Martian's Daughter: A Memoir (21 page)

My CEA colleagues also made me feel comfortable in my new role. Herb Stein had become chairman and Henk Houthakker had been replaced by Ezra Solomon, a well-known professor of finance at the Stanford business school. Born in Burma to parents who endowed him with an exotic Burmese British Jewish heritage, Ezra had snapping black eyes, a round head, and a small, taut body. Physically, Herb and Ezra were in sharp contrast, the one as ponderous as the other was delicate, the one as drawling in speech as the other was staccato. But they had in common wise intelligence, dry wit, and a generosity of heart that made them ideal colleagues. I was also a fan of George Shultz, who became both secretary of the treasury and the president's “economic czar” soon after I joined the CEA. I did get annoyed with him, though, when he hatched a plan to have me visit a supermarket with the president and cast baleful eyes on a package of hamburger, a photo op designed to symbolize the president's sympathy for the difficulties rising food prices were causing the American housewife. “If you put me in that position, George, I'll quit,” I said, only half in jest, and the idea went no further.

Because I had so recently left the Price Commission, I quite naturally became a spokesperson for the administration on the wage-price control program as soon as I joined the CEA. In my early months there, it wasn't hard to take some pride in the way things were going. The price bulge that had immediately followed the end of the ninety-day freeze in November appeared to be slowing by March and April. In our testimony before the Joint Economic Committee in mid-April, Herb and I could truthfully list signs of progress, pointing out that the Phase I and Phase II programs had significantly reduced the rate of inflation, contributed to a
more rapid rise of real (inflation-adjusted) wages, and led to an increase of over 1.8 million in the number of employed workers. We were careful to insert a note of cautions—“We cannot say we are sure that the system
as it now exists
will achieve our goal”—but our overall tone was both optimistic and determined.
²⁷

Even Walter Heller, the “dean” of Democratic economists who had chaired the CEA under presidents Kennedy and Johnson, acknowledged that he and I “were in substantial agreement that the economy would improve measurably during 1972.” Furthermore, he added, Phase II “is nudging wage and price increases down a little faster than natural forces would…After a very wobbly start, Phase II is shaping up.”
²⁸

While I was focused on restraining domestic prices as a member of the Price Commission, the international aspects of the president's New Economic Policy had set off a flurry of activity. The other industrialized countries had been caught off guard by his declaration of August 15, 1971, that the United States would simultaneously abrogate its commitment to convert foreign governments' dollar holdings into gold at thirty-five dollars an ounce and impose a temporary surcharge of 10 percent on imports until there was a positive shift of some thirteen billion dollars in the US basic balance of payments.
²⁹
Foreign leaders expressed outrage at these unilateral declarations. Privately, they acknowledged that their reactions were aggravated by the timing of the president's announcement, which had forced high government officials in Europe to cut short their cherished monthlong August vacations and rush back to their capitals. The stage was set for hard bargaining between Secretary Connally and his counterparts in Europe and Japan.

I had been deeply embroiled in the events that led up to the president's dramatic abrogation of the dollar's tie to gold when I was on the CEA staff, and I felt strongly about the urgency of moving to an international monetary system more responsive to the signals from foreign exchange markets than the one negotiated twenty-five years earlier at Bretton Woods. Now I was a full-fledged member of the Volcker Group, which was struggling to develop an American proposal for restructuring the international system.

The need to move forward on a proposal was urgent. The measures negotiated under the Smithsonian Agreement of December 1971, in
which all participants made some adjustment in the value of their currencies—the United States by reducing the value of the dollar in terms of gold—weren't adequate to shrink the US current account deficit, downward pressure on the value of the dollar continued, and restrictions on international currency transactions were proliferating in Europe. I, along with others in the administration, had to defend American policy against accusations of “benign neglect” of the situation, and it was clear that there would be no progress until the United States put a proposal on the table.

The most significant structural changes embedded in the US proposal were to make the balance of payments adjustment process much more symmetrical than it had been under Bretton Woods. It would put as much pressure for adjustment on countries with chronic payments surpluses as on those with chronic deficits, whereas the old system had exerted pressure only on the latter. In the new system, furthermore, the US dollar, rather than serving as the currency whose value adjusted passively to eliminate inconsistencies in other countries' balance of payments goals, would be a currency much more like any other, meaning that the United States could now take active measures affecting its own exchange rate. It also meant, I warned, that with the United States no longer functioning as the shock absorber, payments balances would have to “add up” more rigorously than before, and there would have to be a conscious effort to achieve compatible balance of payments goals.
³⁰

When the Volcker Group's proposal was presented for international discussion, I cautioned that, although it was flexible, leaving plenty of room for discussion and amendment, it would be a mistake to treat it like a Chinese menu, combining some selections from column A with others from column B. The proposal, I insisted, was comprehensive and its parts highly interdependent, just like one of the elegantly curved staircases in the Old EOB, which would collapse along its entire length if one step were to break or be removed.
³¹

The administration was doing battle at home, as well as abroad, to create an open and well-functioning global economy. It had been fighting congressional proposals to restrict imports when I left the CEA staff, and the battle was still in full swing when I returned. Seizing the initiative, the administration took the lead in starting up a seventh round of multilateral
trade negotiations under the auspices of the General Agreement on Tariffs and Trade (GATT). Its goals were not only to achieve reductions in both tariffs and nontariff barriers but also, by lowering them, to reduce the discriminatory effects of the European Communities' (EC's) preferential trade agreements with both its new members and its former African colonies. Given a chance to put into practice the classroom lectures I regularly gave on the advantages of both trade liberalization and the GATT principle of nondiscrimination, I dove enthusiastically into the preparations for these negotiations.

My interactions with the Washington representatives of the EC countries and Japan sometimes continued, on a more congenial basis, into our weekday evenings, when we were invited guests at dinners hosted by one of their embassies. These dinners, which always ended promptly by ten so that people could be at work early the following morning, generally featured formal dress and boringly predictable menus. Bob was convinced that there was a huge subterranean central kitchen somewhere under the city, whence filet mignon, roast potatoes, and tiny green peas were sent through a network of pneumatic tubes to various embassies throughout Washington.

Whatever the menu, the conversations at these dinners were always stimulating. Where else could one have the deputy director of the National Security Council on one side and the elegant Count Etienne Davignon—a leading figure in the evolution of both the North Atlantic Treaty Organization (NATO) and the European Economic Community—on the other? Nor were all the gatherings of official Washington so formal. Don and Joyce Rumsfeld, in those days the young, ambitious but not yet affluent parents of three young children, gave parties in the garden of their small Georgetown house at which many of the administration's leading lights could be found drinking beer and munching on increasingly soggy popcorn and potato chips.

I was astonished and angry to discover that the gender issue haunted our social, as well as my professional, life in Washington. Before I joined the CEA, I had encountered the separation of ladies and gentlemen after dinner only in the pages of nineteenth-century novels. But at my first official dinner, hosted by the European Union's ambassador in Washington in honor of the heads of Europe's most important central banks,
I was dumbfounded when, following dessert, the ladies were invited to go upstairs to “powder their noses” while the gentlemen enjoyed brandy, cigars, and serious conversation in the living room. Even though I was one of the Nixon administration's most senior international economists, I found myself making small talk in an upstairs bedroom while my husband, the professor of English, listened to Arthur Burns, my old Columbia professor and now chairman of the Federal Reserve Board, discussing the relationships among the dollar, the mark, the franc, and the pound sterling with his European counterparts. The irony of the situation left me inwardly seething.

It was part of Washington lore that when Katharine Graham—owner of the
Washington Post
and a leading figure on President Nixon's “enemies list” for having stood firm on publishing the Pentagon Papers—found herself in a similar situation she simply rose from the table, called for her limousine, and went home. I knew I would never have the courage to do likewise. But, after that first humiliating experience, I did tell my secretary, when responding to such invitations, to ask directly whether it was the host's custom to separate men from women after dinner. If the answer was yes, she was to refuse the invitation and explain quite candidly why. So I never did get to dine at the British Embassy. Eventually, this antediluvian practice was abandoned. Mrs. Graham had won her battle, and I like to think that I was one of her foot soldiers.

By the time the Republican nominating convention was held in Miami in July of 1972, it was clear that the wage-price controls program, which was approaching the first anniversary of its announcement, would be a significant issue in the upcoming presidential campaign. Those of us in the administration took every opportunity to give the president's program credit for the fact that the economy was expanding and the unemployment rate steadily declining, while overall inflation appeared to be on track to reach the “interim goal” of 2 to 3 percent by the end of the year. The Democrats, on the other hand, could highlight the continuing increase in food prices, which had a particularly powerful impact on family budgets. It was no surprise, therefore, that the three council members were invited to attend the Republican convention and brief various groups there, including state delegations and the party platform's drafting committee.

Because protests against Nixon's escalation of the Vietnam War were in full swing across the country, we expected some heightened security at the convention. But the atmosphere of our Miami Beach hotel was that of an armed camp surrounded by enemy troops. Soon after we arrived, having gone for a swim and a walk on the beach, it took considerable argument to persuade the pistol-packing guards to let us back into our hotel because we had forgotten to wear our identifying dog tags. The next morning our bus to the convention center in Miami, even with a police escort, had to plow through a sea of furious faces, shaking fists, hurled epithets, and worse; one angry young man with an ice pick tried to puncture our tire but was quickly hauled off by the police. The center itself had become a fortress, ringed by two concentric circles of buses ringed end to end, with no space in between (I wondered how Miami's bus commuters were getting to work that day). The anger out there was as palpable as the whiffs of tear gas that seeped into our bus, and later into the convention hall itself.

President Nixon's nomination was unchallenged and therefore a foregone conclusion, so almost the entire convention program consisted of speeches of self-congratulation and discussions of how most effectively to attack the other side. It all culminated in the circuslike atmosphere of a screaming audience of supporters, their voices amplified by the acoustics of an enormous arena, its ceiling covered with thousands of red, white, and blue balloons, which were released onto the heads of the crowd in the evening's finale. The fury of the protesters outside was matched, in words though not in actions, by the scurrilous nature of the remarks made inside by the Republican faithful about Democrats, both individually and collectively.

The tone of these comments was utterly alien to me, and the more I listened the more I squirmed. I was a registered Republican and part of a Republican administration, but my voting patterns had always reflected a fiercely cherished political independence, and there was no way that I could regard a group that included many of my close friends as enemies. Political opponents and adversaries, yes, enemies, no. I vowed that if I were ever again asked to participate in such an ugly partisan event, I would find a polite way to say no.

During the fall of 1972, while the administration's economic policy
makers were highlighting progress toward the year-end goals of the Economic Stabilization Program in public, internally we were focused on figuring out what should follow Phase 2. The upshot of intense discussions and a wide range of views on the future of controls was an announcement that they would continue, though in a substantially altered form. Phase 2 would be terminated in January of 1973 and the Pay Board and Price Commission disbanded. The standards for price and pay increases would remain the same as under Phase 2, but, with the exception of a couple of key industries, compliance would now be largely voluntary and self-administered.