I’ve written a lot about deflation over the last three or four months. But yesterday’s column on it, published here, got me an especially big flood of responses. One especially interesting one came by email, and I’m going to reproduce it here, and respond to it point by point.
I thought you were on the right track in the first few paragraphs of your article but then I see in finishing that you actually agree with having central banks, and mucking with the economy is a good thing.
Obviously, the writer of this email hasn’t been reading my commentary for very long. I’ve often written about how the world would be a better place without central banks. But given that they exist, I’ve written over and over that they certainly shouldn’t go “mucking with the economy” — their role must be confined to the guardianship of the integrity of a nation’s currency, its “unit of account.”
Contrary to your article, the money supply *absolutely* has grown at unprecedented rates. Maybe the Fed hasn’t actually done what you suggest, printing money and buying bills, but Greenspin has absolutely had the presses cranked.
All you have to to is go to the Fed’s own website, and you can see to the penny the value of the monetary base through time. And we can each draw our own conclusion about how fast the money supply has been growing. I think most observers would be surprised to see just how slowly it’s been growing compared to scare stories about it in the media. But none of that matters anyway, because (as I’ve also written over and over), there is no “right” amount of money, and no “right” rate of growth of the money supply. Like the supply of anything else, the “right” amount of money has to be judged against the amount of the demand for money. And the supply and the demand for money intersect in the price of monetary commodities, such as gold.
Two things need to happen, and this is proven historically time and again: fiat currency *will* fail, miserably and must be backed by GOLD, and central banking should be abolished *and* is completely unnecessary if currency is backed by GOLD.
Indeed — we are almost agreed, but my emailing friend just doesn’t know it. But because gold represents the intersection of supply and demand for money, fiat money needn’t literally be “backed” by it, in the sense that there has to be one ounce of actual gold in Fort Knox for every, say, $300 of fiat money that “Greenspin” prints. Instead, fiat money can be indexed to the price of gold, by having the central bank simply print money or withdraw money at whatever rate keeps the money price of gold constant at some target (say $300 per ounce).
Read the history books, by people much smarter and more experienced than anyone in the Fed. In fact, Greenspin used to believe that capitalist economies *are* self-correcting and *should* be backed by GOLD. Then, for some reason he decided to become a follower of Ayn Rand who thinks that economies must be managed by something like a central bank, that they must be constantly tweaked.
The sentiment here is good, but my emailing friend has some of his facts right and some of his facts wrong. Yes, Alan Greenspan did used to believe that money should be backed by gold — but this was when he was still a fan of Ayn Rand, and very much reflects Rand’s own radical capitalist orientation. My friend obviously hasn’t read any more of Rand’s writings than he has of mine, or he’d know that she was totally opposed to the ideas that “economies must be managed” or that they “must be constantly tweaked.”
In fact, Greenspan’s most passionate writings on capitalism and gold appear in an anthology of Rand’s work, Capitalism: The Unknown Ideal. You can read a bootleg copy of Greenspan’s treatise on gold from that book — Gold and Economic Freedom — on the web. Check it out. Then next time you watch Greenspan testifying before Congress, droning on and on with endless self-justifying opacities about the economy and his world-weary
I-know-best-this-hurts-me-more-than-it-hurts-you sanctimoniousness, remember what you read. And try to see the remnants in the aging Alan Greenspan of the young firebrand who wrote, “gold and economic freedom are inseparable… the gold standard is an instrument of laissez-faire and that each implies and requires the other.”
