Alan Greenspan’s Question

Alan Greenspan was not just a brilliant economic analyst and a giant of central banking — though he was certainly all that. He was a political philosopher who understood the connection between overbearing government and individual freedom. He embraced capitalism with the vigor of a radical in the 1960s, though his later comportment was tempered by inherent constraints imposed by his increasing gravitas as a top policymaker.Some 20 years before Greenspan became chairman of the Federal Reserve, he asserted, in a chapter that appeared in Ayn Rand’s 1966 compendium “Capitalism: The Unknown Ideal,” that “gold and economic freedom are inseparable.” Arguing that “government deficit spending under a gold standard is severely limited,” he stated that “in the absence of the gold standard, there is no way to protect savings from confiscation through inflation.”In the strongest terms, Greenspan condemned those who would redistribute national income through fiscal overspending. He deemed it a scheme for the “hidden” confiscation of wealth. “Gold stands in the way of this insidious process,” he wrote. “It stands as a protector of property rights.” In Greenspan’s view, that explained the “almost hysterical antagonism toward gold” among big government statists.Lest anyone dismiss these bold declarations as a quaint relic from an earlier period in Greenspan’s intellectual development, it’s instructive to consider his response to a question posed by David Asman in an October 2007 Fox Business television interview, more than a year after stepping down from his 18-year term as Fed chairman.Mr. Asman: “So why do we need a central bank?”Greenspan: “Well, the question is a very interesting one. We have at this particular stage a fiat money, which is essentially money printed by a government, and it’s usually the central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or currency board or something of that nature.“Because unless you do that, all of history suggests that inflation will take hold with very deleterious effects on economic activity. And there are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard.”Here I am proud and grateful to acknowledge that I was considered by Alan Greenspan to be among those numbers that believed, along with him, that there were some very positive aspects to prior monetary regimes based on gold convertibility. Starting in 1990, after he read my book “The Coming Soviet Crash” and asked to discuss its implications, I met with him on numerous occasions, both in his office at the Fed and later at Greenspan Associates.Always gracious and highly conversant, Greenspan specifically sought my views on international monetary relations, exchange rates, global trade, and financial developments. It was a privilege to be able to talk with him about such issues. Greenspan believed that the historical role of gold in anchoring monetary stability had proved helpful in boosting productivity and higher levels of prosperity, aligning with periods of strong economic growth.Greenspan thought the automaticity of the gold standard exacted monetary discipline both domestically and internationally. In November 1998, while serving as Fed chairman, Greenspan, in a speech on the structure of the international financial system, stated:“A key conclusion stemming from our most recent crises is that economies cannot enjoy the advantages of a sophisticated international financial system without the internal discipline that enables such economies to adjust without crisis to changing circumstances. Between our Civil War and World War I when international capital flows were, as they are today, largely uninhibited, that discipline was more or less automatic.“Where gold standard rules were tight and liquidity constrained, adverse flows were quickly reflected in rapid increases in interest rates and the cost of capital generally. This tended to delimit the misuse of capital and its consequences. Imbalances were generally aborted before they got out of hand.”All of which is to testify to the intellectual consistency of Greenspan amid the magnitude of the powers and responsibilities he assumed as a public servant at the highest levels. It’s not easy being in that arena.Looking over prior email communications with Greenspan, I will always be especially appreciative for one dated July 12, 2019, wherein he replied to my plaintive cry that pundits were eviscerating me, as a Fed governor nominee, for speaking favorably about the discipline of gold to help stabilize the dollar. “Interesting times,” Greenspan typed back. “If gold is such a worthless metal then why does the US Government, and all other major governments, hold so much of it in storage?”

Alan Greenspan’s Question

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