What? Greenspan Lost His Zeal?
Jude Wanniski
June 3, 1997


Letters Editor
The Wall Street Journal
New York, N.Y.

Dear Editor:

Your lead essay on today’s editorial page by former Fed Gov. Wayne Angell, “Rational Exuberance,” accuses Fed Chairman Alan Greenspan of having “lost his zeal for getting inflation so low as to not make a difference.” I read the article twice and could find no evidence presented in support of that assertion, made in the face of almost unanimous opinion that, if anything, Mr. Greenspan has been overzealous in fighting an inflation that is nowhere to be seen.

In fact, the article makes little sense at all, beyond stating that inflation is bad and no inflation is good and that economic growth does not cause inflation. The only clue to a policy prescription hinted at by Mr. Angell is a casual throwaway comment near the end of the piece, in which he suggests that the Fed “let the funds rate follow rising market-determined interest rates.” In other words, the Fed should not raise the overnight federal funds rate, its chief policy tool, to slow economic growth. It should only raise it to get it in line with other short-term market rates. This glides over the fact that short-term market rates rise and fall in the process of allocating capital.

Having earlier established the quite plausible argument that the stock market prefers less inflation to more inflation, Mr. Angell asks us to believe that Wall Street would be even happier with deflation. He makes no mention of the price of gold, which is now lower than it was when he was sworn in as a Fed governor more than 11 years ago, because that upsets his argument that Greenspan has “lost his zeal” for fighting inflation.

Over the years, Mr. Angell has let it be known many times that he prefers a dollar gold price somewhere between $300 and $330. To get gold down this low and keep it there, after 11 years closer to $350 and above, would require the Fed to place an enormous burden on dollar debtors. On the margin, they would be unable to pay, and their creditors would fail as well. Is this why we have a central bank? Mr. Angell simply wants the Fed to raise interest rates, but does not want to be associated with the slow-growth crowd.

The financial markets do not like inflation, but they do not like deflation either. Throughout the history of civilization, we find commerce best served when government maintains a stable unit of account. Only when debtors and creditors know the accounting unit is fixed in real value can they draw contracts without premiums on both sides for inflation/deflation risks.

From this perspective, almost nobody but Mr. Angell himself deserves credit for stabilizing the dollar against gold as well as it has been this past decade, following its violent fluctuations in the period 1971 to 1986. The only other person who deserves more credit is Mr. Greenspan, who better than Mr. Angell, understands the value of the dollar as a fixed unit of measure.

Jude Wanniski