Bernanke Rejects Gold Standard Federal Reserve Chairman, Ben Bernanke, rejected the idea that a return to a gold

standard is not on the cards. Previously, the outgoing World Bank head Robert Zoellick had also advocated a return to a gold standard. In addition, there have been press reports suggesting that some central banks have recently stepped up their purchase of gold for monetary purposes. Bernankes objections were essentially four-fold. Firstly, the standard would prevent adjustment of policy in response for shifting economic conditions. No matter how high unemployment rose, for example, under the strict adherence to a gold standard, monetary policy tools could not be used. Secondly, by participating in a gold standard, countries would be more vulnerable to developments in other countries. It would increase the transmission mechanism, leaving countries more sensitive to developments of other participants. Thirdly, Bernanke challenged the credibility of using the gold standard. Participants have to convince investors that they will sacrifice all domestic goals for the sake of maintaining the gold standard. This seems politically unfeasible. Lastly, Bernanke acknowledged that a gold standard did promote price stability over the long run. However, he noted that over the medium run, it sometimes caused periods of inflation and deflation. Apart from the theoretical difficulties, Bernanke cited practical difficulties as well. Essentially, he argued there is simply not enough gold in the reserves. Global currency reserves are valued at about $10.2 trillion. Central banks monetary gold holdings are roughly 31,000 tonnes. The value of that gold is about $2 trillion. Simple calculations suggest that it would require a 4-fold increase in the price of gold in order to bring the value of monetary gold to the value of the currency reserves. The fact that the possibility of a return to a gold standard is so remote does not mean that countries will abandon gold purchases. Not so long ago, central banks were net sellers of gold between 1990 and 2010. This year will likely be the third year of net purchases. However, the amounts of money seem so modest compared with the currency reserves that diversification away from paper money does not seem a very satisfying explanation. Status of rising powers seems to be a more compelling explanation than moving to any sort of efficient frontier of portfolio diversification.