Greenspans Remarks............
Remarks by Chairman Alan Greenspan
At the Opening of an American Numismatic Society Exhibition, Federal Reserve Bank of New York, New York
January 16, 2002
The history of money
The other day I told a spendthrift friend that I had to deliver a short address on the history of money. He responded, "I understand the history of money. When I get some, it's soon history." Fortunately, not all market participants are as spendthrift as my friend. Savers have been in sufficient abundance since the beginning of the Industrial Revolution to enable investment to further material well-being. Money, as a store of value, was an early facilitator of savings and one of the great inventions of mankind. Saving and investment is very difficult in a barter economy.
The history of money is the history of civilization or, more exactly, of some important civilizing values. Its form at any particular period of history reflects the degree of confidence, or the degree of trust, that market participants have in the institutions that govern every market system, whether centrally planned or free.
To accept money in exchange for goods and services requires a trust that the money will be accepted by another purveyor of goods and services. In earlier generations that trust adhered to the intrinsic value of gold, silver, or any other commodity that had general acceptability. Historians, digging deep into the earliest evidence of human practice, link such commodities' broad acceptability to peoples' desire for ostentatious gold and silver ornaments.
Many millennia later, in one of the remarkable advances in financial history, the bank note emerged as a medium of exchange. It had no intrinsic value. It was rather a promise to pay, on demand, a certain quantity of gold or other valued commodity. The bank note's value rested on trust in the willingness and ability of the bank note issuer to meet that promise. Reputation for trustworthiness, accordingly, became an economic value to banks--the early issuers of private paper currency.
They competed for reputation by advertising the amount of capital they had to back up their promises to pay in gold. Those banks that proved trustworthy were able to broadly issue bank notes, along with demand deposits, that is, zero interest rate liabilities. The profit that accrued from investing the proceeds at interest was capitalized in the banks' market value. In the mid-nineteenth century, equity capital/asset ratios were often several multiples of today's ratios.
In the twentieth century, bank reputation receded in importance and capital ratios decreased as government programs, especially the discount window and deposit insurance, provided support for bank promises to pay. And, at the base of the financial system, with the abandonment of gold convertibility in the 1930s, legal tender became backed--if that is the proper term--by the fiat of the state.
The value of fiat money can be inferred only from the values of the present and future goods and services it can command. And that, in turn, has largely rested on the quantity of fiat money created relative to demand. The early history of the post-Bretton Woods system of generalized fiat money was plagued, as we all remember, by excess money issuance and the resultant inflationary instability.
Central bankers' success, however, in containing inflation during the past two decades raises hopes that fiat money can be managed in a responsible way. This has been the case in the United States, and the dollar, despite many challenges to its status, remains the principal international currency.
If the evident recent success of fiat money regimes falters, we may have to go back to seashells or oxen as our medium of exchange. In that unlikely event, I trust, the discount window of the Federal Reserve Bank of New York will have an adequate inventory of oxen.
federalreserve.gov
Contrast this with his Humphrey-Hawkins testimony of two years ago................
Message 13537574
<<The following is from Allen Greenspan's Humphrey-Hawkins testimony.
It clearly shows how it is impossible for a central bank to control an economy.
Dr. Ron Paul: ?We have concentrated here a lot today on prices, and you talk a lot about the price of labor, labor costs. And yet that is not the inflation according to sound money economics. The concern a sound money economist has is for the supply of money. If you increase the supply of money, you have inflation.
Just because you are able to maintain a price level, (a) certain level that because of technology or for whatever, this should not be reassurance because we still could have our malinvestment, we can still have our excessive debt and borrowing. And it might contribute even to the margin debt and these various things.
So I think we should concentrate, especially since we?re dealing with monetary policy, more on monetary policy and what we?re doing with the money. It was suggested here that maybe you?re running a policy that?s too tight. Well, that ? I?d have to take exception to that, because it?s been far from tight. I think that we have had a tremendous growth in money. The last three months of last year might be historic highs for the increase of Federal Reserve credit. In the last three months the Federal Reserve credit was increasing at a rate of 74%. It is true, a lot of that has been withdrawn already. But this credit that was created at the time also influenced M3, and M3 during that period of time grew significantly, not quite as fast as the credit itself. But M3 was rising at a 17% rate.
Now, since that time, of course, a lot of the credit has been withdrawn, but I have not seen any significant decrease in M3. And I wanted to just refer to this chart that the Federal Reserve prepared on M3 for the past three years. And it sets the targets. And for three years you?ve never been once in the target range.
You know, if I set my targets and I perform like that as a physician, my patient would die. I mean, this would be big trouble in medicine. But here it doesn?t seem to bother anybody. And if you extrapolate and looked at the targets set in 1997 and carried that set of targets all the way out, you only missed M3 by $690 billion. I mean, that?s just a small amount of extra money that came into circulation. But I think it?s harmful. I know Wall Street likes it, and the economy likes it when the bubble?s getting bigger. But my concern is, what?s going to happen when this bursts? And I think it will unless you can reassure me.
But the one specific question I have is will M3 shrink? Is that a goal of yours, to shrink M3? Or is it only to withdraw some of that credit that you injected for the non-crisis of Y2K??
Mr. Greenspan: ?Let me suggest to you that the monetary aggregates as we measure them are getting increasingly complex and difficult to integrate into a set of forecasts. The problem that we have is not that money is unimportant, but how we define it.
By definition, all prices are indeed the ?ratio of an exchange of a good for money.? And what we seek is what that is. Our problem is we used M-1 at one point as the proxy of money, and it turned out to be a very difficult indicator of any financial state. We then went to M-2 and had the similar problem. We have never done M-3 per se because it largely reflects the extent of expansion of the banking industry. And when in effect banks expand, in and of itself, it doesn?t tell you terribly much about what the real money is.
So our problem is not that we do not believe in sound money. We do. We very much believe that, if you have a debased currency, that you will have a debased economy. The difficulty is in defining what part of our liquidity structure is truly money. We have had trouble ferreting out proxies for that for a number of years. And the standard we employed is whether it gives us a good forward indicator of the direction of finance and the economy.
Regrettably, none of those which have been able to develop, including MZM ? has not done that. That does not mean that we think that money is irrelevant. It means that we think our measures of money have been inadequate. And, as a consequence of that, we, as I have mentioned previously, have downgraded the use of the monetary aggregates for monetary policy purposes, until we are able to find a more stable proxy for what we believe is the underlying money in the economy.?
Dr. Paul: ?So it?s hard to manage something you can?t define??
Mr. Greenspan: ?It is not possible to manage something you can?t define.?
The bottom line here is that there is no way to control or regulate an economy based on unbacked paper money because you can't determine the value of this fiat money! It should be obvious that unbacked money by its very nature has no value! Through out history every attempt by to use Fiat money has failed in the long run! We have only had fiat money since 1971 which is really a very short time.>> |
