Greenspan on the Gold Standard: 1966 vs. 2005Gary North - August 02, 2007
Iron pyrite is better known as fool's gold. I first saw some iron pyrite half a century ago. My parents had taken my to Central City, Colorado -- a wonderful tourist trap. It had been a gold mining town. There was a Silver Dollar Saloon. There was an old train in the middle of the town.
I bought a little boxed collection of rocks. Of course, they were called minerals. That made them more than rocks. In the box was a sample of iron pyrite. It really did look like gold to my untrained eye. It sparkled in the sun.
I was reminded of that trip when I read Jude Wanniski's extract from an exchange between Alan Greenspan and Congressman Ron Paul. Dr. Paul knows more about monetary theory than anyone else in Congress. He has sat on the House Banking Committee throughout his career.
I remember arriving as his newly hired Research Assistant in June, 1976. That was on a Friday. He had to hand in a minority report on a bill to extend America's support of the International Monetary Fund (IMF). I was assigned the job of writing it. It was officially due the following Tuesday, but he had been tipped off by an old-timer that a deadline for a minority report is always one day before the official deadline. So, I had until Monday morning to crank out something coherent for him to submit. I did it. Of course, the bill passed. President Ford, acting on behalf of William Simon, the Secretary of the Treasury, signed it into law. Simon hated the gold standard. I later heard him tell a group of us Republican staffers, "I reject your theology of gold." A nice phrase, that. You can tar and feather me with that phrase any time.
ALAN GREENSPAN, THEOLOGIAN OF GOLD
In 1966, Alan Greenspan, then under the wing of Ayn Rand, published an article on the gold standard. It appeared in her newsletter. She later reprinted it in her book, "Capitalism: The Unknown Ideal." The article was titled, "Gold and Economic Freedom." It began with this take-no-prisoners paragraph:
An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense -- perhaps more clearly and subtly than many consistent defenders of laissez-faire -- that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
That is the sort of rhetoric that never gets into academic journals. It also never gets into "The Federal Reserve Bulletin."
With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form -- from a growing number of welfarestate advocates -- was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state).
He understood that the gold standard after World War I was a phony, government-run ersatz gold standard that in fact minimized the use of gold by the public. It was a gold standard for central bankers, called the gold-exchange standard. Yet even this stripped-down model was more than the statists could tolerate.
Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.
The issue is government spending. Rather than tax directly, governments run deficits. When they cannot sell all the debt to investors, they sell it to their central banks, which create money to purchase this debt. This imposes a subtle inflation tax: the depreciation of money.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.
That was how Greenspan ended his article. It was a classic.
Fast forward 39 years.
ALAN GREENSPAN, LAPSED THEOLOGIAN
In the most recent Q&A session by the House Banking Committee, Dr. Paul reminded his colleagues of this article -- an unusual punishment, indeed, but not cruel.
Even you, in the 1960s, described the paper system as a scheme for the confiscation of wealth.... Is it not true that the paper system that we work with today is actually a scheme to default on our debt? And is it not true that, for this reason, that's a good argument for people not -- eventually, at some day -- wanting to buy Treasury bills because they will be paid back with cheaper dollars?....
And aligned with this question, I would like to ask something to dealing exactly with gold, is that: If paper money -- today it seems to be working rather well -- but if the paper system doesn't work, when will the time come? What will the signs be that we should reconsider gold?
These were reasonable questions. The depreciation of money since the creation of the Federal Reserve System in 1913 has been in the range of 95%, even using government figures. See the Inflation Calculator of the Bureau of Labor Statistics. (www.bls.gov)
This touched a sore point, I think, as evidenced by the fact that Greenspan momentarily grew clear.
Well, you say central banks own gold -- or monetary authorities own gold. The United States is a large gold holder. And you have to ask yourself: Why do we hold gold? And the answer is essentially, implicitly, the one that you've raised -- namely that, over the generations, when fiat monies arose and, indeed, created the type of problems -- which I think you correctly identify -- of the 1970s, although the implication that it was some scheme or conspiracy gives it a much more conscious focus than actually, as I recall, it was occurring. It was more inadvertence that created the basic problems.
No conspiracy, of course. That Roosevelt unilaterally confiscated the American public's gold in 1933 -- it was just inadvertent. That gold bullion remained illegal for Americans to own until 1975 was again inadvertent, no doubt. And as to the rumor that the FED has sold its gold through Germany through gold leasing -- why, perish the thought. And as for the long ballyhooed "independent audit" -- well, that would be necessary only if there had been a conspiracy. But there hasn't.
But as I've testified here before to a similar question, central bankers began to realize in the late 1970s how deleterious a factor the inflation was. And, indeed, since the late '70s, central bankers generally have behaved as though we were on the gold standard. And, indeed, the extent of liquidity contraction that has occurred as a consequence of the various different efforts on the part of monetary authorities is a clear indication that we recognize that excessive creation of liquidity creates inflation which, in turn, undermines economic growth.
"Liquidity contraction." That's a nice phrase. It sounds like the equivalent of "reduction in the money supply." That has not happened in my lifetime.
The Federal Reserve Bank of St. Louis has a published a table of annual rates of increase in various national currencies since 1992. Take a look. There are remarkably few minus signs in any of these numbers.
There is a chart of U.S. monetary expansion, published by Edward Jones Company. It is based on Federal Reserve figures. It is chart #3: the increase in M-2. From 1960 until 2002, in only one year, 1994, did it approach zero percent increase. In no year was there a decrease, or as Greenspan put it, "liquidity contraction."
Then Greenspan delivered his coup de grace:
So that the question is: Would there be any advantage, at this particular stage, in going back to the gold standard? And the answer is: I don't think so, because we're acting as though we were there.
This month, maybe. Next month? That's none of our business as citizens, which is why the FED delays the publication of a summary of the minutes of the FOMC (which sets monetary policy) for three weeks, and five years for the full set (we are assured by the FED) of minutes.
Alan Greenspan in 2005 is an intellectual caricature of what he was in 1966. He says that Congress and the public can trust the central bankers of the world because they are following monetary policy as if the world were on a gold standard.
Take a look at central bank monetary policy in 2001, in response to the looming recession, which ceased looming and hit in March, 2001. The chart includes the dollar and European money. The chart went ballistic.
The Maestro wants to direct the orchestra. A government- defined and enforced gold standard is much too inhibiting. As for a full gold-coin standard, where every holder of a receipt for gold, private (bank) or public (treasury) has the legal right to walk in and exchange his receipt at a fixed rate for gold coins, would drastically limit his ability to conduct.
That is the whole point of a gold standard. It restricts the ability of politicians and central bankers to manipulate the currency outside of very narrow range. It makes bean-counters and order-takers out of central bankers. It limits their creativity to inflate the currency at various rates -- the never contract the total supply of money.
Congress believes Greenspan, who speaks on behalf of all central bankers, as his remarks indicate.
Gold standard? Who needs it? Iron pyrite? Too old fashioned, too reminiscent of the real thing.
Computer money based on central bank reserves of government debt: that's what the nation needs.
Let the band play on! We know how competent it is. Not as good as this one. . . .
Oh! The drums go bang,
And the cymbals clang,
And the horns they blaze away.
McCarthy pumps the old bassoon
While I the pipes do play.
And Hennessey Tennessee tootles the flute,
And the music is somethin' grand.
A credit to old Ireland is McNamara's band.
Alan Greenspan (born March 6, 1926) is an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006. He currently works as a private adviser and provides consulting for firms through his company, Greenspan Associates LLC. First appointed Federal Reserve chairman by President Ronald Reagan in August 1987, he was reappointed at successive four-year intervals until retiring on January 31, 2006 after the second-longest tenure in the position.
- Once stock prices reach the point at which it is hard to value them by logical methodology, stocks will be bought as they were in the late 1920s not for investment but to be unloaded at a still higher price. The ensuing break could be disastrous because panic psychology cannot be summarily altered or reversed by easing money policies.
- The world of antitrust is reminiscent of Alice’s Wonderland: everything seemingly is, yet apparently isn’t, simultaneously. It is a world in which competition is lauded as the basic axiom and guiding principle, yet "too much" competition is condemned as "cutthroat." It is a world in which actions designed to limit competition are branded as criminal when taken by businessmen, yet praised as "enlightened" when initiated by the government. It is a world in which the law is so vague that businessmen have no way of knowing whether specific actions will be declared illegal until they hear the judge’s verdict—after the fact.
- "Antitrust", essay at the National Association of Business Economists (25 September 1961); published in Rand, Capitalism: The Unknown Ideal.
- Capitalism is based on self-interest and self-esteem; it holds integrity and trustworthiness as cardinal virtues and makes them pay off in the marketplace, thus demanding that men survive by means of virtue, not vices. It is this superlatively moral system that the welfare statists propose to improve upon by means of preventative law, snooping bureaucrats, and the chronic goad of fear.
- An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense—perhaps more clearly and subtly than many consistent defenders of laissez-faire—that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
- In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
- This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.
- We are obviously all hurt by inflation. Everybody is hurt by inflation. If you really wanted to examine who percentage-wise is hurt the most in their incomes, it is the Wall Street brokers. I mean their incomes have gone down the most.
- At a conference on inflation, Washington, D.C. (September 19, 1974). In Report of the Health, Education, and Welfare, Income Security, Social Services Conference on Inflation (1974), pp. 804–5.
- Since becoming a central banker, I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.
- Speaking to a Senate Committee in 1987, as quoted in the Guardian Weekly, November 4, 2005.
- I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I said.
- 1988 speech, as quoted in The New York Times, October 28, 2005.
- Sometimes misquoted as: "If I have made myself clear, I've misspoken."
- But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?
- Francis Boyer Lecture of The American Enterprise Institute for Public Policy Research, Washington, D.C., December 5, 1996 .
- Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.
- Testimony Before the Committee on Banking and Financial Services, U.S. House of Representatives July 24, 1998 .
- The reason there is very little support for the gold standard is the consequences of those types of market adjustments are not considered to be appropriate in the 20th and 21st century. I am one of the rare people who have still some nostalgic view about the old gold standard, as you know, but I must tell you, I am in a very small minority among my colleagues on that issue.
- Speaking to a Hearing before the U.S. House of Representatives' Committee on Financial Services in 7/22/1998 
- Intensive research in recent years into the sources of economic growth among both developing and developed nations generally point to a number of important factors: the state of knowledge and skill of a population; the degree of control over indigenous natural resources; the quality of a country's legal system, particularly a strong commitment to a rule of law and protection of property rights; and yes, the extent of a country's openness to trade with the rest of the world. For the United States, arguably the most important factor is the type of rule of law under which economic activity takes place. When asked abroad why the United States has become the most prosperous large economy in the world, I respond, with only mild exaggeration, that our forefathers wrote a constitution and set in motion a system of laws that protects individual rights, especially the right to own property. Nonetheless, the degree of state protection is sometimes in dispute. But by and large, secure property rights are almost universally accepted by Americans as a critical pillar of our economy. While the right of property in the abstract is generally uncontested in all societies embracing democratic market capitalism, different degrees of property protection do apparently foster different economic incentives and outcomes.
- Alan Greenspan (2004) The critical role of education in the nation's economy.
- American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.
- February 2004, in a speech praising the benefits of adjustable-rate mortgages.
- Rising interest rates have been advertised for so long and in so many places that anyone who has not appropriately hedged this position by now obviously is desirous of losing money.
- Novermber 2004 in a speech in Frankfurt.
- While local economies may experience significant price imbalances, a national severe price distortion seems most unlikely in the United States, given its size and diversity.
- Without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern.
- May 2005, Greenspan said in a speech that he did not believe there was a national housing bubble similar to the bubble in the stock market. But he said there was "froth" in housing and he called the pace of housing price increases unsustainable.
- A decline in the national housing price level would need to be substantial to trigger a significant rise in foreclosures, because the vast majority of homeowners have built up substantial equity in their homes despite large mortgage-market financed withdrawals of home equity in recent years.
- July 2005, in testimony to the House Financial Services Committee.
- [There are] signs of froth in some local markets where home prices seem to have risen to unsustainable levels.
- July 2005, in testimony to the House Financial Services Committee.
- That said, there can be little doubt that exceptionally low interest rates on ten-year Treasury notes, and hence on home mortgages, have been a major factor in the recent surge of homebuilding and home turnover, and especially in the steep climb in home prices. Although a 'bubble' in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels.
- Greenspan on June 9, 2005 .
- The resolution of our current account deficit and household debt burdens does not strike me as overly worrisome, but that is certainly not the case for our fiscal deficit, which, according to the Congressional Budget Office, will rise significantly as the baby boomers start to retire in 2008. Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances.
- History has not dealt kindly with the aftermath of protracted periods of low risk premiums.
- At a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 26, 2005 .
- If you get beyond the political rhetoric [and assembled a group to solve Social Security] it would take them 15 minutes. It would take them 15 minutes only because 10 minutes was used for pleasantries.
- I was aware that the loosening of mortgage credit terms for subprime borrowers increased financial risk. But I believed then, as now, that the benefits of broadened home ownership are worth the risk.
- September 2007, Greenspan's memoir The Age of Turbulence: Adventures in the New World.
- Well, first of all, the Federal Reserve is an independent agency, and that means, basically, that there is no other agency of government which can overrule actions that we take. So long as that is in place and there is no evidence that the administration or the Congress or anybody else is requesting that we do things other than what we think is the appropriate thing, then what the relationships are don't, frankly, matter. And I've had very good relationships with presidents.
- Cash is available and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this.
- December 2007, in an interview Sunday on ABC's This Week. Greenspan suggested the government should boost support to homeowners facing the prospect of losing their homes because their mortgages are resetting to higher interest rates.
The Age of Turbulence (2008)
- The need for values is inbred. Their content is not.
- Modern dynamic economies do not stay still long enough to allow for an accurate reading of their underlying structures.
- Chapter One, "City Kid", p. 36.
- It did not go without notice that Ayn Rand stood beside me as I took the oath of office in the presence of President Ford in the Oval Office. Ayn Rand and I remained close until she died in 1982, and I'm grateful for the influence she had on my life. I was intellectually limited until I met her.
- Chapter Two, "The Making of an Economist", p. 52.
- It's hard to overemphasize how important Ford's deregulation was. True, most of the benefits took years to unfold-rail freight rates, for example hardly budged at first. Yet deregulation set the stage for an enormous wave of creative destruction in the 1980s:...
- Chapter Three, "Economics Meets Politics", p. 72.
- Treasury Secretary Brady didn't like the Fed either. He and the president were friends and had a lot in common-both were wealthy, Yale educated patricians and members of Skull and Bones.
- Chapter Five, "Black Monday", p. 119.
- We generally did not talk about the stock market very much at the Fed.
- Chapter Eight, "Irrational Exuberance", p. 165.
- Of course, shedding the debt burden would be a happy development for our country, but it would nevertheless pose a big dilemma for the Fed. Our primary lever of monetary policy was buying and selling treasury securities-Uncle Sam's IOU's. But as the debt was paid down, those securities would grow scarce, leaving the Fed in need of a new set of assets to effect monetary policy.
- Chapter Ten, "Downturn", p. 214.
- I came to a stark realization: chronic surpluses could be almost as destabilizing as chronic deficits.
- Chapter Ten, "Downturn", p. 218.
- When trust is lost, a nation's ability to transact business is palpably undermined.
- Chapter Twelve, "The Universals of Economic Growth", p. 256.
- The Fabians laid the groundwork for modern social democracy, and their influence on the world would end up being at least as powerful as that of Marx.
- Chapter Twelve, "The Universals of Economic Growth", p. 265.
- In general, corruption tends to exist whenever governments have favors to extend, or something to sell.
- Chapter Thirteen, "The Modes of Capitalism", p. 275.
- Over the years I have had the most contact with Lee Kuan Yew, most recently in 2006, and have always found him impressive, even though we do not always see eye to eye. I met him first when he was George Shultz's guest at the famous (or infamous, depending on your perspective) Bohemian Grove, a male only bonding retreat among the redwoods of California.
- Chapter Fifteen, "The Tigers and the Elephant", p. 312.
- An area in which more rather than less government involvement is needed, in my judgment, is the rooting out of fraud. It is the bane of any market system.
- Chapter Nineteen, "Globalization and Regulation", p. 375.
- The probability of ten consecutive heads is 0.1 percent; thus, when you have millions of coin tossers, or investors, in the end there will be thousands of very successful practitioners of coin tossing, or stock picking.
- Chapter Twenty-Five, "The Delphic Future", p. 465.
- From the development of the textile loom two centuries ago to today's Internet, output per hour has increased fifty fold.
- Chapter Twenty-Five, "The Delphic Future", p. 471.
- Much of the securitization took the form of collateralized debt obligations (CDOs) with senior credit tranches certified by rating agencies as AAA. It was the failure to properly price such risky assets that characterized the crisis.
- We are going through a period with no precedent in American history.
- I know you think you understand what you thought I said, but I'm not sure you realize that what you heard is not what I meant
- Attributed to Greenspan by Rupert Cornwell, "Alan Greenspan: The buck starts here", The Independent, 27 April 2003, citing an unspecified Capitol Hill hearing. However, as Ralph Keyes notes in The Quote Verifier (2006, p. 233), "This popular tongue twister gets attributed to the obfuscator du jour." The earliest known print attribution is to Robert McCloskey, U.S. State Department spokesman, by Marvin Kalb, CBS reporter, in TV Guide, 31 March 1984, citing an unspecified press briefing during the Vietnam war.
- Earlier attributions include: "a high government official", Annual Report, North American Gas Tax Conference, Federation of Tax Administrators, 1967; Jerry Lewis (a sign pasted on the camera during a movie shoot), by Dick Kleiner, Hollywood Correspondent, Sumter Daily Item, Feb. 4, 1970; a sign on the desk of Suzanne Schroeder, collector of bureaucratic gobbledygook, AP wire story, Sarasota Herald-Tribune, July 3, 1973; Jack Nicklaus paraphrasing Richard Nixon, by Larry Dorman, The Palm Beach Post, Dec. 8, 1979; and "a Hollywood film director", by J.D. Douglas, The Third Way, 29 December 1977. Additionally, a thesis monograph by Michael David Katz, Georgia State University, 1973 is titled with the quote.
- On the back of the first Stealers Wheel album, a very similar statement attributed to band member Rod Coombes is found: "We know that you believe you understand what you think we said, but we are not sure you realize that what you heard is not what we meant." The album was released in 1972.
- See Richard Nixon: "Now, when individuals read the entire transcript of the [March] 21st  meeting, or hear the entire tape, where we discussed all these options, they may reach different interpretations, but I know what I meant, and I know also what I did"
Quotes About Greenspan
- If you look at the speeches he gave just before he left the Fed, it's pretty much “After me - the Deluge. I'm getting out while my reputation's intact”.
- If you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God.
- Greenspan doesn't get out of bed before examining the political consequences.
- I would not only reappoint Mr. Greenspan -- if Mr. Greenspan should happen to die, God forbid -- I would do like was did in the movie, 'Weekend at Bernie's.' I'd prop him up and put a pair of dark glasses on him and keep him as long as we could.
- [He is] one of the biggest political hacks we have in Washington.
- Greenspan's reaction with regard to the stock-market bubble has caused two more bubbles to grow: a real-estate bubble and a consumer-debt bubble... History will judge him one of the worst Central Bankers ever.
- Greenspan kept an eye on such fluctuations as the sale of vacuum cleaners in Cleveland to, as they say, " get a precise idea about where the economy is going," and of course he micromanaged us into chaos.
- Nasim Taleb, Antifragile - Things That Gain from Disorder, p. 126.
~ Alan Greenspan (1966)