Which Greenspan Will Surface as Head of the Fed?

James Srodes is a Washington-based financial journalist who writes for the Sunday Telegraph of London

Will the real Alan Greenspan please stand up?

Last week, President Reagan made what arguably could be called the most important appointment of his Administration when he nominated Greenspan, a natty, 61-year-old economist, to be the next and 13th chairman of the Federal Reserve board of governors.

Even before Paul A. Volcker, the Fed chairmanship had become known as the “second-toughest job in Washington.”

Under Volcker, the job became that of central banker to the Free World, a position that brought him into frequent conflict with his largest single client, the President of the United States.

Four years ago, Volcker’s indispensability was so generally acknowledged that when the White House chief of staff privately circulated a short list of possible successors (topped by Greenspan, by the way) the howl of protest spread from Capitol Hill to Wall Street to the world money markets of London, Zurich and Tokyo, making a second term mandatory.

But now Volcker is worn down by eight years of watching Washington budget deficits grow while he fought the good fight against inflation--worn down by hectoring congressmen who want guaranteed low interest rates and easy credit for farmers to plant crops they can’t sell, for consumers to buy what they can’t pay for and for Wall Street to gorge on “junk bonds.”


And Ronald Reagan was just as tired of getting stiff, professional lectures from a man who openly despised him.

Now Reagan has his man for the Fed.

In naming Greenspan to the job, the President is getting something more than a classic conservative Republican economist who has provided friendly campaign advice in the past. Whether Reagan wants all he is getting remains to be seen.

Perhaps no other Fed nominee will have gone before his Senate confirmation hearing with as voluminous, and yet conflicting, a record of pronounced opinions and public performance.

Volcker was a taciturn man who often answered one question with another. Moreover, his philosophy was hard to pin down. He directed the central bank with a pragmatism that sometimes slid over into unsettling experiments with money policy, with bank regulation and with the variety of solutions that have been tried with the world debt crisis since 1982.

Greenspan, on the other hand, is an unabashed “gold bug.” He also is a devotee (some would say even a disciple) of Ayn Rand, the political philosopher who argued against any kind of governmental restraint on economic activity.

Rand’s doctrine of “rational selfishness,” or “ laissez-faire capitalism,” goes beyond American political conservatism, and even libertarianism, in its disdain for progressive income taxes, for any kind of social programs, and, it follows, for any kind of manipulation of the money supply to achieve economic or social objectives such as full employment or a stable dollar.

Nor has Greenspan been shy about arguing those beliefs during his time as chairman of the White House Council or Economic Advisers (1974-1976) or later as a member of a score of official advisory panels or as a personal friend and adviser to the President.

Greenspan vehemently opposed Washington’s bailouts of Lockheed, Chrysler and Continental Illinois Bank, all on philosophical grounds.

He also astounded a Treasury panel by arguing for a return to the gold standard of limiting dollars in circulation to a fixed ratio of the ounces of bullion held in Ft. Knox. He also advanced a scheme to issue Treasury bonds denominated in those same ounces of gold.

Tempers Some Beliefs

That way, he explained, the world value of the dollar would set itself automatically by the world price for gold. This proved too complex for fellow hard-money fans on the panel, such as Rep. Jack Kemp (R-N.Y.) and Senator Jesse Helms (R-N.C.), and the idea went for naught.

But there is another side to Greenspan’s public persona that troubles others equally.

To his credit, or criticism, Greenspan has always been loyal to the Presidents who have given him responsibility. And that has led him to temper some of his most deeply held beliefs. Although a foe of wage and price controls, he learned to live with them under President Gerald R. Ford.

When President Reagan appointed him to reform the Social Security financing system (which he hates), he resorted to a rise in payroll withholding taxes, another anathema.

While loyalty is not necessarily a bad trait, it does put Greenspan in a conflict of interest.

By design, the Federal Reserve System has been kept deliberately buffered from the political gusts that blow from the White House and Capitol Hill. Presidents may name the board, but they cannot dictate policy, something that has galled Reagan from the start.

So whose man will Greenspan be?

Specifically, Wall Street and the world money markets worry that Greenspan may be susceptible to a more accommodative policy of providing easier credit and a larger supply of money after he takes office Aug. 6.

With the five other board members all Reagan appointees and easy-money folks themselves, it would be immensely popular and would help reheat the American economy so it looked good for the Republicans in next year’s presidential elections.

But Greenspan the laissez-faire economist would abhor such a notion. First off, it would be meddling and wrong.

Second, it would risk rekindling inflation next year and reviving the spiral of wage and price rises, double-digit interest rates and stop-and-go economic growth that made the American economy shudder through the 1970s.

The first signal of alarm over Greenspan’s feared susceptibility has shown up already within the ranks of the Federal Reserve System.

Robert Parry, head of the Federal Reserve Bank of San Francisco, told an audience in Boise, Idaho, late last week that the central bank must guard against shifting over to a policy of easy money and liquidity expansion.

“With rising import costs tending to push up the average level of prices, and with the economy near full employment, it is especially important that the Federal Reserve avoid overly expansionary policies that might make the economy expand too rapidly,” Parry argued.

Greenspan was not mentioned by name but the message was loud and clear. Out in the hustings where the Federal Reserve System does its daily business of regulating the flow of money and credit to businesses and consumers, there is genuine concern about the new leader.

The question remains. Which man did Ronald Reagan nominate?