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Alan Greenspan 1967: Gold & Economic Freedom

by Alan Greenspan
From Capitalism: The Unknown Ideal

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense – perhaps more clearly and subtly than many consistent defenders of laissez-faire – that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society's divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one – so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline – argued economic interventionists – why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely – it was claimed – there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form – from a growing number of welfare-state advocates – was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which – through a complex series of steps – the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

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Alan Greenspan - Jekyll & Hyde

It's totally surreal to read this essay by Alan Greenspan. (I also found an alternate link for it here:)


Alan Greenspan is probably the single most importat person who set process in motion for destruction of US economy. I consider him worse than Bernanke & his QE, because Greenspan laid down the foundation with held-down low interest rates & enabled NAFTA/WTO.

For Greenspan to have written an essay like that in 1967 is quite rich. Yes, I know he comes from Ayn Rand circles; but until today I had not read this essay word for word.

Could this Jekyll & Hyde trait be why Alan Greenspan wrote following this week, in Council on Foreign Relations magazine of all places?!?

Golden Rule: Why Beijing is buying gold

Sometimes I get a feeling that this whole madness is all by design, like a play in a theatre. And various players are simply playing out their parts in the play, as pre-destined actors. This sort of stuff makes my head spin with too much cognitive dissonance.

Immoral funding of Military Industrial Complex by Federal Reserve and US taxation system must stop!!!! End illegal/unconstitutional wars! Preserve US currency!

itsallaboutbalance's picture


A very worthwhile read for those who haven't yet.

My question is... Is Alan Greenspan a good guy or bad guy if he was the Fed chairman.....?

"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."

itsallaboutbalance's picture

Found this that seems to provide an answer...


It brings up a whole bunch more questions too...

The bankers knowing that its coming crashing... Wouldn't they prepare and be ready for it to keep their riches and control...?

If the author (Bix Weir) says that the gold standard will be brought back and new laws will be made to prevent bankers from ever taking control again.... Who would pass these laws if all the banker's friends are in power right now.....

I always knew and understood what Dr.Paul has been saying all along and believed it deep down easily. But tonight I have a much deeper understanding of it all...

"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."


I have posted this thrice before and nobody even commented.

Looky on page 414 of this document if anyone cares what else I dug up before without comment...


Since 2007 reserve requirements for bank are 0% for all transaction accounts less than $9.3 million dollars.

From $9.3 million to $43.9 million only 3%. More than that the poor banks have to have 10% reserves.


And, yes...I am hollering.

Thats in any banking

Thats in any banking textbook. Its just the way things are. The huge banks that most people bank with have 10% reserves, which is the common percepted reserve requirement.

Ventura 2012

Not many people understand money and banking

but I do and that shit is INSANE!!!!!!!!!!!!!!!!!!!!!!!

People are going to see their banks run away holding hands with the FDIC

A true flower can not blossom without sunlight and a true man can not live without love.

Good find

So this is the article RP has mentioned!

Even The Fed Doesn't Want US$

The chart shows the dollar’s performance since the Fed announced its Quantitative Easing program in March.

This chart tells us two things:

- Americans just got 15% poorer on the world stage thanks to Ben Bernanke
- A currency crisis is in the works (and perhaps already starting)


It was the exact opposite of what Rand describes that got us into this mess.
We haven't seen what she described in more than a century. The result is exactly as described in the article.

There was money before there were governments.


Good work Michael

A true flower can not blossom without sunlight and a true man can not live without love.

alan greenssan gold and economic freedom

This article is total misinformation passed on to further enslave all societies of the world. It is this type of BS and misinformation that got us into this economic mess in the first place. Money is an institution of law, not a commodity or anything else. It is not tangible wealth in itself, but a power to obtain wealth. Money is an abstract social power based in law, and whatever government accepts in payment in taxes will be money. Gold is a commodity and investment medium. If it were the basis of money, whoever had the most, would control society. For all of those people who do not want government controlling our “money” system, you already have your wish. The Federal
Reserve is a vicious private group that issues interest-bearing debt that is passed onto us as substitute money. This is the reason of why our infrastructure is in ruins. Because the Federal Reserve System is a private company, they do not have to follow the laws that make-up a balanced society. So we now have a war based society because the government, that is to say, all people of the United States, do not have a say in how money should be used. We need government control so that, … we the people…are in charge. The seigniorage of a money system belongs to its owners. It is the fundamental right of a democracy. Without this right in place, you do not have a democracy. The seigniorage is the benefits that the owners of the money power are entitled. With this right, we may rebuild the infrastructure of our country without further expense to its owners, the people. This means that money would be spent directly into existence without any burden on its owners. This means that roads, bridges, dams, the Katrina mess, health-care, education would all be taken care of without further expense to the owners of a democracy. This is what true economic freedom looks like. It is not the twisted view that Alan Greenspan, Adam Smith or what anyone else is trying to pass along so that we may be kept as a society of legalized slaves.

Stephen Zarlenga’s book, “The Lost Science of Money” is the “gold standard” of the true nature of money. Check it out at www.monetary.org.

No, the article is dead on.

No, the article is dead on. Money was not created by government edict.


Ventura 2012

Alan Greenspan = "Objectivist" Wesley Mouch

Worse: the traitor knew right and consciously chose evil.

Either he is secretly

Either he is secretly Francisco, or he is subconsciously Dr. Stadler(the traitor you mentioned).

Ventura 2012

In End The Fed

RP talks about this essay that Greenspan wrote as an amazing piece. He also talks about how he would mischievously bring up this essay to Greenspan while he was on some committee and Greenspan was the head of the Fed. Great article though, sooner or later people will have to wake up and read articles like this so we can END THE FED!!



reedr3v's picture



Good as Gold

An amazing article from an amazing book (Part 1, anyway). It's rare funny how we got this one in print- and a hell of an indictment against the man's later career.

Congress 2010, NJ-1

Congress 2010, NJ-1

Looking back, I wonder, was this written for Nixon?


Note that Greenspan mentions cigerettes as tender, a luxury after WWII. Imagine Greenspan says marijuana instead of cigerettes, the next thing, Nixin takes us off gold, the next thing, starts a war on drugs. ad established the grounds for what some claim is her best work


I'm real happy to get off the Novels and into her non-fiction. Thank you.


Greenspan was a bad Fed Chairman.

I don't think Fractional Reserve banking is Capitalism. If we're going to allow it, then it should be heavily regulated and preferably stopped all together.

I disagree, I think that

I disagree, I think that fractional reserve banking can be Capitalism.

"The most important mistake being made by Corrigan and the Rothbardians is that they continue to ignore the fact that in a free-market system, real bills will automatically spring up and be used wherever they are functional. There is nothing to stop them! They are not fraudulent; and they are not governmentally orchestrated. So they will certainly be utilized among producers, distributors and retailers if we are going to promote freedom. And I presume that is what the Rothbardians wish to promote. What are Corrigan and his cohorts going to do? Suppress the use of real bills with government intervention? Not very libertarian at all.

If Rothbardians wish to prohibit the issuance of real bills by producers, distributors and retailers, and their subsequent discounting by banks, then they will have to circumvent the very FREE market they profess to espouse.

Why are Corrigan and Blumen, et al ignoring this vital point? Because their agenda consumes them! Corrigan writes in his final paragraph of "Fool's Gold" about the necessary "protections which would be afforded by the institution of a free banking system, securely bound by the ordinary laws of contract and girded tightly about with a 100% gold coin reserve standard." [Emphasis added.]

But the mother of all ironies is that in a free banking system, a pure 100% gold system would never come about. The market (if left free) would reject it because it is not as conducive to high capital accumulation and productivity as a gold coin system accompanied by real bills would be. It would be rejected just as the free traders of the Renaissance rejected the 100% gold system of the Middle Ages. For further corroboration of this, see Real Bills, Gold and the Big Picture."


Although I reject the author's statement that "monetary inflation without price inflation is benign", the rest of the article is good.

I would highly recommend that we not pick up this Rothbardian crusade. We have enough on our plate as it is.

Ventura 2012

Fractional Reserve Banking

is the very heart of the problem. As long as one man or a small group of men have the monopolistic privelege of arbitrarily determining the reserve ratio, and when that change of ratio occurs, they'll continue to advantageously "create money". Anything less than a commodity-based, 100% reserve system is destined to be gamed by the controllers.

Fractional Reserve Banking

Would very likely be more of a high-risk "botique" aspect of banking - a very small facet of depositors and investors would use FR Banks due to the massively elevated risks against an existing market of sound money banks.

However, there are other aspects to be considered - if the free market were totally left alone who KNOWS what would be used as money! Maybe not gold or silver - individual producers (companies) might actually come up with their own money. Hard to say what kind of innovation would occur.

Who would have thought something like the internet could have existed in the 1950's, but for the very brave-minded "fictionalist" folks?

FRB might still exist, it might not - we haven't had the opportunity to observe free banking in AGES. But I suspect if it did stick around it would be a minimal part of the banking system due to the high risks and ultimate massive deflationary cycle that it produces every century or so (btw anybody read JPMorgan's latest financials???? Deposits are DOWN $100 BILLION in the last 12 months, and Tier-1 capital is DOWN 60%. So lay off the hyperinflation for a few years, would ya!?)

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Progress is precisely that which the rules and regulations did not foresee. - Ludwig Von Mises.

heard dat man

heard dat man

probably my favorite article

probably my favorite article EVER, followed closely by Rothbard's "Reagan: an Autopsy", Lew Rockwell's "The Reality of Red-State Fascism", and a number of T. Herman Zweibel editorials from The Onion.

Ventura 2012

Ya, one of the

turning points in my thinking too. Then look what happens to young skywalker

It is so crazy to me that

It is so crazy to me that Greenspan get this...then sold out...my God...he could of been an American hero...but instead he turned into a traitor...his legacy will be poop! So sad...the guy knows the truth!

Federal Reserve to the American People:

"Catapultam habeo. Nisi pecuniam omnem mihi dabis, ad caput tuum saxum immane mittam."

Who is John Galt? Vote ███ ███ 2012!

Michael Nystrom's picture


for an oldie.

Yeah, it happens.

tee hee

tee hee