Open Letter To Federal Reserve Chairman Alan Greenspan Re: Monetary Policy and Black America
Mr. Chairman, after viewing your testimony before the Senate Banking Committee yesterday, it has become more apparent than ever, that someone from inside of the Black community must evaluate the impact that your control of US monetary policy has had on Black America. That evaluation must even challenge the prevailing view, in the financial and mainstream media, that your leadership of the Federal Reserve has resulted in a boon for the Black economy. We are of the opinion that your adherence to outdated economic philosophies and your abandonment of your previously stated allegiance to a gold standard are preventing and slowing economic growth among Blacks, in the United States and Africa.
We have identified five groups within the Black economy who have all been hurt by your stewardship of monetary policy:
1) Black Labor. Your refined but continued belief that there is a correlation between employment and inflation is hurting Black laborers and actually ensuring a structural level of unemployment in the Black community among teenagers and adults which exceeds more than double and triple the national level. As you are aware, in the 1950s A.W. Phillips claimed to have discovered a stable inverse relationship between the level of unemployment and the rate of change in money wages. Over time economists transformed what became popularly known as the "Phillips Curve", into a relationship between the level of unemployment and price inflation. You refer to this relationship in technical language as the non-accelerating inflation rate of unemployment (NAIRU). But by any name - NAIRU or the Phillips Curve - the theory has been resoundingly disproved, beginning in the 1970s when high unemployment rates were accompanied by high inflation and most recently, in the 1990s, when low unemployment has occurred in an era of low inflation and even deflation. Though you have modified your view of the relationship between employment and inflation in recent years, to take into account productivity gains, your continued allegiance to the Phillips Curve/NAIRU implies that economic growth can be bad. As long as this belief is part of your worldview, Black America will continue to hit a "job-creation ceiling" that ensures a higher level of unemployment in the Black community than that which exists in the rest of America.
2) Black Debtors. In 1966 for the Objectivist newsletter you wrote the following words, which later appeared in Capitalism the Unknown Idea by Ayn Rand "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". Mr. Chairman, do you not see the same danger in the opposite direction coming from a monetary deflation? From 1996 to 1999 when you allowed the price of gold, which you once publicly recognized as the signal of a monetary inflation or deflation, to drop from $416 per ounce to $256 per ounce, you permitted a massive transfer of wealth from debtors to creditors, where those who took out loans in 1996 were forced to pay them back with more valuable dollars, in terms of gold, in 1997, 1998, 1999, 2000 and even today, in the year 2001, with a gold price of $260 per ounce.
Anyone who borrowed money in 1996 and who was forced to pay it back over the last 5 years has in effect been robbed - on just the principal portion of the loan. Blacks have been especially affected by this scenario as the Black community disproportionately relies upon debt to finance its economic transactions. When one also factors in predatory lending practices that cause Blacks in inner cities to pay interest rates of as high as 60% and above for household purchases, it is obvious that no community in this country has been hurt more by the monetary deflation that has occurred under your watch.
Certainly, this should qualify as a confiscation of wealth, made possible by America's departure from the gold standard in the 1960s and 70s and enabled by your mismanagement of monetary policy by ignoring the gold price - which for five years has indicated that you were allowing this nation to fall into a deflation. Mr. Chairman, it is hard to understand how a man who once publicly praised the gold standard and was able to recognize the negative effects of ignoring the signals it sends would somehow be guilty of exactly that - when he became chairman of the most powerful central bank in the world.
3) Black Farmers. The monetary deflation that you have permitted has caused prices to be dragged down in a chain reaction. First to fall was the price of gold, then oil, metals, farm commodities, land values and finally wages. The drop in farm commodities was devastating. According to the Commodity Research Bureau, among other crops, from 1996 to 1999, the price of corn fell 32% and the price of wheat fell 42%. This dramatic drop in prices was most harmful to Black farmers who were smacked twice - first in that they had to pay back loans obtained in the early 1990s with dollars significantly more valuable than the ones they borrowed, in terms of gold, in the latter part of the decade. And secondly, because these farmers were and are among the poorest farmers in this country, the drop in farm commodity prices hit them the hardest. When these two factors are combined with the fact that the Black farmers have been discriminated against and denied credit by the US Department of Agriculture (USDA), it is easy to see that these men and women were placed in an almost impossible economic situation over the last decade.
4) Black Publicly Traded Stocks. Your decision to not supply enough liquidity to the financial markets has affected micro-cap stocks like the Black publicly traded firms more than any other group in the marketplace. These stocks are the most sensitive to the supply of liquidity or the lack there of, and have suffered from the drought of capital that has ensued as a result of your tight monetary policy over the last four years. If there was ever any doubt that the price of gold was the best indicator of whether enough liquidity has been supplied to the marketplace, one only need to compare the movement in the prices of the Black-owned stocks with the movement of the price of gold.
We recently performed such a comparison and found that in September 1999 the downward trend in the price of gold, beginning in 1996, finally broke, signaling relief for those small and micro-cap companies that had been starving for liquidity and who were carrying a tremendous debt burden as they were forced to repay all of the loans that they made in the time period from 1996 to 1999 with more valuable dollars, in terms of gold, than the ones that they borrowed. From September of 1999 until March of 2000 the price of gold moved away from its deflationary lows - reaching a high of $326 per ounce in October of 1999 and a high of $312 per ounce in February of 2000. Unfortunately by March 3, 2000 gold was back down, trading at $276 per ounce.
Interestingly, during this same time period Black stock after Black stock shot up in this new environment: Broadway Financial Corp (BYFC); Ault Inc. (AULT); Carver Bancorp (CNY); DME Interactive Holdings (DGMF); Granite Broadcasting (GBTVK); OAO Technology Solutions (OAOT); Radio One Inc. (ROIA); all broke out of trading lows beginning in September or October when the price of gold shot up and maintained higher levels in their stock prices until they headed downward in March and April in a trajectory that mirrored that of the movement in the price of gold. Mr. Chairman, again, by ignoring your previous respect for the gold price you have permitted the Black community's few publicly traded companies to collectively suffer from the lack of liquidity.
5) Black Africa. Possibly no continent on earth has been hurt more by your management of US monetary policy than Africa - the continent where more of the population is dependent upon gold and other commodities than any other. There is no complicated arithmetic necessary to figure out what has happened to African commodities producers and government budgets that depend upon revenue from the produce of the earth in order to balance. Because African economies are dependent upon revenue from the export of their commodities throughout the world, the monetary deflation that hits commodities the quickest and hardest has absolutely devastated the continent. With over 40% drops in numerous commodity prices, countries that have little to no economic diversification are sentenced to unwanted budget deficits and the inability to finance badly needed social services and development projects necessary to the food, clothing and shelter of their citizens. In addition to this, every African nation saddled with an enormous external debt has seen that debt balloon even larger, as in the year 2001 it takes more of an African nation's local currency to purchase an ounce of gold or 1 US dollar than it did in 1996 - a direct result of a deflationary Federal Reserve.
Mr. Chairman, although the damage has been done to Black America and the Black world we believe that you can take a significant step toward beginning a repair. We recognize that officially returning the United States to a gold-standard monetary regime is outside of your purview as Federal Reserve Chairman. We understand that can only be done by the executive or legislative branches of government.
However, we do know that you could achieve close to the same effects and benefits of a gold standard regime by beginning to follow a gold-price rule, where you use Federal Reserve monetary policy to stabilize the price of gold within a certain range - give or take a few dollars.
If you would inject liquidity into the marketplace, not by lowering interest rates alone, but by purchasing securities in open market transactions, until the price of gold rises to around $310 per ounce, and maintained that gold price level, we believe that a significant step would have been taken that would allow the Black economy in the US and across the world, to adjust to a gold price equilibrium, providing the stability in the unit of account necessary for economic activity and all other prices to revolve around
This is the recommendation of 1999 Nobel Prize Economist Robert Mundell and one that we support. We understand that being chairman of the Federal Reserve is not the easiest job in the world and we do not even rule out the possibility that you may already desire to return to a gold standard or gold price rule.
In fact, Larry Parks, Executive Director of the Foundation For The Advancement of Monetary Education (FAME) who speaks with you from time to time, tells us that you informed him in 1993 and as recently as last year that you still believe that a gold standard is best but that you relayed to him, " Some of my colleagues at the institution that I represent do not agree with me"
Mr. Chairman, if this is the case we do hope that you can overcome the peer pressure you are receiving from inside of the Federal Reserve and do what you believe to be correct and what is in the best interest of the American economy.
You may be surprised that by returning to your core principles that it is Black America and Blacks in Africa who may be affected the most by your actions, this time for the better.
Wednesday, February 14, 2001