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

121. Memorandum of Conversation¹

Washington, March 23, 1978, 11 a.m.–noon

SUBJECT

• Summary of the President’s Meeting with UK Prime Minister James Callaghan

PARTICIPANTS

• President Jimmy Carter
• Vice President Walter Mondale
• Secretary of State Cyrus Vance
• Secretary of the Treasury W. Michael Blumenthal
• Dr. Zbigniew Brzezinski, Assistant to the President for National Security Affairs
• Ambassador Kingman Brewster, U.S. Ambassador to the United Kingdom
• Ambassador Henry Owen
• Robert Hunter, NSC Staff Member (Notetaker)
• UK Prime Minister James Callaghan
• Ambassador Peter Jay, British Ambassador to the United States
• Sir John Hunt, Secretary of the Cabinet
• Kenneth E. Couzens, Treasury
• William S. Ryrie, Minister (Economics), British Embassy, Washington, D.C.
• Kenneth Stowe, Principal Private Secretary to the Prime Minister
• T.D. McCaffrey, Press Secretary to the Prime Minister
• Thomas McNally, Political Adviser to the Prime Minister

(From 11:00 to 11:25, the President and the Prime Minister met privately in the Oval Office, then joined the others in the Cabinet Room, as follows.)

(The President, the Vice President, and the Prime Minister began by discussing the recent biography of President Truman.)

The President said (in a jocular way) that he and the Prime Minister had not had enough time alone. They make constructive and frank comments to one another, and they needed more time for their conversation.

He is very thankful to have the Prime Minister here. The economic subject is an important one; and it is important that they address it, as well. To give a brief analysis, the Prime Minister sees that we should let the world know that the Summit Conference nations will act in concert, whenever they can reach a common approach. There are five areas to be considered: economic growth, long-term capital flows, energy, trade, and resisting protectionism (sic!). The Prime Minister had sent him a separate presentation, which the President had studied and learned from.² The Prime Minister’s associates had worked on it for several months. The Prime Minister had told him that one can’t press Germany to act against its own interests. We had pressed Schmidt to the limit of his ability to move. He (Schmidt) is concerned over U.S. failure to act effectively enough to stabilize the dollar. We recognize that there are different responsibilities. But it is good to express oneself clearly, if a leader feels that one nation is not acting in the interests of others. The Prime Minister has described well our own concern, and world concern, with the role of the dollar. When the U.S. economy is in good shape, we pay no attention to the dollar. But when we have problems, we react with consternation at the comments of others. We must learn to see that issues of the dollar are not just domestic matters, but also international. Secretary Blumenthal is worried half to death about the dollar! It is important that the dollar play a strong role.

It is important that we (all) use the time between now and July to prepare the Summit carefully, and see what we can do separately and collectively.

The Prime Minister had suggested (the President continued) that when each of the Summit nations act—on inflation, etc.—they should do so within a common framework. They would undertake to consult with one another—though not to give a veto. When the President thinks he must do something, then the Prime Minister says (and he, the President agrees with him) that he should send a private dispatch, to get suggestions, and to reassure our major trading partners. The Prime Minister said that he would be calling Schmidt—and he would not do it to ask him (about this?), but only to tell him that, when the U.S. acts, it will tell him (Schmidt). The world economic situation has deteriorated, and bold and decisive action is needed, or it will deteriorate further.

He (the President) had no further details at the moment. He would like to have the Prime Minister’s comments. They should talk frankly: there are no sensibilities on this side of the table. He wants to thank the Prime Minister for coming; he comes as a good friend. We are honored to have him here. As an added bonus, the Prime Minister will see his grandchildren. We and the world benefit from the Prime Minister’s unselfish work on these complex issues. This is beneficial to everyone.

The Prime Minister said thank you very much—and also expressed thanks to all who had worked on the British paper. It had gone through 3 or 4 drafts, and was beginning to be a rigorous analysis. It is not a plan, but areas for examination. Something needs to be done. He had lived for years, including his time as Chancellor of the Exchequer, in this economic world. There are now fewer signposts in international finance and economics than ever before. They had all been swept away. We need basic, long-term signposts, new criteria by which the international community can make judgments, as well as ourselves. This is needed for the long-term. But in the short-term, how can we make improvements in the next one to two years? These matters will have profound political implications unless we are careful.

That is the background for what he wants to say. Also, there is no question of the UK’s thrusting itself into the driver’s seat. The U.S. has the lead, with its weight in the world economy. U.S. economic strength leads to political strength, and together they lead to Western security. He told Chancellor Schmidt the same thing. We should ask our people (staff) to get some proposals, together, on these subjects or other areas we can agree upon.

What is involved is getting people to do what they do not want to do. If we are to get Schmidt to act, it can be done only if others will also act—from a common (position?). What should Britain do? He had written down four things, which are not very onerous. First, there should be more energy conservation. Britain should help with the Common Agriculture Policy in regard to the Multilateral Trade Negotiations—and will take this line in the European Community. Britain would also help—for example if the U.S. activated an IMF drawing (which should be big, not a piddling amount)—if so, then Britain would itself make an early repayment to the IMF. But for immediate steps, they have a budget in about ten days. If it could be done under complete secrecy, they could see what could come of talks with the U.S., talking about the budget, and make this part of the coordinated plan. He would have to see whether Chancellor Healey would have any objections. Perhaps the United States could do the same on energy?

At the root of the matter is confidence. We must all be able to present what we do between now and July as part of a coordinated approach. What we all do, between now and July, would be greater than the sum of the parts. Each nation could do something it does not like, and if all would do this, then each one could. Schmidt might swallow this. With Japan, more is needed on foreign aid, in the form of long-term capital flows.

Now, all these nations are moving individually, often against one another. There are no guidelines since the collapse of Bretton Woods. Each nation takes defensive actions. But the world needs to feel that the leading countries are taking the situation in hand. There should be no declaration—this would fail, as with the Downing Street declaration—but they should show that they are acting collectively. What measures are put in the package are less important than the restoration of confidence in the world, which would lead to more investment.

If he talks about the dollar, he would recommend that the U.S. not deflate—and hopes there are other ways (to help the dollar)—for if so, that would be the end of world trade this year. That would be a gross waste of human resources—as last year, when world-wide trade only went up by 4%.

He and the President and the other leaders (the Prime Minister continued) should collectively say to the technicians (who can do anything they are asked to do) that we want to give a political impetus, and say we want it done with regard to a group of proposals. This would give the world a feeling that we are in charge again.

Secretary Blumenthal said that he could not improve on what the Prime Minister had said, concerning the requirements. He agreed that the guideposts are gone. This is true in trade and in monetary relations, where the new system is under strain because of energy and capital movements. He agrees that there are limits in the short-term, and that we must primarily deal with psychology. A sense of unity would best assure that we can inject a sense of confidence. We will really turn around the markets by working on the fundamentals, but that cannot be done in the short-term.

The fundamentals include energy, where we are trying hard on getting action, and to limit our oil import bill. He is hopeful that we will get some progress soon. Even if the numbers are low, still there would be the psychological value. (The Prime Minister agreed.) There is also internal (?) inflation. In the U.S., the first quarter of 1978 was poor, with the coal strike and the weather, but the growth outlook is good for 1978—though it will accelerate inflation. To keep control of inflation, with growth, there needs to be an international component.

These are the two fundamentals. On growth, with Germany and Japan this is also a fundamental. Even if Schmidt goes now to reach 3.5%, it takes time. Reaching 3.5% implies an accelerated rate of growth, which would be hard for anyone to do. They hesitate in Germany to go forward very fast. Concerning Japan, its current account surplus of $13 billion is very worrying. It will not be easy for Japan to achieve a 7% growth rate. 5.5% or 6% may be the best it can do. In 1978, therefore, there will probably still be a $9 or $10 billion Japanese current account surplus.

These are the fundamentals. We will do our part. We seek to limit disorderly market conditions (working with the Germans), sometimes with indifferent success. He had prepared some figures on the amount spent on intervention. Since October 1, Japan had spent $11 billion, yet the Yen is at 230 (to the dollar) and is still going down. Germany has spent $5 billion, and we have spent almost $3 billion, with $2 billion since the first of the year. We couldn’t get Congressional approval for a large effort. The Exchange Stabilization Fund is limited.³ Therefore, intervention is not the answer.

The Prime Minister said this is true in the short-term, if it (the dollar?) can be turned around. He hopes the U.S. will be able to do so.

Secretary Blumenthal said that Germany would see the risk of inflation.

The Prime Minister said he doubts that the U.S. could get a new swap.

Secretary Blumenthal said we did get one recently, doubling the amount, but there are still worries. We must work together on trade and aid and to resist protectionism—it will be difficult. On the Prime Minister’s idea about motivating the Saudis to place dollars for the long-term in the U.S., this was good.⁴ And they (the Saudis) have done a lot already.

The Prime Minister said he didn’t realize that the Saudis were placing money for 8 years.

Secretary Blumenthal said that the Saudis were moving to the long-term—two to five years and longer. But this is a sensitive matter, and there is a need to be careful.

The Prime Minister asked what was offered on a stable dollar.

Secretary Blumenthal said that they (the Saudis) have expectations of its improvement. They are committed to the strength of the U.S. economy. They think it is sound. They want to stay with the dollar. If they see energy action in Congress, and if they see that the Summit is working, then it will be all right.

The President said that in 1978, some facts are good. Interest rates are up, which attracts dollars. The prospect is that the differential in growth rates will be reduced, not by the U.S. growth rate’s going down, but by the others’ going up some. The average differential last year was 3%. Therefore, we could buy goods abroad, and they could not. He does not see imports of oil going up. In 1977, there was a rapid rise, but now it has leveled off, with new sources from Alaska, etc. But the basic psychology exaggerates the underlying factors of concern. The Prime Minister’s advice is good. Whenever the British or we act unilaterally, this should be the result of consultations, under the umbrella of a comprehensive approach. Therefore, each step would be more effective. He can act on oil imports and to control inflation. If the public knows that he is consulting with the Prime Minister and with Schmidt, then this will help.

The Prime Minister raised the question whether the Summit should be held earlier. They should not hold up action until July, but they also should not move the Summit up, because of complications with Schmidt.

The President said he had not raised that question.

The Prime Minister said he thinks they can work along these lines between now and July. All should do what they do not want to do. Therefore, the U.S. should lead, though he (the Prime Minister) had put in their pail!

The President said he had noticed that! Could they talk about the British alternative currency idea?

The Prime Minister said that there are some similarities between the position of the U.S. dollar, and that of sterling in the mid-’60s. Treasury Secretary Fowler⁵ had then helped Britain with swaps, in order to preserve sterling in the front-line. He (Fowler) saw that if sterling went out as a reserve currency, then there would be an attack on the dollar. Britain and America worked together, therefore. But now that (attack on the dollar) has happened. He would now speak, not as a British politician, but as a friend. He believes that the burden of having the dollar as a reserve currency is too great—though he knows that the U.S. Treasury people would not like him saying this! After all, the U.S. share of world trade is smaller than it was 20 years ago. The U.S. needs a greater trade share in order for the dollar to be a reserve currency. Otherwise, the U.S. would either be nagged to do things that it does not want to do, or to assist the world in ways that would not fit with U.S. needs. There is some similarity with sterling, though in other ways the dollar and the sterling situations are not similar—e.g. U.S. productivity. But when he sees surges against the dollar, he is moved to say what Mike Blumenthal said 10 years ago (about sterling).⁶

Therefore, this is a personal matter. He believes it would be wise for the President to reactivate SDRs; this would therefore be an act to bring SDRs back to life. He would like, in the U.S. interest and in the world interest, to build up SDRs alongside the dollar—though not to replace it. The situation was different in the 1960s—then it was hard to get SDRs accepted. The argument was about whether more liquidity was needed. France was against increasing liquidity, and may have been right.

Therefore, it would be tough to get his proposal accepted. But if it were possible to get such a system, to convert part of reserves to SDRs, along with other (?) currencies, then the U.S. would have an added pillar.

The basis of a reserve currency is that it is a constant store of value—or the Saudis will say what they will do. With floating rates, there is no constant store of value. He is against floating. His belief is for being close to fixed rates—though he knows he is in the minority! Peter (Jay) is gritting his teeth! And all the President’s experts are doing the same! But without a constant store of value, the U.S. will be in trouble. Thus this (proposal on SDRs) is in the U.S. interest and in the world interest.

The President then adjourned the meeting for lunch. (12:00)

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Subject File, Box 36, Memcons: President: 2–3/78. Secret; Sensitive. The meeting took place in the Cabinet Room. Callaghan was in Washington on a private visit.
2. Carter is referring to the proposal that Callaghan sent him on March 16; see footnote 2, Document 120.
3. Through the Exchange Stabilization Fund, established by the 1934 Gold Reserve Act, the Treasury Department can, among other things, intervene in the foreign exchange market.
4. The British proposal suggested that “a clearer indication by the Saudis that they were prepared to place funds in the US at longer term would strengthen the capital account.”
5. Henry Fowler was Secretary of the Treasury from April 1965 until December 1968.
6. Not further identified.