then the world's premier bank. The board was a roll call of America's business
elite: Frank Cary of IBM, Walter Fallon of Eastman Kodak, John Dorrance
of Campbell's Soup, Lewis Foy of Bethlehem Steel—and me. We
would meet at 23 Wall Street, which J. P. Morgan himself had built in the era
when he reigned over American finance. On the fortresslike facade, you
could still see the pockmarks from the terrorist bombing of 1920, when in
the middle of a busy day a horse-drawn wagon of dynamite and shrapnel
was set off in front of the bank, killing and injuring dozens of people. The
bombing was attributed to anarchists but was never solved. Inside, the
company had preserved the decor, with its high ceilings and rolltop desks.
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The first time I sat in that boardroom I felt a little intimidated. There was a
portrait of J. P. Morgan on the wall above the board table, and where I happened
to be seated, when I raised my head, he was looking right at me.
You might have expected the people running Morgan to be loaded
with pedigrees and manners. Instead, the business was a meritocracy. A
good example was Dennis Weatherstone, who rose to CEO in the 1980s.
Dennis never went to university; he started right out of a polytechnic
school as a trader in Morgan's London branch. His success was hardly a result
of social connections, because he didn't have any.
Being on the Morgan board was a wonderful opportunity to learn the
inner workings of international finance. It puzzled me, for example, that
month after month the bank consistently showed a profit on currency trading.
I knew that because of the efficiency of foreign-exchange markets,
forecasting exchange rates for major currencies is as accurate as forecasting
the outcome of the flip of a coin. Finally I confronted the management:
"Look, gentlemen, all the studies I'm aware of say you can't make profits
consistently in foreign exchange."
"That's true," they explained. "But it's not forecasting that makes us
money. We're market makers; we collect on the spread between the bid and
the ask, no matter which way rates move." Like eBay today, they were taking
a small cut on every transaction in which they served as middleman—
and they were doing it on a vast scale.
One of the people on JPMorgan's international advisory council was a
Saudi billionaire named Suleiman Olayan. He was an entrepreneur a few
years older than I who'd gotten his start driving trucks for the Arabian-
American Oil Company (Aramco) in the 1940s. Pretty soon he'd spun that
off into a business that sold water, among other things, to the drillers, and
provided other services. From there he diversified into construction and
manufacturing; he was also the man who had introduced insurance into the
kingdom.
He was already enormously wealthy when Saudi Arabia nationalized
Aramco and took control of its own oil. And with the rise of OPEC, he'd
developed a taste for American banks. He'd bought 1 percent of the stock
not only in JPMorgan, but also in Chase Manhattan, Mellon, Bankers Trust,
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and four or five other big names. I got a kick out of him and his wife, Mary
an American who'd been working for Aramco when they met. Olayan was
even more of a sponge for information than I—he was forever asking me
questions about different aspects of the American economy
I never asked him about it, but later it occurred to me that being on the
Morgan council may have given him a better feel for the flows of petrodollars.
A major business for U.S. banks in those days was taking in vast deposits
of profits from Saudi Arabia and other OPEC nations and looking for
places, mainly in Latin America, to lend the money out. OPEC didn't want
to take on the risks of investing its surplus. The banks, to their eventual sorrow,
did.
Returning to New York from the Ford administration, I continued dating
Barbara Walters, whom I had met in 1975 while I was in Washington,
at a tea dance given by Vice President Nelson Rockefeller. The following
spring, I'd helped her think through a difficult and very high-profile career
decision: whether to leave NBC's Today show, where she had worked for
twelve years, rising to become a hugely popular cohost, and join ABC News,
where she would be TV's first evening news anchorwoman. To entice her,
ABC was offering a record-breaking salary of $1 million a year; and as everyone
knows, she finally opted to make the move.
I'm not threatened by a powerful woman; in fact, I'm now married to
one. The most boring activity I could imagine was going out with a vacuous
date—something I learned the hard way over my years as a bachelor.
Before getting to know Barbara, a typical evening for me would be a
professional dinner with other economists. Barbara, however, interacted
constantly with news, sports, media, and entertainment personalities, interviewing
a tremendous range of people, from Judy Garland to Mamie Eisenhower,
from Richard Nixon to Anwar Sadat. She also had show-business
roots. Her father, Lou, had been a big-time nightclub owner and Broadway
producer—his Latin Quarter clubs in Manhattan and Miami Beach were
the 1950s equivalent of the Stork Club of the 1930s, or more to the point
by this time, the disco era's Studio 54.
During the several years we dated and afterward (we remain good
friends), I escorted Barbara to lots of parties where I met people I otherwise
would never have encountered. I usually thought the food was good but
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the conversation dull. Of course, they probably thought the same about
me. Business economists are not exactly party animals.
Even so, I did build up a wonderful circle of friends. Barbara threw me
a fiftieth-birthday party at her house. The guests were the people I'd come
to think of as my New York friends: Henry and Nancy Kissinger, Oscar and
Annette de la Renta, Felix and Liz Rohatyn, Brooke Astor (I knew her as a
kid of seventy-five), Joe and Estee Lauder, Henry and Louise Grunwald,
"Punch" and Carol Sulzberger, and David Rockefeller. I'm still friends with
many of these people today, more than thirty years later.
Barbara's social network extended to Hollywood, of course. Business
would take me to Los Angeles five or six times a year, where I'd play golf at
the Hillcrest Country Club—the place where Jack Benny, Groucho Marx,
Henny Youngman, and other comedians used to have a roundtable every
day at lunch. (Ronald Reagan was also a Hillcrest member.) I learned a bit
about the media industry doing work for the William Morris Agency, which
was a Townsend-Greenspan client, and from spending time with the legendary
producer Lew Wasserman. And I'd tag along with Barbara to parties
in Beverly Hills, where I felt totally out of place. I'll never forget the moment
when Sue Mengers came up to me at a party she was throwing for
Jack Nicholson and gave me a hug. She was by far the most powerful agent
in Hollywood, representing stars like Barbra Streisand, Steve McQueen,
Gene Hackman, and Michael Caine. "I know you don't remember me," she
began. Then she explained how when I was fifteen and she was thirteen, we
used to hang out with other Washington Heights kids on the wall of Riverside
Park. "You never noticed me, but I always looked up to you," she said.
I was as speechless as I probably would have been at age fifteen.
D
D
iverting as all this was, I still kept an eye on Washington. Jimmy
Carter had no use for me—we met on only a couple of occasions and
never hit it off. (Of course, I'd been part of the Ford administration, and
he'd defeated Ford.) But from the sidelines in New York, I saw much going
on in government to cheer about. Many of the moves that the administration
and Congress made were the very ones I'd have pushed for, had I been
there.
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Most important, the Carter administration carried on the deregulation
initiative that had begun under Jerry Ford. The airline-deregulation bill,
promoted by Teddy Kennedy, passed in 1978. (Kennedy's right-hand man
on this project was Stephen Breyer, who was on leave from Harvard Law
School and who later became a justice of the Supreme Court and a good
friend.) After that, Congress moved methodically to deregulate telecommunications
and a half dozen other industries. Deregulation had a lasting
effect not just on the economy but also on the Democratic Party, ending its
domination by labor and opening it to business. But as important as these
changes were, President Carter got little credit for them, mainly because of
his style. Unlike Reagan, who knew how to present economic renewal stirringly,
Carter came across as hesitant and dispirited: he made change seem
like something you did because you had no choice.
The economy did not work in Carter's favor. For a year or so, his administration
enjoyed the benefits of the recovery that had started under
Ford. Then growth slowed and inflation resumed a steady and ominous rise.
It cast a continuing pall of uncertainty on wage negotiations and investment
decisions. It affected the rest of the world too, because other countries
depended on the stability of the dollar, and the dollar was weakening.
Throughout 1978 inflation ratcheted up—from 6.8 percent at the beginning
of the year to 7.4 percent in June to 9 percent by Christmas. Then
in January 1979 Islamic fundamentalists overthrew the shah of Iran, and
the second oil crisis began. As gas lines formed that summer owing to gasoline
price controls, the economy started to spiral toward another recession
and inflation crossed again into the double-digit range, hitting 12 percent
by fall.
It's not that Carter didn't try. His administration proposed no fewer
than seven economic programs. But none was strong enough to contain
what was fast becoming a crisis. From talking to my friends and professional
contacts in the administration, I thought I understood their problem.
Carter felt compelled to be all things to all people. So he'd propose new
social programs while simultaneously trying to reduce the deficit, lower
unemployment, and cut inflation. Among all those largely incompatible
goals, controlling inflation was the one most fundamental to long-term
prosperity. Under Carter it never got the priority it deserved. That was the
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analysis I gave to the New York Times in early 1980. I contrasted Carter's
position with that of President Ford: "Our general policy was that until we
beat inflation into the ground, we weren't doing anything else."
The Federal Reserve—by law independent of the White House—only
seemed to mirror Carter's indecisiveness. My old mentor Arthur Burns and
his successor, Bill Miller, kept trying to find a middle ground on monetary
policy that would accommodate conflicting economic needs. They didn't
want to make credit so easy as to further fuel inflation, but they didn't want
to make it so tight as to choke the economy into another recession. From
what I could see; that middle ground they were looking for didn't exist.
But I was in the minority. To most people, the peril to the economy
wasn't clear. There was a widespread feeling in Washington that since you
couldn't bring down inflation without causing more unemployment, it
wasn't worth the cost.
Some on the right and on the left even began to argue that inflation as
high as, say, 6 percent a year might be fine to live with—like Brazil, we
could index wages to take it into account. (As any good economist could
have predicted, Brazil later wound up with 5,000 percent inflation and a
total economic collapse.) This complacency even extended to Wall Street.
You could see it most clearly in the bond market, which, while it gets far
fewer headlines than its noisy cousin the stock market, is even larger.*
The interest rates on ten-year treasury notes, one of the best indicators
of investors' long-term inflation expectations, climbed fairly steadily into
the summer of 1979 but only modestly above where they were in 1975. This
implied that investors were still betting that the American economy was
inflation-resistant—and that the problem would somehow just go away.
The gas lines are what jolted everybody awake. The coming to power
of Iran's ayatollahs and the subsequent Iran-Iraq War cut oil production by
millions of barrels a day, and the resulting shortages at the pump had a
scary cascading effect. The cuts drove up oil prices enough to boost inflation
still more, and the high prices further increased instability by putting
*According to the Securities Industry and Financial Markets Association, the U.S. bond market
in 1980 had a total value of $2.24 trillion, versus $ 1.45 trillion for the stock market. At the end
of 2006, those figures were $27.4 trillion and $21.6 trillion, respectively.
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the banks in the position of having to recycle even more petrodollars. The
jump in inflation finally forced President Carter's hand. In July 1979; he
shook up his cabinet and at the same time named Paul Volcker to replace
Bill Miller as chairman of the Fed. In the years since I'd met Paul as a freshly
minted Princeton graduate, he'd risen to become president of the New
York Fed, the most important bank in the Federal Reserve System. Later it
emerged that until Carter appointed him, the president didn't even know
who Volcker was; David Rockefeller and Wall Street banker Robert Roosa
had urged him on the president as the necessary choice to reassure the financial
world. Volcker captured the dark mood when he said at his swearing-
in, "We are face to face with economic difficulties really unique to our
