July 21, 2005
DISSING THE GOLD STANDARD
In case you hadn't heard, gold's historical role as a monetary medium is no longer relevant. That's the message from Federal Reserve Chairman Alan Greenspan, who suggested as much yesterday during testimony to Congress, which is expected to be his last in an official capacity before his term as a Fed governor expires in January.
Greenspan's opining on gold came during a question-and-answer session that followed his prepared remarks before the Committee on Financial Services in the House of Representatives. (The fun continues today when he extends his official chit-chat in the Senate.) In essence, he asserted on Wednesday that central banks needn't bow to the gold standard any longer because they already act responsibly as stewards of money supplies. It was a theoretical point, to be sure, since the deployment of the gold standard in the 20th century is about as common as bartering in lower Manhattan. Nonetheless, Alan felt compelled to outline his thinking on the issue if only to dispel any notion that he still holds gold near and dear to his monetary heart.
"Since the late 70s, central bankers generally have behaved as though we were on the gold standard," the maestro explained yesterday in the House with his usual calm but assertive tone. "Central banking I believe has learned the dangers of fiat money. And I think as a consequence of that we have behaved as though there are indeed real reserves underneath the system."
As a swansong to his widely celebrated career as Fed chairman, Greenspan's snubbing of the precious metal officially brings him full circle from 1966, when he warned in an essay: "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." The government has an ulterior motive for keeping the gold standard suppressed, he concluded in a year when gold was artificially held to a price of $35 an ounce: "The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves." In sum, "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."
Three decades hence, Alan has a somewhat different perspective, and it extends in no small part from the reported decline and fall of inflation over the past generation in the government's official measures of price changes, he counseled. Speaking yesterday, he thereby advanced his view in no uncertain terms that a gold standard was unnecessary because the Fed was on the case, thank you very much, and doing a bang-up job of what would formally fall to the equivalent of adult supervision in matters of monetary management by way of a gold standard. "Would there be any advantage at this particular stage in going back to the gold standard?" he asked rhetorically before members of Congress. The answer came back without a pause: "I don't think so because we're acting as though we were there."
Gold may be irrelevant in the mind of the world's most conspicuous central banker, but traders in the metal foolishly keep trading. Perhaps they didn't hear the chairman. Or, could it be that the gold market doesn't quite accept the pearls of wisdom dispensed by the maestro in his waning days as head of the world's greatest printing press of currency?
In search of clues, we provide the following public service by noting that an ounce of gold was worth roughly $420 at the close of trading on July 20, which translates into a rise of roughly 63% from the end of 2001's first quarter. Misinformed though gold bugs may be on so-called state-of-the-art thinking in central banking, they're still clinging to their metal just the same. The fear of fiat money, in other words, springs eternal.
Posted by jp at July 21, 2005 5:42 AM
CS transcribed Greenspan's remarks by hand, courtesy of a tape of the proceedings. Some firm no doubt offers transcription copies, but we don't know of any off hand. Sorry.
As for LH's suggestion that Greenspan was "praising the gold standard in the sense that he said central bankers were seeking to emulate it," CS finds that to be faint praise, at best. Indeed, the point of the gold standard is that it's not fiat money, and thus isn't subject to any of the temptations that typically beset such a paper system. The two monetary regimes may, at times, appear equivalent in results, but the equivalency, if history's a guide, is likely to be temporary, even with the best of intentions. The gold standard has its own limitations/flaws as a monetary system, to be sure. What's more, there are some compelling arguments against using a gold standard. But whatever gold's merits as an official monetary medium, we remain skeptical that those benefits can be replicated with a printing press for any length of time.
Posted by: Anonymous at July 22, 2005 11:34 AM
I find it ironic that Greenspan is arguing against the relevance of gold. Almost solely because of him and his irresponsible policies, gold matters again and in a big way. He stated earlier (as you quote) that because central bankers are acting responsibly, thus the need for a gold standard has diminished. I agree that the market seems to give central banks around the world (and Greenspan in particular) credit for being responsible, but his behavior is anything but. Greenspan's credibility is undeserved. He singlehandedly created the tech and telecom bubble. He then created what's now the housing bubble. Moreover, looming (very high) inflation is the result of his (negative real interest rates) expansionary monetary policies. While we might not return to the gold standard, the gold standard will soon be a credible alternative because of him.
Posted by: Steve Sun at July 21, 2005 9:35 PM
Where can I find a transcript of the Q&A where Greenspan made the remarks you've quoted about the gold standard?
From what you've quoted, it sounds to me like he was praising the gold standard in the sense that he said central bankers were seeking to emulate it.
Posted by: Lawrence H. White at July 21, 2005 5:07 PM