Greenspan's greatest contribution to the U.S. and global economy
Greenspan’s greatest contribution to the U.S. and global economy may be to establish the global market’s trust in the U.S. Federal Reserve and the U.S. dollar, which is no longer backed by gold. His deeds can bring another level of enlightenment to the definition of innovation.
Author: GUDORDI | 2024-01-19
Greenspan did something special in a special way at a special time. (Shutterstock)
Gold and economic freedom are inseparable… in the absence of gold standard, there is no way to protect savings from confiscation through inflation…….
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“Gold and Economic Freedom”, 1966, Alan Greenspan
The author mentioned above that Greenspan was a man who did extraordinary things, and his greatest contribution to the U.S. and global economy may be in establishing the global market’s trust in the U.S. Federal Reserve and the U.S. dollar, which is no longer backed by gold. , whose deeds can bring another level of enlightenment to the definition of innovation.
A system that replaces gold with pure trust
The establishment of trust is very important. Under the Bretton Woods system established in 1944, the role of the US dollar was a bit like gold under the gold standard system, and the US dollar was also the anchor of the global financial and monetary system. The then President of the United States, Richard Nixon, suddenly announced in 1971 that the United States would no longer commit to exchanging gold reserves for U.S. dollars, which caused great shock to the entire global financial and monetary system, because it meant that the entire system entered a new legal currency (Fiat Money). ) era, in theory, the central banks of various countries can print as much money as they want, but the currencies of various countries no longer have intrinsic value backed by real assets. Everything only depends on the market’s confidence in a certain country’s economy and the ability of its central bank.
If we think about it carefully, there are many potential problems with the above legal currency system. There are not many governments and central bankers who are always responsible. Once you start using money printing machines to solve the problem, it is difficult to go back and you have to suddenly transition to legal currency. The system also implies greater challenges and risks. Looking back today, there are indeed many things that are worrying about the global financial and monetary system at that time. In the 1970s, the United States was facing stagflation. On the one hand, inflation was high, and on the other hand, economic development and growth were lackluster. Therefore, there were many questions about the value of the dollar and the United States. people with economic prospects.
Since the United States is the world’s largest economic power, once the market’s confidence in the U.S. dollar and the U.S. financial and monetary system gradually disappears, the foundation of the entire global financial and monetary system may also gradually collapse. What will happen next? Thinking pessimistically can be very scary.
Paul Walker’s Determination and Commitment
From this perspective, we have to admire the courage and responsibility of Greenspan’s predecessor, Paul Volker. No matter how much opposition pressure he faced at that time (according to records, someone threatened to assassinate him), he would insist on continuously raising interest rates until he could “subdue” inflation. Doing so will sacrifice the short-term performance of the U.S. economy and his popularity, but it will relieve people’s worries about the long-term prospects of the dollar and the U.S. economy and the pain that must be endured. This is responsible for America’s long-term well-being. Volcker’s determination and commitment undoubtedly helped his successor Greenspan remove a big landmine, but Greenspan’s job is still not easy, because the legal currency system has many potential problems in nature, but in In reality, it is no longer possible to return to the previous gold standard system.
It is worth noting that Greenspan should be well aware of the potential problems implicit in fiat currencies. When he was young, he enthusiastically supported the gold standard and strongly opposed the government’s monopoly on currency issuance. The opening excerpt of this article is from Greenspan’s 1966 article. Although becoming the chairman of the Federal Reserve seems to defeat yesterday’s me, some people have always questioned whether Greenspan betrayed the ideas of his youth. This is still controversial, but Greenspan himself seems to disagree. According to records, someone later asked him to sign a book containing the above articles and asked him if he needed to revise his views. Greenspan immediately replied that he did not think there was anything wrong with his views at the time and signed the book.
A Fed Chairman in a league of his own
History is sometimes a bit ironic. A man who enthusiastically supported the gold standard and vigorously opposed the government’s monopoly on currency issuance in his youth later became the top executive controlling the world’s largest currency issuance organization. However, if you think about it a little deeper, there may be a subtle relationship between the two. Greenspan may have never changed his views on the gold standard, and one of his reasons and motivations for seeking to be chairman of the Federal Reserve may be that he knew that big problems could go wrong in the fiat currency system, so he used this position to avoid that. The system is prone to mistakes and making the system as feasible as possible. If the U.S. dollar fails to build market confidence and trust, the entire global financial and monetary system will be in jeopardy.
It can be said that Greenspan did something special in a special way at a special time. And this story gives us a higher level of understanding of the concept of innovation. We’ll talk about that next time.
Contact the author: Gudordi@proton.me
