Friends,
At the behest of the signer below (and above, and or beside depending on how you read your monitor) we bring you a paper by A. Greenspan in 1996. 'Tis NOT short but WELL WORTH THE TIME!!

An Anon Sysop:

GOLD AND ECONOMIC FREEDOM
BY ALAN GREENSPAN

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 Was 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.

August 19, 1996


For those of you who wish to read this in the original grey stationery background the link is:
http://209.52.183.182/agitator/gold.htm

http://209.52.183.182/agitator/gold.htm

The Anon Sysop


AND

Pinkrock

-- Pinkrock (Aphotonboy@aol.com), October 05, 1999

Answers

That article was penned in August 1966, not 1996.

-- a (a@a.a), October 05, 1999.

That was back before we had DVDs, online brokerages, and phone sex. You know - before gold became a 'barbaric relic'. :)

-- a (a@a.a), October 05, 1999.

The article was part of an Ayn Rand book entitlted "Capitalism: The unknown ideal". The article dates to the mid 60's - not 1996

The religious maniacs, that want to take us back to the cave, are in full force on this board. You think that Y2K is a chance to punish man for wanting to enjoy life on earth. To punish him for the sins of his excesses and rape of the garden of eden. If there was a hell, you pricks, who hate this world and want man to forever kneel and be humble, belong there.

-- Hugh Aktson (hugha@home-net.com), October 05, 1999.

Hugh,

Control yourself...the veins on your forehead are getting dangerously close to popping! Now take a deeeeep breath, and exhale sloooowly.

-- TM (mercier7@pdnt.com), October 05, 1999.

Here, Hugh, I reloaded the bowl for ya.

-- lisa (lisa@work.now), October 05, 1999.

Pass it this way Lisa. Hey you're a cool chick!

-- David Lee Roth (Diver Down@Van Halen.ou812), October 05, 1999.

DR. HUGH AKTSON: Is it really you. I have been looking for you since I read of your disappearance. In my case it was 1965!

I'll have a hamburger, large fries, and a coke.

Y2K does indeed bring about strange "bedfellows." Are you still residing in the Gulch?

The moral crisis described in eloquence by Ayn Rand in Atlas Shrugged is perhaps upon us. Much as she could not have imagined something as incredible as destroying our freedom in the name of protecting the earth from man, she could not have envisioned something as simply rational, yet potentially damaging as that which we are calling "Y2K."

Greespan wrote much in those years (1962 - 1968). Together with Rand and others, he was one of what I would term her "inner circle."

In my judgment his stewardship of the Federal Reserve will likely be one that will be remembered as an attempt to buy time, while maintaining the economic base from which all other needed changes of "morality" might then be instituted.

Should Y2K create significant economic turmoil, the moral crisis will unfold with devastating consequences - led by the politics of out time. A chilling thought.

Yes there is a moral crisis. A moral crisis unlike anything imagined by those of our society who see morality rooted only in a context of religious belief.

Rand understood it. Though she was right, it remains my hope that Y2K will not become a "trigger" event resulting in her "predictions" making her more famous than Nostradomous (sp?).

With respect

-- Dave Walden (wprop@concentric.net), October 05, 1999.

So Dave, it sounds like you are at odds with Decker who claims that morality is no worse now than in the early 70's. You "thoughful pessimists" are so pessimistic! :)

-- a (a@a.a), October 05, 1999.

Dave,

Yes, I believe the motor of the world will be spluttering soon. Rand's vision of the moral crisis was considered extreme at the time she published AS in the late '50's. Now, it's amazingly prophetic.

There are plenty of us in the Gulch, but our location is virtual, not physical. I only wish we could have a real location from which to go back to the world.

Ragnar

-- Ragnar (ragnar@ggulch.com), October 05, 1999.

A: I am sertain that Mr Decker and I are at odds over many things, though much of what he has posted, within the limits of the discussions that take place on this forum, I am in agreement with.

The morality of which I speak, would perhaps be defined differently than the morality to which Mr Decker refers when he considers the "90's" about the same as the "70's."

The morality of which I speak is in reference to the crisis that underlies the fact that individual liberty, capialism, and this wonderful country, whose proper "morality" was briefly referenced in the Declaration of Independence, is at odds with the dominant morality of the world - specifically the morality of the sacrifice of the individual to the group.

As I previously have stated, should Y2K create societal turmoil, those "moral chickens" will unfortunately come home to roost in many forms - one form of which will be the political responses instituted by those of us suposedly representing all of us. All of course for our own good......

Whether it be martial law, with guns substituting for civility and discourse; the seizing of private property with rationing replacing the "price mechansim" of the marketplace, or dictatorship substituting for the remnants of our democratic republic, what will then be considered "moral" behavior by each of us will take on an entirely new meaning.

As far as Mr. Decker is concerned, he has earned from me what I trust I continue to earn from him, respect. Though we may disagree on gold, insurance, or perhaps even morality, I have read enough of his writing to consider his work of value - despite his tendency to at times belittle or look down on some of us that post on this forum. Some of us deserve it by virute of our own words. Just as at times, does he. Perhaps at times so do you and I.

With respect,

-- Dave Walden (wprop@concentric.net), October 05, 1999.