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118. Summary of Conclusions of a Presidential Review Committee Meeting1

SUBJECT

  • Dollar Crisis

PARTICIPANTS

  • State
  • Secretary Cyrus Vance
  • Richard Cooper Under Secretary for Economic Affairs
  • Defense
  • Secretary Harold Brown
  • Treasury
  • Secretary Michael Blumenthal
  • Anthony Solomon Under Secretary for Monetary Affairs
  • Energy
  • Secretary James Schlesinger
  • Council of Economic Advisors
  • Charles Schultze
  • Federal Reserve Board
  • William Miller
  • White House
  • Zbigniew Brzezinski
  • David Aaron
  • Henry Owen
  • David Rubinstein
  • NSC
  • Timothy Deal

SUMMARY OF CONCLUSIONS

The group agreed that we have a potentially serious problem on our hands. In recent months, the dollar’s depreciation against major currencies has accelerated and markets have become increasingly disorderly. The trend is continuing despite public efforts to turn the tide. We have used up $3 billion through intervention in exchange markets. Additional intervention by other countries has totaled $20 billion. Private capital is beginning to flow out of the US, and in the 4th quarter of 1977 net capital outflows amounted to $10 billion. New purchases of US securities by Saudi Arabia and other OPEC states have declined markedly.

The main factors behind these developments are: (1) our large trade and current account deficits, and (2) a lack of confidence abroad in the US economy, relating to concerns about both energy and inflation. The US trade deficit will probably deteriorate further this year to $30–32 billion despite earlier more optimistic forecasts. The US [Page 351]business and banking community and foreign investors are not confident that the US is able or willing to deal with the dollar crisis. In their view, we are not acting forcefully to correct fundamental problems.

The group saw the following possible consequences if the US could not halt the dollar’s decline:

1. OPEC would increase oil prices. OPEC might either raise them directly or begin to denominate them in non-US currencies. Either action would have an adverse impact on the US and world economy.

2. Domestic inflationary pressures would intensify. A depreciating dollar raises domestic prices. (Depreciation to date in 1978 is projected to raise prices by 0.5% by the end of the year.) The dollar’s decline is partly responsible for the stock market’s malaise. These developments could further erode business confidence and dampen private investment flows. Eventually, depreciation-induced inflation might have a snowballing effect leading to still further adverse consequences.

3. US leadership abroad in economic policy and foreign affairs would suffer. The trade negotiations would probably fail; the North/South dialogue would deteriorate. The international economic system would enter into a decline with a serious impact on Allied solidarity and the probability of adverse social and political consequences in key Allied countries.

The group agreed that the Administration must act now to deal with the dollar problem. We cannot afford to wait until self-correcting forces (e.g., a depreciating dollar leading to increased exports) take hold. Immediate action would forestall more drastic measures later. The group agreed on the following steps to deal with the dollar crisis:

1. Energy. The President should next week call in appropriate Congressional leaders and energy conferees and inform them in general terms that because of the deteriorating international economic situation, if they are not able to agree on an energy tax program by late April, he will be compelled to restrict oil imports by other means. The public announcement of such a meeting should be carefully phrased to avoid the appearance that the President has given Congress an ultimatum, and should be linked to the other measures described below. If the Congress does not act in a month or so, we should be prepared to impose a fee on imported oil. The group agreed that there are strong national security grounds for this action. Consequently, if we present our case effectively and give Congress advance warning of our intentions, the risk of Congressional action to withdraw the President’s power in this area should be manageable.2

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2. Anti-inflation program. The President should announce an anti-inflation program. The group agreed that this program should emphasize the anti-inflation controls in our original economic strategy and would not entail any basic change in our overall economic objectives. We would continue on a growth path designed gradually to reduce unemployment.3

3. Export promotion efforts. The Administration would announce a series of measures to stimulate exports.

Next Steps: The President will be given separate action memoranda recommending anti-inflation steps, export promotion measures, and the meeting with Members of Congress. The PRC recommended that the President announce all three actions simultaneously.

  1. Source: Carter Library, National Security Council, Institutional Files, Box 68, PRC–058, 3/16/78, Monetary Situation. Secret; Sensitive. The meeting took place in the White House Situation Room. Brzezinski sent the Summary of Conclusions to Carter under cover of a March 18 memorandum in which he noted “that Schultze and Schlesinger agree with Blumenthal on the recommendations.” (Ibid.)
  2. Carter wrote “?” in the margin adjacent to this paragraph.
  3. Carter wrote “ok” in the margin adjacent to this and the next two paragraphs.