ALAN GREENSPAN

In 1913 in the administration of American president Woodrow Wilson (1856-1924), Congress created the United States Federal Reserve Board. The Board, or Fed as it has become known, was given power to set certain interest rates and control the American money supply.

This was the latest attempt of the United States government to refine its influence over the regulation of American financial affairs.

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Capitalist business systems suffer periodic panics, slumps, recessions and depressions. For instance, before the Fed was created the United States suffered slumps in 1837 and 1871. To mitigate or prevent these economic lurches, and to take ultimate control over the American economy from the hands of such capitalists as J.P. Morgan, the Fed was created.

The Fed's creation succeeded numerous efforts to control credit by the American Treasury in the 18th and 19th centuries.

During the American Revolution, for example, the federal government had printed its own paper currency. These "continentals," as they were known, being backed by no assets, became valueless. In addition, individual states had printed their own currencies. Both types of money were of little value at the end of the war.

The new United States Constitution of 1789 gave the federal government no explicit power over currency. Nevertheless, to improve the situation of a shortage of valuable currency the First United States Bank was created in 1791. The first valuable national currency, a decimal one, was then established in 1792 and a national mint in 1794.

Perhaps because of the worthless continental notes, the American public had a deep suspicion and hostility to banks and paper currency long afterwards. Many, many legislators were deeply suspicious of banks. They wanted such banks as had to exist to be regulated by the states. This meant, however, that there would be little or no central control of credit.

Banks like the federally-regulated First United States Bank were intended to give the federal government some control over credit. After all, the United States had to manage its national debt, incurred to fight the Revolution.

What resulted was a complicated system of small banks chartered and regulated by individual states, with just a few privately-owned and federally-chartered banks. A great deal of significant American legislative history involved controversies over the policies of the federally chartered banks. Should they have been created? Should they be stripped of their charters? If so, should new, differently regulated national banks be created?

Many Americans, including many legislators, believed that banks per se were pernicious or, at least, that they had to be carefully supervised. Conspiracy theorists often have analysed the heroes and villains of these historical movements; they believe that there were many conspiracies by American bankers to enrich themselves by controlling credit. In the usual way, due to antisemitism, some trace the recessions and depressions in American economic history to conspiracies by powerful Jewish bankers. Others are content to trace the problem to private ownership of banks.

I have a minor interest in these matters because of my interest in Ezra Pound (1885-1972), the impressive 20th century American poet and man of letters. Pound had a fascination with American economic history, and developed rigid, fanatical views. He seems to have believed in Major Clifford Hugh Douglas' Social Credit economic theories. He had extreme, almost medieval Roman Catholic views about usury, against which he inveighed. Further, Pound was, until almost his final years, a lifelong verbal antisemite, occasionally of the most virulent, vile and disgusting kind.

The Federal Reserve Board too fits into the annals of conspiracy theorists. Some believe it is privately owned (is it? I have never heard of this) and privately controlled, that it is the latest in a series of private, centralist attempts to control America.

Better informed capitalist libertarians and anarcho-capitalists often accuse the Federal Reserve Board of creating the Great Depression that began in 1929. Through the late 1920s the Fed kept interest rates very low. This caused an enormous economic boom and expansion. Then in 1929 the Fed reversed policy. It raised interest rates. This may indeed have caused the Depression. It certainly contributed.

Greenspan Becomes Fed Chairman

The current chairman of the Federal Reserve Board, Alan Greenspan (1926-     ), was appointed to command the Fed in September 1987. A successful Wall Street manager, and a student and friend of the late philosopher-novelist Ayn Rand (1905-1982), Greenspan had been chairman of the Council of Economic Advisers during the administration of president Gerald Ford (1974-1977).

Within a few weeks of his appointment, the new chairman of the Fed faced an enormous crisis.

The Dow-Jones Industrial Average, a much-watched indicator of America's prosperity, suddenly plummeted hundreds of points. On that October day, it suddenly dropped from about 1800 to 1125, one of its biggest losses in history.

Swiftly stepping in, Mr. Greenspan promised to use the Fed's control of the money supply to give the stock market all the assistance it needed. Based on this promised assistance, markets rallied next day. Within a period of weeks the Dow recovered its losses. A potential stock-market crash and economic recession had been averted.

This was only the beginning of Mr. Greenspan's term in office.

True, a recession did occur during his term, in 1990. Watched over by the Fed, it soon petered out.

Mr. Greenspan's Bull Market

From 1991 to 2000 the United States then prospered in the longest non-recessionary period on record. We who lived through it will remember the great, surging run-up of stocks, from 1100 to 11,000 on the Dow. We will remember the enormous increase in stock market volumes. When Mr. Greenspan took over the Fed, for example, a heavy day on the New York Stock Exchange saw a turnover of about 150 million shares. By 2001, a good day on the NYSE was approaching 2 billion shares.

We will also remember the great increase in American workers' wages during the latter part of Mr. Greenspan's term. American non-farm workers' wages increased by 15%. In the two previous decades American non-farm workers' wages had slightly declined.

American unemployment also dropped during Mr. Greenspan's term. In 2000 it dropped to about 4% -- much lower than any economist had thought possible.

During Mr. Greenspan's term on the Board, also, more and more people began buying stocks. At the beginning of Mr. Greenspan's term only about 16% of Americans owned stocks. By 2001 50% of Americans owned stocks. This has probably made the American stock market more stable, and increased the average wealth of Americans.

Total American wealth also increased.

During this time also, the United States, the locomotive of world growth, drew most of the rest of the world (an exception is Japan, for special reasons) into long periods of steady growth. Canada, for instance, which suffered more and longer from the 1990 recession, grew from 1994 to 2001.

The Bear Returns

In 2000, however, the American economic picture suddenly clouded over.

Much of the wealth-producing action of the past five years had been in technology stocks, especially the so-called dot-com Internet stocks. In March 2000 these suddenly stumbled. A number of dot-coms went under.

In September 2000, the public became aware that growth in some sectors of the economy had virtually stopped. It became debatable whether a recession would now begin.

In March 2001, the National Association of Security Dealers Automatic Quotes (NASDAQ) stock market average peaked at about 5000. This market listed most of the dot-com and technology stocks. At that time, the economies of most of the nations of the Western world had been expanding for six or seven straight years. The United States economy had been expanding since 1991!, the longest continuous economic expansion of the U.S. on record.

Who was responsible for this growth?

The single person probably most responsible was . . . yes, Alan Greenspan. As chairman of the U.S. Federal Reserve Board he had carefully handled the money supply of the planet's most powerful nation.

The American economy had not always been so wisely handled.

Mr. Greenspan's predecessor, Paul Volcker (1927-    ), though widely respected, presided over a few very bad recessionary years in 1981-1983. In his first months of office in October 1987 Mr. Greenspan -- by contrast -- headed off collapse of the American stock market and economy.

But Mr. Greenspan's record has not been faultless. There was a brief recession on his watch in 1990 (it was severe in Canada). And former President of the United States George Herbert Walker Bush (1924-   ) attributed his defeat in the 1992 presidential election, when the U.S. economy was recovering, to Mr. Greenspan's too slow expansion of the money supply that year.

Another minor blemish to Mr. Greenspan's career was the slowing of the American economy for a bit in 1994 and 1995, before it picked up again.

Regardless of his record, Mr. Greenspan has demonstrated that he possesses virtues ideal for one in his position. As he himself appreciates, he has an enormous amount of prudent caution. He is a numbers man, poring over the latest economic statistics. He has a sense of humor. He has a great love of his country, and a deep understanding of its and the world's economic situation. And, perhaps most important, he has an ability to obfuscate with words, an ability to say something woolly that allows him to satisfy a congressional questioner without roiling the markets.

Capitalist libertarians (I used to be one) are people who oppose governments having control over anything but the courts, national defence, and the police. This is because most of them believe that government's sole function should be to defend people from the initiation of force or fraud.

A central money supply or currency controlled by a government is opposed by most libertarians. Indeed, they oppose so-called fiat money. What is fiat money? A currency (such as that of the United States and just about every contemporary country) which is without a guaranteed backing in gold or silver, and is controlled by a government or its agencies. Libertarians fear that the supply and value of fiat money may be altered at will by a government, thus impoverishing those who rely on the money.

Alan Greenspan, as a friend of Ayn Rand, may be presumed to be a closet Objectivist (that is, a believer in Rand's philosophy) or free-enterprise libertarian. According to Nathaniel Branden, Rand's one-time "intellectual heir", Greenspan has said in recent years he still would like America to be on the gold standard. One wonders how Greenspan justifies his job.

SUPPLEMENTARY NOTE: In the last months of 2000, the American economy began slowing down in some sectors. The Dow Jones Industrial Average had dropped by about 1000 points from its high in March. Many companies, including the auto companies and the tech companies, were announcing thousands of layoffs.

By late March 2001, it remained an open question whether the North American economy would tank into a recession, or narrowly skate by one. One article even attributed the dot-com drop to Greenspan himself.

The economy continued to stumble and somewhat to slow until September. On September 11, 2001 the Islamist terror attacks on the World Trade Center in New York and the Pentagon in Washington, D.C., sent the air travel and tourist market into a nose-dive. This was followed by a decline in retail sales and many layoffs. The U.S. economy now appears to be entering a recession. The Federal Reserve Board has dropped Interest rates to the lowest level in two decades. Unemployment rates have quickly risen.

In Canada the economy is certain to tank within a few months, following its American customer down.

Previous section last modified: 8:44 PM 12/24/2001

SUPPLEMENTARY NOTE (written August 31 2002): It gradually became clear that a mild recession had already begun in the United States before the events of September 11, 2001. The terrorist attacks merely aggravated the fall, and the stock market's decline.

Though the United States entered a recession, oddly Canada did not.

Near the end of 2001, telecommunications companies began to collapse, having overbuilt their fiberoptic networks during the end of the economic boom. Orders for telecom equipment suddenly began to fall off a cliff near the end of 2001. The telecoms -- Lucent Technologies, Canada's Nortel Networks -- then laid off hundreds of thousands of employees. Their stock values declined by 70 or 80% or more, as they began to bleed red ink. Quite a few went broke.

Economic fraud and chicanery were revealed in the sudden collapse about October 2001 of Enron, a Houston-based trader of energy futures and one of the largest corporations in the world. Inquiries gradually established that a culture of "aggressive" accounting, executive embezzlement and downright fraud had caused the company's financial managers to establish 3600 dummy companies to keep Enron's debt off its books and to improve its financial image. When these companies' existences had had to be revealed, and the company's inadequate bookkeeping revealed, Enron's stock tanked. On December 2, 2002 Enron entered Chapter 11 bankruptcy.

Congress held hearings in early 2002 at which several senior Enron executives including the chairman of the board Kenneth Lay refused to testify. The former president, Jeffrey Skelling, who had resigned about August 2001 for "personal reasons," testified that Enron had seemed healthy when he left. Strangely, Mr. Skelling appeared to have been present at nearly every meeting where creating the dummy partnerships was discussed. Oddly, his signature nearly always seemed to be missing from the partnership documents.

In August 2002 the chief financial officer of Enron, Mr. Fastow, was arrested on a dozens of charges. (His wife was also later arrested.) Mr. Fastow's assistant was expected to testify against him to lighten his own sentence.

But the problem did not end there.

"Aggressive" accounting was also found in other companies, both telecoms and non-telecoms. The largest of these involved Worldcom, a Mississippi-based conglomerate which had bought up and merged into itself a vast number of telecoms. Its books turned out to be, ahem, remarkable. Worldcom did a Chapter 11 and is soon to rename itself MCI, after the largest company it previously took over. Its CEO, Mr. Bernie Ebers (formerly a motel owner and, before that, a denizen of Calgary, Alberta) turns out to have received millions in questionable "earnings." Alan Greenspan eventually condemned the culture of "infectious greed." More executives were arrested.

Perhaps twice as much was lost to investors in the collapse of the telecoms as in the collapse of the dot-coms: the total of the two approached 7 trillion dollars. Much of the preceding decade's rise in American wealth was thus revealed to be an illusion, a bubble.

George Gilder (1928-     ), a prominent American neo-conservative who had advocated investment in the telecom sector, was shaken by the collapse. In an interview in Wired magazine in 2002, he declared that he was broke and that his reputation had suffered for his erroneous optimism. However, in an August 2002 introduction to the paperback edition of his most recent book, Telecosm (2000), a book which raved about the glorious future of telecommunications, Gilder seemed to have recovered his optimism and self-confidence. He promulgated that the collapse had been a mere hiccup on the glorious road to our wonderful telecom future.

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Books About Alan Greenspan

Martin, Justin. Greenspan: the Man Behind Money. New York: Perseus Publishing (HarperCollins), 2000.

Woodward, Bob. Maestro: Greenspan's Fed and the American Boom. New York: Simon & Schuster, 2000.

Books About American Economic History

Galbraith, John Kenneth. The Great Crash.

-------. The Affluent Society.

-------. The New Industrial State.

Gilder, George. Telecosm: How Infinite Bandwidth Will Revolutionize Our World. New York: The Free Press (division of Simon & Schuster), 2000.

Josephson, Matthew. The Robber Barons.

-------. The Money Lords.

Rand, Ayn. Capitalism: the Unknown Ideal. New York: New American Library, 1966.

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