Yesterday's Wall Street Journal carried a review of Federal Reserve Chairman Benjamin Bernanke's book, The Federal Reserve and the Financial Crisis. While we agree that the book probably doesn't address anything substantive, the review made a few errors itself. Naturally, we couldn't let that go by. . . .
Dr. Jeffrey Hummel makes a common error in his review of Benjamin Bernanke’s book on the Federal Reserve and the financial crisis. He states, “To his credit, Mr. Bernanke considers the merits of the classical gold standard, in which the dollar was fully redeemable for a specific quantity of gold.”
At no time in the history of the United States has the dollar ever been “fully redeemable” in gold or any other precious metal. The only currency fully redeemable in gold was the gold certificate. Silver certificates were redeemable in silver.
Prior to 1933, the United States Notes, National Bank Notes, Treasury Notes of 1890, Federal Reserve Bank Notes, and Federal Reserve Notes were convertible into gold, not redeemable. All of these except the Federal Reserve Notes were legally backed by government debt, bills of credit that the states are forbidden to issue, and the federal government lacks the authority to issue.
Federal Reserve Notes were supposed to be backed by the present value of qualified private sector industrial, commercial and agricultural bills of exchange representing hard assets, rediscounted by member commercial banks or purchased on the open market. These became debt-backed when the U.S. Treasury found a loophole in the Federal Reserve Act of 1913 to finance World War I, using the provision intended to retire the National Bank Notes and Treasury Notes of 1890 to back new Federal Reserve Notes and demand deposits with government debt rather than private sector assets.
There has never been sufficient gold or silver in the U.S. to meet the transactions demand for “money,” legally anything that can be accepted in settlement of a debt. Andrew Jackson’s Specie Circular, that prohibited the federal government from accepting anything other than gold or silver, triggered “Hard Times,” the depression of the 1830s. Negotiable contracts representing the present value of future private sector marketable goods and services — bills of exchange — have, until recently, comprised the bulk of the money supply.