After receiving many verbal jabs by Ron Paul (the Bullionist and candidate for the Republican Presidential nomination), Federal Reserve Chairman Ben Bernanke gave an online lecture at George Washington University this week on the gold standard and monetary policy in terms of the history of the Federal Reserve and the Great Depression. In many of Ron Paul’s campaign speeches, he states that the Federal Reserve violates the principle of the powers set aside for Congress in the Constitution. In a 2007 address on the floor of Congress, Paul stated, “[Abolishing] the Federal Reserve and returning to a constitutional system will enable America to return to the type of monetary system envisioned by our nation’s founders: one where the value of money is consistent because it is tied to a commodity such as gold.”
In his online lecture this week, Bernanke countered Ron Paul’s argument with slides and descriptions of the negative impact the gold standard had on both the domestic and foreign economies before it was abolished in 1933. He stated, “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 … There’s a good bit of evidence that the gold standard was one of the main reasons that the Depression was so deep and long.”
There are two places in the U.S. Constitution that Ron Paul can use to base his arguments on. The first place is Article I, Section 8, Clause 5, which states that Congress has the power “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.” The second is Article I, Section 10, Clause 1, which states that “No State shall … make any Thing but gold and silver Coin a Tender in Payment of Debts.” If you take these two Clauses together, you achieve Ron Paul’s point that Congress should be handling a gold-backed monetary system, and not a third-party entity.
On the other hand, the Constitution does not state that Congress cannot empower a third-party entity to manage monetary policy either. The Federal Reserve – while being an apolitical entity – exists only under the laws that allow it to exist. Congress still holds the final say over what can and cannot be done by the Federal Reserve. In fact, Ron Paul himself recently had created a provision in the 2010 Dodd-Frank law to have the Federal Reserve audited.
Will this battle ever come to conclusion while these two individuals are in office? I doubt it. There has been, and I’m sure there will be for a long time calls to move the economy back to the gold standard. I haven’t been convinced yet that fixing our financial security to the value of a commodity is a wise choice. With our ever-growing knowledge of molecular engineering, what would happen the day it is announced that scientists were able to “create” gold? Wouldn’t economic security countries around the world suddenly collapse from a devaluation of the currency? What do you think?