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

120. Memorandum From Secretary of the Treasury Blumenthal to President Carter¹

Washington, March 21, 1978

SUBJECT

• Prime Minister Callaghan’s Forthcoming Visit

I have just seen Prime Minister Callaghan’s March 16 letter to you and his accompanying proposal for a five-part “package” agreement among the major countries as a means of restoring confidence in international economic leadership.²

Callaghan’s call for commitments to take specific measures on growth looks reasonable, although his proposal that we jointly pressure Chancellor Schmidt to commit before mid-May on further stimulus measures would go beyond the recent U.S. agreement with the Germans and is unlikely to be accepted by Schmidt. Callaghan’s points on long-term capital flows, energy and trade seem generally unobjectionable, although I do not find anything new in them likely to have much impact.

The new significant proposals are in Callaghan’s fifth point—“currency stability.” I strongly advise that we not commit ourselves to the actions in the currency area which he proposes. Unless tailored carefully, they could start us down a road back toward fixed exchange rates, which in turn could place a strait jacket on U.S. domestic economic policy and create huge exchange losses for us if the dollar were to weaken further.

If we act on the fundamentals, particularly energy and price stability, the exchange markets will take care of themselves. If we fail to do so and a major crisis becomes imminent, we can re-examine the feasibility of multilateral currency operations. But implementation of any such scheme should begin with the Germans, and perhaps the Japanese, not the British. I therefore believe that you should make no commitment to Callaghan.

I think it is also extremely important that you reject Callaghan’s proposals for longer term reform of the international monetary system.³ New authority for the International Monetary Fund, agreed upon two years ago,⁴ will become effective in the next few weeks. These new IMF provisions will provide the right framework for the improved management of the system which is needed. Callaghan’s proposals raise major substantive problems but, beyond that, any proposal to reopen long-term system questions at this time of currency instability would be very disruptive and damaging to world confidence.

I will provide you with additional material on the Callaghan proposals before your meeting Thursday,⁵ but I wanted to let you know now of my concerns about his currency proposals.

W. Michael Blumenthal⁶

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Country File, Box 76, United Kingdom: 1–3/78. Secret. Sent to Blumenthal for his signature under cover of a March 20 memorandum from Bergsten, who noted that the memorandum had been prepared at Blumenthal’s request. Bergsten also noted Solomon’s concurrence in the memorandum, as well as Cooper’s and Owen’s support for the Treasury Department position. Bergsten observed that “Cooper is not as worried as I about the implications of the Callaghan proposals and thus is more inclined toward a stance of ‘listen and defer judgment.’” (National Archives, RG 56, Records of Assistant Secretary of the Treasury for International Affairs C. Fred Bergsten, 1977–1979, Box 2, Political)
2. See footnote 3, Document 115. On March 22, Owen forwarded Callaghan’s letter and the accompanying proposal to Carter. In his cover memorandum, Owen summarized and commented upon the British proposal, which included measures to stimulate domestic growth; increases in the flow of long-term capital and aid; more energy conservation and investment; encouragement of trade liberalization and disavowal of protectionism; and multilateral measures to stabilize the dollar, such as a widening of the swap network, U.S. sales of SDRs, and a U.S. drawing on the IMF. (Carter Library, National Security Affairs, Brzezinski Material, Brzezinski Office File, Country Chron File, Box 15, Great Britain: 8/77–3/78)
3. The British proposal suggested the need to address several questions concerning the evolution of the international monetary system, including “whether the US authorities are going on a continuing basis to ensure that the dollar functions appropriately as the only important international reserve asset; and how the other main powers—and the markets—are going to react over time if the dollar does not fulfil this function. Linked with these questions there will also be that concerning the viability of the present exchange rate regime.”
4. In January 1976, the IMF Interim Committee agreed on a program of international monetary reform; see Foreign Relations, 1969–1976, vol. XXXI, Foreign Economic Policy, 1973–1976, Documents 128 and 129.
5. March 23.
6. Blumenthal signed “Mike” above this typed signature.