, alone, is the reason BB spent so much time on gold.

      My guess is that BB’s comments on gold and the recent spate of “HERO” worship articles about BB and the horrors of a gold standard are intentionally designed to head off any move by more mainstream thinkers (such as Gingrich and his ilk and their supporters) that the Central Bank is a disaster.

      The recent articles whining that a gold standard can’t possibly work (by Weisenthal and Foxman, e.g.) show a stunning lack of understanding of free money, or an intentional misinformation campaign.

      The PR machine for TPTB is working overtime trying to save the central hacks that control the money. They must be a little nervous or they wouldn’t say anything at all.

      • olrailbird March 25, 2012 at 4:02 PM #

        Ron Paul has idiotically suggested the way out of the financial hole is to increase interest rates. How does paying more money to bankers help anyone but bankers?

        Suppose that for you to buy my yardstick I charge you two inches of “interest” per year? Does that make any sense to you? Why accept the notion of interest on money?

        Why allow private money to begin with? Couple that with interest and you turn your sovereign nation into a slave state.

  5. schwartzer March 22, 2012 at 6:38 PM #

    Watch swindling the goyim on YT -both parts- and decide for yourself. Think you were made a mockery of after getting into debt? Watch how you are mocked getting out of it.

  6. Gary Anderson March 23, 2012 at 12:37 PM #

    The gold standard is a bad idea, but lack of enforcement of speculation in futures contracts for commodities is a bad idea too. If we have a fiat currency, speculation must be limited.

    • Frank H March 25, 2012 at 2:00 PM #

      please oh please give us a better idea….fiat monetary systems….please oh please …you must be kidding?

      • olrailbird March 25, 2012 at 3:56 PM #

        http://www.perfecteconomy.com

        The problem is not fiat currency, central banking, fractional banking or money printed out of thin air. The problem is simply interest — as identified over two thousand years ago.

        This is not a religious argument, although that is a good one (and explains the war on Islam,) but a mathematical problem If you don’t print the money to pay the interest, you will always have a shortage of money. This is basically a Ponzi scheme.

        Most people just can’t wrap their heads around the fact that it is not in the best interest of society to charge interest at all. Most people are just too greedy to understand the real nature of money and so accept the perverted definition offered by the Federal Reserve.

        Interest (usury) is what has bankrupted the economy and until people admit that, there is no “fixing” the problem. They will try to borrow into infinity because their greed is insatiable.

        We need to unlearn the BS taught by psychopathic “economists.”

  7. olrailbird March 25, 2012 at 4:03 PM #

    Sorry.

    http://usurykills.blogspot.com (not cc)

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