94. Memorandum of Conversation1

PARTICIPANTS

  • Helmut Schmidt, Chancellor, FRG
  • Hans-Dietrich Genscher, Deputy Chancellor and Minister of Foreign Affairs, FRG
  • President Gerald Ford
  • Dr. Henry A. Kissinger, Secretary of State and Assistant to the President for National Security Affairs
  • Lt. General Brent Scowcroft, Deputy Assistant to the President for National Security Affairs

[Omitted here is discussion unrelated to foreign economic policy.]

Schmidt: The whole economic situation in Italy, despite the appearance over the last year, is deteriorating. Unemployment will rise, the differences between North and South will grow; the Communists have shown themselves excellent administrators and have detached themselves from Moscow to become more attractive.

If the economic situation of the world were going up, the economic situation in Italy would be drawn up with the rest. If that doesn’t happen, the economic situation in Italy would deteriorate rapidly. But let’s save the economic situation for the broader meeting.

Giscard says what I have been saying since a year ago May. I have kept quiet currently because I too am pessimistic. He says the greatest threat to the West is not the Communists or the Southern flank of NATO, but the economic ability of the West. If it were a political or military crisis, the leaders would get together and act. Since it is economic, we leave it to our Finance Ministers. If we leave it this way for five years, there will be a political disaster. He thinks the Western leaders have to get together to make a last attempt. He thinks it is a dramatic situation.

Wilson is more hesitant because he fears creating expectations.

The President: His situation is different.

Kissinger: He is already in the situation Giscard wants to prevent.

Schmidt: His inflation rate is twenty percent. The Saudis are losing their money at twelve percent because of inflation. How long will they continue that? The British are aware of it—Callaghan is more afraid than Wilson.

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The President: Wilson may be afraid of a meeting to expose what the situation is and raise expectations.

Schmidt: Wilson would come, but he is not enthusiastic. This is one topic for the Quadripartite lunch at Helsinki.2

Let me speak a few frank words. The leadership here should be by the United States. Your strong leadership is needed, without appearing to do so.

The President: That is difficult. What would you recommend?

Schmidt: The British will have unemployment—it will soon be six percent. In France, it is also too high. Ours is too high, slightly over one million, and by February it could go to 1.5. Don’t take this down. We are an export economy. Our exports to the U.S. have fallen to less than 50 percent over the last year. Our industrial activity is down to 65 percent of capacity. It is the same with France.

The President: Ours is about 75 percent.

Schmidt: My obsession is with the fact that the economic leaders in the U.S.—Simon, Greenspan, and regrettably even Burns—look too much to domestic problems and not to world effects. For example, New York City banks are 3 percent higher, so people sell German bonds back in order to get the higher New York rates. Also the dollar is rising so people seek profit by switching from marks and francs into dollars. So floating currencies—of which I was a great advocate—when the rate is so volatile, could destroy the Western economies.

The President: I read a piece by Laffer,3 who is opposed to the float. But the American consensus in the United States is to float.

Kissinger: But five years ago they were all for rigid rates. The Chancellor’s point is that the uncertainties of fluctuating rates could undermine political stability.

Schmidt: In all of Europe, the boards of the big industrial companies are so skeptical they do not invest, so employment stays low. My program to create domestic demand—we lowered taxes, made money cheap, we gave investment credit, we held back wage requests by persuasion—didn’t work because foreign demand for goods dropped badly. Domestic demand reacted well, but about two-thirds of the total demand is foreign, so that is the critical aspect. Also, many of the consumers saved rather than investing. Savings are the highest since Kreisler.4

[Page 307]

The President: The same with us. Heavy investment goods aren’t selling. Housing.

Kissinger: What is your solution?

Schmidt: There is another negotiation coming. If OPEC announces a ten percent price hike—the Shah5 wants 30 percent—the increase will add to this pessimism. In order to get things under control, we first must show that we want no confrontation with OPEC but we will cooperate to work things out. Second, if we could tell the world we see the dangers eye to eye and will concert our actions to meet it—even if we don’t actually do it.

Kissinger: We will be under domestic pressure for a confrontation with OPEC. Would you explain this to the President and also the need to concert?

Schmidt: We would react negatively in Europe to a confrontation with OPEC. If oil prices go up, it eventually benefits the U.S. and the Soviet Union, who are rich in raw materials. But there is no chance for Europe, who could not stand a confrontation. They need stable prices and assured supply.

If there is any different outlook on oil in Europe, it is in Great Britain, which will soon have its own supply. The Europeans want to come to terms with the energy suppliers.

The President: Is there a negotiating area with respect to price and supply?

Schmidt: Yes, but we can’t join a policy of confrontation. It would so raise unemployment as to be disastrous.

The President: My immediate reaction is favorable to a meeting. Simon is a hard liner. My tendency is to work closely—on the economic side—the perception of us working closely would help us with the producers and the Soviets.

Kissinger: But we should prepare carefully so there are results.

Schmidt: We have confidence in Shultz. Simon and Greenspan are domestically oriented.

Kissinger: But Shultz is difficult to use in a governmental body. Could we use a private group.

Schmidt: I agree that a meeting should be carefully prepared. Heads of government are not equipped to discuss such matters without preparation.

The President: I have full confidence in Shultz, but we couldn’t, we use him officially. He has the confidence of the Congress also.

Schmidt: If an economic conference should take place this year, we shouldn’t expect too many results. If we could create the impression [Page 308]we intend to work together and coordinate our policies, that will be enough. It should be done before the real winter comes.

The President: What do you think OPEC will do?

Schmidt: The Saudis will try to retard any such step until the end of the year. Not so with the Shah and Algeria. Of Perez6 I am not sure—he is annoyed with the United States.

Kissinger: Mostly for domestic reasons.

Schmidt: We are having a study completed now. I think there are differences opening up among the OPEC countries.

Kissinger: If we stick together.

Schmidt: Yes.

Kissinger: We have looked at commodity agreements to see how we could split up the producers.

Schmidt: I think we could separate the poor, non-oil countries from OPEC.

Kissinger: And some non-oil commodity countries. Right now they are all tied up together.

Schmidt: What is the situation in Japan?

The President: We have a meeting with Miki the day we get back. I had a good trip there last fall.7 I think it was a good trip and it reassured them. Economically, I think they are better off than Europe. They have oil agreements with China. I think they are better off now than a year ago.

Kissinger: The collapse of Indochina has had a more profound effect in Japan than anywhere else.

Schmidt: In what direction?

Kissinger: In a more self-assertive way to separate from the U.S.

For the first time they have asked to discuss defense matters at the Prime Minister level.

The President: Yes. With Tanaka, we didn’t discuss defense.

[The party then joined the plenary meeting.]8

[Page 309]

Schmidt: Let me welcome you again in this broader session. We agreed to discuss economic and financial matters, reserving the others for tonight on the boat. Would you begin, Mr. President?

The President: Thank you very much. We are delighted to be here. Let me outline our domestic economic situation. Last fall at the economic summit conference in Washington9 there was a consensus that the real problem was 12–14 percent inflation. Not one economist recognized the coming precipitous rise in unemployment. People last winter stopped buying high-value investment items and began to save. The result is high unemployment and recession. We have had very high inventory liquidation—almost at an alarming rate. The past two months, things have been encouraging. Inflation is down to about five–six percent. Unemployment is about nine percent, but there are encouraging developments. New unemployment is at 400,000 when three months ago it was 600,000. We estimate the unemployment rate by year end will be eight percent and by mid-1976 at 7.5–7 percent. GNP was bad the first quarter, somewhat better the second quarter, and four–five percent the third quarter and seven percent in the fourth quarter.

Some economists think it would go to nine percent. We have some fiscal problems. Our deficit is now about $60 billion. Congressional pressure may force it to around $70 billion. Next year’s forecast depends partly on whether there is a tax reduction. If there is, it would be $35–40 billion; with a continuation of the tax credit, it would add $15–20 billion. We are encouraged by the signs in home building. By year end, the rate could be one/one-half million, up from 700,000.

Automobiles have been bad. The savings rate is the highest it has been in years. The consumer confidence factor has improved recently. Of the tax rebate, only $2 of the $10 billion has yet been spent, so that is potential spending. Our balance of trade is encouraging, although that doesn’t help in the world economy.

Schmidt: That discourages us.

The President: Interest rates are declining. The supply of money is above the rates the Federal Reserve Bank has projected: 11–12 percent as compared to seven–eight percent. We think inflation will be around five–six percent and unemployment seven–eight percent. That is my general appraisal.

Schmidt: Thank you. I would like Friderichs to give us a brief review.

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Minister Friderichs: Our real GNP for the first quarter is from 3.5 to 4 percent. The price increase was about 4–5 percent; however, it was above five percent seasonally adjusted. Capacity utilization was below 70 percent—the worst in heavy industry. Domestic demand has been stabilized by domestic programs. The main difficulty is in exporting. We export 23 percent of our GNP and exports are down in real terms by 16 percent. New demands are down 22 percent. This in net is our economic situation.

Exports to the U.S. are important to us. In energy policy we have exchanged views. For this winter, our consumption has declined and stocks are high. We must assume there will be oil price increases, probably from $1 to $1.50 a barrel. The key countries to watch are Algeria and Venezuela. We are worried about the winter of 1976–77 because if the economic situation in industrial countries improves, oil demand will rise. For other commodities, discussions have been held. We expect some raw material agreements. We are thinking for a new device using IMF gold to stabilize prices.

Schmidt: Pohl would sketch out our financial situation.

Pohl: We are facing our biggest budget deficit—about 60 billion DM. This results from a tax cut and increased expenses. We have no trouble financing it because the private sector hesitates to invest and savings are up.

In the IMF negotiations, I think we are close to compromise. I think an agreement on increase in guarantees is possible by the end of August and also an agreement on gold transactions. On this we are closer to France and the European position is generally unified. On the use of IMF gold, we are closer to an agreement.

The exchange rate system issue is still open, with basic dispute between the U.S. and Europe. The differences are not bridgeable right now. We are pleased that the dollar rate has gone up. Your interest rates are higher than ours and that worries us.

Schmidt: Thank you. Let me add a few words from the European, not German, viewpoint. It is in the interest of Europe that you make the Federal Reserve Board realize their interest rate policy is not just a domestic concern. Your high rates bring up the price of the dollar which is good, but it disrupts our capital markets. I think France will not try to block the results of the IMF.

The future regime of world exchange rates, after the collapse of the Bretton Woods system, won’t be solved at the IMF meeting, but I think it is not insoluble. Since the U.S. is the strongest country monetarily—tradewise we are about even—it must overcome its domestically oriented mind. We need a fixed but adjustable rate system. In the meantime we should bring about a common management of the float to avoid these devastating fluctuations. For smaller companies, it is difficult [Page 311]to deal in dollars when you don’t know whether there will be a ten percent change within six months. In the Bretton Woods system, all currencies were pegged to dollars and all transfers were in gold. You stopped that in 1971, and we understand that. If you won’t transfer gold you have to participate in managing the rates so they are predictable over the longer period. This inflation and oil and commodity prices are the real problems of the world economy.

The political effects of the recession—really a depression—threaten political stability in several countries—Italy, where the Christian Democrats may accept the Communists in government. France also, where there is always a potential for domestic upheaval. The British problem is not social unrest, but strikes and paralysis. Here also, the problem is not upheaval, but bad election results. I don’t know about Japan.

The economic problems are a greater threat to the West than the Soviet Union, the Middle East, or Southern Mediterranean problems. Giscard and I both feel that the strongest country—the U.S.—must take the lead. It is a dramatic situation.

The President: I concur that we must integrate our economic thinking and actions, both because of the domestic political situation in Europe and also in the United States. We have gone through a traumatic economic situation over the past year. The American people have gone through it with patience and stability. Compared to the 1930’s, it is quite surprising. We are anxious for economic and political reasons for economic improvement. We have an election next year and want to enhance the economic improvement in the months ahead. I think we can make progress in concerting our policies.

Schmidt: We can continue at lunch. We are relieved at your statement about cooperation. We are at your disposal any day or night. I look forward to the Quadripartite meeting in Helsinki, where we can discuss how to bring about this cooperation. Our private entrepreneurs—more in Europe than in the United States, because you were the first into a depression and now, properly, the first to come out—need this sense of cooperation in order to give confidence.

[The meeting ended.]10

  1. Source: Ford Library, National Security Adviser, Memoranda of Conversation, Box 14. Secret; Nodis. The meeting took place in the Chancellery. President Ford visited the Federal Republic of Germany from July 26 to 28, at the start of a 9-day tour of Central and Eastern Europe. This memorandum of conversation is scheduled to be published in full in Foreign Relations, 1969–1976, volume E–15, part 2, Documents on Western Europe, 1973–1976.
  2. A memorandum of conversation from the July 31 Quadripartite luncheon meeting is in the Ford Library, National Security Adviser, Memoranda of Conversation, Box 14.
  3. Arthur Laffer was a University of Chicago associate professor of business economics.
  4. Not further identified.
  5. Mohammad Reza Pahlavi was the Shah of Iran.
  6. Carlos Andres Perez was the President of Venezuela.
  7. President Ford visited Japan from November 19 to 22, 1974.
  8. The brackets are in the original. According to a memorandum of conversation prepared in the Department of State that covered only the larger meeting, it began at 11:15 a.m. and took place in Chancellor Schmidt’s conference room in the Chancellery. Joining the meeting were Ambassador Martin Hillenbrand, Sonnenfeldt, Hartman (who drafted the memorandum of conversation), West German Economics Minister Hans Friderichs, West German State Secretary (Foreign Office) Walter Gehlhoff, Pohl, West German Political Director (Foreign Office) Guenther van Well, von Staden, West German State Secretary (Federal Chancellery) Manfred Schueler, West German Federal Chancellery official Carl-Werner Sanne, "and several others." (Ford Library, National Security Adviser, Memoranda of Conversation, Box 14)
  9. Apparently a reference to the conference on inflation held in Washington on September 27 and 28, 1974.
  10. Brackets are in the original.