Alan Greenspan, Come Home

I came across an old article of yours, Mr. Greenspan, and wondered what you would say about it today. It's called "Gold and Economic Freedom." [1] I found it fascinating and would like to review a few of its main points with you.

Money is "a precondition of the division of labor economy," you wrote, and is needed as a store of value for saving, exchange, or long-range planning.

In "richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal," because a metal is homogeneous and divisible. Since luxuries are always in demand, the commodity chosen should be a luxury good. "The term 'luxury good' implies scarcity and high unit value," you note. With a high unit value, such a commodity is easily portable. For most modern societies, the luxury of choice is gold.

Unfortunately, any metal commodity will be inconvenient for making large payments. This brings banks into the picture. Banks entice owners of gold to leave their money with them in exchange for paper notes and bank deposits. They also offer the owners interest on their accounts.

To make money, banks loan out more than the amount of their gold deposits. This works until banks expand credit too rapidly and hit the limit they can loan based on their gold reserves. Then banks raise interest rates, restricting borrowing on new ventures and business expansion. Prior to World War I, this happened occasionally and sent the economy into short-lived recessions.

But economic interventionists had an idea. If limited bank reserves were the cause of recessions, "why not find a way of supplying increased reserves to the banks so they never need be short!" This way, expansion could go on indefinitely and render slumps a thing of the past.

In your eloquent words, "the process of cure was misdiagnosed as the disease" and served as an excuse for creating a central bank, the Federal Reserve System, in 1913.

In addition to depositors' gold, banks could now use the Fed's credit as reserves. The Fed's credit was paper backed by the taxing power of the federal government.

This is where things get really interesting. The Fed kept fueling its banks with paper reserves, keeping interest rates low and business borrowing high. The stock market soared in response. The Fed hit the brakes but not in time. The market nosedived in 1929 and the American economy collapsed. Great Britain, also suffering the consequences of rampant credit expansion, abandoned the gold standard in 1931 and induced a worldwide series of bank failures.

Statists saw this as an opportunity to get rid of gold and fund their vast welfare programs with government bonds. If they tried to collect revenue through regular taxation, they'd be thrown out of power. But with deficit spending, taxpayers get to keep their money and watch its value disappear in higher prices.

Because gold is tied to assets, a gold standard limits the amount of credit an economy can support. Government bonds, however, are backed by taxation — future taxation. The solution to perpetual deficit spending, therefore, is going off the gold standard. The government simply issues bonds to the market, and the Federal Reserve buys some of them to increase bank reserves. As in earlier periods of our history, government could run its printing presses at will, only now it had no competition from gold.

"In the absence of the gold standard," you wrote, "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 . . . The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves."

Gold, you concluded, "stands as a protector of property rights."

Mr. Greenspan, you spoke the truth when you wrote this article, and I ask you to speak it again. It's not too late. No one knows better than you how the Federal Reserve has helped fund the country's dubious wars and countless wasteful government programs, how it's wrecking our money, our savings, and our future. As Chairman of the Fed, you command the world's attention.

Recall also how former IRS commissioners have spoken out against the income tax. Though most suggest replacing it, at least one identified it for what it was: a page out of Karl Marx. "The income tax] is written into the Communist Manifesto," said IRS Commissioner T. Coleman Andrews. "Maybe we ought to see that every person who gets a tax return receives a copy of the Communist Manifesto with it so he can see what's happening to him." [2]

You might recall, the fifth plank of the Manifesto pushes for a central bank such as the Federal Reserve. G. Edward Griffin, author of The Creature from Jekyll Island: A Second Look at the Federal Reserve, believes the Fed is so devious the government could operate without collecting any taxes whatsoever. One of the reasons it does collect taxes is to keep taxpayers from looking too closely at the Fed. [3]

But you could get them to look if you said the right words. Stand by your article, Mr. Greenspan, and stand up for gold.

2. U.S. News & World Report, May 25, 1956, quoted in What Former IRS Commissioners Say, http://www.geocities.com/cmcofer/commish.html

3. G. Edward Griffin, Before the Income Tax, http://mu.anet-chi.com/~bhuston/government/040196n2.html

George F. Smith is currently marketing his screenplay, Eyes of Fire: Thomas Paine and the American Revolution. He can be reached at gfs543@bellsouth.net.