experience. We have lost that euphoria that we had 15 years ago, that we
knew all the answers to managing the economy."
Volcker and I were not personal friends. At six foot seven, with an ever-
present cigar, he made a vivid impression, but in conversation I always
found him quite introverted and withdrawn. He didn't play tennis or
golf—instead, he liked to go off by himself and fly-fish. He was a bit of a
mystery to me. Of course, knowing how to play one's cards close to the vest
is a strength in a central banker, and underneath that eccentric exterior Paul
clearly had tremendous force of character. Having been a civil servant most
of his career, he didn't have much money. He kept his family at their house
in suburban New York for the entire time he was Fed chairman. All he had
in Washington was a tiny apartment—he invited me over once in the early
1980s to talk about the Mexican debt crisis, and the place was filled with
piles of old newspapers and all the other clutter of a bachelor apartment.
From the moment he was sworn in, Volcker knew that his job was, as
he later said, to "slay the inflationary dragon." He did not get much time to
prepare. He'd been Fed chairman barely two months when a crisis erupted:
investors all over the world started dumping long-term bonds. The interest
rate on ten-year treasury notes leaped to nearly 11 percent on October 23.
Suddenly investors began to picture an oil-induced inflationary spiral leading
to breakdowns in trade, a global recession, or even worse. All this started
to happen while Volcker was at an IMF meeting in Belgrade, where he had
gone to make a speech. He cut his trip short—much as I would do years
later on Black Monday, 1987, when the stock market crashed—and rushed
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back to convene an emergency Saturday-morning meeting of the Federal
Open Market Committee.
What he masterminded that Saturday was arguably the most important
change in economic policy in fifty years. The committee decided on his
urging that it would no longer try to fine-tune the economy by focusing on
short-term interest rates; instead it would clamp down on the amount of
money available to the economy.
The money supply then measured by a statistic called Ml, consists
mostly of currency in circulation and demand deposits, such as checking
accounts. When money expands faster than the totality of goods and services
produced—in other words, when too many dollars chase too few
goods—everybody's money tends to be worth less; that is, prices rise. The
Fed could indirectly control the money supply by controlling the monetary
base, mainly currency and bank reserves. Monetarists like the legendary
Milton Friedman had long argued that until you contained the money supply,
you hadn't tamed inflation. But the medicine required to do this was thought
to be extremely harsh. No one knew how tight a rein on the monetary base
would be required, or how high the associated rise in short-term interest
rates would have to be, before inflation was choked off. It would almost
certainly mean more unemployment, probably a deep recession, and possibly
a major outbreak of social unrest. President Carter backed Volcker in
the spring of 1980, declaring inflation to be the nation's number one problem.
That prompted Senator Ted Kennedy, then running against Carter for
president, to complain that the administration wasn't paying enough attention
to the poor or to tax cuts. By October, with the election drawing near,
Carter himself had begun to hedge. He too started talking about tax cuts
and criticized the Fed for putting too many eggs in the basket of strict monetary
policy.
Doing what Volcker did took exceptional courage—I thought so at the
time and believed it even more strongly after I became chairman myself.
Though he and I rarely discussed his experience of those events, I can imagine
how tough it was for him to push America into the brutal recession of
the early 1980s.
The consequences of his policy were even more severe than Volcker
had expected. In April 1980, interest rates on Main Street USA climbed to
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more than 20 percent. Cars went unsold, houses went unbuilt, and millions
of people lost their jobs—unemployment rose to near 9 percent in mid1980,
on its way to near 11 percent by late 1982. Early in 1980, letters
from people who'd been put out of work flooded Volcker's office. Builders
sent him and other officials cut-up two-by-fours to symbolize the houses
they were unable to build. Car dealers sent keys to represent cars they
hadn't sold. But by the middle of the year, after peaking at nearly 15 percent,
inflation began gradually to decline. Long-term interest rates inched
down too. Still, it would take three years before inflation was fully in check.
The economic misery, coupled with the Iranian hostage crisis, cost Jimmy
Carter the 1980 election.
C
C
oming out of the Ford years I was the ex officio senior Republican
economist—the last who'd held high-level public office. So it was
natural for me to get involved in Ronald Reagan's campaign. It made no
difference that Ford and Reagan had competed four years earlier for the
1976 Republican nomination. My old friend and ally Martin Anderson
joined the Reagan team—Marty had spent the post-Nixon years as a fellow
at the Hoover Institution—and I resumed my old campaign role too. Marty
was chief domestic policy adviser, a full-time position on the campaign
plane, and I was an unpaid part-time consultant to the staff, much the same
relationship I'd had to the Nixon campaign in 1968.
I worked mainly from New York, but on occasion I'd fly out to spend a
few days with the campaign. It was on one such trip, in late August, that I
clumsily made what was probably my most important contribution to the
election of Ronald Reagan. He had by this time already received the Republican
nomination, and had been stepping up his criticism of the Carter
administration. Speaking at a Teamsters lunch in Ohio, he declared that
working people's lives had been shattered by "a new depression—the Carter
depression." This, of course, was technically incorrect—I'd written much of
that speech, and the wording had been "one of the major economic contractions
in the last fifty years." Reagan had changed it on the fly. Marty
Anderson and I took pains to explain to reporters that afternoon that the
governor had misspoken. He had really meant to say "a severe recession."
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Reagan thanked us for setting things straight. But he also stuck to his
guns. When Democrats started challenging him on his mistake, he told
reporters, "As far as I am concerned, the line between recession and depression
cannot be measured in the strict economists' terms, but must be measured
in human terms. When our working people—including those who
are unemployed—must endure the worst misery since the 1930s, then I
think we ought to recognize that they consider it a depression." I was impressed
at how he'd been able to turn a mistake to his political advantage.
I assumed this would be the end of the matter, but apparently the episode
touched off an association in Reagan's memory. The following week
he added a new punch line to his stump speech. He started telling the
crowds that the president was hiding behind a dictionary. "If it's a definition
he wants, I'll give him one," Reagan would continue. "A recession is when
your neighbor loses his job. A depression is when you lose yours. And recovery
is when Jimmy Carter loses his!"
The crowds loved it, and it became one of his most oft-quoted lines.
You had to hand it to Reagan. Even though President Carter wasn't actually
the one who'd corrected his economics and even though the first two
clauses of the punch line were an old joke by Harry Truman, Reagan had
spun the episode into a funny and powerful campaign story.
What attracted me to Reagan was the clarity of his conservatism. There
was another line he often used on the stump: "Government exists to protect
us from each other. Where government has gone beyond its limits is in
deciding to protect us from ourselves." A man who talks in such terms is
clear on what he believes. Very rarely in those days would you find conservatives
who didn't fudge on social issues. But Reagan's kind of conservatism
was to say that tough love is good for the individual and good for society.
That proposition starts with a judgment about human nature. If it's accurate,
then it implies much less government support for the downtrodden.
Yet mainstream Republicans were conflicted about thinking or talking in
such terms, because they seemed contrary to Judeo-Christian values. Not
Reagan. Like Milton Friedman and other early libertarians, he never gave
the impression he was trying to be on both sides of the issue. It's not that
there wasn't sympathy for people who, through no fault of their own, find
themselves in dire straits; nor would you find any less personal willingness
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than among liberals personally to assist the downtrodden. But that wasn't
government's role, according to Reagan. Tough love, in the long run, is love.
A little later in the campaign, they put me on the plane with Reagan
for a cross-country flight. I was given a very specific task. The presidential
debates were approaching, and the governor's top aides were concerned
about criticism that Reagan sometimes seemed oblivious of facts. Martin
Anderson asked if I would use a cross-country flight to brief the candidate
thoroughly—not just on the economy, but on all the significant domestic
issues. "He knows you were a good adviser to Ford," Marty told me. "He'll
listen to you." When I agreed, Marty pulled out a briefing book and handed
it to me. It was a binder labeled Domestic Policy that must have been half
an inch thick. He said, "Just make sure you get through every topic."
I studied up on the material, and later that day, when we got on the
flight, Reagan's staffers sat me at a table facing the governor, with Marty by
his side. I noticed that they'd helpfully provided copies of the binder, one
for each of us. But Reagan was in an expansive mood, and by the time the
plane took off, he was asking friendly questions about Milton Friedman and
other people we knew in common. The conversation blossomed from there.
I think I heard more clever stories during that flight than in any other five-
hour period in my life. Marty kept shooting me glances, but I couldn't get
Reagan to open the briefing book. I tried a few times to steer the conversation
that way and then gave up. After we landed, I said, "Thank you, Governor.
That was a very enjoyable trip." And Reagan said, "Oh, I know Marty
doesn't like the fact that I didn't crack a book."
His temperament fascinated me. He brought a sunniness and benevolence
to the presidency that never wavered, even when he had to deal with
a dysfunctional economy and the global danger of nuclear war. Stored in his
head must have been four hundred stories and one-liners; while most of
them were humorous, he was able to tap them instantly to communicate
politics or policy. It was an odd form of intelligence, and he used it to transform
the country's self-image. Under Reagan, Americans went from believing
they were a former great power to regaining their self-confidence.
His stories sometimes had an edge. He told one on the airplane that
seemed particularly meant for me. It started with Leonid Brezhnev on the
reviewing stand at Lenin's Tomb, surrounded by underlings, watching the
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May Day parade. The Soviet Union's full military might is there on display.
First come battalions of elite troops, impressive soldiers, all six foot two;
marching in absolute lockstep. Right behind them are phalanxes of stateof-
the-art artillery and tanks. Then come the nuclear missiles—it's an
awesome show of strength. But after the missiles comes a straggle of six
or seven civilians, unkempt, shabbily dressed, utterly out of place. An aide
rushes up to Brezhnev and begs forgiveness. "Comrade Secretary, my apologies,
I do not know who these people are or how they've come into our
parade."
"Do not be concerned, Comrade," replies Brezhnev. "I am responsible
for them. They are our economists, and you have no idea how much damage
they can do."
Behind the humor was Reagan's long-held distrust of economists who
promoted what he saw as destructive government interference in the marketplace.
He was, of course, at root devoted to free markets. He wanted to
open up the action in the economy. Though his grasp of economics wasn't
very deep or sophisticated, he understood the tendency of free markets to
self-correct, and the fundamental wealth-creating power of capitalism. He
trusted Adam Smith's invisible hand to both encourage innovation and
produce outcomes that he generally perceived as fair. That's why it sometimes
made sense to leave the briefing book closed. Reagan's emphasis on
the big picture helped him defeat a president who seemed compelled to
micromanage.*
My involvement with the campaign made me a bit player in Reagan's
choice of a running mate, a drama that unfolded at the Republican convention
in late July. By then, Reagan had the nomination locked up, but the
race against President Carter looked close. Polls showed that the choice of
a running mate could be crucial. In particular, a ticket of Ronald Reagan
and Jerry Ford would pick up 2 or 3 percentage points, enough to win.
I learned this in the midst of the convention, which that year was in
