The Greenspan Enigma

by Jim Davies

Exclusive to STR

September 27, 2007

Alan Greenspan was economic advisor to governments and presidents from Gerald Ford onwards, and Fed Chairman for 19 years. He has had enormous influence for a third of a century, so it's worth trying to understand him.  

He is brilliant, no doubt of it; a Renaissance Man, if you will. He was a sufficiently talented musician as to be able at age 20 to earn a living playing clarinet in a Harlem jazz band, yet a good enough philosopher to be by his 30s in Ayn Rand's famed "inner circle," where his hangdog expression got him known, despite a well-hidden puckish sense of humor, as "The Undertaker." He was also an economist good enough to write a devastating critique of the Federal Reserve in his famous essay on the gold standard at 39, yet as a politician he could weave his way around the thicket of Washington, DC at the highest level and ultimately lead the world's most powerful central bank for two decades--the very institution he had earlier condemned.  

It is that contradiction that has puzzled me for a long while. Is Greenspan a traitor to liberty--did he abandon his Randian insights and join the enemy? Or did he retain them but go under cover, infiltrating the enemy so as to limit the damage the Fed could do? That's the Greenspan Enigma.  

Thanks to his September round of TV interviews to promote his new book, I may have found an answer. I heard him say that the machinery of the world's economies had had a kind of "governor" prior to the 1920s in the form of gold, the supply of which is of course impossible to change quickly--but that in the ‘20s and ‘30s the gold standard was abandoned, so something was needed to take its place; enter the Fed. In other words, he sees his role in life as having been a kind of gold-substitute.  

As a rationalization of the apparent change from his former position as author of "Gold and Economic Freedom", that sounds almost credible. He regrets the demise of gold, and brings his skills to the service of humanity by providing the next best thing (while, yes, gaining a handsome fortune and immense prestige along the way). What a hero!

It's flawed. The Fed was not created after gold standards were abandoned, so as to provide a substitute; it was created ten years earlier in 1913 so as to make the abandonment of a gold standard feasible and to liberate governments from its discipline--exactly the other way around--as well as to enrich its member banks by licensing them to earn interest on money created out of nothing. So Greenspan re-wrote history in his interviews.

Even so, I'm not ready to condemn him as a turncoat; there is more to understand. A careful re-read of his essay on gold reveals a weakness I'd not previously seen. It builds to a magnificent climax: "This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard." But throughout the essay, Greenspan refers--as there--to a "gold standard" and never once to "unfettered, free-market gold" in either those words or any equivalent. His contemporary Murray Rothbard, notably in his magnificent What Has Government Done to Our Money? does. The difference is huge.

A "gold standard" presupposes a State, an organization that forces that standard upon the society whether it is wanted or not, and regulates the operation of the standard. In contrast, free-market money is whatever an unfettered free market may choose to use as money, and that can (though almost certainly will not) vary from day to day. The difference may at first seem like the splitting of a hair--but that difference is fundamental. It refers to whether a society is free or governed.

The United States had a gold standard for its first century and a half--or more accurately a standard of two metals, gold and silver, an arrangement which reveals the dismal economic ignorance of the Founders. The Constitution provides in Article 1, Section 8 that Congress shall "coin money, and regulate the value thereof," and in 1792, Congress defined a dollar as having 24.75 grains of pure gold, and a silver dollar 15 times that weight. This bimetallism brought serious disruption within a century, after the market valued the two metals in a different relationship, and the troubles were used as an excuse for government intervention--eventually for the formation of the Fed. As Harry Browne so well said: "The government is good at one thing. It knows how to break your legs, and then hand you a crutch and say, 'See, if it weren't for the government, you wouldn't be able to walk'."

During the century 1814 to 1913, even that flawed metallic standard worked rather well; as American ingenuity steadily raised productivity, prices gradually fell (as shown in the chart, taken from Irwin Schiff's "The Biggest Con") by roughly 0.5% a year, despite continuing operations to mine and mint fresh supplies of gold, which increased the supply of money.  It's easy to see there the very different price behavior which followed the 1913 creation of the Fed, and which continues to this day.

In contrast, a free market in money has no "standard" forced upon it at all; I presume it will choose gold as the predominant form of money because gold is so inherently suitable for the task, but it may not. Over time, perhaps some other material will prove to be more suitable, and come to predominate. Fine by me; I trust the market first, and gold second. Thus, the issue is one of sovereignty--of who decides; in the "gold standard" scenario of which Greenspan speaks, ultimately government is sovereign. In the Rothbardian vision, individual members of the market are sovereign. This is the difference between slavery and freedom, and by his own words in his 1966 essay, Greenspan is shown clearly to favor the former.

Consequently, when I asked whether Greenspan was a traitor or an infiltrator, I was posing the wrong question; for one cannot betray a movement or an ideal to which one never had proper allegiance. Greenspan's opposition to the State was strictly limited; he didn't want the State to remove all controls from money, as in true laissez faire ("leave us alone!")--he just wanted the State to behave rationally with regard to money, to manage it sensibly!  And in so doing, he was guilty of that cardinal sin of Objectivism, contradiction. That's because the State is an entity utterly irrational at its very root, and if it ever behaves rationally in some particular way, it does so by coincidence alone.

Accordingly, throughout his life as an economist, Alan Greenspan has been reasonably consistent.  Back in 1966 he believed in a gold standard so that the State would imitate the market to a high degree, and in 2007 he still believes in a gold standard so that the State can imitate the market to a high degree.  And if a gold standard isn't available, he'll settle for a wise and frugal central bank which will perform the regulation of money almost as well as gold . . . on behalf of the State. There was no reversal of view on his part; his life is a seamless whole. Though far more enlightened than most, he is a statist, and always was a statist.

Was his stewardship "wise and frugal," as good as gold, as it turned out?  Not so much. By my reckoning based on the Deflator Table, the US dollar inflated under Greenspan by 2.1% a year. This was far better than his predecessors had done in the two previous decades—1968-87--who inflated it at an annual 5.5% clip, with wild variations within that average.  But as the chart above indicates, had a gold standard operated, the dollar would have appreciated by about 0.5% a year. Those differences are quite large; over a quarter century,

- 0.5% annual deflation gives $100 the purchasing power of $113

- 2.1% annual inflation gives it that of $59 and

- 5.5% annual inflation gives it that of $24.

So even a gold standard (never mind free-market gold on its own) would have performed for us (113/59=) twice as well as Greenspan did.

That leaves one matter to resolve; was he representing Ayn Rand when he wrote in favor of a gold standard? Yes, I believe so. Ayn Rand's magnificent achievement was to turn a century of bad philosophy on its head and put a serious monkeywrench into the collectivist machine--but she never did repudiate the central idea of minarchism, a limited government. Even Galt's Gulch, the ideal community in her Atlas Shrugged, is a free society isolated from the surrounding State but with a kind of border which members frequently crossed, to and fro; never once by the book's end is it suggested that the State should vanish.

So Greenspan has been a true Randian, all his adult life, never quite abandoning a belief in the myth of government. Far from betraying Rand , Greenspan more fully than anyone has implemented Rand 's ideas in reality. That is his fundamental weakness, and hers.