Tuesday, September 18, 2012

Alan Greenspan and the Gold Standard

Speaking of weird monetary economics. Maybe everyone knows this, but a commenter on the last post led me to some details about Alan Greenspan's past that I did not know about.

First, Greenspan puts Paul Ryan to shame in the Ayn Rand department. Greenspan was not just a casual reader of Rand, but was in her inner circle while she was writing Atlas Shrugged. Greenspan was, or is, a committed Objectivist and wrote an essay, "Gold and Economic Freedom," for Rand's book Capitalism, the Unknown Ideal. That essay is described in the link as being influenced by the ideas of Murray Rothbard, whose ideas also have a bearing on what Ron Paul thinks. Like Rothbard, Greenspan thinks that backing bank deposits with gold is a good idea, but he doesn't go so far as to recommend a 100% gold-reserve requirement. Somehow the reserve requirement is supposed to limit inefficient credit creation. Like Rothbard, Greenspan is confused as to why unfettered markets should work so well everywhere except in the banking system. He also thinks that the "golden" age of monetary arrangements existed prior to the existence of the Federal Reserve System. Most monetary historians think of the National Banking era (1863-1913) as a period when the financial system of the United States was fatally flawed, as it produced repeated banking panics. Not Greenspan apparently.

Here's an excerpt from "Gold and Economic Freedom":
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.
You could put those two paragraphs in Ron Paul's "End the Fed," and no one would notice. The use of "insidious" is interesting. That's the same word that Paul Ryan used to describe QE3.

The amazing part of this story is that Greenspan served as Chair of the Fed for a long time, and didn't seem to screw up (though some people lay some of the blame for the financial crisis at his doorstep, I'm inclined not to). If I had read "Gold and Economic Freedom" before his appointment I would have been in a panic. Maybe this means we could appoint Ron Paul to replace Bernanke, and everything would be fine. No, never mind.

For your entertainment, here's a 2007 interview with Greenspan on the gold standard. Apparently his views have not changed much.


  1. 1. First, Alexander Hamilton had a middle ground between gold and a government central bank that issue money and that was private ownership of Bank of the United States, which could issue money. Hamilton thought that the Bank owners would check inflation as appropriate in their own self interest.

    2. Hamilton, Morris, and Franklin all know from experience that bank creation of money was essential, that mining either gold or silver or both would not produce sufficient money. One should be especially aware of Morris and his notes, which were at times much or most of the money in Philadelphia, etc. Hamilton's view of money also lead him to go for silver over gold as the foundation of the dollar because it was more abundant and he anticipated having access to the silver in New Mexico, etc. The reason money was such a concern was that, for example, when Morris sent ships to China they carried silver, to be exchanged for goods for return to the U.S. These shipments stripped the Country of Money. Literally, the economy would freeze when a ship would sail to China for Morris.

    3. Greenspan's argument that "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation is just a total and complete fabrication." If gold is the hedge he claims, then anyone with savings they are concerned about protecting can just buy a futures contract and hedge. This is Randism at its worse. The gov't should protect me, when I could protect myself, but not you, when you cannot protect yourself.

    As for the cause for the financial crisis. As they say Sport, Truth, like Art, is in the Eye of the Beholder.

  2. This is old news to me, except for the interview. I thought that he had indeed changed position on the gold standard, although in the interview he is not 100% clear about his personal beliefs. I mean, Greenspan not only served as Fed Chair but also tried to stabilize output using interest rate targeting, so he must have been aware of the limitations of the gold standard. How can he have been operating under a false model in this respect also, and yet act in the ways that he did? My guess is that he was courting Fox News viewers, who probably hate him less than those on the left. He must feel pretty lonely these days.

    1. Yes, when people fit Taylor rules to the data, it seems that Greenspan's behavior did not deviate too much from what Mike Woodford would approve of. In spite of that, he did not speak explicitly to the dual mandate, as Bernanke does. Greenspan of course benefited from non-turbulent times. I don't know what he would have done in fall 2008.

  3. Stephen, on the performance of the fed and the national banking system, have you read this article by Selgin, Lastrapes and White in the Journal of Macro?


    "(2) While the Fed’s performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I."

    1. Why would anyone read anything in the Journal of Macro. That journal is a waste of paper.

    2. Well, "performance" is hard to measure, especially when the National Banking era data is so poor. It's certainly well-recognized that the Fed screwed up in the Great Depression, but then there's the long quiet period. There's a lot going on. It's not just a story of gold standard vs. discretionary central banking. The whole structure of banking and financial regulation matters.

    3. True, I guess the regulations & structure is what you're trying to take into account into your models these days right?

      Though, if the data is so poor, would you agree that the performance of the Fed when contrasted with the pre-Fed era is more of a question of ideology than anything else?

      Plus wouldn't you agree that many criticisms of the gold standard are a bit over-blown? A return is impractical, and seems silly, but I doubt it would bring economic disaster.

      Also I saw your comment on your previous post:

      "I should add too, that an important feature that any monetary system should have is elasticity of the stock of media of exchange. It's efficient if the money stock (however defined) fluctuates with economic activity. The gold standard does not have that property."

      If I recall correctly, gold production should move counter-cyclically. For if there is deflation, then gold becomes more expensive in terms of goods and it makes sense to expand production.

    4. It seems to me that you do not understand that the United States was on a silver and not a gold standard when formed and for its first 80 years.

      It switched to gold when, surprise, so much silver was discovered in the West that the problem of being able to mine money actually happened.

      There is a second problem with gold, never discussed, and that is, How will people react when it is announced that we are moving to a gold standard and they realize the massive devaluation that would have to take place as there is not enough gold to back all the safe assets that would have to be denominated in gold.

      I suspect that Steve Forbes has his entire fortune in gold, praying we will be stupid enough to devalue and this his worth will multiply many times.

    5. I am deeply disturbed to be on John D's side. I guess the blind squirrel is out and about.

    6. blind squirrel---seems you know yourself

      BTW, what's your take on QE3?

      The Hamilton/Roubini school says: No leadership, no positive impact. No microfoundation for and therefore no negative impact (any "hot" money created cannot get into the hands of anyone who will spend it)

      As for inflation, it is charted independent of the Fed by political events/the price of oil

      BTW, instead of trolling the blogs looking for John D., whomever that person is, like some modern day Javert, why don't you do something useful with your life like come up with an economic model with some connection to realty and therefore one that considers the important intangibles like: vision and leadership and headwinds.

      For example, Williamson somewhere here repeats the meme that the Fed messed up in 1933. Maybe they did and maybe they didn't.

      Even Wiki will tell one, that "On 30 January 1933 the new cabinet was sworn in during a brief and simple ceremony in Hindenburg's office. The NSDAP held three of the eleven posts: Hitler was named chancellor, Hermann Göring was named minister without portfolio, and Wilhelm Frick was appointed minister of the interior." And, "On 27 February 1933, the Reichstag building was set on fire."

      Now, maybe 1933 was a year when anyone with forward looking expectations with a dollar kept it in their mattress. And, the days following--well the few forward wasn't any better. And maybe that is how to read the Fed data.

      In sum, Milton Friedman and every other economist who studied the Great Depression, save Keynes, has been a man with a hammer. They have studied economics and therefore, "It must of been economics."

      I have a different view. Call me naive, but I happen to believe that the economy is stuck because the American people are smart. They know: (1) the political parties are broken (read Romney's father's letter, per Delong); (2) the structure of the government, esp. Congress, is broker; (3) the right wing is wacko; (4) Bush totally screwed up the mid-East/Iraq; (5) Obama is lacking in important ways in being a leader; and (6) the situation with Iran is, like Germany in 1933, really really bad.

      They also have figured out that something has been fundamentally broken about the economy since the 1970s

      Now, in such a situation, people are going to keep their dollars in their mattress and, if they find any loose change on a parking lot, they are going to save that as well

      In sum, we are going to stay here where we are for a long long time.

    7. Pretending you aren't John D isn't going to fool anyone, crackpot.

    8. This comment has been removed by the author.

    9. What's the matter John? Didn't your crackpot dictionary come this week?

  4. "would you agree that the performance of the Fed when contrasted with the pre-Fed era is more of a question of ideology than anything else?"

    No. You use what theory and evidence you have.

    "wouldn't you agree that many criticisms of the gold standard are a bit over-blown? A return is impractical, and seems silly, but I doubt it would bring economic disaster."

    Depends how you define disaster. We're not talking about the Great Depression, but this should reduce real GDP significantly, and also increase the volatility of the same.

    "If I recall correctly, gold production should move counter-cyclically."

    This seems correct. Higher aggregate economic activity makes gold (or gold-backed currency) more useful in exchange, its relative price goes up, and more is produced. Sometimes you want a response very quickly, though. For example, part of what the Fed is doing is responding to shocks on a daily or weekly basis. Even for seasonal shocks, it seems like the response of gold supply would be too sluggish.

    1. "No. You use what theory and evidence you have."

      The evidence part might turn out to be a fallacy. Back in 2002, almost everyone probably said that the Fed and Greenspan did a good job in easing monetary policy after the dot-com burst. In 2008, it became clear that reinflating the economy right after the burst of a bubble was not a sustainable policy, as it created an even bigger bubble right away.

  5. Okay, but the evidence seems to support both arguments, how do we adjudicate between those if the data is poor?

    Also, I am not so sure if it would increase volatility or depress real GDP; both inflation and real GDP should eventually revert to trend under a gold standard, and if you can expect this, this should effectively determine the price-level today as in Cagan's model, right?

    And the more the price-level today is determined by the price-level tomorrow, the less the non-neutrality of money should impact real gdp today, right? Or am I missing something here? I guess that credit-frictions will play a major role in how much expectations about the future can affect the present?

    Also thanks for answering, I really do appreciate that you take the time to communicate to members of the public through the internet about your work and economics in general. I think that's important.

  6. Greenspan: Show us your PhD. Why is it missing from NYU?

  7. The reason the Austrians and the Objectivist are obsessed with the gold standard is they think the gold standard prevents
    "collectivist" policy makers from taxing via inflation. If the currency has to be backed up by precious metals, their hands are tied for financing large government through the monetary system.

    Their reason is political. No model needed.

    1. The problem is that they think it's a commitment, but it's not. Further, it's the same "collectivists" that are making the decision to go on the gold standard, or go off. Supposedly you can't trust the government, but who decides on the institutional rules that will govern the commodity standard?

    2. I think that's the reason for the calls to audit/ end the fed. Without a centralized monetary authority, no one entity has the power to decide to go off the gold standard.

  8. Stephen,

    "it's a commitment, but it's not" just because of central banks.


    you are right and that's the Greenspan's point. But there is another reason: credit expansion leads to booms and follwing busts
    However seems to me that mainstream economists ignore central banks are just government agencies. An governments are run by humans like everyone of us. Not by angels

  9. "If I had read "Gold and Economic Freedom" before..."

    Where was this essay originally published?

    In order to have read it you would have had to find it first.

    I cannot find any reference to it other than "citations" by other authors and am skeptical of its validity.

    Thanks in advance

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