From Al to Ben
ALAN GREENSPAN HAS often been described as the second-most important man in America, but this is a gross understatement. Historians who study the late 20th century will devote far more attention to the changes wrought in the world economy by the retiring Chairman of the US Federal Reserve Board than to any of the actions of the four US presidents under whom he has served since 1987.
The war in Iraq, the terrorist attacks on New York, even the defeat of communism, will pale into insignificance beside the extraordinary and unprecedented transformation that has occurred in the world’s monetary system in the past three decades: the replacement of gold, silver, salt, precious stones and all other standards of monetary value that had underpinned economic activity since the dawn of civilisation, with a system of pure paper money that represents nothing more or less than an edict by the issuing government or its central bank.
I think Anatole’s a fan.
To understand the scale of Mr Greenspan’s achievement — and the importance of the institution he has led for 18 years — we need to think back to the state of the world economy until the early 1970s. Although governments had been issuing paper currencies for centuries, they were all theoretically linked (except in periods of war or extreme crisis) to gold, silver or some other “natural” store of value, or to another currency — such as the dollar or pound sterling — that was itself linked to gold.
Then there’s a quite fascinating little history of gold and paper money, which I’ll skip, but highly recommend.
Japan took 30 years to start applying the new techniques of monetary management successfully, resulting in the economic recovery that began there in 2003. But in Europe central bankers and politicians still refuse to learn these lessons. They are still trying to apply the simplistic monetarist theory once believed to be the only alternative to the old gold standard, but thoroughly discredited by the Greenspan Fed.
Sooner or later, however, even the flat-earth monetarists of Europe will wake up to the revolution in economic cosmology wrought by Alan Greenspan — and he will be remembered as Copernicus, Columbus and Galileo, rolled into one.
IT HAS BEEN a good week in Washington for the meritocratic principle.
I am here skipping a very mean and ungracious comment on Harriet Miers.
On Monday we got a new Chairman of the Federal Reserve. It may not be mentioned in the Constitution, but the Fed is on a par with the Supreme Court in its importance in the lives of Americans, with the added significance that, as custodian of the value of the US dollar and the $11 trillion economy it lubricates, its decisions affect billions of people beyond America’s shores. It is not an exaggeration to say that the whole world had a stake in Mr Bush’s deliberations.
Well, duh, Gerry. I am here skipping a very mean and ungracious comment on Harriet Miers and the president both.
In the event, the man picked by the President to lead the Fed is to Harriet Miers what William Shakespeare is to William McGonagall.
Ben Bernanke is not exactly a household name. But this sometime professor of economics at Princeton and Stanford, one of the most important thinkers on monetary policy in the world, and a policymaker at the Fed for three crucial years, will soon enough become one of the biggest influences on the livelihoods of people everywhere on the planet. And we should all be grateful, because there are few tasks more important than looking after the US money supply, and there are few people as well equipped for the task as Mr Bernanke.
A brief history of instability:
We take price stability for granted now. Indeed, except perhaps when we fill up the petrol tank, prices have been so steady for so long that we don’t even notice them. Although official indicators of inflation still show prices edging up, these data have an upward bias that masks what has been, essentially, immobility in prices for years. The price you paid for your last shirt or blouse was probably no higher than what you paid for it a decade ago.
But the crushing of the great inflation of the 1960s and 1970s has been a painful, tumultuous process that seemed unachievable 25 years ago. Serious economists used to debate whether we might have to get used to a world in which inflation could be contained to “only” 6 to 7 per cent a year.
The debasement of the world’s currencies 30 years ago had its roots in the explosion of US government spending and the subsequent collapse of the postwar Bretton Woods system of monetary management. It impoverished billions, reapportioned wealth and income from the thrifty to the spendthrift, led to the misallocation of trillions of dollars of investment, bankrupted companies and individuals, and toppled governments. It is not too strong to say that it sapped the very spirit of the great industrialised democracies.
And finally:
Few economists have articulated the centrality of the central bank as well as Mr Bernanke. His work has emphasised its responsibility not only to prevent inflation, but also its opposite — depression. The biggest threat now is probably the fading of bad memories. The farther we get away from the era of catastrophic inflation, the harder it becomes to see the peril.
To counter this, we should, I think, all be forced to watch news footage of the 1970s, with images of Shirley Williams and the department of prices and consumer protection in Britain, or Jimmy Carter in America urging businesses to hold down prices, and remember that only a really good central banker stands between us and a rerun of that horror movie. The good news is that Mr Bernanke is that man.
I have now officially seen twice as much about Mr. Greenspan, Mr. Bernacke and the Fed as I have anywhere in the American press.
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