Bernanke channeled Keynes to deflect Paul
Remember that exchange a couple of months ago between Congressman Ron Paul and Federal Reserve Chairman Bernanke over the definition of money? Pressed by the congressman during testimony, Bernanke said gold is not money. Paul retorted: “Why do central banks hold it?”
Bernanke paused and said: “It’s tradition, long-term tradition.”
One of the interesting things about the episode was how disparately it was perceived among different audiences. To most economists, Bernanke was stating the obvious. Gold is not money. You can’t walk into a coffee shop and pay for your doughnut with a raw piece of bullion. Not without at least eliciting a “let me get my manager” from the cashier. To Ron Paul’s libertarian supporters, however, this was a major ‘gotcha’ moment for the presidential hopeful.
What most observers do not realize, however, is that Bernanke was not only dismissing the suggestion that gold is equivalent to money, but also doing so by echoing Paul’s ideological nemesis: the late economist John Maynard Keynes.
In 1930, Keynes, a vocal opponent of a post-World War One attempt to return major world economies to the gold standard, wrote the following:
The choice of gold as a standard of value is chiefly based on tradition.
Keynes, who famously dismissed the gold standard as a “barbarous relic,” goes on to argue that scarcity and difficulty of transport make the precious metal ill-suited to be the basis of currency:
Gold is, and has always been, an extraordinarily scarce commodity. A modern liner could convey across the Atlantic in a single voyage all the gold which has been dredged or mined in seven thousand years.
And further down:
Gold is out of sight – gone back again into the soil. But when gods are no longer seen in a yellow panoply walking the earth, we begin to rationalize them; and it is not long before there is nothing left.