Greenspan on the gold standard

Fed Chairman – Alan Greenspan! In an interview with Fox Business: “We have at this particular stage a fiat money which is essentially money printed by a government and it’s usually a central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced,

Yes, it’s called Congress.

And right now, for the size govt we have, they are grossly over taxing us.

either a gold standard or a currency board, because unless you do that all of history suggest that inflation will take hold with very deleterious effects on economic activity… There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard.” And a further stunner: Greenspan himself wonders if we really need a central bank.

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49 Responses to Greenspan on the gold standard

  1. Henry says:

    Re: They tend to be romantics nostalgic for the good old days of a golden age gone-by.

    Gold bugs are almost invariably libertarians and conversely. Their ideals are more less plausible in an agrarian society composed mostly of small villages and towns, with a few market hubs. In particular, democracy is a fiction in the context of industrial societies comprised of immense agglomerations of heterogeneous populations. Democracy made little sense before industrialization, since quantity is meaningless in itself, and it makes still less sense in the context of the totalitarian quantification of industrial societies.

    Reply

  2. Lorne Marr says:

    The Gold Standard was left because of it’s inability co cope with economic recession. The long term price stability tends to be good under the gold standard, but short term price volatility destabilizes markets. And the central bank isn’t able to cope with deflationary forces, because it can’t issue more money that it has gold. The supply of gold is too small, Gold would have to be several times more expensive that it is today, resulting in in inaccessibility to industries which process bigger amounts.(computer chips…)

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  3. Steve says:

    Comparing late nineteenth century economics to modern economics seems a bit insane to me. It’s as stupid as comparing our economy to Zimbabwe or post WWI Germany; yet otherwise intelligent people keep doing it. Why?

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    Tom Hickey Reply:

    The informal logical fallacy known as appealing to the authority of antiquity? :)

    Reply

    Mario Reply:

    they do it b/c the US is zimbabwe duh?!?!?! haven’t you heard about hyper-inflation and the destruction of the US!?!?! man where have you been under an MMT rock lately!?!?!

    haha!!! Greenspan is so bad this dude is worse (and more dangerous) than wikileaks in my opinion!!!

    Reply

    The Arthurian Reply:

    Why do they still compare current economics to 19th century economics? Because they look back to the peak of the Cycle of Civilization… Toynbee’s Cycle. Keynes’ 150-year “greatest age of the inducement to invest” was the peak of it. They think they can re-create that spot on the Cycle with their nostalgic policies. But they do not recognize what drives the Cycle. (Sidney Homer did.)

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    Tom Hickey Reply:

    I’m sure that Homer would be concerned with the level of interest rate volatility over the past thirty or so years (near 20% to near 0% with plenty of fluctuation in between), which his historical work associated with political dissonance and social turmoil. Not a good sign, since historians are pretty generally agreed that ascendance is based on coherence and coordination and decay on the reversal of the trend.

    Here is Van Sloan’s picture of the cycle of civilizations in terms of periods of world leadership.

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    The Arthurian Reply:

    Thanks for the link, Tom. Van Sloan writes: “In the past, the largest cities of the world were often part of the leading civilization of the time…”

    You couldn’t have cities when everybody was still a hunter-gatherer. The existence of cities depends on the existence and accumulation of wealth. This ties in to my thought that the whole Cycle is driven by a pattern of wealth accumulation and can therefore be seen in the long-term “saucer-shaped pattern” of interest rates noted by Sidney Homer for Babylonia, Greece and Rome (in his Chart 1) for example.

    I don’t usually talk about this stuff. But I do think that thinking of our civilization in terms of the cycle helps to explain why there is today, on the downslope, so much nostalgia for the policies of a “gold standard” era that was near the peak.

    To extend the thought farther than I should: One cannot “control” the cycle by insisting upon a gold standard, just as one cannot control it by legislating interest-rate levels. But I think perhaps one could control where we are on the cycle by a policy of management of the distribution of wealth. This may be why wars and revolutions are related to the start-and-end-dates on Van Sloan’s list.

    This comment is probably off-topic :)

    Tom Hickey Reply:

    I don’t think that this is off topic for the simple reason that the gold bugs usually are operating out of ideology more than empirically based economics. They tend to be romantics nostalgic for the good old days of a golden age gone-by (pun intended).

    One has to look beyond what is not taken to be the scope of economics to discern what is going on beyond the ideological component. History involves the development and decay of cultures, whose institutions are manifestations of the Zeitgeist. When the culture is young strong, and creative, its institutions are strong and productive. When the culture crystalizes and begins to decay, this is reflected in its institutions. When I say “institutions,” I mean the expression of ideas in concrete form, but not buildings.

    It is very important to look at institutions like money as ideas, and to examine not only the substance of the idea but also changes in it over time. Ideas change qualitatively, and so do their expressions as institutions of a culture. Things like interest rate volatility are indications of such change. Most people just see the changing display of phenomena, but a few like Homer see the profound implications that this change suggests.

    Wealth distribution is definitely a key indicator of cultural health, because a society operates on the basis of coordination. As wealth inequality increases, coordination breaks down because coordination is based on a perception of justice, i.e., fairness. Studies show that this is operative even among groups of non-human primates.

  4. roger erickson says:

    Warren: [So it looks to me like all the major currencies have somewhat strong fundamentals. That is, policy is working to make them 'harder to get.']

    It’s amazing to see that a “strong” currency is synonymous with currency shortage.
    That’s simply mixing the extremely minor role of modern currency with it’s major role.
    i.e., confusing a “store of value” with use as numeraire, or transaction bookkeeping

    Humbling, to see this confusion, 2000 years after many other pronouncements of Aristotle were refined.

    I wouldn’t be all that surprised to hear Greenspan quoting Nostradamus next.

    Reply

    Rodger Malcolm Mitchell Reply:

    Roger,

    It’s just supply and demand. That law hasn’t changed in 2000 years.

    Rodger Malcolm Mitchell

    Reply

  5. Isn’t it amazing that people still care what Greenspan says? Way back in the late 80’s I said he was a phony. Why? Because he was mumbling incomprehensible mumbo-jumbo to Congress. The politicians and the media didn’t understand what he was saying, so they assumed it must be brilliant.

    How wrong does he need to be before people see through him?

    Rodger Malcolm Mitchell

    Reply

  6. The excerpts from Greenspan say or imply that it is the money produced by government that leads to inflation. But isn’t it clear that only the money generated by private banks and private borrowers was created in quantity enough to cause inflation? Milton Friedman’s Money Mischief graphs, for example, used M2 money, not M0 and not the monetary base.

    Tom Hickey notes the panics common in times of the gold standard. Those panics arose because the gold standard limited the creation of “base” (?) money, but did not limit the creation of bank-money. In that time the imbalances were dealt with by panic. Since WWII the imbalances have been dealt with by postponement.

    Art

    Reply

    Tom Hickey Reply:

    With the US on the gold standard and without a central bank, the banking system was subject to frequent liquidity crises. In the Panic of 1907 was resolved only when J. P. Morgan convinced his fellow bankers to front liquidity. The Fed was established in order to resolve this recurrent problem. It did not avoid the crash of ’29 and the onset of the Great Depression. FDR’s abandoning the gold standard gave government the tools to address deflation. Nixon finally shut the international gold window in ’71, when he was having trouble financing the Vietnam War.

    The point of having a flexible regime instead of a fixed one is to enable a soft landing instead of forcing a hard one when problems arise due to financial instability. What doesn’t Greenspan get about this?

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    The Arthurian Reply:

    Hi Tom. Well your memory for facts is obviously better than mine, but Wikipedia reports that In modern times, the most notable, and possibly the only true soft landing [was] engineered by Federal Reserve Chairman Alan Greenspan.

    So maybe he DOES “get it.”

    Reply

    Tom Hickey Reply:

    But, as it worked out it turned out to be a very hard landing. A soft landing isn’t a soft landing if it is followed by a hard landing, which it arguably played a role in creating. Greenspan’s soft landing approach, involving the Greenspan put, was to reflate asset price, which resulted in blowing bubbles. He did not know where to stop, and he himself got caught up in the irrational exuberance.

    OK, the final bubble wasn’t blown until after his term had expired and he was replaced by Bernanke, but the Greenspan put just became the Bernanke put, and Bernanke is doing it again, with the Fed driving asset prices “higher than they would be otherwise.” The next landing is going to be even harder.

    Of course, the same could be said for Bush and Obama from the political side, but they aren’t economists and neither really understood the bad advice they were getting.

    WARREN MOSLER Reply:

    and maybe wiki doesn’t

    art Reply:

    Have to wonder how hard the ’94 landing would have been if Tequila crisis hadn’t forced his and Treasury’s hand. GOP tax cuts in the wake of 1994 helped the US, but the Bentsen-Rubin-Summers “strong dollar” nonsense AG endorsed made a wreck of large parts of the world economy until finally hitting home in the early 00’s. Don’t think big Al deserves many (or any) accolades.

    WARREN MOSLER Reply:

    the high deficits caused the economy to continue to expand, much like last august when everyone was talking double dip

    Ken Reply:

    Tom,

    Confused by your 10:01 post. You say the Fed under Greenspan/Bernanke was responsible for asset bubbles …. my question is how? By setting the policy rate too low?

    Of course I hear this all the time in the mainstream, but I thought the MMT position was that the “natural rate” of zero should be maintained permanently. So how could the Fed have been responsible for bubbles from an MMT perspective?

    Are you saying that the zero rate is only viable if the right regulatory regime is in place, which we currently don’t have, and that interest rate policy needs to control asset bubbles until such a regime is enacted?

    Ken

    Tom Hickey Reply:

    Ken, as you may remember, there was a recent kerfuffle when it was proposed that there be a chief regulator other than the Fed. The Fed pushed back hard and won. But where were Greenspan and Bernanke when the Ponzi stage was developing? According to people like Bill Black, the underlying cause of the crisis criminogenic rather than financial excess. In Black’s terms it was “control fraud.” I don’t know that this is “the MMT position.” But it is the position of Bill Mitchell, as stated on his blog.

    Ken Reply:

    OK … so when you said:

    OK, the final bubble wasn’t blown until after his term had expired and he was replaced by Bernanke, but the Greenspan put just became the Bernanke put, and Bernanke is doing it again, with the Fed driving asset prices “higher than they would be otherwise.” The next landing is going to be even harder.

    Were you referring to the Fed’s low interest rate policy, their abdication of regulatory oversight, or some combination of the two?

    I did think that MMT folks in general consider interest rate policy a poor means of controlling asset or other bubbles, because it is a blunt instrument. But when the mainstream blames the Fed for bubbles, they usually mean interest rate policy …. “too low for too long”.

    Am I making a mistake by confusing a Bill Mitchell idea for something that is more generally held?

    I’m just trying to disentangle what you were saying in your post, because it left me wondering if I really understand things correctly.

    Ken

    WARREN MOSLER Reply:

    and if we’d responded in aug 08 with a full fica suspension and demand held up and unemployment didn’t rise this debate would be very different?

    Tom Hickey Reply:

    The Fed did two things. First, and most importantly, it abandoned its regulatory responsibility. Secondly, it apparently acted to prop up asset values instead of letting the market correct. Both contributed to the bubble forming.

    How the Greenspan put was implemented is controversial. Many feel that there was direct sub rosa intervention in the market, along with a wink wink approach to regulation, others hold that it was more indirect but still enough to counteract normal market forces. This is discussed in detail at sites like ZH and Karl Denninger’s The Market Ticker. It’s a chief reason for the big cry from the Paul people about auditing the Fed that is championed over at Zero Hedge, where a lot of people think that they got taken by market manipulation.

    I don’t think that we know the whole story yet, but Bill Black makes a good case for control fraud permitted by regulators and a failure to investigate or correct afterward. So far no one of consequence has been held accountable, and the game goes blithely on.

    Tom Hickey Reply:

    Warren, if the government had done as you say, then the financial crisis probably would not have gone viral and infected the real economy, too. But the financial crisis itself would still have taken place because of all the toxic debt that had been accumulated through Ponzi finance. The proper way to deal with that, Bill Black explains, is the way that the S&L crisis was handled, when over a thousand people were indicted and successfully prosecuted, institutions put into resolution, and reforms instituted. None of that has been done yet, and we have a crisis in the real economy, too.

    WARREN MOSLER Reply:

    agreed with Bill!

    I’d put him in charge

  7. GLH says:

    Mr. Picker: I was thinking about your milk situation. I don’t understand how you know that all the milk was bought up by welfare mothers, however I think you should consider the good part in that they are buying milk for their children instead of drugs. But I do wonder that with such a shortage of milk in the store that the grocers would not do a better job of stocking up on milk. Have you asked the manager of the store if there is a shortage at the farm and if so what can be done about it? Anyway, good luck on getting the situation corrected soon.
    By the way, those welfare mothers aren’t buying up all the cigarettes also, are they?

    Reply

    strawberry picker Reply:

    “I don’t understand how you know that all the milk was bought up by welfare mothers,”

    It is not ALL bought by them I am sure, but the last few times I have seen it run out/get low – it was young women with babies or young couples with babies and they had an EBT card (I spy on my competition a lot). I just want it noted that in florida, in the USA, you can go to Aldi, Wal-Mart, Publix, Dollar General Market, and there is no milk for sale at any price and this has happened several times.

    “however I think you should consider the good part in that they are buying milk for their children instead of drugs.”

    You are right, I know a lot of people that sell the food they get with welfare benefits for drugs and alcohol, but milk is not usually one of the items the dealer wants in exchange, it is normally meat.

    “But I do wonder that with such a shortage of milk in the store that the grocers would not do a better job of stocking up on milk. Have you asked the manager of the store if there is a shortage at the farm and if so what can be done about it?”

    I have talked to the managers at a couple of places, it doesn’t seem to do any good on the milk being stocked.

    “By the way, those welfare mothers aren’t buying up all the cigarettes also, are they?”

    Most of the ones I know are heavy chain smokers, but no, so far I have never went anywhere and they were out of cigarettes. Often times they may be out of a certain brand, like newport 100’s, but they have some other brand of cigarette in stock.

    Reply

  8. Panayotis says:

    Greenspan is suffering from inflation exuberance. What happened to his put?

    Reply

    roger erickson Reply:

    Viagra?

    Reply

  9. Einstein on the Gold Standard: “The gold standard has, in my opinion, the serious disadvantage that a shortage in the supply of gold automatically leads to a contraction of credit and also of the amount of currency in circulation, to which contraction prices and wages cannot adjust themselves sufficiently quickly.” (1934).

    Winston Churchill said that putting the UK back on the gold standard was the worst mistake of his political life.

    Reply

    WARREN MOSLER Reply:

    good quotes!

    Reply

    art Reply:

    great quotes, thanks Ralph (any links?)

    Reply

    beowulf Reply:

    Ralph, did you read Lords of Finance? Its not like Churchill wasn’t emphatically warned of the consequences by someone smarter than the average bear (granted, he wouldn’t rate even an internship at the Peter R. Peterson Center for Mathematical Astrology). :o)
    http://books.google.com/books?id=qsvi8fJAdqwC&pg=PT179&lpg=PT179

    Reply

    art Reply:

    Beowulf, thanks for the link, I didn’t realize that book was about the interwar period, assumed it was one of the many 2007-2009 postmortems. Looks like a good read.

    Reply

  10. MacLaren says:

    The Greenspan piece, http://www.youtube.com/watch?v=yRJs5yL62BA&feature=player_embedded , is not new, it likely dates from some time back in 2007. This can be deduced from the quote for Vornado Realty Trust (VNO) that appears below Greenspan at the 17 second time stamp. VNO is shown to be trading at $110.75, a price it has not traded at since then. http://finance.yahoo.com/echarts?s=VNO+Interactive#chart1:symbol=vno;range=5y;indicator=volume;charttype=candlestick;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

    I believe it has been brought back from the video grave yard in pursuit of an agenda to re-monetize gold, which does not need to be done.

    Transcending Debt as Money, ala Bill Still, MMT, and other monetary reformers can overcome the debt and attendant wealth transfer issues.

    Gold backed money, I believe is the next gambit of the money power elite, to retain power.

    Reply

  11. Mario says:

    Hey Strawberry,

    I don’t get it…what’s your beef with Warren? I mean he’s not doing anything wrong or illicit as far as I can see…in fact I see Warren helping people out and sharing, etc. So what gives man? I don’t get it.

    How can MMT help you with buying milk? Well it sounds like you don’t really understand MMT and that’s totally understandable…believe me…I’ve asked Warren ALOT of questions and done ALOT of thinking and reading about this stuff myself before I got it straight so you’re not alone there that’s for sure!!! But MMT is more macro economic and explains HOW THINGS WORK more than anything else. They just set the facts straight first and foremost. This then paves the way to more properly assess the real issues we are dealing with in our economy and also logically sets us up to find the best solutions. Warren and others get into their own versions and riffs of creative policies and ideas that can be implemented in our economy once MMT is understood, and that is all very, very open and available to read/review/discuss and it is also as varied as the people that create those ideas.

    Does that help you out at all?

    Reply

    WARREN MOSLER Reply:

    He knows better, he just can’t help not tossing out ‘cheap shots’ which I’m removing, thanks.

    Reply

  12. Tom Hickey says:

    Off topic but interesting:

    HOT: Fed Hides Major Accounting Change

    Reply

    Mario Reply:

    Hey Tom,

    Do you see this as any big deal? I mean the liabilities are still being recorded as the Fed’s responsibility, but just as falling under the Treasury rather than the Fed itself. I mean quite frankly isn’t that kind of accurate anyway? I mean the Fed didn’t make those MBS purchases b/c they wanted to…they did them b/c they had to help the economy. Plus can’t the Treasury be justified as the “owner” of such private sector assets anyway? I don’t know if what I am saying is accurate or not just putting it out there.

    I also don’t really see how this helps the Fed one way or another…and how this would stop them from having to borrow money from regional banks. Do you understand that?

    Also btw…I LOVED your longer comment in the coin seignorage post about Marx and social change, etc. I’m reading Marx currently and really enjoying it and it was great to see such a well written little piece on it all. cheers on that one man for sure!! :D

    Reply

    Tom Hickey Reply:

    This has no real relevance as the people reading this, e.g., at Zero Hedge, think. It is just how to account for something at the federal level. Neither the Fed nor the Treasury can become insolvent operationally although politically imposed rules can make it seem so. The question then is how to circumvent those rules. So, in reality, it is much ado about nothing.

    The political class is concerned about numbers on government spreadsheets while the financial sector and the real economy that depends on financing goes to hell. Crazy.

    Reply

    Mario Reply:

    that’s exactly how I see it too. Now it would be a different story if the Fed just didn’t record the liabilities anywhere (ernst and young style!! haha!!). Now that would be an issue that I would have beef with for sure. But they aren’t doing that. They are lumping it onto the Tsy and that’s cool with me, b/c it does not have to be considered a “liquidated” loan if you will at the Tsy…it can just be considered a liability that is still outstanding. Isn’t that right?

    Also wouldn’t then a good reason to do that be b/c it keeps the private banks’ accounts at the Fed in a more liquid state? I mean if the Fed held those liabilities accurately then it would be under the private banks who underwrote them and therefore their reserve accounts would be diminished pretty seriously b/c they would have so many large “liquidated” liabilities (aka loans that closed out and really did go bad) on their books and therefore not enough reserves to offset the liquidation and therefore become insolvent with the Fed (I mean that’s basically the whole point of the purchases in the first place right!?!?!). In fact as I see it here the Tsy is a perfect place to put those liabilities b/c it still accounts for them but also frees up the private banks and the Fed to operate on better terms…again this was the whole point of the purchases in the first place!??!! Man the Fed is doing a really good job handling things as far as I can see. I am missing something here or what?

    Thanks again and cheers! :D

  13. Tom Hickey says:

    Bubbles: “There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard.”

    Yeah, financiers just loved those panics when they picked up assets for pennies on the dollar in the ensuing liquidations. Why does he think that the Federal Reserve Act was passed in the first place, as well as the 16th amendment permitting the income tax, which was initially very highly progressive?

    More magical thinking from the Chairman.

    Reply

    Matt Franko Reply:

    Was he there when it happened? :o)

    Reply

    Tom Hickey Reply:

    He is just fantasizing about the Gilded Age, like most of the gold bugs and folks that want to end the Fed. They think all problems were solved when the US was on the gold standard and private banking ruled. It’s just delusional. Or else they figure on being one of the robber barons.

    Reply

    Mike Valotta Reply:

    Right, they act as if it were this utopian period. It’s simply not true. Private interests re-writing history.

    art Reply:

    Unbelievable. Just how much has Chairman Al read about the period? If he’s in anyone’s rolodex, recommend that he add Saul’s book The Myth of the Great Depression 1873-1896 to his bathtub pile (yes, there was a Great Depression before the Great Depression, it’s now referred to as the Long Depression and gets way too little coverage). Nearly half the US electorate was revolting against gold by 1896. Only thing that cut it short was gold discoveries in S Africa that same year.

    Reply

    Tom Hickey Reply:

    He must at least have heard of William Jennings Bryan’s cross of gold speech.

    Reply

    art Reply:

    You would think. Maybe he’s forgotten about it as he would only have been a toddler at the time (thanks Matt). More likely, he buys into the financial sector meme that farmers were a bunch of deadbeats.

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