On a Monday evening in September 1975, an improbable, schoolmarm-like figure appeared upon the stage at the St. Regis-Sheraton in New York. Speaking with an accent, she lectured her audience that the pursuit of equality was a mirage—it was far more important to create wealth than to distribute it. The drive for so-called fairness was the product of ignoble sentiments: the envy of the underclass on the one hand, the guilt of the wealthy on the other. “Let our children grow tall,” the lecturer declared, “and some taller than others if they have the ability to do so.”1
The speaker might have been Ayn Rand, but the accent was British rather than Russian; and the bracing woman at the podium was the recently elevated leader of Britain’s opposition Conservative Party, Mrs. Margaret Thatcher. New York was not sure what to make of this newcomer to the world stage, with her startling political philosophy and her baby blond hair. “The most operative word is lady—old-fashioned, proper, traditional lady,” said a woman who heard Thatcher at a private luncheon, “she is a flower among the thorns.” “She was prettier than I expected, softer, younger,” agreed Barbara Walters, the rising queen of television news, who interviewed Thatcher on NBC’s Today show. But the Conservative leader was not all soft. She carried a treatise by Hayek in her handbag. She was fond of tough quotes attributed to Abraham Lincoln: “You cannot strengthen the weak by weakening the strong.”2 And she bristled impatiently at unserious small talk. When Barbara Walters warned her, during a brief chat before their interview, that she might have to digress from political topics to the question of how it felt to be a woman in such a high post, Thatcher shook her head and sighed, “Isn’t it too bad that there aren’t more women around who feel as we do.”3
After doing the rounds in New York, the Conservative leader flew to Washington to meet the president and his entourage.4 Secretary of State Henry Kissinger had instructed Ford earlier that Thatcher was “a great gal,” but “not experienced at all in foreign policy.”5 Ford and his national security aide, Brent Scowcroft, formed a similar impression. “She was very warm, very friendly, very composed,” Scowcroft remembered. “We didn’t see her as a heavyweight who was going to change the course of anything.”6 Katharine Graham, the publisher of the Washington Post, was not impressed by this grocer’s daughter with intellectual pretensions: “I think she’s just a vulgar fishwife,” she confided (or so she thought) to the wife of a British newspaper owner.7 But on her third evening in Washington, Thatcher appeared at a British embassy dinner in a black velvet evening suit and spoke from the heart about free markets and liberty. To a certain type of listener, she was more rousing by far than any British leader since Churchill.
One such listener was sitting right beside her. As the senior member of the Ford administration at the British embassy dinner, the chairman of the Council of Economic Advisers had been placed next to Thatcher, and she wasted no time in getting to the point with him.
“Tell me, Chairman Greenspan,” she asked, “why is it that we in Britain cannot calculate M3?”8
It was an unusual dinner-party icebreaker. M3 was a broad measure of the money supply that counted deposits at S&Ls as well as bank deposits and cash; and quite apart from its arcane nature, the timing of this question was remarkable.9 Central banks had only just begun to publish monetary measures, and the Fed would not commit itself firmly to a money-supply target for another four years; to know about M3 in the fall of 1975 was to belong to a rarefied club of hard-money believers.10 But, however unlikely her question, Thatcher had unlocked her shy neighbor. For the rest of the evening, the two got along famously.
After the dinner, Greenspan made the short trip from Embassy Row on Massachusetts Avenue to his apartment at the Watergate. Kaye Pullen had let herself in and was waiting for him in the bare living room—Alan had done nothing to make the place feel like home, though by now this had less to do with the fiction that he might resign his job than with his serene indifference to interior decoration. Kaye was used to this routine by now, getting together with Alan after an evening spent separately; although they had been dating for eight months, they were not officially a couple in the eyes of Washington. But on this particular evening, she could tell that something out of the ordinary had happened. Alan was acting oddly, and for a moment she wondered whether the ambassador’s butler had slipped him an extra gin and tonic. On further reflection, she realized that this theory was implausible: Alan’s relationship with alcohol was as proper and controlled as his relationship with people. In all their months together, there had been just one occasion when Alan had ordered so much as a single drink at lunch—they had been eating at the White House mess, and Alan had broken with habit by asking for a beer to go with the Mexican food on that day’s menu. But even this not terribly wild impulse had soon been squashed. Seeing Arthur Burns take a seat nearby, Alan had summoned the waiter back to his table and quietly told him that there would be no beer after all.11
Alan and Kaye talked—it was the usual evening debriefing—and it soon became clear why Alan was agitated. It was not what he had drunk; it was whom he had sat next to. Imagine, Margaret Thatcher had asked about M3! An obscure measure of the money supply embraced by followers of Milton Friedman! Which American leader would have heard of such a thing, let alone admit to an interest in the midst of a grand dinner party? After that get-to-know-you opener, Mrs. Thatcher had engaged Alan in a debate about market economics and the problems of the West: she talked like Ayn Rand, but she was likely to become the next prime minister of Britain.12 Forced to choose between his libertarian principles and his urge to be at the center, Greenspan was capable of tempering his views, as his advice on Ford’s tax rebate had demonstrated. But in his ideal world, Greenspan would be both a faithful libertarian and an influential power player—and sitting next to Thatcher had allowed him to dream that this combination might be possible.
Kaye had seldom seen Alan so excited.13
• • •
Greenspan’s encounter with Margaret Thatcher came at a propitious moment. For free-market conservatives, 1975 was both dispiriting and hopeful: the West was reeling from unemployment and inflation, but there seemed to be an opening at last for libertarian remedies.14 That spring, an essay by the eminent social scientist James Q. Wilson had circulated inside the White House; it argued that the nation’s difficulties arose “not from government’s having neglected the interests of its citizens, but from its having attempted to serve them.”15 The Harris polling organization reported that no more than 13 percent of the public felt confident in government, and most seemed to regard public assistance programs as false friends—the extra taxes they implied would outweigh their benefits.16 Government regulation was losing favor, too. As an outside consultant, Greenspan had tried in vain to push the Nixon administration to embrace deregulation. But by 1975 some Democrats as well as Republicans were coming around to Greenspan’s point of view; in the Senate, it was a Kennedy, of all people, who led hearings that year on airline deregulation. Margaret Thatcher’s firm pronouncements demonstrated that Britain’s economic troubles had generated a libertarian reaction. It seemed possible that the United States might follow.
Yet if Britain’s Conservative leader illustrated what might be, there were also darker visions of the future. “You have an end-to-Western-capitalism syndrome,” a business school dean worried; “businessmen see the big federal deficits, the capital shortage, world-wide inflation, the energy crisis . . . they see the continued encroachment of the bureaucrats.”17 Time magazine’s cover asked flatly, “Can Capitalism Survive?” while in the pages of Harper’s, the Democratic congressman Michael Harrington proclaimed, “National economic planning is an idea whose time has come.”18 In May 1975 the former vice president, Senator Hubert Humphrey, teamed up with Senator Jacob Javits to introduce a bill to establish an economic planning board; the board was to produce six-year plans every two years, as though this odd echo of the Senate’s two-year/six-year electoral machinery might disguise the resemblance to the Soviet Union.19 On June 3, 1975, Greenspan warned Ford that “a major philosophical issue which will emerge in the months ahead will be the role of government in economic planning.”20 Three weeks later he wrote again in the same vein, urging the president to place his trust in “the self-interest of the businessmen” rather than central planning. “One need only visit department stores in communist countries and compare them with those in the market oriented societies to get an immediate picture of where the consumer fares best,” Greenspan lectured Ford, somewhat condescendingly.21
America seemed to be approaching a fork in the road. The Watergate scandal, the humiliation in Vietnam, and the stagflationary economy had buried the optimism of Kennedy’s New Frontier. Some new kind of credo would have to take its place—either a Thatcherite philosophy of the conservative right or a doubling down on government controls of the sort advocated by Senators Humphrey and Javits. From his redoubt at the White House, Greenspan waded into this battle, denouncing the Humphrey-Javits bill as a plot by the intellectual elite, which “wishes to see its ideals more effectual than the market is likely to permit them to be.” To his relief, the Humphrey-Javits legislation soon hit a wall in the Senate. But not all statist challenges would be seen off so easily—particularly not if they were mounted by a formidable bureaucratic brawler who operated from inside the Ford administration.
The brawler who concerned Greenspan was Henry Kissinger, Greenspan’s fellow graduate from George Washington High School and the man who dismissed Thatcher as “a great gal” of no great consequence. Kissinger had descended from his perch at Harvard University in 1969, serving first as Nixon’s national security adviser and then concurrently as national security adviser and secretary of state; he had no doubt of his ability to perform both jobs simultaneously. No other figure in Washington worked the system as deftly as he did—he was possessed of “an almost devilish psychological intuition, an instinct for grasping the hidden springs of character, of knowing what drives or dooms another person,” a Harvard colleague said of him.22 Whereas Greenspan was coy and ambivalent about acquiring power, Kissinger sought it out, treasured it, and lusted for it openly. His paranoid secrecy alarmed even Nixon, who was once driven to suggest that Kissinger might need psychiatric counseling.23
In May 1975, the same month that Senators Humphrey and Javits introduced their national planning bill, Kissinger directed his manipulative genius at the so-called commodity problem.24 “The paramount necessity of our time is the preservation of peace,” Kissinger told an audience in the first of three economic speeches that month, “but history has shown that international political stability requires international economic stability.” In recent times, he continued, that stability had been threatened by “shortages and disputes over new issues such as energy, raw materials, and food.” Grain, fertilizers, and petroleum had shot up in price, hitting the poorest nations that were net importers of all three; as a result, developing countries were demanding a “New World Order.”25 Such tensions, Kissinger warned, “must be overcome, or we face not only an end to the growth of the last thirty years but a shattering of the hopes of all mankind for a better future.”26
Kissinger refused to contemplate such problems through a Thatcherite, free-market prism. The way he saw things, the miraculous growth of the postwar era was not the achievement of the invisible hand; rather, it was the result of the international architecture established at the end of World War II, with the United States at its center. “For thirty years, the modern economic system created at the Bretton Woods conference of 1944 has served us well,” Kissinger declared; by creating a framework of stability, it had allowed commerce to flourish. It was hardly surprising that the collapse of the Bretton Woods system, marked by Nixon’s abandonment of the gold peg, was now leading to trouble; it was the job of statesmen to come up with a fresh architecture to replace the old one. Kissinger duly proposed a series of price-stabilizing commodity agreements between producer and consumer nations. “Global interdependence is a reality,” Kissinger averred. “There is no alternative to international collaboration.”27
Even at the best of times, Greenspan never trusted Kissinger. He was too dark and too distant; strange secrets seemed to lurk inside the man that even he was not aware of.28 But to Greenspan’s way of thinking, what Kissinger was proposing was not merely untrustworthy. It crossed the border into being simply wrong—it amounted to price controls dressed up in diplomatic verbiage. Just as Nixon’s disastrous price freeze had treated the symptoms of inflation only, so Kissinger’s calls for “a Bretton Woods for the 1980s” missed the point: no international monetary architecture could succeed so long as inflation eroded the value of national currencies and forced periodic devaluations.29 Kissinger’s proposal to control commodity prices belonged to the same class of delusion—fixing the price of wheat or fuel was no more likely to succeed than fixing the price of the dollar. Even before Kissinger had gone public with his proposals for international price-stabilizing arrangements, an economist on the staff of the Council of Economic Advisers had sent a handwritten note to Greenspan, reporting on “an almost interminable series of meetings with the State Department that had been ‘intellectually dishonest.’”30 The secretary of state’s speech was “filled with bombast and rhetoric,” the economist complained after Kissinger laid out his vision.31 When Kissinger created an interdepartmental working group to flesh out his program, attending its meetings “constituted one of the most frustrating experiences I have suffered through in my professional career,” the CEA man reported.32
The frustration at the Council of Economic Advisers spread to the Treasury and the White House budget bureau, and pretty soon an anti-Kissinger backlash surfaced in the newspapers. A string of anonymously sourced articles portrayed the secretary of state as a clumsy interventionist; and on June 4 the New York Times reported complaints from well-placed government economists that Kissinger was making economic policy without going through the proper channels. “Speeches Irk Officials Who Prefer More Research,” the headline said, pointedly.33
The day the Times article appeared, Kissinger called in one of his lieutenants.34
“I want to find out the source of all these newspaper articles,” Kissinger instructed.
“I think it is basically coming out of the White House group,” the lieutenant replied.
“Like who?”
“I know some of it came from Greenspan.”
Kissinger did not register surprise at the suggestion that Greenspan might be knifing him. Perhaps he knew that Greenspan had been involved in faction fights before, showing up at the White House on a Sunday with Donald Rumsfeld and Dick Cheney to rewrite the president’s fireside chat on the economy. “Speeches Irk Officials Who Prefer More Research”—the infuriating condescension of that Times headline sounded just like Greenspan.
“If people want to advertise their bureaucratic defeats, that is their problem,” Kissinger growled menacingly.35
Kissinger was not about to retreat into his shell because of a few newspaper salvos. For some time now, he had been eyeing Iran, a key ally in the Middle East that was looking increasingly unstable. The surge in oil prices in 1973 and 1974 had flooded the country with cash, inflating a financial bubble.36 Then the global recession had driven oil prices back down, cutting Iran’s export revenues and threatening to burst the bubble. To make matters even trickier, the OPEC oil cartel was resisting the price fall by directing its members to pump less, which meant that Iran exported fewer barrels of oil as well as getting less for each of them.37 The U.S. embassy in Tehran cabled Washington with reports of delayed construction projects, unpaid wages, and riots in major cities. The Iranian economy was in free fall. The regime itself might topple.
The prospect of upheaval in Iran was worrying enough for the Ford administration. The ruling shah was an American ally; besides, a revolution would disrupt oil production, driving up world prices yet again and suffocating the U.S. economic recovery. But however alarming instability might be, America’s immediate problem was the shah himself; faced with riots against his regime, he was demanding a lifeline in the form of a 30 percent increase in the oil price set by OPEC. If Saudi Arabia, the cartel’s dominant producer, cut back its own production sufficiently, the shah’s 30 percent price jump could be made to stick. Iran would get the cash it needed to buy off protesters—and the United States would suffer a crippling blow to its economy.
In this cauldron of trouble, Kissinger spied opportunity. He was not going to take oil-price gyrations lying down; he believed that statesmen should shape destiny. And so he conceived a majestic triple play. The United States would offer the shah an alternative oil deal: it would buy up surplus Iranian crude in defiance of OPEC’s quotas, requiring in exchange a discount on each barrel. The move would shore up America’s ally, the shah. It would release more oil onto the global market, bringing down the price and providing a leg up for the U.S. economy. And it would weaken OPEC, avenging the humiliating oil embargo of two years earlier.
On June 12, eight days after the critical Times piece, Kissinger broached his plan with Ford at a meeting in the Oval Office, saying it would “maybe even crack OPEC.” Ford immediately indicated that Alan Greenspan would have to sign off on it. He evidently did not want to make any significant economic decision without Greenspan’s blessing, but he felt that if Greenspan was on board, the rest of the economic team would follow.
“Why don’t you just talk to Alan alone?” the president suggested.38
Four days later, Kissinger summoned Greenspan to his office.
“The President wanted me to discuss something,” Kissinger started. “This is only for you and is highly sensitive.”
Greenspan listened politely to the outline of Kissinger’s oil plan. He knew from the CEA staff memos that the State Department had a statist approach to commodity prices. But he said nothing of this to Kissinger.
“The idea properly packaged seems very attractive,” Greenspan ventured. Then he added that it might take time to think through the details. “We may need a total strategy before we move,” he cautioned.
Kissinger preferred to move first and strategize later. He had satisfied Ford’s instruction to bring Greenspan in on the deal, and he had managed to elicit interest, if not quite approval.
“I think we should pick up what we can and develop a total strategy after Iran is signed up,” Kissinger replied, wrapping up the meeting.39
Later that day, Greenspan had lunch with Charles Robinson, a dashing, bow tie–wearing entrepreneur who had participated in the D-Day landing and now served as Kissinger’s undersecretary for economics. Greenspan reiterated to Robinson that the oil plan needed further thought. After all, Iran was willing to sell only 700,000 barrels a day of discounted oil, less than 3 percent of OPEC’s daily output. As OPEC’s swing producer, Saudi Arabia could easily shut off a few refineries to offset Iran’s increased sales, leaving the world oil price exactly where it had been in the first place.40
Robinson reported to Kissinger that Greenspan was on the fence. He wanted another meeting.41
“Why do you and Greenspan have to see me again?” Kissinger asked, exasperated.
“He suggested it,” Robinson answered. “He wants to explain this more fully.”
“Come on, don’t turn this small problem into a nightmare,” Kissinger said. In two days, he had to deliver an address at a dinner of the Japan Society. It would be his first major speech on Asia since America’s ignominious evacuation from Saigon two months earlier. He needed time to think about the global picture.
“I’ll call him up and tell him I can’t do it,” Kissinger said.
“Hold his hand a little bit and that will solve his problem,” Robinson counseled.
Kissinger called Greenspan the next day.42 “I am working on my speech,” Kissinger began, “so it is very important that—”
Greenspan cut him off. “Can I tell you briefly what I have been thinking about?” he began. He ran through some of the kinks in the deal, starting with the fact that the Saudis could simply offset extra Iranian sales by curbing their production. The plan had to anticipate this Saudi counterpunch, or it would fail. “You have to have pressure on Saudi Arabia,” Greenspan concluded.
“But can’t moving on this give us an option?” Kissinger urged.
“There are a number of technical problems about how we can do this,” Greenspan answered. “They are solvable, but technical.” In his usual way, Greenspan was asserting control with a calculated one-two punch: first, emphasize the complexity of the issue; second, offer himself up as the expert who could unscramble it. “It is not easy,” Greenspan went on, “but I am trying to think of ways to do it and I think it can be done.”
“It would give us an option,” Kissinger repeated, trying to put the big picture back into focus. “It would give us protection against an embargo.”
“That is certain,” Greenspan said, humoring him.
“And a crack at the OPEC cartel,” Kissinger added.
Again, Greenspan pretended to agree. The truth was that Saudi Arabia would have to cut production by just 10 percent to neutralize an Iranian side deal, a relatively small move given that the kingdom’s output had already proved capable of swinging as much as 18 percent from month to month since the start of the year.43 But Greenspan avoided telling Kissinger directly that his scheme was harebrained. His goal was just to slow him down by getting him to agree to a meeting.
“I haven’t thought through how to play it and I would be more than anxious to get your views,” Kissinger allowed. Greenspan evidently understood the technical details of oil markets in a way that he did not. He was coming around to the idea that Greenspan could be useful.
Greenspan sensed that Kissinger was lowering his guard. Pretty soon he would have him where he wanted.
“I am only concerned that before it is done you feel confident with the secondary effects,” Greenspan said mildly.
“I am anxious to discuss it with you,” Kissinger responded. “It may have to slip as late as Thursday.”
“There is no rush,” Greenspan assured him.44
• • •
The following week Kissinger invited Greenspan and the head of the Federal Energy Administration, Frank Zarb, to a lunch in his private dining room at the Department of State.45 Zarb was a newcomer to the discussions over the Iranian oil deal, but Greenspan had worked on him enough to know that he would be an ally.
“Well, my first reaction was that it is an interesting idea,” Zarb began. “A possible way to crack the oil cartel. But then I looked at the consequences and I have some questions.” Ordinarily, it was private American oil companies that bought oil from Iran. If the U.S. government was going to act as the buyer, Congress would have to be on board, and the politics would get complicated. For example, the lawmakers would want a say in how large the Iranian discount would be, which would put them in a position of legislating the oil price. The scheme threatened to politicize a key sector of the American economy.
“We definitely do not want a government purchasing agency,” Zarb said bluntly. “The notion of a government agency handling this sort of matter is inconceivable and inconsistent with our idea of a free enterprise system. The liberals have been pushing it in order to further their effort to nationalize the oil industry. So, success in this venture we are discussing would play into the liberals’ hands.”
Greenspan himself could not have put it better. This crazy oil deal was really about something much larger. If Kissinger was fond of grand strategic thoughts, he should spend a little time contemplating the state versus the market.46
Kissinger allowed that Zarb might have a point. “We might not want Congress to take too close a look,” he conceded. But he evidently thought his plan was too brilliant to abandon.
“For us to work the deal would be a dramatic demonstration that our policy works,” Kissinger urged. “And it would also shock the Saudis. There’s no telling what they will do. But you can be sure they will want to do at least as well as the Shah. That might also give us a nice option.”
“You mean they would want a similar deal?” Zarb asked.
“They will not let the Shah steal the march on them. What is least likely is they will cut production by 700,000 barrels a day,” Kissinger insisted.
Greenspan could see why his staff at the Council of Economic Advisers hated dealing with the State Department. Its arguments were back to front. For some reason Kissinger believed that a deal with Iran would spur the Saudis to make a similar sale to the United States. He did not seem to grasp that the Saudis played the role of swing producer within OPEC.47
“The Saudis . . . have the flexibility to absorb this and preserve the cartel,” Greenspan said, mustering his reserves of patience.
“But it would affect price,” Kissinger countered. He was still failing to see that Saudi Arabia could offset the Iranian sale, in which case the oil price would not actually be affected.
Perhaps sensing that he was losing the argument, Kissinger shifted onto what he thought was safer ground. A deal with the shah, he contended, “would highlight our leadership position.”
Zarb shot back that the credibility of U.S. leadership might actually be harmed if the Saudis played the role of swing producer, as Greenspan predicted. The whole world would understand that the United States had tried and failed to break OPEC.
“I do not regard this as being a decisive break,” Kissinger said, a little weakly. All the loose ends that Zarb and Greenspan were tugging on had him fighting to defend his plan. “It’s really just a nibble, but it gives us flexibility with the others.”
The back-and-forth continued until Kissinger played his final card. He reminded his guests that the clock was ticking. The shah’s enemies were gaining strength and he needed the money quickly.
“It must be in the next six weeks, otherwise it’s lost,” Kissinger said urgently.
Greenspan was not going to fall for this car salesman’s ploy. A limited-time-only bargain was easy to refuse if you did not want the vehicle.
“I’m concerned about the feasibility of bypassing Congress,” Greenspan objected.
“Well, do you want to proceed or not?” Kissinger demanded.
Now, to Greenspan’s chagrin, Zarb faltered. The ticking clock had rattled him, and he relented on the condition that the whole thing be kept away from Congress. “Yes, I think we should proceed,” he conceded.
Greenspan jumped in, still hoping to stall Kissinger. “Is there any way . . . that we can be sure that that sort of legal operation is feasible?” he wondered. “Why don’t we have some lawyers look at it?”
Kissinger seized on Zarb’s assent and ignored Greenspan. The lunch ended with the understanding that Undersecretary Robinson would speak to the Iranians. For now, the secretary of state was winning.
• • •
One week later, on June 30, 1975, Robinson duly met the shah and his foreign minister.48 The Iranians seemed keen to do a deal, but when Kissinger tried to make headway back in Washington, he found that Greenspan was counterattacking. The economic team had returned to the question of who or what would purchase the oil on behalf of the U.S. government. Without an answer to this practical question, Robinson’s negotiations with the shah were not going to achieve anything.
“Couldn’t Defense buy the oil?” Kissinger demanded at a meeting on July 14. Again, Greenspan, Zarb, and Robinson had joined him.49
“Defense buys all its oil on bids from companies,” Greenspan said doggedly.
“As a historian, I say this country has had it,” Kissinger sputtered. “I spend two-thirds of my time explaining to other countries why this country cannot do what is clearly in its own interest.” The way Kissinger saw things, his Iran plan had implications that stretched far beyond one lousy deal. He and Robinson were simultaneously negotiating grain sales to the Soviets and a copper deal for Zaire; they were working on multiple commodity schemes designed to mold the global economy to U.S. interests. After all, the economic side of the U.S. government had let the entire Bretton Woods system go down in flames. Somebody needed to fix it.
“I want to break up the Group of 77,” Kissinger went on, referring to the group of developing countries that had been protesting the deterioration in its terms of trade and demanding a New World Order. The Iran move was just one venture in a larger game. By buying off key third-world governments with commodity deals, Kissinger aimed to destroy their coalition.
“The Zairians told me that if they could get an agreement on cocoa and copper that they would drop the words ‘new international economic order’ from their vocabulary,” Robinson offered, seeking to inject evidence that Kissinger’s diplomacy might be succeeding.
“We must pick concrete issues and split them,” Kissinger agreed eagerly.
“I call it the ice cream parlor approach. You put the ice cream on the table, you open the door, and the kids will come in by themselves,” Robinson pontificated.
By now the economists’ eyes were spinning.
“This is all too fast for me,” Zarb interjected. “Your friends are your enemies and your friends.” Invoking the defense secretary, Zarb continued, “I would rather work with Schlesinger. At least once you get him going, he goes in a relatively straight line.”
“You think so?” Kissinger replied, a bit cryptically.
• • •
A fortnight later, at the beginning of August, Kissinger resolved that it was time to end-run Greenspan. He sent a memo to the president on August 6, pressing for “a decision to proceed with final steps” and promising “a crack in OPEC’s price solidarity.” “I am cutting through the fudge factory,” he told Robinson the next day, instructing him to liaise with Greenspan and Zarb but not to give ground. “The guys will just have stupid nitpicks,” he predicted.50
The next morning Kissinger saw Ford in the Oval Office. He told the president flat out that his economic advisers were petty obstructionists. “Zarb and Greenspan are dragging their feet,” he said. “I have no doubt that they will approve it, but they want to prove their manhood.” There was no more time to waste on their small-minded quibbles. It was vital to get a provisional answer to the Iranian foreign minister that day, Kissinger insisted.
“Go ahead,” Ford responded.51
Having given the Iranians a provisional yes, Kissinger proceeded to the next stage. Eight days later, on August 15, his staff prepared another long memo for Ford, laying out what the State Department hoped would be the conclusive arguments for the Iranian oil purchase, including a way of keeping Congress out of it.52
“This will be a spectacular deal,” Kissinger told Robinson. “The more we buy, the better.”
“We need to clear it with Greenspan and Zarb,” Robinson reminded him.
“There isn’t a brain between the two of them,” Kissinger answered. “I think I understand economics as well as they do.”
“Greenspan apparently made some comment about we should make no more deals,” Robinson cautioned.
“Look, just ignore Greenspan,” Kissinger said firmly. “After this, they’ll all come crawling.” The case in favor of the deal was too powerful to resist, Kissinger believed. “Your arguments are conclusive,” he told Robinson. “They ought to be—you got them from me.”
But Greenspan was not to be ignored so easily. The president took delivery of Kissinger’s long memo, initialed his approval, but added the proviso: “Would want Chuck Robinson to work with Frank Zarb & Alan Greenspan as he has in the past.” Kissinger still lacked the green light he needed.
Seeking to build a coalition against Greenspan, Robinson visited Treasury Secretary Bill Simon in the Hamptons on August 17. Robinson felt that the discussion went well, with Simon nodding sympathetically as he made the case for the Iran deal. But victory proved elusive yet again. As Robinson got up to take his leave, the Treasury secretary made for the telephone; “Simon was attempting to reach Greenspan when I left,” Robinson reported back to Kissinger.53 Evidently, neither the president nor the Treasury secretary would take a firm position without Greenspan’s say-so. Greenspan was the man who knew, and nobody would act without him.
At the end of August, the summer-long struggle over oil came to a close, and Greenspan emerged the victor. Irritated by the delays caused by unseen hands in Washington, the shah changed the terms of the deal: he announced that he must have a better price or he would sell oil just for a few months, not longer. Greenspan chose this moment to insist that only a long-term deal would be acceptable—he was open to the State Department’s perspective, by all means, but only on conditions that made progress impossible.54 On September 3, Kissinger’s team cabled the Iranians one last time, outlining a final proposal. When the shah rejected it, the diplomats threw in the towel. “I conclude that there is no basis for agreement now,” Robinson told Kissinger.55
One year earlier, confronted by an ideological adversary in the shape of Senator Proxmire, Greenspan had defended his libertarian philosophy forthrightly. Now, confronted by a scheming rival such as Henry Kissinger, Greenspan had proved equally adept at a shadier form of combat. By feigning cooperation, by never stating his opposition to the oil deal, he had achieved his purpose stealthily: “Revealing his thinking was not the outstanding attribute of Greenspan,” Kissinger reflected, many years later.56 But what was even more impressive was the aftermath of the victory. In postmortems of the aborted Iranian deal, both Kissinger and Undersecretary Robinson blamed the Treasury secretary for its failure; the CEA chairman somehow retained their respect and even friendship. Greenspan, unlike others, had never been “a bureaucratic factor,” Kissinger averred.57 The fact that Greenspan left few apparent bruises on his adversaries made his achievement all the more striking.58
• • •
On September 5, 1975, President Ford appeared in the Capitol Park in Sacramento, California, and a slight young woman in a nunlike red robe brandished a Colt .45 pistol at him before being clobbered by a Secret Service agent. Less than three weeks later, on September 22, Ford emerged from a San Francisco hotel and found himself at gunpoint once again; this time an older woman forty feet away got off one shot before being tackled by an ex-marine who was standing in the crowd with her. Greenspan was on the curb outside the hotel, and the shot sounded like a dull pop; an agent bundled him into the bottom of a limousine that sped off down a freeway. He lay there on the floor of the vehicle, pressed against a White House colleague. At some point a voice announced, “You can get up now.”59
The second assassination scare took place three days after Greenspan’s encounter with Margaret Thatcher, and it dramatized the scarier version of the nation’s future. If Thatcher held out the prospect of a return to the individual responsibility of the nineteenth century, the attempts on the president signaled that America might descend into a poisonous despond in which citizens blamed government for their lot and, in extreme cases, felt free to vent their grievances by shooting at the president. “Violence is ever more condoned in this country especially if it has some pseudo connection with political positions and revolutionary ideas,” Greenspan lamented in a memo soon after the second attack.60 The increasingly left-wing atmosphere on college campuses deserved much of the blame, he continued. “Our university instructors are cynically disparaging the values which made this country great.” It was time for the president to defend American capitalism “in ethical and moral terms,” Greenspan went on. Ford should give a major address on “the social-political-psychological roots of student nihilism, radicalism, and violence.”
If the assassination scares were not enough, another alarming vision of America’s future was playing out in New York City. Having borrowed too much, spent too much, and generally kowtowed to the unrealistic demands of its people, New York’s municipal government had reached the brink of bankruptcy in May 1975 and come cap in hand to Washington. Most of the rest of the country seemed disinclined to help. New York had indulged its municipal employees shockingly: “You can’t retire people after twenty years, at the age of thirty-eight or thirty-nine, at half their highest salary,” one congressman complained, adding, for good measure, “You can have just so many porno movies.”61 Woody Allen captured the essence of this sentiment two years later in the movie Annie Hall: “Don’t you see the rest of the country looks upon New York like we’re left-wing, communist, Jewish, homosexual pornographers? I think of us that way sometimes and I live here.”
At Greenspan’s prompting, President Ford rebuffed New York’s plea for a bailout. With much of the nation behind him, there seemed to be no reason to cave in to a city that exemplified the culture of the political left in all its gaudy irresponsibility. But almost immediately, New York hit back. Hugh Carey, the governor of New York State, accused Ford of “a level of arrogance and disregard for New York that rivals the worst days of Richard Nixon and his gang of cutthroats.”62 New York’s mayor, Abraham Beame, invoked Nixon in a different fashion: “It’s incredible to me that the President of the United States thinks more about the stockholders of Lockheed or Penn Central than the eight million people of our city.”63
During the Lockheed hearings four years earlier, Greenspan had broken with his mentor Arthur Burns by opposing a rescue. Now he emerged at the helm of the hard-line faction once again, though this time he was doing so from within the government. To his way of thinking, Abraham Beame’s invocation of Lockheed and Penn Central showed precisely why it was vital not to bail out New York. If America continued to slither down this slope, each bailout would furnish justification for the next, and pretty soon the government would backstop every debt in the nation. The essence of the Ford presidency, Greenspan argued at a White House meeting on September 25, should be to reverse this self-reinforcing pattern of softheaded decisions.64
Other Ford advisers agreed in principle with Greenspan, but they worried that New York’s bankruptcy could trigger knock-on problems for the economy. Burns in particular predicted havoc. Banks were stuffed with New York bonds whose value would collapse, leaving banks too weak to lend; a credit crunch would follow. Even if the banks proved unexpectedly resilient, there were other possible channels of contagion. For one thing, a default in New York could destroy financial confidence in other American cities. Finding it hard to borrow, municipal governments would lay off police officers and teachers. As workers tightened their belts, business would fall off and the economy would spiral downward.65
It was not just Ford’s advisers who feared the consequences of Greenspan’s hard line. On October 3, 1975, German chancellor Helmut Schmidt lunched with the president at the White House.
“How’s the Bundesbank? How’s the mark?” Ford asked.
“Mr. President, never mind the Bundesbank or the mark,” Schmidt answered. “If you let New York go broke, the dollar is worth scheisse!”66 As Greenspan and other advisers listened, the German leader lectured Ford that a New York default would have a domino effect on financial centers as far afield as Zurich and Frankfurt.
In the days after Schmidt’s visit, Burns went public on the case for a rescue, and even the normally hard-line Treasury Secretary Simon sounded reluctantly open to the possibility.67 Congressional leaders began to realize that punishing Sin City might mean punishing their own districts at the same time, and two bills offering New York billions in federal loan guarantees passed through the Senate banking committee. With an eye to the following year’s election, Democratic presidential aspirants started to turn New York’s plight into a cudgel. Senator Henry Jackson of Washington State quoted Abraham Lincoln shamelessly: “We are now engaged in a great civil war,” Jackson announced, as though the financial troubles of New York plausibly could be compared to Antietam or Gettysburg.68 Fearing that the political current would force its own solution on him, Ford scheduled a major speech about New York, to be delivered at the National Press Club in Washington.
Acting behind the scenes, Greenspan continued to resist the bailout. No matter that New York was his hometown; the diffidence that he had felt in pressing policy positions had by now clearly deserted him. He argued to Ford privately that a rescue would be unfair to the rest of the nation: Why lavish money on New York when the federal government was having to control spending in other areas? He insisted that a rescue would help New York only for a short time; pretty soon the city’s addiction to deficit spending would swamp the additional money provided by a bailout. Finally, Greenspan maintained that the city’s failure would be less risky for the national economy than most people supposed. The Joint Economic Committee in Congress had forecast that New York’s bankruptcy would depress national growth by as much as 1 percentage point in 1976. But Greenspan’s CEA team countered that the impact on other city budgets would be smaller than feared. Indeed, a New York City default would have welcome “demonstration effects which will contribute to the health of our fiscal system.”69
The Greenspan team’s optimism exceeded the supporting evidence. Burns was right that default might trigger contagion; a Federal Reserve study released in November showed that 179 banks held state and city securities worth more than half their capital, so a sharp fall in their value would compel cuts in lending.70 It was possible, moreover, that many institutional investors would be legally required to dump New York securities once the city defaulted, in which case fire sales would magnify the hit to the banking system. This prospect was disturbing enough to prompt the Council of Economic Advisers to undertake a state-by-state investigation of the rules governing defaulted bonds, but the resulting memo was not sent to Greenspan until twelve days after Ford’s critical speech on the New York question, and even then it was vague in its conclusions.71 But although Greenspan’s no-bailout policy entailed risks that were as yet not analyzed, Ford trusted him anyway, relying on him for “arguments, logic, and articulation,” as a colleague noted in his diary.72 In the days leading up to the fateful speech at the National Press Club, White House advisers who favored aiding New York found themselves pushed to the wall. “I tried with minimal success to soften the harsh rhetoric of some of the best economic minds of the eighteenth century,” Ford’s chief speechwriter, Bob Hartmann, recalled bitterly.73
On October 29, Ford stood up at the National Press Club and declared bluntly, “I can tell you, and tell you now, that I am prepared to veto any bill that has as its purpose a Federal bailout.” As well as citing the CEA’s arguments against a rescue, the president drew the connection to the larger national challenges that had preoccupied Greenspan for years. “If we go on spending more than we have, providing more benefits and more services than we can pay for, then a day of reckoning will come to Washington and the whole country just as it has to New York City,” Ford warned gravely. “When that day of reckoning comes, who will bail out the United States of America?”74 Germany’s chancellor, the Federal Reserve chairman, and a Lincoln-quoting senator had all clamored for a softer line, but Greenspan had succeeded in frustrating them.75
Greenspan’s victory was not popular. By ten o’clock that evening, newsboys were hawking the early edition of the New York Daily News, its front page screaming with a 144-point type headline, “FORD TO CITY: DROP DEAD.” From City Hall, Mayor Beame ripped Ford’s speech as a “default of presidential leadership,”76 while Governor Carey insinuated that Ford’s “kick in the groin” reflected the political weakness of an unelected president.77 A poll after the no-bailout speech found that a majority of Americans disagreed with the president’s stand—and indeed that national support for a bailout had actually increased since he had spoken. Despite Americans’ growing openness to antigovernment ideas, Greenspan’s unvarnished message was too much for them.78
Two weeks after Ford’s address, the New York Financial Writers’ Association staged the Financial Follies, its annual send-up of current events set to old tunes with reworked lyrics.79 An Arthur Burns impersonator appeared in one skit as the Loan Arranger, singing a pledge to prop up New York’s banks while representations of the city’s major financial houses polished his shoes gratefully. Then an actor dressed as Greenspan trotted out on stage and delivered an incomprehensible monologue on the economic outlook, and another figure representing a CEA member belted out a reworked version of an old Broadway number, “Buckle Down, Winsocki”:
Keep it pure, our leader, keep it pure;
Help the rich, our leader, not the lousy poor.80
Even though Ford had ruled out a bailout as clearly as he could, the game was not yet over. Not only was public opinion running against Greenspan’s tough line, but toughness itself was forcing new thinking—which in turn rendered toughness less defensible. In early November, New York’s leaders prepared legislation to impose sacrifices on taxpayers and bondholders; by publicly tightening its belt, New York aimed to strengthen its appeal to would-be rescuers. Sure enough, the city’s sympathizers in Congress stepped up the pressure for a bailout.
In mid-November, Ford attended an economic summit in France. Choosing his moment skillfully, Arthur Burns pointedly told Helmut Schmidt and French president Valéry Giscard d’Estaing that a New York default was probable. The reaction was just as Burns foresaw. “The foreign leaders looked at Ford and said you have to be joking—it would be seen as the bankruptcy of America,” a witness recalled later.81 The president’s resolve was cracking.
On November 26, Ford finally reversed course during a televised press conference at the White House. He called upon Congress to grant a $2.3 billion temporary line of credit to New York, explaining that “Americans have always believed in helping those who help themselves.”82 New York had indeed made strides toward addressing its problems. It had embraced spending cuts, imposed a $200 million tax hike, reduced interest payments to bondholders, cut retirement benefits for municipal workers, and arranged to borrow $2.5 billion from the city’s pension fund. Even so, Ford’s call for a bailout constituted a climbdown. Previously, Greenspan had argued that New York could fix its problems by itself. Now Ford was insisting that Washington should help, even though there was no way to be sure that New York would implement all the reforms it promised. Sure enough, New York needed a second package of federal loan guarantees in 1978, and the city continued to draw on federal support for more than a decade.
Greenspan had seen New York as an opportunity to break the expectation of federal bailouts created by Penn Central and Lockheed. Ford had tried to follow his advice, but in the end it proved politically untenable. Perhaps this should not have come as a surprise. Just as bailouts created a self-reinforcing momentum, with each rescue strengthening the case for the next one, so the refusal of a bailout generated a sort of self-canceling momentum, with Ford’s denial of assistance causing New York to make itself more deserving of assistance. Partly because of these dynamics, Americans have almost never been able to resist bailouts—not in the mixed-economy 1970s, not in the Reaganite 1980s, and not in later decades, either. Even when the intellectual tide turned in favor of conservatives on questions of tax and regulation, Americans continued to look to the government for rescues whenever crises struck. A dozen years after New York’s rescue, Greenspan himself would join the bandwagon.83
• • •
Around the time that Ford caved on New York, Greenspan’s relationship with Kaye Pullen reached an inflection point. The couple had been happy together for the best part of a year. Because they were both working long hours—in Greenspan’s case, six days a week—it was nice to unwind with someone who shared and understood the intensity of the White House experience. Friday night was date night, and they would go out to dinner: Alan would listen to all kinds of stories about Kaye’s family, but he never mentioned his own; he was at once generously supportive and eerily private. No doubt the pain inflicted by an absent father was not something he cared to revisit. No doubt his mother was too close to be the subject of date-night gossip.
On October 1, 1975, when Kaye turned thirty-one, Alan took her to the Jockey Club at the Fairfax. He ordered the smallest bottle of champagne on the menu, knowing that he would drink only one glass of it. But soon after that birthday dinner, Alan asked Kaye gently whether she wanted more out of this relationship than he could give. He was married to his job, he said, and until he got to the top of the mountain, he would never have much time for anything outside it. It was a slightly unpersuasive protest: plenty of men of Greenspan’s generation married without shouldering much responsibility for home or children. But Kaye accepted Alan’s reasoning sadly. He had always been considerate and honest with her, and she never resented the way she was treated; “I was nuts about him,” she confessed simply. After that conversation, the two stopped dating.84
Fresh from that well-managed soft landing, Greenspan appeared at a tea dance at the Admiral’s House off Embassy Row, Vice President Rockefeller’s official residence. Rockefeller had a habit of inviting movie stars, media magnates, and other American royalty to his parties; and on that day at the end of November, Greenspan spied Barbara Walters, the television news celebrity who had interviewed Margaret Thatcher. Walters was a sleek brunette in her midforties; she combined a steely journalistic core with a sweet feminine manner, leading the Russian poet Yevgeny Yevtushenko to dub her “a hyena in syrup.” To many of her viewers, she was the very definition of alluring. Asked whether she felt that television exploited her as a sex object, Walters replied: “I should hope so.”85
Greenspan boldly approached Walters and introduced himself, announcing that he was the chairman of the Council of Economic Advisers. The title “sounded important if rather dull to me,” Walters recalled later.86 But Walters responded warmly anyway, finding Greenspan pleasant, unassuming, and a “very nice dancer.” Greenspan pressed his advantage, telling Walters that he actually lived in New York on the weekends and that he would like to call her. Walters offered her phone number, and Greenspan followed up the very next weekend. “I welcomed this call, the first of many, from the tall, quiet stranger,” Walters recorded in her memoir.87
Alan and Barbara embarked on a romance, though it was not without its complications. Barbara was already involved with a different financial Alan: Alan “Ace” Greenberg, the husky, bald trader who was not yet quite the chief executive of Bear Stearns, and not yet quite divorced from his first wife. Having two Alans pursuing her became a source of confusion for Barbara’s assistants, especially because Greenspan and Greenberg had the habit of leaving only their first names when they telephoned. “Even if they asked either gentleman to please leave his last name, it was not much help,” Walters wrote later. “Greenberg. Greenspan. They sounded so much alike that both [assistants] were in despair.” Barbara’s solution was to ask her assistants about the caller’s tone of voice. If the man on the other end of the line “almost whispered,” Walters knew it must be Alan number two, the one with hair who worked in Washington.
Confusions aside, dating Barbara Walters had clear compensations. It certainly caught people’s attention, and for a man with a lingering lack of social confidence, that mattered. When Ford read the news that Greenspan was dating Walters, he clipped the article and sent it to his chief of staff with a message: “Dick Cheney, note p.2. I don’t believe it.”88 When Barbara visited Alan at the office, she made a similar impact. “There’d be rumors, Barbara Walters is going to come this afternoon,” a very distinguished CEA colleague recalled. “There was a flutter of anticipation and let’s just make sure that our doors are open and that we get a chance to see her in the corridors.”89 One time Greenspan attended a Brookings conference on the economy, and he seemed his usual serious self—“some would say dull,” a fellow participant remembers. But when the technical debates were over and his fellow economists headed for the bar, Greenspan was swept off in a limousine with his famous girlfriend. “Gosh, how can a guy like that lead a life like this?” his colleagues wondered.90 Greenspan would not have been upset to know that they were thinking that.
Alan persuaded Barbara to read Atlas Shrugged, just as he had Kaye Pullen before her. The book failed to impress Barbara, though she briefly regretted that her parents had not named her Dagny, like the novel’s heroine.91 Barbara was not impressed by Alan’s social skills, either. He struck her as “frugal”; he “wore the same navy blue raincoat until it practically fell apart,” and “rarely remembered to pick up a check or buy a Christmas or birthday gift.”92 At dinner parties, Greenspan would not mingle before sitting down to eat, and if he was seated next to a woman he didn’t know, he could be awkwardly difficult to draw out. “He was not the sort of man you would notice when he walked into the room,” Walters added, piling one complaint onto the other, “and often I would have to introduce him to friends more than once because they wouldn’t remember him.”93 But Barbara’s attitude to Alan’s vulnerabilities was to do her best to protect him—after all, she had social poise to spare; she would make up for his lack of it. Once, at a dinner party given by Diane von Furstenberg, creator of the iconic wrap dress, California governor Jerry Brown ripped into overrated presidential advisers, belatedly noticing Greenspan’s presence and allowing that maybe, just maybe, he might profit from Greenspan’s counsel. Barbara leaned forward, raised her eyebrows, and said, “Maybe you would!”94 With this charismatic woman by his side, Alan could feel serenely confident in any social setting.
In his own quiet way, Alan repaid Barbara’s assistance. He made her feel calm and secure; he was neither judgmental nor domineering.95 In the spring of 1976, Barbara was invited to jump from NBC’s early morning Today show to ABC’s flagship evening news program—she was offered an annual salary of $1 million to become the first female evening news anchor, making her more than three times as valuable as ABC’s incumbent evening host, Harry Reasoner. Barbara agonized about whether to take up the offer, and Alan served as her sounding board night after night, at one point analyzing ABC’s accounts to verify that it could deliver on its extravagant pay promise. Alan gave the thumbs-up on the network’s financial soundness, and Barbara eventually resolved to take the job, a decision she never regretted.96
Alan turned fifty in March 1976, and Barbara arranged a dinner party for him. Frank Zarb, Ford’s energy czar, recalls taking a call from the news queen—she knew he was swamped with government business but hoped that he could find the time to come; Zarb assured her sincerely that he would not miss the dinner for anything.97 Henry and Nancy Kissinger were there, and Oscar and Annette de la Renta were there; and there were Joe and Estée Lauder and Punch and Carol Sulzberger.98 Some of Alan’s friends thought a great moment had arrived—perhaps, after so many years of bachelor life, Alan might finally remarry. Kathryn Eickhoff reckoned that this relationship with Barbara was different from the rest; this time Alan was matched with someone three years his junior, not more—and someone who was at least his equal in professional status.99 Alan and Barbara were close enough that Barbara got to know Alan’s mother, Rose; she admired her strong bond with her son, and invited Rose to her apartment to play the piano. In July 1976, Alan took Barbara to a state dinner at the White House for Queen Elizabeth II. It was the quintessentially glamorous occasion for a glamorous celebrity couple.
Yet sometime between that dinner and the Republican convention the next month, the relationship shifted down a gear or two. There was no acrimonious blowup; Alan did not do acrimony. But Barbara could not bond with Alan in an area that mattered intensely—she had no deep relationship with music—and contrary to the speculation of his friends, Alan was not ready for marriage.100 The couple agreed to a new kind of understanding. It was something more than a friendship, and something less than a committed romance. It suited Alan perfectly.101
After that second soft landing, Alan continued to see Barbara; but he also picked up again quietly with Kaye Pullen. On the last night of Ford’s presidency, January 19, 1977, Alan took Barbara to an inaugural party that flowed with Iranian caviar; a line of celebrity-spotting students outside the reception called out to Barbara as she arrived there.102 But when that party was finished, Alan switched personas and girlfriends. He met Kaye for a late dinner at a restaurant in Georgetown, where they ate steak and french fries together.103
• • •
Greenspan’s last year in the Ford administration underlined how hard it was to resist the forces of statism. In December 1975 he fought a rearguard action against a congressional plan to control energy prices, which, as he wrote in a memo, “would extend government direction of the economy and discourage those who would rely on the free market.”104 Ford shrugged off Greenspan’s advice and signed the energy bill anyway. That same month, Greenspan recommended a veto of the Home Mortgage Disclosure Act, a bill that aimed to fight discrimination in lending by requiring banks to disclose details of their customers. The lending disclosures implied that “an efficient capital market is undesirable and that allocation of credit by political group pressures is superior,” Greenspan complained; but Ford ignored him again and signed the legislation.105 The following April, Greenspan endorsed changes to the bankruptcy code that would make it easier for cities to secure protection from creditors—the idea was that this option would make New York–style bailouts less necessary.106 This time the president sided with him, but the victory was hollow. Neither investors nor political leaders trusted the reform’s untested provisions, so cities continued to get bailouts by arguing that the alternative would be chaos.107 The government’s role was expanding.
The spring of 1976 also marked a strange comeback for Hubert Humphrey, the senator and former vice president who had cosponsored the central-planning bill a year earlier. Humphrey teamed up with Representative Augustus Hawkins, a California Democrat, to promote a law that would mandate full employment, ambitiously defined as an adult unemployment rate of just 3 percent; the federal government was to act as “employer of last resort,” hiring anyone who could not find a job at “prevailing wages.”108 Early drafts of the legislation quixotically allowed unemployed workers to sue the federal government for failure to provide jobs; and it called for a permanent antirecession program that would ramp up public works whenever unemployment crept above 4.5 percent.109 In March, Greenspan appeared before the Joint Economic Committee of Congress to point out the pitfalls in the Humphrey-Hawkins bill: experts disagreed on what constituted “full employment,” so it was dangerous to enshrine one number in the law; it would be folly to commit to an employment goal that would detract from the fight against inflation.110 The following month Greenspan weighed in again, insisting that the bill’s emphasis on government planning implied a dangerously exaggerated faith in economists’ ability to forecast the economy.111 But however cogent Greenspan’s arguments, Congress was evidently a long way from his worldview. The Humphrey-Hawkins legislation passed in a diluted form two years later, becoming the basis on which Fed chairmen would be summoned to testify before Congress at six-month intervals.
Greenspan’s warnings about the limits to economic forecasting were timelier than he realized. His last months in office were marked by an error that first haunted him—and then saved his career prospects. Since the beginning of 1976, there had been pressure to boost Ford’s election chances by ramping up government spending—the stimulus would come on top of the previous year’s tax rebate. Greenspan might have backed this spending boost—after all, he had a strong interest in the election outcome because it was widely assumed that he would become Treasury secretary in a second Ford term. But the economy was growing at an annualized rate of 9.3 percent in the first quarter of 1976, and Greenspan resisted calls for further pump priming.112 On April 16 he counseled Ford that a ramp-up in government spending would not be necessary to keep the economy humming.113
As it turned out, Greenspan was mistaken. The rebound of early 1976 was caused by a sugar high from Ford’s 1975 tax rebates. Consequently, it did not last; in the second quarter of the year, growth collapsed to an annualized rate of 3.1 percent. Greenspan confidently insisted that the third quarter would bring better news, as government departments rushed to spend remaining cash before the close of the fiscal year caused them to forfeit it.114 But government spending remained weak into the fall, and the economy slowed further to an annualized growth rate of 2.1 percent. Greenspan’s misguided optimism arguably cost Ford the election.115 Henry Kissinger taunted Greenspan for his bad call years after they left office.116
Ford’s narrow loss frustrated Greenspan’s long-standing ambition to become Treasury secretary. But it was a blessing in disguise. By the time of Ford’s electoral defeat, the inflationary pressures in the American economy were building dangerously—inflation as measured by the consumer price index would top 14 percent in 1980. “By 1977, 1980 was already baked into the cake,” Greenspan reflected as he looked back on those years. Whoever presided over economic policy in the late 1970s was therefore doomed to suffer huge reputational damage. If Ford had been elected, Greenspan mused, “I may well have ended up as Secretary of the Treasury but I would never have become Fed chairman.”117