Debt Tsunami and a dying paper currency: The Alan Greenspan Legacy. By Jeffrey Tucker.
Alan Greenspan, Fed chair from 1987 to 2006, embodies a striking ideological shift from gold-standard advocate to architect of the modern easy-money, debt-fueled financial system. He has now died at the age of 100, and this marks a good time to assess his legacy and explain why it matters.
In the 1960s, as a young economist influenced by Ayn Rand and Objectivism, Greenspan strongly supported the gold standard. In his 1966 essay “Gold and Economic Freedom,” he argued that gold-backed money was essential for laissez-faire capitalism. It restrained governments from inflating the currency to fund welfare states or deficits, preventing the erosion of savings and the boom-bust cycles caused by fiat money manipulation. He viewed central banking and unbacked currency as tools for hidden wealth confiscation through inflation. …
Once in power, however, Greenspan operated within the fiat system that he once criticized. He became known for discretionary, flexible monetary policy that prioritized short-term economic stability and growth over rigid rules.
Rescued the market every time with fresh paper money (the “Greenspan put”):
Markets came to expect the Fed to cut interest rates and inject liquidity during crises to cushion asset price declines. This started with the 1987 stock market crash (Black Monday [Dow fell 25% in a day]), during which Greenspan quickly affirmed the Fed’s readiness to provide liquidity.
This was the beginning of what later became known as Quantitative Easing, or money printing, as the method to deal with market upheavals. It represented a wholesale repudiation of the policies of Paul Volcker from 1979 to 1982, the last time this country permitted an economic downturn to take its normal course rather than use artificial methods of stimulating demand. It was a test of the theory of the Austrian School, which argued that recessions serve a purpose of cleaning out malinvestments to prepare the ground for new prosperity. …
Sound money:
With sound money and a free market, the interest rate was a reflection of the savings rate. Investors would only borrow what was available, while savers were rewarded for their thrift with high interest rates. The rate of return for financial capital would tend toward an equilibrium identical to industrial output levels. That means that you are always better off saving than taking risks unless you have an eye toward entrepreneurial speculation. That was the balance: save, invest, grow.
Unsound money — the formula for riches since 1982 has been to borrow as much money as possible, buy assets, and wait:
Greenspan’s efforts turned the table over. The Fed embarked on a new experiment that would reward debt more than saving through one simple trick. He would push down rates to the point that saving paid less than investing in stocks, such that anyone could go into serviceable debt and invest and make more money with financial markets. Thus began what is called financialization. It overthrew the traditional workings of capitalism for a new calculation that stopped rewarding thrift and started rewarding leverage above all else.
Quite the achievement for a man who decades earlier had condemned this very system!
This strategy was repeated with responses to the 1998 LTCM/Russia crisis, the dot-com bust (2000–2001), and post-9/11. Investors priced in this implicit downside protection — like a put option — encouraging greater risk-taking, leverage, debt service, and wild speculation. …
The result was moral hazard and a wild culture of risk-taking at the expense of financial prudence. The combination of bailouts for markets (not necessarily individual firms) and low rates fostered the belief that the Fed would always “clean up” after bubbles.
This reduced the perceived downside of speculation, leading to higher leverage in finance, exotic mortgages, and a broader “debt finance” era in which credit expansion outpaced productive growth. Greenspan himself spoke of “irrational exuberance” in 1996 but didn’t act decisively to prick bubbles.
Greenspan’s tenure coincided with (and helped enable) a structural shift toward higher public–private debt levels, financialization of the economy, and repeated asset bubbles. The housing bubble and 2008 crisis are the clearest examples — easy money post-dot-com contributed to over-leveraged households and banks. …
In later years, Greenspan reflected on gold favorably (e.g., calling it the premier global currency and admitting in conversations with Ron Paul that the Fed tried to mimic gold-standard signals). He acknowledged the welfare state’s incompatibility with hard money but pragmatically worked within the system.
Fine talk, but look at how he walked. Greenspan’s successors at the Fed only intensified his apostasy, especially Ben Bernanke, who went one better and slammed rates to zero while protecting against inflationary consequences by filling up bank vaults with fake money. This created innumerable zombie institutions, even as the Fed held the overvalued fake assets on its books. It still does. …
We are still paying a huge price for this mismanagement.
Gold is the only financial asset that has no counterparty risk and does not rely on a third party’s promise to pay. Hence, it is a good basis for money.