Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (5 page)

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 Employment 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.

Martin lashed out at Slichter’s populist appeal: “If you take [Slichter’s] view, then another bust will surely come.”
²⁶
Martin, who was not a certified economist (he was a Latin scholar from Yale), knew better than the Harvard professor how empires hoodwink themselves into decline. Economists who could spin nonsensical abstractions into accepted wisdom over the course of this deterioration were amply rewarded.

Greenspan’s Forays into Publicity and Publishing

Alan Greenspan had been born into the dark side of prosperity. The stock market boom of the 1950s was changing the way Americans behaved, and Greenspan did not approve. The
New York Times
reported Alan Greenspan’s discourse at an economic conference in December 1959:

²³
Sumner Slichter, “Five Trends Shape the Business Future,”
Nation’s Business
, February 1957, p. 96.
²⁴
Bremner,
Chairman of the Fed
, p. 128.
²⁵
Albert Jay Nock,
Memoirs of a Superfluous Man
(New York and London: Harper and Brothers, 1943), p. 256.
²⁶
Bremner,
Chairman of the Fed
, p. 128.

Alan Greenspan, of Townsend, Greenspan & Co., New York financial house, presented the view that a break in stock market trends was not just a harbinger of boom or recession, as is commonly held, but a crucial factor in causing a boom or a recession.

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.

His general conclusion was that instability of the general economy results from the flexibility of the banking system, which supplies credit for the stock market.

He questioned the theory that the enlargement of the Government’s role in the national economy had brought a “new era” in which an old-fashioned financial contraction was impossible.
²⁷

As the stock market boomed through the first half of the 1960s, Greenspan consistently put in a bad word. For example,
Time
surveyed an ambivalent Wall Street in January 1962: “[T]he most pessimistic is Alan Greenspan of TownsendGreenspan, who says: ‘The peak of the bull market will be in the early spring, or at the latest by midyear.’”
²⁸
His opinion was validated sooner than he expected. The S&P 500 started falling almost immediately and shed 25 percent through June. It rebounded sharply through the end of the year.

To be quoted in the
Times
was the logical route for a businessman. As such, Greenspan spent little time posturing for the academics who monopolized the status and careers of economists. Greenspan was not a prolific contributor to academic journals.

²⁷
“Economists Sift Jobs and Stocks,”
New York Times
, December 28, 1959, p. 39.
²⁸
“Wall Street Worries,”
Time
, January 26, 1962.

“The New Economics”

In 1961, John Kennedy was a fresh face in the White House. He recruited advisors who promoted the “New Economics,” largely, an American version of John Maynard Keynes’s beliefs. A leading proponent was Paul Samuelson: a graduate of the University of Chicago, of Harvard University, a kingpin of the Massachusetts Institute of Technology’s rise as an economic think tank, and a fervent flag waver for the efficient market hypothesis (EMH).
²⁹
In 1970, Samuelson would be awarded the Nobel Prize in economic sciences.

Samuelson was Kennedy’s primary economic advisor. Viewing a sluggish economy in 1961, Samuelson wrote “what definitely is not called for is a massive program of hastily devised public works whose primary objective is merely that of making jobs and getting money pumped into the economy.”
³⁰
In November 1962, he warned Kennedy that he must cut taxes to avoid a recession: If —and only if—Congress passed a tax cut, by 1964, “events will be working clearly and strongly our way.” That is, for reelection.
³¹
Washington politics had modified the new economics.

Walter Heller, Kennedy’s Council of Economic Advisers chairman, argued that a higher rate of growth would be produced through a looser Federal Reserve monetary policy and by employing Keynesian fiscal policy in the form of a temporary tax cut. Martin was convinced that most of the data pumped out of the Council of Economic Advisers was used “to justify both an expansionary monetary policy and the Kennedy tax cut.”
³²

Douglas Dillon, Kennedy’s treasury secretary, introduced initiatives to close the federal deficit to $2.5 billion—an unsatisfactory result, in Dillon’s opinion.
³³
This may have been the last time a treasury secretary sincerely believed that the government should only spend what it received in revenue.

²⁹
Peter L. Bernstein,
Capital Ideas: The Improbable Origins of Modern Wall Street
(New York: Free Press, 1992), pp.112–125 passim.
³⁰
Bremner,
Chairman of the Fed
, p. 151.
³¹
Ibid., p. 176.
³²
Ibid., p. 183.
³³
Ibid., p. 166.

After President Lyndon Johnson succeeded Kennedy (in 1963), spending for the Great Society and the Vietnam War raced ahead of revenues. Martin offered the public fair warning at the Columbia University commencement on June 1, 1965, where he told his audience that private domestic debt was rising, the supply of money and credit was increasing without an increase in the gold supply, and international indebtedness had risen.
³⁴
The federal budget deficit leapt from $3.7 billion in fiscal year 1965 to $25.2 billion in 1967.
³⁵

Meanwhile, in addition to managing his firm, Greenspan spent considerable time with Ayn Rand. Rand was growing difficult to please: she had always been the sole arbiter of Objectivism, and her rants and excommunications grew fierce.

In 1968, Rand threw Nathaniel Branden and his wife, Barbara, out into the cold. Greenspan was a signatory. The dismissal read in part: “Because Nathaniel Branden and Barbara Branden, in a series of actions, have betrayed fundamental principles of Objectivism, we condemn and repudiate these two persons irrevocably.”
³⁶
Greenspan would say later that “he added his name hastily, unsure in the midst of all the chaos of the charges or what was at stake.”
³⁷

It is natural to condemn Perfidious Alan, but one should note the aptitude of this future government official who abandoned and embraced contradictory positions without rancor. Illuminating is the post-Randian friendship of Greenspan and Barbara Branden.
³⁸
Greenspan’s sterile, nerveless automation might sooth or itch, but was unlikely to repel. His biographer, Jerome Tuccille, wrote: “If Alan was shocked by any of the revelations … it did not show on his face. Alan presented the same face to the world through victory and tribulation. His expression rarely changed—laconic, mostly unsmiling, somewhat hangdog.
³⁹

³⁴
Brooks,
The Go-Go Years
, p. 100.
³⁵
U.S. White House Office of Management and Budget, Fiscal Year Budget Data, October 15, 2008.
³⁶
Justin Martin,
Greenspan: The Man behind Money
(Cambridge, Mass.: Perseus, 2000), p. 51.
³⁷
Ibid.
³⁸
Ibid., pp. 147–148.
³⁹
Jerome Tuccille,
Alan Shrugged: The Life and Times of Alan Greenspan, the World’s Most Powerful Banker
(Hoboken, N.J.: Wiley, 2002), p. 87.

Greenspan’s 1966 Essay: “Gold and Economic Freedom”

A few months after Martin’s Columbia address in June of 1965, Greenspan wrote an essay for Rand. It may have been prodded by the collapse in the national accounts. He never discussed the undisciplined policies of Congress and the Johnson administration, but the parallels are clear.

In “Gold and Economic Freedom,” Greenspan vilified the Federal Reserve’s money-printing excesses of the 1920s. In Greenspan’s thesis:

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. … The excess credit which the Fed pumped into the economy spilled over into the stock market—triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. … The world economies plunged into the Great Depression of the 1930’s.

Greenspan knowingly contrasted the pre-World War I gold standard to the post-1914 monetary arrangement. He also explained the relation of money and the credit system:

Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one—so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries.

He attacked the politicians of an earlier era and their subterfuge of the gold standard.
[T]he Federal Reserve System was organized in 1913.… Credit extended by [the Federal Reserve] is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks (“paper reserves”) could serve as legal tender to pay depositors.
⁴⁰

The succinctness of “Gold and Economic Freedom” is quite a contrast to the labored, meandering speeches that he would make as Fed chairman.

Greenspan’s Warning about the Guns and

Butter Deficit

The Dow Jones Industrial Average had been rising for 18 years, but it reached its peak in 1966. Greenspan coauthored a front-cover story in the January 1966 issue of
Fortune
in which he projected much higher costs than the government foretold. This article was timely, accurate, and probably not welcomed by the administration, since President Johnson and Secretary of Defense Robert McNamara were furtively spending well over budget.
⁴¹