Golden debate: Paul vs. Greenspan

The following is an edited transcript of an exchange between Ron Paul, Republican member from Texas of the U.S. House of Representatives, and U.S. Federal Reserve Chairman Alan Greenspan during a recent session of the House Committee on Financial Services.

Ron Paul: If, indeed, this is your last appearance before our committee, Mr. Greenspan, I would have to say that, in the future, I’m sure I’ll find these hearings a lot less interesting. But I do have a couple of parting questions for you.

Keynes, when he wrote his general theory, made the point that he has tremendous faith in central-bank credit creation because it would stimulate productivity.

Along with this, he also recognized that it would push prices and labour costs up. But he saw this as a convenience, not a disadvantage, because he realized that, in the corrective phase of the economic business cycle, that wages had to go down — a nominal decrease in wages which people wouldn’t accept. But if they were decreased in real terms, it would serve the economic benefit.

Likewise, this same principle can be applied to our debt. To me, this system that we have today is a convenient way to default on our debt — to liquidate our debt after the inflationary scheme.

Even you, in the 1960s, described the paper system as a scheme for the confiscation of wealth. In many ways, this is exactly what has happened. We have learned to adapt to deficit financing. But, also in many ways, the total debt is not that bad because it goes down in real terms.

As bad as it is, in real terms, it’s not nearly as high.

Since we went on a total paper standard in 1971, we have increased our money supply essentially 12-fold. Federal debt in this country has gone up 19-fold — but that is in nominal dollars, not in real dollars.

So my question is this: Is it not true that the paper system that we work with today is actually a scheme to default on our debt? And is it not true that, for this reason, that’s a good argument for people — eventually, some day — not wanting to buy Treasury bills because they will be paid back with cheaper dollars?

And, indeed, in our lifetime, we certainly experienced this in the late 1970s — that interest rates had to go up pretty high and that this paper system serves the interests of big government and deficit financing because it’s a sneaky way of paying for it.

At the same time, it hurts the people who are retired and put their money in savings.

Aligned with this question, I would like to ask something dealing exactly with gold: If paper money — today it seems to be working rather well — doesn’t work, when will the time come? What will the signs be that we should reconsider gold?

Even in 1981, when you came before the Gold Commission, people were frightened about what was happening, and that’s not too many years ago. You testified that it might not be a bad idea to back our government bonds with gold in order to bring down interest rates.

What are the conditions that might exist for the central bankers of the world to reconsider gold? We do know that they haven’t given up on, or gotten rid of, their gold. They’re holding it there for some reason.

What’s the purpose of the gold if it isn’t with the idea that someday they might need it? They don’t hold lead or pork bellies. They hold gold.

What are the conditions that you might anticipate when the world may reconsider gold?

Alan Greenspan: Well, you say central banks own gold, or monetary authorities own gold. The United States is a large gold holder. And you have to ask yourself: Why do we hold gold?

The answer is essentially, implicitly, the one that you’ve raised. Namely that, over the generations, when fiat monies arose and, indeed, created the type of problems — which I think you correctly identify — of the 1970s, although the implication that it was some scheme or conspiracy gives it a much more conscious focus than actually, as I recall, it was occurring. It was more inadvertence that created the basic problems.

But as I’ve testified here before to a similar question, central bankers began to realize in the late 1970s how deleterious a factor the inflation was.

And, indeed, since the late ’70s, central bankers generally have behaved as though we were on the gold standard. And, indeed, the extent of liquidity contraction that has occurred as a consequence of the various, different efforts on the part of monetary authorities is a clear indication that we recognize that excessive creation of liquidity creates inflation which, in turn, undermines economic growth.

So that the question is: Would there be any advantage, at this particular stage, in going back to the gold standard?

And the answer is: I don’t think so, because we’re acting as though we were there.

Would it have been a question at least open in 1981, as you put it? And the answer is yes.

Remember, the gold price was US$800 an ounce. We were dealing with extraordinary imbalances, interest rates were up sharply, the system looked to be highly unstable, and we needed to do something.

Now, we did something. The United States. . . Paul Volcker (the Reagan-era U.S. Federal Reserve chairman), as you may recall, in 1979 came into office and put a very severe clamp on the expansion of credit, and that led to a long sequence of events here, which we are benefiting from up to this date.

So I think central banking has learned the dangers of fiat money and, as a consequence, we’ve behaved as though there are, indeed, real reserves underneath the system.