Forum Post: doug henwood on gold and the fed

SL: What's behind this idea that the Federal Reserve was the creation of a shadowy international conspiracy of bankers? And why should we be alarmed by people within Occupy Wall Street and the Occupy movement embracing that notion?

DH: Well, there are several reasons for that. First of all, just the history of it is at odds. There's a very nice book by James Livingston on the history of the emergence of the Federal Reserve and what he makes clear is that it was a project of many decades undertaken by the modern American ruling class: it was inseparable from the creation of the corporate form and complicated financial markets. But it was not the work of just a small group of people done at a meeting on an island off Georgia, as you see in some of the conspiracy theories, e.g., Eustace Mullins, a guy who wrote several books about the Fed for the neo-Nazi Liberty Lobby, which you often see quoted by left populists as well. Any time you see Eustace Mullins or the likes of him quoted, you have to be very, very careful.

But the agitation for the creation of the Federal Reserve was in large part a result of the intense instability of the late 19th century economy, which went through crazy boom and bust cycles, and had many, many deep panics and depressions, and the central bank was supposed to be a force for stabilizing that. I think it's hard to argue with that. We may not like the class content of that agenda, but a more stable economy is better for just about everyone, and not just the corporate class.

In the present, the Federal Reserve did some pretty questionable stuff during the financial crisis, handed out a lot of money in very unaccountable ways -- and I'm certainly no fan of that. And I would be a fan of auditing it to see where all the money went and who benefited and why. But, on the other hand, it is about the only force for stimulus in the world economy today. Ben Bernanke is about the only economic policy maker of any significance who thinks that the economy needs more stimulus and not austerity. He has actually been talking about the need for a more expansive fiscal policy, which is rather unusual for someone in his position. He and some of his colleagues have given speeches in recent months talking about high and chronic unemployment as a social crisis of the first order. They're saying things that you're not hearing anybody in Congress say. From what I'm told -- people who know people who know people who know Bernanke; it's a couple of levels of remove, but not too many -- he is afraid of being too explicit about calling for more stimulus because he's afraid of being bashed by the yahoos in Congress and the rightwing commentariat. But he made his academic reputation studying the Great Depression and financial markets in the propagation of the Great Depression and he is doing everything he can to try to prevent a rerun of that. There are many other things I'd like to see being done. I'd like to see a much more active jobs program, infrastructure investment, and all those kinds of fiscal things, but you're not going to get through Congress and the President doesn't even seem interested in pushing for those things even rhetorically. So Bernanke is about the only simulative game in town right now. It's unfortunate that a lot of people don't really understand that.

The Federal Reserve is an elite institution. It's the institution of a ruling class, there's no doubt about it. But taking it away and just throwing us on the mercies of the business cycle or the gold standard would be to throw us into a far more brutal regime than we live under right now.SL: Populism, both past and present, is fixated on gold. What's that about?

DH: That's an irony, because the old populists of the 19th century hated the gold standard, for reasons I mentioned earlier. It imposed a tremendous austerity and a general decline in the price level. Which is great if you're a bondholder because it means the value of your bonds is secure. But if you're a worker, that kind of austerity can be brutal. And especially true if you're a farmer or working in a commodity-producing industry, that can be deeply brutal.

But today's rightwing populists love gold. You see that Ron Paul and a lot of those libertarians who intersect with right populists in the Tea Party, but also in the margins of Occupy, want to get the state out of the money business. I'm somewhat taken aback to see signs around Occupy Wall Street that say abolish the Fed. A lot people who don't fully understand what this is all about have picked up on that. Ron Paul at least has a coherent political philosophy. He wants the state out of everything. He doesn't like the Federal Reserve, but he doesn't like Medicare or Social Security either. And that at least is a consistent position, even if it's not very congenial. He wants the state out of the money business. So if you get the Fed out of the money business, if you abolish the Federal Reserve, as he would like to do, he would like to replace it with the gold standard. Libertarians love the gold standard because it's a stateless form of money but also because the supply of gold grows at less than 2% a year. That means that the supply of money could only grow only about 2% a year.

SL: So you couldn't expand the supply of money in a pinch -- in a crisis, for example.

DH: Right. If you had a crisis, that would be absolutely verboten. Which is one of the things the Federal Reserve was created to do, to be more flexible in a crisis. Over the long term, just 2% a year means there's almost no room for any kind of growth if the price level is going to stay stable. It imposes an extremely austere standard. Now, we may want to think about the unsustainability of growth as we experience it now over the long term, for sure, but as long as we're under a capitalist system, slow growth is hellish and faster growth is a little better for the working class. If we want to get to a post-growth economy, we need to get to a post-capitalist economy. But that's certainly not what the likes of Ron Paul want to do.