Jude Wanniski
March 15, 2005

To: Ben.S.Bernanke@***.gov
Subject: Re: Jastram
From Jude Wanniski, 11:38 am 3/15/2005

I suggest you go right to the fold-out graph that covers several centuries... then to the US tables showing prices since 1800. You can see there is little recorded inflation over the period 1800 to 1930, although there are fluctuations in between. In other words, the gold price was the same in beginnning and ending years, about $20.67 oz. Interesting numbers around the Civil War, when we floated the dollar, then came back to gold at $20.67. Also intesting to see how long it took for price level to catch up with gold going to $35 oz in 1934,

I'm watching Greenspan on Social Security and he does very well in trying to make clear there are differences with SS solvency on a financial basis and the macro track of production over the same period. The goods and services have to increase or the standard of living will fall, for workers or seniors. Greenspan still focuses too much on "savings," though, rather than "production," because the former leads him to say there are only two ways to solve the financial problem..... raising taxes or cutting benefits. The far better way would be to increase the production trajectory, which can only happen (I think) with a tax reform that eliminates taxation of capital and a monetary reform that fixes the dollar to gold. Nobody thinks to ask him if he could see the production issue being resolved if somehow Congress decided to raise taxes on capital. (Which the NYTimes argues should be done, i.e., not extending the 2003 tax cuts.) If taxes on capital were raised, the price of gold would head much higher, by the way.

Please come back to me with questions that may occur to you after checking out Jastram. (When Clinton was elected in 1992, the NYT Book Review asked me to name two books I thought he should read... me being one of many parties of the project. I listed only my book and Jastram's, giving the reason for each. (They informed me that they did not use my entries because I recommended my own book. Oh well.)


To: Jude Wanniski <jwanniski@polyconomics.com>
Subject: Re: Jastram

From: Ben Bernanke, 10:52, 3/15/2005

Ok, the library has it and I have requested it.

From: Jude Wanniski <jwanniski@polyconomics.com
:Ben.S.Bernanke@* * * * *.GOV
Subject: Jastram 03/15/2005 10:27AM

I thought I did mention it to you in an e-mail several weeks ago. Jastram's book came out in 1976, as I recall, and it soon became required reading for the supply-siders. Mundell to this day talks of "the Jastram effect," by which he means Jastram's observation of a "retrieval phenomenon." That is, the gold price moves first and then the general price level follows in train. It's an awesome piece of research and I'm sure Greenspan knows about it. Jastram was a Berkeley professor who spent ten years working on it, spending considerable time in London. In rebuilding consumer and producer price indices, he realized the British monarchs kept ledgers of everything they bought back to the early 16th century... loaves of bread, bushels of wheat, lumber, iron, etc. And of course there is a daily record of the price of gold in sterling. Jastram does the same for the U.S. with his start in 1800, when government and private numbers on dollar prices become

The text of Jastram's book is not as important as the tables, which take up a good part of the book, and the charts/graphs that show the retrieval phenomenon. It's one of the most important books I've ever read and I keep a copy on my desk for easy reference. I learned enough from it to be able to add to what I'd learned from Mundell at the same time, and I've taken it even more seriously than he has, because it does raise some troubling issues for things he had written about gold prior to 1971, i.e., if Jastram is right, Mundell is not quite right.

In the current circumstance, Jastram's revelations have been what has kept me so dogged in insisting that raising the funds rate would have the opposite of its intended effect, and that gold had eliminated inflationary and deflationary forces when it crossed $350 in 2003. Now I'm afraid the CPI will be catching up with gold as the CRB index is already doing, and you folks will be thinking you have to double your speed in hiking rates. So Jastram might be enough to give you pause.

If you were to buy a used copy on Amazon, it might cost you $150 or more. Paul Hoffmeister just bought a copy for himself and that was about what he had to pay. There were only a few thousand printed. I'm almost sure the Fed has one in its library as I have recommended it to so many Fed governors. If it doesn't, there should be $150 in its budget to acquire one.


To: Jude Wanniski <jwanniski@polyconomics.com>
Subject: Re: IBD on Greenspan
From Ben S. Bernanke, 9:33 am 3/13/2005

I don't think I recall your mentioning the Jastram book......

From: Jude Wanniski<jwanniski@polyconomics.com
To: Ben.Bernanke@* * * *.gov
Subject: IBD on Greenspan 03/15/2005 09:21AM

Early farewell to Greenspan. Not very good, but it mentions you on top of Hubbard and Feldstein as his replacement. Also indentifies you with inflation targeting, which would be a dreadful experiment. Inflation stats will be getting worse now as consumer prices catch up with commodities, which would mean higher interest rates (and higher commodity prices). It's time for you to start mentioning gold. Did you look at the Jastram book, "The Golden Constant," as I suggested? It will further your education on its importance as a monetary commodity.


Feature Story

Tuesday, March 15, 2005

Greenspan's Tenure Will End In Jan. '06, But Not His Legacy



For 17 years, Alan Greenspan has been the face of the Federal Reserve. But next January, that face will change when the 79-year-old chairman retires.

That has left those on Wall Street and elsewhere wondering what the nation's central bank will look like under a new leader.

Names being tossed around as possible picks by President Bush include Ben Bernanke, a Fed governor; R. Glenn Hubbard, dean of Columbia University's business school and former head of Bush's Council of Economic Advisers and Martin Feldstein, a Harvard professor and head of the National Bureau of Economic Research.

But Josh Feinman, chief economist with Deutsche Asset Management, said regardless of who steps into the job, theinstitution itself is likely to remain much the same.

"The chair has a disproportionate influence at the Fed but it's not the only influence by far," said Feinman, who was a senior economist at the Federal Reserve until '94. "The Fed is much more than one person and there will be a lot of continuity in terms of the staff and other members of the FOMC."

One trend likely to continue is the Fed's greater transparency, although Feinman believes the big changes have already been made.

"The changes that have occurred over the Greenspan era in terms of transparency have been truly marked," Feinman said.

Indeed, the central bank has come a long way since the days when the benchmark interest rate and changes to it went unannounced. Now the Fed immediately announces any change to the fed funds rate, issues a policy statement and recently sped up release of its meeting minutes.

One matter the next Fed chief is likely to have great influence on is whether the Fed should set a specific inflation target like the European Central Bank, Feinman said. Greenspan has opposed such a move, but others, particularly Bernanke, have supported it.

"The general sentiment on the committee is 'Things are pretty good right now, we've done a pretty good job of holdinginflation at levels low,' " Feinman said.

But some contend that by saying where it would like the inflation rate to be, the Fed would smooth over some uncertainty about where Fed policy is headed when Greenspan leaves, Feinman said.

Others think such a move "might just open up more trouble than it's worth," Feinman said. "It might, at some juncture, tie the Fed's hands."

Tony Crescenzi, chief bond market strategist with Miller Tabak & Co., said some Greenspan traits have become part of the institution itself.

"Whenever there is a strong leader in any group a corporation, government or an institution like the Federal Reserve it tends to take on characteristics within its culture of the leader," Crescenzi said. "I think the culture of the Fed will (reflect) the characteristics of the Greenspan Fed for many years to come."

One thing likely to continue post-Greenspan is the "idea that once in a while the Fed has to throw out the rule book," Crescenzi said.

That's what the chief did in the '90s. As the U.S. economy ramped up, some argued that would automatically spawn inflation and urged the Fed to raise rates to head it off.

But Greenspan understood "there was something different about the expansion that we had not seen before," Crescenzi said.

"The U.S. was achieving strong economic growth without inflation and that's something that in the past (hadn't happened), typically strong growth leads to inflation," he said. "He took a bet that that wouldn't be the case."

Greenspan has also strengthened the Fed's respect for free market ideals, Crescenzi said.

"He believes in the free market and this has proven to be a good way to conduct monetary policy to leave the market alone as much as possible, but to assert the powerful tools of the Fed when needed," Crescenzi said.

He says ideally the next Fed chief will share Greenspan's inclination to let market forces run their course.

"It will be a smooth transition because someone who favors free market ideals is probably going to bet the best choice in the market's eyes," Crescenzi said.

And it's crucial the market is comfortable with the new Fed chief, said Rich Yamarone, director of Economic Research at Argus Research.

"If Wall Street disagrees or doesn't take kindly to the next Fed chairperson you can bet that chair will be empty shortly," he said.

Wall Street has been very comfortable with Greenspan. He had a rocky startthe Dow had its worst one-day drop ever two months after he took over. But overall the U.S. economy has been very good, with strong growth and generally falling inflation, providing the foundation for long bull markets.

One of Greenspan's strengths was his familiarity with the business world. Before taking over at the Fed, Greenspan headed an economic consulting firm on Wall Street and served on the board of directors at several companies.

"That's what prepared him and that's why he was so great because he knew what corporations would want," Yamarone said.

He worries that someone whose experience has been limited to the academic world might "think in theoretical terms rather than practical or real life situations."

"The one thing Greenspan did very well was to ignore schools of thought and not get married to theories," Yamarone said.

And though Greenspan has spoken out on policy from time to time most recently on Social Security and the budget deficit he has largely steered clear of the political fray.

"Given the highly political nature of the Federal Reserve and economic science as a whole, no one has been able to walk the line between policy and politics as well as Greenspan has," Yamarone said.

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