Foreign Relations of the United States, 1969–1976, Volume E-15, Part 2, Documents on Western Europe, 1973–1976, Second, Revised Edition

281. Memorandum of Conversation¹

Washington, December 5, 1974, 11 a.m.

PARTICIPANTS

• Helmut Schmidt, Chancellor, Federal Republic of Germany
• Hans-Dietrich Genscher, Vice Chancellor and Minister of Foreign Affairs
• Berndt von Staden, Ambassador to the United States
• President Gerald R. Ford
• Dr. Henry A. Kissinger, Secretary of State and Assistant to the President for National Security Affairs
• Ambassador Martin J. Hillenbrand, Ambassador to the Federal Republic of Germany
• Lt. General Brent Scowcroft, Deputy Assistant to the President for National Security Affairs

[The press was admitted briefly for photos and then dismissed.]

Kissinger: This office has just been redecorated.

President: It is surprising how much difference a rug makes.

I am very pleased to meet with you, Mr. Chancellor. I have heard so much about you. I am looking forward to my discussion with you.

[General Scowcroft left the meeting for a few minutes and missed part of the conversation.]

President: Henry is just back from the PRC. I hear now you are going.

Kissinger: [to Schmidt] They are waiting for you.

Schmidt: I am not sure I will go.

I would like to set aside considerable time in our discussions for economics. I think we are in a recession and on the brink of a world-wide depression. It is not inevitable but it is possible. Our two countries are the biggest weight in the world’s economy. I would like to discuss this.

President: That is fine. A discussion of what we can do to avoid a depression would be useful.

Schmidt: Secretary Kissinger and Minister Genscher can discuss the other things.

There is an economic meeting this afternoon. If there is a press statement, I would hope it would include a number of economic aspects.

Giscard is looking forward to what I can tell him. He as a person is willing to be helpful. It is his domestic situation which is his problem. He needs the Gaullist votes. If you need an emissary to him, you should think of sending Shultz.

President: I have complete confidence in George.

Schmidt: I only mention it because if anything arises which needs a judgment, he can get one from Giscard.

President: First, let me say a word about my Japan trip. I was under some pressure here to cancel it. But it was very productive. We went beyond the traditional security concerns; both of us are deeply concerned with the energy problem and they are interested in the stability of food supply. It’s a consensus government. That’s how they operate. And we were able to establish a rapport with the government.

There were few demonstrations.

Kissinger: Kyoto was the worst, and there was a sound track that said, “Go home as soon as you can.” [Laughter]

President: I had to go to South Korea. Otherwise it would have been seen as a withdrawal of support. We had to establish support for such a strong leader. At Vladivostok. . . .

Schmidt: [interrupting] Whose idea was it to go to Vladivostok?

Kissinger: They proposed Europe. But that wasn’t a good idea. The President would have had to meet with Brezhnev either before or after meeting with allied leaders, and it would have overshadowed the meetings with the allied leaders. Then they proposed Vladivostok. We checked with the PRC and they preferred Vladivostok to Europe.

President: Brezhnev was the only one who had been to Vladivostok.

Schmidt: I saw him just before you, and he gave me a lecture about East Siberia.

Kissinger: It is the prettiest city I have seen. Like San Francisco.

President: We drove around at dusk.

We had done much SALT preparation, culminating in Dr. Kissinger’s October trip. So we didn’t have to spend much preliminary time jockeying.

Schmidt: Brezhnev seemed to me to be certain there would be an agreement. More so than Kissinger.

Kissinger: He knew the concessions!

Schmidt: You did too.

Kissinger: No. We didn’t know that they would change their positions on FBS and the British and French systems.

President: We spent six hours and then broke up without an agreement. We solved it the next morning. Then we talked CSCE and Middle East.

Schmidt: How do you have discussions among yourselves?

Kissinger: We use babblers.

Schmidt: We used the microphones in Lenin Hills to tell them what we wanted.

President: We reached an agreement on equal ceilings of 2400, covering ICBMs, SLBMs, and missiles on heavy bombers.

Kissinger: We have a dispute about the type of missiles permitted on bombers. That must be worked out. We are not sure we should stick on it.

Schmidt: There is no agreement on reentry vehicles.

Kissinger: No, but there is much nonsense being said on this point. We are far ahead in warheads and will stay so for the foreseeable future. We can assume they don’t deploy any on missiles on which they have not tested them.

Schmidt: Is there a definition to distinguish between long-range and short-range bombers?

Kissinger: Not yet, but probably the long-range would include the Bison, Bear, B–52, B–1, and not the Backfire.

Schmidt: I used to be Defense Secretary. That is why I am interested in this.

Kissinger: To get to 2400 they have to cut. They are planning new missiles and will have to cut for that.

Schmidt: They are building submarine missiles.

President: They are counted.

Schmidt: But they may move in that direction.

Kissinger: They should if they are smart.

Schmidt: You don’t have to reassure us; we have no doubts.

Kissinger: We can put three times the throwweight in the Minuteman holes if we wish. If they don’t move to sea they will be 85 percent vulnerable. Their submarine missiles are not very good.

Schmidt: Did you discuss the Middle East?

President: Yes. He wanted to go to Geneva right away. We felt that it would be fruitless at the present time. We will act vigorously to get another Israeli-Egyptian agreement. Because that area is a tinderbox.

Kissinger: It would be helpful if you don’t mention this to anyone. Egypt needs this negotiation to go on with no appearance of it until it is almost completed.

Schmidt: I am worried. The state of Israel’s mind is a concern itself. There is some capability there for taking decisions out of desperation.

Kissinger: They must know that a military victory could be dangerous if the Soviets intervene and there is an oil cutoff.

Schmidt: They are talking of taking all means within their reach. What does that mean? The second danger is the Soviets maneuvering behind the lines to counter your efforts. The last is the French countering your efforts. We feel soon we may have to split with France on the Middle East. We are deeply disturbed about the French behavior in the U.N. We went out of our way to have a unified position, then at the last minute they switched. Through the Sauvagnargues/Arafat meeting.

Kissinger: We have also heard about the activities of their ambassadors in the area.

Schmidt: They are back on the Jobert track.

Kissinger: They are fairly impotent, but more persistently hostile than the Soviet Union.

Schmidt: We are worried about the Soviet role. What is their role? And how do you, for their face, let them play some role and yet limit their behind-the-scenes negative maneuvering?

Kissinger: Gromyko has no understanding of the Middle East. He has it organized as if it were CSCE, and his points are the same as the Arabs. The Arabs at least know the difference between rhetoric and reality. He won’t split it into parts. He tells the Arabs everything we tell him. Otherwise we would bring them in.

Schmidt: How about Brezhnev? They seem to have divided the world. Gromyko handles some, Brezhnev some. We have detected a difference of views between them on some areas. For example: Gromyko is in charge on Berlin.

They can’t—despite what your newspapers say—get a single cent of credit from us over the next years. But economic relations with us is a Brezhnev area.

Von Staden: Brezhnev is dominant in SALT.

Kissinger: CSCE and MBFR are handled by Gromyko. Also the Middle East problem, but Brezhnev may be getting into that.

Don’t tell the Europeans, but we are hoping for an Israeli-Egyptian agreement. That would separate Syria, because Egypt probably wouldn’t go to war for them. That would take it past the UNDOF extension and then we go back to Geneva.

Schmidt: I think this should be talked over privately between you and Giscard. Without Sauvagnargues. You should show him how far you’re going and the dangers of their Middle East policy. Kissinger can’t talk with Sauvagnargues. Giscard wants to cooperate and I would ask you to try.

President: After the SALT discussion, Brezhnev gave more participation to Gromyko.

Kissinger: In this vein, we had to tell Brezhnev implicitly that we didn’t like Gromyko’s approach and would be receptive to another approach. Gromyko wants to settle everything at once. That means an explosion. Israel can deal with only so many issues at once. If there are too many, they will go to war.

Schmidt: We are not interested in supporting the Soviet Union in regaining Soviet positions in the Middle East. But if there is a con-flict, we might be very exposed quickly, though Schlesinger didn’t stress this. Therefore, we hope you will do your best for a tacit understanding.

Kissinger: We think we have 4–6 months. There was no real war danger in November. It was very irresponsible of Israel.

Schmidt: But they will be more irresponsible in the future because they are so deeply in despair and the Government is not strong.

Kissinger: In the 6 months we should arrange a settlement and work with the Soviet Union.

Schmidt: In Israel, there was some concern about a U.N. speech. Genscher and I didn’t clear it and we don’t approve it. Israel was told the same thing.

Now about oil. The explosion of oil prices has added to the downward development of the world economy that was already under way.

The breakdown of Bretton Woods between 1971 and 1973 had already indicated the basic problem. The U.S. balance of payments deficit for 3 years, etc., contributed. Then the oil prices on top of that. For the first time since World War II, a number of countries may be unable to produce a real income increase for their workers. Some have avoided the situation so far by borrowing abroad, but that is only a temporary solution.

I think the psychology is as important as mechanical moves. The big companies are reluctant to invest. Labor is not used to not getting increases. Social strife will increase, in Italy and especially France.

Kissinger: We have seen a report of a systematic attempt to infiltrate the military and police.

Schmidt: I haven’t seen that. If we don’t tell the enterprises we will move upward, we will be in for self-fulfilling bad prophecies. I am really worried. I told my public that we are prepared to take decisive measures when I return from here and the EC Summit. I am prepared to take a number of steps, but I want to consult:

(1) To embark on a path of monetary and credit growth, probably at 8% per year. I would prefer 10%, but my Central Bank won’t.

(2) A tax cut in January ’75, for the working and lower middle class, of 14 billion marks. This is in an economy five times smaller than yours.

(3) The longest budget deficit since the war.

(4) We would pay a premium to any investment between this Wednesday and June 1975 of 2.5% of the value of the investment if it is completed within a certain period, depending on the types of investment.

(5) We will also launch a small-scale public works investment and a few other similar measures.

This is to show that we have shifted from inflation-fighting to recession-fighting and that the increase in investment is our number-one priority. One slogan will include “upward movement and stability” (which means price stability).

We can do it easier because our inflation is one half of yours (6.5%), and because we have taken strong measures already and must end this phase. It is not a complete turnaround, but a change of emphasis.

Kissinger: What inflation rate will you get?

Schmidt: Not over 8%.

President: Let me review our situation. On August 9, our economy was badly deteriorating—inflation was burgeoning, the interest rate was at an all-time high. Burns was making the only effective effort to do something. There was no serious deterioration in employment at that point. I tried to get a consensus with the Congress. I held a series of meetings, and so on, I recommended a program to Congress saying that we felt inflation was the number one problem. We put a ceiling on the budget of $300 million—5–6 billion below the estimated budget. We needed some relief for the low-income people so I recommended tax relief for them. To offset this and help the deficit I asked for a surtax of 5%—this hit only 28% of the wage earners—and a ten-percent investment tax credit to stimulate industry (up from 7%). I must say my advisors did not foresee, among other things, the loss of consumer confidence.

Schmidt: Investors confidence?

President: Not like the consumers. Now we have a crisis in the auto industry.

Schmidt: We also are producing at only two-thirds capacity.

President: I have asked for a new analysis from the Council of Economic Advisers by next week. I think he will recommend a rigid limitation on expenditures. We can get only to $306 billion, even with Congressional cooperation.

Schmidt: How much of a deficit will this be?

President: At $302 billion, it would have been a $9.4 billion deficit, which could be okay. At the rates we expect, the deficit will be somewhat stimulative. He will probably recommend a tax cut instead of government spending.

Schmidt: It depends. If it is on consumption, yes; if on investment it is not good.

President: Yes, but the Congress wants to put it on an income supplement. The new Congress is an unknown quantity. The House is probably more Liberal (in our sense), with the Senate the more conservative. We will probably submit a program to deal with the same kind of problem that you point out.

He thinks we can get inflation down to 7–8% by summer. Unemployment this month may be up to 6.5%. That is bad.

Schmidt: It could go to 7% by February.

President: Yes, and that may launch Congress into a stimulative program of expanding the income supplement. We will make recommendations in the State of the Union Address, which is around 14 January. One other point: Burns was tightening the money supply all summer.

Schmidt: Eighteen months too late.

President: I won’t judge, but he wouldn’t change until we negotiated a plan and got a hand on spending.

Schmidt: The same with us. If I had seen the steep decline of the economy, I would have acted differently.

Kissinger: How do you explain it?

Schmidt: It is psychological. The enterprises of the U.S. are one of the decisive forces of the world; the next is ours. It is in your hands. Whatever we do, if you don’t, we can’t do by ourselves. I think you should have a budget deficit for investment. It would show leadership. Otherwise, a world depression will be blamed again on the United States. It will destroy your world foreign policy leadership.

Kissinger: Please tell the President candidly tomorrow what you think, after talking with our economic people.

Schmidt: Yes. But I think we need a press statement talking about the economy—also something on oil, which has not been discussed yet. You are such a great weight in the world.

President: We recognize that. I must be careful in a statement now because of the Congress. I have to be careful to avoid specifics at this time.

Schmidt: I understand. Countries in surplus should step up demand; countries in deficit (except from imports of oil) should get their houses in order. I would endorse—don’t write this down—a request for Germany to step up demand.

President: In defense of the October plan, . . .

Schmidt: Don’t explain. I made the same mistake. The downward development came much quicker than anyone expected.

President: If we hadn’t hit inflation, no one knows what the Congress would do in an election time. We do need to adjust the October program, but we have to get Congress out of time.

[Omitted here is discussion of energy cooperation.]

1. Summary: Schmidt, Ford, and Kissinger discussed Ford’s November 19 to 24 trip to Japan, South Korea, and the USSR, as well as the U.S. and FRG economies.

   Source: Ford Library, National Security Adviser, Memoranda of Conversation, Box 7. Secret; Sensitive. All brackets are in the original except those indicating text omitted by the editors. The meeting took place in the Oval Office, and ended at 1:05 p.m. (Ibid., White House Central Files, President’s Daily Diary) For the portion of the conversation on energy cooperation, see Document 22 in Foreign Relations, 1969–1976, vol. XXXVII, Energy Crisis, 1974–1980.