Bernanke’s Great Lie – The “Gold Standard” and the Great Depression

The purpose of the following is to argue that the “gold standard,” as understood by most of the public, did not cause or worsen the Great Depression as current FED Chairman Ben Bernanke has based many of his papers, speeches, and, to a large extent, his entire career on. In our contemporary times, I do believe this blame must be firmly rejected and monetary policy should, at the very least, be debated in a national forum. Indeed many other economists, such as the Friedman family, Anna Schwartz, Alan Greenspan, and Jeffrey “Shock Doctor” Sachs, have all propagated this lie. (This article was originally published in December 2008 here.)

My premise is simple.  I charge that these renowned Keynesian and Friedmanite-Monetarist-Chicago-Shock-School economists have consistently used the term “gold standard” to mislead their audiences and readers. For the sake of brevity, I will focus on Mr. Bernanke as he is the current standard-bearer of the FED’s fiat monetary system.

Frequently, these economists do concede there are differences, but instead of clarifying they muddy the waters. For instance, in his 1990 NBER paper Bernanke frequently refers to an “interwar gold standard” and in his 2002 salute to Milton Friedman he acknowledged that “the gold standard was not adhered to uniformly as the Depression proceeded.”

While there may be a paper from the Austrian School of economics that firmly rebukes the claim in my direct fashion, based on the mislabeling of the term, I have not come across it (yet). However, both Murray Rothbard and Walter Block have understood this truth as well, and dropped the clues.

Furthermore, there should be very little surprise that the statist forces have used this trick. Yesterday’s communist “nationalization” is today’s “conservatorship.” “Hoarders” are really savers. “Insurgents” are really guerrilla fighters; only a minority are “terrorists” as our political leaders consistently tell us. An unbiased observer would call a “war” whether on terror, poverty, drugs, WWII, etc. – as state-sanctioned murder, destruction, and theft of property.  Even the political terms “liberal” and “conservative” are terms meant to confuse and divide, as I discovered in one of my first articles “An Hypocrisy of Terms: Liberal and Conservative“. Without more ado, let’s dive into “gold standard” terminology, although if you do not understand the differences between commodity, receipt, fractional, and fiat money please read this first “The Money Matrix – What is Honest Money? (PART 4/15)“.

  • The pure 100% reserve gold and silver standard is commodity money issued in the form of hard gold and silver coins, or receipt (whether paper or electronic) money issued in lieu of metal held in a money warehouse. The amount of coinage in circulation plus the receipt money always equals the total mass of metal in the monetary system. Rothbard refers to this as a “parallel standard,” but be careful to not confuse this with bimetallism1.  I have found that this is what people commonly mistaken as the “gold standard.”  I will refer to the above as the Austrian standard for simplicity.2
  • The “international” or “classical” gold standard is actually a form of fractional money. In simple terms, one can redeem paper or electronic currency for fixed amount of gold coinage; America was officially under this standard from the Gold Standard Act of 19003 until FDR outlawed and confiscated the gold of the people in 1933. The critical concept to understand here is that the monetary supply can be inflated or pyramided upon the total base amount of metal, which of course is conveniently possessed by the government. So, under the “classical” gold standard, if everyone decided to exchange their paper receipts at the same time, the country would be bankrupted; not enough gold would exist for everyone to redeem their receipts. When the United States executed the Gold Standard Act of 1900, the first step was for the government to procure a massive reserve amount of gold, so that everyone can be fooled or lulled into thinking that their gold can always be redeemed in full.4
  • The “gold bullion” standard is one of the systems Bernanke lumps together as the “interwar gold standard.” Under this monetary system, gold coins are never minted. Redemption in gold is only permitted in the case of large international transactions; the country’s populace is prohibited from ever possessing the actual money. [Rothbard, America’s Great Depression, p(190-1/409)]  The country can proceed to inflate for as long as they can fool the populace that the disparity between gold and their banknotes is acceptable.  In many ways, America existed under this unstable yoke from the FDR Gold Theft of 1933 until the Nixon closure of the international gold window in 1971.5 The American citizenry was not permitted to own gold coins and bars until 1975.
  • Under a “gold exchange” standard a country keeps no physical gold that can be redeemed. For reserves, only other “hard” receipt money from another nation that could ultimately be redeemed in gold is kept. The prime example of this is many European countries adopting the US dollar immediately following WWI.  Again, the country can proceed to inflate for as long as they can fool the populace that the disparity between the pegged “hard” currency and their banknotes is acceptable.
  • A fiat monetary system consists of money that is declared “legal tender” by a government with no commodity backing.  Fiat is Latin for “so be it” meaning money ordered into existence by a sovereign power. As Rothbard notes, if one examines both the “gold exchange” standard and the “gold bullion” standard closely, both are de facto fiat currencies as the people are in effect banned from possessing the backing commodity, gold.

Now what really happened in the early twentieth century? This must be understood before we examine Bernanke’s interpretation. Up until 1914, America and most European nations were on the “classical” gold standard.  China operated on a “classical” silver standard.  Then America brought the central bank known as the FED into existence in 1914 via the Federal Reserve Act of 1913. Next, to finance WWI, France, Holland, Germany, Britain, Belgium, and Italy broke off of the “classical” gold standard and issued paper money to finance their military spending deficits. Indeed, the four year long war would have only lasted months if the countries had remained on the gold standard, or had their paper debt been refused by countries like America! [Lips, 2001]

Amidst the ruined fields and cities, the inequities of Versailles led to Germany’s infamous Weimar hyperinflation of 1923, which was only one of many national currencies ravaged by hyperinflation. Germany, Russia, Poland, Austria, and other countries suffered greatly due to the lack of sound money; Weimar was ended by the introduction of the Rentenmark, which was tied to gold. [Evans, 2003]  However, on the side of the WWI victors (Britain, France, and Italy) was America with its gigantic horde of gold. American FED chairman Benjamin Strong massively inflated the dollar to prop up the Bank of England’s “gold bullion” standard, with no benefit to the American people whatsoever. This Great Inflation took place between 1921-1929 and the American monetary supply was inflated by 62%, or 7.7% annualized, as can be seen in the below table. As the table shows, this gushing spigot of credit was abruptly slammed shut by the FED at the end of 1928, and directly preceded the stock market’s infamous crash of 1929, as well as collapses in farm prices and commerce. In 1930, massive job losses gave way to many economists’ soothsayer prophesies of the future, including Lord Keynes’ “The Great Slump of 1930.”  [Note that several intervals  in the table are just 6 months. Rothbard, America’s Great Depression, p(128-209/409)]

In 1931 all hell finally broke loose. A cast starring JP Morgan, the Rothschilds, the Bank of England, the BIS, and the Federal Reserve Bank of New York attempted to avert the collapse of Kredit-Anstalt, Austria’s mega-bank. The attempt failed when France called in its loans issued to Germany and Austria, which had formed a customs and trade union on March 21. The effects of the trade collapse in Europe quickly crossed the Atlantic, and the FED and many American banks had bought up German debt, which had plummeted in value.  Germany and Austria fought like wolves to  cling to their “gold exchange” standard.  The final descent came on September 21 when the Bank of England abruptly left its “gold bullion” standard and depreciated madly, causing massive losses to French banks. Markets hemorrhaged and froze up, and bank runs and panics took place everywhere. [Rothbard, Depression, p(295-322/409)]

To make a long story fairly brief, President Hoover began the ill-fated government-assisted economy called the ‘New Deal,’ which FDR fanatically continued.  FDR ended the “classical” gold standard with his theft by force of America’s remaining coin bullion. On March 5, 1933, he cajoled the American public to return their gold coinage to the banks. On April 5, 1933, he made the private ownership of gold illegal and demanded that all remaining gold be surrendered to the government. The next step was obvious, as Milton Friedman and Anna Schwartz wrote in A Monetary History of the United States, 1867-1960, FDR devalued the dollar from $20.67 to $35.00 per troy ounce of gold to PARTIALLY account for all of the inflation that had occurred since 1914.  Those who were forced into giving their gold to the banks in March and April now realized a whopping 70% loss of their purchasing power, which had been stolen by the FED.  Those who retained their gold were now conveniently branded outlaws, and unable to legally use their gold as currency.  [Note: After the FDR confiscation order was passed, only ~20% of the outstanding gold coinage was returned, the rest disappeared.]  The statists’ rule by decree, or fiat rule, began to fully consolidate its grip upon the world.

America’s poor and middle class would languish in the throes of this ‘New Stupidity’ until WWII.  A few Misesian boom-bust cycles later bring us to the present-day, as President Obama readies his ‘New Stupidity Again’ stimulus plan.  As the Great Depression was to a large extent exemplified by high involuntary unemployment, one has only to look at the below chart to realize that FDR and Hoover were economic failures. Only until the war boom of 1942 would unemployment drop to pre-Depression levels.  [Of course, this “boom” assisted America, but destroyed much more of the industrialized world.  I’ve found that Henry Hazlitt explains the fallacies of the New Deal best in his Economics in One Lesson, chapters 4 and 8.] (2)

Now at long last we can refocus on Bernanke’s lies. In fact, he is fully cognizant of the FED’s role in causing the Great Depression. On November 8, 2002 he stated:

“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

However, in the same speech, a cascade of lies flows:

“The next episode studied by Friedman and Schwartz, another tightening, occurred in September 1931, following the sterling crisis. In that month, a wave of speculative attacks on the pound forced Great Britain to leave the gold standard.

As previously claimed, Great Britain had never returned to the “classical” gold standard, and instead had been propped up by the FED!  The “speculative attacks” were not speculative at all; they were committed by those who recognized that this Madoff-Ponzi scheme had failed!

“[In the 1920’s] countries that adhered to the international gold standard were essentially required to maintain a fixed exchange rate with other gold-standard countries. Moreover, because the United States was the dominant economy on the gold standard during this period (with some competition from France), countries adhering to the gold standard were forced to match the contractionary monetary policies and price deflation being experienced in the United States.”

Again, a blatant misuse of “gold standard”! The countries Bernanke is referring to were on the “gold bullion” or “gold exchange” standards, which are de facto FIAT!

“Friedman and Schwartz’s insight was that, if monetary contraction was in fact the source of economic depression, then countries tightly constrained by the gold standard to follow the United States into deflation should have suffered relatively more severe economic downturns. Although not conducting a formal statistical analysis, Friedman and Schwartz gave a number of salient examples to show that the more tightly constrained a country was by the gold standard (and, by default, the more closely bound to follow U.S. monetary policies), the more severe were both its monetary contraction and its declines in prices and output.”  (photo)

Friedman and Schwartz had no “insight” here! In fact they were blinded! Countries on the “gold exchange” standard were constantly devaluing their currencies by repegging to the dollar or the British pound, although they were correct in that FED dollar inflation secretly contributed to further debasement.

Bernanke in his 2004 speech “Money, Gold, and the Great Depression“:

“After 1918, when the war ended, nations around the world made extensive efforts to reconstitute the gold standard, believing that it would be a key element in the return to normal functioning of the international economic system. Great Britain was among the first of the major countries to return to the gold standard, in 1925, and by 1929 the great majority of the world’s nations had done so. Unlike the gold standard before World War I, however, the gold standard as reconstituted in the 1920s proved to be both unstable and destabilizing.”

He’s lying through his teeth! Great Britain never returned to the “classical” gold standard after 1914! In 1929, NONE of the countries that had left the “classical” gold standard returned to it! NONE ever would! Sure, he admits that the post-WWI “gold standard” did not work well, but he does not state the true reason why! The British pound, the German mark, the Italian lira, et cetera were all just fiat in disguise!

Here’s classic Bernanke:

“The existence of the gold standard helps to explain why the world economic decline was both deep and broadly international.”

Hogwash! First, WWI would have been greatly shortened and the economic decline would never have occurred if the world had not left the “classical” gold standard.  Second, we have already seen how the FED, Hoover, FDR, and especially the British lack of fiscal discipline widened the depth and breadth of the Depression, not the “gold standard”!

“If declines in the money supply induced by adherence to the gold standard were a principal reason for economic depression, then countries leaving gold earlier should have been able to avoid the worst of the Depression and begin an earlier process of recovery. The evidence strongly supports this implication. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which stubbornly remained on gold. As Friedman and Schwartz noted in their book, countries such as China – which used a silver standard rather than a gold standard – avoided the Depression almost entirely. The finding that the time at which a country left the gold standard is the key determinant of the severity of its depression and the timing of its recovery has been shown to hold for literally dozens of countries, including developing countries. This intriguing result not only provides additional evidence for the importance of monetary factors in the Depression, it also explains why the timing of recovery from the Depression differed across countries.”

Sorry for sounding like a broken record, but let’s continue. First, all the countries Bernanke mentions were not on the “classical” gold standard, just a weak fiat facade. For one of his key supporting pieces of evidence, Bernanke fails to complete a thorough eco-political study of China, including the theft of the populace’s silver by their government, and the MINOR detail that China was under massive upheaval and wracked by civil war in the mid-1920s, so they just MIGHT have been fudging some of their economic numbers. Comparing the Chinese economy with the likes of Britain and France in 1925 is as silly as comparing the Somalian economy with Japan’s in 2008.

In his 1990 NBER paper “The Gold Standard, Deflation, and Financial Crisis in the Great Depression,” Bernanke does reveal he is aware of the Genoa Conference of 1922 that promoted the “gold exchange standard.” It is also interesting that in 1990 Bernanke fairly consistently uses the term “interwar gold standard,” while in his recent speeches and writings he just uses “gold standard.” At no point does he clearly define the “interwar gold standard.” In fact, he even lists the League of Nations claim that by 1925, 28 of 48 major currencies were once again “pegged to gold.”

Maybe when this depression finally ends in the hyperinflationary death of a bunch more fiat currencies, I will write a paper to correct all the Keynesian and Friedmanite gaffes Bernanke and others continue to make. Hopefully, I can call it “How the Austrian Standard Cured Inflation and Stopped the Financial Crisis of the Greater Depression.”  I will be sure to correctly define the Austrian Standard first.


1 Bimetallism refers to a policy when countries fix a ratio of silver to gold, say equating 16 grams of silver to the same purchasing power as 1 gram of gold.  America used this type of monetary system during much of its early history.  The key problem with bimetallism is that differing international fixed ratios or even large supply-side changes will result in large outflows of metal, or attempted arbitrage, to make profits based on the ratio difference.  Roughly speaking, a kind of modern fiat equivalent would be the yen carry trade, which is based on foreign exchange rates and interest rate differences.

2 The Austrian School of economics follow the Misesian regression theorem, which succinctly states that for anything to become money, it must first have been chosen by the free market to serve as money. When this occurs, the gold or silver typically gains a monetary premium over other commodities.  [Block, 1999]  From a sound money purist’s point of view, the most obvious example of this is the monetary premium that the petrodollar receives as the world’s reserve currency. Gold and silver have unparalleled records as successful money across most of continents, culture, and time. One has only to research the Alexander’s Greeks, the Mayans, medieval Europe, imperial China, the Egyptians, British Empire, the Romans, and ancient Mesopotamia.

3 The Gold Standard Act of 1900 equated $1 USD = 0.048 troy ounce gold. At ~$850 per ounce, the dollar in December 2008 is worth a scant 2.4% of its’ 1900 value. On February 1, 2018, the price of gold per troy ounce is $1350, so 118 years later, the dollar is only worth 1.5% of its’ 1900 value.

4 The pro-FED forces were actually anxious to pass this law; it was a key step towards the Federal Reserve Act of 1913. By making gold the sole metal backing the currency, the pesky, harder-to-control threat of silver was formally vanquished. [Rothbard, The Case Against the Fed]

5 Federal outlays to pay for President Lyndon B. Johnson’s “Great Society” and the Vietnam War caused a massive debasement (or inflation) of the dollar, which resulted in other nations, most famously France, to redeem their dollar reserves for gold. ___________________________________________________________________________

Alan Greenspan, president of Greenspan Associates LLC and former Federal Reserve chairman, speaks at the Council on Foreign Relation in New York, U.S., on Wednesday, Sept. 15, 2010. Photographer: Jin Lee/Bloomberg

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense – perhaps more clearly and subtly than many consistent defenders of laissez-faire – that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other…

Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation.

“But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale…

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.  If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves…

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

– Alan Greenspan, 1966, “Gold and Economic Freedom


All those intent upon sabotaging the evolution towards welfare, peace, freedom and democracy, loathed the gold standard, and not only on account of its economic significance.  In their eyes the gold standard was the labarum, the symbol, of all those doctrines and polices they wanted to destroy. In the struggle against the gold standard there was more at stake than commodity prices and foreign exchange rates.

“The nationalists are fighting the gold standard because they want to sever their countries from the world market and to establish national autarky as far as possible. Interventionalist governments and pressure groups are fighting the gold standard because they considerate the most serious obstacle to their endeavors to manipulate prices and wage rates. But the most fanatical attacks against gold are made by those intent upon credit expansion. With them credit expansion is the panacea for all economic ills…

“The gold standard is certainly not a perfect or ideal standard. There is no such thing as perfection in human things. But nobody is in a position to tell us how something more satisfactory could be put in place of the gold standard. The purchasing power of gold is not stable. But the very notion of stability and unchangeability of purchasing power is absurd. In a living and changing world there cannot be any such thing as stability of purchasing power In fact, the adversaries of the gold standard do not want to make money’s purchasing power stable. They want rather to give governments the power to manipulate purchasing power without being hindered by an “external factor,” namely, the money relation of the gold standard.

“The main objection raised against the gold standard is that it makes operative in the determination of prices, a factor, which no government can control, the vicissitudes of gold production.  [This was true when Mises wrote this, but gold production has just about plateaued at 2%. – auth.]

The significance of the fact that the gold standard makes the increase in the supply of the gold depend upon the profitability of producing gold is, of course, that it limits the government’s power to resort to inflation. The gold standard makes the determination of money’s purchasing power independent of the changing ambitions and doctrines of political groups and pressure groups. This is not a defect of the gold standard; it is its main excellence. Every method of manipulating purchasing power is by necessity arbitrary. All methods recommended for the discovery of an allegedly objective and “scientific” yardstick for monetary manipulation are based on the illusion that changes in purchasing power can be “measured.” The gold standard removes the determination of cash-induced changes in purchasing power from the political arena. Its general acceptance requires the acknowledgement of the truth that one cannot make all people richer by printing money.  The abhorrence of the gold standard is inspired by the superstition that omnipotent governments can create wealth out of little scraps of paper…

“What the expansionists call the defects of the gold standard are indeed its very eminence and usefulness… The gold standard did not fail. The governments were eager to destroy it, because they were committed to the fallacies that credit expansion is an appropriate means of lowering the rate of interest and of “improving” the balance of trade… The struggle against gold, which is one of the main concerns of all contemporary governments, must not be looked upon as an isolated phenomenon. It is but one item in the gigantic process of destruction, which is the mark of our time. People fight the gold standard because they want to substitute national autarky for free trade, war for peace, totalitarian government omnipotence for liberty… The international gold standard works without any action on the part of governments.”

– Ludwig von Mises, Human Action, 1949.


Suggested Further Research List

Bernanke, Ben. “The Gold Standard, Deflation, and Financial Crisis in the Great Depression.” 1990.

Bernanke, Ben. “Money, Gold, and the Great Depression.” 2 Mar 2004.

Bernanke, Ben. “Deflation – Making Sure “It” Doesn’t Happen Here.” 21 Nov 2002.  The infamous “helicopter” speech.

Bernanke, Ben. “On Milton Friedman’s Ninetieth Birthday.” 8 Nov 2002.  Here Bernanke apologizes to Friedman for the FED causing the Great Depression.

Block, Walter.  Radical Privatization of the Gold Standard: A Critique of Friedman, Mundell, Hayek and Greenspan.” 1999.

Evans, Richard J.  The Coming of the Third Reich. 2003.  Pages 103-117 cover the Weimar hyperinflation.

Friedman, David.  “Gold, Paper, or… is there a Better Money?” 1982.  A Monetarist outlook from the son of Milton, but a worthy short read as he explores commodity, fractional, and fiat money from a different perspective.  I admit I threw my hands up when this fence-sitter concluded: “I will therefore continue to use the present system unless I can somehow arrange for everyone else to shift at the same time I do.”

Greenspan, Alan. Gold and Economic Freedom.” 1966. Interesting work from the Maestro prior to his conversion to inflationary Keynesian theory.

Hazlitt, Henry.  “Economics in One Lesson.” 1946.

Klein, Naomi.  “The Shock Doctrine: The Rise of Disaster Capitalism.” 2007.  A well-researched and damning critique of Friedman’s Chicago School, especially Jeffrey Sachs.  Klein makes a case for socialism, instead of Austrian economics.  She  raises an interesting debate for another article though: a statist government has been enriched, then overthrown (ie post-apartheid South Africa), how best to divide the wealth among the people?  I am also researching her work into the gold confiscation/sham the South Korean government pulled off during the Asian Financial Crisis of 1997.

Lips, Ferdinand. Gold Wars. 2001.  The late ex-Rothschild Swiss banker’s summary of the statist war against gold over the last 100 years.

Mises, Ludwig von. “Human Action: A Treatise on Economics.” 1966. Heavy duty reading, but is a classic of the Austrian school and Ron Paul.

Mises Institute.  “Congressman Ron Paul debating FED Governor Charles Partee.” 1983.  “The paper standard is bucking history, and it’s bucking economic law, and economic truth.” – Dr. Paul.  See 13:00.  Talk about fireworks!  It appears at one time the FED was willing to debate, I very much respect the courage of Partee to address the sound money wolfpack in attendance.

PBS. Commanding Heights: The Battle for the World Economy.”  A 6-hour movie on command-and-control governments during the last century.  Great summary, but there is a gaping hole as they almost completely fail to mention monetary systems and gold.  2002.

Rothbard, Murray N.  “America’s Great Depression.” 1963.

Rothbard, Murray N. “What has the Government Done with Our Money?1990.

Rothbard, Murray N. The Case Against the Fed.”  1994.

Andelman, David A.  A Shattered Peace: Versailles and the Price We Pay Today.  2008.  A very well researched book on the worldwide effects and consequences of Paris 1919 and Versailles.  Andelman is a CFR flunkie (I am no fan) but worthy reading never the less.  I just cringe whenever Andelman talks about the War on Terror today.  In his book, he places a lot of blame on the idealistic Woodrow Wilson and portrays the Yanks as clueless when confronted with the cunning Europeans.  Unfortunately, Andelman fails to realize America may be just as clueless today as we were in 1919.

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