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Alan Greenspan

"digging up gold just to bury it in bank vaults").

Alan Greenspan actually used to recom-

So does the production of bicycle locks from

mend controlling the fiat money supply to

said, "A central

metal rather than paper. The resource cost of a

mimic the price-level behavior of a gold stan-

bank properly

gold standard has often been exaggerated by

dard. In response to questioning at a 2001

functioning will

estimates that assume 100 percent gold back-

congressional hearing, Greenspan said: "Mr.

ing for all forms of money. The preeminent

Chairman, so long as you have fiat currency,

endeavor to, in

monetary economist Milton Friedman, during

which is a statutory issue, a central bank prop-

many cases,

the 1950s and 1960s, relied on such an estimate

erly functioning will endeavor to, in many

in judging a well-run fiat standard more effi-

cases, replicate what a gold standard would

replicate what a

cient than a commodity standard.12 Friedman

itself generate." Two years later he added that

gold standard

central banks had created the inflation of the

overestimated the resource costs of a gold stan-

would itself

1970s because the gold standard no longer

dard by assuming--although such a system has

constrained them, but they had been able to

no advocates and no historical precedent--100

generate."

bring inflation back down by belatedly learn-

percent reserves against all components of M2

ing to emulate the restrained money growth

(that is, against even time deposits). With a his-

that was characteristic of the gold standard:

torically more reasonable fractional reserve

ratio of 2 percent, the amount of gold needed in

The general wisdom during the period

vaults and thus the resource cost of a gold stan-

dard shrinks by a factor of 50.13

subsequent to the 1930s was that as we

moved to an essentially fiat money stan-

Friedman wanted to substitute for gold a

dard, that there was no anchor to the

less costly paper money standard bound by a

general price level. And indeed, what we

strict money growth rule. But in the 1980s he

subsequently observed is, as you point

changed his mind about the feasibility of get-

out, a very marked increase in general

ting the Fed to commit to anything of the sort,

price levels, indeed, around the world as

reconsidered the costs of inflation in the

absence of a strict rule,14 and began to call for

we removed ourselves from commodity

standards, and specifically gold.

abolishing the Federal Reserve System (though

I had always thought that the fiat

not replacing it with a gold standard, because

money system was chronically and in-

he thought no government would any longer

consent to be constrained by a gold standard).15

evitably an inflation vehicle, and indeed,

said so repeatedly. I have been quite sur-

Abolishing the Fed may be a pipe dream, but

prised, and I must say pleased, by the fact

for those who have that dream a gold standard

that central bankers have been able to

may be the most plausible way of abolishing the

effectively simulate many of the charac-

Fed. As Greenspan recently explained to Daily

teristics of the gold standard by con-

Show host Jon Stewart, under a gold standard a

central bank is unnecessary.16

straining the degree of finance in a man-

ner which effectively has brought down

"A gold standard is no restraint at all,

general price levels.11

because government can devalue or sus-

pend gold redemption whenever it wants."

A similar claim could be made about any

Fiat money regimes have not, however,

(other) restraint in the Constitution. And yet

accomplished price stability as fully as did the

constitutional rules are useful. By authorizing

gold standard. Although inflation is less severe

only a limited set of government activities, rul-

today than it was 30 years ago, experienced

ing others simply out of bounds, they save the

inflation rates, and the expectations of future

public the trouble of trying to weigh every

inflation rates embodied in long-term interest

potential activity on a cost-benefit basis.

rates, have remained higher than correspond-

An important problem in fiat money

ing rates under the classical gold standard.

regimes, as famously identified by Finn

It is true that a commodity money standard

Kydland and Edward C. Prescott, is the lack of

entails a resource cost (sometimes described as

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