The recent passing of Alan Greenspan triggered a moment or two of reflection regarding his position on the Just Third Way of Economic Personalism, particularly the recommended monetary reforms which have been covered at some length on this blog. Principally (at least so far as this discussion is concerned) this involves the realization — an integral feature of binary economics — that savings (essential for new capital investment) — can and do consist of both past reductions in consumption and future increases in production.
Bennie Thompson
Bennie Thompson’s Letter
This brings us to the point. In 1995, Congressman Bennie G. Thompson began an exchange with then-Federal Reserve Chairman Alan Greenspan. This was followed by comments from economist Norman A. Bailey and an analysis by the Center for Economic and Social Justice. The central debate concerned:
· Whether Federal Reserve monetary policy unnecessarily restricts economic growth,
· How credit should be created and allocated, and
· Whether broader ownership of productive assets could reduce inequality and poverty.
Representative Thompson began by criticizing the Federal Reserve’s then-recent interest rate increases. He argued arguing they harmed economically distressed regions such as his Mississippi district, where unemployment was high and poverty widespread. He questioned whether the Federal Reserve’s anti-inflation policies were limiting economic growth and reducing opportunities for millions of Americans.
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| Treasury Securities were never supposed to be so important |
Thompson challenged the assumption that economic growth above roughly 2.5% necessarily causes inflation. Pointing to historical examples such as the rapid expansion during World War II, he asked why the United States could not achieve significantly higher growth during peacetime. He also questioned whether policymakers had become overly dependent on raising interest rates to control inflation.
A major focus of Thompson’s letter was the Federal Reserve’s use of open market operations — buying and selling Treasury securities — as its primary monetary policy tool. He argued that when the Federal Reserve was originally established, its main function was to provide credit to productive private-sector activities through the discount window, where banks could obtain reserves by presenting eligible commercial, industrial, and agricultural loans. In his view, this approach linked money creation to real productive activity rather than government debt.
Thompson did not mention the glaringly obvious fact that the U.S. Constitution gives Congress absolutely no power to emit bills of credit — “create money” — (in fact, the power to do so was specifically removed from the first draft), which is at the heart of current open market operations. Even the Federal Reserve Act of 1913 only allowed the Federal Reserve to deal in secondary government securities to purchase them from commercial banks as the first step in retiring them.
The commercial banks had been required to purchase and hold the securities to back the National Bank Notes, which along with the United States Notes and Treasury Notes of 1890 functioned as the national reserve currencies, all backed by government debt. These were to be replaced by government debt-backed Federal Reserve Bank Notes, and the government debt-backed Federal Reserve Bank Notes were to be replaced over time with indistinguishable private sector asset-backed Federal Reserve Notes.
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| John Maynard Keynes |
When the last of the government debt-backed Federal Reserve Bank Notes had been replaced with private sector asset-backed Federal Reserve Notes, the Federal Reserve would no longer deal in government securities. That was the plan, anyway, but the Great Depression and John Maynard Keynes took care of that.
Anyway, Thompson suggested that greater use of the discount window would decentralize credit decisions. It would do this by giving more influence to regional Federal Reserve Banks and local bankers who presumably better understand local economic needs. He argued this could help expand productive investment while reducing reliance on centralized — and politically motivated — monetary management.
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| No, an ownership plan that SELLS shares to the workers |
Another key theme was wealth inequality. Thompson contended that most Americans lack sufficient savings or collateral. They are therefore unable to acquire income-producing assets and are consequently dependent almost entirely on wages or government assistance. He argued that economic growth financed primarily through accumulated savings tends to concentrate ownership among those who already possess wealth.
To address this problem, Thompson advocated expanding mechanisms such as Employee Stock Ownership Plans (ESOPs). ESOPs allow workers to acquire ownership stakes in companies through credit repaid from future profits rather than from existing savings. He proposed that the Federal Reserve could support broader ownership by offering low-cost financing for such investments through its discount mechanism. His broader goal was to create an economy in which people earn income not only through labor but also through ownership of productive capital.
Greenspan’s Response
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| Alan Greenspan |
Greenspan responded by “clarifying” (i.e., dodging the question) that the Federal Reserve does not officially believe growth above 2.5% is automatically inflationary. Instead, he explained that economists estimate a concept known as “potential GDP” — the maximum sustainable level of production that can be achieved without accelerating inflation. Growth can exceed this level temporarily when unused resources exist, but sustained production above potential tends to generate inflationary pressures.
He estimated potential economic growth at roughly 2.5%, based on then-projected labor-force growth of about 1.1% annually and productivity growth of about 1.4%. While acknowledging uncertainty in these estimates, he argued that there is little evidence suggesting substantially faster sustainable growth was possible under existing conditions.
Greenspan noted that despite economic growth and declining unemployment, some unemployment will always remain. Attempts to push unemployment significantly below sustainable levels, he argued, historically lead to rising inflation and economic instability. He also dismissed comparisons to World War II, emphasizing that wartime growth occurred under extraordinary conditions including government controls over wages and prices.
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| If it's creationism, why evolution? |
On monetary policy, Greenspan explained that open market operations became dominant because financial markets evolved significantly after the Federal Reserve’s creation. A national market for bank reserves and government securities emerged, making Treasury securities a more efficient tool for managing reserves and influencing the money supply than discount window lending.
Greenspan strongly opposed using the Federal Reserve to allocate credit toward favored sectors or borrowers. He argued that in a market economy, the central bank should manage the overall supply of money and credit while markets determine how credit is distributed. In his view, government-directed credit allocation risks inefficiency, political pressure, and inflation.
Regarding ESOPs, Greenspan agreed that broader ownership of capital is a desirable goal and acknowledged research suggesting that well-designed ESOPs can improve productivity. However, he stated that he is unaware of evidence showing a shortage of financing for ESOPs. Consistent with his broader philosophy, he argued that the Federal Reserve should not become involved in directing credit toward ESOPs or other specific investments.
Finally, Greenspan emphasized that reducing federal budget deficits would increase national savings, lower borrowing costs, and improve credit availability throughout the economy.
Norman Bailey’s Commentary
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| Norman Bailey |
Norman Bailey largely supported Thompson’s concerns and criticized the Federal Reserve’s historical evolution.
According to Bailey, the original purpose of the Federal Reserve was to act as a decentralized lender of last resort for productive private-sector activity. The system’s regional structure reflected an intention to support commerce, manufacturing, transportation, and agriculture through the discounting of private commercial paper.
Bailey argued that this original mission was abandoned during World War I, when soaring government borrowing needs led the Federal Reserve to purchase Treasury debt. Over time, he contended, the Federal Reserve became primarily a banker to the federal government rather than to the productive economy.
He further argued that Greenspan’s objection to credit allocation is inconsistent because, in practice, the Federal Reserve already allocates credit overwhelmingly toward government borrowing through its holdings of Treasury securities. Bailey maintained that if government debt disappeared, the Federal Reserve’s balance sheet and money-creation system would be fundamentally altered, illustrating how dependent modern monetary policy has become on government obligations.
Despite his criticisms, Bailey praised Greenspan’s technical skill in managing the existing system but regretted that he did not advocate a return to the Federal Reserve’s original focus on supporting productive private-sector growth.
CESJ Analysis
The Center for Economic and Social Justice expanded on Bailey’s arguments and provided a detailed critique of Greenspan’s economic assumptions.
CESJ argued that the U.S. economy contained (and still contains) substantial unused productive capacity, including unemployed workers, underutilized resources, and technologies that remain unfunded. It contended that Federal Reserve policies underestimate this “slack” and therefore unnecessarily restrict growth.
The organization challenged the belief that growth above 2.5% must cause inflation, citing historical periods of rapid expansion accompanied by stable or falling prices. CESJ argued that technological innovation and broader ownership of productive assets could support growth rates of 5% or more without inflation. This is supported by history; in the latter part of the 19th century, a period of explosive growth, prices were dropping dramatically.
A central CESJ argument is that growth should not depend primarily on existing savings, or past reductions in consumption. Instead, productive investments can be financed through future earnings, that is, by future increases in production using self-liquidating credit. The organization viewed ESOPs as an important example because it is a way workers can acquire ownership without prior wealth or collateral.
CESJ also rejected Greenspan’s claim that expanded use of the discount window would constitute government credit allocation. It argued that local banks, not the Federal Reserve, would continue making lending decisions based on market criteria. In its view, the Federal Reserve should simply provide liquidity for productive investments that expand ownership and future income.
Overall, the document presents two competing visions/versions of monetary policy. Greenspan defended the traditional Federal Reserve approach focused on controlling inflation through aggregate monetary management and market allocation of credit. Thompson, Bailey, and CESJ advocated a more active role for the Federal Reserve in supporting productive investment and broadening capital ownership, arguing that such reforms could generate faster growth, reduce inequality, and expand economic opportunity without causing inflation.
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