Dr. PAUL. Thank you, Mr. Chairman.
Mr. Greenspan, over a period of time, the dollar has been weak. If you look at it from 1971 until now, the curve is obviously downward. If you look at the last three years, the dollar has been relatively strong, and some people consider this a problem. Even our Government, our Fed and Treasury, just recently thought our dollar was too strong.
Of course, in free markets, the purchasing power of money is never tampered with, but under today's conditions it was felt that it was too strong in relationship to the yen. Of course, we intervened and had some effect to the currency markets.
When do you suppose the time would be appropriate for the money managers to intervene in a much more aggressive manner, if the dollar continues to be very, very strong, and pressure is put on the Federal Reserve, political pressure, to say, ''We cannot sell our goods, we want some help''? Can you foresee that? And not a token amount of interference, intervention in the market, but a major intervention in the market to change the direction of the dollar, can you foresee that in the near future?
Mr. GREENSPAN. Congressman, let's first emphasize that we do consult with the Treasury and ultimately the Secretary of the Treasury is the legally authorized determiner of the extent to which intervention occurs or doesn't occur. The Secretary has indicated on numerous occasions that it is fundamental values which will determine the value of the dollar and other currencies, and over the long run, intervention doesn't do very much one way or the other. I think that the evidence over the years has demonstrated that that particular statement is clearly sustainable.
I can't anticipate what particular policies will be under hypothetical circumstances. It is an important question, there is no doubt. But overall, the presumption that somehow we, meaning the monetary authorities, the Fed and the Treasury, can somehow alter the value of a currency in a significant manner when fundamentals are going in the opposite direction is an illusion. We cannot.
Dr. PAUL. So in a way what we have done just recently was just wasted money, since we do know that intervention does not have much effect? Why do we bother on occasion--
Mr. GREENSPAN. First of all, we don't waste money. We are taking a position in a currency, and very often over the years we turn out to actually have a profit in the process. When you intervene, you don't spend the money. You are just taking an investment position or a speculative position.
Dr. PAUL. Unless that currency happens to go down, which it well could.
Mr. GREENSPAN. Yes. That is certainly the case, and if you do it in large volume, then the answer is there are speculative risks. We have taken very few of those.
The very few times which we intervened, and we have not intervened for years until this most recent event occured, was when we believed that the markets were unstable and that intervention might have an impact. You need both of those conditions to exist. It was the judgment of the Secretary of the Treasury, to which we agreed, that action taken would have the effect of breaking a pattern of a very quick run in the currency. I don't think any of us believed it would have more than a temporary impact.
Dr. PAUL. A very quick question. You seem to welcome, and you have been quoted as welcoming, a downturn in the economy to compensate for the surge and modest growth in the economy. Is it not true that in a free market, with sound money, you never welcome a downturn in the economy? You never welcome the idea of decreased growth, and you don't concern yourself about this? And yet, here we talk about when is the Fed going to intervene and turn down the economy?
It seems that there is a welcoming effect to the fact that the Southeast Asia has tampered-you know, price pressures. Couldn't we make a case that the free market would operate a lot better than the market we use today?
Mr. GREENSPAN. I think you have to define what you mean by a ''free market.'' If you have a fiat currency, which is what everyone has in the world--
Dr. PAUL. That is not free market.
Mr. GREENSPAN. That is not free market. Central banks, of necessity, determine what the money supply is. If you are on a gold standard or other mechanism in which the central banks do not have discretion, then the system works automatically.
The reason there is very little support for the gold standard is the consequences of those types of market adjustments are not considered to be appropriate in the 20th and 21st century. I am one of the rare people who have still some nostalgic view about the old gold standard, as you know, but I must tell you, I am in a very small minority among my colleagues on that issue.
Dr. PAUL. So I guess we have to accept the downturns?
Mr. GREENSPAN. No. We are not accepting downturns, nor do I think we look at it as desirable. What we do look at is an economy which is running at a pace which is unsustainable over the long run and will eventually run off the tracks and create significant disruption. So we do not look forward to a weakening in growth. All we are concerned about is a pattern of growth which is sustainable.
In other words, when we talk about our goal as maximum sustainable economic growth, the ''maximum'' and the ''sustainable'' are both crucial elements to that. We can get a maximum growth in the short run, which is not going to help anybody over a longer-term period. That we would consider to be an unacceptable or undesirable pattern of growth.
Dr. PAUL. Thank you.
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