128. Paper Prepared by the National Security Council Staff1


The prolonged decline of the dollar could have an adverse effect on the conduct of our foreign policy. Because of the importance of psy[Page 387]chological factors, it is difficult to measure the impact of the falling dollar on the US position abroad. Nonetheless, a plausible case can be made that the falling dollar and our perceived inability to take adequate corrective measures is contributing to the development of an attitude toward the United States that could undermine our credibility abroad.


Our ability to influence events in the world in order to protect our vital interests depends, in large measure, on military and economic power and foreign perceptions of our capacity to bring this power to bear in a controlled fashion on foreign situations. Thus, foreign attitudes about our determination and skill are almost as important as our strength.

Although the weakened dollar has undermined neither our military power nor the basic health of our economy, foreigners may have begun to question our willingness to use our strength in pursuit of our interests and to doubt our ability to grant and withdraw benefits. Our perceived inability or unwillingness to take corrective action may be changing foreign attitudes about our persistence in pursuit of our aims.

If we are seen as not having the resolve and expertness to take the steps necessary to strengthen the dollar, some foreigners may well be asking themselves whether we have the resoluteness and mastery to shape even more complex and hazardous situations. Some foreigners may pose the question to themselves this way: Can a country that has not been able to prevent its currency from tumbling be relied on to act decisively and effectively to influence events far from its shores?

Foreign assessments of the strength and determination of the US are based on many factors in addition to the fall of the dollar. Their appraisal of how the US might act in any given situation depends on their perception of the totality of these factors; and any one factor probably is not decisive.

Also the impact on foreign attitudes of the decline of the dollar and our reaction to it will be heightened if the crisis continues for an indefinite period. On the other hand, if the dollar stabilizes within a short time, it is probable that the damage to our perceived strength and resolve will not be permanent.

The Industrialized Democracies

Our friends and allies fear that we either are indifferent to the fall of the dollar or are actively encouraging the depreciation of the dollar to stimulate US exports. In the former case, they fault us for lack of concern for their welfare. In the latter case, they accuse us of “malign neglect”. In either case, they worry that their interests will suffer—that [Page 388]their exports will fall, their income from investment and tourism drop, and their economies falter.

If they see our position on money as either ineffective or selfish, will this not begin to influence their attitude toward our reliability as a NATO partner? No European country, not even France, thinks that Western Europe can either defend itself against the Soviet Union or stand up alone to the tremendous political pressure the USSR could and would bring to bear on Western Europe if the US power and resolve came to be discounted. So much of the willingness of the Europeans to contribute to their own defense and to follow policies contrary to the wishes of the Soviet Union depends on their appraisal of the strength, steadfastness, and reliability of the United States.

The Japanese, in addition to sharing the European worry that the US is not able to act decisively and effectively to strengthen the dollar, are concerned that they are being discriminated against. Historically sensitive about being treated differently, the Japanese are not happy that the US intervenes to maintain orderly conditions in the Dollar–DM market and not in the Dollar–Yen market. They fear that the United States is using monetary policy to force changes in Japanese economic policies in a way and to an extent that the US would not with regard to Germany.

The Soviet Union

The Soviets are constantly trying to judge the priorities we assign to specific foreign policy objectives and the extent to which we are prepared to use our political, economic, and military strength to attain them. They probably see the dollar crisis and our perceived inability to deal with it as a sign of weakness. This perception could be a factor in persuading the Soviets that they can exploit opportunities in the world with less risk of American opposition than otherwise might have been the case, thus increasing the possibility of miscalculation that could result in dangerous confrontation.

OPEC Countries

The OPEC countries denominate their oil sales in dollars and keep their monetary reserves largely in dollar instruments. They decided to do so because they considered the dollar to be a stable currency. With the recent fall in the dollar, some OPEC countries have begun to question the wisdom of depending so heavily on the dollar. They have asked for OPEC consideration of denominating oil sales in other currencies and diversifying reserves. The Saudis have resisted these pressures. Whether they will maintain their faith in the long-term stability of the dollar will depend in large measure on their assessment of the ability of the US to deal with the fundamental causes of the depreciation of the dollar. If the Saudis and the Iranians decide that they should [Page 389]switch away from the dollar, it is probable that their foreign policy outlook will be affected also. If they conclude that the US has neither the determination nor the ability to handle its currency properly, it is unlikely that this appraisal would not also influence to some extent their attitude toward broader cooperation with the United States. Such a change of perception might spill over onto the delicate Middle Eastern situation in ways and degrees that cannot be predicted.

The Small and Weak Countries

Most countries throughout the world do not have the resources to defend themselves adequately against foreign invasion. Their sovereignty and welfare are not entirely in their own hands. Many are dependent on the implicit acceptance of their frontiers by stronger nations. These small, weak countries feel obliged to live by their wits and, above all, their ability to align themselves directly or indirectly with powerful countries who might protect them or at least not harm them. Thus, the weak watch the strong and try to determine the extent to which the strong are likely to use or threaten to use their strength to harm or protect them.

This is an inexact science; the indications of the willingness of the strong to use their strength to affect foreign events are often fuzzy and contradictory. It is probable that the perception of the weak countries of how the US manages its economy and its money will condition their appraisal of how the US might respond to an armed struggle far from American shores. Thus, the decline of the dollar and the nature of our response may affect to some extent the way the small, weak countries judge the ability of the US to influence political and military events of importance to them.2

  1. Source: Carter Library, National Security Council, Institutional Files, Box 68, PRC 058, 3/16/78, Monetary Situation. Secret. Sent to Brzezinski under cover of an April 20 memorandum from Renner, who wrote: “Following the failure of CIA and State to produce any useful indication of foreign reactions to the dollar crisis, I wrote the attached paper on the basis of reason and instinct.” Renner noted that the paper incorporated the suggestions of several NSC Staff members and commented: “It is ironical that the dollar has strengthened in the last several days. Perhaps the traders heard that the NSC was taking a serious view of the crisis!” (Ibid.) Renner sent a draft of the paper to Brzezinski and Owen under cover of a March 15 memorandum. (Ibid.)
  2. In an April 25 memorandum to Brzezinski, Renner wrote: “In view of your comments about my little paper on the dollar and national security, I am seeking your guidance regarding the next steps.” He offered three options: that Brzezinski formally ask the CIA to prepare a report on “what foreign leaders and opinion makers have been saying about the decline of the dollar and our policy responses;” that Brzezinski discuss with him “what additional work you would like to have done and how best to get it done;” or no further action at that time. Renner counseled taking no further action. Given the stronger dollar, Renner argued, “if the energy bill is passed with COET, the chances are reasonably good that the previous precipitous decline will not be resumed;” moreover, accurately assessing and understanding foreign views was a very difficult task. Brzezinski indicated his approval of taking no further action. (Ibid.)