Concentrating the Mind

• Author: Jeremy Clift
• Position: Interviews Professor
• Pages: 6-9

"Capitalism without failure is like religion without sin. It doesn't work. Bankruptcies and losses, even the threat of bankruptcy, concentrate the mind on prudent behavior."

Page 6

Allan H. Meltzer in testimony before the Joint Economic Committee of the U.S. Congress, February 24, 1998

Economists may rarely be feted by the President of the United States. But, at 75, Professor Allan Meltzer-who briefly served in the U.S. Treasury during the presidency of John F. Kennedy and later was an advisor to Ronald Reagan-is one of the icons of American economics. So he was unfazed when President George W. Bush stepped forward at an award ceremony organized by the American Enterprise Institute (Box 1) in February this year to honor him as one of the leading economists of his time and the foremost authority on the U.S. Federal Reserve System. "I know I'm not the featured speaker," the president said at the Washington ceremony. "I'm just a warm-up act for Allan Meltzer [whom] I want to congratulate ...for a lifetime of achievement."

Sometimes seen as a scourge of international institutions like the IMF and the World Bank, Meltzer is a sprightly man who revels in the power of ideas. Meltzer's recipe, says Charles Calomiris, a professor of finance and economics at Columbia University in New York, "is the basic application of logic and facts and an unwillingness to embrace dubious intellectual fads, which are amazingly prevalent in international finance." It is a view echoed by Federal Reserve Board Chairman Alan Greenspan, who says that Meltzer "calls the evidence as he sees it."

One of the pioneers, along with Milton Friedman, of monetarist economics, Meltzer sits in his bare office working on the next volume of his mammoth history of the U.S. Federal Reserve. He has become fascinated by how good men can make disastrously wrong decisions. Pointing to Arthur Burns, chairman of the Federal Reserve Board during 1970-78, Meltzer says Burns was "an outstanding economist of his day, yet he produced the biggest peacetime inflation we had ever seen." Why did that happen? "I think that's what we learn from history," Meltzer observes. "People make big mistakes-and that was a big mistake. Why did Burns do it? He didn't do it because he wanted to create inflation, any more than the people who created the Great Depression wanted to create the Great Depression. They had a set of ideas that proved to be wrong."

Meltzer, who started out on the left of American politics (as an undergraduate, he worked for the unsuccessful presidential campaign in 1948 of Henry Wallace, the left-leaning candidate of the Progressive Party), has steadily moved to the right. Working primarily in academia, where he feels most comfortable, Meltzer has spent his life prodding, goading, and questioning others and pointing out inconvenient facts. His late colleague and coauthor Karl Brunner once said that Meltzer argued "with the style of a machine gunner-with sharply pointed and rapid duster shots." In the 1970s, when President Richard Nixon made what Meltzer thought was a big mistake by imposing price controls, Meltzer helped set up-with Brunner-the Shadow Open Market Committee of leading economists. The self-appointed watchdog, which shadowed the Open Market Committee of the Federal Reserve, would offer its own recipes for monetary policy design and actions as alternatives to those of the Federal Reserve.

Initial attraction

Born in 1928, Meltzer grew up in Boston during the Great Depression, although his family was not affected greatly by the economic slump. Searching for the tools to explain what appeared to be a wholesale failure of the capitalist system was what initially attracted him to economics. With Brunner, he developed a general...