Elected in a landslide as a candidate of clear convictions, Ronald Reagan could be paradoxically elusive. He exhorted his countrymen to reach for greatness, to “believe in ourselves and to believe in our capacity to perform great deeds. . . . Why shouldn’t we believe that? We are Americans.” But the content of this greatness was sometimes hazy, for Reagan managed to entertain radical notions while simultaneously fuzzing them. He supported deep tax reductions, cuts in welfare spending, and (privately) a return to the gold standard, but he always took care to soften his convictions with self-deprecating humor. When the joke went around that Reagan’s right hand didn’t know what his far-right hand was up to, some thought that Reagan himself had originated it. He made light of his reputation for doziness. “I am concerned about what is happening in government—and it’s caused me many a sleepless afternoon,” he told reporters. “It’s true hard work never killed anyone but I figure, why take the chance?”1
Like a majority of voters, Alan Greenspan was willing to bet on this inchoate figure, even though the political shifts of the late 1970s had landed him closer to Democrats such as Senator Proxmire than to the Republicans of Jack Kemp’s circle. After conferring respectability upon Reagan’s budget plan in Chicago, Greenspan continued to build his standing with the candidate. His friend Martin Anderson arranged for him to brief Reagan thoroughly on domestic issues over the course of a long, transcontinental flight; Greenspan used the opportunity to charm Reagan, largely by listening to his amusing stories and ignoring the tedious briefing book that Anderson had prepared for the session.2 Greenspan was also invited to the Virginia estate of Senator John Warner and his wife, the actress Elizabeth Taylor, where he helped to prep Reagan for the first presidential debate; Reagan thanked him afterward, writing that he was “comforted in the knowledge that you were there and participating.”3 Inevitably, as his relationship with Reagan deepened, Greenspan’s long-standing ambition for high office bubbled up again. In mid-November 1980, a week and a half after the election, he flew out to Los Angeles to take part in a forum with the president-elect and his brain trust. Sharing a cab from the conference center to the hotel with some fellow economists, he made one of those quips that is more revealing than funny: “The future Treasury Secretary is in this taxi,” he blurted out, paying the cabdriver before anybody else got out his wallet.4
Greenspan’s hopes for the Treasury job were disappointed. The Reagan team opted for Donald Regan, the garrulous Merrill Lynch chief with a strong peak of gray hair who had tried to buy Greenspan’s consultancy. But Greenspan was too dogged to allow himself to be discouraged. Praising his rival as “an extremely intelligent and tough person,” he quickly found an alternative role for himself as the quiet counselor to Reagan’s budget chief. Taxes and spending would be the first testing ground for the promised Reagan revolution. Greenspan would be in the thick of it.
The new budget chief was David Stockman, the bumptious thirty-four-year-old who had sneered at Reagan’s base of gun nuts and crass millionaires. A colleague once described Stockman as “flashing like a meteor across the sky,” and Stockman himself confessed roguishly that he might be “the most conniving character in history.”5 But whatever Stockman’s brains and energy, he faced a monumental task. A lousy economic outlook was forcing a rethink of Reagan’s campaign pledges: it would be harder than ever to cut taxes and boost defense spending while simultaneously avoiding a huge budget shortfall. Encouraged by Greenspan, Stockman was ready to ax social spending to make the numbers balance. But his job was going to be complicated by Jack Kemp and the supply-siders, who denied the need for austerity. The tax cuts, Kemp’s people insisted flatly, would pay for themselves.
On December 18, 1980, Greenspan dined with Stockman and several senior Republicans at the Century Club in Manhattan. Stockman had spent the day trying to sell Reaganomics to Wall Street, and had met with a skeptical reception. Spooked by the supply-siders, investors anticipated big deficits; to compensate for the consequent inflation, they were driving up interest rates on bonds. Stockman promised the bond vigilantes that Reagan’s tax reduction would be offset by commensurate reductions in spending. “The tax cut has to be earned through the sweat of the politicians,” he promised.6
The reaction from the other diners at the Century Club showed what Stockman was up against.
“The Street’s delirious!” snarled Jude Wanniski, one of Jack Kemp’s tax-cutting allies. “Stockman spent the whole day selling root canal and threatening to heave widows and orphans into the snow.
“If the administration wastes its political capital on budget cutting and imposing a lot of societal pain and sacrifice, the battle for marginal tax rate reduction, the gold dollar, and supply-side prosperity will be lost,” Wanniski insisted. “We’ll end up with Republican austerity as usual.”7
The outburst presented Greenspan with a dilemma. He had assured the media in Chicago that Reagan’s budget numbers added up; if Wanniski and his cohorts hijacked the process, Greenspan would deserve some blame for the debacle. But beating down supply-siders was like a frantic game of Whack-A-Mole. As Reagan’s campaign budget adviser, Greenspan had smacked them hard. Now they were burrowing up again.
Some ten days later, soon after the Christmas break, Greenspan attended a bull session on the budget in David Stockman’s office. Despite Stockman’s assurances to Wall Street, the group that he assembled was not committed to balancing the budget. Jack Kemp’s supply-siders were there in force, but so, too, was a doctrinaire contingent from the monetarist camp—followers of Milton Friedman who believed that inflation could be painlessly tamed by means of monetary targets. Greenspan’s presence represented a faint hope that both flanks could be quieted.
The group launched into a debate about the economic forecast that would underpin Reagan’s first budget. The supply-siders insisted that thanks to the tonic of tax cuts, growth would accelerate. The monetarists were adamant that thanks to the magic of monetary targeting, inflation would fall rapidly, bringing down interest rates. The dueling perspectives would turn out to be incompatible. High growth implied strong demand for capital and therefore high interest rates—if the supply-siders were right, the monetarists were unlikely to be. Victory over inflation implied a recession—if the monetarists were right, the supply-siders would probably not get the growth that they predicted. But nobody around Stockman was insisting that this contradiction be resolved, and so the group was coalescing around a nonsensical compromise. Growth would be high, but interest rates would be low. Greenspan was conspicuously silent.
Toward the end of the meeting, Stockman turned to Gail Fosler, a Republican staff economist on the Senate Budget Committee. She had rushed over on short notice, dressed as she usually dressed over the holiday period: in jeans and a turtleneck.
“So Gail, what do you think?”
Unintimidated by the radicals around her, Fosler responded honestly. “The only thing you have in this town is your integrity,” she said. “If you present this as the president’s forecast, you will lose your integrity.”
The session soon broke up. Fosler and Greenspan chatted on the way out and headed off together to a cafeteria.
Fosler was wondering why she had even been summoned to Stockman’s office in the first place. She was known in Washington as a critic of the ideologues—they surely would not have wanted to include her. But some powerful somebody had clearly decided that she should be present. Washington invitations did not go out by accident.
To test her theory of who might have invited her, Fosler looked at Greenspan and asked, “I bet you are not very happy that you had me come to that meeting?”
Greenspan gave her a sidelong smile. “You did what I expected you to do,” he said.8
Fosler eyed Greenspan again. He was more Machiavellian than he appeared. Since his days in the Ford administration, he had learned to fight bureaucratic battles while preserving his own capital. If he was going to offer unpopular good sense, he would do so through proxies.
• • •
Soon after Reagan’s inauguration on January 20, 1981, Greenspan visited St. Louis, Missouri. He was there on business, but he took the opportunity to meet privately with Murray Weidenbaum, a rumpled economics professor who would soon become chairman of the Council of Economic Advisers. Weidenbaum and Greenspan both served on Stockman’s economic forecasting committee, and Weidenbaum was furious with the rosy growth assumptions of the supply-siders.
Greenspan knew perfectly well that Weidenbaum was right. But he nonetheless urged Weidenbaum to let the matter slide. The forecasts were the product of hours of fractious haggling between supply-siders and monetarists. If the incoming CEA chairman insisted on reopening the debate, budget policy might end up worse rather than better.9
When Weidenbaum arrived at the White House, he ignored Greenspan’s counsel. He was not going to stand behind a forecast that absurdly combined rising growth with falling interest rates; he was not going to tiptoe around Washington, hiding behind crafty proxies and picking battles timidly. If the forecasting mess was not cleared up, Weidenbaum informed Stockman, he would escalate the fight all the way to the Oval Office.
Stockman conceded that the contradiction should be straightened out. But he urged Weidenbaum not to alienate the supply-siders by rubbishing their high-growth forecast—they were too powerful in Congress. Instead, the forecast could be cleansed of contradiction by ignoring the monetarists and projecting continued inflation. Backing the supply-siders over the monetarists would also have the effect of easing Stockman’s budget arithmetic.
Weidenbaum accepted Stockman’s direction. After all, the monetarists were asserting that inflation would soon collapse to 2 percent; the idea that Paul Volcker would reduce inflation by that much seemed like a crazy fantasy. “Nobody,” Weidenbaum roared, “is going to predict 2 percent inflation on my watch. We’ll be the laughing stock of the world.”10
Stockman told Weidenbaum to plug in whatever inflation number he could live with. He just wanted the estimate for growth to be as high as possible because high growth would make the future deficits look manageable. The CEA chairman duly projected growth of 12.9 percent in 1982: 7.7 percent inflation plus real growth of 5.2 percent.
When Weidenbaum presented his forecast, neither the monetarists nor the supply-siders were happy. As Stockman later recounted in his memoir, somebody taunted the professor:
“What model did this come out of, Murray?”
“It came right out of here,” Weidenbaum responded, slapping his belly with both hands. “My visceral computer.”11
Weidenbaum had shown more courage than Greenspan, but not necessarily more wisdom. He had insisted on a forecast that was internally consistent, but he had picked the wrong side in the battle. As it turned out, the monetarists who thought inflation could be vanquished were not far from being right: the Fed succeeded in bringing inflation down to 3.8 percent by 1982, much lower than the 7.7 percent that Weidenbaum anticipated. Meanwhile, the supply-siders who predicted a growth bonanza were disastrously wrong: the economy shrank by 1.4 percent in 1982, an abysmal performance relative to the real growth of 5.2 percent that the visceral computer had projected. Weidenbaum’s high-inflation, high-growth forecast had allowed Stockman to balance the budget on paper; but when the forecast proved wrong, the low-inflation, negative-growth reality depressed tax receipts, delivering what was by contemporary standards a budgetary calamity. The deficit hit $128 billion in the year to September 1982, and $208 billion the year after. It was the worst budget performance in the postwar era.12
Greenspan’s political antennae had served him well. By hiding behind proxies and picking his fights, he had avoided association with a fiscal humiliation. But even as he dodged this danger, Greenspan was learning a new lesson, too. For Reagan’s top economic officials, and even for the Treasury secretary whose job Greenspan coveted, there was not much glory in presiding over the budget. For an economist with limitless ambition, the real prize lay elsewhere.
• • •
The current holder of that prize was lurking in a marble edifice, a long-legged twelve-minute stroll from the White House. While Stockman and Weidenbaum concocted their forecast, Paul Volcker was driving the policy that would frustrate it.
More even than the announcement of the Saturday Night Special, Volcker’s actions after Reagan’s election qualified him for the history books. During the summer of 1980, the Fed’s monetary straitjacket had caused a recession; by the election, unemployment stood at 7.5 percent. The compensating payoff was still nowhere to be seen: inflation had come down only moderately.13 The climate was ripe for an attack on the central bank; and in mid-November, at the Los Angeles gathering of Reagan’s brain trust, the president-elect’s advisers issued a menacing statement. Warning that the Fed’s independence “should not mean lack of accountability,” they demanded clearer monetary targets from the central bank and encouraged Congress in its efforts to “monitor the Fed’s performance.”14
Two days later, on Wednesday, November 19, Arthur Burns visited Paul Volcker in Washington. He installed himself in a wing chair in front of the fireplace and lit his pipe. Volcker spread his long frame out on a couch and enjoyed one of his cheap stogies.15
Burns was evidently agitated. He had just come from Los Angeles, where Friedman and others had lambasted Volcker. “Milton wants to abolish the Fed,” he began. “He wants to replace you with a computer.”
Volcker remained calm. “It’s a metaphor, Arthur.”
“I understand, Paul, but it’s more than that.” Burns went on to describe how the Los Angeles proceedings had been dominated by Friedman’s obsession with a monetary rule. The whole tone of the discussion had portended trouble for the central bank. Burns seemed so frantic that Volcker grew worried. “I thought he was going to have a heart attack,” he recalled later.16
Volcker hardly needed to be told that politicians might attack him; already the Carter administration had come after him. But Burns insisted that the assault on the Fed had grown more dangerous than before: the political constraints that he had emphasized in his lecture in Belgrade were about to assert themselves with a vengeance. Milton Friedman was at the head of a powerful coalition: monetarists who agreed with him that the Fed could be supplanted with a simple rule, and supply-siders who resented the Fed for tough anti-inflation policies that made tax cuts unaffordable.17
Two months later, with Reagan newly installed in the White House, his staff let it be known that he would visit the Federal Reserve building. Remembering Burns’s warning, Volcker bristled at the thought: the symbolism of the commander in chief marching into his office had to be avoided.18 To prevent the image of a presidential invasion, Volcker demanded that the meeting be shifted to a safer venue. He would lunch with Reagan at the Treasury.
As if to draw attention to the occasion, Reagan refused to be driven to the Treasury building. It had been a long time since a president had walked the streets of Washington, but Reagan strode out of the front door of the White House, a handsome, rangy figure surrounded on all sides by aides and Secret Service men, followed by a delighted press corps.19 On the steps up to the Treasury, the president stopped to kiss seven-year-old Sandy Kotz of Detroit, the winner of the Tiny Miss North America beauty pageant, who wore a sash that read, “Young Republicans.”20 Once inside the building, Reagan took his seat at the head of the table in a wood-paneled conference room.21
“You know,” he began, “I was very pleased to read a prediction that the price of gold will nosedive below three hundred dollars an ounce. If that’s true, it would mean we’ve made great strides against inflation.”
“I could not agree with you more, Mr. President,” Volcker answered, delighted that the conversation was beginning with a softball.
“Well, I expect we’ll make even more progress going forward,” Reagan said genially.
The clutch of reporters and photographers who had been allowed in for the start of the meeting now left the room.
“But I do have a question that I’d like you to help me with,” Reagan continued.
“If I can,” Volcker replied warily.
“I’ve had several letters from people who raise the question of why we need the Federal Reserve,” the president announced. “What do you suggest I say to them?”
It was a stunning question. The Fed had been around since 1914. Reagan appeared to be suggesting a return to the nineteenth century.
Thanks to Arthur Burns’s warning, Volcker was prepared for something like this. “Mr. President, there have been concerns along those lines, but I think you can make a strong case that we’ve operated quite well. Unfortunately, we are the only game in town right now fighting inflation. . . . Once the budget gets under control we’ll have a better shot at taking the pressure off prices.”
The answer did the trick. It addressed Reagan’s question, and switched the focus to budget policy. At the mention of the deficit, Don Regan, the Treasury secretary, weighed in, agreeing that the budget must be moved back toward balance. After some talk about taxes and spending, Volcker got Reagan onto the subject of fishing.22 The more he could avoid monetary issues, the more he would preserve his independence.
When the lunch was over, Volcker returned to his marble-fronted redoubt. Budget policy might be chaotic, with dueling camps of ideologues forcing mainstream economists to the sidelines, but nobody had told the Fed chairman to change course. The era of central-bank supremacy was dawning.
• • •
Despite his doubts about Reagan’s budget math, Greenspan made a public show of cheering along loyally. In one weeklong stretch in the middle of February 1981, when the president unveiled his economic plan, Greenspan made five separate trips to Washington, attended countless White House meetings, and appeared on seven television shows, never defending the radicals in his party but always telegraphing respect for the official policy. The New York Times profiled him as a sort of minister without portfolio, a shape-shifter who could both advise on the inside and operate on the outside as an authoritative commentator. His professional versatility seemed to mirror his curious double persona. He appeared absentminded, soft-spoken, and indifferent to social convention: he bought his suits in batches. Yet he was powerful, connected, and impressively well paid. His annual income came to more than half a million dollars, the equivalent of close to $1.5 million in 2015.23
In his media appearances over the next months, Greenspan emphasized the importance of one part of Reagan’s plan—the spending cuts. Safeguarding his reputation by distancing himself from the supply-siders, he insisted that balancing the budget was now more crucial than ever; and he pressed his point by invoking a new argument. In the past, Greenspan had denounced deficits because the Fed would print money to buy the resulting government bonds, therefore fueling inflation. Now, thanks to Paul Volcker, the Fed had retired from the money-printing business, so deficits would be financed by government’s borrowing from private lenders; the borrowing would drive interest rates up, and the result would be a higher cost of capital for banks, businesses, and households. In the years before Volcker’s Saturday Night Special, in other words, deficits had meant inflation that penalized savers; after Volcker’s policy revolution, deficits meant high interest rates that penalized borrowers. And that shift was troubling for a reason that Greenspan was supremely qualified to diagnose: high borrowing costs threatened to destabilize finance. Savings and loans were being forced to pay more for deposits, raising their cost of funding above the fixed income they received on their mortgage portfolios. As Greenspan put it to the New York Times in March, “The most important thing at the moment is to get interest rates down and avoid what I think is a potentially very dangerous financial problem in the thrift institutions.”24
While Greenspan urged deficit reduction to bring down interest rates, the supply-siders advanced a different remedy. Like druids brandishing a magic talisman, they echoed the president’s faith in the gold standard. The way the supply-siders saw things, Volcker’s monetary medicine was failing to convince the markets that inflation was coming down, with the result that interest rates remained elevated. In contrast, a return to the gold standard would instantly signal that inflation was over; it would have a transformative effect on expectations. Thanks to this psychological revolution, interest rates would plummet painlessly; there would be no need for the “root canal” spending cuts that Greenspan and the old guard advocated. Of course, embracing the gold standard meant depriving the Fed of its power over the nation’s money. Just when Volcker was emerging as a superman, the supply-siders wanted to neuter him.
To long-standing believers in a gold anchor, the supply-siders were perverting a venerable idea. In the 1950s and 1960s, Greenspan had favored the gold standard as a way of disciplining the government: unable to finance deficits by printing dollars, politicians would be forced to balance income and expenditure. But now the supply-siders were embracing gold not as a guarantor of budgetary restraint, but rather as a cover for budgetary recklessness: the way they saw things, tax cuts would have no adverse consequences—for inflation or for interest rates—if only the nation returned to the gold standard. Greenspan, always a skeptic of the government’s power to shape expectations, was not about to buy this view. The government’s credibility as an inflation fighter would have to be earned over time. It could not be conjured instantly, whether by Nixon’s price controls or by the supply-siders’ gold standard.
Whatever Greenspan’s misgivings, the gold camp was advancing. In May 1981, it scored a tactical victory when Arthur Burns was named ambassador to West Germany, removing the doyen of the anti-supply-side old guard from the debate in Washington. The Wall Street Journal speculated drily about a follow-on appointment: Greenspan might be dispatched as ambassador to Tokyo.25 The following month, the supply-siders pressed their advantage, forcing the administration to announce the formation of a gold commission, tasked with considering gold’s role in the monetary system.26 But what was really worrying was the posture of the president himself. His long-standing hankering for gold remained. And the higher unemployment went, the more he was encouraged in his fantasies by his business friends, who were desperate for an alternative to the Fed’s stern discipline.
In July, Gordon Luce, the boss of a California savings bank, wrote to the president to complain about Volcker. Reagan soon wrote back: “I’ve passed your essay on to our economic types to see if they have an answer to whether the Fed is really necessary,” he assured him.27
Sure enough, Luce’s complaints made their way to Murray Weidenbaum at the Council of Economic Advisers, complete with a note scrawled in the presidential hand. “Do we really need the Fed?” Reagan demanded.28
Hoping to calm Reagan, Weidenbaum crafted an artful one-page rejoinder. He began by admiring the “well-written and thoughtful piece” that the president had forwarded to him, and he conceded that the Fed lacked credibility as a bulwark against inflation. But rather than concluding that the central bank should be replaced with a revived gold standard, Weidenbaum invoked the model of the 1950s Fed—the one that had stood firm in the face of Truman’s inflationary demands, and that had contained inflation successfully until the late 1960s. The problem was not with central banks per se, Weidenbaum argued, but rather with a central bank that failed to deliver stable monetary growth—“usually,” Weidenbaum lamented, “because previous Administrations gave them conflicting signals.” The solution lay in making those signals consistent. Rather than attacking the central bank, Reagan should emphasize his support for it.29
On August 13, 1981, Reagan appeared before reporters at his beloved California ranch, decked out in cowboy boots and a tough-guy denim jacket. Seated at a rustic table and grinning for the cameras, he signed into law the budget-busting tax cuts that the supply-siders wanted. The next day he turned his mind back to gold, and the influence of the supply-siders was never more apparent. Writing to Gordon Luce again, the president assured him that the “economic types” agreed wholeheartedly with the critique of the central bank—they had no quarrel with the verdict that it lacked credibility. Then he leaped to a prescription that turned Weidenbaum’s memo on its head.
“Our system of government and our Constitution are based on the proposition that ‘Rule of Law’ is superior to ‘Rule of Man,’” Reagan declared. “Yet, in monetary policy there really are no rules governing how money is created by the Fed. It is my hope that we can put restraints on the creation of money. Perhaps the Gold Commission will be coming up with recommendations along these lines,” he wrote expectantly.30
• • •
As the supply-siders advanced, the mainstream economists at the White House began to panic. Four years earlier, Jack Kemp’s maverick followers had been ridiculed as P. T. Barnum wannabes; now they had Reagan behind them. The president evidently regarded powerful central-bank technocrats as an offense against his antigovernment instincts. “Hold your hats, friends, because the gold bugs are coming,” the Washington Post columnist Hobart Rowen proclaimed; “and they have an ally in the White House named Ronald Reagan.”31
It fell to Greenspan’s ally Martin Anderson to come up with a way of derailing the gold bandwagon. Now on the staff at the White House, Anderson still regarded Greenspan as his favorite collaborator on such issues. In the spring of 1981, when the members of the gold commission had been appointed, Anderson had tried to have Greenspan included so that he could subvert the process from the inside; that ploy had failed, but Anderson continued to confer with Greenspan on ways of countering the gold camp.32 The two comrades had experienced the same intellectual journey on monetary matters. Both had embraced the gold anchor in their Randian years. Both now regarded it as impractical.
At the end of August, two weeks after Reagan’s second letter to Luce, Anderson and Greenspan discussed a ruse that might frustrate the gold lobby. Greenspan would publicly call for a “gold bond”—the Treasury would issue five-year debt whose interest and principal would be repaid in gold rather than dollars. Greenspan would present this gambit as a win for the gold camp; after all, it would require the government to curtail its habit of repaying debts with funny money. But the proposal’s real purpose would be to play for time. The precise specifications of the gold bond would involve plenty of arcane detail, creating an excuse for the administration to extend the gold commission’s deadline. The risk of the commission’s throwing its weight behind a full return to the gold standard would thus be forestalled. A problem delayed might be a problem averted.33
On Labor Day, September 1, the president let loose another reminder of his impatience with conventional monetary policy. “The Fed is independent, but they’re hurting us,” he told an audience of supporters.34 But that same day, Greenspan launched his counterattack, laying out his gold-bond proposal on the op-ed page of the Wall Street Journal. As he had planned with Anderson, Greenspan cloaked his thinking in respect for the gold camp: “The restoration of a gold standard has become an issue that is clearly rising on the economic policy agenda,” he began, conceding that the discipline of gold had powerful attractions. But then he introduced a wrinkle: even if the gold standard represented the ideal monetary policy, there were daunting obstacles to getting there. To begin with, the U.S. government would have to decide the price at which to reestablish convertibility. If it set the price of gold too low, it would be flooded with purchase orders and its gold stocks would be depleted, forcing it off the gold standard permanently. If it set the price too high, owners of gold would rush to sell to Uncle Sam, and the dollars they received would inflate the money supply and cause inflation. Because of these risks, Greenspan suggested, monetary and fiscal discipline should be restored before a return to gold was attempted, allowing enough time for the dollar price of gold to stabilize around some market-determined value. “Concrete actions to install a gold standard are premature,” Greenspan concluded.
Having explained why even the most ardent gold advocate might wish to bide his time, Greenspan presented his gold bonds as a reasonable idea that believers could support in the interim. The more the Treasury issued these obligations, the more it would acquire a vested interest in lower inflation, because the cost of repaying creditors in gold would rise in dollar terms as the greenback lost value. Meantime, the new instrument would create a means of judging whether the country was ready for a full return to the gold standard. If the yields on dollar bonds fell to the same level as the yields on gold bonds, the convergence would signal that investors had as much confidence in dollars as in gold. At that point the dollar could be repegged to gold, with less fear of a repeat of Nixon’s humiliating devaluation.
Greenspan’s proposal had real attractions. Indeed, he would continue to push for inflation-proof bonds until 1997, when the Clinton administration obliged by creating Treasury Inflation-Protected Securities (TIPS). Yet if Greenspan’s advocacy of gold bonds was sincere, his verbiage about the gold standard was not: it was merely a way of humoring the gold camp and perhaps of tipping his hat to his own youthful convictions. After all, Greenspan was the man who had celebrated the publication of Atlas Shrugged by presenting Ayn Rand with a miniature gold bar. He still dined periodically with Rand at the University Club in New York and had no wish to offend her.
Greenspan’s mature conviction, however, was the one he had explained to candidate Reagan two years earlier: the case for the gold standard could be refuted by a paradox. “A necessary condition of returning to a gold standard is the financial environment which the gold standard itself is presumed to create,” Greenspan noted in his Journal essay. “But, if we restore financial stability, what purpose is then served by a return to a gold standard?”
• • •
Two weeks after the publication of Greenspan’s Journal article, on September 16, 1981, Paul Volcker testified before the Senate Budget Committee. If there was going to be a moment when Volcker lost his inflation-fighting nerve, this surely would be it—although Greenspan and the White House were trying to protect his flank, the Fed’s enemies in the gold camp were bearing down upon him. But Volcker firmly stood his ground, directing the blame for high interest rates away from the Fed and toward the budget deficit. Congress had just enacted the supply-siders’ tax cut, Volcker observed. If Congress wanted to bring borrowing costs down, it should now rein in spending.
Senator Lawton Chiles, a Florida Democrat, did not take kindly to Volcker’s lecture. It was all very well for the Fed chairman to urge spending restraint, but politics would not permit it—not with the economy already reeling from the Fed’s tight monetary policy. If Volcker pressed his case too ardently, he was asking for trouble.
“We are going to have an explosion,” Chiles menaced. If Congress didn’t do something to help people battered by recession, there would be pressure “to knock out the Federal Reserve Board altogether. . . . You have given us a good lecture about how much we should cut spending. I just do not think, however, that . . . is in the realm of possibility.”
Chiles was honoring a venerable tradition. Politicians bullied the Fed; the opposite was not supposed to happen.
“You are the political expert,” Volcker responded, gruffly. “What I am saying . . . is that the challenge before the Congress and the Administration now is to do what cutting they can do. . . . Shooting the messenger or the head of the Federal Reserve is not going to do anybody any good.”
“But it is going to be a lot easier to cut the head off the Federal Reserve System than to make these huge cuts,” Chiles retorted. “That is what I am afraid is going to happen.”
“Let’s just clarify the point,” Volcker growled. “It may be easier to cut the head off the Federal Reserve, but even when the Federal Reserve is running around headless you will still have exactly the same problem you started with.”35
Two days later, on September 18, the gold commission gathered for its next meeting. Volcker’s defiance in the Senate had shown how isolated he was—it was not just Kemp’s supply-siders and Reagan’s business friends who were losing patience with him. Even if he and Greenspan were right that high long-term interest rates reflected the ballooning budget deficit, their argument was as popular as broccoli, particularly when compared with the gold camp’s sweet confections.36 The supply-siders even argued that as well as curing inflation and high interest rates, gold would miraculously fix the budget. Lower interest rates, courtesy of gold, would save the government money on debt-service payments; presto, no more deficit.37 With such beguiling arguments as these, gold’s momentum seemed unstoppable.
Then, suddenly, it did stop. Addressing the commission members in the Treasury’s ornate Cash Room, where citizens had exchanged gold and silver in the years after the Civil War, Treasury Secretary Don Regan lamented that the gold standard was dauntingly complex—the technical issues involved in restoring it were widely disputed. There was no chance of coming up with a “fast or simple” answer, the Treasury secretary continued, repeating the argument that Greenspan had made in the Wall Street Journal. To allow time to think through the issue in all its permutations, the commission’s planned October deadline would have to be extended—maybe for six more months, or maybe even for longer.
With that, the Treasury secretary killed the sense of urgency permeating the gold commission: it was now an open-ended talking shop. It did not take the supply-siders long to guess the source of their setback. On September 25, Jude Wanniski fired off a letter to Greenspan, inviting him to a “Gold Lunch” and challenging him to debate the propositions in his Wall Street Journal essay. “Because you have such enormous influence on administration policy, I think it would benefit the President and the nation if you were at least aware of our viewpoint,” Wanniski protested angrily.38 But the truth was that Greenspan and his White House allies understood Wanniski’s viewpoint all too well, and Greenspan’s deliberate delay tactics were about to succeed exactly as intended. By dragging out the gold debate for a further six months, the administration allowed time for inflation to fall, so that the screams for an alternative to the Fed lost much of their saliency. When the gold commission eventually came out in favor of the status quo in February 1982, the best that the supply-siders could claim was that their issue had been debated.39
In 1971, the Nixon White House had recruited Greenspan to help rein in the central bank. One decade later, the Reagan White House had recruited Greenspan to do precisely the opposite. And Greenspan had played his assigned role deftly. Just as he had stymied Henry Kissinger on the Iranian oil deal, Greenspan had feigned empathy with his adversaries and played skillfully for time, morphing from ardent advocate of gold into its most devious opponent.40 The Fed’s power had been preserved. The prestige of the Fed chairmanship, already growing, expanded even further.
• • •
At the end of 1981, the Reagan administration sought out Greenspan’s help again, this time on the question of the government’s pension promises. The revered Social Security system, which mailed regular checks to thirty-six million beneficiaries, was running short of cash; if nothing was done before the spring of 1983, there would be insufficient revenues to keep the checks flowing.41 To fend off that political disaster, the Reagan team needed a survey of possible fixes; and on December 16 the president signed Executive Order 12335, creating the National Commission on Social Security Reform, with Greenspan as its chairman. A bevy of aides arrayed themselves in a semicircle around Reagan as he sat at the Oval Office desk. A flash went off, and the group was captured for posterity: nine sober-suited men, with Greenspan looking grimly grave, the most sober of all of them.
Given Greenspan’s libertarian roots, reforming Social Security seemed like the ideal challenge for him. By the time Reagan created the commission, Milton Friedman had fathered a minor cottage industry devoted to privatizing government pensions; now Greenspan was in charge of a group that could presumably act on these proposals.42 Seven months earlier, in May 1981, Greenspan’s ally David Stockman had proposed fixing the Social Security deficit with deep benefit cuts, and Greenspan had cheered along, declaring that it was time to “restore some sanity to the system.”43 The president himself could be counted upon to support bold reform. In his earlier run for the presidency, in 1976, Reagan had demanded a sweeping overhaul. “People like me shouldn’t get Social Security,” the president would say. “My friends at Burning Tree”—the president was referring to an exclusive golf club in the Washington suburbs—“they don’t need Social Security.”44
Despite the president’s instincts, Greenspan’s mission as chairman of the Social Security commission was anything but Friedman-like. Stockman’s proposed benefit cuts had generated a costly political backlash: Representative Claude Pepper, the octogenarian Florida Democrat who had become the popular face of the program, had raised a clenched fist in the air and called the administration’s initiative “nothing short of a wholesale assault on the economic security of America’s elderly population.”45 Liberal campaign operatives in every swing district were readying Social Security zingers for the next year’s congressional elections, and Greenspan’s mission as the new Social Security czar was to contain this political damage. James Baker, the brilliant campaign operative who had emerged as Reagan’s chief of staff, instructed Greenspan on his task. Fixing Social Security with private savings accounts or bold benefit reductions was out of the question. Instead, Greenspan was to squash radical proposals and come up with a patch for the system that would placate Claude Pepper, thereby reducing Republicans’ electoral vulnerability. Pension benefits would have to be preserved, not cut. The Randian scourge of the welfare state had been hired as its repairman.46
After the Oval Office photograph, Greenspan followed Reagan to the White House press room. The reporters were in a combative mood. Social Security was a hot potato.
Reagan offered brief remarks and left Greenspan to take questions.
The reporters demanded to know whether the commission was substantive or just political. Its terms of reference stated that it would report the following December—conveniently, after the congressional elections. Twelve months of deliberation sounded like a suspiciously long time. Was the administration using Greenspan to keep the Social Security issue quiet until after the voting?
“It’s not the issue of the election. It’s the issue of the amount of time involved in endeavoring to come to grips with the issue,” Greenspan assured them.47 Complex technical questions were in play: inflation, interest-rate volatility, the relationship between Social Security and the private pension system. “It’s just going to be a job which is going to require, as best I can see, something approximating a year, and I don’t frankly think it can be done, in the way in which the president has requested, in less than that.”
Even a rookie reporter could see through these excuses. This commission was evidently a ploy to deprive the Democrats of campaign ammunition.
The journalists pressed again, demanding a more convincing answer. Greenspan continued to dodge. He was comfortable playing politics behind the scenes; he was comfortable explaining policy out in the open. But he hated to combine the two: he would not confess to partisan motives when his words were likely to end up on the next day’s front pages. Never mind the fact that, one year earlier, he had huddled with Ford in Rancho Mirage as the ex-president decided whether to run for the White House; and never mind the fact that he had been at the epicenter of political intrigue during the Republican convention in Detroit. Greenspan had cultivated an image as a technocrat above the fray. He did not want to spoil it.
It was not just reporters who attacked the Social Security commission. A little while later, Greenspan met Ayn Rand for dinner at the University Club in Midtown Manhattan; and when the conversation turned to Social Security, Rand scolded him so furiously that other diners turned and stared—a diminutive seventy-six-year-old woman was berating a famous, square-shouldered economist.48 At the start of the Ford administration, Rand had blessed Greenspan’s move to the government, believing he would quit if the president asked him to violate his principles. Now Greenspan held no government position, yet he was apparently violating his principles anyway—his principles and those of the president. Wasn’t Greenspan, as a libertarian, supposed to favor root-and-branch reform of a collective retirement provision? And did he not have a golden opportunity to do so, given Reagan’s predilections? After all, Reagan had been elected as a vehicle for radical ideas: self-financing tax cuts, a return to gold, a root-and-branch approach to Social Security. But with the exception of the tax cuts, that revolutionary fervor was being gradually buried. Greenspan was emerging as the undertaker—but not the sort of undertaker that Ayn Rand had envisaged.
The dinner at the University Club was one of Greenspan’s last encounters with his mentor. A few weeks later, on March 6, 1982, Rand died of heart failure in her New York apartment. Her body was laid out at a funeral home alongside a six-foot dollar sign, and hundreds of followers dressed in anything from jeans to furs lined up on Madison Avenue to pay tribute to her. Some wept, speaking of her in hushed tones; some glowed, describing how she had changed their lives forever.49 Eugene Winick, one of Rand’s lawyers, spotted Greenspan queuing in the cold, one man in a multitude. He invited Greenspan to ride up to the casket via a special elevator reserved for family and friends.50 Despite the clash over Social Security and his apostasy on gold, Greenspan still belonged to Rand’s inner circle.
• • •
Ayn Rand had died on Greenspan’s fifty-sixth birthday, and the loss left him in a testy mood; to his colleagues at his firm, his dry humor seemed to have deserted him.51 But he carried on doing what he always did: running his business in New York; continuing to be quoted on economic topics in the press; appearing on television. At a meeting of the President’s Economic Policy Advisory Board on March 18, he could feel the tide turning his way: the big guns around the table now agreed on the priority of reducing the budget deficit; and when Arthur Laffer tried to turn the conversation to the magic properties of gold, the rest of the room ignored him.52 Less than a year after their enactment, Reagan’s bold tax cuts were coming to be viewed as a mistake—and just as on gold, Greenspan was leading the charge for moderation. A rumor surfaced that Greenspan might even return to the White House in the new role of economic czar.53 The story infuriated Treasury Secretary Don Regan, who felt his authority challenged. But Greenspan’s star was clearly rising.
It was harder to make progress on Social Security, however. Faithful to James Baker’s instructions, Greenspan showed no urgency in organizing the commission.54 When it finally convened for its first meeting at the end of February, its composition made it clear that nothing would be agreed quickly. There was Claude Pepper, the white-haired critic of the administration’s proposed Social Security cuts the previous May—“Red Pepper,” conservatives had once called him. There were centrists such as Senator Daniel Patrick Moynihan and Republican heavyweights such as the wounded war hero Senator Bob Dole. Few thought that consensus would be possible in such a diverse crowd, but Greenspan saw to it that the commissioners were at least working from a common set of facts, even if they shared few common opinions.55 “If we are to forge a bipartisan consensus, all of us will have to swallow hard on some of the recommendations to which we attach our signatures,” Greenspan admonished his colleagues.56 It was clear that he was serious about getting a deal. Allowing Social Security to run out of cash would be a disaster for the White House.
Years later, the Greenspan commission would be remembered as a model of bipartisan cooperation. At the time, however, it did not always feel harmonious. Despite Greenspan’s appeal for cross-party comity, Washington’s political rancor soon spilled into the group. In May 1982, Republicans offended Democrats by unveiling a budget in Congress that assumed Social Security cuts; Democrats accused Republicans of preempting the commission’s recommendations. Channeling Shakespeare’s Mark Antony, Senator Daniel Patrick Moynihan declared, “I do not want to speak of a breach of faith,” clearly implying that there had been one.57 A few days later, the commission held its third formal meeting, and Moynihan lit into the Republicans all over again, charging that the administration had “terrorized older people into thinking that they won’t get their Social Security.” A Republican commissioner countered that Moynihan had “demagogued this issue from front to back and top to bottom.” Assuming an air of grandfatherly disapproval, Claude Pepper looked at Greenspan through his trifocal glasses and demanded that he assert control. “If one member can make an assault on another, we become a brawling group,” he scolded.58
Greenspan expressed the mild hope that “we can keep the rhetoric down to an absolute minimum.” He added, “Gentlemen, may I request that this particular discussion be moved to another forum?”
His delicate words had no impact whatever. Senator Bob Dole turned to the television cameras with a wry smile. “I want to apologize to the non-Congressional members of the commission,” he deadpanned. “We carry on like this all the time on the floor of the House and Senate.”59 Then Dole jumped into the fight, too. Greenspan looked on helplessly.
By the time of the elections in November 1982, the Greenspan commission had accomplished almost nothing. It had failed even in the narrow task that the White House had set for it. The Democrats exploited Social Security ruthlessly during the campaign; the existence of the bipartisan Social Security commission did not inhibit them in the slightest. Claude Pepper himself stumped tirelessly in two dozen states, demonstrating that some eighty-two-year-olds with hearing aids are fully capable of work. Thanks partly to Pepper’s efforts, the Democrats picked up a net gain of twenty-six seats in the House. The only good news was that the election was over.
Greenspan resolved to hold the next commission meeting somewhere outside Washington. Away from the atmosphere of Capitol Hill, the members might be less distracted from the task; and with the campaigning behind them, they might even be less partisan. A week after the election, the commissioners duly assembled at a nondescript Ramada Inn in Alexandria, Virginia. Outside, a group of seniors calling themselves the Gray Panthers picketed the meeting. “No ifs, ands or buts, no Social Security cuts!” they chanted.60
Partway through the deliberations, Senator Dole stood up and left, accompanied by a Democratic commissioner. This was actually a good sign. Disclosure laws required that the meetings be open to the public, so naturally the real bargaining took place in private huddles, safely away from the TV cameras. A little while later, several more commissioners exited through a side door; presently Dole marched back into the hearing, a look of purpose in his eyes, and bent down to talk to Greenspan. Even though Greenspan was chairing the meeting, he quit the room, too, leaving a member of the commission staff to filibuster for the cameras.61
Greenspan followed Dole until they found the cabal of absentee commissioners clustered in a back room. After months of fruitless stalemate, Dole had apparently discovered a faint glimmer of hope. The Democrats were ready to accept tweaks in the Social Security benefit formula that amounted to cuts.
Greenspan knew that the Democratic move might herald a breakthrough. But he also understood that this was not for him to determine.Despite the myth that later grew up around the commission—that Greenspan led an exercise in technocratic compromise by removing Social Security from the political realm—the truth was that the real negotiating power lay with the White House. Greenspan duly got on the phone to James Baker.
Baker dearly wanted to resolve the Social Security question. But he needed more than token cuts, because the president favored radical ones. “I’m gonna go on the radio; I’m gonna go above the heads of the Congress; I’m going to tell the American public,” Reagan would threaten periodically. “There’s got to be a better way, and you’re just going around there, you’re not coming in with something good.”62
After listening to Greenspan’s description of the Democratic concessions, Baker dismissed them as inadequate. It was not Greenspan’s fault. Baker had chosen Greenspan for the commission because he needed a political ally who could double as a dry economist, and Greenspan was playing the role perfectly. But despite Greenspan’s best efforts, his commission seemed destined to fail. It held a final meeting in December, which broke up after a few minutes.63
Despairing of talking to his colleagues on the commission, Greenspan addressed the public. On January 3, 1983, with the commission’s deadline just a fortnight away, he used his regular slot as a commentator on public television to make a final plea. Failure to repair Social Security’s finances would reinforce Wall Street’s expectation that the government would never fix the budget deficit, he said; it would confirm that policy was paralyzed. So long as Wall Street thought that Washington was dysfunctional, interest rates would remain excruciatingly high. The economic recovery would be delayed indefinitely.
• • •
The day that Greenspan made his plea, Senator Bob Dole published an op-ed in the New York Times—he, too, had decided to negotiate via the media. Dole noted that Republicans and Democrats were not that far apart; a handful of technocratic tweaks would be enough to salvage Social Security. Daniel Patrick Moynihan read the op-ed at his desk on the Senate floor and walked across the aisle to compliment his colleague.
“Are we going to let this commission die without giving it one more try?” Moynihan asked.64
Dole and Moynihan agreed to a final rescue effort. But they needed a new negotiating format. The full commission was too big, and obstreperous members on either flank made real bargaining impossible. The senators rounded up Greenspan and two other moderate commissioners, and then they made contact with James Baker at the White House. A Dole-Moynihan cabal had now supplanted the Greenspan commission.
Two days later, on January 5, the cabal gathered at James Baker’s home on Foxhall Road in Washington. Because the ultimate deal would need the president’s support, Baker and his staff did much of the talking for the Republican side, but they turned to Greenspan to make sure the numbers worked—it was he who had mastered the technical details, and no plan would fly without his blessing. Over the next week the negotiators continued in secret, sometimes convening in Baker’s basement and sometimes at the presidential guest quarters at Blair House, across Pennsylvania Avenue from the White House. On Saturday, January 8, there was a break to watch the Washington Redskins defeat the Detroit Lions in the National Football League play-offs; and then the bargaining began again, ranging over a potential cost-of-living-adjustment freeze and whether Social Security benefits should be taxable. One year earlier, the Greenspan commission had been asked to come up with a fix to present to the White House. But now the White House was shaping the deal directly.65
On the morning of Saturday, January 15, 1983, the Dole-Moynihan cabal met at Blair House for its last session. It agreed on a series of pragmatic fiddles that would extend Social Security’s solvency at least into the 1990s. Cost-of-living increases would be delayed; scheduled payroll tax increases would be brought forward; affluent retirees would pay taxes on their benefits: together, these measures would contain the system’s deficit.66 The meeting broke up around noon, in time for the participants to watch the Redskins take another step toward that year’s Super Bowl victory.
Once the negotiators had a deal, the next step was to sell it politically. James Baker was ready to deliver the endorsement of the president, but he wanted some cover; he proposed that Tip O’Neill, Democratic Speaker of the House, join Reagan in blessing the compromise. But when O’Neill heard what the White House was asking, he let out a torrent of unprintable abuse. There would be no joint endorsement.
Baker disappeared into the White House to consult the president. If O’Neill refused to endorse the package, they needed some other political insurance: Reagan could not be out there alone, taking all the heat for cutting benefits. At around seven o’clock that evening, Baker returned to Blair House with the verdict. The president would back the deal, but only if it had the support of the full Greenspan commission.
Greenspan walked out of Blair House, an owlishly bespectacled figure with slicked-back dark hair, braced against the sharp chill of the evening. Exiting the presidential guesthouse, he turned toward the elegant north front of the White House, then rounded the corner into Lafayette Square, where the rump commissioners were waiting in a nearby office. After months of aimless proceedings, this was his moment. He needed to deliver the commissioners’ support, even though the majority had been cut out of the deal that they would now put their names to.
Facing his fellow commissioners, Greenspan explained the Blair House agreement and called for a vote. To his surprise, Claude Pepper wanted a word with him.
Speaking in his rich southern brogue, Pepper asked, “Alan, you’ve been following these hearings very closely, and you know where I stand in general on all this. Now do you think that I, given my general point of view, can sign this document?”
Greenspan looked at the congressman with his rumpled face and bulbous nose. A few months later, a presidential aide would tell Time magazine that Pepper was almost alone among Democrats in his ability to frighten Ronald Reagan. But now Pepper was turning to Greenspan for advice. Greenspan was the man who knew. Pepper would vote however Greenspan told him.
“I can assure you that you have no concerns about signing this final document,” Greenspan informed him.67
When the vote was taken, twelve out of fifteen commissioners fell into line—including the doughty white-haired populist. It was just about enough, and Greenspan ran upstairs to phone the president to say that he had an agreement. When he came downstairs afterward, he found Claude Pepper holding forth to a scrum of reporters, flashbulbs popping all around. Despite Pepper’s propensity to say whatever came into his head, the moment passed without trouble.68
Around midnight, the group broke up. The members of the Greenspan commission had come together on a compromise that would later be remembered as a model—while the Fed was emerging as the dominant force in economic policy, outbreaks of pragmatic statesmanship from other parts of the government would be treasured for their rarity. But now it was time for the commissioners to go their separate ways, and they walked out into Lafayette Park and gazed over at the White House. The cold evening had brought snow. The usual mud of politics was covered in a soft white blanket.