RIP Alan Greenspan, schizophrenic Gold bug

Chairman Alan Greenspan has now passed from the scene at the age of 100.

Greenspan parlayed his sound-money bona fides into the top post at America's central bank and the stewardship of the world's dominant fiat currency. In betrayal of his own stated free-market principles, Greenspan spent nearly two decades at the Fed pumping up financial markets with easy money, backstopping Wall Street, and enabling runaway government spending commitments.

Today, the "Maestro" of central banking leaves behind a complicated legacy. He was celebrated by the financial establishment as a master economic steward. Yet many of the financial distortions, asset bubbles, and debt excesses that characterize the modern economy can be traced to policies implemented during his tenure.

The irony is that in his later years, Greenspan increasingly sounded like one of his longtime critics.

Long after leaving office, he repeatedly warned about unsustainable government debt, unfunded entitlement obligations, and the long-term consequences of fiscal recklessness. The man who spent nearly two decades at the helm of the Federal Reserve expressed growing concern over the very debt-based monetary order he had helped oversee.

Perhaps it was a late-life crisis of conscience. Perhaps he simply felt free to speak more candidly after leaving public office. Whatever the reason, Greenspan spent his final decades warning about dangers that many observers believe were exacerbated by the policies he championed while wielding power.

What worried Greenspan most was not any particular election, political movement, or partisan battle. It was the arithmetic.

The federal government now carries more than $39 trillion in officially reported debt. Beyond that lies a mountain of unfunded obligations associated with Social Security, Medicare, and other entitlement programs. Those commitments represent promises that politicians have made without corresponding provisions for funding them.

As Greenspan often noted, the problem is structural. More and more Americans are entitled to government benefits regardless of whether sufficient resources exist to pay for them. Economic growth alone is unlikely to close the gap.

His prognosis was simple and ominous: sooner or later, a crisis becomes unavoidable.

Greenspan correctly observed that elected officials have little incentive to confront the problem. Republicans generally refuse to make meaningful reductions in military spending or entitlement programs. Democrats are equally unwilling to discuss substantial reforms to the welfare state. Both parties prefer to postpone difficult decisions and leave the bill for future generations.

Yet under a fiat monetary system, politicians rarely face immediate consequences for fiscal irresponsibility.

They do not have to ensure that future promises can be met through future revenues. They can continue borrowing and spending so long as financial markets remain willing to absorb government debt and the Federal Reserve stands ready to support the system.

The Fed's ability to create money electronically and purchase government securities has made sovereign default politically unnecessary. The result is a system in which debt can expand far beyond what would be possible under a monetary regime constrained by a tangible reserve asset.

The government debt bubble is, in many respects, a product of the fiat monetary system itself.

Under a classical gold standard, Congress would be limited by what it could directly extract from taxpayers or borrow from willing lenders. Under today's system, the monetary authorities possess far greater flexibility to accommodate fiscal excess.

That reality makes one of Greenspan's most famous observations all the more remarkable.

Before becoming Fed chairman, Greenspan wrote extensively in favor of gold. Even after leaving office, he maintained that a properly functioning gold standard had provided an important discipline for governments and central banks. He often praised the economic dynamism of the late nineteenth century and credited the gold standard for helping to restrain monetary abuse.

The self-described "gold bug" was none other than Alan Greenspan himself.

The same Alan Greenspan who presided over an extraordinary expansion of credit and debt.

The same Alan Greenspan, whose interventions helped establish the expectation that the Federal Reserve would rescue financial markets whenever turmoil emerged.

The same Alan Greenspan who encouraged a generation of investors, lenders, and politicians to believe that ever-expanding credit could substitute for genuine economic savings and productivity.

From the rescue of Long-Term Capital Management in 1998 to the monetary policies that fueled the dot-com bubble and the subsequent housing bubble, Greenspan played a central role in shaping the financial landscape of modern America.

History will likely remember him as one of the most consequential central bankers ever to hold office.

His defenders credit him with navigating financial crises, sustaining economic growth, and helping cement America's position at the center of the global financial system.

His critics argue that he normalized interventionism, distorted market signals, and laid much of the groundwork for the financial crisis that erupted shortly after his departure from the Fed.

The contradiction at the heart of Greenspan's legacy never disappeared.

Before entering government, he associated with Ayn Rand and championed free markets, limited government, and sound money. At the Federal Reserve, however, he became the embodiment of discretionary central banking and monetary activism.

Unlike the heroes of Rand's novels, Greenspan chose influence over ideological purity. He entered the machinery of power and ultimately became one of its most effective operators.

Why did Greenspan spend so much of his career undermining principles he once defended? Why did a lifelong advocate of sound money become the world's most influential steward of fiat currency?

Only Alan Greenspan himself knew the full answer.