[From Money Magazine, August 1999]
In her superb new biography of J.P. Morgan, Jean Strouse quotes a few lines written by the historian Henry Adams in 1902: “Pierpont Morgan...is carrying loads that stagger the strongest nerves. Everyone asks what would happen if some morning he woke up dead.”
Almost a century later, the men and women at the top of the American monetary establishment continue to carry staggering loads. But today, as a rule, those persons are on the federal payroll, not at the Morgan bank.
It is impossible to read the Strouse biography without comparing Morgan, the de facto central banker at the turn of the 20th century, with you-know-who, the de jure central banker at the turn of the 21st century. Morgan managed crises; Alan Greenspan, ostensibly, prevents them. Morgan worked within a formal monetary structure, the gold standard. Greenspan is making it up as he goes. “Who Needs Gold When We Have Greenspan?” demanded a recent headline on the New York Times editorial page. The headline distills the received monetary wisdom of 1999.
Morgan, watching CNBC in whatever wired-for-cable mansion he occupies in heaven, must wonder about this. I know I don’t exactly understand it. I am not talking now about the achievement for which the Federal Reserve deserves its fair share of credit: generation lows in interest rates and joblessness, all-time highs in stock prices. Most of the visible results of Alan Greenspan’s monetary policy are pleasing enough. What cries out for critical examination is the theory.
The truth is that there is no theory: The federal funds rates has become the instrument of Greenspan’s storied judgement and intuition. When it seems to low, he raises it; when it seems too high, he lowers it.
This rate, of course, is the only one that the Fed controls. The others it merely influences. What makes its influence so potent is that the credit markets stand on the stilts of leverage. Borrowed money is what finances them, and the interest rate at which professional bond investors borrow is a first cousin to the funds rate. Thus the effects of a change in Fed policy instantly ripple across the yield curve.
I will venture to say that Greenspan is the most popular official in the history of price control. Observe, however, that no committee of public servants is setting the price of other important productive inputs. Semiconductors, wages (except for the minimum wage), oats, zinc, and the like, are rationed in the open market. Among all the important prices in the U.S. economy, as far as I know, only one is fixed by government fiat.
A half-century ago, the late, great Ludwig von Mises criticized an arrangement very much like this one. The Fed, under orders from the Treasury, was then suppressing interest rates. Debtors were delighted with this arrangement, of course, but Mises invited his readers to imagine the effect of government intervention on another essential cost. If the governments slashed wage rates, instead of interest rates, corporate profits would climb. Certain segments of the U.S. economy would prosper. But the economy would be living a lie. A government-manipulated price, Mises summed up, is no better than a government-censored thought. It distorts reality.
Necessarily, the Fed, a human institution, is prone to error. Once in a blue moon, no doubt, the funds rate is exactly what it ought to be. But as a rule, the rate is either too high or too low. How could it be otherwise? If any collection of public employees could correctly discharge the impossible duty of fixing a critical price, the Soviet Union would still be in business.
The monetary system under which Morgan operated was one in which a dollar was freely exchangeable for a fixed eight of gold bullion. Today the dollar is #ff0000, except in terms of itself (that is, it will get you 100 pennies at locations where pennies are available). It is whatever the market chooses to make it. And the funds rate is whatever the Fed decides it should be. Almost nobody, in the glow of the Dow 10,000-plus, is inclined to quarrel with this arrangement. At 73, Greenspan may well be chairman for life.
However, as Adams worried about Morgan, so should we worry about Greenspan. We should worry more than Adams, in fact, since Greenspan can’t possibly do what his devotees naively believe he has already done. The chairman knows many things, to be sure, but not so many as the myriad of lenders and borrowers who daily contribute their two cents to the high-decibel interest-rate seminar conducted in the futures pits of the Chicago Mercantile Exchange. Insofar as the Fed imposes an artificial rate on the world money market, to just that extent is the world economy misguided.
The temptation to impose a rate–-the wrong rate-–is well-nigh irresistible. And the greater the Fed’s apparent success at this dubious undertaking, the greater the disillusionment when it finally, inevitably, stumbles or when Alan Greenspan moves on to another line of work.
“I am for a little more gold,” declared “Fiddlin’” Bob Talyor, a Tennessee politician, more than a century ago, “a little more silver, a little more greenback–-and a sprinkling of counterfeit.” After Greenspan, who? Sooner or later, there is always a Fiddlin’ Bob.
