Wednesday, April 02, 2008
A number of you have sent links to the Barron's story about former Fed Chairman Alan Greenspan's mysterious doctoral thesis - thanks.
We'll get to that in a minute.
As part of an email exchange with CR on this topic, the well-known piece of writing from 1967 came up - Gold and Economic Freedom - and, one thing led to another, ultimately resulting in the title of this post.
Not having read this piece in quite some time, save for the well-worn second to last paragraph that seems to pop up everywhere and begins, In the absence of the gold standard, there is no way to protect savings from confiscation through inflation", another quick read reveals a rather remarkable 40-year old:
In addition to examining the fundamental nature of money, a subject that gets scant attention in economic circles these days, this piece is notable for its look at the pre-stock market crash conditions that led to the crash and then to the Great Depression.
Alan Greenspan, 1967
Penned by Greenspan 41 years ago and reprinted from the book of essays Capitalism, the Unknown Ideal by Ayn Rand & others. As you read it, ask yourself what happened to this man?
An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense-perhaps more clearly and subtly than many consistent defenders of laissez-faire-that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.
Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.
When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates.
The "Fed" succeeded: it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.
Most contemporary economic thought about that period conveniently omits the period prior to 1930, looking instead at how the depression could have been shortened if more easy money had been applied more quickly.
This is pretty amazing stuff coming from one of the most important individuals in recent history. That is, an individual who played a major role in shaping the financial and banking system as they exist today - systems that now seem in danger of imploding on a fairly regular basis.
Anyway, on to the story of the "invisible dissertation" by Jim McTague at Barron's:
Greenspan, who left the Fed in 2006 but is still consulted as a genius, might find a metallic exoskeleton exceptionally comforting come May, when the University of Texas Press publishes an unflattering book by Robert Auerbach entitled Deception and Abuse at the Fed: Henry B. Gonzalez Battles Alan Greenspan's Bank.As is sometimes the case for Presidents of the United States, so too, it seems that judging Chairmen of the Federal Reserve can be difficult to do without the benefit of distance and perspective or, in this case, a doctoral thesis.
Auerbach, a veteran Fed basher, portrays Greenspan as a real-life Professor Marvel -- who, through double-talk or "garblement," transformed himself into a mighty economic wizard à la Oz. Auerbach strongly implies that Greenspan's 1977 Ph.D. from New York University was obtained in a few months with little more rigor than a matchbook-cover art degree and that Greenspan has kept his Ph.D. thesis secret in order to protect his vaunted academic reputation.
Greenspan appears to have taken only a few months to obtain his NYU doctorate in '77.
Auerbach contends in his book that Greenspan's invisible Ph.D. thesis is symbolic of a career marked by prevarication, cover-ups and a general aversion to making the Fed more publicly accountable. He calls on Congress to "bring the Fed into the Democracy" because "unelected Fed decision makers should not decide what the public should know about how they are running the central bank."
Unlike Greenspan, Auerbach writes: "No one should be given the immense powers bestowed on the Board of Governors and the FOMC without having his or her credentials publicly examined."
If only Greenspan's thesis were available to examine.