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).
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." Encyclopedia of World Biography. . Encyclopedia.com. (April 23, 2018). http://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/alan-greenspan
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Greenspan, Alan 1926-
Alan Greenspan spent much of his career at the highest levels of government economics. He served as a top advisor to presidents Ford and Nixon, but is most widely known for his long tenure as chairman of the Federal Reserve, a position he held from 1987 to 2006.
For much of that period, Greenspan was arguably the most influential economist in the world. His early reputation as chairman of the Fed was boosted by his able handling of the 1987 stock market crash, wherein he quickly provided the economy with the liquidity needed to offset the market’s falloff. Beginning in the mid-1990s, Greenspan was among the first to recognize the importance of productivity’s acceleration. Given this increase in the growth of output per hour, Greenspan believed that the economy’s “speed limit”—the rate of growth consistent with stable inflation—had increased. During the latter 1990s, the unemployment rate fell well below the comfort level of most economists, yet inflation decelerated, and broadly shared real wage gains were handily paid for out of rising productivity growth.
Greenspan was widely viewed as favoring conservative economic policy, a view reinforced by his early association with the libertarian, antiregulatory philosophy of the writer Ayn Rand. And while he exhibited throughout his career a strong preference for market-driven outcomes and a diminished role for government, his approach to monetary policy was largely pragmatic and data-driven. Though he avoided true “inflation-targeting”—explicitly stating the range of price growth acceptable to the Fed, a practice he viewed as too restrictive—he focused closely on measures of inflation and resource utilization, urging the Federal Open Market Committee (the group of Fed governors that set interest-rate policy) to adjust rates based on the relationships between these variables.
Though generally highly regarded by the economics and policy community, Greenspan has had his critics. Throughout his term at the Fed, he was sometimes viewed as elevating inflationary concerns above the goal of full employment, despite the Fed’s mandate to maintain balance in its simultaneous pursuit of stable prices and low unemployment. Most recently, some have maintained that Greenspan played a decisive role in the swing from fiscal surplus to fiscal deficits. Based on what turned out to be a highly optimistic forecast of government revenues, Greenspan endorsed large tax cuts proposed by the Bush administration. Though the chairperson of the Fed is a political appointee, it is rare for the Fed chief to play such an overtly political role in a policy matter before the Congress. Furthermore, his endorsement was instrumental in the passage of these cuts, which ultimately played an integral role in the move from federal budget surpluses in the latter 1990s to deficits in the 2000s.
The most common criticism of Greenspan, however, is that he presided over damaging investment bubbles that could have been avoided by more aggressive Fed policy. Two major speculative bubbles emerged over Greenspan’s tenure: the information technology (IT) bubble of the latter 1990s and the housing bubble of the 2000s. Speculation in IT firms, some of which had little more than a sketchy business plan, was rampant in the 1990s, while at the same time, many firms overinvested in IT-related goods and personnel. When it became clear that returns on these investments could not be sustained, a large sell-off of stocks and IT-related assets ensued. Shortly thereafter—in March 2001—the economy entered an investment-driven recession.
More recently, speculative bubbles formed in housing markets as prices were steeply bid up, particularly in highly populated areas of the country. Though Greenspan observed the sharp rise in home values, he again refrained from criticizing the development of what some observers recognized as a housing bubble. In fact, critics argue that Greenspan and the Fed further inflated the bubble by sharply lowering interest rates in response to the recession of 2001. Moreover, many homeowners took advantage of the rising value of their home equity, and boosted their consumption with cash borrowed against their homes. As this bubble began to burst in the mid-2000s, home prices fell steeply, slowing the economy and hurting key economic sectors, such as construction and real estate.
In both cases, Greenspan and the Fed did nothing to intervene as speculative bubbles formed. During the formation of the IT-bubble in 1996, Greenspan popularized the oft-repeated term “irrational exuberance,” suggesting speculation was inflating asset values. Thereafter, however, he refrained from either critical scrutiny of the stock market’s run-up, or more concrete policies, such as raising the Fed’s margin requirements (i.e., limiting the amount that investors could borrow to purchase stocks “on margin”).
Prior to retiring from the Fed, Greenspan defended his lack of action in these cases by claiming the Fed has neither the ability to recognize bubbles, nor the tools to deflate them. Especially given the fact that Greenspan himself clearly recognized the irrational nature of the stock market’s climb in the latter 1990s, the first part of this defense seems weak. Whether the Fed could have intervened is another question. Reflecting on the IT bubble, Greenspan reasonably argued that “it was far from obvious [that the bubble] could be pre-empted short of the central bank inducing a substantial contraction in economic activity, the very outcome we were seeking to avoid” (Greenspan 2002).
These criticisms aside, Greenspan will likely be remembered in a positive light, as an excellent crisis manager and an able central banker who presided over two of the longest economic expansions in the country’s history. True, his conservative political ideology inappropriately broke through on occasion, and he might have led the Fed to do more to push back against speculative bubbles that formed on his watch. Nonetheless, his economic insights and data-driven approach to monetary policy remain the model for central bankers today. In fact, when nominated by President George W. Bush to succeed Greenspan, current Fed chief Ben Bernanke paid a high compliment to the retiring chairman: “[I]f I am confirmed to this position, my first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years” (The White House 2005).
SEE ALSO Bubbles; Bull and Bear Markets; Central Banks; Depression, Economic; Economic Crises; Federal Reserve System, U.S.; Financial Instability Hypothesis; Financial Markets; Interest Rates; Internet Bubble; Macroeconomics; Policy, Monetary; Recession; Speculation; Stock Exchanges
Galbraith, James K. 2006. Unbearable Cost: Bush, Greenspan, and the Economics of Empire. Basingstoke, U.K.: Palgrave Macmillan.
Greenspan, Alan. 2002. Economic Volatility. Remarks by Chairman Alan Greenspan at a Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 30. http://www.federalreserve.gov/boarddocs/speeches/2002/20020830/.
Jones, David M. 2002. Unlocking the Secrets of the Fed: How Monetary Policy Affects the Economy and Your Wealth-Creation Potential. Hoboken, NJ: Wiley.
The White House. 2005. President Appoints Dr. Ben Bernanke for Chairman of the Federal Reserve. October 24. http://www.whitehouse.gov/news/releases/2005/10/20051024-2.html.
Tuccille, Jerome. 2002. Alan Shrugged: The Life and Times of Alan Greenspan, the World’s Most Powerful Banker. Hoboken, NJ: Wiley.
Woodward, Bob. 2001. Maestro: Greenspan’s Fed and the American Boom. New York: Simon & Schuster.
"Greenspan, Alan." International Encyclopedia of the Social Sciences. . Encyclopedia.com. (April 23, 2018). http://www.encyclopedia.com/social-sciences/applied-and-social-sciences-magazines/greenspan-alan
"Greenspan, Alan." International Encyclopedia of the Social Sciences. . Retrieved April 23, 2018 from Encyclopedia.com: http://www.encyclopedia.com/social-sciences/applied-and-social-sciences-magazines/greenspan-alan
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Alan Greenspan (1926–), chairman of the Federal Reserve Board since 1987, has sometimes been described as the second most powerful person in the
world. Greenspan's slightest utterance could directly affect the lives of millions of citizens and could alter the monetary policies of governments on six continents. His tenure at the Federal Reserve has been marked by low unemployment, near-zero inflation, a strong dollar, and unprecedented prosperity.
The only child of divorced parents, Greenspan was born and raised in New York City where he attended public schools. He enrolled in the prestigious Juilliard School of Music but, after a year he left to play tenor saxophone and clarinet on the road with Henry Jerome's swing band.
Toward the end of World War II (1939–1945), he entered New York University where he received a Bachelor of Arts in economics in 1948 and a Master's in economics in 1950. He studied for a doctoral degree at Columbia University but left in 1953 before completing work on it. (In 1977, based on his impressive career as an economist, New York University awarded him a Ph.D. in economics without a formal dissertation.) At Columbia he became close friends with economist Arthur Burns, who later became Chairman of the Federal Reserve Board from 1970–1978.
In the early 1950s he came under the intellectual influence of novelist Ayn Rand, the author of The Fountainhead. Gloria Borger in U.S. News and World Report reported that Greenspan said of Rand, "What she did was to make me see that capitalism is not only efficient and practical, but also moral." With this view in mind Greenspan virtually invented the business of providing economic analyses specifically for senior business executives. He and William Townsend founded the economic consulting firm of Townsend-Greenspan & Co., Inc. which provided industrial and financial institutions with forecasts and other business-related services. The firm was immediately successful and Greenspan became a wealthy man. He was soon in demand as a forecaster and adviser and was named to the boards of such prestigious companies as Alcoa, Capital Cities/ABC, J.P. Morgan & Co., and Mobil Corporation.
In 1968 Greenspan was recruited to serve as an adviser to then presidential candidate Richard Nixon (1969–1974). In 1974 Greenspan's friend, Arthur Burns, urged him to serve as chairman of the Council of Economic Advisors. Burns felt it was Greenspan's "patriotic duty" to combat the inflation was threatening capitalism. Greenspan accepted the position and began his battle against inflation on September 1, 1974. For the next three years, under his leadership, the rate of inflation dropped from eleven percent to six-and-a-half percent. Ten years later, then Treasury Secretary James Baker (1985–1988) nominated Greenspan to the chairmanship of the Federal Reserve. Little wonder Greenspan was the only nominee for the position.
The Federal Reserve system ("the Fed") is a complex organization of independent parts. It is made up of twelve regional Federal Reserve banks, each with a president, board of directors, officers, and research staff. In Washington DC, a board of governors also maintains a staff of top economists. Chairman Greenspan exercised strong and effective leadership of the Fed. Greenspan's personal charm and his mastery of data helped secure his position as undisputed chief.
Greenspan's steady hand calmed uncertain domestic and global economic markets. From 1989 to 1992 he tightened lending practices but also injected cash into the U.S. economy to ensure recovery from the post–Cold War economic downturn. He also refused to inflate the money supply in reaction to a temporary worldwide price hike for oil; thus price stability remained. By 1992 the economy was on an upward trend. In 1994 Greenspan raised interest rates several times in a successful effort to thwart possible inflation. The ultimate result, despite what critics warned, was a very low 4.7 percent unemployment rate. Over the next few years the Fed gradually decreased the prime lending rate. As a result, the economy boomed at an historic pace, the federal budget balanced, and the nation's inflation rate fell below two percent.
By the accounts of his contemporaries, Greenspan was considered the best chairman the Federal Reserve Board had ever seen. In 1998 a Louis Harris survey of 400 senior executives gave Greenspan a favorable rating of 97 percent. Economists at all points along the theoretical spectrum awarded him high marks. The 1990s, as a period marked by peace and prosperity in the United States, could easily be called the Age of Greenspan.
See also: Federal Reserve System, Inflation, Ayn Rand
Borger, Gloria. "The politician-economist: walking the fine line between the public White House and the private Fed, Chairman Alan Greenspan looks to the numbers for answers." U.S. News and World Report, July 1, 1991.
Foust, Dean. "Alan Greenspan's Brave New World." Business Week, July 4, 1997.
Kudlow, Lawrence A. "Four more years." National Review, March 9, 1998.
Moritz, Charles, ed. Current Biography Yearbook, 1989. New York: H. W. Wilson Co., 1990, s.v. "Alan Greenspan."
Norton, Rob. "In Greenspan We Trust." Fortune, March 18, 1996.
Who's Who in America,1988–1989. New Providence, NJ: Marquis Who's Who, 1989, s.v. "Alan Greenspan."
"Greenspan, Alan." Gale Encyclopedia of U.S. Economic History. . Encyclopedia.com. (April 23, 2018). http://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/greenspan-alan
"Greenspan, Alan." Gale Encyclopedia of U.S. Economic History. . Retrieved April 23, 2018 from Encyclopedia.com: http://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/greenspan-alan
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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.
See his The Age of Turbulence (2007) and The Map and the Territory: Risk, Human Nature, and the Future of Forecasting (2013); 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).
"Greenspan, Alan." The Columbia Encyclopedia, 6th ed.. . Encyclopedia.com. (April 23, 2018). http://www.encyclopedia.com/reference/encyclopedias-almanacs-transcripts-and-maps/greenspan-alan
"Greenspan, Alan." The Columbia Encyclopedia, 6th ed.. . Retrieved April 23, 2018 from Encyclopedia.com: http://www.encyclopedia.com/reference/encyclopedias-almanacs-transcripts-and-maps/greenspan-alan