When alan greenspan retires in January, after eighteen and a half years as chairman of the Federal Reserve Board, he will have served longer than any previous occupant save William McChesney Martin Jr., who held the job for nearly 19 years. A lot happened during the Greenspan era – two wars in the Persian Gulf, various currency crises, three stock market meltdowns – but no topic interested him as much as the revolution in information technology.
Greenspan will ever be associated with the bubble in high-tech stocks – first for warning, in 1996, that investors might be succumbing to “irrational exuberance,” and later, after stock prices had soared and investors truly had succumbed, for presiding over the collapse. Greenspan’s critics tend to focus on his enthusiasm for Silicon Valley before the crash; his defenders point out that, after all, the stock market has begun to recover. Both points are somewhat tangential to his real legacy. Greenspan’s primary interest was never the precise level of tech-stock prices: it was how the computer was transforming American society.
“Virtually unimaginable a half-century ago was the extent to which concepts and ideas would substitute for physical resources and human brawn in the production of goods and services,” he told an audience in 1996. At that time, the chairman drew comparisons between the computers of our day and the innovations of earlier eras. Four years later, Greenspan was advancing the proposition that our era was indeed different. “When we look back,” he said on January 13, 2000, “we may conceivably conclude…that…the American economy was experiencing a once-in-a-century acceleration of innovation…[and] it is information technology that defines this special period.”
In August 1987, when Greenspan took the reins at the Fed, information technology was still relatively young. Mainframe computers had long been a staple of American industry, of course, but most Americans did not yet own PCs, and as Greenspan was to observe, “the billions of dollars that businesses had poured into” computer technology “seemed to leave little imprint on the overall economy.” The Internet as we know it did not exist. And oh, yes, the Nasdaq was barely above 400. Greenspan, of course, had nothing to do with creating technology, but as a central banker he allowed technology to influence economic policy to an astonishing degree. Did he get the big picture right?
The proper duty of the Fed chief was forever defined by Martin, who served from 1951 to 1970, as to “take away the punch bowl just as the party got going.” Thanks to Robert Bremner’s new biography Chairman of the Fed: William McChesney Martin Jr. and the Creation of the American Financial System, we have a deeper understanding of how complex this job can be. Greenspan isn’t mentioned in the book, but his shadow hangs over it. Between them, Martin and Greenspan dominated central banking for half a century – a period that saw the U.S. economy reassert itself after the calamity of the Depression; fall siege, during the 1970s, to the worst bout of inflation in recent history; and then recoup in the great boom of the 1990s. Bremner’s book, on bookstore shelves during Greenspan’s last year in office, stirs us to an uncomfortable contrast. How are we to reconcile the failure of the puritanical Martin with the success of Greenspan, who can be accused not only of failing to remove the punch bowl, but also of spiking the punch?
Greenspan’s infatuation with the peculiar punch being ladled out in Silicon Valley is a matter of record. To cite but one example, in April 2000, when dot-com fever was at its peak, he spoke at the White House Conference on the New Economy and warmly referred to the “prescience” of security analysts who were then touting tech stocks at lunatic prices. “There are many who argue, of course, that it is not prescience but wishful thinking,” Greenspan acknowledged. “History will judge.”
History did judge. The bubble popped, and yet the fact is that Greenspan’s overall record is one of price stability and robust growth, dampened by a pair of only mild recessions. Meanwhile, the humorless Martin, who essentially equated speculation with sin, somehow managed to let inflation careen out of control.
Both men entered office as orthodox inflation hawks, and both eventually adopted more-nuanced – one might say more-relaxed – views toward restraining prices. Aside from a shared passion for tennis, however, that is where the similarities ended. The straitlaced Martin, born in 1906, learned macroeconomics from firsthand experience, much of it painful. His grandfather lost his grain business to the depression of 1893, and Martin spent his early career, as a broker and then as a reformist president of the scandal-ridden New York Stock Exchange, trying to emerge from the suffusing gloom of the Great Depression. Contrariwise, Greenspan’s education was intellectual and faintly bohemian: the conservative economist, who grew up in Washington Heights in Manhattan and studied at the Juilliard School of Music, emerged from Ayn Rand’s salon and, improbably, the swing band in which he blew his clarinet.