The gentle persuader: the long shadow of Alan Greenspan.

• Author: Taylor, Jeff A.

"Under the gold standard," Alan Greenspan wrote in Ayn Rand's 1966 book Capitalism: The Unknown Ideal, "a free banking system stands as the protector of an economy's stability and balanced growth. In the absence of the gold standard, there is no way to protect savings from confiscation through inflation."

What happened? Why didn't Greenspan, upon taking control of the Federal Reserve in 1987, barricade himself inside the Fed's ornate temple to the dollar on the National Mall and put America back on the gold standard?

Probably because in the intervening 20 years Greenspan learned the importance of speaking more softly while wielding ever-greater influence in order to achieve your goals. It is this gentle art of persuasion that Ben Bernanke, Bush's nominee to succeed him, will have to master to be the Greenspan II some have already dubbed him.

Before Greenspan's long tenure it was assumed that the Fed has two buttons to push, one to increase inflation and one to increase unemployment. All it could do was move the economy along the so-called Phillips Curve. Greenspan invented a third option, a Jedi mind trick to convince the world, not to mention his fellow Fed governors, that he really did possess special insight into the U.S. economy and would fight even a hint of inflation to keep dollars the world's preferred currency and a store of value better than gold.

Greenspan got things rolling by proving his anti-inflation mettle and enduring nearly constant jawboning from Bush I Treasury Secretary Nick Brady to cut interest rates. Brady wanted the Fed to ease the country out of a mild economic downturn and thus save Poppy Bush from the fallout of breaking his "no new taxes" pledge. That gave Greenspan the lee-way to settle into a respectful detente with Treasury Secretary Robert Rubin during the Clinton years and focus on the real keys to a stable and growing economy: sound money and rising productivity.

Then Greenspan endured criticism for not hiking rates faster in 1997, when conventional wisdom said the economy was "overheating," as evidenced by the low unemployment rate. No, Greenspan counseled, it is productivity gains brought on by improvements in technology that are producing the job growth, not raging inflationary pressures. By 1998 he was being hit for not cutting rates faster, thereby either achieving a sort of parity sweet spot or managing to be doubly wrong. The last quarter of '98 told the tale: 5.6 percent growth, inflation nowhere...