Portions (containing speech of Rep. Ron Paul) from Banking Committee Hearing on
Conduct of Monetary Policy
2/24/99

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Mr. GREENSPAN. There is a significant part of our work force who are not doing well and haven't been doing well for quite a long period of time. I don't deny that at all.

Mr. SANDERS. Thank you, Mr. Chairman.

Chairman LEACH. [Presiding.] Thank you, Mr. Sanders.

Dr. PAUL. Thank you, Mr. Chairman.

Mr. Greenspan, a lot of economists look to the price of gold as an indicator and as a monetary tool. It has been reported that you might even look at the price of gold on occasion.

Last summer on a couple of occasions here when you were talking before the committees on securities and on derivatives you mentioned something that was interesting. You said that central banks stand ready to sell gold in increasing quantities should the price rise, which I thought was rather interesting.

Then I followed up with a letter to you to ask you whether or not our central bank might not be involved in something like that, in the gold market. And you did answer me and stated that since the 1930's the Federal Reserve has had no authority to be involved with the gold markets.

I am quite confident that the Treasury has authority to be in gold markets, but you stated that the Federal Reserve did not. But this contradicts some reports that have been made by some Federal Reserve officials that said that the New York Fed was very much involved in the London gold pool from 1961 to 1971. But your answer implied that the Fed has never been involved since the 1930's, which I think is interesting.

The reason why this could be of importance is that we do know that our Treasury was supporting a fixed price of gold at $35 an ounce in the 1960's, so therefore the price of gold of $35 an ounce was totally useless in predicting what might happen and what did happen in the 1970's. So if central banks stand ready to lease and sell gold in increasing amounts should the price rise, we are more or less, you know, in a time when the gold price is probably so-called fixed; and we do know that the evidence is there that central banks do loan gold, they sell gold. So could it be that the price of gold today is less valuable to the economists, who think that gold could help us, in thinking that maybe we are in a period of time comparable to what we had in the 1960's?

Mr. GREENSPAN. I think the price of gold has, over the decades, been a generally usable indicator of what the level of inflation has been. Obviously, during the period of an active gold standard, which was really prior to World War I, the price level pretty much locked itself in to the gold price. In fact, by definition it did.

The issue of buying and selling gold as the price changes is indeed exactly what we used to do. We used to, at a certain thing called the gold points, which was the price of gold plus the transportation cost differentials, we, that is, the United States Treasury, stood ready to buy and sell gold at a spread, as indeed all other participants in the gold standard did. So in that regard that was exactly what was happening.

But, needless to say, since we have gone off the gold standard, and especially since 1973, there has been basically a general float of the dollar vis-a-vis gold, which means that the gold price is like another commodity's price.

Nonetheless, like a lot of commodity prices, and perhaps better than most, it has been useful, in my judgment, in trying to get some sense of what inflationary pressures have evolved in this country.

Dr. PAUL. Even if the central banks, who are the major holders of gold, are willing to sell gold in order to manipulate the price or hold the price at a certain level? We are not on a gold standard, so what would the motivation be?

Mr. GREENSPAN. They are not doing it for purposes of fixing the gold price. They are looking for it to reduce their stock of gold when they have sold on the grounds that: one, it costs to store the gold; and, two, it didn't obtain any interest. So they perceived it to be a poor asset to hold. But the purpose was not to manipulate the price of gold.

Dr. PAUL. Another quick question on another subject, on Argentina. You stated earlier that you have been studying this and will answer the question about whether Argentina can use the dollar as their currency. It has been reported that there was a consideration, and I surely hope this is not true, that the Federal Reserve could become the lender of last resort, and they would have access to the discount window.

Along that line, how does it work when a foreign country dollarizes and they expand their credit through fractional reserve banking? Does that put an obligation on us and can that interfere with the dollar's value?

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Mr. GREENSPAN. That is a good question, Congressman. The answer is no. We view monetary policy in the United States as for the United States. We have no interest in, nor does the Treasury, of being a lender of last resort outside the United States.

Dr. PAUL. Outside the IMF?

Mr. GREENSPAN. The issue of whether or not another country wishes to use the American dollar as its medium of exchange is theirs to make. They can do it unilaterally. Panama did. Liberia did. If they choose to do that, that is their sovereign right to do that. But we have no obligation in that regard.

Clearly, we do sense some obligation with respect to our Latin American colleagues for the same reason that we have had relationships with all of our trading partners. Their interests do concern us, and we would like them to be prosperous. To the extent that we are helpful in trade negotiations or other negotiations, that is fine. But lender of last resort, no.

Thank you, Dr. Paul.

Mr. RYAN. Thank you.

Mr. Greenspan, I would like to ask you to comment on a few things, but first I would like to go off of that last question. Are you suggesting that you prefer unilateral dollarization for a country like Argentina versus giving an arrangement that gives them access to the Fed window? You are not advocating a treaty with Argentina to grant them access to the Fed window, you are suggesting that a unilateral dollarization is preferable from our point of view?

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Mr. GREENSPAN. Access to the Fed window I think is nothing either we nor our colleagues at the Treasury think is a good idea. Indeed, we would oppose it.

Dr. PAUL. Thank you. That is very informative. Thank you.

I would like to pull back, broadly speaking, and I would like you to comment on a few things, namely, the worldwide call for new currency regimes, both in broad currency unions and in individual currency regimes. Do you believe that is preferable, to advocate more currency unions, such as the euro, for areas such as Latin America?

And in individual nations, what is your preferable currency regime, generally speaking, a peg, a float, a currency board, or unilateral dollarization?

Mr. GREENSPAN. The change in the international financial structure has re-raised all of these issues and put them really up front, whereas they had not been before. There is very considerable debating in the academic community and indeed among central bankers on all of these questions.

The euro is going to be a very interesting experiment. It is going to teach us an awful lot about how those systems work when you start from scratch. It has not been tested yet. Obviously, it is going to take years before there have been really significant tests in that system.

We all have a lot of general views as to what the appropriate currency regimes are. At the moment, most people I would suspect say that floating is perhaps the least worst of all of the various different--