(FORTUNE Magazine) – At the center of the Washington vortex, where the budget deficit, taxes, and the dollar swirl into national policy, is Treasury Secretary and stalwart Texan James Baker. He and his new-found ally, Alan Greenspan, chairman of the Federal Reserve, are prodding a querulous President and timorous Congress to take action that will both calm the international markets and avoid recession. Alone among the major figures who have served the Reagan Administration for the past seven years, Baker had not been bruised much -- until lately. A low- key, patient man (he has eight children), he earns an A+ as a political strategist. When the critics finally got him, they roughed him up for the wrong reason: accusing him of setting off Wall Street panic by publicly expressing his anger with the Germans for their persistence in nudging up interest rates. ''It's a bum rap,'' says Barry Bosworth, a senior fellow at the Brookings Institution. ''The crash was an event waiting to happen.''

Now Baker, cudgeled by this calamity, is negotiating with Congress on what the President had sworn repeatedly was not negotiable: taxes. He would find consumption taxes on tobacco and alcohol least odious. As an architect of the most sweeping tax reform legislation in years, he will resist higher rates for individuals or corporations. Baker's failing is as a grand international strategist. His far-reaching policies have often been so much at odds with real world forces that they will not work, or so much in step with them that they are not needed. Probably his ! most famous initiative, the 1985 Baker Plan for reducing Third World debt, has foundered. This is partly because it made unrealistic demands that debtor countries quickly restructure their economies to promote free markets. The belief: Free markets would make the Third World prosper. So Baker asked international lenders to give the borrowers $40 billion in new loans. Major banks did not lend nearly that much, and many followed the lead of Citicorp, which has created $3.5 billion in reserves for debts it figures it might never collect. In 1985 Baker also convened a meeting at New York's Plaza Hotel and persuaded the finance ministers of Britain, France, Japan, and West Germany to agree to help push down the value of the dollar. It was a good move, and the dollar did drop. But it seemed to be headed south anyhow. When the dollar looked as though it might fall through the floor last winter, Baker got together with the finance ministers of the major powers in Paris. They decided not to let exchange rates fluctuate outside a prescribed band. But in October, when falling international stock markets threw economic order off balance, the Administration and the world's central bankers moved away from the Louvre accord and allowed the dollar to fall to near-record lows. The retreat looks like a defeat for Baker but a victory for Beryl Sprinkel, who has long opposed using monetary policy to defend the dollar. Though he had announced his resignation, Sprinkel recently agreed to stay on as chairman of the Council of Economic Advisers. His price: elevating his position to Cabinet level. As a horse trader with more narrow and practical goals, Baker is superb, perhaps even better than is generally recognized. When a free-trade pact between the U.S. and Canada was about to collapse in October, he quietly tugged the negotiators to his office at Treasury. Baker and U.S. Trade Representative Clayton Yeutter swapped concessions with the Canadians for days and saved what may turn out to be one of the century's most important economic agreements. Outsiders have faulted him for concentrating on banking and the dollar, the traditional purview of the Fed, and for not previously impressing on the President the dire consequences of the twin deficits. Still, as the lead man on the budget negotiations, the Treasury Secretary has perhaps more influence than ever within the White House. Should Vice President Bush succeed Reagan, then Baker -- a friend and principal adviser to Bush for 17 years -- could almost certainly apply for any job he wanted. What might please a Treasury Secretary with an interest in international affairs? A good bet seems to be Secretary of State.