Alan Greenspan 1926-, American economist, chairman of the Federal Reserve Board (1987-2006), b. New York City. Influenced by the philosophy of Ayn Rand , Greenspan is a strong supporter of the free market and an opponent of government intervention in the economy. He was private economic consultant (1954-74, 1977-87) and served (1974-77) as chairman of the Council of Economic Advisers during the administration of President Gerald Ford . From 1981 to 1983 he also chaired the bipartisan National Commission on Social Security Reform, which restructured the financing of the U.S. social security system to help assure its solvency.

In 1987 President Ronald Reagan appointed him chairman of the Federal Reserve System , replacing Paul Volcker . Reappointed by Presidents George H. W. Bush, Bill Clinton, and George W. Bush, he served in the office for nearly two decades. As Federal Reserve chairman, he earlier emphasized controlling inflation over promoting economic growth, but by 2003 a prolonged economic slowdown had shifted concern to possible deflation. During the 10-year expansion that began in 1991, Greenspan won widespread praise for what was regarded as the deft manipulation of interest rates, but the cutting of rates to historic lows during the 2001-3 slowdown only gradually produced the desired growth. A side effect, however, of the historically low interest rates was a significant increase in housing prices (in some parts of the country) and consumer indebtedness, both of which contributed to economic difficulties after Greenspan retired as Federal Reserve Board chairman in 2006. Greenspan's resistance in general to governmental regulation of financial markets also contributed to the economic crisis that began in 2007. Since retiring, he has headed an economic consulting firm and served in a number of advisory positions.

Bibliography: See his The Age of Turbulence (2007); D. B. Sicilia and J. L. Cruikshank, The Greenspan Effect (1999); J. Martin, Greenspan: The Man behind Money (2000); B. Woodward, Maestro: Greenspan's Fed and the American Boom (2000).

Alan Greenspan

Appointed chairman of the nation's central bank just two months before the stock market crash of 1987, American economist Alan Greenspan (born 1926) acted quickly to avert a general financial collapse.

Alan Greenspan was born in New York City on March 6, 1926, to Herman H. and Rose G. Greenspan. His Bachelor's (1948), Master's (1950), and Ph.D. (1977) degrees in economics were all earned at New York University. For three decades, 1954-1974 and 1977-1987, he was chairman and president of an economic consulting firm in New York City, Townsend-Greenspan & Co., Inc. His distinguished record during this time is reflected by his elections as chairman of the Conference of Business Economists, president of the National Association of Business Economists, and director of the National Economists Club.

His career in the private sector was interrupted by calls to public service, first as chairman of President Ford's Council of Economic Advisors (1974-1977), then as chairman of President Reagan's Commission on Social Security Reform (1981-1983), as well as several other presidential boards and commissions. These included President Reagan's Economic Policy Advisory Board, and a consultant to the Congressional Budget Office.

Career With the Federal Reserve System

Greenspan assumed his most important public position on August 11, 1987, replacing Paul A. Volcker as chairman of the Board of Governors of the Federal Reserve System (the Fed). The Fed seeks to control the creation of money and to influence key interest rates, thereby controlling fluctuations in prices of financial market assets, such as stocks and bonds. Perhaps most important among the Fed's responsibilities is to provide temporary loans (through the so-called "discount window") to banks and other financial institutions in times of need. This "lender of last resort" function was the primary reason the Fed was created by Congress in 1913, since individual bank failure had often spread to other banks, leading to a general financial market collapse.

Less than two months after assuming office, Greenspan was faced with such a financial market crisis. After peaking at 2,722 in August of 1987, the Dow Jones industrial average (an index of 30 major industrial stock prices) floated downward by 17 percent over the next month and a half. Suddenly, on "Black Monday," October 19, the market collapsed by more than 500 points as terrified sellers dumped millions of shares. Falling stock prices automatically triggered millions of additional sale orders owing to computerized program trading. Buyers that had previously bought stocks "on margin"—borrowing some portion of the purchase price using the stock as collateral—were then subject to margin calls and forced to provide additional collateral when these stock prices fell. Many of these stock holders were thus also forced to sell.

What consequently resulted was the largest one-day drop in stock prices in U.S. history, with over 20 percent of the New York Stock Exchange wealth evaporating overnight. The securities firms (brokerage firms and dealer-brokers) that as middlemen provide for orderly trading in stocks on the New York Exchange were hard-pressed to find operating capital as Black Monday wore on, particularly when major domestic and foreign banks withdrew their loans as the alarm spread. The financial system neared collapse from a lack of ready cash (a "liquidity" crisis). Many other financial institutions would have faced insolvency had the market continued to drop the following day.

Acting quickly, Greenspan met with top Fed officials and mapped a strategy for easing the cash crunch, using the Fed's virtually unlimited reserves to bolster the troubled financial institutions. Before the market opened on Tuesday, October 20, Greenspan announced the Fed's "readiness to serve as a source of liquidity to support the economic and financial systems." With the full force and power of the Fed backing these institutions, fear of a general collapse receded and the Dow-Jones industrial average rebounded with a rally of over 100 points on that day.

Incidentally, the bull market of the "Roaring Twenties" had collapsed on October 29, 1929, with again the Fed, acting through the New York Regional Federal Reserve Bank, providing needed short-term liquidity to stop the financial panic from spreading to other sectors of the economy. In contrast to 1987, however, the Crash of 1929 foretold and contributed to a long-term economy-wide collapse. This was partially due to infighting over monetary policy at the Fed, which allowed the money supply to fall by a third over the period from 1929-1933 and which contributed to banking panics that led more than a fifth of the nation's banks to suspend operation.

Yet Greenspan's worries were far from over. On the inflation front, he found cause for considerable alarm. The federal budget deficit had swollen to $221 billion by 1986 and was exerting a powerful inflationary effect on the macroeconomy. While the deficit stabilized at around $150 billion for the remainder of the decade, the collapse of many federally-insured savings and loan institutions was obligating the government to pay out many hundreds of billions of dollars more in the future. The overall effect was to raise interest rates, thereby supplanting spending for capital investment in the private sector. Thus future supply productivity might be hampered at the very time demand was increasing.

Reappointed Despite Differences

Having weathered the financial market panic of 1987, Greenspan sought to send a clear signal that the fight against inflation was now his top priority. This meant slowing the growth of financial reserves that add to the money supply, which, when spent, put upward pressure on prices. Thus the Fed is faced with the dubious task of fighting unemployment (by expanding reserves) and simultaneously fighting inflation. His four-year term as chairman expired in 1991. However, President Bush announced that he would reappoint Greenspan to another term, although the recession caused tension between them.

In 1996, Clinton also reappointed him, despite different financial policies. Greenspan has been criticized for raising interest rates at the first sign of inflation even when the economy has been slow and unemployment high, whereas Clinton believed in strong economic growth, even if it meant a small rise in inflation. Since interest rate hikes mean fewer businesses take out loans to expand, and therefore fewer jobs, the 1996 reappointment surprised many. On April 6, 1997 Greenspan married NBC reporter Andrea Mitchell.

He had also served previously as a member of TIME magazine's Board of Economists and senior advisor to the Brookings Institution Panel on Economic Activity. In addition, Greenspan served as corporate director to numerous banks and manufacturing companies, including J. P. Morgan (the nation's fourth-largest commercial bank) and Alcoa (the nation's largest aluminum company). His honorary degrees were numerous, including those from Wake Forest, Colgate, Hofstra, and Pace, and he was the joint recipient with Arthur Burns (a Fed chairman in the 1970s) and William Simon (a former treasury secretary) of the Thomas Jefferson Award for the Greatest Public Service Performed by an appointed official, presented by the American Institute for Public Service (1976).

Further Reading

General discussion of the Fed's operating procedures are outlined in U.S. Board of Governors, The Federal Reserve System: Purposes and Functions. For an inside look at the workings of the Fed, see William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (1987). Greenspan's views on inflation are given in Weapons Against Inflation (1979). As Greenspan is always making new decisions regarding interest rates, there are numerous articles to be found in periodicals such as Business Week and Money. For a good comprehensive work on his career, see Robert Sherrill "The Inflation of Alan Greenspan", The Nation (March 11, 1996). For a brief look at the differences in the philosophies of Greenspan and Clinton, see Owen Ullmann "Clinton and Greenspan: Is an Explosion Coming?", Business Week (June 6, 1994).

Fascinating discussions of the Crash of 1987 are found in" Terrible Tuesday: How the Stock Market Almost Disintegrated a Day After the Crash," Wall Street Journal (November 20, 1987) and Frederic S. Mishkin, Money, Banking, and Financial Markets (1989). The most famous monetary scholars of the Great Depression are Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867-1960 (1963), but for a more readable classic account, see John Kenneth Galbraith, The Great Crash, 1929 (1955). □

Alan Greenspan
1926-

Chairman of the federal reserveboard

Eclectic Talents, Diverse Careers

Born in New York City on 6 March 1926, the son of a stockbroker and a retail salesclerk, Alan Greenspan early displayed impressive mathematical skills. In fact, many considered him something of a mathematical prodigy. After finishing high school, however, Greenspan enrolled in The Juilliard School and played saxophone and clarinet with a touring swing band during the 1940s. In 1945 Greenspan's musical career came to an end when he enrolled in New York University to study economics. He completed a B.A. in 1948, graduating summa cum laude, and earned an M.A. in 1950, He then entered the doctoral program at Columbia University. In the early 1950s Greenspan dropped out of Columbia and went to work for the National Industrial Conference Board (NICB). In 1977 NYU conferred his Ph.D. without requiring Greenspan to complete a dissertation. After leaving the NICB in 1954, Greenspan and bond-trader William Townsend founded Townsend-Greenspan & Company, Inc., a consulting firm that offered economic forecasts to corporations and banks. He served as chairman and president of Townsend-Greenspan between 1954 and 1977, and again between 1977 and 1987, before dissolving the partnership upon his appointment as chairman of the Federal Reserve Board (the Fed).

Dollars and Sense

As chairman of the Fed, Greenspan displayed a rare combination of intellectual acumen and political savvy. He is an erudite economist with a remarkable sensitivity to the shifting political currents. Such characteristics enabled him to serve as chairman under three different administrations: those of presidents Ronald Reagan, George Bush, and Bill Clinton. Greenspan got his first taste of public life as director of policy research for Richard M. Nixon's presidential campaign in 1968. President Gerald R. Ford appointed Greenspan chairman of his Council of Economic Advisors, on which he served from 1974 until 1977. Out of politics between 1977 and 1987, Greenspan returned to Washington when Reagan nominated him as the chairman of the Federal Reserve Board, a position he has held ever since.

Greenspan at the Fed

In October 1987, two months after he took office, the stock market crashed. Greenspan took quick and decisive action. A child during the Great Depression, Greenspan got the Fed to pump money into the banking system, thereby avoiding the liquidity trap that magnified the problems of the market in 1929. In so doing, he helped to avert a worse crisis on Wall Street. Given Greenspan's fiscal conservatism and comments about the "irrational exuberance" of the market, it is likely that he interpreted the events of October 1987 as a logical and necessary consequence of a steep and unwarranted rise in stock prices, which took place without due consideration of the true strength of the U.S. economy. Since his earliest days at the Fed, Greenspan has been obsessed with balancing the economy between the cycles of boom and bust. In his first years as chairman, Greenspan raised interest rates with great frequency in an effort to keep inflation to a minimum. He raised rates in 1989 and 1990, easing off slightly during the Gulf War and the recession of 1990-1992. In 1994, the most controversial period of Greenspan's tenure, he raised interest rates six times in order to quell rapid economic growth that he saw as inflationary. Those who were at the Fed remember it as a period of triumph. Alan Blinder, vice chairman of the Federal Reserve Board through 1996, called this period "the most successful episode of monetary policy in the history of the Fed," and other analysts in the financial community were equally free with their accolades. Those in the business community and labor movement, however, saw the increases as reflecting Greenspan's ideological bias toward low inflation even at the cost of higher unemployment and economic contraction. They maintained that the economy could grow at a faster rate than the Fed allowed without sparking inflationary pressures. Greenspan's tight money policies, his critics argued, kept profits down, wages stagnant, and economic expansion paralyzed.

Pragmatism Triumphs at the Fed

To nearly everyone's surprise, during the second half of the decade, Greenspan showed a remarkable lack of dogmatism in setting policy at the Fed. In 1998 and 1999 he became a great advocate of the so-called New Economy, raising interest rates just once. That increase was almost pro forma, a signal to the markets that he was still watching. In his public speeches, Greenspan has also increasingly suggested that improvements in productivity and technology have made American business more efficient, thus lowering inflationary pressures and enabling the economy to grow without generating higher prices and wages. Uncharacteristically, Greenspan dismissed official productivity figures as too low, insisting that the difficulties of measuring productivity in a service economy concealed the real gains U.S. business has reaped since 1994. As a result, he has proven more willing to allow the economy to grow without raising interest rates as a hedge against inflation. If forced to choose, Greenspan would still prefer lower inflation and higher unemployment. For the moment, he believes that the U.S. economy could have it all: low inflation and low unemployment coupled with a high rate of growth.

Sources:

"Alan Greenspan," ABCnews.com, Internet website.

"Members of the Board of Governors: Alan Greenspan, Chairman," The Federal Reserve Board, Internet website.

David B. Sicilia and Jeffrey L. Cruikshank, The Greenspan Effect: Words That Move the World's Markets (New York: McGraw-Hill, 2000).

John Surowiecki, 'What Has Greenspan Done at the Fed?," The Motley Fool, Internet website.

Surowiecki, "Who is Alan Greenspan?," The Motley Fool, Internet website.

Owen Ullmann, Laura Cohn, and Michael J. Mandel, "The Fed's New Rule Book," Business Week (3 May 1999): 46-48.