December 27, 2005

Wonk alert: Greenspan's paper in 1966 on credit, bubbles and gold

Funny how such a smart guy made the very mistake that in 1966 he wrote about, causing him to be the king of bubbles. For the wonks among us, read the whole article - it's very interesting given today's over-speculative, over-credited economic condition.

The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom.

Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom.

But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence.

As a result, the American economy collapsed

Then he writes on the gold standard:

It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.


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