Maestro
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Leonard Downie Jr., The Washington Post’s executive editor, and Steve Coll, the Post’s managing editor, have yet again allowed me to wander on what is perhaps the longest leash in American journalism. This enables me to pursue book-length, in-depth projects. Along with them, I also want to thank the Post’s owners, Katharine Graham and Don Graham. The support of these four makes my work possible.
I once again thank Jennifer Belton, director of news research, and her staff for her numerous assists.
Olwen Price transcribed interviews, often under serious time pressure. She always found a way to meet my requests.
Joe Elbert and his photo staff at the Post, the best in the business, provided most of the pictures in this book.
At Simon & Schuster, a special effort was made by Carolyn K. Reidy, the president and publisher, to once again put this book on the fast track so it would be in the bookstores soon after completion. I also thank Jonathan Newcomb, the chairman; Jack Romanos, the president and chief operating officer; David Rosenthal, the publisher, who is always full of creative ideas; Anja Schmidt, the associate editor, who suggested numerous improvements; Elisa Rivlin, the general counsel; Victoria Meyer, the director of publicity; Aileen Boyle, the associate director of publicity; Jackie Seow, the art director and jacket designer; Deirdre Amthor, the associate design director; Brooke Koven, the designer; George Turianski, the production manager; and K. C. Trommer, the assistant to Alice Mayhew.
A special thanks to Stephen Messina, the copy supervisor, for his care and expertise with all details—small, medium and large.
Sona Vogel came to Washington and spent a week copyediting the manuscript. I thank her very much for her steady, precise work and her acceptance of a less formal style.
I thank Kelly Farley for her painstaking attention to typesetting details.
The core of this book comes from more than 100 sources who agreed to provide information as long as their identities would not be revealed. Some were official and some unofficial; some might not mind having their names mentioned, others would. Exercising maximum care, I will thank none by name. To all those unnamed I offer my thanks and gratitude. Many spent hours, and some spent dozens of hours, with me engaging the subject. What is presented is not the way any single person would do it himself or herself. Despite its shortcomings, all should recognize this book as a scrupulous and careful effort to find what was for me the best obtainable version of the truth.
The Wall Street Journal, which provides the most comprehensive financial and economic coverage, and The Washington Post, particularly its veteran Fed reporter John Berry, were invaluable for this project. Their reporting and analysis are the starting point and the foundation for a book attempting to cover 13 years. My assistant Jeff Himmelman and I relied on their work, both directly and indirectly. We also relied heavily on The New York Times, BusinessWeek, Newsweek, Time, U.S. News & World Report, the Los Angeles Times, The New Yorker, National Journal and the Associated Press.
A number of books offered important background. They are William Greider’s Secrets of the Temple, Stephen K. Beckner’s Back from the Brink, David M. Jones’s The Politics of Money, and Steven Solomon’s The Confidence Game. These books assisted us in our understanding of the Volcker and early Greenspan years at the Fed. Alan Blinder’s Central Banking in Theory and Practice and Lawrence Lindsey’s Economic Puppetmasters provided useful information about the Fed’s decisions and responsibilities. Kiplinger’s Practical Guide to Investing and the Fed’s publication Purposes and Functions were of great help in creating our own glossary.
Lou Cannon’s President Reagan: The Role of a Lifetime, the definitive book on Reagan, was also a great help.
Robert B. Barnett, my agent and attorney, again provided the soundest advice and guidance—counselor in the sense of friend, almost an extra brother.
Jim Wooten of ABC assisted me at a critical point in the writing.
Thanks again to Rosa Criollo, Norma Gianelloni and Jackie Crowe.
Tali Woodward, my older daughter and a reporter for the San Francisco Bay Guardian, took a week to read the manuscript and offered many wise and penetrating suggestions.
Elsa Walsh, my wife and true confidant, has established a loving house and life for all of us. Her editing, suggestions and questions helped immeasurably. She is a woman and writer of both tenacity and conscience. For me, she has done nearly everything but invent the Internet.
One of the final pieces of the Richard Nixon puzzle.
The Last of the President's Men
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ABOUT THE AUTHOR
Bob Woodward, an assistant managing editor of The Washington Post, has been a newspaper reporter and editor for 30 years. He has authored or coauthored eight number one national nonfiction bestsellers. They include four books on the presidency—All the President’s Men (1974), The Final Days (1976), The Agenda (1994) and Shadow (1999)—and books on the Supreme Court (The Brethren, 1979), the Hollywood drug culture (Wired, 1984), CIA (Veil, 1987) and the Pentagon (The Commanders, 1991). He has two daughters, Tali and Diana, and lives in Washington, D.C., with his wife, Elsa Walsh, a writer for The New Yorker.
ALSO BY BOB WOODWARD
Shadow: Five Presidents and the Legacy of Watergate
The Choice
The Agenda: Inside the Clinton White House
The Commanders
Veil: The Secret Wars of the CIA 1981–1987
Wired: The Short Life and Fast Times of John Belushi
The Brethren
(with Scott Armstrong)
The Final Days
(with Carl Bernstein)
All the President’s Men
(with Carl Bernstein)
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GLOSSARY
Arbitrage The buying of stocks, currency or any security in one market to sell for an expected profit in another market. The strategy is to take advantage of small price differences. Since the differences may be quite small, large volumes must be purchased to make money. It can be risky and expensive if prices move in directions the investor has not anticipated.
Board of Governors The Board of Governors of the Federal Reserve System is made up of seven governors, each of whom is appointed by the president and confirmed by the Senate to a 14-year term. The chairman is a member of the Board of Governors, and his position as head of the Federal Reserve is based on a separate four-year appointment by the president. The board controls the discount rate, and each member of the board is also a voting member of the Federal Open Market Committee. The board also has responsibilities for bank regulation.
Bond A note or obligation requiring the borrower, normally a government or corporation, to pay the lender, normally an individual or institutional investor, the amount of the loan—or face value—at the end of a fixed period of time. That period is normally anywhere from 3 months to 30 years. The borrower must pay the lender a fixed rate of interest—a percentage of the face value—each year until the bond matures. Government and corporate bonds, totaling trillions of dollars of indebtedness, trade in the bond market. Bond prices move in the opposite direction of interest rates.
Central Bank A national bank that operates to control and stabilize the currency and credit conditions in a country’s economy, usually through control of interest rates. This is called the nation’s money or, more formally, its monetary policy. The Federal Reserve is the central bank of the United States and is assigned by law to pursue specific national economic goals.
Consumer Price Index The consumer price index (CPI) is a measure of the average change over time in the prices paid by urban consumers for certain consumer goods and servi
ces. The CPI provides a way to compare what goods and services cost this month with what the same goods and services cost a month or a year ago. The CPI is the most widely used measure of inflation. Many economists, including Alan Greenspan, believe that the CPI overstates inflation by as much as 1 percent, because of the difficulties and errors in measuring prices and weighting them in the overall index.
Discount Rate The rate controlled by the Board of Governors that the 12 Federal Reserve banks charge on daily loans to private commercial banks, savings and loan associations, savings banks and credit unions. In the period roughly from 1987 to 1992, the announcement of changes in the discount rate was the primary means the Fed used to communicate its interest rate policy to the general public.
Ease or Easing To “ease” credit, the Fed pumps money into the nation’s banking system through the purchase of U.S. Treasury bonds. This causes the key fed funds interest rate—the rate banks charge each other for overnight loans—to go down, which makes it easier for consumers and businesses to borrow. This normally causes the economy to grow and is a strategy for averting low economic growth and fighting a recession.
Fed Funds Rate The rate controlled by the FOMC that banks charge each other on overnight loans—and, in recent years, the key short-term rate. The rate affects overall credit conditions in the United States and is the Fed’s main weapon against both recession and inflation. Since 1994, changes to the fed funds rate have been announced publicly. The markets and bankers realize the power of the Fed to enforce the new rate, so the rate moves to its new level immediately.
Federal Open Market Committee (FOMC) The FOMC consists of the 7 members of the Board of Governors and the presidents of the 12 Federal Reserve Banks. Everybody participates in each meeting, but only 12 people vote: the 7 Fed governors; the president of the New York Fed, who serves as the FOMC’s vice chairman and has a permanent voting seat; and 4 of the other 11 bank presidents, who serve one-year terms as voting members on a rotating basis. The committee meets in Washington eight times a year, about once every six weeks, to assess the state of the economy and to decide whether to take any action on the fed funds rate, which the committee controls.
Federal Reserve Act Passed in 1913, the Federal Reserve Act established the Federal Reserve System as an independent government body that had sovereign power over the nation’s currency and over a number of regulatory issues concerning the banking system. Since 1913, the act has been modified a number of times—most notably in 1978, with the Full Employment and Balanced Growth Act, which instructed the Federal Reserve to seek stable prices, maximum sustainable growth for the economy and maximum employment consistent with the two other goals.
Federal Reserve System The system includes the Board of Governors in Washington, D.C., and the 12 district Federal Reserve Banks and their outlying branches. The reserve banks are in New York, San Francisco, Boston, Philadelphia, Richmond, Cleveland, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City and Dallas. The Federal Reserve System also processes and clears the great majority of all banks’ paper checks, facilitates wire transfers for payments, regulates how much paper currency and coin are in circulation and oversees the entire banking industry.
Gross Domestic Product (GDP) The broadest measure of the output of the U.S. economy, the GDP is the amount of goods and services produced in the United States.
Hedge Fund An investing group that pools large sums of money. The basic strategy is to identify stocks or other investments that will increase in value, but also to identify those that will decline. By short selling those expected to decline, the fund hedges against market downturns and makes more money than it would by investing strictly in securities expected to increase in value.
Inflation A rate of increase in the general price level of all goods and services.
Inflation Expectations The rate of increase in the general price level anticipated by the public in the period ahead, which affects purchasing decisions, business expansion or contraction and investment decisions.
Long-term Interest Rates Interest rates on loan contracts—or debts such as Treasury bonds or corporate bonds—having maturities greater than one year.
Monetary Policy A central bank’s actions to influence short-term interest rates and the supply of money and credit in accordance with national goals. The main tool of U.S. monetary policy is open market operations, the buying or selling of U.S. Treasury bonds, to control the fed funds rate.
Money Supply Technically, the amount of money in the economy—including currency, bank deposits and money market accounts. As people moved large amounts of money into mutual funds in the early 1990s, the money supply became almost impossible to measure.
NAIRU The non-accelerating inflation rate of unemployment is an economic concept that holds that there is a certain rate of unemployment that the economy can sustain without severe inflation. Economists who believe in the NAIRU think that if the unemployment rate dips below the NAIRU, the workforce will insist on wage increases and trigger inflation.
Open Market Operations Purchases and sales of government and other securities in the open market through the Domestic Trading Desk at the Federal Reserve Bank of New York, as directed by the FOMC. Open market operations effectively set short-term interest rates. Purchases inject money into the banking system and stimulate growth of money and credit, while sales contract credit.
Productivity Output per worker per hour.
Short Selling A technique used to take advantage of an anticipated decline in the price of a stock or other security by borrowing stock from a broker and selling it immediately. If the investor is right and the price of the stock declines, the borrowed shares can be replaced by buying them at the cheaper price from the market. The profit is the difference between the price at which the investor sells the shares and the price at which the investor buys them later on. If the price of the shares rises, however, the investor will lose money when the shares have to be replaced.
Stocks Certificates representing partial ownership in a corporation and a claim on the firm’s earnings and assets. Stocks of profitable corporations normally yield periodic payments of dividends. The value of a stock often rises or falls in the market as a company meets, or fails to meet, earnings expectations.
Tighten or Tightening To “tighten” credit, the Fed sells U.S. Treasury bonds, which withdraws money from the banking system. With the supply of money decreased, banks become less willing to lend—which causes the fed funds and other short-term interest rates to rise. This makes borrowing more difficult and usually causes the economy’s growth to slow. Tightening is the Fed’s main weapon against inflation.
NOTES
Most of the information in this book comes from extensive interviews with those who made, participated in or witnessed the decisions recounted here. Since the story is about politics, money and Washington, nearly all of the sources declined to allow me to identify them by name or position. In addition to these sources, I and my assistant, Jeff Himmelman, have been able to use some of the extensive documentary records kept by the Federal Reserve. Most important have been the verbatim transcripts made from tape recordings of the FOMC meetings. These transcripts, available only for the period 1987 to 1994, amount to hundreds of pages for each year—providing an unusual, intimate and real-time record of the discussion about decisions on key interest rates and other matters.
PROLOGUE
Most of the information in this chapter comes from the author’s interviews with four primary knowledgeable sources, who provided specific recollections based on an agreement that their identity would not be revealed. The first source provided specific information during three interviews; the second source was interviewed on June 2, 2000; the third source was interviewed on three occasions; and the fourth source was interviewed on four occasions. In addition, former Reagan White House Chief of Staff Howard Baker was interviewed in detail about these incidents on the record on May 15, 2000. President Reagan, who is seriously ill, could not b
e interviewed.
Reagan, who saw virtue in Volcker’s anti-inflation campaign: For more information on Reagan’s relationship with Volcker, see Lou Cannon’s comprehensive biography, President Reagan: The Role of a Lifetime (2000 edn.), 227–239.
Baker had no illusions that a Fed chairman: The Federal Reserve System is independent only in the sense that nobody within government—the president, the Congress, the courts—can reverse its decisions. Congress does have oversight over the system, because the Constitution gives Congress the power to coin money and set its value—a power that, in the Federal Reserve Act, Congress delegated to the Federal Reserve. The Fed must work within the framework of the overall objectives established by the government, so the Fed describes itself as “independent within government” instead of independent of it. For more information on the basics of the Federal Reserve System, see also “The Board of Governors of the Federal Reserve System,” The Federal Reserve System: Purposes and Functions (1994), 1–15. The publication can be ordered from the Federal Reserve or found on-line at www.federalreserve.gov/pf/pf.htm.
Board members are appointed to 14-year terms: the 14-year terms are essentially rolling. If a governor is appointed to a 14-year term but leaves after 6 years, the next governor to fill that slot signs on for the remaining 8 years and then has to be reappointed to another 14-year term.