by Ron Paul
ALAN GREENSPAN: Well, Congressman, you are raising the more fundamental question as to being on a commodity standard or another standard. And this issue has been debated, as you know as well as I, extensively for a significant period of time.
Once you decide that a commodity standard such as the gold standard is, for whatever reasons, not acceptable in a society and you go to a fiat currency, then the question is automatically, unless you have government endeavoring to determine the supply of the currency, it is very difficult to create what effectively the gold standard did.
I think you will find, as I have indicated to you before, that most effective central banks in this fiat money period tend to be successful largely because we tend to replicate that which would probably have occurred under a commodity standard in general.
I have stated in the past that I have always thought that fiat currencies by their nature are inflationary. I was taken aback by observing the fact that, from the early 1990s forward, Japan demonstrated that fact not to be a broad universal principle. And what I have begun to realize is that, because we tend to replicate a good deal of what a commodity standard would do, we are not getting the long-term inflationary consequences of fiat money. I will tell you, I am surprised by that fact. But it is, as best I can judge, a fact.
On February 11, 2004, I directly challenged Greenspan on his power.
RON PAUL: 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, yet we reject the marketplace. But it is part of the system. And I understand that. But doesn’t it ever occur to you that maybe there is 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 have said to you before, the problem you are alluding to is 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. And that is one of the reasons why I have 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 am here today is to endeavor to convey why we are doing what we are doing. And I will continue to do that, and I am sure that all of my colleagues are fully aware of the responsibility that the Congress has given us, and I trust that we adhere to the principles of the Constitution of the United States more so than one would ordinarily do.
Greenspan’s last appearance before the Financial Services Committee occurred on July 20, 2005. On this occasion, I pressed him hard about what kind of conditions would require him to reconsider the use of gold in the monetary system. Prefacing the question, I pointed out that central banks still hold gold, evidently on the belief that it does represent a monetary purpose. They hold no other commodities, and even though they have been selling gold over the years, there’s still a lot of gold held by the International Monetary Fund and the central banks.
RON PAUL: 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 dealing exactly with gold…. 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?
ALAN GREENSPAN: 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.
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 the monetary authorities is a clear indication that we recognize that excess of credit of liquidity creates inflation which, in turn, undermines economic growth. 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. Would it have been a question at least open in 1971, as you put it? And the answer is yes. Remember, the gold price was $800 an ounce. We were dealing with extraordinary imbalances, interest rates were up sharply, the system looked to be highly unstable and we needed to do something, and we did something. Paul Volcker, as you may recall, in 1979 came into office and put a very severe clamp on the expansion on credit. And that led to a long sequence of events here, which we are benefiting from up to this date.
So I think central banking, I believe, has learned the dangers of fiat money and I think as a consequence of that we’ve behaved as though there are, indeed, real reserves underneath this system.
So it looks like it will take high consumer price and producer price inflation for Greenspan ever to give token reconsideration to gold. In the meantime, I believe, many central banks of the world as well as the IMF will hold on to gold. What we are seeing is that the Western banks, the nations that have lived beyond their means, are selling gold at the same time the more growth-oriented countries in the East are buying gold.
As for his claim that central bankers were behaving as if on a gold standard, the record of the 1990s indicates otherwise, and the result is the catastrophe that began in 2008.
The message Greenspan was delivering in 1966 was quite different from his message and policy as Federal Reserve Board chairman. In one private conversation, he did acknowledge his association with Murray Rothbard but volunteered no value judgment. Maybe Rothbard had been a favorable influence on Greenspan, since it was during that time that the excellent article on gold and freedom was written.
In a way, it’s pretty astounding. After inflating the currency endlessly for every correction and every political crisis during his tenure, he claimed that he recognized the danger of how excessive credit of liquidity creates inflation. Now in the middle of possibly the greatest correction of credit creation of all history, Greenspan remains in denial as to his most significant contribution to the crisis. I would say that he never came close to achieving what he claimed—that he could get paper to substitute for gold when managed by wise central bankers. History will prove that goal is unachievable, and any sophistication in managing fiat currency may well delay corrections, but in doing so only allows a greater financial bubble to form. That’s what today’s crisis is all about.
Many libertarians had actually advanced the theory that Greenspan was still a true believer and wo
uld advance the cause of sound money and freedom when appropriate. I never thought that a possibility, and as time moved on, I became more firmly convinced that pragmatism, a philosophic position Ayn Rand hated, drove Greenspan. He visited the House Committee on Oversight and Reform on October 24, 2008, and was welcomed as a “distinguished” former Federal Reserve Board chairman.
This was the final word on Greenspan.
Most of his testimony was designed as an attempt to protect his reputation and to explain away his shortcomings as Federal Reserve Board chairman. His testimony was pathetic. He made the point that the computer programs that they were using to anticipate these problems were not well designed. The only reason there was an expansion of debt is there was an excessive demand for our debt; it was not a consequence of Federal Reserve Board policy. And to climax his arguments, he said that he did make a mistake, that indeed we did not have enough regulations on the market. In other words, create the conditions for malinvestment and compensate for them by having more government regulations. As the hearings were coming to a close, I could only conclude: Greenspan is not John Galt.
History will show that Greenspan, during his years as Fed chairman (1987–2006), planted all the seeds of the financial calamity that erupted in 2007 and 2008. For the same reason a disease cannot be cured by more of the germ that caused it, the inflation and debt accumulation of the Obama years will not inflate our way out of it. This depression will likely last and last. If the depression lasts a decade or more, its length cannot be blamed solely on Greenspan. That blame will be placed on the current Federal Reserve Board, Congress, the President, the Treasury, but above all on Keynesian economic policy, the same philosophy that gave us the Great Depression of the 1930s.
The economic downturn is the necessary correction of the artificial boom period produced by the central bank’s easy credit and artificially low interest rates. The duration itself is a consequence of the interference with the liquidation of debt and malinvestment and adjustment in prices of labor, goods, and services. It’s too much to ask politicians or bureaucrats not to centrally plan the economy, especially when the market is struggling to rectify all the mistakes that come as a consequence of the Federal Reserve Board policy.
CHAPTER 7
CONVERSATIONS WITH BERNANKE
I’ve since had several run-ins with Ben Bernanke. In fact, I’ve grilled him continually at every meeting of the Financial Services Committee, so that at least I know that he has heard another view. He became chairman on February 1, 2006. In an exchange with him on July 20 of that year, I questioned him in detail on the secrecy of the “plunge protection team”—the Working Group on Financial Markets that included the secretary of the Treasury and the chairmen of the Federal Reserve Board, the Securities and Exchange Commission, and the Commodity Futures Trading Commission—on some existing biases against economic growth, and the role of the Fed in the event of financial crisis.
Here is how the exchange went.
RON PAUL: I have a question dealing with the Working Group on Financial Markets. I want to learn more about that group and actually what authority they have and what they do. Could you tell me, as a member of that group, how often they meet and how often they take action; and have they done something recently? And are there reports sent out by this particular group?
BEN BERNANKE: Yes, Congressman. The President’s Working Group was convened by the President, I believe, after the 1987 stock market crash. It meets irregularly, I would guess about four or five times a year, but I am not exactly sure. And its primary function is advisory, to prepare reports. I mentioned earlier that we have been asked to prepare a report on the terrorism risk insurance. So that is what we generally do.
RON PAUL: In the media you will find articles that will claim that it is a lot more than an advisory group, you know, if there is a stock market crash, that you literally have a lot of authority, you know, to impose restrictions on the market. And we are talking about many trillions of dollars slushing around in all the financial markets, and this involves Treasury and, of course, the Fed, as well as the SEC and the CFTC. So there is a lot of potential there.
And the reason this came to my attention was just recently there was an article that actually made a charge that out of this group came actions to interfere with the prices of General Motors stock. Have you read that, or do you know anything about that?
BEN BERNANKE: No, sir, I don’t.
RON PAUL: Because they were charging that there was a problem with General Motors, and then there was a spike in GM’s stock prices. But back to the issue of the meeting. You tell me it meets irregularly, but there are minutes kept, or are there reports made on this group?
BEN BERNANKE: I believe there are records kept by the staff. These are staff mostly from Treasury, but also from the other agencies.
RON PAUL: And they would be available to us in the committee?
BEN BERNANKE: I don’t know. I am sorry, I don’t know.
RON PAUL: The other question I have deals with a comment made by one of the members of the Federal Reserve Board just recently. He made a statement which was a rather common statement made. He expressed a relief that the economy was weakening, mainly inferring that the weakening economy would help contain inflation. And I hear these comments a lot of times, the economy is too strong, and therefore we need a weaker economy. If this assumption is correct—would you agree that this assumption, that a weaker economy is helpful when you are worried about inflation?
BEN BERNANKE: Congressman, as I talked about in my testimony, we need to go to a sustainable pace. We need to have a pace which matches the underlying productive capacity; that will probably be a bit less robust than the last few years, because over the last few years we were also reemploying underutilized resources, and going forward we don’t have that slack to put to work.
RON PAUL: But if you accept the principle, as it seemed to be in this quote, that if you are worried about inflation, you slow up the economy, and then inflation is brought down, it is lessened, it infers that inflation is caused by economic growth, and I don’t happen to accept that, because most people accept the fact that inflation is really a monetary phenomenon. And it also introduces the notion that growth is bad, and yet I see growth as good. Whether it is three or four or five or six, if you don’t have monetary inflation, we don’t need to worry, because if you have good growth in the marketplace rather than artificial growth, that it is this growth that causes your productivity to increase. You have an increase in productivity, and it does help bring prices down, but it doesn’t deal with inflation.
And I think what I am talking about here could relate to the concerns of the gentleman from Massachusetts about real wages. There is a lot of concern about real wages versus nominal wages, but I think it is a characteristic of an economy that is based on fiat currency that is just losing its value that it is inevitable that the real labor goes down. As a matter of fact, Keynes advocated it. He realized that in a slump, that real wages had to go down; and he believed that you could get real wages down by inflation, that the nominal wage doesn’t come on and keep the nominal wage up, have the real wage come down and sort of deceive the working man. But it really doesn’t work because ultimately the working man knows he is losing, and he demands cost of living increases.
So could you help me out in trying to understand why we should ever attack economic growth? Why can’t we just say economic growth is good and it helps lower prices because it increases productivity?
BEN BERNANKE: Congressman, I agree with you. Growth doesn’t cause inflation; what causes inflation is monetary conditions or financial conditions that stimulate spending which grows more quickly than the underlying capacity of the economy to produce. Anything that increases the economy to produce, be it greater productivity, greater workforce, other factors that are productive, is only positive. It reduces inflation.
RON PAUL: Do you see our deficits that we produce—and that you have control on—as a burden to
the Fed in managing monetary affairs and maintaining interest rates as well as maybe even living with a lower increase in the money supply?
BEN BERNANKE: Well, in our short-term monetary policymaking, we are able to adjust for the conditions of fiscal policy, however they may be. I think fiscal issues are more important in the long-term sense because of the long-term obligations we have, for example, for entitlements. We have not found the fiscal situation to be a major impediment to our short-term management of monetary policy.
I suspected that Bernanke was a bit nervous during that exchange, and was unnecessarily close-lipped about issues about which he was surely well informed. He also struck me as taken aback to be dealing with such technical topics in public, and struggled to get beyond clichés about sustained paces and the like. Finally, he concluded in a way that we expect from a lifelong devotee of monetary expansion: no matter how bad the fiscal situation gets, nothing will serve as an impediment to the Fed.
