For Greenspan, Gold Once Glittered
Nat Worden | April 29, 2008
The Federal Reserve’s fiercest critic on Capitol Hill is again tapping into rising angst over inflation, loose monetary policy and the central bank’s alleged role in pumping up the housing bubble.
Rep. Ron Paul’s controversial views on the U.S. dollar have been largely dismissed as the populist rhetoric of a libertarian outsider during his 2008 presidential run, but his views actually match those once held by the man many blame for the expansion of the credit bubble: former Fed Chairman Alan Greenspan.
In a new book to be released this week, Paul (R., Texas) again takes aim at the central bank — a familiar target — and in doing so accuses Greenspan of doublespeak on his views about the dollar. The accusation comes as Greenspan vigorously defends his low interest rate policy in the early years of the housing bubble, which many point to as a root cause of the credit crisis that is currently roiling financial markets.
It also comes at a time when inflation expectations are rising as the Fed on Wednesday is poised to continue lowering interest rates in hopes of stimulating a weakening economy and of reviving shell-shocked credit markets. Meanwhile, the dollar has plunged while government deficits are spiraling and the costs of fuel and food, among other things, are soaring.
It’s a scenario that Paul has been warning about for years in Congress, though his views have long languished outside the mainstream of American political discourse. That said, Paul enjoyed surprising success for a libertarian outsider in online fund-raising for his failed bid for the 2008 Republican presidential nomination.
His new book, The Revolution: A Manifesto, is aimed at galvanizing his sizable and devoted band of eclectic followers, which has become increasingly vocal on Google’s (GOOG – Cramer’s Take – Stockpickr) YouTube and elsewhere on the Web.
In a chapter titled “Money: The Forbidden Issue in American Politics,” Paul narrates his mid-1990s meeting with Greenspan at a special meeting in Congress in which the two were photographed together. As a long-avowed advocate of returning to a currency based on the gold standard, Paul decided to bring along his original copy of Greenspan’s 1966 article from the Objectivist Newsletter called “Gold and Economic Freedom.”
In the paper, Greenspan laid out an economic and moral case for a commodity-based monetary system vs. a fiat paper system, like the one now used in the U.S. When Greenspan wrote the paper, the U.S. dollar was still loosely tied to the gold standard. President Richard Nixon later severed the already tenuous link completely in 1971 — the beginning of a painful period of stagflation in the U.S. economy.
When Paul presented Greenspan’s old paper to him, the Fed chairman agreed to sign it.
“As he was doing so, I asked if he wanted to write a disclaimer on the article,” Paul writes. “He replied good-naturedly that he had recently reread the piece and that he would not change a word of it. I found that fascinating: could it be that, in his heart of hearts, Greenspan still believed in the bullet-proof logic of that classic article?”
Years later, Paul brought up the article and its arguments to Greenspan when he was giving public testimony to the Financial Services Committee in 2005, and Greenspan changed his tune.
“First of all, that was written 40 years ago, and I was mistaken in part,” Greenspan said in testimony to the committee. “I expected things that didn’t happen. And, nonetheless, my general view toward the type of gold standard effect remains to this day. My forecast of what was going to happen subsequent to that period has proved, fortunately, wrong.”
Greenspan went on to say that he didn’t think “the central bank is facilitating the expansion of expenditures in this country” — an assertion that Paul says is “preposterous.”
“Congress could not get away with spending beyond our means year after year if we did not have a Federal Reserve System ready to finance it all by purchasing bonds with money it creates out of thin air,” writes Paul.
Greenspan, through a spokeswoman, declined to comment for this story. The spokeswoman did, however, point to a passage in his recent memoir The Age of Turbulence: Adventures in a New World, in which he writes that he has “always harbored a nostalgia for the gold standard’s inherent price stability.”
Greenspan goes on to contradict his previous assertion that the Fed doesn’t facilitate the federal government’s deficit spending by writing that he long ago acquiesced to the prevailing view that the gold standard doesn’t adequately accommodate government spending on welfare programs, or social safety nets like Social Security and Medicare.
“The propensity of Congress to create benefits for constituents without specifying the means by which they are to be funded has led to deficit spending in every fiscal year since 1970, with the exception of the surpluses of 1998 to 2001 generated by the stock market boom,” Greenspan wrote. “The shifting of real resources required to perform such functions has imparted a bias towards inflation.”
For most of American history, the dollar has been defined as a specific weight in gold. The Constitution gave Congress the responsibility to maintain the value of the dollar by making only gold and silver legal tender and not to “emit bills of credit.” When the Federal Reserve Act was passed in 1913, 20 dollars could be redeemed for an ounce of gold. That ended during the Great Depression in 1933, when gold could no longer be redeemed by the public, but only by foreign governments for $35 an ounce.
The dollar’s final link to the gold standard was severed by Nixon in 1971, when the modern era of asset bubbles, federal budget deficits and inflation began in earnest. A return to a gold standard now is far-fetched, as Paul acknowledges, but he proposes legalizing the use of gold and silver as a competing currency to the dollar as an initial, practical measure to address the problem.
“If anyone would rather continue to transact in a depreciating dollar, he would be free to do so,” writes Paul. “But anyone that prefers a currency that would hold its value and won’t become worthless before his eyes just because his government ran the printing press one too many times would have real options.”
Today, as the dollar hits historic lows against foreign currencies and oil and other commodities reach record highs, talk of bubbles and inflation is again at the center of debate over the Fed’s role in the economy.
As the housing bubble burst and turmoil in the credit markets spread last summer, the central bank played a key role in brokering the sale of Bear Stearns BSC, the fifth-largest U.S. investment bank, to JPMorgan Chase JPM. Bear had been on the brink of bankruptcy.
Additionally, the Fed set up a series of new lending facilities to provide liquidity to other investment banks — like Goldman SachsGS, Lehman Brothers LEH, Citigroup C and Merrill Lynch MER — to prevent a similar situation.
Former Fed Chairman Paul Volcker said at a recent speech at the Economic Club of New York that the central bank’s recent actions raised political concerns about “the proper use and allocation of government power” and “embedded economic interests and lobbying.”
Volcker’s comments echoed Paul’s assertion that Fed policies favor the wealthy at the expense of the poor and middle class.
“The price increases that take place as a result of inflation do not occur all at once and to the same degree,” writes Paul. “Those who receive the new money first receive it before prices have yet risen. They enjoy a windfall. Meanwhile, as they spend the new money, and the next wave of recipients spend it, and so on, prices begin to rise throughout the economy — well before the new money has trickled down to most people.”
Paul’s anti-Fed stance strikes a populist tone, but his analysis echoes that of Greenspan’s own criticisms in the 1960s.
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation,” wrote Greenspan back then. “There is no safe store of value.
“This is the shabby secret of the welfare statists’ tirades against gold,” he adds. “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.”