During testimony before the House Financial Services committee last week, Federal Reserve Chairman Alan Greenspan indicated that he is prepared to maintain low interest rates for “as long as it takes” to energize the listless economy. Unfortunately, this will only prolong the painful economic consequences of his own easy money, easy credit policies.

Throughout Greenspan’s tenure, we’ve been told that inflation is either nonexistent or very much in check. The Treasury department assures us that consumer prices, measured by the consumer price index (CPI), are under control. But inflation is much greater than the government admits. The CPI excludes housing prices, among other things. Everyone knows that housing prices have risen dramatically over the last decade in most parts of the country, with rents following closely behind. So the single biggest expense for most Americans – their mortgage or rent payment – certainly has inflated! The price of many other goods and services, including medical care and energy, also has risen substantially.

The real measure of inflation is the increase in the money supply. Chairman Greenspan, through his relentless cutting of interest rates, has made it possible for banks to flood the worldwide economy with dollars. In fact the money supply, as measured by a figure economists call M3, has nearly doubled since 1996.

This increase in the money supply ultimately causes price inflation, despite the government’s claims. When the money supply rises quickly relative to a fixed amount of goods and services, prices always go up. In other words, more dollars chasing the same number of consumables results in higher prices.

The Fed’s inflationary policies hurt older people the most. Older people generally rely on fixed incomes from pensions and Social Security, along with their savings. Inflation destroys the buying power of their fixed income and savings, while low interest rates reduce any income from savings. So while Fed policies encourage younger people to overborrow because interest rates are so low, they also punish thrifty older people who saved for retirement but find their dollars eroded by inflation.

Mr. Greenspan once again discussed his concerns about deflation during the hearing. This is ironic not only because he has caused so much inflation, but also because deflation used to be viewed as mostly a good thing. In most cases, falling prices result from better technology, increased productivity, and price competition. I doubt many older people would complain about a drop in the price of groceries, gas, or utilities!

Yet even as the Chairman warned about the supposed danger of deflation, he also discussed his view that rising natural gas prices pose a serious threat to the U.S. economy. There seems to be no coherent message coming from Mr. Greenspan: we’re warned about “irrational exuberance” even as the Fed cuts interest rates and wildly inflates the money supply; we’re told there is no inflation, yet housing prices skyrocket; we’re told that only our central bank planners have the wisdom to determine proper monetary policies, yet the Chairman himself seems to equivocate constantly and provide only the fuzziest answers to straightforward questions.

Centralized planning is as disastrous in monetary affairs as in economic affairs. Just as Russian commissars could not determine prices or production levels in the absence of a free market, the Federal Reserve Board cannot determine the “proper” level for interest rates or the money supply. Our fiat currency and artificially low interest rates can only result in the deterioration of the U.S. dollar through inflation, which in the end will cause interest rates to rise no matter what the Fed says or does. Older Americans especially stand to suffer most from Mr. Greenspan’s easy money policies.

July 22, 2003

Dr. Ron Paul is a Republican member of Congress from Texas.