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The Ron Paul/Alan Greenspan
Congressional Exchanges

Transcripts of the historic hearings before the U.S. House of Representatives' Committee on Financial Services during question & answer sessions, 1997-2005


2003

2/12/2003

Mr. PAUL. Thank you.

Welcome, Chairman Greenspan. I have a question relating to the speech that you gave at the Economic Club in New York in December, because you introduced your speech with three paragraphs dealing with gold and monetary policy. And you made some very pertinent points about gold, indicating that from the year 1800 to 1929, the price levels were essentially stable under gold. And after we got rid of the gold restraint on the monetary authorities, prices have essentially increased by over tenfold since that time. But you follow that by indicating that inflation, when it was out of control in 1979, monetary policy changed direction and they were able to take care of inflation, more or less conquer inflation, and that now you are more or less not concerned about inflation, that your concern really is about deflation.

And it was interesting that you brought up the subject of gold, of course, and there is a lot of speculation as to exactly why you did this and what this means. But my question deals with whether or not we should forget about inflation, whether or not this has been dead and buried. Federal Reserve credit for the last 3 months has gone up at the rate of over 28 percent. Inflation is a monetary event, so therefore we have monetary inflation. The median CPI is almost going up at twice the rate as the CPI, close to 4 percent. The Commodity Research Bureau Index is going up, in the last 15 months over 35 percent. Gold is up 36 percent over 18 months or 15 months. Oil is up 60 percent. So we have a lot of inflation. And we have medical care costs skyrocketing, housing costs going up, the cost of education going up, the cost of energy going up. And to assume that we shouldn't be concerned about inflation, all we can do now is print money. I would suggest that this is what we have been doing for 3 years, the monetary authorities. You have lowered the discount rate 12 times, and there is still no signs of good economic growth. So when will you express a concern about an inflationary recession? Because that to me seems like our greatest threat, because that has existed before. We even had a taste of it in the 1970s. We called it stagflation.

So I would like you to comment on that as well as follow up on your comments on just why you might have brought up the subject of gold at the New York speech.

Mr. GREENSPAN. First of all, we have not lessened our concerns about inflation. Indeed, our general presumption is that we seek stable prices, and stable prices mean no inflation nor deflation.

The reason I raised the issue of gold is the fact that the general wisdom during the period subsequent to the 1930s was that as we moved to an essentially fiat money standard, that there was no anchor to the general price level. And indeed, what we subsequently observed is, as you point out, a very marked increase in general price levels, indeed, around the world as we removed ourselves from commodity standards, and specifically gold.

I had always thought that the fiat money system was chronically and inevitably an inflation vehicle, and indeed, said so repeatedly. I have been quite surprised, and I must say pleased, by the fact that central bankers have been able to effectively simulate many of the characteristics of the gold standard by constraining the degree of finance in a manner which effectively has brought down general price levels.

The individual price levels to which you allude are certainly correct. I might say the gold and the oil issue are clearly war-related and not fundamental, but we still are looking at the broadest measures of average inflation, and the best statistics that we have still indicate very low inflation with no evidence of an acceleration. That does not mean, however, that we believe that inflation is somehow inconceivable any time in the future. We will maintain a considerable vigilance on the issue of inflation, and are looking all the time for evidence of an emergence of inflation, which at this particular time we do not see. But that does not mean that we believe inflation is dead and that we need not be concerned about it. We will continue to monitor the financial system as best we can to make certain that we keep prices stable. They are stable now, and we hope to be able to continue that indefinitely into the future.

(7)

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