Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (8 page)

⁵⁰
“The Winners and Losers from Devaluation,”
Time
, February 26, 1973.
⁵¹
“Perils of a Breakneck Boom,”
Time
, April 30, 1973.
⁵²
Ibid.

Not that the presiding Fed chairman, Arthur Burns, was in the mood to lecture in such a manner. The surging inflation of 1973 was a component of Burns’s decision to open the floodgates of new money in early 1972. That was an election year, and Nixon appreciated the support of his independent monetary shop, although he may have had second thoughts by 1973.

There is generally a lag between a looser Fed monetary policy and when it affects the economy. The Consumer Price Index rose 3.4 percent in 1972 and 8.8 percent in 1973.
⁵⁵

In April 1973, “Inflationary psychology [was] prodding people to buy all sorts of goods before the prices [went] up further.”
⁵⁶
Time
reported that shortages of rubber, silver, aluminum, copper, and lead were frustrating producers. Nixon wanted to sell materials from stockpiles to meet demand. Competitive American businessmen could accomplish much by “speculation.” A U.S. executive “may enclose a check with his order rather than wait until the steel is delivered and the dollar’s value may have fallen.”
⁵⁷
By August, “many would-be house buyers simply [could] not get mortgage loans,” and “[i]nflation and shortages are turning some people to crime. Supermarkets are reporting rising thefts from meat counters: often a shopper will stuff a couple of steaks under his belt.… Professional thieves are increasingly hijacking meat
trucks.”
⁵⁸
California forest rangers tried to control the illegal hunting of deer, bear, and elk. In retaliation, park warden Kenneth Patrick was shot dead, with two darts from a crossbow through his chest.
⁵⁹
False rumors of a rice shortage found frantic Californians dragging 50-pound bags of rice from supermarkets to their cars.
⁶⁰
Shortages were not limited to food. “Newsprint, baling wire, tallow, sawdust, blue jeans, even toilets” were hard to come by.
Time
devoted a good portion of its news coverage to the inflation and to economic problems. Chicago housewife Jean Salmon told
Time
, “I don’t understand what’s happening. It seems to me that when one raises his prices, the other raises his in turn. It’s a vicious cycle.”
⁶¹
The old were particularly ill equipped in such circumstances.
Time
reported an elderly woman with a shopping basket full of cat food. She admitted to the supermarket cashier, “I’m the cat.”
⁶²

⁵³
“Winners and Losers from Devaluation.”
⁵⁴
Bremner,
Chairman of the Fed
, p. 132; Martin, testimony to Senate Finance Committee Hearings, April 22, 1958.
⁵⁵
Ibbotson Associates,
Stocks, Bonds, Bills and Inf lation, 2000 Yearbook
, p. 226, Table A-15.

Naturally,
Time
asked its Board of Economists for clarification of what was happening. Alan Greenspan did not have much to offer. In April 1973, he declared: “To slow this type of inflation requires strong action, and it is difficult to do that without tilting the economy down.”
⁶³
One suspects that Chicago housewife Jean Salmon could have told us as much.

Time’s
anonymous staff writers told us more. In February 1973, the magazine published a 4,579-word article in which the story of our times was stated clearly in a mere 24 words: “The root cause of dollar weakness is that ever since the early 1950s, the U.S. has been living beyond its means in the world.”
⁶⁴

Greenspan’s forbearance was noteworthy. In a search through the archives, the author of “Gold and Economic Freedom” did not say, “I told you so” (at least, not in a major newspaper or magazine). Nor, did he mention the word
gold
or discuss the inflationary consequences of the Nixon administration’s policies. He did not stick up for the little guy and instruct the nation—which was badly in need of sound instruction—that “deficit spending is simply a scheme for the confiscation of wealth” and that “this is the shabby secret of welfare statists’ tirades against gold.”
⁶⁵

⁵⁸
“The Gut Issue: Prices Running Amuck,”
Time
, August 27, 1973.
⁵⁹
Ibid.
⁶⁰
Ibid.
⁶¹
Ibid.
⁶²
Ibid.

Having demonstrated his tact, Alan Greenspan was a top candidate for a government job.

⁶⁵
Alan Greenspan, “Gold and Economic Freedom,” in Ayn Rand,
Capitalism: The Unknown Ideal
(New York: Signet, 1967), p. 96.

4

1973–1976

I pretended to be somebody I wanted to be and I finally became that person. Or he became me. Or we met at some point.
¹

—Cary Grant

In 1973, Greenspan was nominated to head the President’s Council of Economic Advisers. He was fortunate that Nixon’s presidency disintegrated before his confirmation hearings in 1974. Whether fair or not, remnants of the Nixon administration operated under a cloud of public consternation, but the newcomers were accorded some leniency. Although Gerald Ford was under no obligation to stand by his predecessor’s nominations, he decided to proceed with Greenspan’s.

Greenspan phrased his detour into government service as a duty (“I could have a real effect”). He was, however, now pledging his allegiance to the administration that had dropped the gold standard. His 1966 “Gold and Economic Freedom” article read like it was written by a martinet preparing to lead a peasants’ revolt. Now he was conspiring with the enemy.

¹
Benjamin Schwarz, “Becoming Cary Grant,”
Atlantic
, January/February 2007.

47

The 1970s: The Federal Reserve and Inflation

As Greenspan was well aware, his pipe-smoking mentor Arthur Burns had contributed mightily to the confiscation of private wealth. Before the Joint Economic Committee in February 1972, Burns intoned that unbalancing the budget by $40 billion only “gives me some pause.”
²
It was on the first day of Alan Greenspan’s doctoral training at Columbia University when the professor harrumphed: “Excess government spending causes inflation.”
³

In 1970, Greenspan had explained why this is so. He told the
Times
that higher budget deficits “would force the Federal Reserve ‘to at least partially accommodate, through money-supply growth, the flood of new issues emerging from the Treasury.’ The cost of such actions, [Greenspan] contended ‘could be devastating in terms of inflation.’”
⁴
Back when he spoke his own mind, Arthur Burns would have been hard pressed to offer a more lucid description.

In 1972, the monetary base grew by 10.4 percent. What banks receive, banks lend. President Nixon was reelected, but at quite a cost. (In Burns’s defense, some of those close to the situation think that “honest mistakes” rather than political manipulation lay behind the Fed’s zeal.)
⁵

In 1973, the Fed increased the monetary base by only 2.4 percent, but credit was spilling into the economy. As mentioned in the previous chapter, there is usually a lag before the rise in money fills the channels of credit. The consumer price index rose from 3.4 percent in 1972 to 8.8 percent in 1973 to 12.2 percent in 1974.
⁶

²
Richard H. Timberlake,
Monetary Policy in the United States: An Intellectual and Institutional History
(Chicago: University of Chicago Press, 1993), p. 341.
³
Justin Martin,
Greenspan: The Man behind Money
(Cambridge, Mass.: Perseus, 2000), p. 29.
⁴
Thomas E. Mullaney, “Voters Will Assess Nixon’s Game Plan to Revive Economy,”
New York Times
, November 1, 1970, p. 139.
⁵
William Greider,
Secrets of the Temple: How the Federal Reserve Runs the Country
(New York: Simon and Schuster, 1987), p. 67.
⁶
Ibbotson Associates,
Stocks, Bonds, Bills and Inflation, 2000 Yearbook, Market Results for 1926–1999
, 2000, p. 226, Table A-15.

How the United States Inflated the World

After the United States discarded the gold standard, the dollar remained the world’s reserve currency. Trade around the world was still conducted in dollars even though it had depreciated against most currencies. This created havoc. Exporters to the United States received the depreciated dollars for their goods. OPEC (the Organization of Petroleum Exporting Countries), an exporter of oil to the United States, received less value for each gallon of oil exported. (The dollar fell about 50 percent against other currencies during the 1970s. This varied, depending on the foreign currency, and requires many qualifications.) Since OPEC could buy fewer goods for each gallon of oil sold, it wanted more dollars for the exchange.

Another example, the trade loop between the United States and Germany, presented a similar problem for Volkswagen. When an American bought a Volkswagen, the dollars wound their way to Volkswagen’s headquarters in Germany. (This is a hypothetical case, with no knowledge of how Volkswagen operated.) The automobile manufacturer did not want dollars. It shipped them to the German central bank (the Bundesbank). In return, Volkswagen received deutschmarks at the appropriate exchange rate.

Americans were spending much more abroad than at home. Since dollars in circulation in Europe were rising in relation to deutschmarks spent on goods from the United States, cars from abroad cost more: Americans were paying for goods with less valuable dollars. The German government did not want its exporters to suffer. The Bundesbank’s dollar-deutschmark transaction with Volkswagen increased the German money supply. This slowed the rise of the deutschmark’s value against the dollar, but also increased German domestic inflation. In fact, the excess dollars led to inflation around the world.

This flood of dollars led to price inflation in the 1970s. More recently, the flood of dollars has led to asset inflation, including the worldwide housing bubble. This relationship will be discussed again in Chapter 24.

The Federal Reserve’s Inflation Calculations

Arthur Burns followed the most expeditious route to tame inflation: changing how the measure was calculated. Stephen Roach was a young economist at the Federal Reserve.
⁷
After oil prices quadrupled, Arthur Burns instructed his staff to calculate a CPI stripped of energy costs. Burns’s rationale was the blazing Yom Kippur War, over which the Fed had no control.
⁸
Why the Federal Reserve’s influence should matter in how the rate of consumer price inflation is calculated could be better understood by reading memoirs of the Nixon administration than by studying Arthur Burns’s seminal textbook,
Measuring Business Cycles
.

Roach recalls: “Alas, it didn’t turn out to be quite that simple.” Burns thought the disappearance of anchovies off the Peruvian coast caused food costs to rise. They too were removed from the price index.
⁹
Next went used cars, children’s toys, jewelry, and housing—about half the costs that consumers absorbed in their daily struggle with rising prices.
¹⁰

Today, three decades after the anchovy shortage, without much ado from the economics guild, the media announces the monthly ex-food, ex-energy CPI, produced by the Bureau of Labor Statistics. This gently rising CPI—a charade—has compounded at a much lower rate than the true costs paid by Americans. This is one reason the collapse in living standards among the lower half remains a mystery to those who trust government press releases and the media that report them.

The science of economics as applied to national statistics was (and is) more a confiscation of the truth than a midwife to it. Incumbent and future politicians, including future Fed chairman Greenspan, introduced and nurtured such hullabaloo as “hedonics” and the “birth-death rate” in the highly publicized but little understood calculations of economic growth rates and unemployment numbers. The figures were a disgrace, and so were the parties responsible for their introduction and dissemination. Greenspan’s turn at the Council of Economic Advisers was to be a screen test for a future role in the charade, a dress rehearsal for his political, acting, and dissembling talents, the inestimable qualities needed by a Fed chairman in an economy that was rocketing off its moorings.

⁷
Roach would be chief economist at Morgan Stanley during the Greenspan years, where he used his bully pulpit to decry the Greenspan legend.
⁸
Grant’s Interest Rate Observer
, July 21, 2000, p. 1.
⁹
Ibid.
Grant’s
quotes taken from Stephen Roach, “The Ghost of Arthur Burns,”
Global: Daily Economic Comment
, Morgan Stanley, June 26, 2000.
¹⁰
“A Nasty Whiff of Inflation,”
Economist
, September 24, 2005, p. 85.

In any case, numbers cannot capture inflation. Inflation generally works hand in hand with deterioration. What was money buying?
In a 1966 Lou Harris poll, 75 percent of respondents thought that American goods were of “good” or “excellent” quality. By 1977, this had fallen to 47 percent.
¹¹
A poll conducted by the University of Michigan in 1977 found that only 27 percent of American workers would buy the products they made.
¹²
Absences at Ford and General Motors had risen steadily during the 1960s, then spiked upward in 1969 and 1970. By 1970, 5 percent of General Motors’s workers went fishing on any given day; more than 10 percent played hooky on Mondays and Fridays. The overpaid and disgruntled workers took to sabotaging the cars.
Fortune
magazine found that “screws have been left in brake drums, tool handles welded into fender compartments (to cause mysterious, unfindable and eternal rattles), paint scratched, and upholstery cut.”
¹³
At the same time, Americans were thinking big. The average size of a new house in the United States was 953 square feet in 1950; by 1970, it was 1,500 square feet. In 1950, 66 percent of new houses had two or fewer bedrooms; by 1970, that had dropped to 13 percent.
¹⁴
Americans wanted more. The “bigger is better” trend leads to other questions: if less had been OK, would oil prices and shortages have made headline news in the 1970s?