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113. Memorandum From John Renner of the National Security Council Staff to the President’s Assistant for National Security Affairs (Brzezinski) and the Special Representative for Economic Summits (Owen)1

SUBJECT

  • International Economic Policy

The public airing of differences between the United States and Germany over economic policy is having adverse effects. This persistent policy dispute has created a feeling of uncertainty and uneasiness about future developments. Chief Executive Officers are wary about large investment projects. The stock market is nervous. International money markets are in disarray. Every time we urge Germany to expand further and Germany refuses, the dollar falls and the stockmarket gets more jittery. Every time Germany points the accusing finger at our huge oil imports while the energy bill remains stalled, the mood of money managers and investors gets blacker.

We should act now to break this downward spiral. What is needed to change the psychological climate is to give the impression that governments are acting in harmony in pursuit of agreed objectives.

Let us stop urging the Germans to be an economic locomotive. Regardless of the merits of our case, Germans of all political and economic persuasions are united in opposing this role. They disagree with our economics (however sound), resent our pressure (however gently applied), and cannot resist the political credit from standing up to us.

We can pursue the same objectives more indirectly. Most governments want to increase economic growth and at the same time not fan inflation. Differences arise mainly over means and degree, not ends. Perhaps we could defuse the policy dispute and create a more positive atmosphere by approaching the problem together with Germany, Japan, and other OECD countries.

I realize that this matter has a long history, that many ideas have been tried, and that by now no one’s motives are considered to be pure. But what is needed is a new beginning.

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I would favor trying:

—To persuade the Germans that we are no longer going to push them to expand more than they think they should and to convince them to stop taking public pot shots at us. We would also try to work out with them a unified approach to the following problems. Blumenthal started this process in his recent talk with Schmidt.2 So the ground is prepared.

—To get agreement in the OECD to study the relationship between growth and inflation, with specific reference to the extent to which and the manner in which each OECD country could increase its rate of economic growth without provoking general price increases. The OECD study should concentrate on how best to increase investment in each country. It would also be useful to have an OECD study of the current account consequences of all OECD countries simultaneously expanding their economies to the prescribed extent.

—Exploring with the key OECD countries their experience with and ideas about encouraging non-inflationary economic growth by stimulating investment in areas that need additional capital in order to solve other pressing problems such as conserving energy, developing alternative sources of energy, and improving the environment. It might well be politically feasible to adopt policy measures to encourage business investment for these ends without also stimulating final demand to an inflationary extent.

—To examine and evaluate the long experience the Europeans have had with intervention in the money markets. We could at the same time explain our concerns about systematic intervention to support a given exchange rate. We should also reassure the other OECD countries that we do not want the dollar to fall further. The President has already done this. So has Blumenthal. But the other countries still are not sure of our intentions.

In conjunction with these steps, the President could make a major speech to explain our domestic and international economic policy, indicate our strategy and priorities, and show how we see the interrelationship between growth, inflation, money, trade, and energy.

This series of interrelated actions should help tighten the gloomy economic mode, contribute to a more cooperative atmosphere, take a few steps toward solving some of the hard problems, and set the stage for a positive, constructive meeting of the heads of governments at the Bonn Summit. Unified movement in this direction, even if cautious, [Page 342]could help settle the foreign exchange markets and give Wall Street a positive boost.3

  1. Source: Carter Library, National Security Affairs, Brzezinski Material, Brzezinski Office File, Subject Chron File, Box 89, Economics/International: 1/77–7/78. Confidential. Sent for information. Copies were sent to Solomon, Bergsten, Widman, and Junz (Treasury); Cooper, Katz, Vine, and Hormats (State); Schultze, William Nordhaus, and J. Shafer (CEA); and Hunter (NSC).
  2. See Document 111.
  3. In a February 22 memorandum to Brzezinski on “the continuing spate of reports about quarrelling with the West Germans,” Hunter suggested the “need for a re-think of some basic attitudes.” Specifically, he questioned whether the United States should continue to pressure West Germany by linking the success of its efforts at economic expansion to the timing of the next G–7 Summit, proposing that Brzezinski reconsider this tactic with Carter, Vance, Owen, Blumenthal, and Strauss. At the top of Hunter’s memorandum, Aaron wrote: “I tend to agree.” (Carter Library, National Security Affairs, Staff Material, Office, Outside the System File, Box 49, Chron: 2/78)