Memo To Janet Yellen’s Vice Chair Nominee Stanley Fischer: That Was Then. This Is Now.

By Ralph Benko

fedDr. Janet Yellen now has taken over the chair of the Fed. And President Obama, to great acclaim, recently nominated Prof. Stanley Fischer as Vice Chairman. Prof. Fischer may be the most distinguished and beloved central banker at work within the world financial system today. It is not often that central bankers find themselves beloved. Fed Chairman William McChesney Martin famously quoted a writer saying that the Federal Reserve is “in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.” Yet Fischer is beloved.In 1999 Dr. Fischer was interviewed by Arthur J. Rolnick, then Senior Vice President and Director of Research of the Federal Reserve Bank of Minnesota.  The Fed, at that moment, was riding high.  When asked about the gold standard, Dr. Fischer’s answer concluded that “It may be hubris to believe that human beings can do better than depend on the supply of gold, but we certainly should be able to do so, and are doing so now.”

One hopes he would answer differently today.

“ROLNICK: Why don’t we just go back to the gold standard? Some would argue that world economies were more stable under the gold standard. Comments?

“FISCHER: It’s hard to quarrel with nostalgia for what the 19th century must have been like. But there is no good reason to tie the growth of the world’s money supply, and global inflation, to the vagaries of gold production. Nor is there good reason to waste real resources to produce gold for use as money. And there is reason to think we can do better than the gold standard: The United States has certainly done so recently, and the development of the inflation targeting approach to monetary policy suggests most countries will do so in future too. It may be hubris to believe that human beings can do better than depend on the supply of gold, but we certainly should be able to do so, and are doing so now.”

Prof. Fischer’s genteel views were, in the context of the times, understandable.  In 1999, gold and the gold standard were … déclassé.  Gold’s status a few years ago was as described to perfection by the Wall Street Journal’s Gregory Zuckerman and Carolyn Cui as “considered a haven for those with bleak economic outlooks or dystopian views of society.”

In academic circles admiration for the classical gold standard then mostly was confined to the then-marginal Austrian School, primarily in the works of Menger and Mises.  In office, gold’s championship mostly was confined to Rep. Ron Paul, adhering to the Hayekian preference for competing currencies, and to Rep. Jack Kemp, adhering to the classical gold standard model. In policy circles, the most prominent champion was businessman/philanthropist Lewis E. Lehrman (with whose Institute this columnist has a professional relationship) and to a coterie of intellectuals and activists surrounding Rep. Kemp.

Stanley Fischer, in 1999, dismissed the gold standard.

He did so with the gentility for which he is admired.

That was then.

This is now.

The hubris of the day, to which he alluded, has become obvious.

Nemesis followed hubris.

The Bank of England in its 2011 Financial Stability Paper No. 13, published to wide note, concludes that the economy and financial markets have performed much worse under the fiduciary dollar standard than under the predecessor Bretton Woods gold-exchange regime or that of the classical gold standard.  Some observations on the Paper by columnist Charles Kadlec:

  • Economic growth is a full percentage point slower, with an average annual increase in real per-capita GDP of only 1.8%
  • World inflation of 4.8% a year is 1.5 percentage point higher;
  • Downturns for the median countries have more than tripled to 13% of the total period;
  • The number of banking crises per year has soared to 2.6 per year, compared to only one every ten years under Bretton Woods….”

The Bank of England, the dean of central banks, hardly is given to exercises in nostalgia.  Then Herr Jens Weidmann, president of the Bundesbank, some months afterward publicly stated that “gold is thus, in a sense, a timeless classic.”  The Germans, when it comes to matters economic, are splendid pragmatists not given to bouts of … nostalgia.

In 1999 Prof. Fischer expressed concern about tying “the growth of the world’s money supply, and global inflation, to the vagaries of gold production.”  The foundations of this concern have been called into serious doubt.  Gold has an empirically stable stock to flow ratio, as astutely observed by Erste Bank (p. 17).

“The entire amount of gold ever mined totals approximately 172,000 tons. That is the ‘stock’. Annual production was about 2,700 tons as of 2012. That is the ‘flow’. If one divides the two  amounts, one arrives at the stock-to-flow ratio of currently 64 years. We therefore proceed from the premise that gold isn’t as valuable because it is so rare, but quite the opposite: Gold is valued so highly because annual production relative to the existing stock is so small.

“Putting it differently: not only scarcity, but primarily the relative constancy of the available stock is what makes gold unique. The annual production of 2,700 tons is therefore not relevant to price determination. This characteristic was attained over centuries and can no longer be altered. This stability and security is a crucial precondition for creating confidence.”

As for  Prof. Fischer’s stated concern about wasting resources, one of his illustrious former students, Ben Bernanke, when Federal Reserve Board Chairman, opened his March 20, 2012 critique of the gold standard with a similar criticism:

“One small problem … is that there’s an awful big waste of resources. I mean, what you have to do to have a gold standard is you have to go to South Africa or some place and dig up tons of gold and move it to New York and put it in the basement of the Federal Reserve Bank in New York, and, that’s a lot of effort and work and it’s a, you know, it’s a–Milton Friedman used to emphasize that that was a very serious cost of a gold standard ….”

Although it had escaped Chairman Bernanke’s notice, a rigorous reassessment of Prof. Friedman’s concern in this matter is well under way.  This columnist has observed elsewhere,

“As it happens, a half century ago Prof. Milton Friedman, a relentless opponent of gold, published a famous estimate that the costs of maintaining the gold standard might be as high as 2.5% of, then, GNP — a prohibitive amount.  …

“But is it true?  According to Prof. Lawrence White, of George Mason University, Friedman may have miscalculated, overstating the cost by up to a factor of 50!  In a lucid synopsis for the Atlas Sound Money Project of some important and not yet fully assimilated work by Professor White, doctoral student Nicolas Cachanosky distills White’s analysis:

‘There are two main reasons usually mentioned to prefer fiat money over gold standard. One is that fiat money offers more flexibility to do fine tuning on the economy and also central banks will have their hand free if they need to go into a monetary stimulus. The other reason is that a regime of gold standard involves unneeded costs that can be avoided with fiat money. Gold has to be extracted from mines, processes, shipped, put into custody, etc.

‘Working on Friedman (1953, 1960), White estimates that the cost of gold standard is 0.05% of GNP rather than 2.5% of GNP as Friedman calculated. White’s point is that Friedman’s calculation overestimates the cost of gold standard by assuming a 100 percent reserves on gold. However, a developed monetary system that makes use of fractional reserves can considerably cut these costs.’”

Prof. Tyler Cowen, also of George Mason University, himself no gold standard advocate, last month also rejected the resource cost argument against the gold standard.  Cowen: “I’m not happy with counting the stock of ‘monetary gold’ as the ‘resource costs of a gold standard,’ as did Milton Friedman. …  [P]ostulating zero real resource costs for a gold standard is more reasonable than it might at first appear.”

The purpose here is not harshly to criticize the good Prof. Fischer, whose nomination for the Vice Chairmanship of the Federal Reserve System this columnist heartily supports.  It is to bring the discourse present.  As Bank of England Governor Sir Montagu Norman — in his era the world’s most prestigious central banker — once memorably wrote: “dogs bark but the caravan passes on.”  Much has occurred since 1999.

Prof. Fischer managed (among many other accomplishments) the astonishing feat of fomenting some civility between the rival Fresh Water and Salt Water schools of economics. Such diplomatic finesse could prove valuable today in a broader, and far more significant, arena.  There is rising impetus in the Congress, embodied by the Brady-Cornyn legislation to create a Centennial Monetary Commission (including one commissioner appointed by the Fed Chair), to take a cool headed fresh look at monetary policy.

It is designed to study empirically the economic outcomes produced, or portended, by monetary policy “based in discretion in determining monetary policy without an operational regime; price level targeting; inflation rate targeting; nominal gross domestic product targeting (both level and growth rate); the use of monetary policy rules; and the gold standard.”  If questioned about this pending legislation during his confirmation hearings it would be excellent if Prof. Fischer will encourage the formation of this commission.  This Commission is the vehicle by which the Congress and the Fed can, without in the slightest compromising the Fed’s independence, cooperate in the crucial matter of maximizing job creation and deficit reduction.

“Dogs bark,” Prof. Fischer. “But the caravan passes on.”

Republished with permission from


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