The gold standard does not hold a chance to see the light during Bernake's time. In summary :
Problems with the gold standard
· In a gold standard, the value of the currency is fixed in terms of a
quantity of gold.
· The gold standard sets the money supply and price level generally with
limited central bank intervention
· The strength of a gold standard is its greatest weakness too: Because
the money supply is determined by the supply of gold, it cannot be
adjusted in response to changing economic conditions.
· All countries on the gold standard are forced to maintain fixed
exchange rates.
· As a result, the effects of bad policies in one country can be transmitted
to other countries if both are on the gold standard.
· If not perfectly credible, a gold standard is subject to speculative attack
and ultimate collapse as people try to exchange paper money for gold.
· The gold standard did not prevent frequent financial panics
· Although the gold standard promoted price stability over the very long
run, over the medium run it sometimes caused periods of inflation and
deflation.
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