On the evening of September 30, 1979, the world’s financial statesmen gathered in Belgrade, Yugoslavia. The annual meetings of the IMF and World Bank were to open the following day with a speech from Josip Tito, the Yugoslav strongman, who would harangue his audience about inequality and then rapidly absent himself, lest shoulder rubbing with financiers diminish his revolutionary aura. But tonight the assembled dignitaries were to hear from one of their own. Arthur Burns, the former chairman of the Federal Reserve, was to deliver an address on “The Anguish of Central Banking.” Given the surge of inflation across the Western world, it seemed an appropriate topic.
“One of the time-honored functions of a central bank is to protect the integrity of its nation’s currency,” Burns began. “And yet, despite their antipathy to inflation and the powerful weapons they could wield against it, central bankers have failed so utterly in this mission.” The roots of this paradox lay in “philosophic and political trends” that had begun during the Great Depression, Burns continued; he looked as though he were puffing on his pipe, even when he wasn’t. Rehearsing the thumbnail history repeated so often by his student, Alan Greenspan, Burns noted that the 1930s had turned a nation of hardworking individualists into a people who looked to the government to battle unemployment; the postwar era had brought an extension of this attitude, so that by the 1960s Lyndon Johnson’s Great Society programs had committed the expanding state to placating multiple political constituencies. It was hardly surprising, Burns pleaded, that the central bank had been caught up in this profound change. As he put it,
Viewed in the abstract, the Federal Reserve System had the power to abort the inflation at its incipient stage fifteen years ago or at any later point, and it has the power to end it today. At any time within that period, it could have restricted the money supply and created sufficient strains in financial and industrial markets to terminate inflation with little delay. It did not do so because the Federal Reserve was itself caught up in the philosophic and political currents that were transforming American life and culture.
Burns’s pronouncement was doubly remarkable. For one thing, he was not arguing that the Fed lacked the tools to vanquish inflation: he was rejecting the widespread view that monetary policy was impotent. As recently as 1978, he had suggested that budget policy, not monetary policy, was the key driver of prices; and even when he was not blaming the budget deficit, he resisted the idea that the Fed was responsible, instead pointing the finger at cost-push factors: commodity-price shocks, over-mighty labor unions, rent-seeking monopolists, regulations that created bottlenecks and scarcities.1 On occasions when he acknowledged the power of interest rates, he nonetheless took refuge behind a version of Greenspan’s conundrum. In congressional testimony in July 1975, he noted that it was long-term interest rates that really influenced the economy, and that “all of us recognize that the influence the Federal Reserve has on long-term rates is negligible.”2 In declaring unambiguously that the Fed did have the power to control inflation, Burns was announcing the arrival of a new consensus.
But Burns’s speech in Belgrade was also striking for another reason. In blaming the political culture for the Fed’s lack of determination, he was invoking a truth that modern commentators forget: despite the aura of independence that has grown up around central banks, they do not exist in a vacuum. To the contrary, their mandates come from lawmakers; their legitimacy derives from the climate of expert opinion; and they ultimately depend on the sympathy of voters. If Burns had tried to extinguish inflation under Nixon, he would have suffered even more punishment from the president’s henchmen; and even under Ford and Carter, there were limits to his freedom. At a minimum, a Fed leader wanting to defy his political overlords would need the legitimizing support of the economics profession; but in the 1970s many economists argued that the cost of fighting inflation would exceed the benefit.3 Because there was neither a political nor an intellectual consensus in favor of higher interest rates, Burns had felt unable to act. Thanks to the constraints imposed by the zeitgeist, the Fed was omnipotent in principle but still impotent in practice.4
Sometime after Burns had begun speaking, a huge, rumpled, egg-headed figure entered the auditorium. Not seeing a convenient chair free, he slouched down against the back wall like an overgrown schoolboy and crossed his legs in front of him. The strange impression he created—powerfully gigantic in stature, meekly childlike in posture—mirrored Burns’s message; for the six-foot, seven-inch latecomer was none other than Paul Volcker, the newly appointed Federal Reserve chairman. In principle, Volcker was the world’s most powerful economic policy maker, with the weaponry to eliminate inflation at will. But he was doing his best to impersonate a 240-pound kindergartner.
Burns continued. Not only did central bankers face political constraints; their task was intrinsically treacherous because the economy and the financial system were forever changing. Central bankers understood that an expanding money supply could herald inflationary pressure; but given the protean nature of finance, they were unsure whether time deposits, money-market funds, and such should be counted as money. They recognized that changes in monetary policy took effect gradually; but the duration of the lags was unpredictable. They knew that higher interest rates would restrain prices, but they had no clear sense of how large the effect might be. Because of these manifold uncertainties, monetary experts could not be expected to speak with one voice. Mustering the intellectual consensus necessary to defy political pressures was therefore all but impossible.5
As Burns spoke, Paul Volcker listened at the other end of the huge hall.6 Anyone with a window into his thoughts would have been startled. Whatever the impression created by his schoolboyish posture, this giant was not mild. He was rebellious, possibly dangerous. Burns’s long lament came down to the claim that the political and intellectual assumptions of the age constrained the Fed’s actions. It was precisely the argument that Volcker rejected.7
Burns was coming to the end of his lecture. “Fairly drastic therapy will be needed to turn inflationary psychology around,” he announced, stressing that the therapy could not be administered only or even mainly by constrained central bankers. In addition to tougher monetary policy, governments would have to play their part by disciplining their budgets, and they would have to unleash supply by deregulating industry and lowering business taxes. “I wish I could close this long address by expressing confidence that a . . . forceful program for dealing with inflation will be undertaken in the near future,” the professor concluded. “That I cannot do today. I am not even sure that many of the central bankers of the world, having by now become accustomed to gradualism, would be willing to risk the painful economic adjustments that I fear are ultimately unavoidable.”
The day after the speech, Volcker suddenly left Belgrade. He did not care that the IMF/World Bank meetings had barely begun. He was heading back to Washington with a mission: to refute Arthur Burns’s message.
• • •
Paul Volcker is often held up as the model Federal Reserve chairman—the standard against which others must be judged, including Alan Greenspan. Everything about him seemed to radiate frugality and discipline; with his wearily stooped shoulders, lumpy features, and bald head, he looked like an Old Testament prophet. He was raised by a fiercely ethical town manager in a small New Jersey suburb: “Do not suffer your good nature . . . to say yes when you ought to say no,” ran a quotation from George Washington on the wall of his father’s office.8 As a student at Princeton, he imbibed the writings of the austere Austrian Friedrich Hayek, who taught him that inflation could reduce unemployment only by disguising real wage cuts. “Hayek’s words forever linked inflation and deception deep inside my head,” Volcker told his biographer William L. Silber. “And that connection, which undermines trust in government, is the greatest evil of inflation.”9
Volcker’s legendary stature is built on what he did after listening to Burns in Belgrade. Arriving back in Washington, he convened a secret weekend meeting of the Federal Open Market Committee, which usually gathers every six weeks to decide the Fed’s monetary policy. Emerging from that confabulation on October 6, 1979, Volcker drew himself up to his full height and unleashed his Saturday Night Special, a sharp break in the way the Fed would conduct business. Rather than targeting a particular short-term interest rate, Volcker decreed that the Fed would henceforth target the supply of money in the banking system—he would switch from manipulating the price of credit to policing the quantity of it. Under the old system, the Fed might raise the official short-term borrowing rate by what felt like a hefty amount, but the economy might continue to surge if home-equity extraction or some other market change made long-term credit cheap and plentiful. Under the new system, by contrast, the Fed would impose a straitjacket on the quantity of money and credit. If that meant that interest rates went through the roof, so be it.
Volcker could have halted inflation simply by raising interest rates aggressively. If he had pulled that lever hard enough, the appetite for loans would have collapsed and the money supply would have been brought under control without being directly targeted. But Volcker understood that a fierce-sounding new policy would get the public’s attention: it would signal that the Fed really meant business. The more the giant could shock people, the likelier they were to stop expecting inflation. If workers pulled back from demanding pay raises and companies thought twice before hiking prices, inflation might subside without requiring drastic treatment.
The Saturday-night shock was the most impressive moment in the Fed’s history since the Fed-Treasury Accord of February 1951, when Chairman Thomas McCabe had defied President Truman by refusing to hold down the government’s borrowing costs. At the time of Volcker’s announcement, in October 1979, consumer price inflation was running at 12.1 percent; three years later, when Volcker ended his experiment with monetary targets, the rate had plummeted to 5.9 percent. To force inflation down, round upon round of tightening proved necessary; and in the summer of 1981 short-term interest rates breached the extraordinary height of 20 percent, prompting Representative Henry González, a Democrat from Texas, to denounce Volcker for “legalized usury beyond any kind of conscionable limit.”10 The economy endured a double-dip recession, and unemployment hit double digits, too. But the payoff was clear. Inflation not only halved during Volcker’s three-year monetarist experiment, it kept falling into 1983. By dint of iron-willed persistence, Volcker turned the inflationary 1970s into the disinflationary 1980s.11
Nobody, least of all Alan Greenspan, likes to question this achievement. At the time of Volcker’s elevation to the top job at the Fed, Milton Friedman himself had predicted he would fail—like Burns, he believed that the political constraints on central banks were insuperable.12 But Volcker trampled those constraints under his large feet, and even the most hostile reactions could not stop him. Bankrupt home builders protested by mailing two-by-fours to his office; struggling carmakers sent him the keys of unsold vehicles; furious farmers drove their tractors to Washington and encircled the Fed’s headquarters.13 But unlike Ayn Rand’s Atlas, Volcker refused to shrug off his responsibility, patiently carrying the world on his shoulders even when lawmakers threatened to impeach him. Month after month, the giant sat stoically through furious congressional hearings in his cheap suits, blowing clouds of cigar smoke as if to hide himself from his critics, occasionally shaking his domed head as if to say that he pitied the simpletons who abused him. “I’ve always considered him the most important Chairman ever,” Greenspan said flatly, years later.14
And yet despite his courage and achievement, the legend of Paul Volcker requires qualification, for if he is allowed to stand too tall, others will be left to shrink unfairly. The first thing to be noted is that Volcker’s victory against inflation owed much to timing. He assumed the Fed chairmanship in August 1979, at a moment when Americans craved bold leadership. Confidence in the dollar was evaporating fast: the moment favored a big man with a big sense of his own destiny. As one pollster put it, “For the public today, inflation has the kind of dominance that no other issue has had since World War II. . . . It would be necessary to go back to the 1930s and the Great Depression to find a peacetime issue that has had the country so concerned and so distraught.”15 If ordinary people wanted Volcker to act forcefully, Wall Street was even more desperate for a firm hand. Around this time, Merrill Lynch dispatched a team to hyperinflationary Brazil to learn how to navigate a world in which prices might do anything.16
Even though circumstances cried out for decisive monetary tightening, Volcker proceeded cautiously during his first weeks, contrary to the legend that has grown up around him. The first two meetings of the Federal Open Market Committee held under his guidance, in August and September 1979, raised interest rates only modestly. As a result, the inflationary fear in the markets continued to build, and investors fled the dollar in favor of gold. On Monday, October 1, perhaps reacting to Burns’s speech the previous evening, gold rose by fully 4 percent. The next day it spiked a further 6 percent—investors’ determination to dump dollars implied an expectation of hyperinflation. Now, with both the public and the markets clamoring for a dramatic move, the political constraints that Burns emphasized magically loosened: with the nation behind it, the Fed could clamp down on inflation and ride out any recriminations from the White House. Yet even with this strong wind behind him, Volcker coaxed the timid members of his Open Market Committee as gently as he could. He pleaded that the switch to monetary targets might bring down inflation expectations painlessly, sparing the economy a prolonged recession. He reassured his colleagues that they could always turn back. “If we adopt a new approach,” he said, “we are not locked into it indefinitely.”17
Volcker did not so much lead his committee into battle as deliberately wait for the panic in the markets to do the leading for him. In this sense, he did not quite refute Burns’s Belgrade speech. In ordinary times, the Fed would indeed be hard-pressed to defy political currents, just as Burns argued; it was only when the times were out of the ordinary that the Fed acquired the latitude that Volcker was now exploiting. In 1951, the Fed had stood firm against President Truman because inflation had hit the terrifying rate of 20 percent. In 1979, the combination of 12 percent inflation and a crashing dollar gave Volcker the chance to show his greatness. Fed chairmen who preside over calmer periods, like American presidents who govern in peacetime, face an altogether different set of challenges and opportunities.
• • •
Greenspan anticipated the Volcker shock, or at least something like it. A short while before the Saturday Night Special, he told Fortune that inflation was destined to come down, basing his forecast on opinion polls. Prices would stabilize “not because politicians become wise and courageous, or because some economist invents an easy and painless way to slow inflation,” he explained, but “because Americans generally, especially the middle class, are getting so fed up with inflation that the federal government will be compelled to adopt effective inflation-slowing policies.”18 Commenting on the Saturday Night Special later in October, Greenspan had nothing but respect for Volcker, whom he praised as “a tough guy.” But he regretted that the fight against inflation had not been pressed further. If the goal was to discipline wild money creation, the government needed to clamp down on federal subsidies for mortgages.19
Among the politicians channeling the public’s inflation rage was Greenspan’s new acquaintance, Ronald Reagan. In November 1979, a month after the Volcker shock, Reagan formally launched his campaign for the presidency. He spoke in swelling tones of America as “a shining city on a hill,” paraphrasing John Winthrop, the Puritan father of the Massachusetts Bay Colony. Time characterized Reagan as a “romantic conservative,” while others dismissed him as naïve.20 “Reagan steps out of the pages of Reader’s Digest,” sniffed the New Republic. “He is as direct as Daffy Duck.”21 But whatever one’s view of the candidate, his position on inflation was clear. He excoriated rising prices not just for disrupting the economy but also for threatening “family life itself.” Inflation was the demon that compelled women to forsake their homes and join the workforce.
Back in September, at the meeting in Marina del Rey, Reagan had invited Greenspan to endorse his favorite cure for inflation: the gold standard. Gold appealed both to the romantic within him and to Daffy Duck; it evoked the heroic individualism of the nineteenth century—rugged pioneers paying for homesteads with leather pouches of metallic coin—and it was seductively simple. Two months after declaring, he returned to the same idea again, this time with Milton Friedman.
On Monday, January 21, 1980, coincidentally the day on which the gold price hit its all-time high, Reagan huddled in earnest discussion with Friedman at the candidate’s nondescript Los Angeles headquarters, at 9841 Airport Boulevard; rather than a marina and a sea of fancy yachts, the view from Reagan’s office featured aircraft hangars. Inflation was the first topic on the agenda. Consumer prices had actually accelerated since the Volcker shock in October.
“What if we announce a plan to mint and sell gold?” Reagan suggested. If Americans had gold coins in their pockets, they would feel confident that the government would not expropriate their wealth by engineering inflation.
“Gold is an unstable basis for a monetary system,” Friedman answered. The gold price, which had leaped from $559 per ounce at the start of January to around $850 by the time of this meeting, was proof that gold was a fickle store of value. “The gold bandwagon is a false path. . . . The key to fighting inflation is to hold down monetary growth and control the budget.”22
Reagan had struck out a second time. He had tried his gold infatuation on the top Republican economic consultant, and now on the top Republican economics professor. Not finding satisfaction, he resolved to bide his time. Perhaps some future adviser would prove more sympathetic.
• • •
If Reagan’s gold nostalgia reflected the broad public horror at double-digit inflation, his stance on the budget was equally reflective of the moment. The Kemp-Roth tax-cutting proposals, which Greenspan had expediently endorsed in 1978, still enthused congressional Republicans, and Reagan was happy to embrace them. In January 1980, around the same time as the meeting with Friedman, the candidate spent a few days with Representative Jack Kemp, the more fiery partner in the Kemp-Roth alliance, and with two of Kemp’s tax-cutting allies, Arthur Laffer and Jude Wanniski. Both Kemp and his sidekicks were given to messianic eccentricity. Laffer in particular believed that there was no need whatever to offset tax cuts with cuts in spending, and he had nothing but contempt for anyone who disagreed with him. “In the latest gyrations of highly-situated government officials in this country, we hear the litany of personal sacrifice ad nauseam,” Laffer wrote in his newsletter at the time of his encounter with Reagan. “Federal Reserve Chairman Paul A. Volcker states that the American standard of living will just have to be lower, if we’re ever to come to grips with inflation. Treasury Secretary G. William Miller assures us that slow growth is good”—Laffer underlined the key names like an obsessive recluse plotting the destruction of his enemies. Then he spelled out his message to these puritanical killjoys. “More often than not, acts which are pleasurable are also good for you,” he preached. “Cutting tax rates is the primary example”—tax cuts would pay for themselves.23 Reagan, who liked sunny messages, was quickly won over. Emerging from those January meetings, Kemp announced triumphantly that the Republican front-runner was “ninety percent with us.”24
Greenspan had no sympathy for the Kemp-Laffer tax dogma, just as he could not honestly endorse Reagan’s nostalgia for the gold standard. He had planted one foot in the Reagan camp with the help of Martin Anderson, but by January 1980, Reagan’s emerging stance on economics was a bad caricature of Greenspan’s. Greenspan had long favored tough monetary policy, but Reagan’s belief in gold was simpleminded, as Greenspan had tried to tell him. Greenspan had long favored tax cuts, but Reagan embraced these naïvely—without any of the spending cuts that would make them affordable. From Greenspan’s perspective, Reagan was congenial in his small-government instincts, but alarming when it came to policy detail; and on social issues he was anathema. In the words of David Stockman, a brilliant young congressman and Greenspan protégé, Reagan stood for “the anti–gun control nuts, the Bible-thumping creationists, the anti-Communist witch-hunters, and the small-minded Hollywood millionaires to whom ‘supply side’ meant one more Mercedes.”25
Greenspan showed his mixed feelings about Reagan by keeping a safe distance. The Reagan camp was “reaching around for solutions and considering some innovative ideas,” Greenspan told the Wall Street Journal in November; “I didn’t say they were all necessarily good ideas.”26 Meanwhile, he carried on his social life, attending the premiere of Superman at the Kennedy Center with Barbara Walters and escorting her to the White House for a state dinner in honor of the Middle East peace accord. Barbara disloyally enjoyed Henry Kissinger’s response to Superman—“I want to thank Warner Brothers,” Kissinger had said in his Germanic baritone, “for making a movie about my life”—but Greenspan did not let this bother him; the fact that Israel and Egypt had buried the hatchet under a different secretary of state served to contain Kissinger’s ego, at least marginally.27 In between the glittering parties, Greenspan maintained an impressive intellectual flow. In late 1979, he collaborated with Fortune on a long-run economic forecast, correctly predicting that falling inflation, lower corporate taxes, and deregulation would boost the incentives for business investment, turning the 1980s into a boom era.28 In March 1980, he published an essay in Challenge that was equally prescient, but in an eerie way. Reflecting on the fragilities in finance, Greenspan showed how deeply he understood the demons that would haunt him as Fed chairman.29
Greenspan’s Challenge essay was prompted by the fiftieth anniversary of the 1929 crash, which had heralded the Depression of the 1930s. If the nation was vulnerable to a repeat, Greenspan began, it would come not from the equity market but from housing. After all, home prices had nearly tripled during the 1970s, and because that bubble had been built on debt, a reversal would impose a long period of weak growth on the economy. Moreover, the risks from the housing bubble were magnified by the “extraordinarily complex development of international finance.” Bankers’ creativity outstripped public understanding of the risks entailed: “There are very likely to be structural inadequacies in these new financial innovations which the standard bailout procedures of the central banks do not fully address,” Greenspan wrote soberly. Banks and quasi banks were increasingly interconnected by daisy chains of lending, so that the failure of one could bring down others, and capital-asset ratios had been allowed to shrink alarmingly. Any bank that got into trouble “would have to be bailed out by its central bank or international agencies, or be absorbed by institutions not yet in difficulty,” Greenspan predicted.
Despite his own record of opposing bailouts, Greenspan reassured his readers that a repeat of 1929 was highly unlikely—because bailouts were a certainty. At the first sign of a banking failure, central banks would ride to the rescue, even if they damaged long-run growth in the process. “The overriding mandate of the world’s monetary authorities to prevent a credit deflation almost assures policy overkill,” he wrote. “Deflation would be quickly aborted—to be followed shortly by . . . economic stagnation. . . . Thus, in today’s political and institutional environment, a replay of the Great Depression is the Great Malaise,” Greenspan concluded.
• • •
On March 10, 1980, Greenspan moved to distance himself from the economic naïfs in his own party. Appearing before the Senate banking committee, flanked by five other former CEA chiefs, he joined with his cowitnesses in rejecting the fantasy of self-financing tax cuts.
“There remains the desperate yearning that somehow we can resolve our very difficult inflationary problems without taking the harsh measures,” he lamented. But harsh medicine was inevitable, because the budget deficit was actually far larger than it appeared to be. If you counted in loan guarantees, the true measure of government spending exceeded what was captured in the conventional budget. Whatever the wishful thinkers around Reagan might say, it was time to rein in Leviathan.
Senator William Proxmire, the senior Democrat who had opposed Greenspan’s appointment to the CEA six years earlier, was delighted with this testimony.
“There are four times as much in dollars outside of the budget as within the budget,” he marveled. “My question is this: Do you see that as a real loophole?”
“I would most certainly say so, Mr. Chairman,” Greenspan responded.
“That is a very welcome warning,” Proxmire said, appreciatively. He noted that federal loan guarantees had recently been used to bail out the car company Chrysler; meanwhile, loan guarantees continued to mount up for New York City. Given all this government-backed money creation, it was no wonder that inflation was accelerating.
Proxmire turned next to Walter Heller, the architect of the Kennedy-Johnson tax cut. Noting that some Democrats had lately grown eager to balance the budget, Proxmire demanded whether Heller would endorse his party’s shift to deficit cutting.
“You are quite right . . . the world has changed,” Heller acknowledged. He added that he welcomed deficit reduction so long as Congress avoided rigid limits on spending.
“I’m not talking about inflexible limits,” Proxmire responded testily. “What concerns me very much is what Mr. Greenspan has brought out I think brilliantly here,” the senator continued, alluding to the growth of off-budget loan guarantees. Surely it was time to take an ax to the excesses of the 1970s.
Heller pleaded that several types of government spending had already been reined in considerably.
“Does that take into account the enormous increase in the off-budget credit?” Proxmire demanded.
“That does not.”
“Shouldn’t that be included?” Proxmire pressed him.
Heller dodged and weaved until the two men reached a stalemate. But a strange reversal had transpired. Proxmire was siding with the libertarian, Alan Greenspan, and assailing Walter Heller, the Democrat. The world really was changing, as Heller had said; and the effect on a conservative economist such as Greenspan could be disorienting. When he surveyed the policy landscape, Greenspan could see a Democratic Fed chairman, Paul Volcker, who embodied his own hard-money ideals; he could see a Democratic Senate banking chairman, William Proxmire, who embodied his budget conservatism. Meanwhile, portions of Greenspan’s own party were headed off to wishful la-la land. They were not so much do-nothing as know-nothing.
Yet if Greenspan aspired to hold high office, he could not afford to dwell on this reshuffling.
• • •
One way Greenspan’s problems with the Reaganite wing of his party could be resolved was with a successful Gerald Ford candidacy. Since the summer of 1979, polls had indicated that Ford was more likely than anybody else to beat Reagan in the Republican primaries, and the president’s former lieutenants were urging a fresh bid for the White House.30 The Washington Post noted that almost all the Ford old-timers were holding off on joining other campaigns, although some, like Greenspan, were no doubt playing footsy with Reagan on a “nonexclusive” basis. Ford, for his part, was in no hurry to commit. “We seem to be doing better not being a candidate,” he told the Post in September 1979, using the majestic plural.31 For the rest of the year and into 1980, Ford waffled back and forth. He insisted that he was not planning a campaign. He insisted that he knew better than to say “never” in politics.
By the time of Greenspan’s testimony to Proxmire, the moment of truth was approaching. The early primary states had already voted; if Ford wanted to capture enough delegates for the nomination, he would have to plunge in quickly. On March 5, 1980, with time dwindling, Ford allowed himself to be interviewed by Barbara Walters, and declared that his likelihood of running was around fifty-fifty. He then delivered a series of attacks on Carter’s record and picked up the endorsement of Henry Kissinger, not to mention much feverish newspaper attention. On March 12, two days after Greenspan’s Senate appearance, Ford met several former advisers in Washington to discuss his chances of winning. A journalist asked Greenspan what he would counsel Ford to do. “There are certain types of decisions nobody should give advice on,” Greenspan answered coyly. “You know—‘Should I marry Jane?’”32
A couple of days later, Greenspan flew out to Ford’s home in Rancho Mirage, California. A kitchen cabinet had formed around the ex-president: there was Thomas Reed, a former air force secretary who had launched a draft Ford committee; John Marsh, a former White House assistant; and three political consultants. Greenspan was the only senior policy figure in the group—a testament both to his proximity to Ford and to his chameleon-like ability to double as a political operative. For two hours on March 15, Ford’s advisers debated his prospects. But their conclusion was grim. At this late stage, Ford’s chances of overtaking Reagan seemed negligible.33
Emerging from that consultation, Ford marched off to face the reporters camped outside his ranch house. At last, the equivocation was gone: “I am not a candidate. I will not become a candidate,” he declared firmly. Afterward, he shed his suit and tie and stormed off to the golf course with three loyalists in tow, Alan Greenspan among them. That day, Ford played some of the worst golf of his life, spraying erratic shots alarmingly, clobbering palm trees, missing easy chips, and finally finishing after darkness had descended. His aides told friends to keep their distance. “Stay the hell away from him,” one told a caller who sought to console the ex-president, “and make sure anybody you care about does the same.”34
With Ford out of the race, Greenspan pedaled back to Reagan. His close relationship with the ex-president gave him an advantage, because Reagan advisers were intrigued by the prospect of Ford as a running mate. It was an outlandish idea: there had never been a case in history of a president later becoming vice president. But polls continued to show that Ford was popular, and having him on the ticket would boost Reagan’s chances against Carter. In June, Reagan planned a courtesy visit to Ford in Rancho Mirage; and as the day of the visit approached, Reagan’s campaign manager, Bill Casey, briefed him carefully on what Ford might want from him.35 Ford would recommend bringing Henry Kissinger into the campaign, Casey reported, suggesting that Reagan could accept that. But Ford also had ideas on economic policy, Casey continued, and the campaign manager offered a preview of the details based on a long talk with Alan Greenspan. “Greenspan told me that Ford will express concern and skepticism about your going all out on Kemp-Roth,” Casey warned Reagan. “He’s concerned about the budget-inflationary impact.”
Two years earlier, Greenspan had given a green light to the Kemp-Roth tax plan. But privately, Casey reported, Greenspan was arguing that voters would be skeptical of a free budget lunch—and Casey himself seemed ready to agree with him. “Greenspan has constructive ideas on how to handle this,” Casey told Reagan. “To make our tax position credible we must emphasize a corresponding commitment to reduce the size and scope of government.”
Casey then rounded off his memo with a note on the dress code for the upcoming meeting. “Ford intends to wear a dark blazer and open gold shirt,” he confided.
Reagan duly visited Ford, and the two discussed the running-mate idea without reaching any conclusions. But one month later, on July 7, Greenspan reaped the reward for his long conversation with Casey: he was named chairman of Reagan’s Budget Advisory Group.36 Ford’s onetime budget director and his deputy would join the advisory group, too. Greenspan and his fellow old-timers were making their bid to shape Candidate Reagan. A battle with the wishful fringe was looming.
• • •
A few days after Greenspan signed up with Reagan, old-timers and insurgents alike descended upon Detroit, host of the Republican nominating convention. The Reagan campaign installed itself on the sixty-ninth floor of the soaring Detroit Plaza Hotel; and on July 13, the day before the formal proceedings got under way, Ford gave another interview to Barbara Walters. Asked about his vice presidential ambitions, Ford gamely played them down. But he was tanned, fit, and on TV. He was evidently not tired of the limelight.
After the interview, Ford said to Walters, “If you see Alan Greenspan tell him I’d like to speak to him.” Walters duly passed the message on, but thought nothing of it until later.37
The next day, Monday, July 14, was Ford’s sixty-seventh birthday. Escorted by his wife, Betty, he went over to Reagan’s hotel suite, and Ronald and Nancy toasted him with champagne and presented him with an antique Crow Indian pipe.38 When the conversation turned to the vice presidency, Ford declared that he and Betty wanted a quiet retirement. But that evening Ford appeared before the convention crowd at Detroit’s Joe Louis Arena and delivered a rousing oration.39 “This country means too much to me to comfortably park on the bench,” he declared, before thrilling the assembled faithful with a thundering crescendo. “Count me in!” he roared. The question was, in what capacity?
Encouraged by Ford’s mixed signals, the Reagan team resolved to press him. Bill Casey, the campaign manager, and Dick Wirthlin, the pollster, visited Kissinger on Tuesday, informing him that Reagan would not defeat Carter without Ford on the ticket—in view of the electoral arithmetic, Ford had an obligation to his party to serve as running mate. Kissinger promised to relay this message to Ford, whom he would see that evening.40
When Kissinger told Ford about the Reagan team’s approach, Ford sought out Alan Greenspan. His favorite economist was not hard to find. Together with some large fraction of the Republican high command, he was attending a party on a yacht belonging to a party money raiser. The overture from Reagan sounded like the real deal, Ford said; it was not just some media rumor. The former president was visibly excited. “For the first time, I thought it was possible,” Greenspan told the Wall Street Journal later.41
Ford and Greenspan left the yacht for Ford’s suite on the seventieth floor of the Plaza, one floor above Reagan’s. They were joined there by Kissinger and several other advisers. Starting around midnight, the group hashed out the possibility of a Reagan-Ford alliance, each speaker building upon the last until the whole room believed in the “Dream Ticket.”42 The old battles over the Iranian oil deal now apparently forgotten, Ford instructed Kissinger and Greenspan to hash out the terms of the engagement.
• • •
On the third day of the convention, Wednesday, July 16, negotiations over the Dream Ticket opened in the morning. Kissinger and Greenspan proposed that Ford should be made into a sort of executive vice president. He would assume responsibility for foreign policy, the budget, and various other functions. In fact, he would not be a vice president so much as a copresident.
If this was a lot to expect from the Reagan camp, there was still a risk that it was not enough to get Ford to do it. Characteristically indecisive, Ford still had cold feet. Betty hated the idea of a return to Washington. The excitement of the previous night was fading.
Partway through the morning, Greenspan took a break from the negotiations to urge Ford not to back out. He understood that the former president and Betty were enjoying retirement. But echoing the pitch that Arthur Burns had made to him during the dying days of Nixon’s presidency, Greenspan told Ford he had a duty to his country.
“Look, for God’s sake, if I’m going to do this, would you be willing to come in and help me out on the economic side?” Ford demanded.
“If I’m sitting here and strongly suggesting that the vice presidency isn’t a bad idea, I have no choice but to say yes,” Greenspan responded.43
At five that afternoon, Ford returned to Reagan’s hotel suite, flanked by his Secret Service detail. He announced that he would like to bring Alan Greenspan and Henry Kissinger into the administration with him. Reagan listened pleasantly, raising no objections. After half an hour or so, Ford left, stopping on the landing to greet Reagan’s national security adviser, Richard Allen, who was on his way in to see the candidate.
When Allen entered Reagan’s suite, a handful of advisers sat hushed on a large U-shaped couch. It was as though they had fallen under the collective spell of an unseen hypnotist.
Allen asked if Reagan needed anything.44
“Oh, no,” the candidate replied, “but thanks.”
As Allen turned to leave, Reagan asked, “What do you think of the Ford deal?”
“What deal?” Allen responded.
“Ford wants Kissinger as secretary of state and Greenspan at Treasury.” It seemed that Greenspan was about to get the job that he coveted, in the most roundabout way possible.
“That is the craziest deal I have ever heard of,” Allen retorted. Quite apart from the fact that the glassy-eyed figures on the U-shaped couch might be shut out of some plum jobs, Reagan was supposed to be the standard-bearer of the party’s new guard. His campaign promises directly contradicted what Ford and the old-timers stood for.
Crazy or not, Allen realized nervously that the Dream Ticket might be unstoppable. In just a few hours, Reagan would announce his selection for vice president. Little had been done to prepare the ground for a running mate other than Ford.
An hour or so later, Barbara Walters was reporting live from the floor of the Joe Louis Arena. Standing in front of an American flag, blond hair falling in waves to her shoulders, she held the microphone straight up in front of her and cited “highly informed sources” who knew that “top advisers” had been “wrestling with the problem of how to make Jerry Ford say yes.” “One Ford intimate told me, ‘The decision the former president must now make is to weigh the national interest against his personal feelings,’” she confided. “The odds are still against Ford saying yes, but the answer is not yet a formal and definite no.”45
At 7:30 p.m., Ford himself appeared on CBS with Walter Cronkite. With the television cameras trained on him, his political appetite was whetted. He declared that he would seriously consider running for vice president if he received assurances of a “meaningful role,” adding that he and Betty had already joked about taking up residence in the vice presidential mansion.46 Determined to keep up with her rivals, Barbara Walters rushed over to the CBS booth to seize Ford on his way out; and when she had her turn to grill the ex-president on air, he explained that the Dream Ticket would entail “a far different role than any of the vice president–president relationships I have known in the past thirty years in Washington.”47
In his suite at the Plaza, Reagan had emerged from a catnap and parked himself in front of three muted television sets. When he saw Ford appear on one of the screens, he asked that the volume be turned up. Richard Allen, who was watching Reagan closely and taking notes through the evening, thought that the candidate looked appalled by Ford’s talk of power sharing.
Seeing an opening, Allen suggested that Reagan issue a statement ruling out a copresidency.
“I can’t,” Reagan said weakly. Then, after a pause, he asked, “Who else is there?”
“There’s Bush,” Allen suggested.
Reagan demurred. George Bush represented the establishment wing of the Republican Party, and he lacked Ford’s poll ratings. Besides, Bush had likened Reagan’s advocacy of self-financing tax cuts to “voodoo economic policy.”48
Reagan continued to sit before the televisions, snacking on his favorite jelly beans. One floor up from where he was sitting, negotiations over a Dream Ticket carried on. Just after eight p.m., according to Allen’s notes, the candidate asked whether Ford didn’t “realize there is no way in the world I can accept? What kind of presidential candidate would I be in the eyes of the world if I were to give in to such demands?”
About half an hour later, Reagan got word that Ford wanted to speak with him. He went into his bedroom to dial Ford, and emerged after a few minutes. The talks had moved, he told his aides. Kissinger had taken himself out of the running for secretary of state. As far as Allen could tell, Greenspan had not taken himself out of anything.49
At the convention center below, the news anchors buzzed with Dream Ticket speculation. Determined to trump the competition, Barbara Walters let viewers in on the story of Ford’s using her to pass a message to Greenspan. Having thus established her insider authority, she predicted that Ford’s ultimate decision would hinge on the advice he got from Greenspan and Kissinger.
As the television stars were talking, the convention delegates went through the ritual of reporting their votes for the prospective nominees, and at 11:13 p.m. the Montana delegation clinched Reagan’s victory, making his nomination official. There were cheers on the convention floor, and a few in the candidate’s hotel suite, too. But the Dream Ticket negotiations were still grinding on. If they were not concluded soon, it would be too late to nail down an alternative vice presidential candidate.
When the conclusion did come, it was as abrupt as the negotiations had been extensive. At 11:30 p.m. Ford appeared in Reagan’s hotel suite. “Look, this isn’t going to work,” he said.50 He had evidently gotten cold feet about the whole idea. He was gone after five minutes.
When Ford had left, the Reagan team was silent.
“Well, what do we do now?” Reagan demanded.
“We call Bush,” Allen ventured.
Reagan looked at his other advisers. Nobody was proposing anybody else. Nobody was objecting.
“Well, let’s get Bush on the phone,” Reagan ordered.51
Within a few minutes, Reagan offered Bush a place on the Republican ticket, which Bush accepted giddily; and just after midnight, Reagan announced his vice presidential choice to a surprised public. Greenspan had come close to landing the big job, but it had slipped through his fingers in the end. His adversaries within the Republican Party might be dismissed as economic dreamers. But the Dream Ticket itself had been a dream. There was no way that an ex-president would agree to serve on terms that a new president would find acceptable.52
• • •
Greenspan’s failure to emerge as Treasury secretary in waiting did not mean that he stopped wanting the position. He had negotiated persistently on Ford’s behalf, risking the resentment of the Reaganites. Now, to preserve his political prospects, he needed to soften the memory of his side’s demands—notably the demand that he himself should take a prime position in the cabinet.
The next day, Thursday, July 17, Greenspan began to massage history. He had an ally in Barbara Walters, who appeared on the evening news shortly after 6:30 p.m., blond hair spilling over a pink-and-white jacket. Right before her appearance, an ABC reporter had reprised the Greenspan-for-Treasury saga, explaining that the combined Greenspan-Kissinger demand had poisoned the deal for Reagan. But when Walters put her spin on the story, she focused on the Kissinger angle, and she set Ford up as the fall guy. “What brought down the Dream Ticket was indeed Henry Kissinger, and it wasn’t his fault,” she announced. “Gerald Ford himself, without Kissinger’s asking, said he wanted within his administration people with whom he could work; people like Henry Kissinger and economist Alan Greenspan. The Reagan negotiators took this to mean that Ford wanted Kissinger as secretary of state and this is where the negotiations broke down,” Walters contended. “Henry Kissinger was the stumbling block, and nothing was the same once his name came up.”53
A few minutes later, Walters appeared on air again, this time in a khaki suit and a wide-collared maroon blouse. Her colleague Ted Koppel gave her a drumroll. “It is such an incredible story that it is undoubtedly going to be chewed over both by politicians and those of us in the media for some time to come,” he said of the Dream Ticket. “Let’s start chewing with someone who knows what’s going on.” The action moved to Walters sitting high above the convention floor, accompanied by none other than Alan Greenspan.
Greenspan reached for a preinterview sip of water, the bright-white cuffs of his dress shirt extending far beyond his pin-striped sleeves. He wore his trademark heavy spectacles, and his hair looked as though it had been slicked back with Brylcreem.
Walters leaned in for her first question. “Dr. Greenspan,” she began, as though meeting him for the first time—she evidently did not believe that she needed to disclose their relationship. “Some of the Republicans are saying that Ford never had any intention of accepting this position, and why did he do it, and create all this controversy? Just to get even with Ronald Reagan?”
“Well that’s just not true,” Greenspan responded, leaping to the defense of his patron. “I’ve known Gerald Ford for quite a long time and there are no occasions which even remotely suggest to me he could do such a thing.”
“He would have accepted it if it had been worked out, that’s what you’re saying?” Walters leaned farther forward and pointed her pen gently in Greenspan’s direction as she attempted to put words into his mouth. If she could get him to say that Ford had been ready to take the vice presidential slot, then she could force him to come clean about other possible reasons for the Dream Ticket’s failure.
Greenspan sensed where the conversation was going. “Well, not necessarily,” he parried.
Walters switched tack. “Let me ask you,” she said, requesting permission for something she would certainly do anyway, “what the plan was, what did Ford want, what was it going to be?”
“Well basically, Governor Reagan was interested in what Ford—in what I would call an enhanced vice presidency.”
“Well let me be specific,” said Walters, reaching for her notes. “What we understand is that Ronald Reagan was going to be chairman and chief executive officer and Ford would be the chief operations officer, and the budget committee, and foreign policy, and so forth.” Walters allowed her hand to fall up and down as she emphasized all Ford’s responsibilities. “Reagan would make the broad decisions but Ford would implement them.” At “implement,” her hand formed a fist and came down as if to emphasize the finality of implementation. “Is that true?”
“Well, essentially that,” Greenspan said, a bit uncertainly.
“Ford would run it—the day-by-day operations,” Walters coaxed him.
“In effect,” Greenspan answered warily. He was fencing on a stage that Barbara commanded. If his goal was to soften memories of Ford’s Constitution-stretching demands, the interview was going badly.
“Now, we have heard,” Walters continued, “the Reagan people couldn’t swallow Kissinger and that’s what broke everything off. Why didn’t Ford then back down?”
“The actual negotiations went well beyond any discussion as I gather of personalities even though I wasn’t there at that time,” Greenspan said vaguely.
Walters was not going to let him get away with that. “Get back to this business about Kissinger,” she snapped. “My understanding—”
Walters stopped suddenly, and unexpectedly switched tone; had Greenspan grimaced at her off camera? “I don’t mean to be that, that, that abrupt about it,” she stammered, reaching over to her guest apologetically. It was a moment of softness, and then gone. “My understanding was—and we all seem to have heard the same story—that the Reagan people could not seem to accept Dr. Kissinger. Is that false?”
“Well, that may or may not be true,” Greenspan waffled.
“Then what was the final breakdown?” Walters demanded.
This was the crux. Either Greenspan had to confess that the Dream Ticket had been scuppered by personnel demands, or he would have to blame Ford’s maddening indecisiveness.
“The final breakdown was Gerald Ford never quite was able to get himself to say yes,” Greenspan answered. “He was moving toward it. I personally thought he would say yes, but he never quite made it.”
The confession elicited another momentary respite. The camera panned out, showing Barbara still leaning in toward Alan, her right hand gently draped over the edge of the armrest. “Is it workable? Is it workable,” Walters resumed, her voice rising again, “to have . . . a vice president who is really in charge of foreign policy, budget—by the way was there a chief of staff?”
“No there would not be in the usual sense.”
“So Ford would be.”
“Yes. But wait a second,” Greenspan countered. Time was rushing, and he had one last chance to place a favorable construction on the past forty-eight hours. “The president’s burdens are just much too large and it strikes me that an enhanced vice presidency is almost an inevitable new element within the federal system,” he ventured.
Moments after that, the interview ended. Greenspan had done his best to soothe the ruffled feathers of his adversaries. The Dream Ticket had not been just a vulgar power play. It had reflected a farsighted vision of America’s constitutional future.54
• • •
Having played the political broker in Detroit, Greenspan switched back to his more familiar role as data master and economist. He hung on to his position as Reagan’s chief budget adviser, and waged open war on the conceit that the Kemp-Roth tax cuts would pay for themselves. In August he worked up estimates of how much extra growth and government revenues the tax cuts would really generate, sensibly concluding that every $100 in cuts would generate only $17 in new revenues, meaning that they would expand the budget deficit by $83. If Jack Kemp had put the voodoo into Reagan’s economic policy, Greenspan aimed to be the exorcist.55 It followed that Reagan’s tax plan would be affordable only if it was phased in slowly, with deep spending reductions in the meantime.56 But Reagan was trapped. He had already promised tax cuts, a balanced budget, and a defense buildup besides. His rivals scoffed that his economic plan depended on smoke and mirrors.
Eager to counter the critics, the Reagan team announced that the candidate would soon give a major address on the budget. The project was known internally as the “mirrors speech,” but agreement on the name did not extend to the contents. Greenspan’s old friend Martin Anderson believed that balancing the budget was the easiest to sacrifice of Reagan’s three priorities. The defense buildup was sacrosanct, and the tax cuts were the only thing distinguishing Reagan from Carter’s generally conservative economic program. But a few hours before Reagan was due to appear in Chicago to lay out his fiscal vision, Anderson was forced to think again. James Baker, a canny Texan political operative who had parachuted into the campaign with Bush’s selection as running mate, insisted that the goal of a balanced budget could not be tossed aside so easily.
Baker combined the polish of a Princeton education with the earthiness of his southwestern roots; he could pose convincingly in tailored suits while chewing a wad of Red Man tobacco. More important to Anderson, he was the savviest campaign tactician in the Republican Party. If he said the budget plan was a mistake, everyone would take him seriously.
“We just can’t go with these $50 billion deficits,” Baker protested, alluding to the shortfall that Anderson had proposed to tolerate. Reagan would be eviscerated for advocating so much red ink. “There must be something you can do,” Baker insisted.57
Anderson had installed himself at the Palmer House Hilton in downtown Chicago. Greenspan and a defense expert named William Van Cleave were there with him, and that evening the three of them were due to brief the national press on the mirrors speech. Now Baker had thrown their script for a loop. If the $50 billion deficits were unacceptable, the Palmer House trio had to come up with a way of reducing them—quickly.
Anderson proposed an escape strategy. The Senate Budget Committee had recently produced a rosy growth forecast that made Reagan’s plans seem more affordable. Over the span of five years, it would give Anderson an additional $224 billion to work with. But before he could embrace the Senate’s numbers, Anderson needed buy-in from Greenspan. “A happy Greenspan, fully confident about the program, was crucial to a successful press briefing that night,” Anderson recalled later.58 The press knew Greenspan as the man who knew. His endorsement was crucial.
Unfortunately for Anderson, Greenspan was uncomfortable with the Senate’s forecast. It assumed nominal growth of around 12 percent per year; because the trend rate of real growth was about 3 percent, this implied annual inflation of about 9 percent. In other words, the Senate forecast would prove responsible only if the broader response to inflation was irresponsible.
Greenspan told Anderson to dial back the Senate’s projected windfall by a fifth. But even with that revision, he seemed anxious. The doubtful Senate forecast would be the icing on the hopeful numbers that Anderson had already baked into the plan. The combination would be indigestible.59
Greenspan suggested that the fact sheets for reporters simply omit all numbers rather than containing false ones.
Anderson was alarmed. Reagan was under attack as the smoke-and-mirrors candidate. He had to lay out specifics.
Greenspan asked for the sheet of paper with the campaign’s budget projections. He commandeered the one big soft chair in the room and withdrew into a private reverie. Anderson could feel the clock ticking. The press briefing was just an hour away; if there were going to be numbers in the fact sheet, the budget table had to be typed, photocopied, and stapled to the other materials.60
Greenspan continued to stare silently. Eventually, Anderson asked him one more time whether they could go with the dialed-back version of the Senate numbers.
Greenspan looked up quizzically at his old friend. After sixteen years of steady comradeship, after their shared migration from Ayn Rand’s salon to the Republican front line, he was not going to resist him. The numbers were not pretty, but they were good enough.61
Anderson snatched up the budget table before Greenspan could get cold feet again. He headed downstairs to the press room, sat down at an old Royal typewriter, and bashed out a table that contained the essence of Reagan’s economic program.
When the press conference got under way, Greenspan delivered the performance that Anderson wanted. Exuding technocratic seriousness, and using the supply-side wing of the Republican Party as a convenient foil, he presented Reagan’s budget as a model of sobriety, gravely cautioning reporters that it was “a risky proposition” to justify tax cuts on the assumption that they would be self-financing. The effect on the assembled journalists was exactly as planned. “The names Kemp and Roth don’t appear in Reagan’s speech,” Elizabeth Drew marveled in the New Yorker, capturing the essence of the candidate’s pivot. “Reagan has entered the orthodox conservative mainstream. He has been pushed into a new policy by his new advisers.”62
Reagan had attained policy respectability, with an assist from Greenspan—he was on his way to the White House. But neither Reagan nor Greenspan could anticipate what was to come, courtesy of a lumpy giant with a bald head who had been watching from the sidelines.