I recently had an opportunity to hear testimony by Federal Reserve Chairman Alan Greenspan at a hearing of the Joint Economic committee. I always relish the opportunity to question Mr. Greenspan at such hearings, because I disagree so strongly with Fed policies. Mr. Greenspan is a remarkable man, with a background as a devotee of novelist Ayn Rand, a supporter of the gold standard, and a fervent advocate of capitalism. So I’m at a loss to explain his metamorphosis into a believer in fiat currency and centralized economic planning.
Of course capitalism is based on the premise that centralized economic planning is bad. I’m always amazed that otherwise pro-market conservatives, who rightfully scorned disastrous Soviet economic policies, are so willing to accept centralized monetary planning by the Fed. True capitalism requires a free market for money and interest rates, just as surely as it requires a free market for wages and prices.
Mr. Greenspan declined to answer my question about the tumbling value of the dollar, citing a kind of gentlemen’s agreement between him and the Treasury department not to discuss dollar policy. This is preposterous, of course, because he is unquestionably the one man on earth most responsible for the value of the U.S. dollar. If a member of Congress cannot ask the Federal Reserve Chairman a straightforward question about dollar policy, how can we expect the American public to have the faintest idea about what the Fed really does? The answer is that very few Americans pay any attention to the Fed, which has successfully insulated itself as a “nonpolitical” entity.
Mr. Greenspan’s two greatest sins are easy to understand. First, he has wildly inflated the money supply by creating more than $5 trillion in new dollars since he became Fed chairman. Second, he has relentlessly cut interest rates below market levels. These actions make money too plentiful and too cheap. When dollars are abundant and the cost of borrowing is low, people and businesses spend money less carefully. The stock market bubble of the late 1990s is all the proof we need that Fed printing presses can create money, but not wealth.
Because of Fed expansion of the money supply, the dollar has suffered a precipitous decline in the past year when measured against other world currencies. A Euro note worth only 89 cents shortly after its introduction is now worth about $1.16. Some consequences of this decline are obvious to the American public; a trip to Europe costs a lot more than it did a few years ago. But the long-term significance of this decline has not yet begun to sink in. Our relative wealth as a nation is measured in dollars, and the steady erosion of the value of those dollars means we will all be poorer in the future.
Both Congress and the Fed should be promoting sound dollar policies, because a sound and stable currency is required for sustained economic growth. Instead, both have through default and deliberate action promoted fiat policies that systematically depreciate the dollar. The financial markets understand this, and investors track the minute-by-minute fluctuations in value of the dollar seeking an investment advantage. This kind of speculation would not exist in a sound monetary system.
Mr. Greenspan certainly basked in the glow of admiration during the 1990s, when money and credit seemed limitless. He was deemed a genius by both the financial press and a general public eager to let the good times roll. Even today, with the nation mired in the inevitable bust following the Fed’s artificially-created boom, his detractors are few. In fact, President Bush plans to offer Mr. Greenspan another term as Fed chief. If our economic woes continue, however, the nation someday may regret not taking a closer look at the Federal Reserve and its manipulation of our financial fortunes.