Alan Greenspan. He’s the man who gave us ultra-low interest rates every time anything went wrong anywhere. The man who flooded the world with dollars in the wake of the Asian crisis of 1997-8, the Russian crisis, Y2K, whatever. The man who created the technology bubble and then the housing bubble via his bouts of extraordinarily loose monetary policy. And the man who set the stage for Ben Bernanke to create the global bubble now underway in all asset classes.
Oh, and the world’s most famous gold bug.
Yes, all the time that Greenspan was busy debasing the US dollar and putting in place the conditions for global inflation, he was also a believer in the gold standard. His early writings – from the 1950s – show this clearly.
Here he is in his 1967 essay Gold and Economic Freedom: “in the absence of the gold standard, there is no way to protect savings from confiscation through inflation. … 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.”
You can read the whole essay here. Note in particular the bit where he argues that the stock market bubble and crash of the late 1920s were entirely due to monetary excesses.
Greenspan was still a gold bug when he took over as chairman of the Federal Reserve. He didn’t talk about it as much, but he still mentioned it: this comment suggests that even in 2005, after much monetary loosening of his own, Greenspan still said that he had been recommending a return to the gold standard “for years”.
He has repeated this rather more often since 2006, most recently in this much-watched clip on Fox News, in which he points out that that US did “extremely well” during the period 1870 to 1914 when it had no central bank and relied on an international gold standard instead.
He also claims that, thanks to the never-ending efforts of governments to buy voters, “some mechanism has got to be in place that restricts the amount of money that is produced – either a gold standard, a currency board or something of that nature – because if you don’t do that, history suggests that inflation will take hold with very deleterious effects on economic activity”. Indeed it does.
What went wrong?
So why, if he believed in an Austrian-style moral philosophy of money, did he do what he did as head of the Fed from 1987 to 2006? If he disapproves of fiat money, then why did he use it to such an extreme, wreaking havoc in the West as he did so?
There is a reasonable argument to be made that Greenspan took the job of Fed chairman on the basis that if the Fed had to exist, it might as well have a gold bug running it. It is also possible to argue that he himself acted as though he was on the gold standard for the first decade of his reign: when the gold price rose he raised rates, when it fell he cut them. Perhaps he figured that if a central banker acted like he was on the gold standard he wouldn’t actually need to be on the gold standard.
This was his best time – and the time when the ‘Greenspan as God’ books first started to appear. Let’s hope, said lovestruck journo Steven K Beckner in his 1996 offering, that as the shocks and “potential disasters” keep coming, “Americans like Alan Greenspan will be there to hold us back from the brink”.
It didn’t work out like that. Instead, as the brinks came more and more often, Greenspan’s own little gold standard came to an end in the late 1990s. He told Fox News – and has told others before – that it was all about democracy. When you live in one, you have to live with compromises over how money should be handled. “Compromise is the very essence of democratic society.” And he compromised. Despite his deification, perhaps he couldn’t fight the Fed system alone?
But his own explanation isn’t just about compromise. It is also about intellectual confusion and misplaced trust. He has also told us often that he “didn’t get it”. He warned of a housing bubble in 2007, but claimed he didn’t see it until “very late in 2005 and 2006”. In 2005, he made his now infamous speech pointing out how very clever the sub prime lenders were at figuring out risks – something that later (not much later) turned out to be nonsense.
And in 2008 he claimed that he never really understood quite how nuts the markets would go if not regulated carefully. In the same year, he said he had been at partial fault in his total opposition to the regulation of derivatives: he had expected financial institutions to work primarily to protect their shareholders and their own capital bases, and they did not.
Perhaps he really did just make a mistake. Having been chairman of the Fed for a decade or so, perhaps he began to have more faith in its system – and in his ability to manage its system – than he had had in the past. Perhaps he abandoned the moral framework of economics he had long claimed to work within because he trusted himself to get it right without being led by gold, and because he trusted the institutions and individuals around him to manage their own risks.
Compromise and confusion – both good excuses. But there is one other possible explanation to Greenspan’s behaviour: that he knew exactly what he was doing and did it anyway.
Why? Here’s one for the conspiracy theorists – to destroy the system from within and to make his case for the gold standard absolutely watertight. No one was listening to him blah on about gold standards and currency boards back in 1967, no one was listening in the 1980s, and no one was listening in 2005. They’re listening now.