Alan Greenspan – Ayn Rand is dead

Alan Greenspan 1.2B

Alan Greenspan thinks food is a luxury for hungry people. He uses a common economic term incorrectly when explaining commodity based currencies. He displays insensitivity.

Greenspan describes money, “… Durable…In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium…”ⁱ “More importantly, the commodity… must be a luxury… Wheat is a luxury in underfed civilizations… The term “luxury” implies scarcity and high unit value.”ⁱⁱ

In an underfed nation, desperately hungry people require food for nourishment. Because it is necessary, scarce food has high unit value; but that doesn’t make food a luxury. Greenspan is using an incorrect definition.

In the field of economics, “luxury” is a technical term which refers to goods which are not necessary. “Luxury” does not refer to food staples, such as wheat. In economics, food is a “necessity good”, not a luxury good. If money must be a luxury, food wouldn’t used as money, especially in an underfed nation.

In Greenspan’s example, the institution of a monetary system is a given. The goal is an efficient economic system. The material circumstances are irrelevant except for how they serve the requirements of the economy. Feeding hungry people is not a factor. If food has high unit value, Greenspan thinks hungry people should not eat the food, but use it as money. Greenspan is insensitive.

iPg 96 Gold and Economic Freedom by Alan Greenspan in Capitalism the Unknown Ideal Signet, New American Library

iiPg 97 Gold and Economic Freedom by Alan Greenspan in Capitalism the Unknown Ideal Signet, New American Library

Ayn Rand contradicts herself 1.9

Ayn Rand published two essays about monetary systems, one written by Alan Greenspan and one written by herself. They both cite events for which there is no objective evidence, which is a violation of Rand’s philosophy.

WHEREAS, Rand’s philosophy says, “… concepts represent classifications of observed existents…ⁱ; which means that mental concepts are true only if we saw examples of them in the real world…

AND Alan Greenspan asserts that “The existence of (money) is a precondition of a division of labor economy. If men did not have some commodity of objective value… as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible”ⁱⁱ…

BUT, there is no objective evidence for Greenspan’s assertions. The objective evidence is to the contrary. Most people have lived as part of an interdependent group, whether with a monetary system or not. Communities without money have had division of labor and operated non-monetary economic systems, such as communism or gift/obligation. They also remembered who shared what with who, and acted equitably. They made long-range plans and had systems of exchange within the community and with other communities,ⁱⁱⁱ not necessarily using barter…

THEREFORE, Greenspan is in violation of Rand’s philosophy. Because she published Greenspan’s essay as appropriate for her system of thought, Rand contradicts herself.

WHEREAS, Rand’s philosophy says, “… concepts represent classifications of observed existents…^iv; which means that mental concepts are true only if we saw examples of them in the real world…

AND Ayn Rand asserts that mediums of exchange and money grew out of barter systems. “… you discover you can trade with other farmers… , and you trade your products by direct barter… You can trade your grains for something that will keep longer, and which you can trade for food when you need it… but which commodity?… You devise a tool of exchange – money”^v…

BUT, there is no objective evidence for Rand’s assertions regarding barter and monetary systems. There is no evidence or record of barter economies. There is no evidence of monetary systems arising from customs of barter. There is no record of barter practices which did not operate within a larger economic system along with complex financial instruments, such as credit^vi. Rand may be repeating Aristotle’s speculations^vii…

THEREFORE, Rand’s statements are violations of her philosophy. Because she violated her own philosophy, Rand contradicts herself.

i The Analytic/Synthetic Dichotomy, Pg 131, Leonard Piekoff, Introduction to Objectivist Epistemology,

ii Pg 96, Gold and Economic Freedom, Alan Greenspan, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

iii This paragraph is based on material in https://libcom.org/files/__Debt__The_First_5_000_Years.pdf by David Graeber, Melville House Publishing, 2011

iv The Analytic/Synthetic Dichotomy, Pg 131, Leonard Piekoff, Introduction to Objectivist Epistemology,

v Rand pg 127 Egalitarianism and Inflation, Philosophy: Who Needs It. Signet, Penguin 1984

vi This paragraph is based on material in Debt the First 5000 years. Pg 21 and more, David Graeber, Melville House Publishing, 2011

vii Aristotle, Politics I.9.1257 paraphrased in Debt the First 5000 years. Pg 24, David Graeber, Melville House Publishing, 2011

Alan Greenspan 1.4 – Contradictory

In “Gold and Economic Freedom”, Alan Greenspanⁱ wishes to show that “… under the gold standard , a free banking system stands as the protector of an economy’s stability and balanced growth”. However, Alan Greenspan’s examples of unregulated banking based on gold are contradictory.

Greenspan starts with banks generating money to make loans: “A free banking system based on gold is able to extend credit and thus create bank notes (currency) and deposits, according to the production requirements of the economy”.

When the economy is slow, “… when the business ventures financed by bank credit are less profitable and slow to pay off”; the banks: “curtail new lending,…usually by charging higher interest rates.”

When the economy is good, “when banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly”. The loans have lower interest, “and bank credit continues to be generally available.”

His next paragraph creates contradiction. It presents the situation where different countries have the gold standard in common, and “there are no restraints… on the movement of capital”.

If a country has a liberal credit market, “interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries” and “immediately cause a shortage of bank reserves in the easy credit country… tighter credit standards and a return to competitively higher interest rates.”

As a result, “the economies of the different countries act as one… Credit, interest rates, and prices tend to follow similar patterns in all countries”.

Greenspan’s contradictions are:

Banks cannot act according to the production requirements of their economy, as in his first example ; but must act according to the interest rates of the banks in his second example, in other gold standard economies.
The banks in his first example could never have started or participated in their expansion with low interest, because the gold deposits would have fled to the countries in the second example.
If the interest in all the countries started at parity; when the banks of the first example started charging higher interest, the gold would leave other countries and cause those economies to contract. To prevent loss of their gold deposits, the banks of the other countries would also raise their interest rates – causing their economies to contract. Either way, all the countries must contract their economies whenever one country raises interest rates.
Wherever business starts to get better, banks cannot return to the previous low interest rates or they will lose their deposits to other banks. Economic growth will stop as soon as it starts.

Greenspan fails to show how expansion or growth can begin. His first example of the creation of money starts with the economy already in full swing. When Greenspan’s gold standard economy contracts, the banks have no means to counter that. Instead, the banks wait for businesses to solve the problem, “and require… existing borrowers to improve profitability” without funds. They also “.. restrict the financing of new ventures…”. Both Greenspan’s examples of the individual bank and the multinational situation end with high interest rates and economic contraction.

In Greenspan’s ideal system, there is incentive to set high interest rates. Once high interest rates are in place, there is no way to lower them. Once in a contraction, Greenspan’s gold standard banks do not have the tools to begin expansion. They only have tools to slow the economy down. The contraction must continue. The ratchet only works in one direction.

Here is Greenspan’s statements in full:

“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-sol 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.”

iGold and Economic Freedom, by Alan Greenspan, Pg 98, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

Alan Greenspan 1.5A, parts I & II

In his famous essay “Gold and Economic Freedom”, Alan Greenspan presents a gold based banking system.ⁱ The way currency is created conflicts with Ayn Rand’s philosophy.

Part I: The banks’ creation of currency. Part II: The conflict with Ayn Rand’s philosophy.

Part I:

Greenspan wrote: “… a logical extension… 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 create bank notes (currency) and deposits, according to the production requirements of the economy”ⁱⁱ.

Many people would not realize what Greenspan was talking about. And he doesn’t explain it. Greenspan is using a meaning of “deposit” most people don’t know, referring to a bank’s debt. Obviously, a customer’s deposit of gold wouldn’t convert to or substitute for gold.

This is one example of the procedure he described, according to his words:

Step 1: Extend Credit: The banker agrees to loan 900 gold oz to a Borrower, who will spend it on production requirements.

Step 2: Create a Deposit: The banker writes “900 gold oz” in the debt column of the bank ledger. The banker has “created” the bank’s deposit, without a customer deposit or any gold. He wrote down a debt the bank doesn’t owe.

Step 3: Create Bank Notes: The bank notes say the bank owes 900 gold oz, when the bank notes are redeemed. The bank notes document the the banks’ liability in the debt column, not gold. There isn’t any gold yet.

Step 4: Substitute Bank Notes for Gold: Instead of loaning gold to the Business, the bank substitutes the bank notes. The bank retains the loan agreement, a claim for future payments of 900 gold oz plus interest.

Step 5: Convert Deposit into Gold: The value of the loan, 900 gold oz plus interest, is recorded in the asset column next to the banks’ deposit in the debit column.

The result of the process is that the banker, “… holds claims to gold rather than gold as security…ⁱⁱⁱ”.

The process is essentially the same with or without considering reserves.

Greenspan’s “banking system based on gold” prints money that is not backed by gold. They artificially “create” deposits and loan the result, paper money secured by paper claims; which he says “… enables the banker to loan out more than the amount of his gold deposits…^iv”.

What Greenspan describes is current banking practice. Greenspan was reassuring bankers that the gold standard wouldn’t change their procedures.

Part II: Greenspan contradicts Rand’s philosophy.

Bank reserves, Greenspan vs Brandon
Inflation, Greenspan vs Rand

II.1:Bank reserves, Greenspan vs Brandon

Many people incorrectly think banks loan part of the customer’s deposit and keep part as a reserve. For example, Nathaniel Brandon, a psychologist writing in the same book as Greenspan’s essay, published by Ayn Rand,

“… Banks do not have unlimited funds to loan; they are limited in the credit they can extend by the amount of their gold reserves.”^v

Mr. Greenspan, a trained economist, is clear that is not the case,

“This enables the banker to loan out more than the amount of his gold deposits…^vi”. “… holds claims to gold rather than gold as security…^vii”. Greenspan contradicts Brandon.

Many people think a gold standard will regulate the supply of money. For Mr. Brandon, the requirements of production must be within how much gold already exists,

“On a gold standard… the supply of money and credit needed to finance business ventures is determined by objective economic factors… the principles governing money supply…^viii”

In Ayn Rand’s philosophy, the “objective” economic factor in this case would be the presence or absence of the physical gold.

Mr. Greenspan says gold based banks do the opposite, as they

“create bank notes (currency) and deposits, according to the production requirements of the economy.”^ix Greenspan contradicts Brandon.

For Mr. Brandon, the limited supply of gold money tells banks to slow down business activity:

“… in response to the shrinking availability of money… funds are more difficult to obtain… curtailment and contraction of business investment.^x ”

For Mr. Greenspan, slow business activity tells banks to limit the supply of money,

“But when business ventures financed by bank loans are less profitable and slow to pay off, bankers soon… curtail new lending… restrict financing…^xi ” Greenspan contradicts Brandon.

Once Greenspan is deciphered, the meaning is highly controversial for people who think a laissez faire gold economy automatically does the right thing; that is – the amount of gold available is what determines “the production requirements of the economy”; that people shouldn’t decide production requirements and create currency to match. The idea that money has to be deliberately manipulated to make the economy work is offensive to them. Many people who want a gold standard, want it because they think it prevents human interference with the natural order of things.

Those people are strongly represented in the fan base for Ayn Rand. Greenspan didn’t want to offend them. But he also had to reassure bankers that Objectivism was on their side. So he used technical terminology that regular folks wouldn’t recognize and simply left out any explanation of actual practices.

II.2: Inflation, Greenspan vs Rand

Greenspan advocates “created bank notes” generated by extending credit, based on debt.

This contradicts Rand, who wrote,

“The most disastrous loss… is the loss of the concept that money stands for existing, but unconsumed goods.”^xii

Rand disapproves of

“…paper money which is used as a claim check on actually existing goods- but that money is not backed by any goods, it is not backed by gold, it is backed by nothing. It is a promissory note issued to you in exchange for your goods to be paid by you… out of your future production.^xiii” “… this dear readers is the cause, the pattern, and the outcome of inflation.^xiv”

Rand denigrates what Greenspan advocates. Bank notes are also called promissory notes. The ones the Borrower spends are created out of nothing, cost the banker nothing and are backed by nothing except the future production of the market, which must generate enough income for the Borrower to pay the loan. Yet these promissory notes are in the marketplace competing with actual gold. It is the definition of inflation in a gold economy.

Rand’s philosophy requires money to represent savings from past production. Money based on future production is a major violation. Rand and Greenspan contradict each other.

Rand was wrong when she said,

“Only one institution can arrogate to itself the power legally to trade in rubber checks: the government. And it is the only institution that can mortgage your future without your knowledge or consent: government securities (and paper money) are promissory notes on future tax receipts, i.e., on your future production.”^xv

Greenspan asserts the bank based on gold can do the same thing. Merchants and communities don’t have knowledge of, or consent to, the risk these bank notes represent. Greenspan contradicts Rand.

Ayn Rand authorized the publication of Greenspan’s contradictory essay in her magazine and book as appropriate for her economic philosophy; therefore, Ayn Rand contradicts herself.

iGold and Economic Freedom, by Alan Greenspan, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

iiPg 97 and 98 Gold and Economic Freedom, by Alan Greenspan, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

iiiPg 98 Gold and Economic Freedom, by Alan Greenspan, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

ivPg 98 Gold and Economic Freedom, by Alan Greenspan, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

vPg 78 Common Fallacies About Capitalism, by Nathaniel Brandon, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

viPg 98 Gold and Economic Freedom, by Alan Greenspan, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

viiPg 98 Gold and Economic Freedom, by Alan Greenspan, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

viiiPg 78 Common Fallacies About Capitalism, by Nathaniel Brandon, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

ixPg 97 and 98 Gold and Economic Freedom, by Alan Greenspan, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

xPg 78 Common Fallacies About Capitalism, by Nathaniel Brandon, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

xiPg 97 and 98 Gold and Economic Freedom, by Alan Greenspan, Capitalism the Unknown Ideal, Ayn Rand, Signet, New American Library, 1967

xii133 Inflation and Egalitarianism, Philosophy Who Needs It, Ayn Rand, Signet, Penguin Books USA1984

xiii133 Inflation and Egalitarianism, Philosophy Who Needs It, Ayn Rand, Signet, Penguin Books USA1984

xiv128 Inflation and Egalitarianism, Philosophy Who Needs It, Ayn Rand, Signet, Penguin Books USA1984

xv129 Inflation and Egalitarianism, Philosophy Who Needs It, Ayn Rand, Signet, Penguin Books USA1984

Alan Greenspan 1.3 (Rand vs Greenspan)

Alan Greenspan and Ayn Rand contradict each other when explaining commodity based currencies.

Greenspan starts by describing money. “… Durable…In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium…”ⁱ “More importantly, the commodity… must be a luxury… Wheat is a luxury in underfed civilizations… The term “luxury” implies scarcity and high unit value.”ⁱⁱ

Rand starts by describing the need of the individual for food to survive and the importance of savings. “You need the saved harvest of your good years to carry you through the bad ones; you need your saved seed to expand your production”ⁱⁱⁱ. Rand’s story is about coping with productive abundance. “Grain and foodstuffs are perishable and cannot be kept long”^iv, however “you don’t have to expand your storage, you can trade your grain for a commodity which will keep longer and which you can trade for food when you want it.”^v.

In Rand’s example, the disposition of abundant food was the necessary cause of the monetary system. Increased production is funded by surplus. The goal is for people to have food to eat, in accordance with a person’s “ultimate value… the (person’s) life”^vi.

In Greenspan’s example, the institution of a monetary system is a given. The material circumstances are irrelevant except for how they serve the requirements of the economy. If food has high unit value, hungry people are not to eat the food, but use it as money. Scarcity creates wealth. The goal is an efficient economic system. Feeding hungry people is not a factor.

Greenspan and Rand disagree on the fundamental purpose of an economy. Greenspan and Rand disagree on the function of food in an economy. Greenspan and Rand disagree on the value of human life.

iPg 96 Gold and Economic Freedom by Alan Greenspan in Capitalism the Unknown Ideal Signet, New American Library

iiPg 97 Gold and Economic Freedom by Alan Greenspan in Capitalism the Unknown Ideal Signet, New American Library

iii pg 126 and 127, Egalitarianism and Inflation, Philosophy: Who Needs It, Ayn Rand, Signet, The Penguin Group

iv pg 126 and 127, Egalitarianism and Inflation, Philosophy: Who Needs It, Ayn Rand, Signet, The Penguin Group

v pg 126 and 127, Egalitarianism and Inflation, Philosophy: Who Needs It, Ayn Rand, Signet, The Penguin Group

vi Pg 17, Objectivist Ethics, The Virtue of Selfishness, Ayn Rand, Signet, New American Library

Alan Greenspan 1.2

Alan Greenspan presents an incorrect example of a luxury good and defines the common economic term “luxury good” incorrectly. He argues that “wheat is a luxury in underfed civilizations… the term “luxury good” implies scarcity and high unit value.”ⁱ”

There are two necessary conditions for categorizing something as a luxury good which Greenspan omits: 1) A luxury good is not a necessityⁱⁱ. 2) The economic demand for a luxury good is elasticⁱⁱⁱ. Greenspan’s definition of the term “luxury good” is false through omission.
The vocabulary of economics^iv classifies food, especially staples such as wheat, as a necessity good, not a luxury good. The economic consequences are well known^v. Greenspan is incorrect.
Elastic demand for luxury goods means people buy disproportionately less as their income falls. Demand for food is “inelastic”, which means people have to buy a certain amount even if they are poor^vi or if the price is high. The high unit value of wheat for the underfed people in Greenspan’s example is due to the necessity of food (demand) and the apparent lack of it (supply). Greenspan’s characterization of wheat as a luxury for underfed people is false and incorrect.

Therefore, Alan Greenspan presents an incorrect example of a luxury good and defines the common economic term “luxury good” incorrectly.

iPg 97, Gold and Economic Freedom by Alan Greenspan in Capitalism, the Unknown Ideal by Ayn Rand, Signet, New American Library

iihttps://en.wikipedia.org/wiki/Luxury_goods

iiiIbid.

ivhttps://en.wikipedia.org/wiki/Necessity_good

vhttps://en.wikipedia.org/wiki/Engel’s_law

viIbid.

Alan Greenspan 1.1

Greenspan makes a false equivalency and misuses common economic terms.

1: “Desires for luxuries are unlimited, therefore luxuries are always in demand”ⁱ.

Greenspan draws a false equivalency between “desire” and “demand”. “Desire” is an emotional “wish” for something. “Demand” is a technical term of economics which means someone has both desire and the ability to pay a price for something. A person, or society, may desire luxuries and yet not be able to pay, therefore no demand.

2: “Luxuries are always in demand”.

Greenspan’s conclusion contradicts the definition of luxury good. The demand for a luxury good, by definition, is elastic. Poor people don’t buy luxury goods, therefore luxuries are not always in demand. “Always in demand” is the definition of a “necessity good”. It’s as if Greenspan is saying luxuries are necessity goods, which is incorrect.

Alan Greenspan makes a false equivalency between “desire” and “demand”, and misuses the economic terms “demand” and “luxury”.

Pg 97, Gold and Economic Freedom by Alan Greenspan, in Capitalism:The Unknown Ideal by Ayn Rand Signet Books, New American Library