Saturday, September 08, 2007

Greenspan the collectivist forgot about Gold

The human race has never found a way to confront bubbles. Alan Greenspan

It has been a few decades since Al Greenspan was a devotee of Ayn Rand, and it shows. I'm not much of a fan of Rand as I found her philosophic views tended to steam roll over the, in my view, important questions of consciousness and totally missed Hume's point on the failure of reason alone, however, she did have her moments. Her steadfast defense of gold as money is a case in point- a point obviously lost on Greenspan over the decades.

Greenspan's quote above is, in my view, true if one assumes that confronting a bubble means stopping it entirely thereby saving all participants from its nasty effects. The interplay of ignorance, deception and concentration of power with respect to money makes me doubt that we ever will find a way to avoid such problems, en masse. Of course, the same can be said for many of the ills mankind faces. As the saying goes, you can lead a horse to water but you can't make him drink (or in this case, think).

I wonder from whence Greenspan came up with this idea of saving everyone, which is a very collectivist conception. If freedom means anything it must include the freedom to fail as well as succeed. Perhaps Greenspan thought of himself as a monetary messiah.

However, there is another way to interpret the quote above. The human race did come up with a way to confront bubbles but the Central Bankers have been endeavoring to take it away- Gold.

Moving one's savings out of a financial system run amok and into Gold is a way to confront bubbles. Those, like me, who have taken this route have managed to preserve far more purchasing power than those who stayed in the system, despite the best efforts of the Central Banks. They apparently believe that truth is a matter of faith- the more people who believe a proposition, the truer it becomes.

Gold's ability over the millennia to retain purchasing power was, I believe, one of the key reasons it was chosen as a basis for western monetary systems as commerce emerged from Feudal Europe.

Although a gold standard will not stop bubbles from forming, its effects on the behavior of people in such systems tended to facilitate the termination of the bubbles which did form- making their duration shorter and the end result clean up faster. It did this by giving the people a way to both escape the system and vote on it at the same time, which in turn tended to keep the bankers on their toes. I doubt the derivatives mess would have grown nearly as large, thus making its clean up easier, had such a system been in place- a point worth considering whenever you read some commentary on the intractable problems appearing as the world tries to fix this disaster.

Greenspan's faith in the abilities of central bankers, who, as another of his mentors, Arthur Burns, warned in The Anguish of Central Banking, must operate in a political climate, is his blind spot in this regard as it leads him to the collectivist view that they should govern the many. I hope the human race learns once again that we did find a way to confront bubbles, we just threw it away.

4 comments:

zeropoint said...

It is not the central bankers that endeavored to take away gold.

It was the Populists of the 1880's, self-taught (home-schooled) agrarians, who first proposed the idea of a fiat currency controlled by a central bank.

These farmers and ranchers were trying to compete for loans with the new industrialists and railroad and oil tycoons for the limited amount of credit based on a precious metal of limited supply. This lack of money was also deflating the price per yield for the commodities they brought to market.

Frustrated with this situation, they banded together and proposed a new financial system founded on a fiat currency which could be expanded when necessary and allowed to contract before excessive inflation occurred.

Gold, which must be mined from the earth, works adequately in an economy that is also based on raw materials that are extracted from the earth. Nature has a way of keeping supply and demand in balance.

But upon the dawning of the Industrial Age, the demand for credit expanded beyond the mines' ability to supply the gold. This limited supply raised the interest rates out of reach of the farmers whose profits were waning and who needed to borrow in order to keep their farms and ranches.

The populist movement died out when the new gold discoveries in the 1890's boosted credit availability. But their proposal of a central bank controlled fiat currency was adopted either consciously or unconsciously by the creatures on Jekyll Island.

Gold, or a gold-backed currency, works adequately in an economy that is growing no faster than the new gold discoveries. However, in an economy where new technological advances increases the demand for credit above and beyond the new gold discoveries, the limitations of a currency in limited supply creates pockets of deflation which can structurally cripple an economy.

Those who wish for a world currency backed by a substance of limited quantity are either, consciously or unconsciously, wishing for a new paradigm wherein the demand for credit -- that is the need for growth -- is controlled by Nature Herself.

One of such a persuasion might ask oneself if he would now be reading these words on his computer monitor had the Populists' idea of a free-floating currency never been implemented.

Zeropoint has asked himself that question many tim... err... well........ at least once.

His answer?

"No way in hell."

0.

Dude said...

I have a different view on that slice of history. In this country the Populists weren't calling for fiat money, they were complaining about the loss of silver money, thus the famous "Cross of Gold" speech by Bryan.

Nor was it the Populists who pushed through legislation creating the Fed, rather it was the machinations of JPMorgan and a few other bankers. The vote was taken right before Christmas break or else it would not have passed.

So, despite the fact that the world was industrialized, electrified, and connected via telecoms under a hard money standard, you think computers and the internet would not have occurred except under the current regime.

Interesting.

zeropoint said...

Very interesting indeed, dude, in that we have seemingly reached the point where the solutions of the past will remain in the past.

William Jennings Bryan took over the Populist movement prior to his bid for the presidency in 1896. His "Free Silver" campaign then replaced the much more radical plan of the original Populists.

It is not that these self-taught agrarians founded the Federal Reserve, their ideas preceded its institution and would have applauded the Act as it was instituted.

What ended the Populist movement was the new discoveries of gold that occurred in the 1890's. These discoveries expanded the money supply sufficiently to ease the continuing deflation in the prices of agricultural commodities and allowed the farmers and ranchers to keep their land and resume the seasonal borrowing so necessary.

It also allowed the bankers who refused to loan to the farmers to spread their dinner tables without resorting to rakes and hoes.

Now...

Regarding the question of technological advances' dependency on a flexible currency; we need only look back to the years prior to WWII after Roosevelt and Eccles removed the gold backing from the currency in order to try to revive the Great Depression economy.

We all know that it wasn't fiat currency itself that ended the depression, but it was the gearing-up for the war that enabled factories open-up again to production. Once Roosevelt declared war on the axis powers, radical expansion of the money supply was a slam-dunk necessity.

From William Greider's "Secrets of the Temple":

"If market pressures threatened to push rates higher, the central bank simply bought more Treasury issues itself, thus adding more money to the financial system and preventing the price of money from rising. In effect, the Fed guaranteed that if there was any Treasury paper that the private market would not buy, then the Fed itself would buy it. In 1933, when FDR took office, the national debt was $22 billion. When Pearl Harbor was attacked in 1941, it was $48 billion. By V-J Day, when the war ended in 1945, the national debt was $280 billion.",

If America had remained on the gold standard this expansion would have been impossible short of a return to the alchemy of the transmutation and multiplication of metals in the 17th century.

Now, regarding fiat money's contribution to technological advances, we hear again from Greider's "Temple" treatise.

"The operative principle was Keynesian economics on the grand scale: create new supply by first creating new demand for it. The government borrowed and spent in unprecedented volume, and the government's spending created the market for new products and newly emerging technologies. To meet the necessities of war, the government, in effect, force-fed the rapid development of new productive facilities across many industrial sectors. These would become the basic industries of America's postwar prosperity-electronics, petrochemical synthetics, aircraft frames and engines, shipbuilding, steel and nuclear power, among others. The new industrial base created by World War II was the platform that launched America's global hegemony, the era of multinational corporations based in the US and astride the world economy. This revolution might also be called "supply side" economics, but it was done from the gospel according to Keynes."

But all this history regurgitation aside, common (or maybe not so common) sense begs to ask the question:

How could a currency backed by an asset of limited availability allow the creation of new technologies and their inherent research, development and, "If one does not succeed, try, try again" exponentially increasing demand for brains, beakers and batteries?

How?

Zeropoint says, "No way in hell."

Now...

This is not to say that a fiat currency is the answer to all our current problems. Currency backed by debt has obviously found its Waterloo.

But to suggest that a currency backed by a substance of limited quantity is the answer to this current financial fiasco is a mere wistful wish to return to a system that got us to where we are at this point in time.

All roads led to where we are right here... right now.

Where we go from here is anyone's gas.


0.

Dude said...

Our reads of history differ.

In my understanding, Bryan did not take over the populist movement, the Populists, rather, opted to join the Democrats.

While I agree that there was a subset of Populists who favored a continuation of the Greenback policy of Lincoln, called the Greenback Party to my knowledge they were never a dominant force in the Populist movement.

The Populist platform of 1892 (http://www.wwnorton.com/college/history/ralph/workbook/ralprs32d.htm)
did not call for fiat money, but for a return of the old bi-metallism.

I think we might need to agree to disagree on the limitations of specie money.