There was a concern that when interest rates started to go back up it might choke off the recovery. Laura Tyson and I went to the Oval Office, to have a specific discussion with the president on a very narrow technical question - "What is the full employment rate of growth of the economy?" We said to the president that the economy was getting back on track, but at the same time, if we're going to have an extended recovery, then you couldn't let the recovery get out of hand on the upside either. You needed to have a certain discipline. And that the increase in interest rates might very well, in the long run, benefit the economy, even though it would reduce short-run growth below what it otherwise would have been.

What was the president's mood after the 1994 elections in which the majority was lost in the Congress?

There was a period -- not just with the president but with people in the White House -- of general concern, a sense of having lost our footing, and of a need to regroup and try to think our way through it. . . . But what was most interesting to me was that this was one of those kinds of events in life that just shakes at your footing, and you have to rethink your footing and where you are. And then the president led the way back, because he thought his way through to where he wanted to position himself. He got himself back on his feet, and figured out where he wanted to go from there. And you think about it, the administration did very well from that point forward.

Was there a concern that not having a majority to work with was really going to affect the economic plan?

I think the concern was a much more general one of how to deal with what was really a seismic change in the political environment. Subsequently, in 1995, in the summer, the question honed in more on what the president's proposed budget should look like. He made the decision -- rightly, I think, although it was a very controversial decision internally in the White House at the time -- he made the decision to put forth a budget that not only continued fiscal discipline, which was our strategy, but actually went to balance. And he said that was the next logical step in the strategy track he was on. He felt that that was the way to best carry forward what he was trying to do, and also to regain the initiative, politically.

At this time, Dick Morris comes onboard as a secret adviser with the code name "Charlie." Could you tell there was something going on here in the White House? Speech drafts were being changed; the president's focus was different.

. . . Because I went to the senior staff meetings every single day, in the White House, I was less attuned to what was happening than some other people. But then I began to hear from some of the people who were there, that something going on that seemed a little bit curious.

You said that before the president proposed his balanced budget, there was a lot of debate in the White House.

There was an immensely strong commitment to continuing with fiscal discipline. That debate no longer existed. But the question was, what is the best way to go forward? There were those who felt that we should continue on the fiscal discipline track that we were on, which would get us to balance, but over some longer period of time. And there were others who felt that it would make more sense, if we were going to continue on that track, to put out a balanced budget proposal right now.

The president was of the latter view. He said -- and I can very specifically remember this happening in a meeting we had in the Oval Office with him -- that we needed to put out a balanced budget proposal, both to best carry forward this whole strategy of fiscal discipline, and also, more generally to regain the initiative, politically.

And did you needed to do that especially because there was now a Republican Congress?

He was on a strategy of fiscal discipline right from the beginning, in 1993. The only dynamic that changed was how to protect that strategy against very large tax cuts, which could have undermined our fiscal strategy, and how to put in place a budget that basically continued to force the issue on deficit reduction, as opposed to moving back into a fiscal strategy of large tax cuts and larger deficits. We also had to preserve the president's emphasis on education and the other areas that he believed very strongly we needed to invest in.

In November comes the crisis over shutting down the government. ...The budget shutdown actually was in two parts. First, the Republicans threaten the president on the ceiling.

Correct. The basic threat was, "We will not raise the debt ceiling, therefore, you will not be able to pay the debt, and you'll be in default," as a way of pressuring the president to sign a budget that he basically believed was unsound. At the Treasury Department, we found a means of drawing on federal trust funds -- something that'd never been done before, at least in the way that we did it -- to continue paying the debt, even though they wouldn't raise the debt ceiling.

Did that "trump" the Republicans' hand, essentially?

That trumped the Republicans' hand, and took that strategy off the table. So then they moved to the strategy of forcing a showdown over shutting down the government, and that, ultimately, is what happened.

What was the president's tenor like at this time?

The president was terrific. The president had put out a budget. The president had a very strong sense from the very beginning of the administration of what he wanted to accomplish. He also had a very strong sense that some things were simply unacceptable. As you might remember, in 1995, there were proposals to make enormous cuts in Medicare. And at one meeting, he said that even though the Medicare proposals were the ones that had the most political salience, the thing that most troubled him was that the Republican budget involved large cuts in Medicaid, health care for the poorest. And he said that, while that had not very much political constituency, he would never ever sign a bill that had that provision. I had enormous respect for his resoluteness, first in the face of the threat of default, which we fortunately were able to design a way around, and, secondly, in the face of the government shutdown.

In 1996, the, the major economic battle is welfare reform. There is a discussion in the cabinet about this. As we understand it, the debate was fairly passionate.

The debate on welfare . . . was an interesting example of how the president functioned in decision making. He's an extraordinary decision maker. . . . I thought he was as good as any decision maker I'd ever worked with. Each of us expressed our views. The president would explore with each of us the issues that our views raised, and then with all the substantive, and political pros and cons on the table, he raised some issues himself, that he felt we had not adequately raised. He was exceedingly knowledgeable about the issue, and then he said he would make his decision. Shortly therefore, he did make his decision. But the tone of that meeting was not a tone of heated debate. The tone of that meeting -- and I remember it exceedingly well -- was a tone of enormous respect for the difficulty of the decision that he needed to make, and for the complexity of the tradeoffs that were involved.

This was almost a core emotional issue for Democrats.

It was an issue of competing core emotional views for not only Democrats, but for people more generally.

But within the cabinet, you had advocates such as Donna Shalala, who clearly thought this was the wrong thing to do.

But even the people who felt he shouldn't sign the legislation felt that this was a relatively close call, and that there were very powerful competing considerations, and that there was strong weight on both sides of the argument. The thing that was most impressive about this meeting . . . was that you had a very serious thoughtful discussion of these pros and cons amongst a very large, relatively large group of people who were deeply involved in the issue.

In 1996, Clinton wins the second term in November. Did you have a sense after that reelection that the president had some kind of economic mandate, or was there a sense that you could accomplish other things in the second term?

Probably the single most significant issue in the election, at least in my opinion, with respect to mandate going forward, was that [Dole] and Kemp had proposed an enormous tax cut. It gave the American people an opportunity to vote for an enormous tax cut, on the one hand, or for continuation of deficit reduction . . . for a continuation of fiscal discipline, on the other hand. I think it was pretty broadly held that was that this was a mandate to continue on the path that we'd been on.

In early 1997, the Asian economies start to "melt down." How did the president react to that, and what did actions tell you about him as a decision maker?

The Asian crisis was a very complex matter, and he got into it very quickly. He wanted to know what was going on, and what we were doing, and why we were doing it, and, for that matter, why we weren't doing some things we weren't doing. He kept himself very closely informed through the whole process.

I remember, a little later in the process . . . I was fishing for salmon in Alaska. The Secret Service agent who was standing next to me got a call on his cell phone, and it was the President of the United States. I had a salmon on, and he wanted to talk about Russia, and he was very interested in getting into some very specific aspects of what was happening. I told the Secret Service agent, "Ask the president if I can call him back in just a few minutes. I have a salmon on, and I want to land him." The president said okay. I landed the salmon.

I called him back, and he was very focused on very specific aspects of what was happening in Russia. He was deeply, deeply steeped -- not only the issues and the problems -- but also in the various kinds of approaches that people were taking to try and deal with the early stages of the crisis, and then the later stages.

In late 1997 and early 1998, what is the real economic threat?

The greatest threat during that period, and maybe the greatest threat during the entire Asian financial crisis, was the possibility of Korea going into default in the last week of December of 1997. At Thanksgiving of 1997, the president was at Camp David, and I was at a little house we have in the country. We needed to get the President of Korea and the Prime Minister of Japan on successive phone calls with the President of the United States, to urge the president of Korea to pursue economic reform, and to urge the prime minister of Japan to pursue certain policies in Japan.

So we set up a conference call which I was on, although the president would obviously be doing the speaking. The president spent probably two hours of his Thanksgiving evening waiting for the others to get on the phone, and talking to them, then doing a reprise of the discussions and then waiting for the other one. During the time when we were waiting for the Prime Minister of Japan to get on the phone, he was working a crossword puzzle and said to me something, "What does this word mean" or something. And I didn't have any idea. So I said to my son, "What does this word mean?" And he said, "Oh, any idiot would know that. Who's so stupid?" I said, "The President of the United States."

But in any event, the president was very deeply involved, and a very active participant in helping get or try to persuade or urge the various participants around the world to do what, in the judgment of all of us, needed to get done.

In January of 1998, the Lewinsky scandal breaks, and on January 23, the president has a cabinet meeting. What do you recall about that?

I remember being there, and I remember his discussing it, and that's about what I remember. We had a cabinet meeting, as you correctly say. He discussed it. I had a broader view of this whole thing, which is that whatever the facts may be, he may have made some terrible mistakes. But I also felt that, relative to everything else that was going on, this whole set of events was being given a focus that was vastly disproportionate to its importance relative to everything else that was going on.

In this cabinet meeting, the president lied to his cabinet.

Look, the president made some terrible mistakes, and he's admitted that. And all of us make terrible mistakes. My reaction to that period, starting with that cabinet meeting and then going forward over the course of the next year, was to have an increased respect for the president -- because what I saw was a president who came into work every day, despite these immense external pressures, and basically applied himself to the issues that were in front of us.

I can remember a meeting we had when the whole impeachment matter was in a boil. He had about 50 or so members of Congress -- half senators, half representatives, half Republicans, half Democrats. We discussed Social Security, and it was in a meeting that he led. And it was a remarkable discussion. He pursued the various intricacies of Social Security reform as if there was nothing else happening around, in an effort to move that process forward, even though quite a number of the participants in that meeting were people who basically wanted to see him impeached. That, to me, was an example of the tremendous commitment to and effectiveness of what he was doing, despite these vast external pressures. I developed a great respect for how he handled that whole situation.

Did you ever consider leaving at that point?

Absolutely not. As I said, my respect for the president was enhanced. I think he made some terrible mistakes. He acknowledged that. But I also watched how he handled himself in the face of those enormous pressures, and I developed an enhanced respect for him.

On September 10, the president invites you and other members of the cabinet to the residence -- to say what?

There was a meeting in the residence, and he discussed the situation. I don't think I feel comfortable repeating what he said. But I'll tell you what I said. A number of people spoke, and I was one of them. I said, "Mr. President, you've acknowledged you've made terrible mistakes, and I think that's right. But I think you've handled yourself extraordinarily well, and I have enormous respect for the way you've handled yourself through an extremely difficult situation, number one.

And, number two, while they were serious issues, I think they were vastly disproportionately covered by the American media at a time when there are a lot of other issues that are of tremendous importance to the American people. And I think there was a lot of hypocrisy in the way the people reacted to this whole set of events." And that's a pretty good characterization of what I said during that meeting. . . .

During the impeachment period, especially before the Senate vote in the House, several members of the administration during that time have told us that they were concerned at moments that this president might not finish his term. . . . Was there ever a moment when you thought that this president would either be removed from office or would have to resign?

I don't think so. I suppose each of us reacted to that period in a different way, and it's probably a reflection of our own nature and psyche. My reaction was to do what I was doing, and we had an enormous amount going on at the time. And it was very much the president's reaction.

I think one of the things that affected how that whole White House functioned was the fact that he, himself, continued to devote himself to what needed to be done with such enormous energy. But I don't think that I ever thought that. I think my view was that this thing would work its way through in one way or the other. On the other hand, I was not enormously focused on that issue. My focus was on what we were doing.

Since the impeachment period, did the president change? Did you notice a difference about him? How would you characterize the president in the post-impeachment period?

I don't think that he was particularly different, as far as I could see. As you may remember, there was this enormous debate over what to do about the surplus, and he spoke to the American people about preserving the surplus to protect Social Security. That wasn't the exact phraseology, but that was the thrust of it. And he threw himself into this question of trying to avoid having the surplus consumed by a tax cut, and rather to preserve it in order to promote a national savings, promote the fiscal position of the government, and in fact to strengthen Social Security.

And it seemed to me that this president was the same person I had been working with all along, somebody who was deeply involved in what he was doing, cared a lot about the substance of it and was willing to take very difficult political positions.

You leave your post as secretary of the treasury in May, 1999. Did you postpone your departure so you could see the president through his difficult period of impeachment? Why did you choose to leave?

I might have left a little bit earlier if it hadn't been for the Asian financial crisis and the impeachment crisis, because you had two crises going on at the same time. But I had thought to myself that if I was going to leave -- and I wasn't sure that I was -- but if I was going to leave, probably the right time to do it would be with about two years left in the term.

. . . Given that there were still, in my judgment, some instabilities relating to the Asian financial crisis, and given that there was still unsettled issues around the impeachment crisis, it seemed to me that I should not leave until that had reached an appropriate point. Fortunately for me, I had an outstanding deputy, Larry Summers, and I knew that whenever I did leave, I certainly thought there would be a seamless transition which, in fact, there was.

Did you worry how it might look if the secretary of the treasury was resigning during this impeachment process?

Firstly, I wasn't going to resign during the crisis. And as I said, my respect for the president and my view of the president were enhanced by how he handled himself. So that was my net reaction to that entire set of events. I don't think I ever thought about how something would look, in that respect. What I did think a lot about was being there until the instabilities around the Asian financial crisis really seemed to work their way through, and also being there through the completion of this impeachment process.

It was important to show loyalty?

Oh, I think it was more than an issue of loyalty, although I think that was a piece of it, perhaps. But I think much more importantly was, as long as these events of great moment were going on, there was the possibility, at least, of things happening where I could have been useful. And while I had total confidence that Larry Summers, who is really truly outstanding, would have a seamless transition, the fact is I had been there for a long time. I was seen as having been pretty deeply involved in a lot of what had happened, and it seemed to me useful to have me there until these issues had worked their way through.

Now that you've had a chance to reflect on this administration, we're asking everyone the same question -- in history, good and bad, and as succinctly as you can, what do you think this president's legacy is going to be?

The question of what his legacy will be is a broad issue that all of us will probably think about and have different views on as we have further distance from it. I can reflect . . . I'll give you a few pieces of what I think his legacy will be. I think he will be seen as a president who took office at a time that the economy was in a morass, unemployment was substantially above 7 percent, there were large fiscal deficits and the rest. He put in place, at great political difficulty, a dramatic change in economic policy that not only repositioned the country for recovery, but also for long-term economic well being.

I think he will be remembered as a president who, in that context, stood for fiscal discipline, for trade liberalization, for leaving our own markets open, for dealing with inner cities, and education and the other areas that are so important for future productivity. I also think that he will be remembered as a president who understood what's sometimes now referred to as the forces of change of the new economy, and who geared economic policy toward globalization, toward the needs of the new technologies, and toward the enormous opportunities available to the spread of market-based economics around the world.

In time, hopefully people will look at this administration with more perception and also more examination. He should be remembered as a president who brought a kind of managerial insight to the White House that has not always been there -- the insight that if structures are created and incentives are created for people to work together in a reasonably cohesive fashion, that that can result in a great deal more being accomplished than if people are constantly at odds with each other. And I think that he did a great deal in that respect, which would be well worthy of study by others who have to set up administrations.