(Reuters) – Federal Reserve Chairman Ben Bernanke on Tuesday took aim at proponents of the gold standard, saying that such a system handicaps the government’s ability to address economic conditions.
Bernanke spoke in the first of a series of four public lectures at George Washington University that is the central bank’s latest effort to counter a raft of negative public sentiment that has arisen from its handling of the financial crisis. The former Princeton economics professor delivers a second lecture on Thursday and two more next week.
“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,” Bernanke said. “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.”
Embodied by Texas congressman and Republican presidential hopeful Ron Paul, a loud minority advocates the closure of the central bank and a return to a gold standard where every dollar issued must be backed with equivalent reserves of precious metal.
Most economists credit the Fed for acting forcefully by lowering interest rates aggressively once it realized the magnitude of the 2007-2009 crisis. But policymakers, including Bernanke, have been chided for downplaying the housing downturn in its early stages and for turning a blind eye to flaws in the regulatory system that laid the groundwork for the boom and bust.