Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession
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Rand and Branden were instinctively suspicious of Greenspan’s motivations. In his autobiography, Nathaniel Branden recalls a man without philosophical inclinations. At lunch, most of their discussions were not about philosophy, but about Greenspan’s disgust with the Federal Reserve: “A number of our talks centered on the Federal Reserve Board’s role in influencing the economy by manipulating the money supply. We talked about the Fed’s destructive contribution to the Great Depression. [Greenspan] spoke with vigor and intensity about a totally free banking system.”22 Free banking would eliminate Federal Reserve “policy.”23 Such an argument would hold great appeal with Rand, but elicit disclaimers from Arthur Burns. Even then, Greenspan could talk in one direction while moving in another.
18 Tuccille, Alan Shrugged, p. 52.
19 Martin, Greenspan, p. 40. The quote is slightly different in Tuccille, Alan Shrugged, p. 53: “I think I exist, but I can’t be certain. In fact, I can’t be certain that anything exists.”
20 Martin, Greenspan, pp. 39–40.
21 Ibid., p. 40.
22 Branden, My Years with Ayn Rand, p. 160.
23 Ibid.
Four decades later, Branden still can’t reconcile Greenspan’s temperament with the Collective: “Now, looking at [Alan], I wondered to what extent he was aware of Ayn’s opinions. He rarely voiced his feelings about anything of a personal nature, and his language tended to be detached and passive.” Branden recalls that in the discussions of Rand’s Atlas Shrugged, Greenspan’s contributions were meager. Complimenting Ayn on some passage, he might say, “On reading this … one tends to feel … exhilarated.”24
Branden also recalled “[i]f Alan Greenspan mentioned a social event he had attended, Ayn would speculate about his fundamental seriousness or lack of it: ‘Do you think Alan might basically be a social climber?’ ”25 What specifically he acquired, or expected to acquire, from the Collective is impossible to know. He would learn later, if he did not understand already, the value of social accomplishment.
Greenspan may have been motivated for professional reasons. Objectivism appealed to those who professed freemarket economics. Martin Anderson, later a member of the Reagan administration, was a fringe Randian who would prove instrumental in Greenspan’s rise in the 1960s.
It is interesting that Greenspan’s economic views are most often associated with a novelist, not an economist. This does not matter. There has never been a profile of Greenspan that does not mention his “attachment to Ayn Rand’s freemarket economics” or words to that effect. Any description of an economist to the public requires simplifications, and this was his name tag. Not one in a thousand readers would understand what this meant, which was fine. What Greenspan really believed has been probed by few and understood by none.
Greenspan Joins William Townsend
While he was at the Conference Board, Greenspan was approached by William Townsend, who managed an economic consulting practice on Wall Street.26 Townsend had been a successful bond trader in the 1920s, but lost everything in the 1929 crash. Starting from the bottom, Townsend managed a firm that published statistical indexes for stock and bond market forecasting.27 Greenspan’s comparative advantage as an economist was evident to Townsend. The young economist’s consumption of figures was, as one biographer wrote, “a data-head’s delight.”28 In 1958, William Townsend died of a heart attack, and Greenspan, only 32 years old, was given the opportunity to buy out the Townsend family interests. He did, but he retained the firm’s name of TownsendGreenspan & Co. His clientele included U.S. Steel, Owens Corning, Weyerhaeuser, and Alcoa.29 Greenspan continued to operate the firm until it was liquidated in 1987, when he became Federal Reserve chairman.
24 Ibid.
25 Ibid., p. 212.
26 Martin, Greenspan, p. 54.
Fellow economists and clients assayed the future chairman’s strength to be numbers. Greenspan’s job was to collect data and project the demand for steel in six months’ time. He was thorough and conscientious when collecting the inflow; however, the value of his forecasts is not clear. We do know that he warned Fortune magazine readers in March 1959 of “overexuberance” in the stock market after the Standard & Poor’s 500 (S&P 500) rose 43 percent in 1958. The market bumped and skidded for the next two years—in sum, neither making nor losing money for investors—before rocketing again in 1961.
His “overexuberance” claim is well known (as a precursor to his “irrational exuberance” worry in 1996). More interesting is the context. He explained to Fortune that there were automatic stabilizers prior to World War I that held overexuberance in check. In the words of Fortune reporter Gilbert Bruck, Greenspan explained that “prices could not get too far out of line with real values because the supply of credit was automatically constricted by a limited money supply.” These constraints, Greenspan explained, were severed once the Federal Reserve came into existence.30
The data that Greenspan collected were of physical properties that could be counted. As his biographer Justin Martin wrote: “The economy of the 1950s was a physical economy in very real and quantifiable terms: X number of men worked Y number of hours to produce Z tons of steel. It all got loaded onto so many railcars and wound up pounded into so many girders and aircraft struts and auto fins.”31
27 Greenspan, The Age of Turbulence, p. 45.
28 Martin, Greenspan, p. 56.
29 Ibid., p. 58.
30 Gilbert Burck, “A New Kind of Stock Market,” Fortune, March 1959, p. 201.
But structural changes in the U.S. economy made Greenspan’s specialty less authoritative. The numbers became more elusive as the economy grew less physical and more conceptual.
Greenspan’s forte was staying ahead of his peers in the collection of previously under cataloged data. Yet, he was falling behind the times. Econometrics was the future.
Greenspan was skeptical of econometric modeling. In 1958, he wrote in The American Economic Review: “[Stephen] Taylor is right in pointing out that the basic problem in handling flow-of-funds accounts is the primitiveness of our financial theory. These accounts are extremely elaborate and extraordinarily well constructed. But unless we know what we want to use them for, they are of as much practical value as a table of random numbers. …”32
Econometrics substitutes statistical tests for understanding (such as “what we want to use them for”). Greenspan was skeptical, yet, he succumbed—in his fashion. TownsendGreenspan purchased a $100,000 computer that was the size of a car.33 Greenspan “was especially inclined to tinker with the findings. He would often make substantial changes, certain that punch cards were no substitute for good old-fashioned observation.”34 Later, as Fed chairman, he was admired for ignoring models and conceptualizing Fed policy.
31 Martin, Greenspan, p. 56.
32 Alan Greenspan, American Economic Review, May 1958, vol. 48, (May 1958), p. 171.
33 Martin, Greenspan, p. 56.
34 Ibid, p. 59.
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2
The Dark Side of Prosperity
1958–1967
Mr. Greenspan declared that a rising stock market tended to put strong upward pressure on stockholder inclination to spend. If market values rise, and do not quickly fade again, he said, the gain gets built into an individual stockholder’s permanent assets and his standard of living ideas change, with consumption rising accordingly.
—“Economists Sift Jobs and Stocks,” New York Times, December 28, 1959
When Alan Greenspan, joined William Townsend’s firm, Wall Street was the last place a bright and promising college graduate would launch his career. The Dow Jones Industrial Average would not reach its 1929 peak again until 1954. The relative attraction of launching a career at General Motors was not only obvious but necessary—only eight people were hired to work on the floor of the New York Stock Exchange between 1930 and 1951.1 A study commissioned by Wall Street after World War II reported that, when respondents were asked their opinion of the stock
market, “most people believed Wall Street was home to some of the
1 John Brooks, The Go-Go Years: (New York: Weybright and Talley, 1973), p.113.
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nation’s slickest, most accomplished crooks, while a substantial segment thought the stock market was a place where cattle was sold.”2 Predictably, the best decade in the twentieth century for stock market returns was the 1950s. The period was one in which the American economy boomed.
The Federal Reserve at Mid-Century
During these early years of Greenspan’s financial awareness, the Federal Reserve was fighting a battle royal with the Treasury Department. The Fed had responded to the patriotic calling of World War II by playing a subservient role to the needs of the U.S. Treasury. It held the 90-day Treasury bill rate at 3/8 percent and the longterm Treasury at 2½ percent.3 After the war the Fed pressed for greater autonomy.
By early 1951, yields on Treasury securities began to rise. President Truman tried to coerce the Fed by issuing a statement on February 1, 1951: “The Federal Reserve Board has pledged its support to President Truman to maintain the stability of Government securities.”4 The Fed had done no such thing. Previously, Truman had decided not to reappoint Marriner Eccles, who had been chairman of the Fed from 1935 to 1948. The former chairman, who was still a Federal Reserve Board member, released his own statement that Truman’s press release was a fabrication.5 The administration stood down, but no Fed victory is long-lived. Treasury yields would rise for the next three decades, the market’s response to ever-expanding government.
William McChesney Martin Jr. was an assistant secretary of the treasury at the time of the truce. He served as Fed chairman from 1951 to 1970. Alan Greenspan observed this Federal Reserve chairman from afar. The lunchtime conversations with Nathaniel Branden about the errant Fed were during Martin’s term.
2 Robert Sobel, The Pursuit of Wealth: The Incredible Story of Money throughout the Ages (New York: McGraw-Hill, 2000), pp. 277, 293, 300.
3Robert P. Bremner, Chairman of the Fed: William McChesney Martin, Jr., and the Creation of the Modern American Financial System (New Haven, Conn.: Yale University Press, 2004), p. 73.
4 Martin Mayer, The Fed: The Inside Story of How the World’s Most Powerful Financial Institution Drives the Markets (New York: Free Press, 2001), p. 89.
5Ibid., p. 89. The Federal Reserve chairman between 1948 and 1951 was Thomas B. McCabe.
Martin Mayer, author of several books about money and the Federal Reserve, sums up William McChesney Martin’s character: “an unusually nice man, a good listener who actually heard what other people were saying, friends with just about everybody in all the financial communities where he lived or visited.”6 The economist Milton Friedman, no slouch when it came to publicity, attended the swearing-in ceremony for Arthur Burns’s first term as Fed chairman. He watched the lollygagging senators mixing with Martin and pouted, “I still think Bill Martin is the best politician in the room.”7 Alan Greenspan, also in attendance, would have been equally observant.
Martin was a foe of both speculation and inflation. During the Eisenhower years, Martin’s quest was largely a success. Between 1952 and 1962, the monetary base of the Federal Reserve Bank remained unchanged.8 The Fed accommodated the rising demand in credit by reducing the reserve requirements of Federal Reserve member banks.9 A lower reserve base allows banks to lend more, although it compromises bank stability. The Fed had been cutting reserve requirements since its formation and would continue to do so through Alan Greenspan’s reign.
Americans wanted to borrow, but a problem was developing. The United States was spending more abroad than foreigners were buying from the United States. The deficit was paid for in gold, thus redistributing $1.7 billion of America’s gold reserves to foreign central banks between 1950 and 1957. In 1958, foreigners bought $2.3 billion of gold from U.S. reserves (selling the dollars from the American purchases overseas). At this rate, the United States would lose all its unrestricted gold in four years; yet, in 1944, it had committed itself to honoring foreign government exchange requests.10
6 Mayer, The Fed, p. 165.
7 Charles A. Coombs, The Arena of International Finance (New York: Wiley-Interscience,
1976), p. 71.
8 Richard Timberlake, Monetary Policy in the United States: An Intellectual and Institu
tional History (Chicago: University of Chicago Press, 1993), Table 21.1, p. 328. 9 Ibid., Table 21.2, p. 330. Reserve requirements of “central reserve city banks” as a percentage of deposits were lowered from 26 percent in 1948 to 16½ percent by 1960. 10 Bremner, Chairman of the Fed, pp. 144–145.
The Bretton Woods Conference of 1944 instituted the “gold exchange standard.” The dollar served as monetary backstop for the world’s currencies. The dollar would remain pegged to gold at the value of 35 to the ounce. Balance would be preserved by the legal authority of foreign central banks. They could redeem their dollars for gold at that rate.
One reason that Americans were spending more was that they had spent so little. GIs were marrying and needed a place to live. Only 326,000 new houses were built in 1945. By 1950, nearly two million houses were built.11 The average size of new houses constructed in 1950 was 953 square feet, and only one-third had more than two bedrooms.12 Government financing was instrumental. Loans were generally courtesy of Federal Housing Administration and GI Bill guarantees. The first program was a legacy of the Roosevelt administration; the latter, of the nation’s support for soldiers.13
Credit flowed more readily, and material possessions were bought and discarded more rapidly. The New York Times captured the evolution on August 25, 1957: “[T]imes have changed. Owning a house is no longer so important as being able to use it while paying for it.”14 Economists classify people as “consumers.” The word fit changing habits. Americans were growing more detached from ownership of property and more attached to the acquisition of things, many of which were disposable. The American temperament of the time was summed up by an economic historian of the Eisenhower years: “Although the standard of living steadily rose through the 1950s, people were not satisfied, but wanted more.”15
New York: A Leading Economic Indicator
Alan Greenspan had the advantage of working in New York. Many of the changes in America over the next 60 years were first evident in his hometown. In 1946, New York was still the “nation’s largest manufacturing town.”16 Between 1946 and 1951, five-sixths of the new factories “were built beyond the limits of the major metropolitan districts existing at the end of World War II.”17
11 Sobel, The Pursuit of Wealth, p. 280.
12 National Association of Homebuilders; www.nahb.org; Source: U.S. Census Bureau, Table C-25.
13 Sobel, The Pursuit of Wealth, p. 280.
14 John Lukacs, Outgrowing Democracy: A History of the United States in the Twentieth Century (Garden City, N.Y.: Doubleday, 1984), p. 115.
15 John W. Sloan, Eisenhower and the Management of Prosperity (Lawrence: University Press of Kansas, 1960), p. 154; quoted in Bremner, Chairman of the Fed, p. 148.
One who anticipated the evolution was developer William Zeckendorf. In 1956, Zeckendorf described the loss of manufacturing jobs as “magnificent.… [A]s we have lost industrial workers from the population we have gained higher paid, higher educated administrative personnel that make New York an unparalleled consumer’s market.”18 In 1960 Zeckendorf told Fortune magazine: “[p]recisely because New York is a national headquarters, it is also a middle income as well as high-income town.”19
The changing face of publicity was also previewed in Manhattan. Lever Brothers Chairman Charles Luckman explained: “New York is the inevitable answer to our major problem—selling.”20 By 1960, more than 25 percent of the nation’s 500 largest corporations had headquarters in New York City.21
Populism Defeats William McChesney Martin’s Battle against Inflation
Martin fought a valiant battle against inflation, although he was stymied by Congress. The Empl
oyment Act of 1946 committed the Fed to seek healthy economic growth—in addition to its responsibility for stable money. When the economy turns down, it does not grow. It contracts. Insolvencies and recessions are instrumental to the business cycle. Martin stood his ground before the Senate: “We are dealing with waste and extravagance, incompetency and inefficiency, the only way we have in a free society is to take losses from time to time. This is the loss economy as well as the profit economy.”22
Washington, of course, did not want to hear this. “Pro-growth economists” lobbied in Washington. They spoke the words that would both appeal to the politicians’ expansive tendencies and embellish their patriotic image.
16 Robert A.M. Stern, Thomas Mellins, and David Fishman, New York 1960 Architecture and Urbanism between the Second World War and the Bicentennial (New York: Monacelli: Press, 1995), p. 19.
17 Ibid.
18 Ibid., p. 29.
19 Ibid., p. 29.
20 Ibid., p. 61.
21 Ibid., p. 29. Of those that did not, 69 percent had sales offices in New York.
22 Bremner, Chairman of the Fed, p. 132; William McChesney Martin, testimony to Senate Finance Committee Hearings, April 22, 1958.
The young Wall Street economist with latent political ambitions would have noted the opportunists’ media presence. Harvard University professor Sumner Slichter believed that the Fed would have to accept inflation if the economy was to generate sufficient jobs. Slichter argued that costs for materials and labor were rising as “unions push up wages and fringe benefits faster than the gains from productivity of labor. The result is a continuation of the slow rise in prices.”23 For this he acquired a publicity-enhancing sobriquet: Fortune magazine dubbed Slichter the “father of inflation.”24 To economists of the old school, the solution was obvious: wages must meet productivity. Albert Jay Nock, who was a philosopher, not an economist, put into words what anyone with common sense knows: “It is an economic axiom that goods and services can only be paid for with goods and services.”25 America, or at least its leaders, ignored this axiom, so production migrated to where Americans were spending: overseas.