Last month, Alan Greenspan spoke to the N.Y. Economic Club and sounded, for a while, like his old self.

"Although the gold standard could hardly be portrayed as having produced a period of price tranquility," he conceded, "it was the case that the price level in 1929 was not much different, on net, from what it had been in 1800.

But, in the two decades following the abandonment of the gold standard in 1933, the consumer price index in the United States nearly doubled. And, in the four decades after that, prices quintupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, had allowed a persistent overissuance of money. As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess."

Mr. Greenspan was setting the stage. He might have added that no central banker in all of history had ever succeeded in proving the contrary. Every fiat currency the world had ever seen had shown itself 'subject to excess' and then subject to destruction.

Against this epic background, the new Mr. Greenspan strutted out, front and center.

Today's essay is not about Mr. Greenspan, per se, but rather about his trade. Each metier comes with its own hazards. The baker burns fingers...the psychiatrist soon needs to have his own head examined. The moral hazard of banking is well documented. Given the power to create money out of thin air, the central banker almost always goes too far. And if one resists, his successor will almost certainly succumb.

There are some things, dear reader, for which success is more dangerous than failure. Running a central bank - like robbing one - is an example. The more successful the central banker - that is, the more people come to believe in the stability of his paper money - the more hazardous the situation becomes.

Warren Buffett's father, a congressman from Nebraska, warned in a 1948 speech:

"The paper money disease has been a pleasant habit thus far and will not be dropped voluntarily, any more than a dope user will without a struggle give up narcotics...I find no evidence to support a hope that our fiat paper money venture will fare better ultimately than such experiments in other lands...."

In all other lands, in all other times...the story is the same. Paper money does not work; the moral hazard is too great. Central bankers cannot resist; when it suits them, they overdo it, increasing the money supply far faster than the growth in goods and services that the money can buy.

Asked to produce a list of the world's defunct paper money, Addison was soon overwhelmed.

"I don't think you want all these," he replied, "looking at his screen. They're in alphabetical order. But there are 318 of them and I'm still in the B's. And every one of them worthless."

Against this sorry record of managed currencies is the exemplary one of gold itself. No matter whose face adorns the coin...nor what inscription it bears...nor when it was minted...an unmanaged gold coin today is still worth at least the value of its gold content, and will generally buy as much in goods and services today as it did the day it was struck.

Gold is found on earth in only very limited amounts - only 3.5 parts per billion. Had God been less niggardly with the stuff, gold might be more ubiquitous and less expensive. But it is precisely the fact that the earth yields up its gold so grudgingly that makes it valuable.

Paper money, on the other hand, can be produced in almost infinite quantities. When the limits of modern printing technology are reached, the designers have only to add a zero...and they've increased the speed at which they inflate by a factor of 10. In today's electronic world, a man no longer measures his wealth in stacks of paper money. It is now just 'information.' A central banker doesn't even have to turn the crank on the printing press; electronically registered zeros can be added at the speed of light.

Given the ease with which new 'paper' money is created, is it any wonder the old paper money loses its value?

But for a while, Mr. Greenspan seemed to have a light shining on him. Standing there, center stage of the world economy like Moses in front of the Red Sea, he believed he had found the promised land of managed currencies - for his paper dollars rose in value against gold for two decades, when they ought to have gone down.

Mr. Greenspan explains how this Exodus came about:

"But the adverse consequences of excessive money growth for financial stability and economic performance provoked a backlash. Central banks were finally pressed to rein in overissuance of money even at the cost of considerable temporary economic disruption. By 1979, the need for drastic measures had become painfully evident in the United States. The Federal Reserve, under the leadership of Paul Volcker and with the support of both the Carter and the Reagan Administrations, dramatically slowed the growth of money. Initially, the economy fell into recession and inflation receded.

"However, most important, when activity staged a vigorous recovery, the progress made in reducing inflation was largely preserved. By the end of the 1980s, the inflation climate was being altered dramatically.

"The record of the past twenty years appears to underscore the observation that, although pressures for excess issuance of fiat money are chronic, a prudent monetary policy maintained over a protracted period can contain the forces of inflation."

Until recently, Mr. Greenspan's genius was universally acclaimed. Central banking looked, at long last, like a great success. But then the bubble burst. People began to wonder what kind of central bank would do such a dumb thing.

"Evidence of history suggests that allowing an asset bubble to develop is the greatest mistake that a central bank can make," wrote Andrew Smithers and Stephen Wright in "Valuing Wall Street," in 2000. "Over the past five years or so the Federal Reserve has knowingly permitted the development of the greatest asset bubble of the 20th century."

When the stock market collapsed, Mr. Greenspan's policies began to look less prudent. During his tour of duty at the Fed, the monetary base tripled, at a time when the GDP rose only 50%. More new money came into being than under all previous Fed chairmen - $6,250 for every new ounce of gold.

All this new money created by the Greenspan Fed has the defect of all excess paper money; it has no resources behind it. Though taken up by shopkeepers and dog-groomers as if it were the real thing, it represents no increase in actual wealth. The retailer and the dogwasher think they have more 'money', but there is really nothing of real value to back it up.

The new money was issued, light on value but heavy on consequences. It helped lure the lumpeninvestoriat into their own moral hazard; they no longer needed to save - because the Greenspan Fed always seemed to make money available, at more and more attractive rates. And it misled suppliers into believing there was more demand than there really was. Consumers were buying, until recently; there is no doubt about that. But how long can they continue to spend more than they actually earn?

Encouraged by what seemed like almost unlimited buying from America, foreigners - notably, first in Japan in the '80s, then in China in the '90s - constructed new factories on a monumental scale. They sold their products to Americans...and then invested the proceeds, either in more capacity at home, or in more assets in the U.S. As mentioned above, by the end of 2002, U.S. manufacturing was in still in a 30-year slump...and foreigners owned nearly 20% of the U.S. stock market...42% of the treasury bonds market...and total dollar assets of as much as $9 trillion.

The effects of this moral hazard are just now being felt. The consumer is more heavily in debt than ever before - and seems to need increased credit just to stay in the same place. State and Federal governments have gone from modest surplus to flagrant deficit. Where was the money going to come from? Americans have very little in savings; it must be imported from abroad. But the current account is already in deficit by $450 billion annually. Stephen Roach estimates that the new capital demands will push the deficit to $600 billion - or $2.5 billion every working day.

Foreigners may be willing to finance the new U.S. spending binge. Then again, with the dollar already falling, they may not. We cannot know what will happen, but we can take a guess: they won't be willing to do so at the same dollar price. The dollar ought to fall against gold...and against foreign currencies. It probably will.