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Source link: http://archive.mises.org/1558/paul-greenspan-exchange/

Paul-Greenspan Exchange

February 12, 2004 by

Exchange following prepared remarks in the House Financial Services Committee, February 11, 2004.

Dr. Ron Paul: Thank you Mr. Chairman. Welcome Chairman Greenspan. I want to call attention to the committee that I certainly was pleased that you brought up the subject of deficits because deficits obviously do cause a problem. And you mentioned that deficits usually cause interest rates to go up. But, I also would like to suggest that deficits alone are not the problem because whether you borrow the money or tax the money out of the economy, it still puts pressure on the capital markets. So, deficits alone are not the problem. Big government, big spending – the amount that we spend here that really really counts. But, you said that deficits could – future expectations of deficits could raise interest rates and I certainly would agree with that. But, we all must remember that future expectations of the inflation rate and future expectations of the value of the dollar also can raise interest rates. Those are monetary policy causes and therefore the pressure or the emphasis or the blame for high interest rates that will come can’t be put on the deficit alone and has to be put on those who manage monetary policy.

Also, you warned on page seven that the printing presses won’t run indefinitely. You use the word indefinitely and that’s good. Because if they do run this fast indefinitely, will all know what will and can happen. So that’s good that eventually you will turn the printing presses off. But, for now you said we can be patient and that means we’ll just let the money flow and see what happens. Which I think is a risky proposition. But, you mentioned the condition of protectionism. You’re worried about protectionism, which I think is characteristic of all societies that destroy their currency. Especially when you have fluctuating fiat currencies, people yield to the temptations of protectionism. But, once again, there are different ways of bringing about protectionism. There are the tariffs. But, there’s also the competitive devaluations in the exchange rate of the dollar which is a reflection of monetary policy. But, my question is related a little bit to the wording of ‘indefinitely’ and ‘being patient’ because they’re arbitrary. They’re subjective and in January, your report, FOMC report, omitted two words; two words that were subjective and that was ‘considerable period.’ I find that very interesting and also very alarming, the amount of clout, the amount of power that we as a nation, that we as a committee have allowed to get into the hands of one or two individuals, or a committee. From the time the market was up to the release of that report the stock market lost $250,000,000 as a reflection of the concern about the dropping of two words.

Frederick Hayek was fond of saying that the managed economy was in danger because it was based on a pretense of knowledge that certain things the economic planners don’t know. And, for instance, he would agree with me that we don’t know, you don’t know, the Congress doesn’t know what the overnight rates ought to be and that we reject the marketplace. But, its part of the system and I understand that. But, doesn’t it ever occur to you that maybe there’s too much power in the hands of those who control monetary policy? The power to create the financial bubbles. The power to maybe bring the bubble about. The power to change the value of the stock market within minutes. That to me is just an ominous power and challenges the whole concept of freedom and liberty and sound money.

Alan Greenspan: Congressman, as I’ve said to you before, the problem you are eluding to is called the conversion of a commodity standard to fiat money. We have statutorily gone onto a fiat money standard and as a consequence of that it is inevitable that the authority, which is the producer of the money supply, will have inordinate power. This is one of the reasons why I’ve indicated, because of that and because of the fact that we are unelected officials, it is mandatory that we be as transparent as we conceivably can and remember that we are accountable to the electorate and to the Congress. And the power that we have is all granted by you. We don’t have any capability whatsoever to do anything without the agreement or even the acquiescence of the Congress of the United States. We recognize that and one of the reasons I’m here today is to endeavor to convey why we are doing what we are doing, and I will continue to do that and I’m sure that all of my colleagues are fully aware of the responsibility that Congress has given us. I trust that we adhere to the principles of the Constitution of the United States more so than one would ordinarily do.

{ 31 comments }

David Heinrich February 12, 2004 at 3:54 pm

The real tragedy is that Greenspan actually used to be an Austrian economist (there’s an audio lecture on it at Mises.org). Then, realizing that that’s no way to advance in politics, he started down his current path. I don’t think he actually believes most of the humbug that he says, or that his policies are good. I think he understands exactly why and how they’re harmful. Maybe he’s worse than most politicians, because not only is what he’s doing harmful, but he knows it’s harmful.

If Greenspan really wanted to help this economy, he’d recommend we go to the Gold Standard, which I’m sure he knows would be beneficial. Obviously, he doesn’t.

Alessandro Catanzano February 12, 2004 at 5:31 pm

Greenspan, like Galbraight and Freidman, know very well what they say, what they teach, what they do. Because they know very well austrian theory. The real problem is people, once more
careful to money and save. Today only unbacked colored paper counts.

Brian Gladish February 12, 2004 at 9:26 pm

I believe that Greenspan once told Dr. Paul that he had not changed his ideas on gold. If one takes him at his word, the article at this link might explain his actions: http://www.gold-eagle.com/editorials_02/heller052102.html

Farfetched, but entertaining. If it is true, I don’t think that history will treat Greenspan kindly, as the ensuing chaos could sweep away what is left of Western Civilization. This kind of game is best left for romantic novels where the outcome is controlled by the author.

DSpears February 15, 2004 at 10:45 am

The Gold standard is a fool’s paradise. While a pure Gold Standard may work in theory, in practice it has always ended up working just like the “fiat” system where all money is denominated not only in gold but in every other good and service. Actually in practice it works much worse.

Milton Friedman (from “Capitalism and Freedom”): “My conclusion is that an automatic commodity standard is neither a feasible nor a desirable solution to the problem of establishing monetary arrangements for a free society. It is not desirable because because it would involve a large cost in the form of resources used to produce the monetary commodity. It is not feasible because the mythology and beliefs required to make it effective do not exist.”

Milton Friedman studied this subject in detail for most of his professional life. I will defer to him.

David Heinrich February 15, 2004 at 11:38 am

DSpears,

Milton Friedman is a Statist, not an advocate of freedom. It’s thanks to Milton Friedman that we have tax-witholding. So, let’s not refer to him on any matters regarding freedom (David Friedman, on the other hand, is an advocate of freedom).

Simply because Milton Friedman studied the subject for most of his life does not mean he’s right. Rothbard also studied the subject for most of his life, and concluded differently. David Friedman, though not opposed to fractional reserve banking like Rothbard, also disagreed with Milton Friedman. The simple fact is that when we’ve had a gold standard, it has worked. Milton Friedman is just making excuses for The State’s irresponsible use and creation of the printing press.

When people have been given a choice, they have chosen the Gold Standard (and the Silver Standard). That’s because if you eliminate The State’s monopoly on printing money, no-one is going to want unbacked pieces of paper; they will want notes redeemable in defined weights in gold. This eliminates the problem of rampant inflation. You can’t “print out” gold. It needs to be discovered, and the requires resources and time. There could still be gradual and sporadic inflation, as gold-mining companies discover gold. However, it would basically be insignificant, and due to the sporadic nature, the market would be able to correct itself (eliminating the minor mal-investments) on a regular basis; mal-investments would not build up over many years. Also, currently, Gold is being taken out of the monetary supply as fast as it’s being put in, due to the use of gold in electronics and other technological areas.

Milton Friedman’s criticism about the resources required to produce the commodity is hogwash. Firstly, any resources used pale in comparison to the effects of the government-created business cycle. Secondly, all coins made would be made because the free market demands it. Thirdly, Milton Friedman erroneously assumes that everyone would do day-to-day transactions in gold. In reality, people would use bank-notes redeemable in gold (because they’d be freely redeemable, this fixes the problem of banks issuing notes for Gold they don’t have, because other banks would demand redemption). People would also use credit and debit-cards, as they do today, except units would be in gold, not dollars.

Of course, all of this stems from the fact that “Milton Friedman and ‘Justice’ do not belong in the same sentence. The gene for ‘Justice’ is missing.’” Milton Friedman has little regard for the actions people freely choose to do on the free market, nor the commodities they voluntarily choose to use as standards. Milton Friedman, through his Statist career, has served to help make the government more efficient in eliminating liberty. This may be an uncharitable characterization of Friedman, given that he has also supported freedom in various areas; however, the good that a man can do is far outweighed by the evil that he can do. See Milton Friedman Unraveled at http://mises.org/journals/jls/16_4/16_4_3.pdf.

Alex February 15, 2004 at 12:42 pm

I scratched my head at Friedman’s comment.

I do not understand why (assuming his arguement is correct) we would need to have a lot of gold circulating around. I’m guessing this is what he’s arguing for – a certain level of gold in the economy. If he weren’t, he would not be making this comment.

Friedman should know better than to say that. There is no ‘optimum’ level of money in society; there is only very rapid deflation or inflation that we have to worry about. Given that rapid *inflation* of gold is something that he himself admits would be an unlikely event, we’re out of the clear for rapid inflation (and business cycles).

On rapid deflation; if we were to get rid of the fiat system that we have, I would be led to believe that the price of gold would go up (as it has been for quite some time) making it worth more, and lowering prices.

An X amount of gold in a certain country is irrelevant because there is no ‘best’ amount of a given set of money that a country uses. Also, as Mr. Heinrich has stated, people use bank notes for gold held in reserves in their banks.

What an incredibly off statement from a professor of economics.

DSpears February 15, 2004 at 4:31 pm

“The simple fact is that when we’ve had a gold standard, it has worked.”

When exatly did this happen and what do you mean by “worked”? The history of the Gold Standard is hardly marked by price stability, in fact just the opposite. So I’m curious when this period was and why, if it worked so well, it was so easily cast aside by the entire world, never to be considered again.

Inflation and deflation have happened with and without a Gold Standard because all currency IS fiat currency. The gold standard simply imposes a false sense of security.

Reagrdless, it’s not coming back any time soon so this is an irrelevant discussion.

Walt Byars February 15, 2004 at 6:07 pm

fiat n.
1.An arbitrary order or decree.
2.Authorization or sanction: government fiat.

Monetary commodities arose out of the free market. Instead of reading Friedman’s pseudo-economics, read Mises’ The Theory of Money and Credit if you want to see whether or not all currency is Fiat currency. It would also be a good idea to read this article:

http://mises.org/fullarticle.asp?control=1333&id=65

And who cares about price stability? It can never be achieved. The general price level is a representation of nothing. The best discussion of this issue is Roger Garrison’s

“Second, even if we allow ourselves to abstract from individual price changes and think in terms of price levels, an elastically supplied currency will not eliminate the need for costly price adjustments. Consider, for instance, a growing economy in which the real rate of interest is declining. Which price level should the monetary authority keep constant: the consumer price level, the factor price level, or the general price level (which includes prices of both consumer goods and factors of production)? If the consumer price level is kept constant, then factor prices will have to be continually adjusted upward as the rate of interest falls; if the factor price level is kept constant, then the prices of consumer goods will have to be continually adjusted downward; if the general price level is kept constant, then the prices of both factors of production and consumer goods will have to be continually adjusted so as to reflect the declining interest rate. There is no price level whose constancy will eliminate the necessity for economy-wide adjustments in individual prices.

“Economic growth does not consist in an across-the-board increase in the quantity of goods produced. It consists instead of increases in the quantities of some goods and decreases in the quantities of other goods, improvements in the quality of some goods, and the introduction of new goods. Growth-induced changes in the pattern of output are accompanied by corresponding changes in the pattern of prices. The fact that the price level calculated on the basis of the new pattern is lower than the price level calculated on the basis of the old pattern is strictly incidental. To the extent that each individual change in the pattern of prices can be attributed to non-monetary factors, the issue of monetary non-neutrality does not arise despite the fall in the price level.”

Also, we have never in our history, or in just about any nations history, had a government which did not mess with the money supply.

Walt Byars February 15, 2004 at 6:09 pm

Should say : The best discussion of this issue is Roger Garrison’s “The ‘Costs’ of a Gold Standard ”

http://www.auburn.edu/~garriro/g4gold.htm

David Heinrich February 15, 2004 at 6:14 pm

DSpears,

As long as the currency is in the control of The State — that is, as long as The State has a monopoly on issuing currency — there will be problems. When we had a “real” gold standard, problems occured because The State debased the gold coins. See What Has Government Done to Our Money? at http://mises.org/money.asp and Taking Money Back at http://mises.org/rothbard/moneyback.asp. Alternatively, problems could occur because The State simply confiscated all of the money.

Your assertion that “all money is fiat currency”, that is hogwash. Gold (and silver) are the monetary standards that the free market has chosen, when given the opportunity. Hence, as it is the money that the free market chooses, it is not fiat. Why you seem to think the standards chosen by the free market are “fiat” is incomprehensible to me, unless, of course, you think people had no good reason for choosing Gold and Silver as the monetary unit. Yet, there are many good reasons. For starters, you can’t print out gold or silver, they have to be discovered, which takes work. Thus, they are relatively buffered against inflation. Other qualities include maleability and divisibility, as well as a high value per unit weight.

As for why we’re no longer on the Gold standard, you can thank government intervention, such as the confiscation of all gold from citizens, and the prevention of citizens from owning large quantities of gold which existed when the government wanted to get on a completely baseless fiat currency. Today, The State forces us to recognize gold coins at face value, when in fact they are worth much more in their gold-weight. Contracts specified with Gold as the exchange medium are not upholdable in courts, and so-on and so-forth.

DSpears February 16, 2004 at 6:37 am

I’ve seen all the arguements, I’m just not compelled by them. I understand why gold was chosen as the commodity of choice, but the arbitrary (from a supply and demand of real goods and services standpoint)historical changes in it worldwide quantity have had drastic effects on the world economy, some good, some bad, but none that had any connection to real economic conditions. The period from 1897-1914 is a good example of a rapid expansion of the world gold stock. That period resulting in an increase in the quantity of money, was marked by some good (economic growth) and some bad aspects (inflation). Whereas the previous 15 years had been marked by deflation and economic instability becasue there wasn’t enough money to go around. Neither of these condidtions had anything to do with the supply and demand of real goods and services. The economic conditions in both periods were dictated not by the productiive potential of the economy but by the arbitrary supply of Gold.

The inherent value in gold, since it doesn’t crrently have significant demand as an industrial quantity (which could someday change and throw the system into chaos)is based purely on faith.

But a larger question for those that would label others as “statists” (I don’t know what that means but it appears to be some sort of ideological slur) how does a system that puts even more power in the hands of govenment (since in practice governments hold the largest reserves of gold) square with what appears to be a very anti-government belief?

What Milton Friedman, left-wing nutball that he is, has concluded is that money only has value because everybody who uses it believes it has value. It may be soothing to think that at any time I can trade my money in for “something with real value” but the value of gold is only based on the fact that everybpdy believes it has value as well. So it’s a circular arguement. It’s all based on faith. Holding up that fascade just provides a false sense of security which lets the system be more easily manipulated by governments when nobody is paying attention (because they wrongly assume that the system is fol proof).

The big problem with the gold standard is that in practice it is always manipulated by the governments to produce the same outcomes as “fiat” currency. There are a myriad of reasons why this happens but it is a fact bourn out by the history of the gold standard.

This sounds a little like the arguement that communism only failed because evil men kept getting in charge. The mis-application theory. Actually communism failed because it required absolute government power. It was failed idea, not a failed application.

I feel the same way about the gold standard. Does that make me a “statist”? Should I feel dirty?

Don Lloyd February 16, 2004 at 7:38 am

From Greenspan via Garrison via Skousen:

“Allowing the state to create paper money is like putting a penny in the fuse box. The resource costs of the penny may be less than the resource costs of the fuse, but the total costs, which take into account the likelihood of a destructive fire, are undoubtedly higher.”

Roughly paraphrasing Mises, the primary virtue of a gold standard is the restriction in supply related to the profitability of producing gold.

But this cannot be expected to function well in the short term if the current price of gold has moved far above its cost of production or if the central banks hold substantial gold that they are willing to at least threaten to sell, serving as potential and actual gold suppliers with an effective zero cost of production.

Regards, Don

Walt Byars February 16, 2004 at 9:07 am

DSpears- have you listened to anything that has been told to you? you obviously haven’t “seen all the arguements” because you just ignore them.

Were the government to be abolished, we would have the gold stadard. The Gold standard arose on the free market. Mises proved that the only way you can make people leave a commodity standard is through arbitrary fiat and govt. theft.

Who cares about price stability? what is wrong with deflation?

http://mises.org/daily/1298

See chapter 11 in Man, Economy, and State as well

And the more important thing is: It’s impossible for the government to ensure price stability, the general price evel means nothing. Read the article by Garrison

David Heinrich February 16, 2004 at 9:55 am

DSpears,

Price stability is not a good thing, and it is impossible to guarantee, as Walt showed. A Gold Standard works best when the government is completely divorced from money. That is, private banks issue their own bank notes, backed in gold. The possibility of bank-runs by other banks would prevent banks from issuing fraudulent notes, as they would go bankrupt.

People didn’t choose gold to be the monetary unit “on faith”. It was chosen because it was already highly valued, and had many useful qualities which make it extremely useful both as a commodity and as a monetary unit. Simply saying “money has value because people accept it” it a tautology, not an explanation of why it has value. See How does money acquire its value by Frank Shostak, at http://blog.mises.org/archives/paulgreenspan_exchange_001558.asp#comments.

In short, you are wrong to believe that The Gold Standard requires a more powerful government. In fact, by necessity, it dis-empowers the government. Your idea that the Gold Standard would put more power in the hands of the government is wrong, because the government already has most of the gold anyways, and as things currently are, it can print out money at will. You are also wrong to state that the gold standard created problems because “there wasn’t enough money to go around”. As Mises and Rothbard have shown, the specific quantity of money is completely irrelevant (so long as it is divisible, which gold is). It is only the expansion of contraction of the money supply by State action which is harmful.

statist — n. The practice or doctrine of giving a centralized government control over economic planning and policy. When referrign to a person as a Statist, one means he supports this kind of policy. No-one has accused you of being a Statist (I referred to Milton Friedman as a Statist, which, being responsible for the witholding tax, he obviously is). You simply have the incorrect notion that The Gold Standard means more State-power. In reality, what The Gold Standard wouldn’t be set in stone, but only enforced because that’s what people will most likely demand as money on the free market (though it’s perfectly possible that the Austrians could be wrong, and people would demand Silver, or Uranium, or Platinum).

DSpears February 16, 2004 at 11:29 am

“It is only the expansion of contraction of the money supply by State action which is harmful.”

If both expansion and contraction of the money supply is harmful, then the alternative is that there is a fixed amount of wealth in the world barring the discovery of more gold, correct?

That is the implied foundation of Marxism: In order for somebody to get richer, somebody else has get poorer. The zero-sum game.

“Were the government to be abolished, we would have the gold stadard.”

Were the government to be abolished, a whole lot of things could theoretically happen. An interesting discussion, but not relevant to the current situation.

David Heinrich February 16, 2004 at 11:57 am

DSpears,

I specifically referred to inflation caused by the government printing out money. The reason the government can do this is because they forced people off the gold standard, illegalized the holding of private gold, and refuse to uphold contracts in gold amounts. This is immoral, as it amounts to theft and robbery. Even if the inflation were only miniscule, that does not change the fact that it is theft. However, in reality, government-created inflation is, and always will be, so long as government controls money, major and continuous. This is what causes the business cycle.

In a gold-standard world, there would be nothing wrong with mining gold. It is a legitimate activity. The mining of gold requires significant time and resources, unlike the printing of dollar bills. Thus, the inflation created by it will be minor and discontinuous. Thus, the malinvestments are revealed quickly, and will not build up. Additionally, any malinvestments will be minor, as the inflation was minor. Also, unlike the creation of dollar bills, the mining of gold actually does make us richer. The expansion of the monetary supply, however, is not what does this. The reason mining gold actually makes us richer is because gold has very useful non-monetary functions. Dollar bills, on the other hand, do not. Furthermore, the amount of gold being taken out of the monetary supply and turned into electronics and jewelery will serve to partially or even completely counter-act the minor inflation of gold by mining.

Your comment that I think “In order for somebody to get richer, somebody else has get poorer. The zero-sum game,” is incorrect, and indicates your own flaws in thinking on monetary matters. Simply having a larger monetary base does not make us richer. If everyone woke up tomorrow with 10-million times as much money as they have now, it would not make anyone richer. Simply expanding the monetary base does not make anyone richer. When we talk about “richer”, what we really mean is purchasing power, or the power to purchase a higher standard of living. This does not come about by printing out more money; this comes about via capitalistic innovation, invention, and cost-cutting.

Cap'n Arbyte February 16, 2004 at 12:00 pm

DSpears,

There is no relationship between the quantity of money and the quantity of wealth. Wealth would still be created even if the quantity of money were fixed. The result would be lower prices.

Walt Byars February 16, 2004 at 6:39 pm

“That is the implied foundation of Marxism: In order for somebody to get richer, somebody else has get poorer. The zero-sum game. ”

Some people’s monetary incomes would go down. In fact, that is a requirement for other’s monetary incomes to increase. However – Real Income – increases as the amount of production increases. Ignoring things like the business cycle, people’s real incomes, in relation to others would vary exactly as they do were there “price stability”.

Also, when we say “gold” we really mean “whatever currency arises out of the free market”. It just usually happens to be gold

David Heinrich February 16, 2004 at 6:49 pm

Walt makes a good point. Austrians commonly assume that gold will be the commodity that arises out of the free market as the standard. However, it could be silver, plutonium, or anything else that has a high non-monetary value per unit weight and is divisible, and having other qualities that make for good money (like being difficult/costly to discover/produce). Though Rothbard vigorously defended “The Gold Standard”, what he was really defending was “whatever commodity the free market chooses as money”. In the olden days, nails were used as money, for they were very rare and valuable. When you burned down your house, you saved the nails aftewards. In prison camps during WWII, cigarettes were used for money (obviously, they’re a poor money, as they aren’t divisible and are easily destructible, but the soldiers made due with what they had).

Ken Evans February 16, 2004 at 9:17 pm

“An almost hysterical antagonism toward the gold standard is one issue WHICH UNITES STATISTS OF ALL PERSUASIONS (empahsis mine). 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 (emphasis mine).

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the “hidden” 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.”

Alan Greenspan, excerpt as reprinted from the book “Capitalism, the Unknown Ideal” Ayn Rand, 1966
====
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After a previous hearing before the House Banking Committee, Dr. Ron Paul asked Mr. Greenspan to autograph a copy of this article. While Mr. Greenspan was signing his name, Dr. Paul asked him if he would change anything.

Mr. Greenspan replied, “Not a word.”

I personally heard Dr. Paul tell this story.

At then end of Mr. Greenspan’s response to Dr. Paul’s most recent querry (as detailed at the beginning of this chain of messages) Mr. Greenspan stated that he is only doing what Congress has authorized. Sadly, he doesn’t speak out more as to the immorality of this un-Constitutional delegation of authority to ‘regulate the value thereof’ the country’s coinage.

David Heinrich February 16, 2004 at 10:14 pm

The case of Allan Greenspan is a real tragedy for liberty and capitalism, because he was such a strong supporter of sound and, more importantly, just monetary policy. One almost sympathizes with him. The parallels to a certain trilogy are evident. Perhaps like his fictional counter-part, Allan Greenspan will once again turn to righteousness and justice.

Adem Kupi February 16, 2004 at 10:14 pm

I believe unfortunately, that both Mr. Heinrich and Mr. Catanzano are correct. Greenspan knows damn well what he’s doing. It’s called STEALING by some.

In fact, it is the “skimming” of wealth through fraudulent money that creates a “zero-sum” economic situation. Because as soon as general prosperity increases, the low shenanigans of these crooks go into high gear.

It’s more complicated than simply printing money, because they are also pinning that money to interest-bearing bonds!

I think that many mainstream economists might be ignorant of this basic logic, but when you get to the highest levels, those guys have to know. It’s just a racket.

Brian Macker February 17, 2004 at 7:02 pm

DSpears,

You say, “If both expansion and contraction of the money supply is harmful, then the alternative is that there is a fixed amount of wealth in the world barring the discovery of more gold, correct?”

Quite simply, wrong. It is obvious you don’t understand the issues. Please read Rothbard’s “What has government done to our money”. It’s a two day read and will advance you immensely on the topic. It is available here online at mises.org.

Graeme Bird October 11, 2004 at 6:02 pm

Young Austrian sympathisers have this unfortunate habit of demonising those who should be their natural allies. I think this comes from the Austrian economists frustration at their colleagues in the economics proffession more generally. I think its just no use belittling Greenspan who is after all just doing the job he has been given. His job is to keep retail prices rising beetween 1-3% and to avoid recessions. Thats his unspoken requirements even if it isn’t all spelt out explicitly by law.

As Austrians and Austrian sympathisers we should be bringing these targets or at least one of them into question. And I think the experience of the 90′s with asset inflation gives us the empirical evidence that we need. Its true that Greenspan has recently been printing money like crazy. But this is because the asset boom of the 90′s has led to a situation where the real estate and stock markets could easily have crashed had he not had an easy money policy for the last three years or so.
We can see that the problem started in the 90′s and is not really the result of poor job performance on the part of Greenspan but the result of the goal of low inflation being the wrong one.

And in some ways this is our first time around. And some of us thought that low positive inflation might not be a perfect goal but that it would perhaps be good enough. As it turned out that assumption was wrong.

To figure out what we Austrians (or sympathisers) should be advocating as a medium-term goal (to make monetary policy better and to ready a nation for a 100% non-fractional reserve Gold Standard) we might ask ourselves how the various markets would work under non-fractional reserve Gold and then try and adopt policy which would mimic these results.
Well for starters we can say that under 100% Gold we would not expect the stock market or the real estate market to rise unless there was a drop in consumer prices. Because with the monetary base such a large fraction of the total money supply, and with velocity so low and stable the only way to create the extra purchasing power for a stock market rally would be for prices to drop. If prices were not dropping than the stock and real estate markets almost COULDN’T rise or if they could it would have to be on thin trading.

So I would suggest for the Fed to uncouple its monetary policy from consumer prices. We could set up a composite index for the stock and real estate markets taken together and the Fed should (in the medium run) try to use monetary policy to stabilise the composite index instead of retail prices.
The other thing would be to lift the discount rate up so high that Banks would only use this facility for emergencies. When the Fed wants to restrain the index it should simply raise the reserve requirement and when it wants to push the index up or stop it from falling it should release more cash.

In this way we would be smoothly moving to a position where we can just so seemlessly switch to the 100% non-fractional Gold Standard without enduring a crisis or even a recession. And I would argue that it would be superior policy in the interim.

I’ll leave folks to think through the implications of this policy change since this post is already too long.

David Heinrich October 11, 2004 at 6:38 pm

I do not consider Greenspan a “natural ally” by any stretch of the imagination; he was a “natural ally”, some 40 or 50 years ago, when he was a follower of Rand and was writing essays on the virtues of the gold-standard. However, no-more. What Alan Greenspan says is just a bunch of babbling nonsense, and amazingly everyone (except for Ron Paul) bows down in worship of the babbling wizard of oz, never looking behind the curtain. If Alan Greenspan was consistent with his Austrian roots, his first and only act would be to eliminate the Fed.

As for a strategy for moving to the gold standard, I like the strategy proposed by Rothbard in The Case for the Genuine Gold Dollar, which is essentially the plan promoted by Ron Paul.

Graeme Bird October 11, 2004 at 7:21 pm

What makes you think he’s changed. What makes you think he is not just doing the job thats been given him. Lets say you believe in the Gold Standard. Lets say he still believes in the Gold standard. But the Federal Reserve chairmans job isn’t to reinstitute the Gold Standard. So it wouldn’t really matter what his private views are. And we are have some ways to go before we would be politically ready to institute a Gold Standard. It hasn’t been even on the agenda since the beginning of Reagans first term.

The other thing is (and this is particularly true now that we are in the information age) there are very big practical problems with going back to Gold. If you do so prior to getting used to deflation you could get a very severe collapse in both the money supply and velocity. I think you definately would get this which is why I have suggestd these interim measures.

You have to realise for intelligent and non-committed third parties a single recession is a big price to pay for a change in monetary arrangements. And in any case what we have found is stable and free money doesn’t seem to be compatible with low inflation. Rather it seems that stability and total de-regulation is only realy going to work where you have more or less constant deflation. I’m listening to mises.org and I’m not hearing them make that point. In some ways they are under-selling the transitional problems but under-selling also just how well 100% non-fractional Gold should work in practice.

There seems to be things they are missing out which I’m trying to include here. If we are assuming low inflation than Greenspan and Friedman are right. And you practically need a government Gosplan just to stop this system from running off the rails. But if you are talking deflation as the norm than the whole deal should be so smooth and stable. Perfection itself. With all this elbowing of Friedman and Greenspan I am just not seeing these points being made.

Friedman has practically come over to the Austrian side and would come over perhaps if not for these transitional problems. I saw him suggesting on uncommon knowledge that the Fed should just keep the domestic monetary base stable. What this would mean is that you would have an active Fed until deflation kicked in and then after some time the Fed would be doing almost nothing (such would be the stability) and the situation would come to mimic 100% non-fractional Gold.

He’s your natural ally and if he disagrees with and doesn’t endorse the Austrians its because of real concerns and it strikes me its as much the Austrians fault as anyones.

David Heinrich October 11, 2004 at 10:02 pm

Mr. Bird,

Milton Friedman has said that yea, the gold standard is great, but it costs resources to dig up gold, so we shouldn’t have it. That’s hardly a respectable position to me. Friedman has also done other dispicable things, like supporting the with-holding tax, which allows the State to steal more money than it would ever otherwise be able to. I suggest Rothbard’s article on M. Friedman, Milton Friedman Unravelled. Of course, Friedman isn’t bad on everything — he is still, relative to the norm, a libertarian.

If Alan Greenspan hasn’t changed his mind, then the only conclusion can be that he is evil. What else do you call someone engaged in an immoral profession which involves systematic stealing and wealth-redistribution?

The idea that going to the gold standard isn’t feasible is nonsense. Think of it this way: what would happen if there was never again any inflation of the dollar? Well, the business cycle would end, people would generally become more wealthy, and prices would discontinue their never-ending rise. Of course, this halt in the printing of money would reveal real time-preferences, and malinvestments would be realized and liquidated. This is a good thing. The longer malinvestments occur, the worse — they are wasted resources, and wasted time. Reverting to the gold standard (per Rothbard’s plan) would have the same effect, except it is feasible (while anyone who believe it possible for the government to have control of the money-supply but not abuse it is clearly an idiot).

Graeme Bird October 11, 2004 at 10:40 pm

Well you see you are being so ideological that you are misrepesenting both mine and Mr Friedmans position. Yes Friedman said that and if you follow folks around enough you will see they will say a lot of things from time to time. As I’m sure you would know thats a poor argument against Gold because folks are digging up Gold all the time anyhow.

I just spent some time describing how 100% non-fractional reserve gold would work fantastically. I think you see I have some ideas about how it should work and how the most seamless transition would be possible. I sure have an emotional bias for this idea. Thats the whole reason I’m making these posts after all.

What I am saying is that the Austrians are both underselling the potential benefits AND the transitional problems. I’ve seen Rothbards and Pauls scheme and its not good enough since its hard to see how the transition could go without a recession. I would say a depression and the consequent rejection of the new arrangements by the electorate would then be likely. And it might be that such concerns were not relevant when Rothbard was in his heyday. But we have the information age now.

And in the information age a small amount of cash can be turned into an enormous amount of purchasing power at the moment which means there is a long way to fall when behaviour changes in accordance to what we would expect if we were under the more ideal system.

Now I never said that a Gold standard was impractical. In fact I said the opposite. You just read a little bit more carefully next time hey. Becuse I think I understand your (or should I say ‘our’) ideal system a little bit better than you. Otherwise you would have been a little bit more interested in grappling with what I actually did say.

Some time soon I may explain why I think that the Austrians are UNDERSELLING just how good this system should work.

David Heinrich October 11, 2004 at 11:32 pm

The way I see it, gaming the system to try avoid a depression is also a problem, for you’re just pro-longing malinvestments. That is, I was referring to the idea that transitioning back to a gold standard (par Rothbard/Paul’s plan) is impractical. The sooner malinvestments are liquidated, the better — and that means a depression; however deep the depression could be, it would be brief if the State allowed the free market’s natural corrective measures to occur without intervention.

We have recessions frequently, I don’t see why a recession to revert to a sound monetary policy should be so dreaded. It seems to me that to fear such is to fear the symptom more than the disease. The real problem is not when the unsustainable boom culminates in a bust. The problem is the unsustainable boom in the first place, the malinvestment of resources. In my view, the sooner and quicker and harsher these malinvestments are brought to an end, the better.

Now, from what I understand of your proposal, I have some concerns…however, let me first make sure that I understand you…

I hold to the correct, Misean definition of the words inflation and deflation. I consider deflation to mean a reduction in the monetary supply; that is, a reduction in the supply of monetary gold, or a reduction in the supply of dollars (e.g., if the State retires dollars). I consider inflation to mean an increase in the monetary supply; that is, an increase in the supply of monetary gold, or an increase in the supply of dollars. If you are speaking in different terms, then please tell me. Another classical definition of inflation is an increase in the supply of money without an increase in the demand for money (too much money chasing too few goods). The modern Orwellian redefinition of inflation confuses cause and effect, calling inflation “price-increases”.

Now, your plan’s aim is to take us from our current state to a completely 100% gold-standard. Do you also plan on a ban on fractional reserve depositing (which most Austrians consider fraud)?

From what I can see, it seems that you plan is as follows:

1. We are currently in a state of enormous inflation.

2. You would like to slowly reduce that amount of inflation. That is, you would like to slowly reduce the rate at which the State prints out money. Currently it is increasing the monetary supply at 20% per year (off the top of my head); so, you’d like to reduce it by say 5% each year, or something like such.

3. Once the level of inflation reaches 0%, we will then be in a non-inflationary environment. Thus, price-levels will tend to fall.

4. This is when you wish to convert from the fiat money to the gold standard, presumeably then implementing Rothbard’s plan.

Graeme Bird October 12, 2004 at 5:42 pm

You know you are dealing with a mindless ideologue when he replaces what you have said with his own assertions in order to shoot those assertions down. Your description of my plan has got nothing to do with what I actually said. Go read it again.

There is a couple of other mindless things going on here. “The correct Misean definition”. Whats that all about? I can use the Austrian usage as opposed to the current usage but its not going to change the conclusion. Presumably you knew what I was talking about when I said that Greenspan was expected to keep inflation at between 1 and 3%. So there was no confusion there right? Then all of a sudden you start getting snippy when I use deflation to mean the converse situation.

I’m not worried about going from a 20% growth in money supply growth to a 0% growth. And I’m not so worried about if you went from a 20% monetary base growth to a zero percent monetary base growth. I’m worried about what happens subsequently when the behavioural change kicks in after this point. It may be that the problem would be less serious than what I am imagining. But I can have no confidence that you have even grasped what I am talking about.

I want to point out something else that was just totally bizarre. When Milton Friedman worked on the with-holding tax America had already entered World War II. Now he couldn’t reverse this decision. He couldn’t have guessed FDR was going to hand over Eastern Europe to Stalin. He didn’t know they would keep the with-holding tax after the war and he has dedicated his life since then to reversing the trend towards bigger government. Maybe you didn’t know the context. This was a story of a bright young economist coming up with a good scheme to raise tons of money in an emergency situation, not of his own creation.

I would want to move as quickly as possible and at the least cost to a stable 100% reserve Gold. Recessions are costly if measured in terms of lost production. To me its a deadweight loss. I think you are misunderstanding the malinvestment problem or overestimating it. For sure if you were cruising along in a stable situation and then hoodlums with printing presses entered into a conspiracy with bankers and they started printing extra money and lending on fractional reserves. If they hadn’t been doing this previously but they were still loosely tied to Gold…………

Then what would happen is that there would be all this malinvestment; and an artificial boom, an excess investment in high order investment goods, and a parrallel speculative over-investment in real estate and the stock market.

But this is a different situation entire to what we would expect if we had been living with inflation ( i.e rising prices. Bugger it. I’ll use the definitions I’m comfortable with. You are just going to have to work around this. Stop being so politically correct.)

This is a different situation to what you would expect if you had been living with inflation for a very long time. A few malinvestments being written off is one thing. But to bankrupt virtually everyone who had recently borrowed money to buy a home is another situation altogether. Anyone who had bought an asset with borrowed money would suddenly see the World turn against him if this is not handled very carefully. Which means it would not be politically doable in the first place.

Premises.

1. Getting to where you want to go is better with a more politically doable strategy than a less politically doable strategy.

2. Getting to where you want to go at the cost of a slowdown is better than getting there at the cost of a recession.

3. Going from strength to strength and still moving toward where you want to go would be more politically doable and objectively better than either of the above.

4. MV=PQ where M equals Money supply, V is the velocity of money, P equals the price evel and Q is the quantity of goods produced. My assumption is that both M and P have got a very large way to fall AFTER the monetary base is stabilised. It could be that I am overestimating how far they have to fall. But nonetheless thats my premise.

I hope to regret the mindless ideologue barb. But what you should realise is that I have read all of Ayn Rands stuff and listened to every last audio file on the Mises.org site. So its just no use throwing it back at me since I hope to be pushing forward on some stuff that they may not have covered adequately or where I disagree. On the other hand I, like anyone else, can always get things wrong.

Graeme Bird October 12, 2004 at 5:50 pm

You know you are dealing with a mindless ideologue when he replaces what you have said with his own assertions in order to shoot those assertions down. Your description of my plan has got nothing to do with what I actually said. Go read it again.

There is a couple of other mindless things going on here. “The correct Misean definition”. Whats that all about? I can use the Austrian usage as opposed to the current usage but its not going to change the conclusion. Presumably you knew what I was talking about when I said that Greenspan was expected to keep inflation at between 1 and 3%. So there was no confusion there right? Then all of a sudden you start getting snippy when I use deflation to mean the converse situation.

I’m not worried about going from a 20% growth in money supply growth to a 0% growth. And I’m not so worried about if you went from a 20% monetary base growth to a zero percent monetary base growth. I’m worried about what happens subsequently when the behavioural change kicks in after this point. It may be that the problem would be less serious than what I am imagining. But I can have no confidence that you have even grasped what I am talking about.

I want to point out something else that was just totally bizarre. When Milton Friedman worked on the with-holding tax America had already entered World War II. Now he couldn’t reverse this decision. He couldn’t have guessed FDR was going to hand over Eastern Europe to Stalin. He didn’t know they would keep the with-holding tax after the war and he has dedicated his life since then to reversing the trend towards bigger government. Maybe you didn’t know the context. This was a story of a bright young economist coming up with a good scheme to raise tons of money in an emergency situation, not of his own creation.

I would want to move as quickly as possible and at the least cost to a stable 100% reserve Gold. Recessions are costly if measured in terms of lost production. To me its a deadweight loss. I think you are misunderstanding the malinvestment problem or overestimating it. For sure if you were cruising along in a stable situation and then hoodlums with printing presses entered into a conspiracy with bankers and they started printing extra money and lending on fractional reserves. If they hadn’t been doing this previously but they were still loosely tied to Gold…………

Then what would happen is that there would be all this malinvestment; and an artificial boom, an excess investment in high order investment goods, and a parrallel speculative over-investment in real estate and the stock market.

But this is a different situation entire to what we would expect if we had been living with inflation ( i.e rising prices. Bugger it. I’ll use the definitions I’m comfortable with. You are just going to have to work around this. Stop being so politically correct.)

This is a different situation to what you would expect if you had been living with inflation for a very long time. A few malinvestments being written off is one thing. But to bankrupt virtually everyone who had recently borrowed money to buy a home is another situation altogether. Anyone who had bought an asset with borrowed money would suddenly see the World turn against him if this is not handled very carefully. Which means it would not be politically doable in the first place.

Premises.

1. Getting to where you want to go is better with a more politically doable strategy than a less politically doable strategy.

2. Getting to where you want to go at the cost of a slowdown is better than getting there at the cost of a recession.

3. Going from strength to strength and still moving toward where you want to go would be more politically doable and objectively better than either of the above.

4. MV=PQ where M equals Money supply, V is the velocity of money, P equals the price evel and Q is the quantity of goods produced. My assumption is that both M and P have got a very large way to fall AFTER the monetary base is stabilised. It could be that I am overestimating how far they have to fall. But nonetheless thats my premise.

I hope to regret the mindless ideologue barb. But what you should realise is that I have read all of Ayn Rands stuff and listened to every last audio file on the Mises.org site. So its just no use throwing it back at me since I hope to be pushing forward on some stuff that they may not have covered adequately or where I disagree. On the other hand I, like anyone else, can always get things wrong.

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