158. Memorandum From Acting Secretary of the Treasury Carswell to President Carter 1

SUBJECT

  • Impact of the July Trade Deficit

The large and unexpected increase in our trade deficit (from $1.6 billion in June to $2.9 billion in July) which was announced Tuesday2 had a severe impact on the dollar’s position in the foreign exchange market and wiped out virtually all the dollar gains achieved through the monetary actions announced by the Federal Reserve and the Treasury following your statement on August 16.3 While there may have been special [Page 497]factors that contributed to the disappointing July trade figures, preliminary analysis has not identified them.

The markets remain cautious because of the uncertainty created by the statement that we expect to announce a series of continuing actions.4 But lacking positive steps in the relatively near term, we cannot be certain that the decline will not continue or accelerate. Foreign governments and private traders are stating publicly and privately to us that only forceful measures to deal with inflation and reduce the trade deficit will save the dollar from further declines, with serious consequences for the world economy and our leadership in world affairs.

It also would appear that the Japanese have concluded that U.S. agreement to intervene in yen is not worth the price that we have requested—a 4 trillion yen supplemental budget and a 1% decrease in the discount rate as well as further progress on the trade issues. They have advised us that the overall magnitude of the supplemental budget would be 2½ trillion yen.5 It seems quite doubtful, therefore, that it would be advisable to proceed with any IMF drawing as a means of acquiring yen for intervention. While there have been suggestions that we announce a sizable sale of special drawing rights to the Germans for deutschemarks to hold for purposes of intervention, there is doubt that this would have a very significant or lasting impact on the market. In any event, the German monetary authorities are reluctant to have us continue to intervene in marks until we have taken more fundamental U.S. domestic measures. They are providing almost no dollar support them[Page 498]selves. Thus, little more can be done with strictly monetary measures other than a tightening of the domestic money supply.

The EPG is meeting tomorrow morning on specific steps that you might take to reduce the rate of inflation. Work is also going forward to provide you with options to reduce imports of oil into the United States either through a fee or quota system. We would hope to have this work completed for you by the conclusion of your Camp David meeting so that you will be in a position to take prompt action. 6

Robert Carswell 7
  1. Source: Carter Library, Records of the Office of the Staff Secretary, Presidential File, Box 100, 8/31/78. Confidential. The memorandum bears the incorrect date of August 30, 1979. Carter initialed “C” at the top of the page. The memorandum was sent to Carter under cover of an August 30 memorandum from Owen, which both Carter and Brzezinski initialed. (Ibid.)
  2. August 29.
  3. See footnote 4, Document 156. In the days after this August 16 statement, the administration undertook three initiatives to strengthen the dollar. On August 18, the Federal Reserve Board increased the discount rate by .5 percent. Four days later, the Treasury Department announced that it would increase its monthly gold sales from 300,000 ounces to 750,000 ounces. Finally, on August 28, the Federal Reserve Board eliminated domestic reserve requirements in an effort to encourage U.S. borrowing in the Eurodollar market. (Hobart Rowen, “The Fed Raises Borrowing Rate To Bolster Dollar,” The Washington Post, August 19, 1978, p. A1; James L. Rowe, Jr., “U.S. Is Doubling Sales of Gold To Assist Dollar,” The Washington Post, August 23, 1978, p. A1; Hobart Rowen, “New Steps Designed to Aid Dollar,” The Washington Post, August 29, 1978, p. C1)
  4. On August 17, after a press conference in which Carter had offered few clues as to what the administration would do to shore up the dollar’s value, Blumenthal issued a statement suggesting that “a series of continuing actions” would be undertaken “as decisions are reached over the next few weeks.” (Hobart Rowen, “Statement Follows Carter’s Press Conference,” The Washington Post, August 18, 1978, p. F1) For Carter’s remarks on the dollar at the press conference, see Public Papers of the Presidents of the United States: Jimmy Carter, 1978, Book II, p. 1441.
  5. In his August 30 cover memorandum to Carter (see footnote 1 above), Owen commented: “Although this budget falls short of the four trillion yen that we have felt was needed to justify activation of a US-Japanese swap, it is a very substantial stimulus (about 1% of GNP). A great deal will depend on composition of this stimulus: A hard 2.5 trillion package could be worth at least as much as a soft 4 trillion package; a soft 2.5 trillion package would be a very different situation.” Owen promised that when more was known about the Japanese package he would “recommend whether a statement should be issued indicating your pleasure at Fukuda’s fulfillment of his Summit commitment, similar to the statement we issued after the recent German cabinet decision on growth.” For Owen’s subsequent recommendation to Carter, see Document 160. The White House statement on the West German decision was issued on August 3; see Public Papers of the Presidents of the United States: Jimmy Carter, 1978, Book II, p. 1360.
  6. Carter met with Egyptian President Anwar Sadat and Israeli Prime Minister Menachem Begin September 5–17 at Camp David, where they negotiated framework agreements for peace in the Middle East.
  7. Carswell signed “Bob Carswell” above this typed signature.