UPDATE: Bernanke Defends Country's Break With Gold Standard

--Federal Reserve Chairman Ben Bernanke defends country's break with gold standard
--Gold standard can cause both inflations and deflations, Bernanke says
--Adds there are practical, policy problems with gold standard



WASHINGTON (Dow Jones) -- Federal Reserve Chairman Ben Bernanke on Tuesday defended the country's break with a gold standard at the first of his four lectures at George Washington University.

Bernanke explained to a packed lecture hall why a gold standard harmed the global economy during the Great Depression. Some recent critics of the Fed have pushed for a return to the gold standard, in which paper money is backed by gold. The U.S. was on the gold standard between the Civil War until the 1930s, and the tie was fully severed by President Richard Nixon in 1971.

The gold standard poses both practical and policy problems, Bernanke said. On the practical side, it can be a waste of resources to secure all the gold needed to back currency, moving it from South Africa to the basement of the Federal Reserve Bank of New York, for example, or as he put it, "all this gold is being dug up and being put back into another hole."

More significantly, a country on a gold standard will see more short-term volatility, Bernanke said.

"Since the gold standard determines the money supply, there's not much scope for the central bank to use monetary policy to stabilize the economy," he said. Bernanke noted the gold standard did not prevent frequent financial panics.

During the Great Depression, "policy errors" in the United States spread to other countries that were also on the gold standard, Bernanke said. Countries on the gold standard must maintain fixed exchange rates, making it easy for bad policies in one country to spread to another on the gold standard, he noted.

The gold standard can also cause both periods of deflation and inflation in the medium term, Bernanke said. If not "perfectly credible," the gold standard can be subject to speculative attack and ultimately collapse as people try to exchange paper money for gold. However, he did acknowledge that over decades, prices are very stable for countries using the gold standard.

Part of the reason the Fed failed in its managing of the Great Depression were its attempts to stay on the gold standard, he noted. One of Franklin Delano Roosevelt's most successful moves as president was to begin to take the country off the gold standard, he said.