Gold and Mr. Greenspan

Money is one of the most important phenomena, if not the most important, in the market. Money (indirect exchange) evolved out of barter as a medium of exchange that allowed man to turn goods into money, and then trade later for what he really wanted. In time, the division of labor evolved; one man produced shoes, for instance, another armor. Armor could then be exchanged for money, which could be exchanged for shoes and vice versa, each according to how people value them. Thus it became possible for the originators of an exchange, who could not get today what .they needed, to

take in trade a medium of exchange that was more negotiable than the goods that they brought to market, and which they could exchange for goods they needed in the future. With money, they could finally acquire what they themselves wanted to consume.

To be acceptable in trade, a medium of exchange must be something people value: Gold, silver, or currency redeemable in gold or silver. The destiny of an inconvertible paper currency is bound to be, as Hobbes described precapitalistic life, “nasty, brutish, and short.” Consider, for example the Continental dollars of our revolution, the Confederacy’s paper money, the German marks of the early 1920s, and the post-World War II moneys of Hungary, Argentina, and Bolivia. Governments can, of course, support the value of a paper money and maintain it in circulation for a time by declaring it “legal tender,” and compelling creditors to take it. But for how long?

In What Does Mr. Greenspan Really Think? Lawrence Parks – an ardent proponent of the gold standard – is concerned by the complete divorce of the U.S. dollar from gold, and the Federal Reserve’s unlimited power to create dollars. He argues that the U.s. dollar is threatened by the very institution responsible for protecting it.

Parks analyzes, sentence-by-sentence, a speech by Federal Reserve System Chairman Alan Greenspan. His basic criticism of the Fed is that its role as a “lender of last resort” provides a “safety net subsidy” to banks. This reduces their risks, “induces” them to make questionable loans to less qualified borrowers at lower interest rates, and assures them of gains without fear of suffering losses (p. 37). The “market signals that usually accompany excessive risk-taking” are “muted,” so that when trying to set interest rates, the Fed’s “regulators are compelled to act as a surrogate for market discipline”

(39). Greenspan realizes that lowering interest rates induces malinvestment, while allowing interest rates to rise tends to snuff out jobs. In attempting “to simulate the market responses that would occur if there were no safety net,” the Fed’s regulators make decisions every day, “either explicitly or by default” (38-39), without ever know- ing for sure whether their decisions are “appropriate” (48).

In the talk Parks analyzes, Greenspan admits, not once, but five times, that the central bank has “unlimited power” (41) to create unlimited dollars (5, 7, 12, 41-42). The market value, the purchasing power, of our “legal tender” currency has become completely dependent on faith in the Fed. Greenspan admits that “the abandonment of the domestic convertibility of gold effectively augmented .. the .power of the monetary authorlHesto create claims [dollars]” (12). And if, in some crisis, the Fed should increase dollars without limit – as Greenspan admits it has unlimited power to do – it could destroy entirely the value of the U.s. dollar, its usefulness as a medium of exchange, and thus the market itself.