I'm very new to this gold discussion, but I was absolutely amazed at the attached article forwarded to me by a friend, including a crisp article purpotedly written by Mr Alan Greenspan in 1966, indicating his profound belief in the gold standard!
Jay, I'm sure relates to the expression that the 'fish rots from the head down'.
Read on, and what awaits for us is truly scary, imho.
Selva
From J Taylor's Gold & Technology Stocks (www.miningstocks.com)
The Fish Rots from the Head Down
New York State Attorney General Eliot Spitzer has threatened to prosecute Merrill Lynch and its analysts for knowingly pumping and dumping equities that were bad investments. Analysts allegedly were extolling the virtues of investing in shares to the public while at the same time using the company's internal email system to let their colleagues know how terrible they REALLY thought these investments were. Why did these analysts lie to the public? It's very simple. They wanted to keep their jobs. If they had spoken the truth, Merrill Lynch most certainly would have fired them.
As dishonorably as the Merrill Lynch analysts may have acted, I find it hard to argue that the behavior of Alan Greenspan, Chairman of the Federal Reserve Bank is any more honorable. How can I make such a bold statement about America's beloved Fed Chairman? Let me answer that simply by asking the following question. If an American citizen knowingly set out to destroy the monetary system of the United States, would you consider that a serious offense? And if that same citizen understood that his actions would inevitably lead to global and domestic economic instability and a gradual if not sudden overthrow of the Constitution of the United States, would you not consider that to be an offense at least as serious as those committed by the Merrill Lynch analysts? I would! Which is why I have headed this monthly issue "The Fish Rots from the Head Down." I don't know for sure if the head of a fish is the first part of a fish to spoil. But that saying, which is reportedly common in some 36 European languages makes a point. How can you expect the citizens of a country to behave morally if its leaders don't set the example by speaking the truth and living in a truthful manner?
So far as the integrity and stability of our monetary system is concerned, no visible person on the face of the earth has more input into that than Alan Greenspan has. Regrettably, an article that he wrote in 1966 titled "Gold & Economic Freedom" demonstrates that he knows that by debasing the U.S. dollar as he has been doing on behalf of the Fed he is leading our nation toward economic instability in the long run. Moreover, he also knows that this activity is leading toward a gradual and perhaps sudden overthrow of the U.S. Constitution and the economic freedom it sought to make the birthright of every American. In other words, with respect to the amount of harm done to Americans, the self serving dishonest activities of Merrill Lynch analysts pales compared to those of Mr. Greenspan.
Might it be that Mr. Greenspan has simply had a change of views since he authored his 1966 article? Based on what he told Congressman Ron Paul back in February 2001, we don't think so. Following a House Banking Committee hearing, Congressman Paul asked the Chairman to autograph a copy of Greenspan's 1966 article, "Gold & Economic Freedom." While Mr. Greenspan was signing the article, Congressman Paul asked him if there was anything he would change in the article were he to write it today. According to the Congressman, Greenspan told him, "I have recently read the article again, and I would not change a word."
How does Mr. Greenspan justify his actions when he knows them to be so destructive? Dr. Larry Parks (www.fame.org) has reportedly confronted Greenspan with this very question. According to Larry, Greenspan said that he does not argue his pro gold views with his colleagues at the Fed because his minority views would simply be overruled. So, for the sake of job security and perhaps near term adulation, Mr. Greenspan knowingly carries out actions that are destructive to the American people for the benefit of an non-elected faceless group of men who control the Fed. What a good "German" Mr. Greenspan is!
Setting aside for a moment the issue of being loyal to your bosses, I would like someone to explain to me how the behavior of analysts at Merrill Lynch who face prosecution is more egregious than that of Mr. Greenspan who is still widely admired in America. In both instances, truth has been held hostage to personal career motivation. In the case of Mr. Greenspan, he is pleasing the privileged elite who through a legalized counterfeiting process line their own pockets and consolidate political power, while falsely implying he has the best interests of Americans at heart. In the case of the Merrill Lynch analysts, they were knowingly selling inferior equity products to investors while falsely proclaiming the merits of those investments. I should think it is only a matter of magnitude that separates the deception of Mr. Greenspan from that of Merrill Lynch analysts. Merrill Lynch damaged individual clients. Greenspan is knowingly and willingly contributing to a process of destroying the entire moral and economic fiber of America. If one acts in a manner that he believes will result in economic instability and the destruction of the Constitution of the United States, can that behavior be viewed as anything but treasonous? At least that is my view. For the benefit of subscribers who may never have read Greenspan's remarkable 1966 article "Gold & Economic Freedom" we are publishing it below. It initially appeared in Volume 5, Number 7 of "The Objectivist" newsletter, edited by Ayn Rand and Nathaniel Branden. As they say at Fox News, "We report, you decide."
Gold & Economic Freedom
By
Alan Greenspan
An almost hysterical antagonism toward the gold standard is one issue that 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 fee 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 forego the inestimable advantages of specialization. If we 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 sufficient 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 accepted commodity, which, in turn will make it still more acceptable. The shift is progressive until the 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 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 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 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, 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 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 worldwide 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 stop 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 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 standards 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 voter 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 s 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 their bank deposits to silver or copper or any other good, and there after 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. THE END |
