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Voluntary Man
01-04-2012, 10:17 PM
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 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 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.

GeorgiaAvenger
01-04-2012, 10:18 PM
lol....well i'll let somebody else take this

eduardo89
01-04-2012, 10:20 PM
lol....well i'll let somebody else take this

Yeah I'll pass too

Chowder
01-04-2012, 10:26 PM
Probably because Ron Paul spoke bad about Alan Greenspan at the Bloomberg debate.

freneticentropy
01-13-2012, 03:10 AM
Nathaniel: Alan was a good friend. When I first met him, he was already a great economist. But I was amazed how strongly the Market was with him. I took it upon myself to train him as an Objectivist. I thought that I could instruct him as well as Ayn. I was wrong.

Ron: There is still good in him.

Nathaniel: He's more machine now than man. His mind is twisted and evil.

Ron: I can't do it, Nathaniel.

Nathaniel: You cannot escape your destiny. You must face Darth Greenspan again.

Dsylexic
01-13-2012, 03:28 AM
this is greenspan from 1966.ron showed him this essay from the Objectivist and asked him if he would change any of it.. g'span said -nope,he still agrees with it.
it just means,that for the sake of power and money,G'span sold out.he is not an idiot.but HE WILL ABSOLUTELY PLAY ALONG with the idiotic keynesians to keep his job and grab some money.
he is a sell out. he doesnt represent free markets -though in his heart he understands it.
people like him are worse than spies who sell out their countries defense secrets.

we dont need him.ron knows him too well to understand what is going on with g'span

MooCowzRock
01-13-2012, 04:47 AM
Alan Greenspan's policies as Federal Reserve Chairman is what caused the bubbles we are seeing today. His expansionary policy during the late 1990's and early 2000's in combination with Fannie Mae and Freddie Mac, under Clinton's advisement is what led to the current housing crisis.

Essentially, the guy betrayed his own philosophies once he got control of the US supply of money.

Thats how I've read it to be, at least.