Our Fed Chairmen and Our Money

Wednesday, March 9, 2011
Last Friday morning on CNBC’s Squawk Box the honorable former Fed Chairman Alan Greenspan was interviewed. He was asked about the role that gold is playing in financial markets. He stated that what we have are “two faulty fiat currencies”, referring to the Dollar and the Euro. Greenspan did not elaborate on why they are “faulty” but he went on to explain gold. To paraphrase, Gold is one of the only things that does not rely on governments and central banks to be used as a media of exchange. He noted “that in 1944; Germany was required to pay for its imports in gold”. After the defeat in WWII the German government had lost its credibility and with that its fiat currency. Fiat money relies solely on confidence in government. Two days prior the honorable current Fed Chairman Ben Bernanke testified at a Financial Services hearing on Monetary Policy. When asked by Representative Ron Paul of Texas, what his definition of a dollar was, Bernanke responded “what it can buy”. This to me is a vague and unclear definition of the thing he manages. A dollar is what it can buy? Money is one half of every economic transaction and the man who creates it can not even articulate a clear definition. Thomas Jefferson declared we must “say with precision what a dollar is”. The full argument on defining a dollar is a somewhat separate issue and I don’t want to get too far into it. But, when we had gold and silver as money it was very important and possible to define our dollar with precision. Let’s take Bernanke’s definition of “what it can buy”. I would argue not much. A dollar can buy 95% less than what it could before the Fed came to the rescue to save our monetary system. I wonder if this is what Greenspan meant by “faulty” fiat currency? Finally, I would like to make a few points. How can we as a people have any confidence left in our money and the honorable men who create, protect, and manage it? The value of our money depends on confidence in our government, Federal Reserve, and Fed Chairmen. Greenspan says the dollar and euro are “faulty” currencies. Bernanke can not even define it and says it is “what it can buy”. The Federal Reserve with the help of these two Chairmen has led our money to its current state, “faulty” and vaguely defined. The question is what happens to our money if we, as a people, lose confidence in these great institutions and the men who run them?  Andrew Mack is currently interning for the Cato Institute and is a guest blogger for Sound Money. Image by worradmu / FreeDigitalPhotos.net.