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Section: Daily Dispatches

Friends of GATA and Gold!

GATA member Gary Harany has sent the hereon following article by Alan
Greenspan, FED Chairman, written for the Wall Street Journal, way back
in 1981. Alan Greenspan was then a partner in Townsend-Greenspan & Co.,
an economic consulting firm. The article tells us a lot about
Greenspan's essentially Pro-gold orientation, now disallowed by the fiat
money crooks he serves.

"It is relevant and very significant to know that Greenspan was the
Chairman of the Council of Economic Advisors from 1974 to 1977, a period
witnessing dramatic changes in the price of gold," writes Gary Harany.

Gary also sent a quotation from a still earlier Greenspan, of 1966, who
was then fully aware, in his own words, "of the shabby secret of the
welfare statists tirades against gold." "Deficit spending," wrote the
then 39-year-old Greenspan, "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."

"We, the John QPublic, should know who our enemies are," writes Gary.
"If I had the resources, I would consider taking out full page ads in
some major newspapers with that Greenspan quotation. I think it would be
quite effective. Politics such as they are, it may be that some
newspapers would not print it."

The poor man, Greenspan, has got himself into a hopeless fix. The
credit bubble that he has helped inflate for "the 'hidden' confiscation
of wealth" is now so huge, he must know that whatever happens next, he
is a loser. Cronyism is all that is left to him perhaps -- (Although the
analogy is not quite accurate, I am reminded of the parable of the
shrewd steward).

For GATA, for Gold,

Boudewijn Wegerif "GO GATA"
Moderator GATA Forum
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By Alan Greenspan
Published in the Wall Street Journal on September 1, 1981.

The growing disillusionment with politically controlled monetary
policies has produced an increasing number of advocates for a return to
the GOLD STANDARD - including at times President Reagan (the then
President-- GO GATA).

In years past a desire to return to a monetary system based on gold was
perceived as nostalgia for an era when times were simpler, problems less
complex and the world not threatened with nuclear annihilation. But
after a decade of destabilizing inflation and economic stagnation, the
restoration of a GOLD STANDARD has become an issue that is clearly
rising on the economic policy agenda.

A commission to study the issue, with strong support from President
Reagan, is in place. The increasingly numerous proponents of a GOLD
STANDARD persuasively argue that budget deficits and large federal
borrowings would be difficult to finance under such a standard. Heavy
claims against paper dollars cause few technical problems, for the
Treasury can legally borrow as many dollars as Congress authorizes. But
with unlimited dollar conversion into gold, the ability to issue dollar
claims would be severely limited. Obviously if you cannot finance
federal deficits, you cannot create them.

Either taxes would then have to be raised and expenditures lowered. The
restrictions of gold convertibility would therefore profoundly alter the
politics of fiscal policy that have prevailed for half a century.


Even some of those who conclude a return to gold is infeasible remain
deeply disturbed by the current alternatives.

For example, William Fellner of the American Enterprise Institute in a
forthcoming publication remarks "...I find it difficult not to be
greatly impressed by the very large damage done to the economies of the
industrialized world... by the monetary management that has followed the
era of (gold) convertibility... It has placed the Western economies in
acute danger."

Yet even those of us who are attracted to the prospect of gold
convertibility are confronted with a seemingly impossible obstacle: the
latest claims to gold represented by the huge world overhang of fiat
currency, many dollars. The immediate problem of restoring a GOLD
STANDARD is fixing a gold price that is consistent with market forces.

Obviously if the offering price by the Treasury is too low, or
subsequently proves to be too low, heavy demand at the offering price
could quickly deplete the total U.S. government stock of gold, as well
as any gold borrowed to thwart the assault. At that point, with no
additional gold available, the U.S. would be off the GOLD STANDARD and
likely to remain off for decades.

Alternatively, if the gold price is initially set too high, or
subsequently becomes too high, the Treasury would be inundated with gold
offerings. The payments the gold drawn on the Treasury's account at the
Federal Reserve would add substantially to commercial bank reserves and
probably act, at least temporarily, to expand the money supply with all
the inflationary implications thereof.

Monetary offsets to neutralize or "earmark" gold are, of course,
possible in the short run. But as the West Germany authorities soon
learned from their past endeavors to support the dollar, there are
limits to monetary counter-measures.

The only seeming solution is for the U.S. to create a fiscal and
monetary environment which in effect makes the dollar as good as gold,
i.e., stabilizes the general price level and by inference the dollar
price of gold bullion itself. Then a modest reserve of bullion could
reduce the narrow gold price fluctuations effectively to zero, allowing
any changes in gold supply and demand to be absorbed in fluctuations in
the Treasury's inventory.

What the above suggests is that a necessary condition of returning to a
GOLD STANDARD is the financial environment which the GOLD STANDARD
itself is presumed to create. But, if we restored financial stability,
what purpose is then served by return to a GOLD STANDARD?

Certainly a gold-based monetary system will necessarily prevent fiscal
imprudence, as 20th Century history clearly demonstrates. Nonetheless,
once achieved, the discipline of the GOLD STANDARD would surely
reinforce anti-inflation policies, and make it far more difficult to
resume financial profligacy. The redemption of dollars for gold in
response to excess federal government-induced credit creation would be a
strong political signal. Even after inflation is brought under control
the extraordinary political sensitivity to inflation will remain.
Concrete actions to install a GOLD STANDARD are premature.

Nonetheless, there are certain preparatory policy actions that could
test the eventual feasibility of returning to a GOLD STANDARD, that
would have positive short-term anti-inflation benefits and little cost
if they fail. The major roadblock to restoring the GOLD STANDARD is the
problem of re-entry. With the vast quantity of dollars worldwide laying
claims to the U.S. Treasury's 264 million ounces of gold, an overnight
transition to gold convertibility would create a major discontinuity for
the U.S. financial system. But there is no need for the whole block of
current dollar obligations to become an immediate claim. Convertibility
can be instituted gradually by, in effect, creating a dual currency with
a limited issue of dollars convertible into gold. Initially they could
be deferred claims to gold, for example, five-year Treasury Notes with
interest and principal payable in grams or ounces of gold. With the
passage of time and several issues of these notes we would have a series
of "new monies" in terms of gold and eventually, demand claims on gold.

The degree of success of restoring long-term fiscal confidence will show
up clearly in the yield spreads between gold and fiat dollar obligations
of the same maturities. Full convertibility would require that the yield
spread for all maturities virtually disappear. If they do not,
convertibility will be very difficult, probably impossible, to
implement. A second advantage of gold notes is that they are likely to
reduce current budget deficits.

Treasury gold notes in today's markets could be sold at interest rates
at approximately 2% or less. In fact from today's markets one can
construct the equivalent of a 22-month gold note yielding 1%, by
arbitraging regular Treasury note yields for June 1983 maturities (17%)
and the forward delivery premiums of gold (16% annual rate) inferred
from June 1983 futures contracts. Presumably five-year note issues would
reflect a similar relationship. A Risk of Exchange Loss The exchange
risk of the Treasury gold notes, of course, is the same as that
associated with our foreign currency Treasury note series.

The U.S. Treasury has, over the years, sold significant quantities of
both German mark - and Swiss franc denominated issues, and both made and
lost money in terms of dollars as exchange rates have fluctuated. And
indeed there is a risk of exchange rate loss with gold notes. However,
unless the price of gold doubles over a five-year period (16% compounded
annually), interest payments on the gold notes in terms of dollars will
be less than conventional financing requires. The run-up to $875 per
ounce in early 1980 was surely an aberration, reflecting certain
circumstances in the Middle East which are unlikely to be repeated in
the near future. Hence, anything close to doubling of gold prices in the
next five years appears improbable. On the other hand, if gold prices
remain stable or rise moderately, the savings could be large: Each $10
billion in equivalent gold notes outstanding would, under stable gold
prices, save $1.5 billion per year in interest outlays. A possible
further side benefit of the existence of gold notes is that they could
set a standard in terms of prices and interest rates that could put
additional political pressure on the administration and Congress to move
expeditiously toward non-inflationary policies.

Gold notes could be a case of reversing Gresham's Law. Good money would
drive out bad. Those who advocate a return to a GOLD STANDARD should be
aware that returning our monetary system to gold convertibility is no
mere technical, financial restructuring. It is a basic change in our
economic processes. However, considering where the policies of the last
50 years have eventually led us, perhaps there are lessons to be learned
from our more distant GOLD STANDARD past.
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