The Maestro Changes his Tune
HON. RON PAUL OF TEXAS
February 22, 2005
Nearly 40 years ago, Federal Reserve chair Alan Greenspan wrote
persuasively in favor of a gold monetary standard in an essay
entitled Gold and Economic
Freedom. In that essay he neatly summarized the fundamental
problem with fiat currency in a few short sentences: "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 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 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."
Today, however, Mr. Greenspan has become one of those central
planners he once denounced, and his views on fiat currency have
changed accordingly. As the ultimate insider, he cannot or will
not challenge the status quo, no matter what the consequences
to the American economy. To renounce the fiat system now would
mean renouncing the Fed itself, and his entire public career
with it. The only question is whether history will properly reflect
the destructive nature of Mr. Greenspan's tenure.
I had an opportunity to ask him about his change of heart when
he appeared before the House Financial Services committee last
week. Although Mr. Greenspan is a master of evasion, he was surprisingly
forthright in his responses to me. In short, he claimed he was
wrong about his predictions of calamity for the fiat U.S. dollar,
that the Federal Reserve does a good job of essentially mimicking
a gold standard, and that inflation is well under control. He
even made the preposterous assertion that the Fed does not facilitate
government expansion and deficit spending. In other words, he
utterly repudiated the arguments he made 40 years ago. Yet this
begs the question: If he was so wrong in the past, why should
we listen to him now?
First, the Federal Reserve does not mimic a gold standard by
any measure. The clearest example of this lies in our current
account deficit, which our fiat currency encourages. Under a
gold standard we would not have exchange rate distortions between
the Chinese renminbi and the U.S. dollar, for example. True currency
stability is impossible when fiat dollars can be produced at
will and foreign lenders bankroll our deficits.
Second, inflation is a much greater problem than the federal
government admits. Health care, housing, and energy are three
areas where costs have risen dramatically. The producer price
index is rising at the fastest rate in seven years. Bond prices
are rising. To suggest that rapid expansion of the money supply
and artificially low interest rates do not ultimately cause price
inflation is absurd. Third, Fed policies do indeed have adverse
political ramifications. Fiat currency and big government go
hand-in-hand. Without a gold standard, Congress is free to spend
recklessly and fall back on monetary expansion to pay the bills.
Politically, it's easier to print new dollars than raise taxes
or borrow overseas. The Fed in essence creates paper reserves
that enable Congress to undertake spending measures that far
exceed tax revenues. The ill effects of this process are not
felt by the politicians, who can always find popular support
for new spending. Average Americans suffer, however, when their
dollars are "confiscated through inflation," as Mr.
Greenspan termed it.
It's not enough to question the wisdom of Mr. Greenspan. Americans
should question why we have a central bank at all, and whose
interests it serves. The laws of supply and demand work better
than any central banker to determine both the correct supply
of money in the economy and the interest rate at which capital
is available- without the political favoritism and secrecy that
characterize central banks. Americans should not tolerate the
manipulation of our economy and the inflation of our currency
by an unaccountable institution.
February 22, 2005
Rep. Ron Paul, MD
 website: Project
Freedom
Who is Ron Paul?
Congressman Ron Paul of Texas enjoys a national reputation as
the premier advocate for liberty in politics today. Dr. Paul is
the leading spokesman in Washington for limited constitutional
government, low taxes, free markets, and a return to sound monetary
policies based on commodity-backed currency. He is known among
both his colleagues in Congress and his constituents for his consistent
voting record in the House of Representatives; Dr. Paul never
votes for legislation unless the proposed measure is expressly
authorized by the Constitution. In the words of former Treasury
Secretary William Simon, Dr. Paul is the "one exception to
the Gang of 535" on Capitol Hill.
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