Foreign Relations of the United States, 1977–1980, Volume III, Foreign Economic Policy

116. 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

Washington, March 14, 1978

SUBJECT

• Upcoming Choice for the President on Economic Policy

At this afternoon’s meeting of the International Monetary Group battle lines were drawn for a future fight about economic policy.

Solomon and Wallich (Federal Reserve) argued that the dollar crisis cannot be terminated satisfactorily without following somewhat more restrictive fiscal and monetary policies. They contended that the dollar continues to fall because of the sour psychological mood of the money managers and that nothing less than a hard-nosed anti-inflation program would work.

Nordhaus (CEA) said that more restrictive fiscal and monetary policies would halt US economic growth and freeze unemployment at present levels. He preferred to see the dollar depreciate further.

I supported Solomon on foreign policy grounds and advocated the adoption of a comprehensive program along the lines of my memo to you of this morning.² On the basis of Solomon’s presentation of the extremely gloomy mood among money managers, I would add to the list of measures I recommended moderately restrictive fiscal and monetary policies. This means at a minimum not allowing the budgetary deficit to increase and raising interest rates slightly.

It seems to me that the President will soon be faced with a tough decision:

Option 1: In order to stabilize the dollar and avoid a deterioration of our national security position, take measures to restrain economic growth and freeze unemployment at the present level with the resultant undesirable domestic economic and social consequences.

Option 2: In order to keep the economy growing and unemployment falling, let the dollar continue to depreciate with the risk of a major flight from the dollar with all of the serious economic and political repercussions that would follow.

The policy dilemma is put in stark terms for clarity. In reality, I think that economic growth could be restrained somewhat and unemployment held at present levels without serious economic or political consequences. A higher rate of economic growth and lower level of unemployment could be pursued after the dollar had stabilized and after the current account disparities had been reduced to tolerable proportions.

I recommend that you give serious consideration to my recommendation that the President create a “council of war” to consider and decide on an integrated, comprehensive program to stabilize the dollar.

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Subject File, Box 16, Economic Policy Group Executive Committee: 1/78–3/80. Confidential. Sent for information. Carter initialed “C” at the top of the page.
2. In his March 14 memorandum to Brzezinski, Renner proposed a number of measures, in addition to an oil import fee, to stabilize the dollar: the convening of “a ‘council of war’” to devise a comprehensive stabilization program; a Presidential effort to encourage the energy bill’s passage; a subcabinet investigation into executive action to accelerate oil conservation; a report from Blumenthal on increasing U.S. foreign exchange reserves so as to augment the government’s ability to intervene in the exchange market; Treasury market intervention “to stabilize the dollar in an acceptable range;” foreign government cooperation; wage and income guidelines to stem inflation; and a major Presidential statement. (Carter Library, National Security Affairs, Brzezinski Material, Agency File, Box 21, Treasury Department: 2/77–3/78) On March 15, Renner sent Brzezinski and Owen a revised version of the program (which omitted the report from Blumenthal, but suggested that Carter “clamp a firm ceiling on the budgetary deficit,” as well as a moderate interest rate increase by the Federal Reserve); in his cover memorandum, Renner noted Solomon’s “100 percent” agreement with the proposals. (Carter Library, National Security Council, Institutional Files, Box 68, PRC–058, 3/16/78, Monetary Situation)