Keynote Address by Under Secretary Robert Hormats

George Mason University School of Public Policy, Arlington, Virginia
March 7, 2011

MODERATOR
- Ed Rhodes, Dean, George Mason School of Public Policy
PARTICIPANTS
- Dr. Robert Hormats, Under Secretary of State for Economic, Energy, and Agricultural Affairs
- Dr. Kathleen Rasmussen, Division Chief, Asia & General, Office of the Historian

Note: This transcript and linked audio recording contain comments made during a roundtable discussion of the “Foreign Economic Policy, 1973-1976” volume of the Foreign Relations of the United States (FRUS) series. The comments of Robert Hormats and Kathleen Rasmussen reflect their individual points of view and do not necessarily reflect the views of the Department of State or the United States Government.

DEAN RHODES: Okay, if we can reconvene. We have two highlights left for us. The most important highlight, of course, is Dr. Hormats, who has agreed to give the keynote address. But following that, you’ll all have earned some wine and cheese and other goodies next door, so there is a reception to follow, and we hope everyone will stick around.

It gives me enormous pleasure to – pressure as well – pleasure to introduce Dr. Hormats. As all of you know, Dr. Hormats is Under Secretary of State for Economic, Energy, and Agricultural Affairs. He was appointed in 2009. Prior to this appointment, he has, of course, had a most impressive string of appointments in the public sector and important service in the private sector as well. He was vice chairman of Goldman Sachs, International and before that, of course, he served as Assistant Secretary of State for Economic and Business Affairs and Ambassador and Deputy USTR from – that was back in the late ‘70s and early ‘80s – Senior Deputy Assistant Secretary for Economic and Business Affairs, Senior Staff Member for International Economic Affairs on the National Security Council during the period that we’ve been focusing on today. And there he was economic advisor to Henry Kissinger, Brent Scowcroft and Zbig Brzezinski, which must have been the reason he was recipient of the French Legion of Honor – (laughter) – to have survived, to have worked with those three.

I could go on and on. Dr. Hormats earned his Ph.D. from the Fletcher School of Law and Diplomacy up in the Boston area. It is a great pleasure to have the opportunity, Mr. Secretary, to have you with us today. Thank you. (Applause.)

UNDER SECRETARY HORMATS: Thank you and thanks for this book. I had a chance to go over it over the weekend, and I must say it brings back a lot of old memories. Let me just try to –

PARTICIPANT: Excuse me. Let me just turn – let me turn this up. There we go.

UNDER SECRETARY HORMATS: It’s very nice to be here. I had a chance to go over most of the book over the weekend, and it does bring back a lot of old memories of various issues. So let me try to set the scene, which I think is useful, because – rather than going into all the details. This took place – these conversations took place (inaudible) going through a number of these periods. This is ’73 to ’76 and it was an eventful period, and I’ll try to recapture some of the events that occurred.

But it was in the middle of the oil crisis. That was probably the dominant factor in the international economic policy of the United States, but there were a number of other issues, one of which was that the United States had in 1971, in effect, going off the gold standard and had argued that the dollar was overvalued and the overvalued dollar was harming U.S. trade, and therefore we wanted a system that was more flexible. And the Europeans, on the other hand, were fearful that if the United States did get a more flexible exchange rate system it would cause the dollar to be artificially low and it would improve the U.S. trade balance but be detrimental to European trade and therefore adverse to European economic growth.

There was another element in this period that was going on, and that was the attempt by the United States after the European Union had formed, in effect, a free trade area to get compensation, under what was known as Article 24.6 because these countries all were trying to create a similar external tariff and some would be raising their tariff in order to comply with the European external tariff against American goods. So the United States was engaged in constant wrangling with those countries.

And then there was the broader question not just of whether the dollar should be lower in value, which the United States had wanted and had actually achieved in 1971 and’72, but whether the system itself would be as centered on the dollar. And there were those who were expressing the view that the SDR should play a greater role and the dollar was too dominant a player in the international economic system.

These were a few of the issues, and there were lots of tensions between the United States and Western Europe. And one way for – and Japan, I might say. Japan had maintained an exchange rate of 360 yen to the dollar since World War II, the end of World War II. And, of course, that was considered, over a period of time, as the Japanese economy recovered, too low an exchange rate. So we were pressing for the Japanese to raise the value of the yen, and ultimately, the United States was able to get the Japanese to do this. So we were in a constant debate with the Japanese over what the exact exchange rate for the dollar and the yen ought to be.

In addition to all this, there were a lot of pressures from developing countries, because the concern was that the United States would be subject – not just the United States, but the industrialized world together would be subject to not just an OPEC cartel, which had – to a degree, it wasn’t really OPEC, but it was the Arab members of OPEC had imposed this embargo against the United States and the Netherlands during the ’73-’74 Middle East war. But there was a feeling that OPEC, using its economic strength, would get together with other commodity-supplying countries and would form a coalition, and there would be more commodity wars or, at a minimum, there would be a huge amount of pressure from the industrialized – on the industrialized countries from the emerging economies utilizing their commodity strengths.

So one goal of the United States – and you can see it throughout this book – was to, in effect, split off the commodity-producing countries and the poorer countries from one another. And one of the ways we did this was what was known as the North-South Dialogue or had various incarnations. But the developing countries are talking on a new international economic order or a new global order; and our view was, of course, the new global order was North versus South. And so we were trying constantly to jockey with these countries to, in effect, placate them so that they wouldn’t form a coalition against the United States, which they never did because they really were not of the same mind. And many of the developing countries had been more adversely hurt by the oil embargo than the industrialized countries because it pushed the price of oil up so much, and they had to depend on oil, and it pushed the price of food up because the price of oil went up the price of food went up because of transportation and fertilizer costs and such things.

So we had this constant ring of various complicated issues during this period. And during this period I was economic advisor to Henry Kissinger, so I sat in on almost all the discussions that focused on all these issues and was constantly sending him memos on the various issues that are described in this book. Moreover, during this period, one of the things that we had in mind was that the industrialized countries should work more closely together with one another and therefore came up with the idea toward the end of 1975. And it wasn’t initially an American idea; it was really the idea of Chancellor Schmidt and French President Giscard d’Estaing to get the industrialized countries together to discuss how do we deal with the oil issue, how do we deal with the exchange rate issue, how do we deal with the trade issue, was there a view on the developing country problem.

And initially the idea was for the French to call the meeting, and they – which they did. The Germans would come, the Brits would come, the Americans would come. Japan – they were a little unsure whether Japan could come because Japan was sort of an outlier at that point. But it was a big economy, it was second-biggest in the world, and therefore there was a general conclusion Japan should come and would have to be there. But Japan was very reticent about playing much of a global role. So it wasn’t – it knew it had to come, but it really was a little bit shy about being as pushy on some of these issues as the French or the Germans or the Americans or the Brits were.

And then there was the question of Italy. Originally, it started out as the G-5, not a G-6 or certainly not a G-7. And why did Italy get in there? The Italians got in because there was – and we tend to forget this, but there was a very strong communist movement in Italy at the time. They got a third of the votes. It wasn’t a Moscow kind of communist party, but there were communists nonetheless, and it was the middle of the Cold War. So Prime Minister Moro, who was prime minister of Italy, made an impassioned plea to the United States and to Germany and to France to get in and be part of it because if the West did demonstrate support for him, he would be weaker in dealing with the communists. Well, the French weren’t quite sure they wanted Italy in there. They didn’t have a very favorable view of the Italian economy at that point. But the United States, again as sort of the champion of the Western Cold War – and the Germans, I must say – insisted on Italy coming. So Italy – Prime Minister Moro was invited. He, unfortunately, was killed by radicals and found in the trunk of his car about three months afterwards, so – but Italy did get in and has been a member ever since.

Canada – the French vehemently opposed Canada, did not want Canada in. We tried everything we could because we didn’t it to be so pro – so Europe-centered. So we supported having Canada in, and the French refused to invite them. But the U.S. got its revenge because the following year, when we had the summit in Puerto Rico, the U.S. unilaterally invited the Canadians, and the Canadians have been members ever since. And then it became the G-7.

So all these things took place during this period. And I have sort of reviewed some of the issues, but let me just go on to a few issues in greater detail, one of which was the question of exchange rates. This – I cannot tell you how emotional an issue this was between the United States and, largely, the French, although the Europeans in general, but the French more than any others. The French resented this – the preeminent role of the dollar, and DeGaulle had called the dollar’s role an exorbitant privilege because the United States could borrow in its own currency, whereas none of the other countries could. So the French were constantly trying to get a system established and get the Americans to accept a system whereby there would be some kind of either fixed rates or close to fixed rates – some narrow finding so that the United States didn’t have the freedom of allowing its exchange rate to devalue, whereas the United States didn’t want necessarily a very rapidly fluctuating system but didn’t want to be bound to an overvalued exchange rate, which the U.S. thought would be harmful to creating jobs in this country.

So there was a bitter battle between Giscard d’Estaing and ultimately Secretary – well, Schultz wasn’t the Secretary then; he was the Sherpa. He was the organizer for this summit. So we had Secretary Simon as the Treasury Secretary and then Kissinger was Secretary of State, and ultimately became Secretary of State when President Ford – toward the end of Nixon and throughout the whole Ford Administration, and Scowcroft was the National Security Advisor. So we had meeting after meeting after meeting to figure out how we wanted to deal with the French and how we wanted to deal with the Europeans and how to deal with the exchange rate. And the exchange rate became a very political issue, and it was not an issue that was just left to the Treasury, although the Treasury had a role to play. The Treasury – there was a major foreign policy issue here. And ultimately, the goal that – the rubric that was worked out was “fixed but flexible,” which really, you can – (laughter) – interpret for yourself what it meant. Ultimately, what it meant was that there would be some stability in the exchange rate, but from time to time if need be, under certain conditions which were never fully appropriately spelled out, there could be flexibility.

And then there was something that was even more interesting, which was an exchange rate – a reserve indicator, which was essentially if you built up reserves at a rapid rate – and again, there was never any precision here – then you had to appreciate your currency. And if you lost reserves at a rapid rate – again, no benchmark – you had to devalue your currency. And it was a way of avoiding – no one wanted the IMF to tell anyone what to do with their exchange rate, but knew that they wanted a system that had no rules, that this was more or less where they came out. And this was sort of a decision made in the Rambouillet summit. The Rambouillet summit was the first of the G – as I say, the G summits. And it was ultimately six countries quite near – right near Paris.

And I was the note taker, the – Kissinger had briefed. It was supposed to be, first, only heads of state, and then only heads of state with the foreign ministers sitting near, and then only heads of state with the foreign ministers and the finance ministers sitting there. And then Kissinger began to realize you had better have some record here because these Cabinet members – (laughter) – are not going to take any records. So I was the note taker, and the note takers were given a little – the French didn’t want any note takers. They just thought this was too lowly a thing to have 20-some-year-old kids in the room with all these heads of state. But ultimately, we were given a little desk and we did take notes. And Kissinger insisted on everyone on his staff being able to take notes.

And then you had to transcribe them before you went to sleep. So we didn’t really get much sleep because there were, like, seven hours of meetings and we had to transcribe the notes. And there were no computers in those days. You had to type them out on your own typewriter or dictate. Then no secretary was willing to stay up, so you really had to take – you had to really type them out yourself. But you had to have them ready the next day, and then you had them negotiate the communiqué. And now the communiqué is negotiated over, like, a three-month period. Those days there was one draft and you had to stay up pretty much all night negotiating the communiqué, so you got almost no sleep for about two-and-a-half, three days. But it was well worth it.

In any case, there was one – and we managed to work out language which was more or less acceptable on the exchange rate issue. That was – that gave the French enough so that they could say there was some measure of fixity but gave the United States enough so that we could say there was enough flexibility in the system, and that was really the big result of Rambouillet. There were others.

One of the other issues that took place was how you dealt with, as I say, the oil producing and commodity producing countries. And there was a general notion that the United States should and the West should – provide some benefits for them and try to avoid solidarity. Well, the French – the Europeans were worried. They were much more on the side of placating the oil producers because they depended far more on imported oil than we did. And they really were, accept for Holland, targets of the embargo. So what the French wanted to do was have what they considered a dialogue between oil consumers and oil producers. Well, the United States bitterly opposed this because we figured, then, the oil producers will use their leverage. They had already used their leverage to try to get Israel to give up land in order for them – the oil producers, the Arab oil producers – to start producing oil again. And the United States – (inaudible) found that unacceptable.

And second, the United States found it more than unacceptable; we found it counter to any country’s interest, because once you give up anything, the United States – the argument was, well, the United States would just pull its troops out of Egypt. The United States had troops in Egypt during the war in Sinai. We refused to pull them out on the grounds that the oil flow would be restored, because we said all you do is enhance the power of those people who want to use oil as a lever. So we refused to negotiate with them at all on anything. And over a period of time, these countries decided that it would be a wise thing not to continue to embargo because it had adversely affected the global economy, and therefore their interests, and then they began to realize that if the price went up, there would be substitutes. Literally, they realized how quickly we forgot about these oil shocks. (Laughter.) But they – but there would be substitutes.

So the – we – I went on these shuttle trips that Kissinger had on the Middle – in the Middle East where we spent a lot of time – mostly – most of the time negotiating about Middle East policy, but part of the time talking about how bad our economies were going to be if they continued this oil embargo. And we spent a lot of time with the King of Saudi Arabia. And President Sadat, who was really the hero of this, who was assassinated later on, he was the predecessor of Mubarak. So we spent a lot of time and went to Syria and went to all these places just trying to sort of explain our view and calm these countries down about the American presence, which they found very troublesome. I mean, we were arming the Israelis. We didn’t actually have physical troops in Israel, but we had ships – American ships in the Gulf which were – and the question was really whether we would continue to supply Israel or we would stop supplying Israel in return for the Arabs lifting the embargo.

So one of the things we tried to do in the United States was reduce our dependence on imported oil in order so we wouldn’t – to avoid our being vulnerable to this kind of thing yet again. And we tried something – we tried a lot of things. None of them worked. One of them was – well, some of them worked a little bit. One of them was a minimum selling price, which is to say if the price of oil – and I forget what it was – it went up from a few – like 60 cents to $4, and then $4 to $5. It was nothing compared to what it is today. But what we were trying to do is find a floor price, or what we call a minimum selling price, so that we would provide an incentive for the producers to produce more oil in the United States on the grounds that if the price of oil went below the minimum selling price, the federal government wouldn’t buy the oil in the market. So that would provide an incentive for producers to produce more, knowing that they had a minimum selling price or what tended to be known as a floor price.

That didn’t go because, of course, it was a contingent liability on the federal government that it would buy the oil at a given price if the price went below the market. So there was a lot resistance to that. It would never have mattered because the price never went down below what we thought the minimum selling price would be. But it was a signal to the industry that they should produce more oil here.

The other thing we did do, which we have today, is the Strategic Petroleum Reserve. It’s known as the SPRO, which would enable us to store oil in Mississippi and Louisiana in these big salt domes. And originally, it was 500 million barrels a day. The idea was that 90 percent of your inflow, but not every country was able to do this. Not every country has salt domes. Where are the Dutch going to put oil? They don’t have those things. So – but the United States did it, Japan did it, Britain – which is an oil exporter – did some of it, which it just shut in the oil, and a few other countries did it. So we developed this international energy agency and this notion of a Strategic Petroleum Reserve for countries that were able to do it as a way – a buffer in case we were ever again threatened with an embargo. So that was one of the outcomes.

The other outcome was that Americans did, for a period of time, reduce their dependence on oil – reduce their use of oil substantially. But then the price went down again, and American consumption went up. So these are a couple of the elements of what went on then. On trade, we ultimately did reach an agreement to start the trade round again, to try to reduce overall global tariffs. The Europeans did agree on this Article 24.6, which is to say they did agree to a formula for compensation in the form of countries that paid a higher tariff, but that charge a higher tariff in its American goods, would have to lower tariffs or in some other areas to compensate us. On the other hand, we avoided a big fight. So this is basically where we came out. This is sort of a quick distillation of a lot of the things here.

We – I mean, as you can see, during this period there were numerous meetings on economic issues. And in most of these cases, we, before each meeting, the NSC person would write up for the – if the President came or his Cabinet members came. But this book tends to eliminate – although, once in a while refers to them – meetings with the President that occurred. Those tend to be in the presidential library, not in this thing. But once in a while, they do creep into this. So you really have to go to the Nixon and the Ford libraries to get where the President’s involved.

But in most cases, what was done here was that the NSC staff person would write out the options for the meeting, what the options were, what the alternatives were, and then they would be debated, and then the NSC staff person would sort of write up the conclusions and send them out to the member – people who participated in the meetings. So there would be a clear record of what the decision was, and if the President was there, what the President said, if the Secretary of State, who chaired – Kissinger was not actually Security Advisor during most of this. So he would chair most of these meetings. And then he became National Security Advisor and Secretary of State. So he would continue to chair these meetings.

I don’t know if you went through it. Once in a while – at one point, Simon comes into the room and Kissinger wasn’t there, so Simon sits at the head of the chair – the head of the table. So Kissinger walks in and says, “Get out of my chair.” I mean, so it was very clear that Kissinger dominated this process. And therefore, his staff had a lot to do. But the key point organizationally was in every circumstance, the decision, the study memorandum – they were called NSMs, National Security study memorandums – before they went to the meeting, everyone had a chance to comment on whether the questions had been posed fairly and accurately, and whether the options and the various consequences of individual options were spelled out fairly.

In other words, you’d have option one would be do this. And then the pros and cons would be such and such. And option two would be this, and here would be the pros and cons, so that it was – the aim was to make sure that the alternatives were spelled out clearly and that there was a fair assessment of the pros and cons of each, not to say that everyone would agree on each of the options. That was never – or rarely the case, but it was supposed to be a fair or very transparent process. And then at the end, before the final National Security decision which encapsulated the results was out, the individual Cabinet members could look and make sure it was a fair rendition of what was said in the meeting. So it aimed to create a sense of legitimacy about the process, which was very important, and sense of order to the process.

Anyway, this is sort of a quick overview of this system and what it proves. So I’m happy to answer any questions. It’s hard to go through all of it because there’s a lot of stuffing in our few pages – a thousand pages – yes, 1,089 pages. Yeah.

QUESTION: We had some discussion today before you came, and this is certainly a statement when one studies Kissinger. Kissinger always made quite a bit of the fact that he didn’t know anything about economics or didn’t know very much. From your perspective and your experience of him, did he really understand the economic angles? Did he would learn over time? Did he change at all? Did he really know all the time and pretend that he didn’t know?

UNDER SECRETARY HORMATS: No, he really – I mean, I think he changed a lot. I think the oil crisis really focused his attention on economics a lot more than was the case beforehand. I mean he had – it wasn’t that he didn’t know anything. I mean, he had been at Harvard. He talked about economic issues, more from a strategic point of view. And in fact, I had one of his courses that he taught with Stanley Hoffmann and Sam Huntington. It was called – the course was called “War.” (Laughter.) That wasn’t the real name of the course, but that’s what it was nicknamed, War. And – but a fair amount, not the part he taught – they were – each would teach one week and the other would the other week, and then they’d have three altogether, and then back again. But Huntington focused a lot on the economic parts of this. As you can read – it was before Clash of Civilizations . But he wrote a lot of books on international history. And one of them – one of the key elements of his book, the book he used – I forget the name of it – was essentially how economic issues was a – were factors in the war. And then Kissinger was very familiar with the origins of World War II because he had written on that, and the Treaty of Versailles and the reparations. So he had a pretty good idea of that period. And don’t forget, he’d been in Germany as a translator, so he knew a lot about what was going on in European economies. And he – and in fact, he had met – while he was over there, he knew – he got to know Erhard, who was sort of the father of the German economic miracle.

And then he met with [Jean] Monnet, and on a couple of occasions he and I went to see Monnet. We had – 1971 or 2 – ’72 there was something called the Year of Europe, when we tried to repair the fragment – the fractured relations that took place because of the unilateral American decision to get off the gold standard. So Monnet was sort of our advisor. He was then about 80, but still very lucid. I mean, he had an apartment on Avenue Foch, fine wine, good lunch, and very good advice. He’s still – he was – he lived in the U.S. for a while. He spoke perfect English. He really knew us. He was like de Tocqueville. He had a very good sense of how the American economy worked and how the American political system worked and why the Europeans felt – were suspicious of us, essentially.

But yeah, the answer is after a while he learned more about economics as time went by. And then in the end – and he would test you. I mean, if you – to find out how strongly your views – how strong your views were on given points. He would sort of throw out propositions that he knew weren’t right to see if you were willing to agree with him, even though he knew they were wrong, just to sort of test whether you knew what you were talking about or not. That was always the test.

Yes.

DR. RASMUSSEN: You talked a lot about America exerting leadership during this period. And with the (inaudible) 1971, a lot of scholars have since interpreted that sort of a mastication of American leadership. In the ’73 to ’76 period, you have the Europeans increasingly taking the lead on response to the March 1973 currency crisis. You referenced Giscard’s leadership that had turned into the Conference on International Economic Cooperation. Craig Schmidt, because of the G summit mechanism – did policymakers at the time consciously think about the need to exert American leadership? And if so, how did you do it when other countries were themselves trying to exert a leadership role?

UNDER SECRETARY HORMATS: Well, I think – that’s an interesting question. I think on the organizational thing, it was certainly Schmidt and Giscard, although George Shultz, who was not in the government at that point, played a very active role, too. And Harold Wilson – but see, the difference is Schmidt and Giscard had both been finance ministers, so they really were interested. And [Gerald] Ford had never been a finance minister, and didn’t – and I think there was some consternation about Ford getting into a financial discussion with these guys, because they really knew what they were talking about. (Laughter.) And it wasn’t his area, nor Harold – nor was it Harold Wilson’s. He was the British prime minister at the time. And Denis Healy was the Chancellor of the Exchequer, who was very good. He knew this stuff inside and out, and was sort of always chafing that Wilson would talk, and he was just sitting there on the sidelines. But over a period – and Moro didn’t really know much about these issues either.

But I think on the – that was where the Europeans really were most energetic in their leadership. On the question of what the new currency system would look like, the guy who was the most dominant was Paul Volcker. He was the under secretary at the time. So all these meetings, as you’ll read this, you’ll find Volcker was the – Volcker and the French Finance Minister, who was then Giscard d’Estaing – before it was Giscard and then became – he became President of France. They were really the two – and then Schmidt. So – but Volcker was really the sort of intellectual, the dominating intellect in the whole question of the system. And then Ed Yeo replaced Volcker later on. But – and Yeo wasn’t nearly the sort of intellectual dynamo that Volcker was. But Volcker played a very key role, and you’ll see that in the book.

On the North-South issue, it was clearly Kissinger. Kissinger – and the energy issue was clearly Kissinger, because he was just worried that the Europeans would give in to the Arabs and let oil be used as a lever, and he was determined that wouldn’t happen. So he really engineered the whole North-South response and the whole energy response. And the fact there’s an IEA and the strategic reserves is Kissinger. And the guy who also deserves credit – he’s now no longer with us – is Tom Enders, who was the then-Assistant Secretary of State, and you’ll see him mentioned, too. He was just sort of bigger than life. He was about 6’7”. He was really dominant. He’d gone to school in France, so he was bilingual. He was very good. Ken will remember him. I mean, he was really a tour de force at that point. Tour – (laughter) – double entendre.

But, yeah, he – they were – so on the structural issue, it was the Europeans. But on North-South, energy, and the exchange rate issue, it was all – it was the Americans who were still – and nothing happened without the Americans. I mean, the Europeans could be obstreperous, but – and intellectually, they had their own point of view. I mean, they were – and they were very good. They had – they went through – there were several finance ministers in here after Giscard became President. But they were – they held their own, but they just – nothing the U.S. didn’t want could happen. We couldn’t make what we wanted happen, but we could – but we could block things that we didn’t like. And it was not – I mean, it was sort of a cooperative thing, but – and we – and no one forgot that we were in the Cold War, because every – the feeling was any division between the industrialized countries would just be seized on by the Soviet Union. So that really – it didn’t mean there weren’t spats. But Nixon was always very clear, and then Ford after him.

Ford’s in most of this book, not Nixon. They both understood that they couldn’t go – didn’t want to go to an international meeting divided. They wanted to make sure that these issues were resolved. So on some issues, they probably gave a little more than they otherwise would so there wouldn’t be an out-and-out fight. So the U.S. never really – except on the currency issue – never really pushed its advantage to the ultimate where it got everything it wanted. It always gave the Europeans enough so that they didn’t leave unhappily – unhappy.

Yes.

QUESTION: You were talking earlier about how there were some similarities between the situation then and the situation now, commodities being a question once again, uncertain financial relationships and so forth. Are there lessons you would take from the ’73-’76 period that you might suggest to Secretary Clinton?

UNDER SECRETARY HORMATS: Yeah, that’s an interesting question. The key point we concluded, although it’s triply valid now, is that you really had to work with the emerging economies, because they really weren’t monolithic. There were differences among them, and you couldn’t treat them all the same way. They had to be – we had – the big leader of the sort of North-South, I would say, confrontational approach was Algeria, (inaudible), and then Venezuela. That hasn’t changed much. The Shah – Iran was different because the Shah was in power. But it was a few countries that took a more radical view. But most of them really didn’t want to radicalize the North-South divide. So I think the basic point is you have to work with these countries on an individualistic basis to identify where their interests are and where ours are, which means a very sophisticated diplomacy.

Now, the Cold War wasn’t that sophisticated because either they were your allies or not. So these countries really didn’t have any appetite for a big dustup with the United States, most of them, because most of them realized that the United States was protecting – many of them didn’t have democratic systems at that point. In Latin America, many of them didn’t. So they – their – the American – the U.S. was sort of their protector. In Africa, there were those sort of supportive of the Soviet Union and supportive of the United States. So you didn’t have the sort of diversity of attitudes and ideologies and economic models that you have today. But basically, that was one.

The other is that you really – the lesson we still haven’t learned is we have to reduce our dependence on imported oil. We’re a lot worse off now than we were then in terms of our dependence on imported oil. We haven’t learned a damn thing, in my judgment, from that period. Every time there is the oil prices going up – ’73-’74, and then the fall of the Shah and then the first Iraq oil crisis and you – and then the – of the other confrontations in the Middle East, the other – the additional Iraqi threat to Kuwait, where they put all their troops on the border during the Clinton Administration. None of those things have really – they all spiked up the price of oil. But the price goes down, so Americans have this notion that somehow we don’t really have to do anything, the price will go down, the government really doesn’t have to take any tough actions, we don’t have to take any tough actions. And that’s a lesson we haven’t – we, unfortunately, haven’t learned.

On exchange rates, I think now the notion of flexible exchange rates is pretty well – except for a few countries, notable exceptions – the notion of currency flexibility is pretty well established. Those are the things I’d mention.

The other one was that process is important in the way governance is conducted. Rob Rubin wrote about this in his book, and I think that’s one of the things that you see. You can tell some of these meetings were not very well organized, and you sort of came in and threw out ideas. But for the most part, the key to making good policy is to structure the decision making process in an orderly way, so that everyone – so that all the options are examined and the various pros and cons of each option are examined, and then you make a decision that everyone has a sense of participation in, even if they don’t get what they want. And then there’s a very clear articulation of the outcome so that everyone knows what they’re supposed to do or not do. And that has been more or less adhered to for a fairly long time. There have been – there are a few exceptions, but not that many.

QUESTION: Well, that actually – the question of process brings to mind, I think, a question that (inaudible). Working conditions under Henry Kissinger, Brent Scowcroft, and (inaudible) Zbigniew Brzezinski. Would you care to comment on what it was like working for these very competent individuals?

UNDER SECRETARY HORMATS: Well, it was – I mean, you didn’t get a lot of sleep. But was it was lot – it was always a lot fun. I went on this – on the shuttles with Kissinger, because there was an economic – there was always an economic component, and he didn’t want to deal with it and he didn’t have time to deal with it. Like – I’ll give you an example. In the ’73 war, Israel had taken – Egypt has oil wells called the Elmore Gant Oil Fields. They’re in Sinai. They’re still – they still produce, like, 90,000 barrels a day, something like that, which is for Egypt a lot of oil. And the Israelis got them and, of course, were pumping all the oil they could pump. So they were over-pumping. If you pump oil too rapidly, it depletes the pressure. So our – one of our goals was to get the Israelis, as the – we knew the Israelis were going to give up Sinai; they didn’t want Sinai. They couldn’t defend it. It wasn’t a strategic benefit for them at all anyway. And the IDF just didn’t want to be in Sinai. So we knew they were going to give it up. But the – they were pumping all this oil out and the Egyptians were getting very upset because they said, “When we get the oil wells back, we won’t have any oil pressure so we can’t get any oil, and we need that oil.” So one of the – one of my tasks was to go get the Israelis to stop doing this and to pump 90,000 barrels and no more. So that was, like, a one-week negotiation. They were getting every drop they could out of it. And so I explained this, and they said, “Oh, we know we’re over-pumping it,” but ultimately they (inaudible). (Laughter.) And, I mean, they had engineers (inaudible).

The other thing was we gave Sadat a lot of money to help him feel comfortable about doing a number of things. One was that their army was surrounded. The Egyptian army was surrounded by Israelis, so we had to negotiate some honorable way the Egyptians – the Israelis would pull back and the Egyptians could claim a victory as opposed to a defeat, which was very important to Sadat. And then we gave them money that he could – so he could get his country going again.

So Kissinger didn’t like the notion of negotiating large amounts of money with him, and so he would lead me to do this. So we went over how much money we were going to give them, and sort of wrote it out, and was – it was all accounted for. I mean, we had to do that. But then the question is how it would be allocated. And that was purely up to Sadat. So I explained to him how much money it was and how it had to be accounted for and all of that. “Oh, I’ll use it for this (inaudible).” And it’s not like the U.S., where you had to get it all appropriated. So Kissinger – then you had to report to Kissinger what is he going to do.

But basically, he kept you working a lot. And you had – every night before you went to bed, you had to do the – a cable that he would send the President, and that he would send the next morning, because that was before they woke up in Washington time, so the White House would get it before they woke up and the President would have it on his desk. That was imperative that you report to the President. And he kept the President with him and the President was up to date and all that. But of course, someone had to write that before they went to bed. It wasn’t him. (Laughter.) And then he would look at it in the morning and edit it and then send it out.

So you learned to pay attention to what was said and the nuances. And then you had to get up two hours before him – than he did to do the briefings of what had happened during the night. So you – maybe you got two hours or three hours of sleep, I mean, for like two weeks. Maybe you could sleep on the airplane, but not much.

But it was – but he always – but the one thing about it: We had a – he had his 70th birthday party a while ago, and the people who were on his NSC staff did a book; we did a book for him. Everyone wrote a letter about him. And the one thing about this was that everyone commented – virtually everyone commented on the fact that he’d given them more responsibility at a younger age than they ever imagined they could ever – they could have, and helped them to sort of learn a lot about how to get things done and to use good judgment at an early age, because if you didn’t use good judgment – you were never penalized for mistakes, although he would get angry. But if you used poor judgment, you were out. If he didn’t think your judgment was good – you could be inaccurate; people make mistakes. But if he really questioned your judgment or your integrity, or you told him things that you didn’t – that you really had not researched, you just sort of gave him informal advice that you hadn’t thought about – I guess that’s the nicest way to put it – if he felt, he found that out, that you had not thought it through or you gave him inaccurate advice without doing a deliberative attempt to determine what was right, you didn’t really last very long. He saw that. He saw through that very clearly.

And the same with Scowcroft. Scowcroft had a very different – a much lower-key approach, but he had that same very tough approach to individuals. And as a result, a number of people left the Kissinger staff quite quickly. And – but the people he kept, he had – he would give you enormous amounts of responsibility, and take your – well, you can see these memos. I mean, he would let you write memos to the President. And rarely – I would say he edited them, but very rarely. I mean, he would just sign them. You’d write a memo to Kissinger and then there would be underlying – the underneath was the Kissinger memo to the President, and he would almost always sign it. If you made a mistake – I mean, he hated typos, because he considered those lazy – that you were lazy; you didn’t proofread it. And he was right. And it drives me crazy when I see some of the memos that go the Secretary. I mean, people just don’t proofread them, and it just – there’s no excuse for that. You can make a mistake, but if you make a mistake by not reading the memo that’s going to the President or the Secretary – sometimes, you’re tired and you make mistakes that way. That didn’t trouble him too much. But sort of a constant pattern of sloppiness, he just found that crazy.

And Brzezinski was different. Brzezinski would like to throw out ideas. He was much more of an idea man and less of a structured deliverer of organized policy. But he had a lot of good ideas. He was very, very smart, very talented.

Do one more? Okay, go ahead. We’ll do two more. Okay, go ahead.

QUESTION: I was wondering if you could describe it, but the fault lines in policy battles. And we had some earlier discussion about people who are more – very laissez faire-oriented versus people like Kissinger who were more pragmatic in terms of at least mouthing certain words to placate the Third World, or whether it was a (inaudible) agency turf battles were for (inaudible) policies. What was it that drove disagreements within the U.S. Government?

UNDER SECRETARY HORMATS: Oh, interagency battles. The Third World’s basically – he did understand we need not just to placate them. They weren’t naïve. He understood that you had to do something for them. I think the –there were different – certainly differences in interagency positions, and they were worked out. Most of them were worked out in a fairly harmonious way. I mean, you don’t see there – you don’t see some, really, a lot of bitterness. I think Secretary Simon called the Shah and not – and then Kissinger said – and then Kissinger confronted him with this – how’d you – why’d you call him a nut? So Simon says, “Well, it was taken out of context.” So Kissinger said, “Well, in what possible context could you have called the man a nut?” (Laughter.) So there were things of that nature.

But mostly I think people got along pretty well. I would say there were some issues. Ed Yeo, who was – who took over from Volcker – I think was a little more confrontational and little more defensive of the Treasury position. Volcker was very open, so there were always a lot of issues with Yeo sort of not sharing his views, not playing nicely in the same sandbox. But most of the time, there was – there were differences of view, but they were mostly fought out in a fairly amicable way. And Ford, who was President during most of this, was very calm in his demeanor and did not like these big fights and fights. And if there were fights between the Cabinet members, he would be quite firm in making sure they didn’t continue.

So last question.

QUESTION: All right. One of the challenges for foreign relations scholars is trying to establish linkages among different policy areas that we tend to study separately – for example, détente with the Soviet Union or the opening to China. So we’ve been discussing today, kind of amongst ourselves a little bit, what interaction there might have been between these kinds of issues, mostly within the industrial West and other aspects of American grand strategy.

UNDER SECRETARY HORMATS: Well, what’s the question?

QUESTION: Well, for example, does détente or the Cold War have an impact on American policy in the economic realm? Does the opening to China have –

UNDER SECRETARY HORMATS: Oh, yeah.

QUESTION: -- that sort of (inaudible).

UNDER SECRETARY HORMATS: Oh, yeah. Oh, for sure. I think that if you look at the opening – let’s just take the opening to China, which we had these – I worked on a lot of the books that we opened – used. They were called the Marco Polo books. (Laughter.) They were these two big books that we used as – to brief the President for the trip to China, these big thick books. And a lot of the early signals to China – in fact, most of the early signals to China that we wanted to normalize, except in a few instances where Kissinger and Zhou Enlai would exchange these somewhat cryptic little suggestions, was that we would open up trade. And the first signal was – for most of the time there was no trade permitted. Americans couldn’t buy any Chinese goods at all, zero, none. And then we opened up and we allowed Americans to buy $100 worth of Chinese goods, but not directly from China, through Hong Kong. And mostly they were brushes. The Chinese make brushes with pig’s bristles and toothbrushes and things like that, or silks, certain kind of silks, $100 you could buy. And if you were in Hong Kong, you went the bazaar, you could buy $100 worth of Chinese things and they wouldn’t be confiscated, which they would have been earlier than that.

And then so we – and then we also allowed a few other things, little by little by little. And then at one point we went to see the Chinese to explain how we were opening up in these – calling their attention to these little signals. So at one point, Zhou Enlai – we explained to Zhou Enlai – Kissinger explained to Zhou en-lai what we’d done. So Zhou Enlai said, “These are two big countries, and you use $100 worth of trading to demonstrate your desire to have a closer relationship?” (Laughter.) And he sort of – he did it in this very wry – he spoke very good French, so he would sometimes – French, he did this in French so no one could – so people could get it. It made the point that it was sort of minor and insignificantly relevant.

But the basic point is that you’ve got to blend economics and the foreign policy and the national security elements collectively. And therefore, the fact is that we – I don’t think anyone imagined – the only one I can really imagine who could envisage the way China would look today was probably Deng Xiaoping. He understand this. He was really a great visionary. I don’t think Zhou Enlai would have gotten it. (Inaudible) probably would have, people like that. But basically the notion of closer economic relations was considered really a critical element of strengthening our economic ties with China. And even more important was the fact that they – all these countries had really committed themselves to undermining the Western economic system during the ‘60s and ‘70s. Khrushchev said “we’ll bury you,” and the Chinese regarded the IMF and the World Bank as anathema. The first thing they did was to join the IMF and the World Bank, as the Russians – the Soviets did. And then the WTO, or the GATT and then the WTO.

So what was quite interesting is that these countries had really had a parallel but dysfunctional system, which was the common term. And then the various international groups that the communist countries maintained among themselves, all of which were fictional and dysfunctional, they all craved joining the WTO and the IMF and the World Bank because they realized they got real benefits out of plugging into the global system. And I think the key point just to leave you with is if we’re going to continue to develop relations with these countries, then we need to continue to integrate them into the global system. And you need institutions, and it goes back to the point Monnet made in the 50s, which was you need – it’s good to have leaders, inspirational leaders, but you really need strong institutions to sustain things. And I think if there’s a lesson now, it is that the amount of time we spent building up institutions after the war and then during the energy crisis, the IEA, for instance, or strengthening the WTO, all of these institutions really do play a greater role in pulling countries together. (Applause.)

Foreign Economic Policy, 1973-1976

Keynote Address by Under Secretary Robert Hormats

MODERATOR

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