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Bank of England's former deputy governor misleads about gold and credit creation

By: Chris Powell, Secretary/Treasurer, GATA

 -- Published: Monday, 8 December 2014 | Print  | Disqus 

Dear Friend of GATA and Gold:

In an interview today with Russia Today's Sophie Shevardnadze, Sir Howard Davis, former deputy governor of the Bank of England and former director of the London School of Economics, makes the most elementary mistake in his objection to restoration of a gold standard for currencies. That is, Davis says a gold standard "would radically reduce the amount of credit and would cause a worldwide depression that would make the 1920s look like a holiday."

But of course the amount of credit supported by a gold standard would depend entirely on the price established for currency convertibility into gold, a price that could be revised from time to time. While Britain's return to a gold standard for the pound in 1925 is now widely regarded as a deflationary mistake, it is because the pound's value in gold was set too high, at the parity in force prior to the First World War and the inflation caused by the war. If the gold price for convertibility was set high enough, a gold standard could support infinite money and infinite credit.

That was established by the famous trillion-dollar platinum coin idea in the United States a few years ago:

Of course gold revaluation allowing an increase in money creation and credit would be instantly recognized as currency devaluation, while, at present, central banks can create infinite money and credit and, with surreptitious intervention in the gold and commodity markets to suppress prices and thereby destroy markets, can prevent most people from figuring out how their money is being devalued. Is that really why a gold standard is so objectionable to Davis -- that it would make central banking a lot more transparent?

At least Davis acknowledges the occasional flaws of central banking and fiat money in regard to credit creation. "At times," he sais, "given the paper money basis of our economy, maybe we allow credit to expand too rapidly, and essentially the story of the last financial crisis was that. We allowed credit to grow too quickly. But there are ways of dealing with that, through interest rates, bank capital ratios, etc., which can constrain credit growth, and you don't need the really freezing shower of a gold standard to do that, which would destroy much of the world's economy."

But can central banks be relied upon to undertake in time the cautionary measures Davis cites, and to do it consistently?

Well, maybe someday, in a more virtuous era, they will, and allowing the money supply to be determined by the amount of a particular metal or two that can be dug out of the ground does seem awfully primitive.

But were the ancients so primitive in establishing such a metallic money system because they realized that anything more sophisticated requires perfectly mechanical virtue in administration and that, administered by mere mortals, a sophisticated system inevitably goes haywire as a result of human corruptibility?

And if today's central bankers have achieved the supreme expertise and disinterestedness required to administer a sophisticated system, why do they do nearly everything in secret, and why is the world's wealth constantly being siphoned upward away from the many and into the accounts of the very few?

Maybe Russia Today could interview Davis again and put such questions to him. In the meantime his interview is posted here:

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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