AMERICAN MONETARY INSTITUTE
PO BOX 601, VALATIE, NY 12184
ami@taconic.net
Stephen Zarlenga, DirectorDedicated to the independent study of monetary history, theory, and reform
March 31, 2000ALAN GREENSPAN'S REMARKABLE ADMISSION
Underlines His Dilemma as Chairman of the Federal Reserve
The re-appointment in January of Alan Greenspan as Chairman of the Fed
received no opposition from politicians or economists. Indeed, Senator John
McCain joked that if Greenspan died while he (McCain) was President, he'd
prop his corpse up behind his desk to make it appear he was still running the
Federal Reserve! We'd have to admit Greenspan could do less damage that
way, but in our view such adulation is so seriously misplaced that it now
endangers the future of the nation.In one way, the reality is just what it appears - Alan Greenspan is a nice
enough fellow; a free market ideologue and protégé of Ayn Rand - a nasal
personality, who is comfortable wearing ten dollar suits. And if almost
no-one else understands the damage he's done, certainly it has escaped his
notice also.The problem is that Greenspan's (and the Fed's) performance is being judged
by the wrong measures. Not only are they being given high grades for doing
the wrong things but their actions are potentially dangerous to the state of
the union.The Fed Chairman is praised for three reasons: First the low level of inflation.
Second the high level of the stock market. Third the low level of
unemployment. But what's wrong with these measures?First, Alan Greenspan and the rest of his high command are fighting inflation
in the way military Generals are often said to be fighting the last war.
Managing the money system to keep wages down (in itself a wrong idea) the
Fed may have already pushed the nation into the beginnings of an as yet
unrecognized deflation, judging by the M1 measurement. (see our website
Deflation essay)Second, the high stock market makes for ebullient business page reporting
but it has served to further concentrate wealth into the hands of the already
wealthy. A process which needs to go in the opposite direction if the
American experiment is to succeed. As for the middle class who believe their
pension money is growing royally; in reality the stock market must be
considered one of the greatest bubbles in human history, and there can be no
painless exit for substantial numbers of stockholders. The inevitable bursting
of this bubble is not going to be pretty. Thank God that social security will be
there for them (and it will).Third, the unemployment measurement doesn't take into account that despite
unprecedented working hours and job stress, a large part of the work force
isn't earning enough to live like human beings with a future. That over 45
million Americans can't even afford health insurance! Employment at such
wages really represents a type of semi-voluntary slavery.So these three measurements of the Fed's "success" really add up to very
serious risks for the nation. Moreover, on February 17, In Congressional
testimony Greenspan admitted to the basic cause of these errors, which is of
such fundamental importance that we'll quote it here:Congressman Ron Paul asked him why the Money measure - M3 - has been
growing for the past several years. WHY, If Inflation, which Greenspan
claims to be trying to control, is caused by growth in the Money Supply, why
has the FED allowed M3 to grow unchecked since 1992?Greenspan replied, "... We have a problem trying to define exactly what
MONEY is...the current definition of MONEY is not sufficient to give us a
good means for controlling the Money Supply..."Congressman Paul asked "Well, if you can't define Money, how can you
control the Monetary System?"Greenspan replied "That's the problem..."
!!! Just how serious a problem this represents is still being underestimated.
Ideologues fight their battles (e.g. against inflation) in the realm of their
pre-conceived ideas. But even in that self created tooth fairy land They
cannot formulate valid battle plans or economic concepts, unless they first
have a valid concept of the nature of money.Alan Greenspan has just come face to face with the basic error and essential
horror of the Classical, neo-classical and the Austrian schools of economics,
which the American Monetary Institute has pointed to for years: THEY
HAVE NO VALID CONCEPT OF THE NATURE OF MONEY - special
interests have misdefined money from Adam Smith's Wealth of Nations in
1776 (and earlier) to the present!It was this lack of definition which allowed the monetary power to be
inadequately dealt with at our Constitutional Convention. This lack of a
proper definition has allowed the monetary power to be privately exercised
throughout most of our history, to the benefit of the bankers and the
detriment of the nation. This ignorance of the nature of money is what
allowed the roaring twenties to go wild, and then ran our country into the
wall with the Great Depression.In Greenspan's time at the helm, his free market views, his worship of
markets and general downplaying of the proper monetary role of government
has allowed a bull market to turn into a dangerous bubble and fostered a
continuing concentration of wealth. His complaints against "irrational
exuberance" were not given real monetary teeth, but simply used as an excuse
to raise interest rates. Great for Bankers. Bad for the nation. The markets
ignored him.His mistaken market view of money has caused him to allow the M1 money
supply to decrease by as much as 8% since 1994 (July 1994 to October 1997,
minus 7.7%). It presently fluctuates 3 to 4% under the 1994 highs - an
unprecedented situation in modern times, which will have dire consequences
in a deflationary environment. He has allowed a large part of the cash
element of M1 to be circulating not in America, but in Russia and other
monetary disaster areas.This is all the more serious since M1 is the M which he could have exerted the
greatest control over. With the other M's, money creation is more market
dependent, and less secure; and what the market can create, the market can
destroy. This is Greenspan's dilemma. He has not exercised real control of
the money supply for some time, though he may not have realized or
admitted it to himself.What he must learn is that the money created by high stock multiples, where
stock options are being used as currency to pay workers, and to finance
acquisitions; will go out of existence when those multiples come down to
realistic levels.Under adverse market conditions the money supply will be reduced to much
lower levels; at extremes, down to the level of M1 (minus the US cash in
foreign countries, and un-gauranteed bank deposits), plus the most secure
parts of M2 and M3 - those which are not subject to market wipeout.What should the Fed have been doing, or do now? There have been so many
wrong practices from a monetary viewpoint, where do we start? They should
not have allowed stocks to be purchased on margin; not even when Treasury
instruments are deposited as collateral, but only be purchased for cash. They
should not have allowed banks to make so many loans based on the high
values of stocks as collateral.The Fed should have taken steps to encourage banks to make loans that
would have stimulated more production rather than concentrating in
financing speculation; what good economists refer to as bubble financing.
They should have kept better control over the money supply by continuing to
use M1 as their primary gauge and increasing it faster than they have. Of
course this would not have allowed a major speculative boom market to rage.
They should have taken steps to see that US currency was not expected to be
the circulating medium of foreign countries. But please - don't expect us to
rethink their years of monetary errors in a few paragraphs.By developing a more accurate concept of the legal rather than market nature
of money their main errors could have been avoided. However, a more
accurate concept of money would also have called for the Federal Reserve
System to be nationalized by our government. (see our web site essay on the
Balanced Budget Stampede)What should the Federal Reserve do now? Well, our purpose is not to help
bail out this diseased institution, but to have it properly reconstituted as a
department of the U.S. Treasury, where it belongs.If Chairman Greenspan can realize the magnitude of his problem and its full
implications, then he'd best approach the U.S. Treasury with a view to getting
the Treasury ready to implement the 100% reserve solution devised by Henry
Simon to save the banking system during the Great Depression (see our
review of de Fremery's Rights Vs. Privileges). It is sound monetarily; it is
sound from a banking viewpoint; and it would be fair. It would also mean the
monetary power would be properly placed in the US Government. The new
Fed chairman (goodbye Alan) would receive his paycheck from the U.S.
Treasury rather than the private Federal Reserve System, and he would be
charged with running the system for the benefit of the American people
rather than the private financial institutions which own and control
Greenspan's Fed.What difference would it make if the interests of America were placed before
the interests of the wall street investment bankers? For one thing the
following deplorable situation would never arise because the money would be
going where it should, rather than to mergers, acquisitions and bonuses
which appear to be funded in proportion to the amount of damage they do to
America. For example, of the $365 billion loaned by the US banking system
in 1997, $125 billion of it was loaned to purchase investment securities!The American Society For Civil Engineers 1998 Report on America's
Infrastructure graded 10 major infrastructure categories and estimated how
much money is needed to remedy the ills:SUBJECT . . . . . GRADE GIVEN . . . . .AMOUNT NEEDED
Roads . . . . . . . . . D- . . . . . . $357 billion
Bridges . . . . . . . . C- . . . . . . $ 80 billion
Mass Transit. . . . . . C . . . . . . $ 72 billion
Aviation . . . . . . . C- . . . . . . $ 60 billion
Schools . . . . . . . . F . . . . . . $172 billion
Drinking Water. . . . D . . . . . . $138 billion
Wastewater. . . . . . . D+ . . . . . . $140 billion
Dams . . . . . . . . . . D . . . . . . $ 1 billion
Solid Waste . . . . . . C- . . . . . . $ 75 billion
Hazardous Waste . . . D- . . . . . . $750 billion
GRADE AVERAGE . . . . . D . . . . . . TOTAL NEEDED: $1.8 Trillion
This engineer's report is an unanswerable indictment of the current way
America’s monetary power is allocated; and its long past time to apply
rational remedies.