Iron pyrite is better known as fool’s gold. I first saw some iron pyrite half a century ago. My parents had taken me 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.” 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 welfare-state 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.
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.”
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, yes. 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 — they 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, and 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 bassoonWhile 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.
August 1, 2005
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