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of October 19, 1987.
ABOVE: Courtesy of the Ronald Reagan
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History took an astonishing turn when the
Berlin Wall fell in November 1989. But even
more amazing to me in the following days was
the economic ruin exposed by the fall of the
wall. By the time Soviet premier Mikhail
Gorbachev made his third visit to the United
States during the following spring, the Soviet
Union itself had begun to disintegrate. He is
shown below with President George H. W. Bush
and me in a receiving line at a state dinner in
Washington on May 31, 1990.
LEFT: AP Images/John Gaps HI; BELOW: Courtesy of the
George Bush Presidential Library
The strain between President George H. W. Bush and the Federal Reserve Board was evident in this
July 1991 meeting in the Oval Office. He made no secret of his view that the Fed hadn't eased interest
rates sufficiently. He reappointed me as chairman that year but later blamed me for his loss of
the presidential election of 1992. Courtesy of the George Bush Presidential Library
I he Federal Open Market Committee, the Fed's most powerful and sensitive
decision-making group, in session in June 2003. It meets eight times a year.
Federal Reserve photo—Britt Leckman
I had access to an increasingly
broad range of information
in my Fed office, as technology
revolutionized economic
analysis at the Board.
Photograph by Diana Walker
I made it a point to reserve time each day
for quiet study and reflection.
Photograph by Linda L. Creighton
BLACK MON DAY
I still have a letter Nick sent me during that time. He'd taken the extraordinary
step of inviting eight prominent economists from industry and
academia to the White House for lunch with the president. At the lunch,
each economist was asked whether the Fed ought to further cut short-term
rates. Put on the spot in front of the president, Nick wrote, "every single
one replied that it would do no harm"—and virtually all felt it would help.
"Alan, in my travels you stand alone in your view," the letter continued,
complaining bluntly of "lack of forceful leadership by the Fed."
In the event, the administration's bark was worse than its bite. As my
term as Fed chairman ended in the summer of 1991, there was a behind-thescenes
meeting in which the treasury secretary was fishing for a commitment
to further relax monetary policy in exchange for a second term. Nick
later claimed I had made such a deal. In fact there was no way I could commit
to that, even if I had wanted to (and even though I privately thought
our rate decreases might continue). Nonetheless, President Bush reappointed
me. I think he concluded I was his least worst choice: the Fed itself by all
accounts was functioning well, there was no other candidate whom Wall
Street seemed to prefer, and a change would have roiled the markets.
The impasse on monetary policy made it hard for Nick and me to remain
friends; though we continued to cooperate professionally, he canceled
our weekly breakfasts, and our socializing came to an end. With the election
year nearing, the administration decided to change its approach to the
Fed and its pigheaded chairman. The "Greenspan account," as they called it
in the White House, shifted to CEA chairman Mike Boskin and the president
himself.
T
T
he recovery was in fact finally picking up steam as the campaign sea
son began. By July I felt confident enough to declare that the fifty-
mile-per-hour headwinds had partially abated. Later analysis showed that
by spring GDP (which in 1990 replaced GNP as the standard measure of
aggregate output) was growing at a healthy 4 percent annual rate. But that
was hard to discern at the time, and the president, understandably, was
concerned that the growth be as robust and obvious as possible.
I met with the president only a handful of times that year. He was al
121
THE AGE OF TURBULENCE
ways extremely cordial. "I don't want to bash the Fed/' he'd say. He'd probe
and raise substantive questions based on what he'd been hearing from his
business contacts. He'd ask things like, "People are saying restrictions on
bank reserves are part of the problem; how should I be looking at this?"
These were not questions Reagan would have raised—he had no patience
for discussing economic policy—and I was delighted that Bush wanted to
know. I felt a lot more comfortable dealing with him than I did with Brady
because the discussion was never adversarial. But when we talked about interest
rates, I was never able to convince him that lowering rates further
and faster almost certainly wouldn't have speeded the recovery and would
have increased the risk of inflation.
The fact was; the economy was recovering, just not in time to save the
election. The deficit probably hurt Bush worse than anything else. Although
the belated budget cuts and the tax hikes of 1990 had put the country on
a somewhat better fiscal footing, the recession cut so deeply into federal
revenues that the deficit temporarily mushroomed. It hit $290 billion in the
last year of Bush's term. Ross Perot was able to hammer at that in the campaign
and succeeded in dividing the Republican vote enough to sink Bush.
I was saddened years later when I discovered that President Bush blamed
me for his loss. "I reappointed him and he disappointed me," he told a television
interviewer in 1998. It's not in my nature to be suspicious. I realized
only in retrospect the extent to which Brady and Darman had convinced
the president that the Fed was sabotaging him. His bitterness surprised me;
I did not feel the same way about him. His loss in the election reminded me
of how voters in Britain had ousted Winston Churchill immediately after
the Second World War. As best I could judge, Bush had done an exemplary
job on the most important issues confronting the United States, our confrontation
with the Soviet Union and the crisis in the Middle East. If a
president can earn reelection, he did. But then, so did Winston Churchill.
122
S I X
THE FALL OF
THE WALL
I
I
t was October 10, 1989. Jack Matlock, the U.S. ambassador to the Soviet
Union, was introducing me to an audience of Soviet economists
and bankers at Spaso House, the ambassador's official residence in
Moscow. My assignment was to explain capitalist finance.
Of course, I had no notion that in a month the Berlin Wall would be
torn down, or that in a little more than two years the Soviet Union would
be no more. Nor did I know that I would, in the years following the Eastern
bloc's collapse, become witness to a very rare event: the emergence of com
petitive market economies from the ashes of centrally planned ones. In the
process, the demise of central planning exposed the almost unimaginable
extent of the rot that had accumulated over decades.
But the biggest surprise that awaited me was an extraordinary tutorial
on the roots of market capitalism. This is the system with which, of course,
I am most familiar, but my understanding of its foundations was wholly ab
stract. I was reared in a sophisticated market economy with its many sup
porting laws, institutions, and conventions long since in place and mature.
The evolution I was about to observe in Russia had occurred in Western
economies scores of years before I was born. As Russia struggled to recover
THE AGE OF TURBULENCE
from the crash of all the institutions related to the old Soviet Union, I felt
like a neurologist who learns by observing how a patient functions when a
part of the brain has been impaired. Watching markets try to work in the
absence of the protection of property rights or a tradition of trust was a
wholly new experience for me.
But that was all ahead of me as I looked out at the hundred or so people
assembled before me at Spaso House and wondered, What are they
thinking? How can I reach them? They were all products of Soviet schools,
I assumed, and deeply indoctrinated with Marxism. What did they know
of capitalist institutions or market competition? Whenever I addressed a
Western audience, I could judge its interests and level of knowledge and
pitch my remarks accordingly. But at Spaso House, I had to guess.
The lecture I had prepared was a dry, diffuse presentation on banks in
market economies. It delved into such topics as the value of financial intermediation,
various types of risk commercial banks face, the pluses and minuses
of regulation, and the duties of central banks. The talk was very slow
going, especially as I had to pause paragraph by paragraph for the translator
to render my words into Russian.
Yet the audience was quite attentive—people stayed alert throughout,
and several seemed to be taking detailed notes. Hands went up when I finally
reached the end and Ambassador Matlock opened the floor for questions.
To my surprise and pleasure, the ensuing half hour of discussion made
it obvious that some people got what I was talking about. The questions
they asked revealed an understanding of capitalism that startled me in its
sophistication.*
I'd been invited by Leonid Abalkin, the deputy prime minister in charge
of reform. I'd expected our meeting that week to be largely ceremonial, but
it turned out to be anything but. An academic economist in his late fifties
*How did these people know so much? In 1991 I finally asked Grigory Yavlinsky, one of Gorbachev's
top reformers. He laughed and explained, "We all had access to books on econometrics
in the university libraries. The Party ruled that because these were mathematical works,
they were purely technical, devoid of ideological content." Of course, the ideology of capitalism
was embodied in many of the equations—econometric models revolve around the driving
forces of consumer choice and market competition. Thus, Yavlinsky said, Soviet economists
had become quite knowledgeable about how markets worked.
124
TH E FALL OF TH E WALL
who was one of Gorbachev's kitchen cabinet of reformers, Abalkin had
built a reputation for political flexibility and grace. His long face made him
look as if he was carrying a lot of stress, and there were plenty of reasons for
that to be the case. Winter was setting in, there were reports of looming
electricity and food shortages, Gorbachev was talking publicly about the
risk of anarchy, and the prime minister had just asked the parliament for
emergency powers to ban strikes. Perestroika, Gorbachev's ambitious fouryear-
old economic reform initiative, was in danger of collapse. I sensed that
Abalkin had his work cut out for him because his boss understood so little
of the mechanics of markets.
Abalkin asked my opinion of a proposal being touted by the Soviet
state planners. It was an inflation-fighting program that revolved around
indexation—tying wages to prices—as a way to reassure the population
that the purchasing power of their wages wouldn't be destroyed. I told him
briefly about the U.S. government's ongoing struggle to foot the bill for
having indexed Social Security benefits, and volunteered my strongly held
view that indexing is only a palliative that, in the longer run, is likely to
cause even more serious problems. Abalkin didn't seem surprised. He said
he thought that the transition from bureaucratic central planning to the
private market, which he called "the most democratic form of regulating
economic activity," would take many years.
Fed chairmen had ventured behind the iron curtain before—both Arthur
Burns and William Miller had come to Moscow during the period of
detente in the 1970s—but I knew they'd never had a conversation like this
one. In those years, there had been little to discuss: the ideological and political
divide between the centrally planned economies of the Soviet bloc
and the market economies of the West was simply too vast. Yet the late
1980s had brought astonishing changes, most obviously in East Germany
and other satellites, but also in the Soviet Union itself. Just that spring, Poland
had held its first free elections, and the ensuing events had amazed the
world. First the Solidarity union won decisively against the Communist
Party, and then, instead of sending in the Red Army to reassert control,
Gorbachev declared that the USSR accepted the outcome of a free election.
More recently East Germany had started to dissolve—tens of thou
125
THE AGE OF TURBULENCE
sands of its people took advantage of the state's weakening hold to emigrate
illegally to the West. And just days before I arrived in Moscow, Hungary's
Communist Party renounced Marxism in favor of democratic socialism.
The Soviet Union itself was obviously in crisis. The collapse of oil prices
a few years before had eliminated its only real source of growth, and now
there was nothing to offset the stagnation and corruption that had become
