Greenspan: Role Of Central Bankers Is to Try to Replicate the Stability of the Gold Standard

Greenspan said on any number of occasions that his model was that a 'fiat currency' works when it emulates the rigor of the gold standard.

I am using this post as a placemarker to gather a few citations along these lines. Sometimes people doubt these things, and it is not always easy to go back and find the actual idea in print.

I will place other example here as I find them but it is not a high priority because Alan Greenspan has never deviated from this point of view. One of the most poignant examples I have was when Ron Paul asked him if he still believed in what he wrote in his famous essay on Gold and Economic Freedom.

And Greenspan answered that he would not change a word.

I think the squaring up of what Greenspan believed, and what he did as Fed Chairman, is one of the more interesting conundrums that I hope that time will explicate. 

The other of course is why the flaming liberal and 'socialist' Obama is really closer to Richard Nixon in his performance and outlook than most would care to admit, on either the right or the left. 

This is from a 2007 Interview by National Public Radio with Alan Greenspan on Turbulence and Exuberance

Greenspan: Well actually, we were not fundamentally regulators [at the Fed]. The vast portion of our efforts were not involved in bank regulation.

NPR: No, but you were regulating interest rates, which have a profound effect on world economies.

Greenspan: You're raising really a very interesting question. I have always argued that the gold standard of the 19th century was a very effective stabilizer. It kept inflation essentially at zero, and I felt it was critical for the tremendous growth that occurred for the American economy in the latter part of the 19th century. When we went off the gold standard essentially in 1933, we then had to have what we call "fiat money" which is essentially money that is - it's printed paper money. Which unless we restrict the volume of, can be highly inflationary.

The type of interest rate regulation that I and indeed most central banks in the last 20 years have been involved in...has been to try to replicate the laws and rules that were governing the gold standard.

And so it is an odd situation where all the central bankers -- while none of them are advocating a return to the gold standard -- nonetheless try to replicate the various types of interest rate policies that the gold standard would have created. And it is an interesting question whether you call that regulation, or basically functioning of a central bank in stabilizing the economy."

I remember all such statements of Greenspan's vividly because they were one of the few times in which I felt that he was telling the truth, at least as he sees it.

I think that a fiat currency can 'work' if it emulates the rigor of an external standard. And exceptions that can be made to this rigor during times of exogenous shocks could be a quite useful tool for monetary policy.

The problem is that it NEVER seems to work out that way in the real world. It does not take long for financiers and politicians to discover the heady power and easy money to be had in manipulating the markets and the fiat currencies to their own advantage, the public and the real economy be damned. And then a pigfest ensues, and a nation's savings and civic virtue are consumed.

"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.

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. 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 the system."

Greenspan, A., Hearing on Monetary Policy Report, US House Committee on Financial Services, 20 July 2005, Washington D.C.

From: Jude Wanniski < jwanniski@polyconomics.com
To: Ben.S.Bernanke@ * * * * *.GOV
Subject: Fwd: Re: Savings glut
5:44 pm, 7/21/2005

I thought you should see this. Greenspan was plain awful in his testimony this week. But members of Congress don't know any better, so they slobber all over him. He again said we don't need a gold standard, because he has demonstrated since he came to the Fed in 1987 that the central bank could "replicate" the gold standard.

Take a look at the dollar/gold price from 1987 until today and you will see how terrific he has been in replicating the gold standard. I can't wait for him to leave, Ben, because he now has so much invested in his Fed legacy as a Maestro that he could never admit he screwed up almost all along the way.

Famous 2005 Exchange Between Ron Paul and Alan Greenspan about the Gold Standard


Related: Why There Is Fear and Resentment of Gold's Ability to Reveal the True Value of Financial Assets

IMPACT 2012 in NYC: Chris Hedges and Robert Johnson

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained growth and recovery.

Chris Hedges On the Current State Of Journalism and Post-Literate Society - The Age of Spectacle

"In our age, the idea of intellectual liberty is under attack from two directions. On the one side are its theoretical enemies, the apologists of totalitarianism, and on the other its immediate, practical enemies, monopoly and bureaucracy. Any writer or journalist who wants to retain his integrity finds himself thwarted by the general drift of society rather than by active persecution. The sort of things that are working against him are the concentration of the press in the hands of a few rich men, the grip of monopoly on radio and the films, the unwillingness of the public to spend money on books...

Wherever there is an enforced orthodoxy — or even two orthodoxies, as often happens — good writing stops. This was well illustrated by the Spanish civil war. To many English intellectuals the war was a deeply moving experience, but not an experience about which they could write sincerely. There were only two things that you were allowed to say, and both of them were palpable lies: as a result, the war produced acres of print but almost nothing worth reading...

The enemies of intellectual liberty always try to present their case as a plea for discipline versus individualism. The issue truth-versus-untruth is as far as possible kept in the background...

The organized lying practiced by totalitarian states is not, as is sometimes claimed, a temporary expedient of the same nature as military deception. It is something integral to totalitarianism, something that would still continue even if concentration camps and secret police forces had ceased to be necessary...

Totalitarianism, however, does not so much promise an age of faith as an age of schizophrenia. A society becomes totalitarian when its structure becomes flagrantly artificial: that is, when its ruling class has lost its function but succeeds in clinging to power by force or fraud. Such a society, no matter how long it persists, can never afford to become either tolerant or intellectually stable.

It can never permit either the truthful recording of facts or the emotional sincerity that literary creation demands. But to be corrupted by totalitarianism one does not have to live in a totalitarian country. The mere prevalence of certain ideas can spread a kind of poison that makes one subject after another impossible for literary purposes.

Totalitarianism demands, in fact, the continuous alteration of the past, and in the long run probably demands a disbelief in the very existence of objective truth. (cf. truthiness - Jesse)

Meanwhile, totalitarianism has not fully triumphed everywhere. Our own society is still, broadly speaking, liberal. To exercise your right of free speech you have to fight against economic pressure and against strong sections of public opinion, but not, as yet, against a secret police force. You can say or print almost anything so long as you are willing to do it in a hole-and-corner way.

But what is sinister, as I said at the beginning of this essay, is that the conscious enemies of liberty are those to whom liberty ought to mean most. The big public do not care about the matter one way or the other. They are not in favour of persecuting the heretic, and they will not exert themselves to defend him. They are at once too sane and too stupid to acquire the totalitarian outlook. The direct, conscious attack on intellectual decency comes from the intellectuals themselves."

George Orwell, The Prevention of Literature, 1946

I feel compelled to say an explanatory word or two about Chris Hedges at this point, about what it is that I 'like' about him, and to answer a couple of inquiries about why some others prefer to ignore him, besides the usual suspects as they say.

As I have said previously, politically I am almost a perfect centrist, in the classical sense of the term. I say this after having taken yet another 'objective test' to place myself on the political spectrum. I do not hold this out as anything of significance other than to say, this is pretty much where I come out, where I am in my thinking at this stage in my life. It is a hard place to be, because one sees the world in shades of grays, in all its complexity, without the comfort of easy forms in black and white. It requires quite a bit more thought and effort than most can afford.

Hedges is a socialist, self-admittedly. And I am not. I am a believer in markets, but in sound regulation of them by an objective, publicly controlled organization, much like a referee or umpire, who transparently enforces the rules which are clear and fair to all. Why? Because people always and everywhere will cheat, some much more readily than others. The meme of naturally efficient markets is a classic 'big lie.'

I believe that widely dispersed, practical rules of organization and decision making within a greater context of general principles are far superior in their effectiveness in the distribution of resources that any sort of central planning, of the right or of the left. As Acton once said, 'no class is fit to govern.' So I like decision making that is broadly based, and subject to compromise. I think the rewards and punishments of the market are an effective stimulus to productive behaviour, provided that the rules do not become slanted by the power of an inequality propagated by cheating.

But I also see that rules alone cannot embody wisdom. There is a need for the conscious hand of humanity to guide the legendary 'invisible hand of the market.'

So I like Hedges, because what he says brings me back to center, even though he is further left. That is how bad things have become in this age of austerity, the willfully immature, and the false bravado of the destructively greedy and ideologically irrational. The western nations have moved and are still moving to the Right, as they did in the 1930's. As corruption enervates the old order, as empires once again crumble, we are re-entering the Age of Spectacle, the time of fire.

And if you stay in place, at the center, you have the false feeling of 'moving left,' relatively speaking. It has become noticeable especially when one compares the Right to their forbears of even ten years ago.

Hedges irritates some of the sacred orthodoxies of the Right without a doubt and to say the least since they are the epitome of intolerance. But he also disturbs the Left, who can be as inflexible and censorious as the Right which they hold in utter disdain for those very qualities. And he tweaks their nose on it, which is doubly irritating for those who are currently not in power.

Hedges has an absolutely wonderful description of this phenomenon of the unseeable center in describing the debates he had with both the new religious right, and the irreligious neo-atheists. The relativity of their extreme views distorts all of their perceptions, so that to both groups, Hedges the religious moderate becomes anathema, for similar reasons of intolerance and vanity.

I think that western society has gone off the tracks, in a loosely cyclical manner, by adopting an unsustainable set of priorities. Rather than forming policies to support the general good of the people, they have instead adopted the objective of the 'greatest good' where that implies the maximization of profit, but for a select few. That was a fateful decision, and I mark it somewhat loosely from 1987 for a number of reasons, not the least of which was the bailout of Wall Street by Alan Greenspan. It had its cultural resonance in the theaters.

"The richest one percent of this country owns half our country's wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It's bullshit. You got ninety percent of the American public out there with little or no net worth.

I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you're not naive enough to think we're living in a democracy, are you buddy? It's the free market. And you're a part of it. You've got that killer instinct. Stick around pal, I've still got a lot to teach you."

Gordon Gekko, Wall Street, 1987

This situation, and history, has a lot to teach us indeed, and I think those lessons have only just begun in earnest.

This historically recurrent principle of the greatest greed rather than the greatest good is killing us. There should be no doubt that it will revert to the mean, a balanced society, once again, but that reversion may be painful, and bloody, if history is any guide. But this too shall pass.

I like to include historical quotes in these pieces, like the extended Orwell quote above, not only to illustrate the situation using powerfully resonant words from greater writers than myself, but also, in a Socratic way, to infuse the quiet understanding that every generation fights perhaps not the same, but similar, battles against ignorance, greed, intolerance, mean-spiritedness, carelessness, lawlessness, fear, hysteria, betrayal, hatred, and apathy.

And so there is hope, always.

We are not facing anything new, anything insurmountable,  but rather the same old enemy, the principalities and powers, the rulers of the darkness of this world, and the ancient spiritual wickedness in high places.  And that is the basic plot line of all human history.

And so we will write our own particular chapter in human history and the book of life, and thereby be remembered by our children and our grandchildren, and perhaps by those who interest themselves in all things human, for all time.





I have to note, most strongly, that the same principle of objectifying the other as a prelude to oppression and the language of violence is a tool of both the extreme right and the extreme left.  Their inflexibility and intolerance of differences in the individual virtually indistinguishable, and in every case is used to justify violence and murder.



I include this clip below in particular because he is describing 'the economic hitmen coming home to roost' which has been a forecast and an image I have used for quite a few years.  And it is happening now, predominantly in parts of Europe, but very much in the US and the UK.  The move on from victim to victim, their ravening hunger insatiable.



As they become more extreme, belief systems tend to resemble their putative opposites more closely, and the center becomes almost imperceptible, if noticed at all and not merely held in complete disdain.

Ex-Fed Governor Mishkin in 'Pay for Say' Controversy Over Icelandic Economy

The Icelandic Chamber of Commerce commissioned ex-Fed Governor Mishkin to write a glowing report on their economy, even while the country was being destroyed from within by a rogue banking system, a financial oligarchy, and a corrupt regulatory regime.

What is surprising is that there was no disclosure of the payment of $124,000 and that Mishkin was unable to cite any substantial effort he made to investigate the economy when forming his analysis.

Alan Greenspan handled his own apparent faux pas in mismanaging the Federal Reserve and actively opposing the regulatory efforts that might have stemmed the orgy of financial fraud which occurred on his watch much more skillfully, so that the Fed was able to gain even more power from the recent 'financial reform' crafted by an industry complaisant Congress.

In a recent NY Times piece Making It Up, Paul Krugman takes economic fluffery to task, and rightfully so. In this day of think tanks and special interest foundations, there are often experts willing to engage in 'pay for say.' Experts are not exempt from the powerful contamination and capture by special interests, particularly the financial industry, that has affected regulators and politicians

In the formulation of public policy the learned opinions of economists must be weighed carefully, and the supporting data examined. And of course any conflicts of interest disclosed. Academic economists are no different than anyone else, because as it appears, their interests are not always purely academic.

As in so many instances of scandal and corruption, the best disinfectant is the light of day in the form of transparency, disclosure, and public accountability and review.

"Every thing secret degenerates, even the administration of justice; nothing is safe that does not show it can bear discussion and publicity." Lord Acton

Why There is Fear and Resentment of Gold's Ability to Reveal the True Value of Financial Assets

There were a few questions raised about the note on the long term chart of the SP 500 deflated by gold which was posted last night, and which is reproduced here on the right, which read "This is why the financial engineers like Bernanke hate and fear gold; it defies their plans and powers."

The chart shows something that most investors have suspected. There has been no genuine recovery in the price of stocks since the decline that cannot be fully explained by the monetary inflation of the dollar, as can be discovered by the ultimate store of value, which is gold.

I thought that this was a fairly straightforward observation, but it apparently jarred a few people and their thinking. So perhaps we have some new readers who are not familiar with the long standing animosity towards gold that is uniformly expressed by all those who promote centralized command and control economies, from both the left and the right.

Can any astute observer doubt the Fed's desire to act in secret and privacy? Their obsession with this is almost unbelievable and beyond comprehension, unless one understands that they are in a 'confidence game,' and use persuasion and even illusion to shape perceptions, especially at the extremes of their financial and monetary engineering of the real economy.

This animosity and desire for secrecy was described by Alan Greenspan in his famous essay, Gold and Economic Freedom, first published in 1966. In a fairly amusing exchange between Congressman Ron Paul and the former Chairman a couple of years ago, Mr. Paul asked Sir Alan about this essay, and if he had any corrections or misgivings about it after so many years. Would he change anything?

"Not one word." replied Greenspan, in one of his few candidly honest and straightforward statements.

It helps to understand the dynamics of the money world, which appear so mysterious to those who do not specialize in it, even economists, although some may feign ignorance to promote their cause or avoid unpleasant disclosures.

Money is power. Ownership of the means of production may provide for the control of groups of disorganized labor.  But the power of the issuance of money allows for the control of whole peoples and governments, through the distribution and transference of wealth, by the most subtle of means. And this is why the US Constitution relegated this power to the Congress and by their explicit appropriation, and denied it to the States and private parties except in the form of specie, that is, gold and silver which have intrinsic value.

It might be useful to review a prior post in reaction to the self-named maverick economist Willem Buiter, who wrote a few attacks on gold, prior to his leaving academia and the Financial Times to take a senior position with Citibank. Willem Buiter Apparently Does Not Like Gold

It may seem a bit perverse, but I do not favor a return to a gold, or a bi-metallic gold and silver standard at this time.   Each nation can be free to devalue or deflate their own money supply as their needs require, with the consent and knowledge of the people and their representatives.

What I do promote is for gold and silver to trade freely without restraint or manipulation as a refuge from monetary manipulation, and a secure store of value for private wealth. When nations adopt the gold standard, they invariably seek to 'fix' and manipulate its price, and reserve the ownership to themselves, with the tendency to seize the wealth of their citizen under the rationale of such an ownership, or dominant privilege.

Let those who have a mind to it have the means of securing their labor and efforts, and let the state do as it will, with the open knowledge and consent of the world.

"Gold is not necessary. I have no interest in gold. We will build a solid state, without an ounce of gold behind it. Anyone who sells above the set prices, let him be marched off to a concentration camp. That's the bastion of money."

Adolf Hitler

A draconian approach no doubt. It is much more common for the ruling parties to debase the coinage secretively while advantaging their friends and supporters, thereby manipulating the value of gold and silver covertly.

 In modern times of non-specie currency one might choose to select a few cooperative banks and the central money authority to manipulate the price using paper and markets, and hope that this scheme will remain undiscovered. But it always comes out, the truth is always known in the end.

"With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people."

F. A. Von Hayek

There are any number of amateur economists and investing pundits around these days who betray an almost irrational opposition to gold, becoming jubilant in every decline, and despondent at every rally. And some of them even take the label of 'Austrianism' in their thoughts which is quite odd given that it is one of their schools strongest bulwarks.

Most often this can simply explained as the envy of those who have not prepared for a crisis, and wish ill upon those who have, regretting and hoping for another chance to provide for their own security. And yet they will fail to take advantage of every opportunity to do so, as they are creatures betrayed alternatively by their own fear and greed.

One of the best indications of quack advice on the question of investing in precious metals is when one of the reasons against it includes the scurrilous non sequitur, 'You can't eat it,' as if nutritional content is a valid measure of the durability of wealth. It betrays a lowness of argument and intellectual integrity that should promptly urge one to run in the other direction.

And regrettably, there are always those who will say almost anything for money, and the profession of economist seems to be particularly infested with that sort, given the stochastic nature of the discipline, and its lack of scientific rigor, being based on principles which do not easily lend themselves to objectification with serious damage to the data being made by the assumptions in their equations and proofs.

But most of all, the financial engineers, politicians, and Wall Street Banks fear gold because it is the antidote to their frauds, and the informant to their confiscation of wealth.

Do not expect them to capitulate once and for all, but only slowly and grudgingly as it becomes more difficult for them to sustain their illusions and persuasion. Protecting wealth against official adventurism is never easy.

Here is Alan Greenspan's famous essay on Gold and Economic Freedom. I suggest your read it, because it will help you to understand much of what is said and done as the global reserve currency system changes and evolves.

Gold and Economic Freedom
by Alan Greenspan

Published in Ayn Rand's "Objectivist" newsletter in 1966, and reprinted in her book, Capitalism: The Unknown Ideal, in 1967.

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.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society's divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one — so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline — argued economic interventionists — why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely — it was claimed — there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.

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). 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.

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which — through a complex series of steps — the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

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.

Given his Randian audience and the mood at the time, it is interesting that Greenspan defines the culprits in the scheme of fiat monetization as 'welfare statists.' How ironic, that over a period of time there is indeed a group of welfare statists behind the latest debasement of the currency, the US dollar, but the recipients of this welfare are the Banks and the financial elite, who through transfer payments, financial fraud, and federally sanctioned subsidies are systematically stripping the middle class of their wealth. Perhaps they decided that if you cannot beat them, beat them to the trough and take the best for themselves until the system collapses through their abuse.

Here Is Why the Fed Cannot Simply Continue to Inflate Its Way Out of Every Financial Crisis That It Creates

The return on each new dollar of US debt is plummeting to new lows according to figures from the Federal Reserve.

The chart below is from the essay, Not Just Another Greek Tragedy by Cornerstone.

I have been watching this chart for the past ten years, as part of the dynamic of the sustainability of the bond and the dollar as the limiting factor on the Fed's ability to expand the money supply.

The ability to expand debt is contingent on the ability to service debt. If the cost of the debt rises over the net income of the country's capital investment, or even gets close to it, the currency issuing entity is trapped in a debt spiral to default without a radical reform.

In other words, if each new dollar of debt costs ten percent in interest, largely paid to external entities, and it generates less than ten cents in domestic product, it is a difficult task to grow your way out of that debt without a default or dramatic restructuring.

So we are not quite there yet. But we are getting rather close on an historic basis. Without the implicit subsidy of the dollar as the world's reserve currency it would be much closer.

As it is now, this chart indicates that stagflation at least, rather than a hyperinflation, is in the cards for the US. But the trend is not promising, and the lack of meaningful reform is devastating.

A 'soft default' through inflation is the choice of those countries that have the latitude to inflate their currencies. Greece, being part of the European Monetary Union, did not. The US is not so constrained, especially since it owns the world's reserve currency.

The economy is out of balance, heavily weighted to a service sector, especially the financial sector which creates no new wealth, but merely transforms and transfers it. With stagnation in the median wage, and an historic imbalance in income distribution skewed to the top few percent, with the banks levying de facto taxation and inefficiency on the economy as a function of that income transfer, there should be little wonder that the growth of real GDP is sluggish in relation to new debt.

Or as Joe Klein so colorfully phrased it, the elite have been strip-mining the middle class in America for the past thirty years.

Along with the 'efficient market hypothesis,' trickle-down economics is also a fallacy. This is why the stimulus program being conducted by the Federal Reserve, in an egregious expansion of its authority to conduct monetary policy, in subsidies and transfer payments to Wall Street is not working to stimulate the real economy. It merely inflates the bonuses of the few, and extends the unsustainable.

So obviously one might say, "The Banks must be restrained, and the financial system reform, and the economy brought back into balance, before there can be any sustained recovery.

Modern Economic Myths and The Failure of Financial Engineering

"The whole history of civilization is strewn with creeds and institutions which were invaluable at first, and deadly afterwards." Walter Bagehot

The housing bubble did nothing for real median incomes in the US but it did wonders for the insiders in the financial sector.

This is why the average Joes in the States went into debt to continue to maintain their consumption.

Until this situation is addressed, there will be no sustained economic recovery in the US. The US Census Bureau only goes to 2007, but it is highly likely that the median income has taken another serious downturn in the latest financial crisis.

Very little has been done by the Obama administration to address this problem.



Trickle down or supply side economics does well for the upper percentiles of income but does much less for the median wage.



Why care? For several reasons.

First, the median wage is the bulwark of general consumption and savings, and the prosperity of a nation. It must match the character of the social fabric, or place a severe strain on the contract between classes and peoples. A nation cannot survive both slave and free without necessarily resorting to repression.

Second, in any relatively free society, the reversion to the mean in the distribution wealth and justice is never pleasant, and often bloody and indiscriminate.

There are several economic myths, popularized over the last thirty years, that are falling hard in the recent series of financial crises: the efficient market hypothesis, the inherent benefits of globalization from the natural equilibrium of national competitive advantages, and the infallibility of unfettered greed as a ideal method of managing and organizing human social behaviour and maximizing national production.

One has to wonder what would have happened if some more coherent, approachable science, had put forward a system of management that relied upon the nearly perfect rationality and unnatural goodness of men as a critical assumption in order to work? They would have been laughed out of the academy. Yes, there is a certain power to befuddle and intimidate common sense through the use of professionally specific jargon, supported by pseudo-scientific equations.

Why doesn't 'greed is good' work? Because rather than work harder, a certain portion of the population, not necessarily the most productive and intelligent, will immediately seek rents and extraordinary income obtained by unnatural advantages, by gaming the system, by cheating and coercion, by the subversion of the rule of law, which saps the vitality of the greater portion of the population which does in fact work harder, until they can no longer sustain themselves. And then the lawless few seek to expand their reign of greed, and colonies and empires are born.

What will take the place of these modern economic myths? Time will tell, and it will vary from nation to nation. But the winds of change are rising, and may soon be blowing a hurricane.