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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


2004

7/21/2004

The CHAIRMAN. The gentleman from Texas, Mr. Paul.

Mr. PAUL. Thank you, Mr. Chairman.

Good morning, Chairman Greenspan. Yesterday's testimony was received in the press as you painting a pretty rosy picture of the economy. You have already remarked a second time on one statement you made that I would like to comment on again, because I think my colleagues should pay close attention to it: And that is your statement that corporate investment in fixed capital and inventory has apparently continued to fall short. The protracted nature of this shortfall is unprecedented over the past 3 decades. The proportion of temporary hires relative to total employment continues to rise.

I think that is very, very significant and probably should be taken in the context of the rosy picture of the economy.

Also, at the end of your statement, you make a comment about inflation in the long run, which I entirely agree with. And that is, it is important to remind ourselves, you say, that inflation in the long run is a monetary phenomenon. However, you sort of duck the issue on the short run, that various factors affect inflation in the short run, and yet I think monetary policy is pretty important in the short run. And our temptation here and too often with central banks is to measure inflation only by Government measurement of CPI, where the free-market economists, from Ricardo to Mises to the current free-market economists, argue the case that, once a central bank interferes with interest rates and lowers them below the real rate, that investors and others do make mistakes, such as overinvestment and now investment over-capacity, excessive debt, and speculation. And, therefore, I think that we should concentrate more on the short run effects of monetary policy

Over the last several months, you had been hit by two groups. One half is saying that you are raising rates too fast, and the other half says you are way too slow. And of course it begs the question of whether or not you are really right on target. But from a free-market perspective, one would have to argue that you can't know and you don't know, and only the market can decide the proper money supply and only the market can decide the right interest rates. Otherwise, we invite these many problems that we face.

As the economy slowed in 2000, 2001, of course, there was an aggressive approach by inflating and lowering the interest rates to an unprecedented level of 1 percent. But lo and behold, when we look back at this, we find out that manufacturing really hasn't recovered, savings hasn't recovered, the housing bubble continues, the current account deficit is way out of whack, continuing to grow as our foreign debt grew, and consumer debt is rising as well as Government debt.

So it looks like this 1 percent really hasn't done much good other than prevent the deflating of the bubble, which means that, yes, we have had a temporary victory, but we have delayed the inevitable, the pain and suffering that must always come after the distortion occurs from a period of time of inflating.

So my question to you is, how unique do you think this period of time is that we live in and the job that you have? To me, it is not surprising that half the people think you are too early and the other half think you are too late on raising rates. But since fiat money has never survived for long periods of time in all of history, is it possible that the funnel of tasks that you face today is a historic event, possibly the beginning of the end of the fiat system that replaced Brenton Woods 33 years ago? And since there is no evidence that fiat money works on the long run, is there any possibility that you would entertain that, quote, ''We may have to address the subject of overall monetary policy not only domestically but internationally in order to restore real growth''?

Mr. GREENSPAN. Well, Congressman, you are raising the more fundamental question as to being on a commodity standard or another standard. And this issue has been debated, as you know as well as I, extensively for a significant period of time.

Once you decide that a commodity standard such as the gold standard is, for whatever reasons, not acceptable in a society and you go to a fiat currency, then the question is automatically, unless you have Government endeavoring to determine the supply of the currency, it is very difficult to create what effectively the gold standard did.

I think you will find, as I have indicated to you before, that most effective central banks in this fiat money period tend to be successful largely because we tend to replicate which would probably have occurred under a commodity standard in general.

I have stated in the past that I have always thought that fiat currencies by their nature are inflationary. I was taken back by observing the fact that, from the early 1990s forward, Japan demonstrated that fact not to be a broad universal principle. And what I have begun to realize is that, because we tend to replicate a good deal of what a commodity standard would do, we are not getting the long-term inflationary consequences of fiat money. I will tell you, I am surprised by that fact. But it is, as best I can judge, a fact.

(8)

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