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Grilling
the Maestro: Ron Paul Questions Alan Greenspan
by George F. Smith
 When
monetary matters have been left to the voluntary choices of market
participants, we’ve had a gold standard, little or no inflation, and a
thriving economy. Even a gold standard corrupted by the government
and fractional reserve banking, as we had in the 19th Century, promoted
vibrant economic growth while maintaining the purchasing power of the
dollar.
Money, whether fiat or gold, is subject to the same market forces as
other goods. If the supply goes up, the value of each unit tends
to come down. While lower prices for eggs and kidney operations
are a good thing, a lower price for money is not. Money’s price
is what it will buy; we certainly don’t want it to buy less.
Why, then, would anyone want to inflate the supply of money and
thereby lower its price? For the same reason a counterfeiter
would: the new money will let him buy things at current prices, without
requiring him to earn it first. Counterfeiting is an insidious
form of wealth transfer because the depreciation effect takes time, and
it is only after the new money has circulated will it put upward
pressure on prices. People whose incomes rise slowly or not at all
will bear the heaviest burden of the devalued dollar.
The Fed and the End of the Gold Standard
The great turning point in the history of the American dollar came with
the Federal Reserve Act of 1913, which established a Morgan-dominated
banking cartel with a monopoly on the issue of currency. For the
next 20 years we stayed on a government-regulated gold standard, and
people could still get their gold from banks if not too many of them
tried at once.
Then came the Crash and a recession and government’s attempts to pull
us out of it, making matters worse. More people started showing up
at banks asking for their money. When too many showed up, the
banks had to shut their doors because they couldn’t meet their
liabilities to depositors. As Dr. Timothy Terrell has succinctly
put it, “[t]he fractional reserve banking system, in which multiple
people have a claim on the same deposited dollar, made widespread bank
insolvency possible.” [1]
When Franklin Roosevelt took office in March 1933, he immediately
declared a banking holiday, forbidding people to make deposits or
withdrawals. On April 5, he issued an executive order
criminalizing the private ownership of gold, and on June 5 he signed a
resolution repudiating the gold clause in all private and
government contracts. For the first time in its history, the dollar
domestically was no longer tied to gold.
On June 12, 1933, the World Economic Conference opened in London at
which the gold bloc of remaining gold standard countries – France,
Belgium, Switzerland, Holland, and Italy – tried to persuade Great
Britain and the U.S. to restore the gold standard. The American
delegation to the conference, which included Secretary of State Cordell
Hull, approved the idea. But Roosevelt overruled them, saying
“the United States seeks the kind of dollar which a generation hence
will have the same purchasing and debt-paying power as the dollar value
we hope to maintain in the near future.” [2]
Translation: We want a currency we can inflate, but we promise we’ll
stop inflating soon, and after that there’ll be no more inflation.
The Fed Exists to Inflate
In December 2002, Fed Chairman Alan Greenspan compared the fiat
dollar’s performance to the gold dollar: “[T]he price level in 1929
was not much different, on net, from what it had been in 1800. But, in
the two decades following the abandonment of the gold standard in 1933,
the consumer price index in the United States nearly doubled. And, in
the four decades after that, prices quintupled. Monetary policy,
unleashed from the constraint of domestic gold convertibility, had
allowed a persistent overissuance of money.” [3]
Was this “overissuance” a deviation or did it follow approved
guidelines? If we check the Fed’s charter, we see that the
Federal Reserve is entrusted with furnishing “an elastic currency.”
[4] It doesn’t define “elastic currency,” but fiat money, in
the sense that it can be commanded into existence at will, suggests a
stretching quality that gold lacks.
The Bureau of Labor Statistics provides another picture of the Fed’s
inflation-fighting prowess. Check out their inflation calculator
and see how well the Fed has preserved the integrity of the dollar since
it opened its doors in 1914. [5] Then go to “How Much is That
Worth Today?” and run a few calculations there to see how well gold
did from 1800 to 1929. [6]
By chronically increasing the money supply, the Fed has all but
destroyed the dollar. Yet when Chairman Greenspan appears before
Congress, he comes in as a man showered with honorary doctorates from
prestigious universities for his outstanding service to our prosperity.
He is Alan Greenspan, KBE – Knight Commander of the British Empire –
since the Queen knighted him in 2002. [7] He is flatteringly referred to
as the Maestro, after the Bob Woodward biography of the same title. [8]
Ron Paul Fights For Sound Money
But Greenspan’s visits to Congress are not all trumpets and roses.
Sooner or later he has to face Rep. Ron Paul of Texas. Everyone
who puts in an honest day’s work owes Congressman Paul a debt of
gratitude for holding Mr. Greenspan to the standards of sound money.
Paul won’t change Greenspan – there’s no knighthood waiting in the
wings for a Fed chairman who repudiates central banking and champions a
free market – but at least he’s made to face strong ideological
opposition.
A short while ago LewRockwell.com published a transcript of the
congressional Q & A sessions between Paul and Greenspan held from
1997 – 2004. [9] As I read the material, I kept recalling
Murray Rothbard’s description of Greenspan as someone who “can be
trusted never to rock the establishment's boat.” In spite of his
now-famous 1966 article extolling gold [10], Greenspan, according to
Rothbard, is a conservative Keynesian, “[w]hich means that he wants
moderate deficits and tax increases, and will loudly worry about
inflation as he pours on increases in the money supply.” [11]
The Q & A transcript is rich with insights on what the
government’s banking monopoly is doing to us and how it hides its
misdeeds behind vague and complicated language. In its raw form,
however, the transcript is long for an article – almost 16,000 words
– and carries with it the ambiguities of face-to-face speech.
Mr. Greenspan’s political use of English further obstructs one’s
efforts at understanding.
The following sections represent my attempt to reduce the dialog to
essentials, though I did omit some topics, such as the discussion of the
Mexican peso. I’ve also added a few comments of my own. In
some cases, I thought Greenspan was so thoroughly cornered any comment
would be superfluous. Needless to say, what I’ve done is subject
to error, and I strongly encourage you to work through the original
transcript.
In Congress, March 1997
PAUL: We have talked a lot about the Consumer Price Index in an effort
to calculate our cost-of-living. But in reality aren’t we trying
to measure the depreciation of our currency? We’re looking at
prices, but we’re really dealing with a currency problem.
When we debase our currency we do get higher prices, but we also get
malinvestment, distorted interest rates, and increased deficits.
And are we looking at the right prices? At times we see inflated
prices in financial instruments.
Debasing the currency hurts some more than it does others. And a
few benefit from inflation of the currency. This raises serious
questions about our monetary policy.
We’ve had some famous economists who’ve told us to watch out for
people who talk about prices because they’re only distracting us from
the root cause of the issue, which is inflation of the currency.
GREENSPAN: Price increases are really the same thing as
depreciation of the currency.
There are lots of different measures of inflation. When we were
heavily industrialized, commodities such as steel and copper used to be
very good measures of inflation in the economy. Today, services
are far more relevant to the purchasing power of the currency.
PAUL: During the past 2 months foreign central banks bought $23
billion worth of our debt. Does Treasury Secretary Rubin have an
agreement with them that they help us out like that?
GREENSPAN: In spite of what you might have read, there is no agreement.
PAUL: Well, they’re accommodating us, whether there is an
agreement or not. And it seems as if you’re working to keep
interest rates from rising, to maintain our trade deficit. If we
had a perfect balance of trade, foreigners wouldn’t have all those
dollars with which to buy our debt and absorb our inflation. If we
had a balance of trade you’d have to raise interest rates.
GREENSPAN: There is no evidence that foreign holdings of U.S.
Treasuries materially affect interest rates in the long run.
July 1997
PAUL: In the past three months we had a stock price rise of 25
percent. If that trend continued stocks would be up 100 percent in
a year. Now, if that happened to commodities or the CPI you would
be doing something.
I would like to suggest that we should do something. There is an
awful lot of credit in the market causing malinvestment that will lead
to a correction. No one has repealed the business cycle, so
we’re headed that way.
Or perhaps you can reassure us otherwise. Maybe we shouldn’t
concern ourselves with excess credit and malinvestment. And
perhaps these stock prices are not an indicator similar to a Consumer
Price Index.
GREENSPAN: We spend a lot of time looking at various economic
forces, which we hope will tell us what is likely to occur in the near
future. We suspect there are things going on, but we don’t know yet
how important they are. But we are watching things very closely.
We want to create the kind of monetary policy that will keep this
expansion going on in a noninflationary way. That is what is
required to keep growth going.
PAUL: So you’re saying stock prices are a lot less important
than prices of commodities or consumer products?
GREENSPAN: Product prices are the most crucial. If you keep
them stable you’re likely to keep the others stable as well.
[ME: Product prices didn’t rise much during the 1920s, leading some
people to conclude there was no inflation – even though the Fed
increased the money supply from $45.3 billion in 1921 to $73.3 billion
in 1929. [12] Technology and productivity improvements
lowered costs, counteracting the increase in the money stock. As
Paul and Lehrman write, “a ‘stable’ price level was masking the
fact that inflation was going on and creating distortions throughout the
economy.” [13] The new money, of course, found its way to the
stock market and real estate.]
PAUL: In a comment to one of my colleagues, you sounded hostile or
fearful that wages might go up. I understand your concern.
Monetary inflation will be reflected in higher wages. But where
has the concern been about the escalation of stock prices? People
are expecting them to go up 30 percent a year. It’s only natural
that labor wants to share in all this new money.
GREENSPAN: Let wages rise – the more the better – as long as
they are real wages. It’s only when wages rise faster than the
rate of inflation that I have concerns.
PAUL: Real wages are down compared to 1971.
GREENSPAN: That’s a statistical problem, Congressman. I
don’t believe real wages are down since 1971.
PAUL: The workers in my district aren’t convinced it’s a statistic.
GREENSPAN: Let me put it this way: The productivity increases of
the ‘50s and ‘60s came to a dramatic end in the early ‘70s.
Productivity flattened out after that, until recently. We all
should be concerned about that, and I believe we are.
July 1998
PAUL: Mr. Greenspan, someone quoted you as saying you would
welcome a downturn in the economy to compensate for the surge and modest
growth we’ve experienced. Is it not true that in a free market
with sound money, you never welcome an economic downturn? But what
we’re hearing now is, when is the Fed going to intervene and turn down
the economy?
Wouldn’t a free market operate a lot better than the market we use
today?
GREENSPAN: When you have a fiat currency, which is what everyone
in the world has—
PAUL: You don’t have a free market.
GREENSPAN: You don’t have a free market. Central banks
determine the money supply, not the market. If you are on a gold
standard, then the system works automatically.
We are not on a gold standard because leaders of the 20th and 21st
centuries don’t want a market that functions in that manner. I
personally have feelings of nostalgia for the gold standard, but as you
know, I’m a very small minority among my colleagues.
PAUL: So we have to accept the downturns.
GREENSPAN: No, we don’t accept them or regard them as desirable.
Our goal is maximum sustainable growth in the economy. But maximum
growth in the short-run may not be sustainable in the long-run.
[ME: As Rothbard said, the establishment can trust him never to rock the
boat.]
February 1999
PAUL: Many economists view the price of gold as an indicator of
inflation. The higher the price goes, the greater the worries
about inflation and the value of the dollar.
You have said that central banks, who are the major holders of gold, are
willing to loan or sell gold in increasing quantities should the price
rise.
Since we are no longer on a gold standard, are central banks selling
gold to hold its price at a certain level?
GREENSPAN: No. They are selling gold for two reasons: one,
to reduce their storage costs for gold, and two, it’s considered a
poor asset to hold since gold does not yield any interest.
[ME: If it’s such a poor asset to hold and costs money to store,
why not sell all of it? But if they did that they wouldn’t have
any to sell when the price started to rise again.]
July 1999
PAUL: Mr. Chairman, in your opening statement you said we should be
especially alert to inflation risks. You admitted today as you
have done in the past that the business cycle of booms followed by busts
is not dead.
Since you took office in 1987, the money supply as measured by M3 has
shot up $2.5 trillion. The Consumer Price Index has gone up 44
percent. Capitalization in the stock market has gone from $3.5
trillion to $14 trillion.
It’s not a matter of anticipating that a problem might arise –
we’ve already created one, and we’re going to have to deal with it.
How are you going to handle it? In 1979 and 1980, under
similar circumstances, the Fed raised interest rates as high as 21
percent to save the dollar.
And why on earth would you want to stay around for this calamity?
I would think you’d want to get out while the getting is good.
GREENSPAN: Dr. Paul, it is not by any means clear that the
increase in money supply is reflected in stock prices. A lot
people assume it is, but the evidence is not clear.
PAUL: Excuse me, but in your 1966 article didn’t you argue that
the increase in money supply was indeed the factor that led to the
Depression?
GREENSPAN: No, that was not my argument. In 1927 we adopted
an easy money policy to swing the flow of gold in favor of Great
Britain. That policy was but one of the possible creators of market
speculation in 1928 and 1929. We don’t see anything like that
happening today.
We don’t know if we have a significant bubble at this time.
We do know that inflation is a monetary phenomenon but we don’t know
exactly what money is. It is not any of the M’s people use –
M1, M2, M3, MZM. They’re only proxies people use when they talk
about inflation. We have great difficulty identifying something we
can call true money.
[ME: I wonder if Greenspan would have the same trouble if we were
on the gold standard?]
February 2000
PAUL: Good morning, Mr. Greenspan. I see you have stayed on
the job in spite of my friendly advice last fall. At least you
remember the days of sound money, even if it’s only nostalgia, so
I’m pleased to have you here.
We have talked a lot about prices today, but for the sound money
economist the money supply is the critical issue. If you increase
the supply, you create inflation.
If we aim at a stable price level, we’re making a mistake.
Technology and other factors can keep prices contained, but if you’re
increasing the money supply we still have malinvestment, excessive debt
and borrowing.
Someone mentioned that the Fed might be too tight with money. I
disagree. The last quarter of 1999 might be historic highs for an
increase in Fed credit. Over the last three years the Fed has not
once been in the target range for M3. You went over it, in fact,
by $690 billion. Everyone likes it now because the bubble is still
growing. But what happens when it bursts? Can you
reassure me it won’t? Will M3 shrink?
GREENSPAN: Let me assure you we believe in sound money. We
believe if you have a debased currency you will have a debased economy.
As I’ve said earlier, the difficulty is defining what money truly is.
We have been unable to define a monetary aggregate that will give us a
reliable forecast for the economy. Until we find a reliable
“M” we will go light on the use of monetary aggregates for monetary
policy purposes.
PAUL: So it’s hard to manage something you can’t define.
GREENSPAN: It’s impossible to manage something you cannot
define.
[ME: When there’s no real money in the system, it’s hard to find
real money. But it does seem to let the ones in charge of creating
fiat money off the hook.]
July 2000
PAUL: I would like to get your comments on the Austrian free
market explanation of the business cycle.
My understanding of it is this: once we embark on a policy of creating
new money, which is inflation, we distort interest rates and cause
people to do dumb things. They overinvest, they malinvest, they
create overcapacity, and all of that has to be corrected.
In the 1920s, the Austrian economic policy explained what would probably
happen in the 1930s. The Austrians predicted the breakdown of the
Bretton Woods agreement. None of the Austrian economists were
surprised when Japan’s bubble burst in 1989.
We are now the biggest debtor in the world. We have a foreign debt
of $1.5 trillion, which is 20 percent of Gross Domestic Product.
Because of our current account deficit, we are now borrowing more than a
billion dollars a day to finance our prosperity.
My question is: Where do the Austrian economists go wrong?
GREENSPAN: I once attended a seminar given by Ludwig von Mises.
I am aware of the Austrian teachings and believe a lot of them are still
right.
The remarkable thing about the behavior of economies is they rarely
square with forecasts as much as one would hope they did.
Economists continuously struggle to understand which structure is likely
to move the economy in one direction or another. Their views
change from decade to decade. For instance, in the 1960s most
economists believed a little inflation was desirable. The vast
majority no longer hold that view.
PAUL: I was hoping you would say don’t worry about these
Austrian economists even if their past predictions did come true.
GREENSPAN: As I said, economies are difficult to forecast.
February 2001
PAUL: Mr. Chairman, you’re getting a lot of suggestions these
days about what to do with interest rates. That’s likely to
continue because I suspect we’re moving into – you don’t call it a
“recession,” but a “retrenchment.”
In many ways we have an unmanageable system, and that is the key to what
is happening in our economy.
You are continuously asked to lower interest rates. Let me remind
my colleagues that when somebody says “lower the interest rates”
they’re saying “inflate the money supply.”
If we concentrate on prices and find that the Producer Price Index is
satisfactory, for example, we neglect the fact that the money supply is
surging and causing a lot of mischief.
In your testimony today you talked about “excesses” and
“imbalances” and the need for “retrenchment.” In 1996 you
were justifiably concerned with “irrational exuberance in the stock
market.” Since then the money supply as measured by M3 has gone
up $2.25 trillion. The stock market has soared. I see the
imbalances as a consequence of excessive credit.
I don’t believe you or anyone can know what the proper rate of
interest is. Only the market can dictate that. I don’t
think you know what the proper money supply is. You admit you
don’t even have a good proxy for measuring the money supply, yet that
is your job.
Now you’re talking about monetizing other securities like state bonds
and foreign bonds. Isn’t it ironic that with a $5.7 trillion
debt we’re running out of things to buy?
GREENSPAN: But of that $5.7 trillion a large part is held in trust funds
of the U.S. government. The net debt is really $3.5 trillion, of
which the Fed owns more than $500 billion.
When we look at State and local securities to buy, we’re looking to
maintain the same degree of risk we have when we buy federal government
securities.
July 2001
PAUL: A few decades ago the Keynesians believed they could
eliminate the business cycle. Your conclusion was that they
can’t because they can’t control human nature. I agree with
you on that point.
You keep interest rates artificially low by increasing the money supply.
Human nature is such that businessmen will, under those conditions,
overbuild their businesses. In a recession, which we have now,
this has to be liquidated.
The hard money school says that when you manipulate interest rates, you
have made it a certainty that we will have a recession. And now
you’re trying to get us out of it by resuming the inflation, the
debasement of the currency. This sometimes works and sometimes
doesn’t. Right now it isn’t working.
GREENSPAN: As long as you have a fiat currency, which is a statutory
issue, a central bank should try to replicate what a gold standard would
do. Even when the gold standard was functioning close to its ideal
in the late 19th century, the economy still experienced business cycles.
These were very much like what we’ve observed in the last couple of
years.
Given the fact that we have a fiat currency and that is the law of the
land, we’re doing as good a job as one could do under the
circumstances.
[ME: It wasn’t the gold standard that brought on the business cycles,
but the banks’ practice of fractional reserve banking. As
Rothbard has explained, fractional reserve banks are inherently
inflationary. [14]
February 2002
PAUL: You said that Enron provides encouragement that the force of
market discipline can be counted on over time to foster a much greater
transparency. That’s exactly what the market does with money.
In 1979 and 1980 we saw sudden and rapid devaluations of fiat currencies
around the world. That was the market forcing transparency on us.
Do you see any corollary between the way the Fed runs the monetary
system and the way Enron operated?
GREENSPAN: Enron tried to imply that their earnings were much
greater than they really were. They tried to obscure the extent of
the debt they had. We’re not doing anything like that. I
hope your analogy is inappropriate.
PAUL: I guess we’ll all keep hoping.
July 2002
PAUL: I don’t think the Federal Reserve has done a good job
protecting the value of the dollar. Since you have been chairman
we’ve experienced rampant inflation of the money supply. We have
created $4.7 trillion worth of new money in M3. Since last January
it has gone up over $1 trillion. If you keep printing new money
the dollar can only go lower.
You once championed gold, and you know that gold has to be undermined if
fiat money is to work. Central banks dump hundreds of tons of gold
to make sure gold does not discredit their paper money. I think
there is a concerted effort to do that.
GREENSPAN: As far as the United States is concerned, we don’t do
it.
February 2003
PAUL: You mentioned in your speech last December that price levels
essentially remained stable under gold. But after we went off the
gold standard, prices rose ten-fold. Then you said when inflation
was out of control in 1979, monetary policy changed direction and
brought it in line. This gave you confidence that central bankers
had learned how to manage a fiat currency. Now your main concern
is deflation instead of inflation.
But I seriously question whether inflation is a dead issue. Over
the last 3 months Fed credit has gone up at the rate of over 28 percent.
Price indices such as the Consumer Price Index and Commodity Research
Bureau Index are rising. Gold is up 36 percent over the last 18
months. Oil is up 60 percent. Medical care costs are
skyrocketing, housing and education costs are going up. And all we
can do is print money.
You have lowered the discount rate 12 times and there’s still no sign
of good economic growth. When will you express a concern about an
inflationary recession?
GREENSPAN: We are still concerned about inflation. We seek
stable prices, and stable prices mean no inflation or deflation.
I would say the prices of gold and oil are war-related and not related
to monetary policy. The best statistics we have still indicate
very low inflation with no evidence of an acceleration.
We will continue to monitor the economy as best we can to make certain
we keep prices stable. They are stable now, and we hope to
continue that indefinitely into the future.
February 2004
PAUL: Mr. Chairman, does it ever occur to you that maybe there is
too much power in the hands of those who determine monetary policy?
You have the power to create financial bubbles, the power to change the
value of the stock market within minutes by the wording of a sentence.
GREENSPAN: Under our system of fiat money it is inevitable that
the producer of the money supply will have inordinate power. For
that reason, and because we are unelected officials, it is mandatory
that we be as transparent as we conceivably can.
Remember, the power we have is all granted by you. We can’t do
anything without the agreement or acquiescence of Congress. One of
the reasons I’m here today is to convey to you what we’re doing and
why. I’m sure all of my colleagues are fully aware of the
responsibility that Congress has given us.
PAUL: I agree that the responsibility is here in Congress.
July 2004
PAUL: In yesterday’s testimony you said inflation in the long
run is a monetary issue, but various factors affect inflation in the
short run. I contend that it’s a monetary issue anytime.
Yet our temptation here and with central banks is to focus on the
government’s measure of CPI. Once you increase the money supply
and thereby lower interest rates you’re going to lead investors and
others into making mistakes, even if consumer prices remain stable.
During the slowdown in 2000 and 2001 you inflated aggressively by
lowering interest rates to the unprecedented level of 1 percent.
But what has it accomplished? Manufacturing hasn’t recovered,
savings hasn’t recovered, the housing bubble continues, the current
account deficit continues to grow as our foreign debt grows, and
consumer and government debt are both rising.
Since fiat money has never survived for long periods of time, is it
possible that we’re at the beginning of the end of the fiat system
that replaced Bretton Woods 33 years ago?
Perhaps, as you said, we may have to address overall monetary policy,
both domestically and internationally, in order to restore real growth.
GREENSPAN: Once you go off a commodity standard and turn to a fiat
standard, it is very difficult to create what the gold standard did. Yet
we have tried to do just that. I’m pleased that we are not
getting the long term inflationary effects of fiat money. I am
surprised by that fact, but as best I can judge, it is a fact.
[ME: Over the past 90 years, the Fed has whittled the dollar down
to a nickel. A free market in money is our only hope. Thank
you, Ron Paul, for fighting for that vision.]
1
Inflation and Deflation, http://www.chalcedon.edu/articles/0309/030918terrell.php
2 The Case for Gold, Rep. Ron Paul and Lewis Lehrman, Cato
Institute, 1982, p. 130
3 Remarks by Chairman Alan Greenspan, December 19, 2002, http://www.federalreserve.gov/boarddocs/speeches/2002/20021219/default.htm
4 Federal Reserve Act, http://www.federalreserve.gov/generalinfo/fract/
5 Inflation Calculator, http://www.bls.gov/
6 How Much is that Worth Today?, http://www.eh.net/hmit/ppowerusd/
7 Knighthood for Fed’s Greenspan, http://archives.cnn.com/2002/WORLD/europe/09/26/greenspan.knighthood
8 Maestro: Greenspan’s Fed and the American Boom, Bob Woodward,
http://www.amazon.com/exec/obidos/tg/detail/-/0743205626/qid=1118538122/sr=1-1/ref=sr_1_1/102-8310335-8408140?v=glance&s=books
9 Questions for Greenspan, http://www.lewrockwell.com/paul/paul253.html
10 Gold and Economic Freedom, Alan Greenspan, http://www.321gold.com/fed/greenspan/1966.html
11 Making Economic Sense, Murray Rothbard, http://www.mises.org/econsense/ch83.asp
12 The Case for Gold, p. 125
13 Ibid., p. 124
14 What Has Government Done to Our Money? Murray Rothbard, Mises
Institute, 1990, p 48.
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