Alan Greenspan’s Forgotten Legacy

Key Takeaways

• Decades before becoming the face of modern discretionary monetary policy as Federal Reserve Chairman, Alan Greenspan authored a robust defense of the gold standard,
• Greenspan originally posited that the gold standard is an indispensable safeguard for economic liberty because it limits government expansion.
• His early work advanced a strict Austrian school understanding of economics, characterizing inflation as a purely political and monetary phenomenon driven by credit expansion rather than an organic or mysterious market process.
• Although his early writings warned that fiat currency removes critical economic discipline, Greenspan ultimately became the principal architect of modern technocratic banking.

With the passing of Alan Greenspan, economists and market participants are once again reflecting on the career of the man who became known as “The Maestro.” For nearly two decades as chairman of the Federal Reserve, Greenspan occupied a position of extraordinary influence. Markets moved on his words. Politicians sought his approval.

Financial institutions increasingly came to believe – for good reason – that the Federal Reserve would step in during periods of financial distress, giving rise to the famous “Greenspan Put.”

By the time he left office in 2006, Greenspan had become the embodiment of modern central banking: discretionary monetary policy, activist intervention, and the belief that a small group of experts could successfully guide a complex economy through careful management of interest rates and credit conditions.

Yet there is another Greenspan, one largely forgotten today.

The Ideological Foundation: Gold and Economic Liberty

In 1966, decades before he became chairman of the Federal Reserve, Greenspan wrote an essay entitled Gold and Economic Freedom. It remains one of the most forceful and elegant defenses of the gold standard written in the second half of the twentieth century.

The essay is remarkable not merely because of its arguments, but because of how fundamentally those arguments differ from the policies Greenspan would later administer.

The central claim of Gold and Economic Freedom is that the gold standard serves as a critical constraint on government power. Greenspan argued that gold was not merely a commodity used as money.

Rather, it was a mechanism that limited the ability of governments to finance spending through inflation. Under a gold standard, money creation is constrained by the availability of gold itself.

Governments wishing to spend beyond their means must either tax openly or borrow honestly. They cannot simply create purchasing power through the proverbial “printing press.”

Greenspan saw this constraint as indispensable to economic liberty. The essay repeatedly emphasizes that advocates of expansive government programs have historically found gold inconvenient precisely because it restrict their access to insidious means of finance.

Deficit spending becomes more difficult when governments cannot rely on monetary expansion to fund expenditures. In Greenspan’s telling, opposition to gold not only reflects disagreements about monetary policy but broader disagreements about the proper size and scope of government itself.

The Austrian School Framework and Monetary Discipline

The essay also advances a distinctly Austrian understanding of inflation. Greenspan rejected the notion that rising prices emerge mysteriously from market processes. Inflation, he argued, is fundamentally a monetary phenomenon resulting from increases in the supply of money and credit.

The gold standard serves as a safeguard because it limits the ability of political authorities to engage in such expansion. Without that constraint, governments face never-ending incentives to their debase currency, particularly during periods of fiscal stress.

For Greenspan, the fundamental issue was political rather than technical. The gold standard imposed discipline on governments by limiting their ability to create money and credit. Fiat money removed that discipline.

Once convertibility was abandoned, governments acquired a powerful mechanism for financing expenditures indirectly through monetary expansion, allowing inflation to perform functions that explicit taxation might not politically sustain.

Reading the essay today, one encounters a Greenspan who appears far closer to Ludwig von Mises or E. C. Harwood than to the chairman who later presided over the Federal Reserve. The young Greenspan viewed sound money as a protection against political opportunism, inflationary finance, and the expansion of state power. He regarded gold as a bulwark of economic freedom precisely because it removed important decisions from the hands of policymakers.

One cannot help but wonder what might have happened had Greenspan remained committed to those views. Rather than becoming the most celebrated central banker of his generation, he might have occupied a role more akin to that of Ron Paul: an outspoken critic of discretionary monetary policy and a persistent advocate of sound money.

He would likely have enjoyed less influence in Washington and few if any accolades from financial market luminaries. Yet he might also have avoided becoming associated with the increasingly interventionist framework that came to define modern central banking.

From Sound Money Advocate to Technocratic Architect

History took a different course. Greenspan became one of the principal architects of moder technocratic banking, presiding over the Great Moderation and helping establish expectations of recurring central bank intervention.

To some observers – often, unsurprisingly, those positioned to benefit from it – that period represented a triumph of monetary management.

Looking back, however, it increasingly resembles a form of surface level stability purchased at the cost of greater leverage, larger imbalances, more severe crises, and ever more expansive interventions when those imbalances eventually emerged.

That irony remains the most fascinating aspect of Alan Greenspan’s life. The author of Gold and Economic Freedom spent much of his later career operating the very system he once warned against. Whether one views that evolution as wisdom, pragmatism, or capitulation is a matter of judgment.

But the essay survives as a reminder that Greenspan’s most provocative ideas were not the ones he expressed as Federal Reserve chairman. They were the ones he wrote before he ever entered the institution that would define his legacy. Rest in peace, Maestro.

 

About the author: Peter C. Earle, Ph.D, is the Director of Economics and Economic Freedom and is Head of Reseach who joined AIER in 2018. He holds a Ph.D in Economics from l’Universite d’Angers, an MA in Applied Economics from American University, an MBA (Finance), and a BS in Engineering from the United States Military Academy at West Point.

Prior to joining AIER, Dr. Earle spent over 20 years as a trader and analyst at a number of securities firms and hedge funds in the New York metropolitan area as well as engaging in extensive consulting within the cryptocurrency and gaming sectors. His research focuses on financial markets, monetary policy, macroeconomic forecasting, and problems in economic measurement. He has been quoted by the Wall Street Journal, the Financial Times, Barron’s, Bloomberg, Reuters, CNBC, Grant’s Interest Rate Observer, NPR, and in numerous other media outlets and publications.

 

Disclaimer: All opinions expressed by the author are the author’s opinions and do not reflect the opinions of Goldco. The author’s opinions are based on the author’s personal experience, education and information the author considers reliable. Goldco does not warrant that the information contained herein is complete or accurate, and it should not be relied upon as such.