Bubble Boy: Alan Greenspan’s Rejection of Reason and Morality - The Objective Standard

Not long ago, Alan Greenspan was widely regarded as a sort of gnome of Zurich, on whose unique, ineffable powers our prosperity depended. His famously cryptic mumblings could spook markets and spur investors, many of whom believed that his every word carried great weight.1 One news channel would cite the thickness of his briefcase before certain meetings as an “economic indicator.”2 The “Maestro,” as one biographer called him, even appeared on the cover of Time as part of a three-man “Committee to Save the World.”3 And, most remarkably, Greenspan’s reputation as a brilliant economist and potential savior of the world was part and parcel of his reputation as a capitalist. Indeed, he had studied under the great “radical for capitalism” Ayn Rand and had written cogent essays in defense of individual rights and free markets.

But then, on October 23, 2008, media outlets around the country dropped a bombshell: Alan Greenspan, “lifelong champion of free markets,” had declared capitalism dead.4 The financial crisis, it seems, shook Greenspan to his core and led him to conclude that free markets do not work. As the San Francisco Chronicle reported:

Asked by committee Chairman Henry Waxman [D-CA] whether his free-market convictions pushed him to make wrong decisions, especially his failure to rein in unsafe mortgage lending practices, Greenspan replied that indeed he had found a flaw in his ideology, one that left him very distressed. “In other words, you found that your view of the world, your ideology was not right?” Waxman asked.

“Absolutely, precisely,” replied Greenspan, who stepped down as Fed chief in 2006 after more than eighteen years as chairman. “That’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence it was working exceptionally well.”5

But the idea that Greenspan possessed “free-market convictions” and that those convictions are why he failed to rein in unsound lending practices is ridiculous. The very purpose of the Federal Reserve—the central bank at the heart of our troubled, government-controlled economy and the money machine that Greenspan operated for almost twenty years—is to manipulate the market. Such a “bank” would not even exist in a free market, and its precise function in our mixed economy is to engage in unsound lending practices as a means of such manipulation.

As explained in The Federal Reserve System: Purposes and Functions, which is available from the Federal Reserve’s website, one of the primary functions of the Fed is “conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy.”6 The document elaborates, explaining that the Fed “influences” the rate of inflation by setting the interest rate (known as the “federal funds rate”) at which private banks can borrow from the various Federal Reserve banks. When the Fed lowers this rate, it thereby expands credit and increases the supply of fiat money—money that is unmoored to any commodity; money that is just printed paper representing no real value in the marketplace; money that is, essentially, worthless. This constitutes inflation and wreaks havoc on the economy.7

Once upon a time, Greenspan openly acknowledged the destructive nature of fiat money. “The law of supply and demand is not to be conned,” he wrote in his famous 1966 essay “Gold and Economic Freedom”:

As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.8

Again, “the earnings saved by the productive members of the society lose value . . . represent[ing] the goods purchased by the government for welfare or other purposes.” In other words, Greenspan acknowledged in 1966 that one of the primary functions of the Fed is to violate property rights—yours and mine—by printing fiat money and thereby coercively decreasing the value of our hard-earned savings.

The Federal Reserve—in all its anti-capitalistic glory—is by its very nature the primary generator of unsound banking. Greenspan knew this in 1966, when he wrote that article; he knew it in 1987, when he accepted his post as chairman of the Fed; he knew it during the eighteen years he manipulated the money supply; and he knows it today.

Moreover, Greenspan, who claims in his autobiography, The Age of Turbulence, to have “long since decided to engage in efforts to advance free-market capitalism as an insider,” knew exactly how to prevent inflation and the economic misery that comes with it.9 As he explained in “Gold and Economic Freedom”:

[G]old and economic freedom are inseparable, . . . the gold standard is an instrument of laissez-faire and . . . each implies and requires the other. . . .10

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal. . . .

The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.11

This is true. Greenspan, however, used this knowledge not to protect the wealth of Americans but rather to plunder it.

Yes, Greenspan once wrote articles in support of property rights and free markets. He once advocated capitalism. But Greenspan is no capitalist, nor has he been one for decades. And his claim of shock that the free market failed belies both his written words and his known history.

Might Greenspan have taken the position at the Fed in order “to advance free-market capitalism as an insider”? Perhaps he did. Whatever his initial intention, however, his years at the Fed bespeak only contempt for capitalism. Greenspan never so much as hinted during his tenure that the function of the Federal Reserve is contrary to the proper purpose of government, which is the protection of individual rights. He never mentioned that meddling with the money supply forcibly redistributes wealth and distorts the economy. He never advocated returning to the gold standard—or, if he did, he did not make this widely known, and his memoirs do not mention it. He never “advance[d] free-market capitalism as an insider.” Rather, he advanced statism—and he did so in spades.

Nor, apparently, did Greenspan exhibit moral reservations about manipulating the economy. Indeed, he reports in his memoirs that he was “honored” by the offer of the job as head manipulator of the economy, which he described as a “challenge . . . too great to turn down.”12 Greenspan does admit at one point of “nostalgia” for the “inherent price stability” of hard currency.13 But that nostalgia did not provide him with the courage to challenge the “wisdom” of the crowd regarding fiat money:

I’ve long since acquiesced in the fact that the gold standard does not readily accommodate the widely accepted current view of the appropriate functions of government—in particular the need for government to provide a social safety net. The propensity of Congress to create benefits for constituents without specifying the means by which they are to be funded has led to deficit spending in [nearly] every fiscal year since 1970. . . . The shifting of real resources required to perform such functions has imparted a bias towards inflation. . . . [T]he pressure to make low-interest credit generally available and to use fiscal measures to boost employment and avoid the unpleasantness of downward adjustments in nominal wages and prices has become nearly impossible to resist. For the most part, the American people have tolerated the inflation bias as an acceptable cost of the modern welfare state. There is no support for the gold standard today, and I see no likelihood of its return.14

Here, Greenspan coyly admits that he is as aware as he was more than forty years ago that the chairman of the Fed actively causes inflation and thus coercively redistributes wealth.

Greenspan’s role in precipitating the current financial mess was, as he might put it, to fail to “resist” “the pressure to make low-interest credit generally available.” The prospect of manipulating interest rates, siphoning money from our bank accounts, reducing the value of the dollar, and turning our national economy into a train wreck was, for Greenspan, an “honor” and a “challenge” simply “too great to turn down.”

It is clear that Greenspan long ago abandoned capitalism, but that is not the whole story, nor even the most important part of it. The most important point is why he abandoned capitalism. What caused this once-advocate of individual rights and free markets to embrace statism, to violate rights, and to mangle markets? The answer is Greenspan’s deeper philosophy, which is pragmatism.

As philosopher Tara Smith explained in a recent issue of this journal, pragmatism involves four key characteristics: (1) a short-range perspective, (2) the inability or refusal to think in principle, (3) the denial of definite identity, and (4) the refusal to rule out possibilities.15 Greenspan, on all four counts, is a poster boy for pragmatism:

  1. He could not resist “the pressure to make low-interest credit generally available,” and he was willing to ignore the long-term consequences of such a policy—because, as a pragmatist, he holds a short-range perspective.
  2. Although Greenspan knows that “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation” and that “The shifting of real resources required to perform such functions has imparted a bias towards inflation,” he ignores these and other principles—because, as a pragmatist, he refuses to think in terms of principles.
  3. Rather than calling confiscation of property “confiscation of property,” or redistribution of wealth “redistribution of wealth,” Greenspan uses phrases such as “shifting of resources” and “a bias towards inflation”—because, as a pragmatist, he denies definite identity.
  4. Recalling some recent congressional testimony, and quoting himself, Greenspan said that “monetary policy should make even a fiat money economy behave ‘as though anchored by gold.’”16

If that is the case, why bother with fiat money at all? Because without fiat money, the government would be unable to confiscate property and redistribute wealth via inflation—and, as a pragmatist, Greenspan refuses to rule out possibilities.

Alan Greenspan is not a capitalist; he is a statist—and he has been for many years. The reason why he is a statist is that he abandoned the principled approach to politics and economics in favor of a pragmatic approach. A pragmatist cannot be an advocate of capitalism, because capitalism is concerned not only with the short term but also with the long term; capitalism is based on principles, the most immediate of which is the principle of individual rights, including property rights; capitalism is based on the fact that things are what they are (i.e., the law of identity); capitalism rules out the violation of individual rights and thus government interference in the economy.

In 1987, shortly after Greenspan had been appointed chairman of the Fed, the New York Times described him as “a man of . . . demonstrated pragmatism,” who “has not been a doctrinaire monetarist, or a doctrinaire anything else, except at a high philosophical level.”17 The Times got this half right. And, ironically, contrary to its appreciation of Greenspan’s pragmatism, the half the Times got wrong—the notion that Greenspan somehow still embraced principles “at a high philosophical level” but not in practice—is the very myth that positioned Greenspan for the “honor” of taking the helm of the Fed.

At the time, American voters had repudiated the economic policies of Jimmy Carter and his Democratic party—policies that had led to double-digit inflation, high interest rates, high unemployment, a stagnant economy, and long lines at the gas pumps. Communism was beginning to crumble, and central planning was becoming widely discredited in the West via such stark examples as the comparative economic conditions of East and West Berlin. America was eager for an alternative to inflation and central planning, and the time was ripe for a knowledgeable, high-profile capitalist to explain the principles and advocate the policies that could begin reversing the statist trends and moving the country in the direction of freedom. Greenspan could have seized the day for capitalism, but he did not.

Instead, Greenspan chose to ignore what he knew, to evade the principles on which freedom and prosperity depend, and to march the country toward economic disaster. And not only did his eighteen years as a central planner lead the country into one of the greatest avoidable financial catastrophes in American history; to top it off, Greenspan pragmatically smeared capitalism—claiming he was “shocked” that it had failed—in order to save his statist skin.

Greenspan could have been one of history’s greatest defenders of freedom. He could have been the first major economist to present an integrated moral and practical argument for capitalism to the American public—whether as “the Copernican chairman of the Fed” or as “the capitalist who turned down Reagan.” He could have embraced reason and morality and applied them to one of the biggest problems in America: central banking. But he abandoned reason and morality in favor of pragmatism and prestige.

As his one-time mentor Ayn Rand might say were she alive today: “Reason and morality are the only weapons that determine the course of history. Alan Greenspan dropped them, because he had no right to carry them. Pick them up; you have.”18


Acknowledgment: I would like to thank Craig Biddle for very helpful suggestions on an earlier draft.

1 Meg Richards, “Greenspan’s hints on interest rates push stocks lower,” Seattle Times, April 21, 2004. Available from http://community.seattletimes.nwsource.com/archive/?date=20040421&slug=stox21, accessed on November 5, 2008.

2 Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin, 2008), pp. 197–198.

3 Time, vol. 153, no. 6, February 15, 1999, cover. Available from http://www.time.com/time/covers/0,16641,19990215,00.html, accessed on November 21, 2008.

4 Sam Zuckerman, “Greenspan shocked at failure of free markets,” San Francisco Chronicle, October 24, 2008. Available from http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/10/23/BUI513N8QM.DTL, accessed on October 24, 2008.

5 Ibid.

6 The Federal Reserve System: Purposes and Functions, 9th ed., edited by Lynn S. Fox et al. (Washington, DC: Board of Governors of the Federal Reserve System, 2005), p. 1.

7 Ibid., pp. 15–16.

8 Alan Greenspan, “Gold and Economic Freedom,” in Capitalism: The Unknown Ideal, edited by Ayn Rand (New York: Signet, 1967), p. 101.

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9 Greenspan, Age of Turbulence, p. 52.

10 Greenspan, Capitalism: The Unknown Ideal, p. 96.

11 Ibid., p. 101.

12 Greenspan, Age of Turbulence, p. 99.

13 Ibid., p. 481.

14 Ibid.

15 Tara Smith, “The Menace of Pragmatism,” The Objective Standard, vol. 3, no. 3, Fall 2008, pp. 73–74.

16 Greenspan, Age of Turbulence, p. 391.

17 Leonard Silk, “Economic Scene; At Fed, Change and Continuity,” New York Times, June 3, 1987. Available from http://query.nytimes.com/gst/fullpage.html?res=9B0DE0D61539F930A35755C0A961948260&sec=&spon=&pagewanted=all, accessed on November 21, 2008.

18 Ayn Rand, “The Cashing-in: The Student ‘Rebellion,’” in Capitalism: The Unknown Ideal, edited by Ayn Rand (New York: Signet, 1967), p. 269.


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