Alan Greenspan, internationally recognized economist and chairman of the Federal Reserve Board of the United States from 1987 to 2006 wrote a compelling academic essay back in 1966 entitled: “Gold and Economic Freedom,” where Greenspan stated:
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.
Looking back with the benefit of hindsight, the experiment of a fiat currency and fractional banking system after disambiguation from the gold standard has made the U.S. and global economies demonstrably less financially secure, and, in what is perhaps one of the least reported, but most stunning admissions by a former policymaker in the past several years, in a recent Gold Investor interview Greenspan suggested the impact and desirability of a return to the gold standard.
According to Greenspan, “if the gold standard were in place today we would not have reached the situation in which we now find ourselves. We cannot afford to spend on infrastructure in the way that we should. The US sorely needs it, and it would pay for itself eventually in the form of a better economic environment (infrastructure)… We would never have reached this position of extreme indebtedness were we on the gold standard, because the gold standard is a way of ensuring that fiscal policy never gets out of line.”
At GSI Exchange, we have seen the fractured fault lines revealing itself for several years and there are a number of catalysts supporting significantly higher gold prices over the coming years, including EU uncertainty, US inflationary pressures, currency depreciation/devaluation, risk of military conflict with an increasingly assertive China, Iran, Russia and North Korea.
Despite these trends, when you see a figure like Alan Greenspan long wistfully for the days of the gold standard, it may encourage others to listen. Moreover, Greenspan noted the “growing risk of stagflation across the developed world, as stagnant economic growth combines with rising inflation. Suggesting that significant increases in inflation will ultimately drive the gold price, he says: “Investment in gold now is for insurance. It’s not for short-term gain, but for long-term protection.”