Alan Greenspan's Gold and Economic Freedom

Alan Greenspan wrote Gold and Economic Freedom in 1966, when he was 40-years-old. It appeared in Ayn Rand's Objectionist newsletter that year, and in her non-fiction book, Capitalism, the Unknown Ideal, in 1967.

In it, the middle-aged Greenspan makes a strong and persuasive argument for the gold standard and against central banks.

After reading Gold and Economic Freedom, one can't help but wonder what happened to that Alan Greenspan. It hardly sounds like a man who would eventually go on to head the Federal Reserve.

As a fully formed adult, Greenspan underwent a total conversion as Fed Chairman and became a hypocrite. He completely betrayed his own ideals and abandoned the beliefs he had once argued so articulately.

The selection of Greenspan as head of the Federal Reserve was a curious one. Greenspan was a believer in Ayn Rand, a believer in free markets. That seems incompatible for a central banker, because central banking is nothing less than a massive intervention in the market through the setting of interest rates.

Greenspan recognized this incongruity himself, as he noted in his book, The Age of Turbulence:

"I knew I would have to pledge to uphold not only the Constitution but also the laws of the land, many of which I thought were wrong."

"I had long since decided to engage in efforts to advance free-market capitalism as an insider, rather than as a critical pamphleteer."

Included here, in its entirety, is the full text of Gold and Economic Freedom. It is an excellent read and clearly illustrates why holders of the US debt have good reason to be worried.

It is absolutely full of amazing quotes such as:

"The gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state).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."

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation... The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves."

"Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process."

Without further adieu, please enjoy....


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, sea shells, 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 always been considered a luxury good. It is durable, portable, homogeneous, divisible, and, therefore, has significant advantages over all other media of exchange. Since the beginning of Would 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 division 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, 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 for 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 War 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 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 "hidden" 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.


After the financial crisis, Greenspan was called to Capitol Hill to testify before Congress. In his testimony, Greenspan clearly seemed to regret his earlier conversion, refuting the views he had professed for 18 years as Fed Chairman. These views had led him to continually inflate the nation's money supply and manipulate its interest rates.

“I made a mistake in presuming that the self-interest of organizations — specifically banks and others — were such as that they were best capable of protecting their own shareholders and their equity in the firms."

Greenspan also said that he was “shocked" and professed, “I still do not fully understand why it happened, and obviously to the extent that I figure out where it happened and I — I will change my views. The facts change; I will change.”

"I found a flaw," said Greenspan. "I don’t know how significant or permanent it is. But I have been very distressed by that fact.

"I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works."

"In other words, you found that your view of the world, your ideology, was not right, was not working," replied Rep. Henry Waxman.

"Precisely. That’s precisely the reason. I was shocked because I’d been going for 40 years or more with very considerable evidence that it was working exceptionally well."

Until suddenly it didn't.

News On Home Sales Only Gets Worse

On Wednesday, we learned that new home sales in January hit a historic low, dating back nearly half a century.

As if that wasn't bad enough, things got worse today with the news that existing January home sales also slumped unexpectedly.

The National Association of Realtors reported that existing home sales dropped by 7.2% last month from December levels.

Though year-over-year sales improved by 11.4%, the January slide surprised many analysts, who were expecting a slight increase.

Why anyone would be surprised is a mystery. With U-6 the unemployment rate at 17%, one in six Americans is either unemployed or underemployed. And everyone else is afraid they're going to join those ranks.

The most worrisome element is this; if government tax credits (scheduled to expire on April 30) and artificially suppressed
interest rates aren't boosting home sales, what will?

Is it realistic to expect that Americans – who are desperately trying to reduce or get out of debt – will be inspired to buy a home due a tax credit ranging from $6.500 to $8,000?

The median home price nationally is $164,700 for existing homes, and $203,500 for new homes. This means that the government tax credit ranges from 4%-5% of the sales price. That's hardly motivational, especially for people worried about their employment prospects.

Reports indicate that many existing homes are being bought by investors who plan to rent or flip them, particularly in the case of foreclosed homes. Distressed or foreclosed homes made up 38% of all sales nationally in January.

All of the government intervention may simply be expediting sales that would have occurred anyway, as in the case of the Cash for Clunkers program. And despite that intervention, the government cannot thwart what is a plainly organic and natural reaction to economic trends.

The issues in both housing and unemployment are equally deep and structural. Neither will rebound any time soon. It is very likely that these problems with will linger, remaining with us for years to come.

Apparently, government intervention cannot overcome the will of the markets, or the rational anxieties of millions of Americans.

New Home Sales Hit Record Low

More bad news for the housing market. New home sales hit a record low in January.

Today, the Commerce Department reported that new home salesdropped 11.2 percent last month, to the lowest level on record going back to the early 1960s.

January's sales slump is part of a much longer trend; new home sales for all of 2009 fell by almost 23 percent, the worst year on record.

Home sales have fallen for three straight months, despite massive government support. Sales will likely fall even further when that support is withdrawn this spring, as scheduled.

The $1.25 trillion Federal Reserve program, which has held down mortgage rates, is set to end March 31 and tax credits to bolster home buying are scheduled to expire at the end of April.

Those supports seem to be the only things holding up the fragile housing market, which is seeing not only slowing sales but also slumping prices.

The drop in home sales pushed the median sales price down to $203.500, pushing the market back to 2003 levels.

With the U-6 unemployment measure remaining at 17%, consumers still aren't spending. In fact, consumer confidence plunged to 46 this month, from 56.5 in January. A reading of 90 indicates a stable economy.

Americans are rightfully scared and they simply aren't spending. Even those who are willing are finding that loans are tough to get right now.

By these measures alone, we are a long way from a housing recovery, or any kind of economic recovery for that matter.

Like California, Los Angeles' Bond Rating Lowered

Following the lead of credit rating agencies Moody's and Fitch, Standard & Poor's lowered Los Angeles' bond rating today.

Plagued by a $212 million debt, as well as plunging tax revenues, Los Angeles finds itself in a precarious position. The lowered rating will cost the city millions in additional borrowing costs.

Things are so bad that last week the city announced plans to eliminate 4,000 workers. Though the layoffs are projected to save as much as $300 million, analysts fear that the savings will be offset by the city's still excessive spending.

S&P downgraded Los Angeles from AA to AA-minus. That will increase interest rates for city bonds. Over the next few months, Los Angeles is expected to issue $70 million in bonds to pay for various legal judgements.

Moody's view of Los Angeles had already dropped from "stable" to "negative" last week.

S&P's move came just weeks after it lowered California's bond rating. Already lower than any other state in the union, California's rating was dropped yet again as it remains mired in a massive budget deficit of $20 billion.

The agency lowered the state's general obligation bond rating from A to A-minus. It says it has a negative outlook on California's debt, an indication that it may yet lower the state's bond rating even further.

The state's borrowing costs have increased, and Gov. Schwarzenegger is seeking $7 billion in assistance from te federal government, which has its own staggering debt problem.

S&P’s cut brings it in line with Moody’s rating of Baa1 and Fitch's BBB.

According to the state Treasurer’s office, Moody’s assessment of California’s debt is just three steps above so- called junk, or non-investment grade. Meanwhile, Fitch's rating is now just two steps above junk.

State budget officials have already said they may delay paying some of the state’s bills in March because the state's cash balance will dip below the $2.5 billion cushion they like to maintain.

California Treasurer Bill Lockyer warned that California may need to delay or shut down thousands of infrastructure projects if budget problems prevent it from raising additional funds from investors.

Consumer Confidence Plunges As Reality Sets In

Consumer confidence nosedived to a 10-month low in February, according to the Conference Board.

The index, which stood at 56.5 in January, plunged to 46. The economy is considered stable only when the reading surpasses 90.

By this measure, our economy is halfway to stable.

Consumers are clearly worried about their jobs or, for the unemployed, their prospects of finding jobs. They are worried about mortgage payments, or delinquencies and defaults. They are worried about credit card debt, medical debt, and every other manner of debt.

Their anxiety will likely lead to curbed spending, the board said.

That's a problem for the economy since about 70% of economic activity is derived from consumer spending. This lack of consumer confidence dampens hopes of a nascent recovery.

People are simply reacting to what they feel, to what they hear, and to what they see around them. They see empty storefronts and foreclosure signs everywhere. If they haven't lost their jobs, they know people who have.

People aren't buying any of this "greenshoots" nonsense. They obviously dismiss the government's and media's claims of an economic recovery.

Americans are opting for realism over baseless optimism. Reality is setting in. Our current situation is more than jut an economic cycle.

Everything has changed, and may never be the same.

Millions Set to Lose Unemployment Benefits as Economy Fails to Create Jobs

According to the National Employment Law Project, nearly 1.2 million Americans will lose their unemployment benefits next month unless Congress steps in to extend the filing deadline. By July, that number jumps to almost 5 million.

Under current law, unemployed Americans have access to 26 weeks of state-sponsored insurance benefits. But due to the Great Recession, the federal government has initiated four separate tiers of emergency benefits that can extend the benefits period up to 99 weeks.

However, recipients must exhaust their current benefits before filing for the next tier. Yet, the filing deadline for all tiers is at the end of February. As a result, nearly 1.2 million Americans will either not be able to apply for federal assistance or unable enter the next federal tier.

If Congress doesn't act immediately — with money it doesn't even have — all of these Americans will face an even greater crisis.

The Labor Department projects that eight million Americans will exhaust their regular 26 weeks of unemployment benefits in 2010.

Yet, the cost of extending unemployment benefits to the federal government and the states will be burdensome, and require taking on even further debt.

According to AP, the costs of another extension of unemployment benefits will reach $100 billion. The estimated price tag includes the costs of extending unemployment benefits through 2010 for those who have been unemployed for more than six months, as well as costs to provide subsidies to assist in paying health insurance premiums.

The White House estimated the cost of unemployment compensation to exceed $140 billion for fiscal 2010, which began in October.

Republican demands for tax cuts directed toward businesses that hire new employees this year will only shortchange an already broke Treasury Department and reeling Social Security Administration.

Currently, 25 states have run out of unemployment money and have borrowed $24 billion from the federal government to cover the gaps. Collectively, states are projected to run a $57 billion deficit in the program in 2010 alone.

The federal government projects that 40 state programs will go broke within two years and need $90 billion in loans to keep issuing benefit checks.

Of particular concern, a total of 6.3 million Americans have been unemployed for at least six months, the largest number since the government began keeping track in 1948. That's more than twice as many as in the early '80s recession.

Collectively, nearly 16 million Americans remain jobless. That number doesn't include those who have lost unemployment benefits and are no longer counted. Nor does it count those who have part-time jobs but want full-time work.

The unfortunate reality is that job creation has been slowing for decades.

According to the Economic Cycle Research Institute, during periods of American economic expansion in the 1950s, ’60s and ’70s, the number of private-sector jobs increased about 3.5 percent a year.

But during expansions in the 1980s and ’90s, jobs grew just 2.4 percent annually. And during the last decade, job growth fell to 0.9 percent annually.

Despite this reality, the government says that 1.3 million jobs needed to be created every year from 2006-2016 just to keep up with the growing labor force.

Yet, more than 8 million jobs have been lost during the Great Recession, meaning that job creation for the previous decade was actually negative.

That's a very deep hole to work out of.

Even if the nation could add 2.15 million private-sector jobs per year starting in January 2010, it would need to maintain this pace for more than 7 straight years (7.63 years), or until August 2017, to eliminate the current jobs deficit.

That seems highly unlikely. Sadly, our nation's unemployment problem will be with us for many years to come.

Shadow Inventory Amounts to Nearly Three Years of Home Sales

According to a report from the credit rating agency Standard & Poor’s (S&P), the “shadow inventory” of bank-repossessed properties, as well as distressed mortgages facing foreclosure, will take nearly three years to clear at the current sales rate.

The “shadow inventory” of homes includes all delinquent loans and real-estate owned (REO) property that has not reached the market. REO property are foreclosed homes taken back by the bank for liquidation.

On average, $14.5bn of seriously delinquent loans or REO property liquidates each month.

S&P estimates the inventory to equal a 33-month supply of homes. All of that inventory will further drive down home prices.

“Overall, it is our opinion that recent positive housing reports should not be construed as a sign that the distress in the residential housing market is abating, but rather should be attributed to the temporarily limited supply of homes on the market,” according to the report.

“We believe that the recent constriction in the supply of foreclosed homes on the market is a temporary one,” said the analysts.

According to the S&P report, homes are falling into serious delinquency faster than REO transactions are closing.

Following current trends, S&P analysts predict that 70% of the mortgages that have received a loan modification will re-default.

The total balance of these re-defaulting loans and the current amount of serious distressed loans will reach $473.4 billion, nearly 30% of the total outstanding balance on all privately securitized loans.