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Don Regan, while he was still Treasury Secretary in 1984, formulated the Administration's initial tax-reform scheme, "Treasury I," which Baker concluded had "absolutely no chance of flying." After swapping jobs with Regan, Baker crafted his own version, "Treasury II," incorporating numerous deals cut between him and various members of Congress. Regan's White House staff predicted its demise and told the President he should retreat. "Regan's actual motive for that conclusion was jealousy," says Lawrence F. O'Brien III, a Washington attorney in charge of private-sector lobbying for the bill. "I think he saw Baker as being able to do something that he couldn't, so he set out to scuttle Treasury II."
To turn the President around and keep the heat on Congress, Baker pulled out all the stops. Corporate chairmen friendly with the President were enlisted to bend his ear. And, as he had before, Baker skillfully used Nancy Reagan to influence her husband. He reminded her of past presidential statements consistent with the tax bill, and she, in turn, threw the President's own words back in his face. The tax-reform act that was finally passed in 1986 had Baker's fingerprints all over it -- but his hand was well hidden.
The September 1985 Plaza agreement, which led to the dollar's orderly decline, required an even defter touch and near total secrecy. When Baker took over Treasury, Reagan was still saying that "a strong dollar means a strong America." As with some other Reagan bromides, this one was outdated and dangerous. The nation's overvalued currency was strangling American exports, boosting the trade deficit and encouraging cries for protectionism. The dollar-devaluation strategy was necessary because Baker had got nowhere with Reagan on the budget deficit. "I had to use the tools actually available," recalls Baker, "and that meant monetary policy."
The world -- and most of the Reagan Administration -- became aware of Baker's scheme only when he convened the conference of finance ministers at the Plaza Hotel in New York. Reagan knew of the meeting in advance, of course, but was apprised of the full scope of Baker's plan only two days beforehand. Devaluation "was sold to the President as necessary to stem the protectionist tide in Congress," says a Baker intimate. "It was sold to Don Regan as being consistent with an earlier call he had made for an international conference to discuss exchange rates. To this day, I don't think Don understood what we were about to do. ((Then Federal Reserve Chairman Paul)) Volcker was managed because we had carefully split his board. Paul had no alternative but to go along."
The finance ministers too were roundly manipulated. "At first," says one of those subjected to Baker's machinations, "he split us just like he split the Fed. He began by using the U.S. and Japan against West Germany. Then he combined those three to bring along the whole Group of Five ((including Britain and France)). He bluffed us constantly and regularly threatened to pack up and go home. He was particularly adept at never rebutting those who insisted on dismissing what we were doing as irrelevant. Thus the supply- siders were never able to counter him. It all seemed so mellow."