Gold makes The Wall Street Journal

Section:

11p ET Wednesday, February 27, 2002

Dear Friend of GATA and Gold:

A friend has just sent an official transcript
of today's exchange between U.S. Rep. Ron
Paul, R-Texas, and Federal Reserve Chairman
Alan Greenspan before the House Financial
Services Committee, so I'll append it here,
and you can judge how good or bad my
reporting of a few minutes ago was!

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

REP. RON PAUL (R-TEXAS): Welcome, Chairman
Greenspan. I want to start by referring to a
speech you gave on January at the American
Numismatic Society, where you spoke
profoundly about monetary policy, where you
expressed that central bankers have had this
relative success over the past decades, and
it raises hopes that the fiat monetary system
can be managed in a responsible way. So I
think you're still at that point of hoping
that this system will work. I maintain that
the jury is still out on whether fiat money
will work on the long term.

And then you foiled it up by saying, in case
it didn't work -- and I don't know whether
you had tongue in cheek or not about this,
but you said that we might have to go back to
seashells and oxen as our medium of exchange.
And then you reassured everybody that the
open discount window would have an adequate
supply of oxen.

Chairman Oxley, if we get this point, which I
suspect we will someday, I ask you that we
have hearings to debate the issue of what
medium of exchange that we have before the
Fed starts using oxen as a medium of
exchange.

HOUSE FINANCIAL SERVICES COMMITTE CHAIRMAN
OXLEY: Are you referring to the chairman
here?

PAUL: Yes. I hope that you will at least
consider that. But I think it is an important
point, and I relate that to the Enron issue,
because in many ways I think the system that
you have been asked to manage it's similar to
being asked to manage an Enron system.
Because Congress is notoriously in favor of
deficit spending; we are currently expanding
the national debt at $250 billion a year and
we have nearly a $6 trillion debt.

Now, we create that debt by buying votes. We
spend a lot of money.

Now, the Federal Reserve comes in and they
buy that debt in order to maintain the
interest rate that they think is the right
interest rate, and they take that and use it
as an asset. You put it in the bank, you call
this debt that we created as an asset, and
you use it as collateral for our Federal
Reserve notes.

So that's a pretty good scheme. And I think
in the moral terms, as well as the economic
terms, it's very similar to what the Enron -
how Enron operates.

I'm not convinced this system works very
well, because a lot of people here praise you
for the adequate amount of liquidity -- and
that's what inflation is: create more money,
lower interest rate. Every time you ask for
liquidity, every time you ask for lower
interest rates, you're asking for inflation
of the money supply.

And I think what we fail to do is every ask
about the cost. Do we ever concern ourselves
about the people who have had two-thirds of
their income removed because they happened to
be savers and living off interest, we gouge
them with inflation, the loss of purchasing
power, as well as taxing that, and yet a lot
of people in this country have suffered from
that particularly system?

Now, the analogy I would like to draw is
something you said in your testimony on page
13, and you have mentioned several times now
that Enron may be a good lesson. And I think
it is. And I'm not for more of this
regulation by SEC. I think you're correct
that derivatives provide a market tool that
is worthwhile.

But you said, "The Enron decline is an
effective illustration of the vulnerability
of a firm whose market value largely rests on
capitalized reputation, with very little, if
no, physical assets." That's exactly what our
monetary system is all about, and that's what
I believe the dollar is vulnerable.

We in Congress do not have a responsibly to
run Enron. Some other government has a
responsibility to deal with fraud. We have a
responsibility to the dollar. And I think
that's what we fail so often to address
around here.

And you said that "Enron provides
encouragement that the force of market
discipline can be counted on over time to
foster a much greater transparency." That's
exactly what the market does with money. If
you look at the rapid and the sudden
devaluations of the fiat currencies around
the world, if you look at what happened to us
in '79 and '80, that was the market coming in
and forcing vulnerability and transparency on
us.

Now, gold gives you a hint as to what's
happening. Gold has sent a mild message in
this past year, in spite of the fact that
central banks and others continually sell and
loan out gold and pushing the price of gold
down. But there is a message there. So I
would ask you, can you see any corollary
whatsoever on what you're asked to do in
running our monetary system to that which
Enron was involved in?

FEDERAL RESERVE CHAIRMAN ALAN GREENSPAN: I
hope there are fundamental differences. I
mean, there are -- first, dealing with
essentially a fiat currency, what it is that
we are doing is that the currency is granted
value by fiat of the sovereign, as it is said
in the textbooks. The issue there is that, in
years past, there's been considerable
evidence that fiat currencies have been
mismanaged in general and that inflation has
been too often the result.

What I was mentioning in the speech that you
were referring to is the fact that there is
some evidence that we're learning that
lesson, learning how to manage a fiat
currency. I've always had some considerable
skepticism about whether that in the long run
can succeed, but I must say to you, the
evidence of recent decades is that it has
been succeeding. Whether that continues is a
forecast which I can't really project on.

The Enron situation is essentially one in
which there was an endeavor to imply that
earnings were much greater than they really,
that increasing debt was hidden.

I think of no reason to have done what they
did with their off-balance-sheet transactions
other than to obscure the extent of the debt
they had. And what essentially was squandered
in that process was the reputational capital
which they had succeeded in achieving over a
period of time.

And I don't perceive that anything that we
are doing as a central bank involves anything
related to that. I hope that where we need to
be transparent and indicate what we are
doing, we do so, and we so except in those
areas where it, as I mentioned to you
previously, inhibits the ability to actually
function as a central bank. But as I say in
summary, I hope your analogy is
inappropriate.