The founders of the United States had quite a good understanding of the main problems caused by government banks (e.g., “Why Do We Have the Federal Reserve Bank?” by Dalia Marciukaityte). This knowledge was not completely lost in the 20th century. Before becoming one of the longest serving Fed chairs, Alan Greenspan described the reasons that were given for creating the Fed as misdiagnosing the process of cure as disease (“Gold and Economic Freedom,” by Alan Greenspan in Capitalism: The Unknown Ideal by Ayn Rand, Nathaniel Branden, Alan Greenspan, and Robert Hessen).
Before we got the Fed in 1914, some people complained that credit became scarce after periods of rapid economic expansion, interest rates went sharply up, and economic recessions followed. They wanted to eliminate credit scarcity by printing more money to help the economy prosper. However, credit scarcity was driven by low profitability of the new investments. As Greenspan described, credit scarcity stopped unprofitable investments, reducing the harm to the economy, speeding up the correction in the markets, and shortening the recovery time.
In the same essay, Greenspan also explained how the Fed exacerbated the crash in the late 1920s that led to the Great Depression. The Fed interfered during the mild contraction of 1927 by providing more paper reserves and delaying market corrections. Moreover, claiming that they tried to help Great Britain to stop losing their gold, the Fed kept interest rates in the United States low by providing excessive paper reserves to American banks. Greenspan described the consequences: “it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market—triggering a fantastic speculative boom.”
Unfortunately, Greenspan seems to have forgotten his understanding of the importance of free markets and the destructiveness of the Fed after becoming the Fed chair—working in powerful bureaucracies, like the Fed, appears to have a negative effect on people’s understanding of reality. As Greenspan’s record seems to be not as bad as that of the later Fed chairs, looking at it allows us to see how bad the Fed is even when it seems to be at its best.
Part of Greenspan’s past positive reputation came from the Fed’s ability not to reduce the value of U.S. dollar in terms of ounces of gold for most of his term. Greenspan claimed that he tried to run the Fed as if the U.S. dollar was on the gold standard. In his post-Fed book The Age of Turbulence, Greenspan writes, “Monetary policy can simulate the gold standard’s stable prices… the Volcker Fed demonstrated that it can be done.” However, during the last five years of his tenure, gold prices in U.S. dollars more than doubled, increasing from $266.2 in January 2001 to $569.8 in January 2006.
Greenspan also participated in many other ways of interfering with free markets that had serious long-term negative consequences on the U.S. economy and the economies of foreign countries. For brevity, I cover only three types of interference: delaying market corrections by bailing out failing institutions, interfering in foreign countries without understanding what is going on in those countries, and providing valuable financial information to some people in advance of others. Learning about them is disturbing enough. To avoid arguing if some events really happened, I rely on examples which Greenspan describes himself in his post-Fed book The Age of Turbulence.
In the book, Greenspan admits to supporting many actions that interfered with free markets without admitting the problems those actions caused. For example, he supported the bailout of Long-Term Capital Management (a hedge fund that managed investments for the very rich) in 1998. Earlier attempts by our bureaucrats to bail out Russia (whose default on its debt caused problems to this hedge fund) failed because Russia refused to accept their conditions.
If the bailout of Russia succeeded, we would have not learned about the bailout of Long-Term Capital Management. However, whenever the Fed or other government institutions engineer a bailout of failing private sector institutions either directly or by supporting the value of securities that those institutions hold (e.g., Russia’s bonds, mortgage-backed securities), the government does not allow the market to correct itself without a delay and creates much worse problems for the future.
Greenspan sounds proud in his book about a long period of economic growth during his tenure. However, delaying a crash in the markets during the late 1990s worked as it usually does and as Greenspan himself described in his pre-Fed essay mentioned above, it makes the crash bigger and recovery harder.
The Fed made some post-crash recovery numbers look nicer by reducing dollar value: Gross Domestic Product (GDP) or stock market index values look higher when estimated in cheaper dollars. However, the numbers that are harder to fake, like employment and unemployment rates, show that the recovery was slow and we got the next crash in 2007-2008 before a full recovery. Moreover, the employment rate as reported by the Fed itself has not fully recovered by September 2025 (the last data reported by the Fed available at the time of writing this).
In addition to increasing inefficiencies in the markets, such interference by bureaucrats is unfair, as it gives an unearned advantage to politically connected private sector institutions. Moreover, this was not a single case of interference. For example, before the attempted bail out of Russia, Greenspan admits to successfully supporting the bailout of Mexico. Unfortunately, in that case, it was not easy to learn which of our financial institutions benefited from it.
The willingness of our bureaucrats to interfere in other countries is especially distressing given their very limited understanding of foreign countries. In his post-Fed book, Greenspan sounds very confident talking about the Union of Soviet Socialist Republics (USSR) and Russia, but his comments reveal extreme ignorance of what was going on in those countries.
For example, Greenspan claimed that “Gorbachev didn’t bring down the Soviet Union purposely, yet he did not raise his hand to prevent its dissolution.” As evidence of this, he mentioned that Gorbachev did not send troops to East Germany and Poland when Communists lost power there. However, East Germany and Poland were not part of the USSR. Lithuania was the first republic of the USSR to separate from it. Greenspan omitted that Gorbachev did send the Red Army to Lithuania when Lithuania elected non-Communists and, following the legal procedures of the USSR, voted to separate from the USSR. Moreover, the USSR imposed an economic blockade on Lithuania. The rulers of the USSR did try to prevent the dissolution.
The Red Army could not reoccupy Lithuania because people in Lithuania were not as naive as some American high-level bureaucrats and did not believe that the top Communists of the USSR had really changed. Lithuanian civilian people were willing to serve as a human shield against Communist tanks if the alternative was to go back to live in the USSR. Civilian participation was completely voluntary—I lived in Lithuania at the time—and the Lithuanian government did not try to force people in any way. The Lithuanian government seemed to have not been surprised by the attempted occupation and had a plan that people were willing to follow.
While Communists of the USSR might have expected that some American high-level bureaucrats were willing to ignore tanks running over civilians, they probably did not expect that most American people or people of other civilized countries would view such behavior as tolerable. Modern technology has many advantages—Communists knew that their attempt at occupation was recorded and was available for anybody to see. They did kill some people, but they did not attempt the mass killing of unarmed civilians that was required for the occupation to succeed. Because of its disastrous economic policies, the USSR was dependent on foreign countries and could not afford to destroy its image completely.
USSR Communists did not send troops to Poland and East Germany not because they became nice people but for the same reason why they let some parts that belonged to Russia before the 1917 revolution avoid joining the USSR when it was created. Communists realized that they were not strong enough to control the wider territory at that time.
Unfortunately, this is only one of many examples of the misrepresentation of the USSR in Greenspan’s book. When Greenspan talks about the USSR in his book, he sounds like Communists of the USSR who stopped calling themselves Communists but fundamentally remained the same people they were before. Moreover, the misrepresentation is not limited to the USSR in his book. For example, Greenspan states:
Controlled experiments almost never happen in economics. But you could not have created a better one than East and West Germany, even if you’d done it in a lab. Both countries started with the same culture, the same language, the same history, and the same value systems. Then for forty years they competed on opposite sides of a line, with very little commerce between them.
The first Greenspan sentence here is correct, but the rest of this analysis is fiction. People who lived in Germany were not one homogeneous group. They were first united into one German empire only in 1871. Some northern and eastern parts (e.g., Prussia) were created by sending volunteer soldiers to conquer people who practiced native European religions. Volunteer soldiers who signed up to go to foreign countries for the promise of wealth and forgiveness of all sins were not typical representatives of the whole population. People who joined the military as soldiers were likely to be less successful at productive pursuits—poverty was one reason for joining the military. People who were willing to earn their living by killing and robbing were also likely to have less consideration for other people than those who remained on their own lands. Moreover, forgiveness of all sins encouraged joining by those who already committed crimes and wanted to avoid punishments. That was not a good approximation of choosing a random sample.
Even right before the separation into East and West Germany, Germans did not practice the same religion. Catholics dominated in West Germany and Protestants in East Germany. It is hard to understand how a person with a significant background in data analysis like Greenspan can make these types of mistakes. Moreover, these mistakes reflect poorly not only on Greenspan but also on other government bureaucrats and government economic and foreign experts with whom he worked “helping” other countries. Unfortunately, such mistakes are common among people educated in our Prussian academic system. Thus, it is not surprising that foreigners often are not appreciative of the “help” their governments receive from our government institutions.
Talking about sharing information with Washington politicians, Greenspan states: “I’m a believer in delivering bad news in person, privately, and in advance—especially in Washington…” When taken out of context, this general principle sounds quite nice. However, Greenspan here is talking about informing somebody about upcoming increases in interest rates before informing everybody. He does not mention that such information is extremely valuable financially as changes in interest rates mean changes in bond prices. It is very easy to make money in financial markets if one knows in advance about the changes in bond prices.
Too-close ties between some financial institutions and high-level bureaucrats are a significant source of weakness in our financial markets as it gives advantage to the most corrupt. We do not want financial institutions that survive because they have close ties with Washington. We want competent financial institutions who know how to run their own businesses without special favors from Washington, because that leads to a strong financial system.
Greenspan admitted learning to practice what he called “Fedspeak” while working at the Fed. He presented this as an acceptable practice. However, it is clear from Greenspan’s statements that Fedspeak is meant to mislead. Dishonesty is still dishonesty regardless of what Greenspan calls it. This is common in many bureaucracies, not just the Fed. Thus, if we want to name this specific type of dishonesty, it would be more precise to call it “bureaucracy speak” and explain it as bureaucrats misleading people while claiming that they are doing this for “the greater good.” Of course, “the greater good” is always the expected good for the bureaucrat. Maybe we should not be surprised that a person who engaged in Fedspeak also engaged in the above-described practices.
There is some worthwhile reading in Greenspan’s book other than learning about the problems with the Fed and the delusions of those who work there. He mentions a fictional story that the successful presidential candidate at the time, Ronald Reagan, told him about the May Day parade in the USSR. The moral of the story was that government economists were more powerful weapons of destruction than even the best traditional military weapons: the weapons were paraded in the order of increasing strength, with the economists at the end of the parade after nuclear missiles.
Ronald Reagan was more intelligent than most people realize. While government economists have done more harm in the USSR than in the United States, our economists unfortunately are catching up. As we have adopted the Prussian academic system, whose economists mostly thought that the economic system of the USSR was the best economic system even after many years of failures in the USSR, the incompetence of our government experts should not be very surprising.
If we want to stop our government economists from destroying our economy, we need major changes, possibly starting with our academic system. We need an American, not Prussian, education system if we want people, including economic experts, educated rather than misinformed about economics and other sciences.
Dr. Dalia Marciukaityte is an associate professor of finance at Illinois State University. She is also a policy advisor for the Heartland Institute.
