Alan Greenspan Admits
Ron Paul Was Right About Gold by Ryan McMaken |
February 21, 2017
In the next issue of The
Austrian, David Gordon reviews Sebatian Mallaby's new book,
The Man Who Knew, about the career of Alan Greenspan. Mallaby
points out that prior to his career at the Fed, Greenspan
exhibited a keen understanding of the gold standard and
how free markets work. In spite of this contradiction, Mallaby
takes a rather benign view toward Greenspan.
However, in his review, Gordon asks the
obvious question: If Greenspan knew all this so well, isn't
it all the more worthy of condemnation that Greenspan then
abandoned these ideas so readily to advance his career?
Perhaps not surprisingly, now that his career
at the Fed has ended, Old Greenspan — the one who defends
free markets — has now returned.
This reversion to his former self has been
going on for several years, and Greenspan reiterates this
fact yet again in a recent interview with Gold Investor
magazine. Greenspan is now a fount of sound historical information
about the historical gold standard:
I view gold as the primary
global currency. It is the only currency, along with silver,
that does not require a counterparty signature. Gold, however,
has always been far more valuable per ounce than silver.
No one refuses gold as payment to discharge an obligation.
Credit instruments and fiat currency depend on the credit
worthiness of a counterparty. Gold, along with silver, is
one of the only currencies that has an intrinsic value.
It has always been that way. No one questions its value,
and it has always been a valuable commodity, first coined
in Asia Minor in 600 BC.
The gold standard was operating at its peak in the late
19th and early 20th centuries, a period of extraordinary
global prosperity, characterised by firming productivity
growth and very little inflation.
But today, there is a widespread view that the 19th
century gold standard didn’t work. I think that’s like
wearing the wrong size shoes and saying the shoes are
uncomfortable! It wasn’t the gold standard that failed;
it was politics. World War I disabled the fixed exchange
rate parities and no country wanted to be exposed to the
humiliation of having a lesser exchange rate against the
US dollar than itenjoyed in 1913.
Britain, for example, chose to return to the gold standard
in 1925 at the same exchange rate it had in 1913 relative
to the US dollar (US$4.86 per pound sterling). That was
a monumental error by Winston Churchill, then Chancellor
of the Exchequer. It induced a severe deflation for Britain
in the late 1920s, and the Bank of England had to default
in 1931. It wasn’t the gold standard that wasn’t functioning;
it was these pre-war parities that didn’t work. All wanted
to return to pre-war exchange rate parities, which, given
the different degree of war and economic destruction from
country to country, rendered this desire, in general,
Today, going back on to the gold standard would be perceived
as an act of desperation. But if the gold standard were
in place today we would not have reached the situation
in which we now find ourselves.
Greenspan then says nice things about Paul
Volcker's high-interest-rate policy:
Paul Volcker was brought in as chairman
of the Federal Reserve, and he raised the Federal Fund
rate to 20% to stem the erosion [of the dollar's value
during the inflationary 1970s]. It was a very destabilising
period and by far the most effective monetary policy in
the history of the Federal Reserve. I hope that we don’t
have to repeat that exercise to stabilise the system.
But it remains an open question.
Ultimately, though, Greenspan claims that
central-bank policy can be employed to largely imitate a
When I was Chair of the Federal Reserve
I used to testify before US Congressman Ron Paul, who
was a very strong advocate of gold. We had some interesting
discussions. I told him that US monetary policy tried
to follow signals that a gold standard would have created.
That is sound monetary policy even with a fiat currency.
In that regard, I told him that even if we had gone back
to the gold standard, policy would not have changed all
This is a rather strange
claim, however. It is impossible to know what signals a gold
standard "would have" created in the absence of
the current system of fiat currencies. It is, of course, impossible
to recreate the global economy under a gold standard in an
economy and guess how the system might be imitated in real
life. This final explanation appears to be more the sort of
thing that Greenspan tells himself so he can reconcile his
behavior at the fed with what he knows about gold and markets.
Nor does this really address Ron Paul's Concerns expressed
for years toward Greenspan and his successors. Even if monetary
policymakers were attempting to somehow replicate a gold-standard
environment, Paul's criticism was always that the outcome
of the current monetary regime can be shown to be dangerous
for a variety of reasons. Among these problems are enormous
debt loads and stagnating real incomes due to inflation.
Moreover, thanks to Cantillon effects, monetarily-induced
inflation has the worst impact on lower-income households.
Even Greenspan admits this is the case with debt: "We
would never have reached this position of extreme indebtedness
were we on the gold standard, because the gold standard
is a way of ensuring that fiscal policy never gets out of
Certainly, debt loads have taken off since
Nixon closed the gold window in 1971, breaking the last
link with gold: