Home' Technology Review : May 2005 Contents 79
History did judge. The bubble popped, and yet the fact is that
Greenspan s overall record is one of price stability and robust
growth, dampened by a pair of only mild recessions. Meanwhile,
the humorless Martin, who essentially equated speculation with
sin, somehow managed to let in ation careen out of control.
Both men entered o ce as orthodox in ation hawks, and
both eventually adopted more-nuanced---one might say more-
relaxed---views toward restraining prices. Aside from a shared
passion for tennis, however, that is where the similarities ended.
The straitlaced Martin, born in 1906, learned macroeconomics
from rsthand experience, much of it painful. His grandfather
lost his grain business to the depression of 1893, and Martin
spent his early career, as a broker and then as a reformist presi-
dent of the scandal-ridden New York Stock Exchange, trying to
emerge from the su using gloom of the Great Depression. Con-
trariwise, Greenspan s education was intellectual and faintly
bohemian: the conser vative economist, who grew up in Wash-
ington Heights in Manhattan and studied at the Juilliard School
of Music, emerged from Ayn Rand s salon and, improbably, the
swing band in which he blew his clarinet.
A Bumpy Ride
As Fed chief, Martin patiently worked to free the central bank
from executive control in the aftermath of World War II and to
reassert a system of market rates. His reward was to have Presi-
dent Tr uman label him a "traitor."
Martin also had di culties with President Kennedy. The
economy had grown sluggishly under Eisenhower, and Kennedy
was anxious to energize it. He adopted a Keynesian prescription:
tax cuts and de cit spending. This was the same tonic President
George W. Bush would later adopt. Martin, though, worried
about de cits. As a central banker, he frowned on the idea that "a
little bit" of in ation could be benign. "There is no validity," Mar-
tin countered, to the notion "that any in ation, once accepted,
can be con ned to moderate proportions." This would prove
more prophetic than even Martin feared.
Under Lyndon Johnson, domestic spending soared, just as
the United States became deeply involved in Vietnam. Martin
cor rectly sensed that LBJ was underaccounting for the war s cost.
He fretted to LBJ that the United States was "heading toward an
in ationary mess," and despite LBJ s pleading, in December
1965 the Fed raised rates, decisively. Then, after having fought
o LBJ, Martin inexplicably cr umbled. He felt committed to the
administration, and he perceptibly---and tragically---shifted his
emphasis from managing interest rates to working on the presi-
dent to balance the budget.
In retrospect, he missed, or underestimated, the salient trend
of his era. It wasn t budget de cits (though they were real) but in-
cipient in ation. By the time Martin retired in 1970, prices were
rising at a 6 percent annual clip. In ation would exceed 13 per-
cent before Paul Volcker, appointed in 1979, brought it down.
When Greenspan began his rst term as chairman, in ation was
4 percent; clearly, he does not deser ve the credit for taming it. But
it would be a while before markets realized the dragon had been
slain. And just as Martin had to out public opinion in the 1950s,
tightening monetary policy despite fears that a new depression
lurked around the corner, so Greenspan had to break with the
postin ationary mindset. The New Economy was his ticket.
As a Wall Street economist, Greenspan was well positioned to
recognize technology s impact. Wall Street, which in the 1970s
had nearly drowned in the physical paper brokers generated, was
one of the rst industries to productively use computers. Not only
did they speed trading, but they made new forms of trading, and
new nancial instruments, possible. To Greenspan and others, it
appeared that technology would break down barriers, promote
competition, and lessen the need for regulation. "New technol-
ogy," he noted, "has fostered mergers that allow rms to take
great advantage of economies of scale and thus reduce costs."
Greenspan was perhaps too infatuated with technology to ap-
preciate its potential for mischief. He was consistently, and inex-
cusably, lax in pressing for rules that would govern the new
nance. And if technology had led only to mischief, he would
have been a failure. But of course, technology has mainly been a
blessing, not least for allowing r ms to make more of their re-
sources. Greenspan sensed that far earlier than almost anyone.
The pivotal moment came in September 1996. The economy
was picking up steam, and labor markets were tight. According
to conventional analysts, businesses would be forced to pay more
for labor and to pass on their costs as price hikes. Preventing in-
ation, the argument went, meant raising interest rates. But in-
ation was falling. Greenspan saw that "something else might be
going on," recalls then Fed gover nor Alice Rivlin. His hypothesis
was that IT investments were making businesses more produc-
tive. If so, pay raises wouldn t really be "raises": workers would
simply be receiving greater compensation for greater output.
And yet, even though business had been pouring money into
computers for years, the o cial data indicated that the rate of
productivity growth remained low. "Why have our recent pro-
ductivity data failed to register any improvement?" Greenspan
asked in a speech. "Is it possible that much of the frenetic activity
[involving computers] is mere wheel spinning, and as a conse-
quence, very little real value added is being produced---or maybe
ever will be?" Greenspan didn t think so. A majority of the Fed s
gover nors wanted to nip the in ationary threat, even before it
was visible, by raising rates, but Greenspan insisted that rates re-
main stable. The boom continued for four more years. This had
profound social consequences, as it was only after 1996 that real
wage increases began to dribble down to middle- and lower-
income workers. Nonetheless, in ation remained quiescent, and
sharply higher productivity was soon visible in the o cial stats.
Greenspan s bet had nothing to with dot-com stocks; he thought
technology was making the rest of the economy---steel, nance,
retail---more e cient. And so it was.
He was wrong about tech stocks, and his endorsement of the
Bush de cit may tur n out to be grievously wrong. But Fed chiefs,
ultimately, are paid neither to pick stocks nor to balance budgets.
As Martin understood, the central banker has two primary tasks:
maintain stable prices and promote growth. Alas, the banker
who famously stood watch over the punch did not fare as well as
the musician with an ear for the pulse of computers. ■
Roger Lowenstein s most recent book is Origins of the Crash: The
Great Bubble and Its Undoing.
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