109. Telegram From the Embassy in the United Kingdom to the Department of State1
London, October 14, 1975, 1534Z.
15749. For Secretary Kissinger and Treasury Secretary Simon. Subject: Under Secretary Yeo’s Report on Conversations with Germans.
Our discussions with Poehl were quite pleasant and frank. They centered on the following points: [Page 345]
- Poehl indicated that he expected Giscard to make a presentation on exchange rates. They anticipate that it will cover familiar territory, describing recent exchange rate fluctuations, attributing the current economic stagnation to exchange rate variability and calling for establishment of bands or zones within which rates should be kept.
- This view of the French position as insisting on zones was in no way congruent with the tone or specifics of our conversations in Paris with de Larosiere or Clappier.2
- Interestingly, Poehl indicated that they thought an appropriate zone with the DM would be 2.50 to 2.70. This compares with the figures of 2.40 to 2.60 mentioned by Emminger in a speech several weeks ago.3
- Either the Germans are not aware of the current French position as described by de Larosiere or they themselves are pushing for zones by using the French.
- Poehl apologized for their performance in re the SDR/aid link at the U.N. He explained that the Chancellor, confronted late at night by the urgings of Genscher and Bahr, had made the decision to withdraw their reservation on the link. Following the U.N. affair, the Chancellor had been criticized in the press for acquiescing to the link. As a result he issued an interpretation of their position which in substance stated that they are still opposed to the link.
- We agreed that the link would destroy the SDR as originally conceived. Furthermore, the link lacked any semblance of conditionality, any consultation with a view to improving individual countries’ economic performance and any political quid pro quo. We suggested that the private banking system’s ability to continue to finance that part of the LDCs deficits which could be described as structural is limited. The heavy debt burdens of many LDCs plus the banking system’s own limitations suggest that the flow of private credit might stagnate or decline somewhat. Improved world economic conditions might mitigate the LDCs earning problems but to the degree individual LDCs have structural concerns the positive effect would be only partial.
- It is clear that Poehl and perhaps others in the German Government are concerned about the liquidity issue. We indicated that the [Page 346] very sizeable amount of short-term economic expansion in recent years should not be confused with international liquidity. Existence of huge capital flows is not a symptom of too much liquidity or too little. We indicated that our own concern centered on the distribution of official liquidity and the related fundamental issue of individual countries’ comparative earning power.
- Poehl indicated he personally feared an attempt by the British and Italians in conjunction with the LDCs to try for a new issue of SDRs.
- We agreed this would be undesirable in the sense that it would represent an attempt to float everyone off the rocks without addressing underlying problems. We indicated at some point individual countries’ standards of living must be related to their earning capacities. Expansion of SDRs would in effect transfer income from healthy developed countries to others. The mechanism would be through the process of inflation engendered by the broad issuance of SDRs and this in turn would cripple our individual efforts to bring about price stability.
- We indicated that Germany’s ability to operate as an island of price stability in the future would be limited by other countries’ adoption of individual price stabilization programs and in any case meant that Germany would have to accept such low real rates of growth that they would have in effect embraced a policy of engineered stagnation.
- We discussed the New York City problem and gave them a full review of the situation.4 It was apparent that they were not familiar with many of the pivotal factors in re the overall issue.
- We discussed the chairmanship of the Interim Committee. Poehl said he favored Duisenberg. Impartiality and a steady and even hand were the most important criteria to us and we indicated some reservations re Duisenberg. Poehl then mentioned Healey and Declerq and we indicated both were on our list but we were not prepared as of that moment to put forward a name.
- Source: National Archives, RG 59, Central Foreign Policy Files. Confidential; Cherokee; Nodis.↩
- See Document 107.↩
- On September 15, the Embassy in Bonn reported on an August 26 article written by Bundesbank Vice President Otmar Emminger in which he discussed the dollar’s strength vis-à-vis the mark and the implications of an exchange rate that hovered between DM 2.40 and DM 2.60 per dollar (a rate below DM 2.40 would mean trouble for West German exporters, while a rate above DM 2.60 would raise import prices and exacerbate inflation). (Telegram 15123 from Bonn, September 15; National Archives, RG 59, Central Foreign Policy Files)↩
- The finances of New York City were in such disarray that the city was in danger of defaulting on its loans. On October 3, Chancellor Schmidt told President Ford: “I am also worried about Simon’s attitude toward New York. If New York shouldn’t pay on the bonds, it could be looked on outside the United States as kind of a Black Friday. There are other cities, not like New York, but that are under some suspicion, and if New York collapsed they perhaps couldn’t sell bonds. I am sympathetic to the problem of New York’s mismanagement but there is a psychological problem involved.” (Memorandum of conversation, October 3; Ford Library, National Security Adviser, Memoranda of Conversation, Box 15)↩