Home' Technology Review : May 2005 Contents 78
How the Fed Learned
to Love Technology
Greenspan avoided the mistakes
of his Federal Reserve predecessor.
BY ROGER LOWENSTEIN
W retires in January, after eigh-
teen and a half years as chair man of the Federal Re-
ser ve Board, he will have served longer than any
previous occupant save William McChesney Martin Jr., who
held the job for nearly 19 years. A lot happened during the
Greenspan era---two wars in the Persian Gulf, various currency
crises, three stock market meltdowns---but no topic interested
him as much as the revolution in information technology.
Greenspan will ever be associated with the bubble in high-
tech stocks--- rst for warning, in 1996, that investors might be
succumbing to "irrational exuberance," and later, after stock
prices had soared and investors truly had succumbed, for presid-
ing over the collapse. Greenspan s critics tend to focus on his en-
thusiasm for Silicon Valley before the crash; his defenders point
out that, after all, the stock market has begun to recover. Both
points are somewhat tangential to his real legacy. Greenspan s
primary interest was never the precise level of tech-stock prices: it
was how the computer was transforming American society.
"Virtually unimaginable a half-century ago was the extent to
which concepts and ideas would substitute for physical resources
and human brawn in the production of goods and services," he
told an audience in 1996. At that time, the chairman drew com-
parisons between the computers of our day and the innovations of
earlier eras. Four years later, Greenspan was advancing the prop-
osition that our era was indeed di erent. "When we look back,"
he said on January 13, 2000, "we may conceivably conclude...
that...the American economy was experiencing a once-in-a-
century acceleration of innovation...[and] it is information tech-
nology that de nes this special period."
In August 1987, when Greenspan took the reins at the Fed, in-
formation technology was still relatively young. Mainframe com-
puters had long been a staple of American industry, of course, but
most Americans did not yet own PCs, and as Greenspan was to
obser ve, "the billions of dollars that businesses had poured into"
computer technology "seemed to leave little imprint on the over-
all economy." The Internet as we know it did not exist. And oh,
yes, the Nasdaq was barely above 400. Greenspan, of course, had
nothing to do with creating technology, but as a central banker he
allowed technology to in uence economic policy to an astonish-
ing degree. Did he get the big picture right?
The proper duty of the Fed chief was forever de ned by Martin,
who ser ved from 1951 to 1970, as to "take away the punch bowl
just as the party got going." Thanks to Robert Bremner s new
biography Chairman of the Fed: William McChesney Martin Jr.
and the Creation of the American Financial System, we have a
deeper understanding of how complex this job can be. Green-
span isn t mentioned in the book, but his shadow hangs over it.
Between them, Martin and Greenspan dominated central bank-
ing for half a century---a period that saw the U.S. economy re-
assert itself after the calamity of the Depression; fall siege,
during the 1970s, to the worst bout of in ation in recent history;
and then recoup in the great boom of the 1990s. Bremner s book,
on bookstore shelves during Greenspan s last year in o ce, stirs
us to an uncomfortable contrast. How are we to reconcile the
failure of the puritanical Martin with the success of Greenspan,
who can be accused not only of failing to remove the punch bowl,
but also of spiking the punch?
Greenspan s infatuation with the peculiar punch being ladled
out in Silicon Valley is a matter of record. To cite but one exam-
ple, in April 2000, when dot-com fever was at its peak, he spoke
at the White House Conference on the New Economy and
warmly referred to the "prescience" of security analysts who
were then touting tech stocks at lunatic prices. "There are many
who argue, of course, that it is not prescience but wishful think-
ing," Greenspan acknowledged. "History will judge."
The Other Famous Fed Chief
Chairman of the Fed: William McChesney Martin Jr.
and the Creation of the American Financial System
By Robert P. Bremner
Yale University Press, 2004, $38.00
William McChesney Martin Jr.
was chief of the Federal Reserve
from 1951 to 1970.
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