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

122. Memorandum of Conversation¹

Washington, March 23, 1978, noon–1 p.m.

SUBJECT

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

PARTICIPANTS

• President Jimmy Carter
• 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

(The participants reassembled in the Private Dining Room on the first floor of the Mansion. At 12:17, the President invited Secretary Blumenthal to continue the discussion.)

Secretary Blumenthal said that the Prime Minister is right that in the Treasury there are experts and technicians who take theological views. But he can assure him that Tony Solomon and Fred Bergsten have no theological baggage. He sees two issues: first is the question of the floating rate system—which we are trying to make work; second is the question of whether the dollar alone can bear the burden in the future as the reserve currency. There are burdens, we have learned, and a connection with our domestic economy. There has been a rude awakening with our trade percentage down—we had thought we could separate the domestic and the international (factors?).

On fixed vs. floating rates, he joins those, in the United States and Britain, who feel that the old fixed-rate system couldn’t work again. The flexible rate system is best suited in a world where fundamental changes are not finished. We need perhaps a decade of flexibility. He feels that the flexible rate system is needed, but maybe it does not work well enough. New articles for the IMF—in the next few weeks—will increase the IMF’s surveillance role. This will strengthen the IMF.

On SDRs, we are for thinking about the Prime Minister’s proposal. The roof leaks, but we should not give cause for concern to the markets, that we are tinkering with the whole system. This would be another element of uncertainty in a delicate situation. Maybe the Prime Minister has a point in the long-term; maybe this is something for the U.S. in the long-term, but only the long-term. We must be very, very careful about this: we can think about it, but must give no impression that we are working on it. This is delicate.

The Prime Minister said he had planned just to note the issue, only the President had then asked about it. He is worried, too, about the markets. But it should be all right to talk as friends. He agrees that the markets (?) are important; this is the psychology of the situation. Money is like a woman’s virtue; it is most safeguarded when least talked about. On fixed rates, he will accept what has been said. But in the long-term, he hopes thought will be given to them. The situation is not good. He hopes people will not think that the issue is solved, even as we get through this present period. It will still be with us after the U.S. amends its Constitution and the 4th Carter Administration is beginning!

The President said he hopes to get to the fourth year!

The Prime Minister said that there is a problem, and that it is basically in the United States’ and the world’s interest for it to be solved.

Ambassador Jay said he agreed about that in the long-term.

Mr. Couzens said that he agreed with the Prime Minister on the fundamentals. If they are talking of other issues, it is because there is so much common ground between the United States and the United Kingdom. Therefore, we should not get the issues out of proportion. On SDRs, he agreed that it would be dangerous in the markets to say anything. But there is really nothing to say: the proposal has already been made. Information on it has got into the press from Witteveen. Therefore it is in the press, and there is a debate, without our acting to bring this about. It is best that the idea has come out in public that way. And he hoped that the United States will think about it.

The Prime Minister asked what the proposal was that was put forward by Witteveen.

Mr. Ryrie said that it would replace some reserves with SDRs.

The Prime Minister asked if there were a U.S. proposal.

Mr. Couzens said no, and that there was not a British proposal, either.

The Prime Minister said that yes there is, he had made it this morning! He then agreed that the two sides should “work it out.”

Secretary Blumenthal said that there is an Interim Committee Meeting next month. Would this idea come up?

Mr. Couzens said that it might come up.²

The Prime Minister said that he hoped that this would not be worked on by countries individually. Do they talk with one another?

Mr. Couzens replied that this is going on constantly.

Secretary Blumenthal asked what could be done before the Summit to increase growth rates. He hoped that Henry Owen would talk about the Preparatory Meeting. It was important to have some sense of the level of numbers before the Summit. Then there could be some level of commitment before then. If nations would put their weight behind it, this would be good.

Ambassador Owen said that in preparing for Bonn, one question is how to create the needed climate with Germany and Japan. The Prime Minister had suggested putting this into a framework, with each nation’s contributing to the right approach. There should be a package, with each contributing, and each gaining. Therefore in Bonn, the issue will be how to fashion this approach, and how to get agreement. Between now and Bonn, we need to find how to work on all the information (?), then have the Summit, and see what should happen next.

Sir John Hunt said that, on getting a satisfactory response at the Summit, we will not get this from Germany without something on currency stability—something—that will convey a sense that the issue is being tackled.

Ambassador Owen said that we should distinguish between symptoms and the fundamentals—such as energy and inflation in the U.S. Where should the balance be struck? Mike Blumenthal might talk about multilateral swaps and long-term currency borrowings, which they had not covered.

Secretary Blumenthal said that, on multilateral swaps, if we activated a line with several countries, including Britain, this would lead to expectations for intervention on the dollar–sterling link, as well as on the French franc, the lira, and the yen. There would be a number of serious problems. First, there are not enough resources. Second, this is an expensive process, even with one currency. Third, the key Congressional chairmen are unalterably opposed even to what we are doing now. Fourth, the market is not the real problem. Intervening on currencies will not deal with the perception of the dollar’s instability. Fifth, what are the costs of commitment in a multilateral system of larger numbers of currencies?—it could be substantial.

Secretary Vance asked about the yen in terms of perceptions.

Secretary Blumenthal said that the yen is a special case: the Japanese have a huge current account surplus. There is no way, without the market’s seeing a rapid reduction in this current account surplus, for intervention to work. And the yen does not pull the D-mark and sterling. The D-mark pulls other European currencies, and is the key currency in the snake. Japan wants us to act. But there are no resources to do so. And it would not be understood here, in terms of trade and protectionism, that we were trying to maintain the dollar–yen rate, with that $13 billion Japanese current account surplus. The President would be put in an impossible position. This is difficult for the Japanese, but the U.S. will not agree to maintain the dollar–yen rate. Is that what the British really want?

The Prime Minister said no. But if the U.S. says that it will not intervene, then there will be political nervousness, and a reaction. How will the U.S. deal with that? Schmidt said that getting sterling in would help. He (the Prime Minister) is not keen on that, but he is willing for psychological reasons to help—though he does not think it would really help.

Mr. Couzens said that there are two sides to the issue. Britain has not ruled out putting its money where its mouth is. This had helped in the past. It spreads the burden. But Britain is not pressing the approach.

The Prime Minister said that if the U.S. leaves out this approach, how will it finance its deficit?

Secretary Blumenthal said that on the 13th of March, we set up additional swap lines with Germany. We will see further what to do on SDRs, and will draw from the IMF if need be. He hopes—in talks with Schmidt—that Germany will use other currencies than the dollar for intervention in the snake. We will have more SDRs, and the IMF approach, and work on fundamentals. We hope to have action on energy, and there is the President’s anti-inflation program; if these are seen as biting, this will give assurances on the course of the U.S. economy.

On the question of the sale of foreign-currency denominated bonds, it has been his experience that there is a clamor for a new bandaid as the answer to problems. We put on a bandaid, and there is a new clamor. Thus, this is not the answer; it is just another way to borrow foreign currencies, and is dangerous for the United States. First, the Saudis—and OPEC generally—are loyal in their support for the U.S., and stay with the dollar. Their interests are in dollar-denominated securities. As soon as there were some in D-marks or Swiss francs, then the Saudi finance ministry would say it now wants the same rate securities for Saudi Arabia. Therefore, there would be a counterproductive reaction. Second, there is total opposition to this approach in Congress. The exchange risk is great. The Roosa bonds,³ for example, were very costly to us.

Mr. Couzens said that they cost the U.S. an arm and a leg!!

The Prime Minister mentioned Roosa—who is on Wall Street making a fortune!!

Secretary Blumenthal asked how we could account for these in the Exchange Stabilization Fund? It was nearly broke. With the Roosa bonds, we borrowed in Swiss francs at 4 to 1 to the dollar, and now it is 1.8 to one. The paper loss is enormous. Some people are saying that we should borrow even more—$10–20 billion worth. They should see Senator Proxmire’s comments! Thus we don’t want to do this, and would have difficulties if we did.

The Prime Minister agreed that we should focus on the long-term. The Market is short-term. Therefore, how do we get from here to there? He does not say that Roosa bonds are the answer, but with market psychology, we must show we are dealing with real fundamentals. This is a similar time to ten years ago in Britain.

Secretary Blumenthal asked whether the Prime Minister feels that, if the U.S. is seen as acting on energy and on inflation—in believable ways, and if people saw international concord and commitment to reach growth targets, and with swap lines, and with U.S. drawings on the IMF, and with SDRs, and maybe the U.S. were prepared to sell gold—can’t we turn the situation around?

The Prime Minister replied yes—for two to three years (although there were a lot of “ifs”). It is vital to make this the focus for July.

The President said that none of the “ifs” listed by Secretary Blumenthal are difficult for the U.S. to do; all are possible for us.

The Prime Minister said that other steps are needed in some (countries?). It would be tough to get Germany on board.

Sir John Hunt agreed. If the United States did all these things, this would be a considerable help. The present problem is to relate these steps together, as energy action is related to the wider situation—this helps considerably.

Mr. Couzens referred to the latter part of the list—like IMF drawings: these are goods in the shop window. They show that we are using the international system, and not acting just bilaterally, hand-to-mouth. This will help, if it looks like a score on the Summit list.

On SDRs, these should be used with Germany, but linked to the international system. Therefore, this would be less offensive to Britain and to others. It would achieve many of the same things, but it would not be bilateral or unilateral—rather, all would be acting together. Therefore, there is a virtue in this approach, within the Blumenthal context.

Secretary Blumenthal agreed, in context. He continued that, on the IMF, we are in the middle of getting the Witteveen facility. Our IMF action will show Congress that the Witteveen facility is not foreign aid, since we would be using it (the IMF).

The Prime Minister said that the U.S. has to carry the technical things on. Could Henry Owen and John Hunt tell us secretly how to carry on?

Ambassador Owen said that, at the preparatory meeting, they would go down the main heads for discussion from the British paper. Maybe more preparatory work will be needed. There will be reports of the Seven, such as how they will work out jointly on energy. The Bureau in the OECD would look at non-inflation ideas. Then there would be another preparatory meeting, and if each government were keeping to the framework, then we could go to the Summit for a success. He will not know about this until he sees German officials next week. There will be a Presidential letter to Schmidt, and Ambassador Owen would be seeing Schmidt.

Sir John Hunt said that Germany will not say yes (on growth?) or do anything before the Summit. Part of the operation is getting others to do what they should. Schmidt wants a good Summit. Intellectually Schmidt thinks that Germany should not do more, but he may do it. Therefore, next week they will get little at the Preparatory Group, but there will be a report to heads of government on what they will have covered. They should try to get agreement on the objectives; later, they can try for agreement on the means. Before Bonn, there will be a European Summit on April 7 and 8. It is his guess that they could get help for their approach at this European Summit. We will need top level political encouragement at each stage.

The Prime Minister said that, on Germany, he had seen Schmidt. Sir John is right about Schmidt’s attitudes. Schmidt said that the Prime Minister should come to see the President. Schmidt agrees on the problems, but he disagrees on the remedy. He (the Prime Minister) thinks we can move Germany and Schmidt, but he fears that Schmidt will make a gesture in May, then at the Bonn Summit say that what he did in May was his contribution. Therefore, we need to get him to act, and can do so. Part of it is how we dress it up.

Secretary Blumenthal then reviewed paragraphs 4 and 5 of the text of the March 13 agreement with Germany,⁴ to indicate that Germany—on paragraph 4—may move. This was a German paragraph. It implies that after the first-quarter figures are in, there may be more action. Paragraph 5 was on energy, in which the U.S. was committed to look further at its efforts.

The President said that we found this meeting worthwhile. It has clarified some possibilities. The Prime Minister now understands U.S. limits and inclinations. He seconded what Mike Blumenthal had said about announcements by Germany before the Bonn Summit. Though maybe Schmidt will wait until Bonn to act, in order to create an aura of success. As we will do, these steps would be identified as part of the overall approach. He guesses that Schmidt would like the heads of state to leave with a sense that Germany was helping, and had made some sacrifice. Schmidt would not want to be seen as an obstacle to progress. On political pressure, we should not underestimate the German ordeal in the 1920s.⁵ We understand.

All this has been very helpful. With the Prime Minister at Copenhagen, and as we also present ideas to the press, this should not be put forward as an American and British plan. He would like to say to Schmidt that he would like him to understand the U.S. view of the problems and the way we are addressing them. All of us need to work together, and ease Schmidt forward. He then asked Dr. Brzezinski to draft a message to Schmidt, emphasizing our conviction that efforts should be multinational, but that each nation would need to do something. The draft should say what we can do, with cooperation and consultation.

The Prime Minister said that he will write to Fukuda.

The President said he would, too; Fukuda thinks he is left out, sometimes.

(The President then adjourned the lunch at 1:00 for a private Oval Office meeting with Prime Minister Callaghan, which continued to about 1:25.)

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 Private Dining Room on the first floor of the Mansion.
2. Witteveen’s proposal, which involved the substitution of newly-created SDRs for dollars in national currency reserves, was slated to be discussed by the IMF Interim Committee when it met at the Ministerial level in Mexico City on April 29 and 30. (Hobart Rowen, “Witteveen Plan Aims To Ease Dollar Pressure,” The Washington Post, April 12, 1978, p. D13; Clyde H. Farnsworth, “U.S. Resisting Witteveen’s Plan For Supplanting Surplus Dollars,” The New York Times, April 24, 1978, p. D1)
3. During the 1960s, the Treasury issued medium-term securities that were denominated in foreign currencies; these were called “Roosa bonds,” after Under Secretary of the Treasury for Monetary Affairs Robert Roosa.
4. See footnote 4, Document 114.
5. Apparently a reference to the German hyperinflation during the early years of the Weimar Republic.