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

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

Washington, October 3, 1978

You may be interested in my impression of prevailing attitudes toward developments in the U.S. economy, based on last week’s Bank/Fund meetings with two dozen finance ministers and the world’s leading private bankers. Their views are fairly homogeneous, along the following lines:

—In general, they are strongly supportive of our efforts to reduce oil imports, increase exports, reduce the budget deficit and strengthen our efforts to contain inflationary impulses. Progress on all these fronts is viewed as critical to restoring a stable dollar and insuring the long term viability of the U.S. economy.²

—They are guardedly optimistic about our balance of payments prospects. In my plenary speech,³ I projected a 30–40% reduction in our current account deficit next year, whereas Morgan Guaranty projects a 40% reduction and the IMF staff, 50%. The envisioned reductions stem primarily from forecasts of more rapid growth abroad and moderately slower growth here.⁴

—It is assumed, however, that reduction of these orders of magnitude will not solve our problems with the dollar unless it is combined with an effective anti-inflation program. Here there are still serious doubts among foreign officials and private bankers about our willpower and ability to succeed.

—On the fiscal side, they view the budget deficit as the litmus test of our willpower. The considerable reductions that have been made from the $66 billion deficit we inherited are attributed to shortfalls and “Congressionally imposed” reductions in our tax cut proposal, rather than to Administration initiatives. Your willingness to trim all the fat from our budget will be watched closely. (In this important regard, I wish some of my foreign colleagues could have heard your excellent DNC speech).⁵

—On the monetary side, official and private money managers are wary of Administration attempts to exhort the Fed not to tighten monetary policy. They view inflation as being both monetarily and fiscally induced, with further discipline needed on both fronts. There is concern that the Fed will prematurely begin easing monetary policy once we have settled on a tight budgetary and wage/price policy. To be sure, there is some concern about overkill if we tighten up too severely on both fronts. But many remember the damage done in 1968 when the Fed too abruptly eased monetary policy in the aftermath of that year’s tax increase.⁶

—This prevailing sentiment has important implications for the dollar. Adjusted for current rates of inflation, interest rates in the U.S. are essentially zero, whereas investors can earn a positive real return on German and Swiss money market instruments. As long as this relationship prevails money managers will continue to seek out German and Swiss investments. Until our anti-inflation efforts yield tangible results, this tendency will likely be exacerbated if it appears that the Fed is too quickly letting down its guard.

—This predicament is complicated by the uncertainty frequently voiced about Chairman Miller. He is still viewed as an unknown quantity. His actions are being closely watched to see whether he will maintain what they regard as tight and responsible monetary policy in the period ahead. Any indications otherwise will likely have a negative impact on the dollar.

In summary, the world’s official financial leaders (unlike the private people who are moving money around in huge quantities) are beginning to appreciate and even applaud our economic initiatives. They are anxiously awaiting your anti-inflation proposal and will judge its success by the discipline it imposes on the government itself. And they are hopeful that the Federal Reserve will refrain from prematurely easing monetary policy.

W. Michael Blumenthal⁷

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Subject File, Box 31, International Monetary Fund: 9/77–7/80. No classification marking. Carter initialed “C” at the top of the page. The memorandum was sent to Carter under cover of an October 4 memorandum from Owen, who noted that based on his impression of the recent joint IMF-World Bank meeting, Blumenthal’s memorandum represented “a balanced and accurate report. It is worth reading, since it indicates what kinds of US policies would persuade these people to buy, rather than sell, dollars.” (Ibid.)
2. Carter made a checkmark in the margin adjacent to this paragraph.
3. On September 27, The Washington Post and The Wall Street Journal published reports of Blumenthal’s September 26 speech before the joint IMF–World Bank meeting. (Hobart Rowen, “Current Account Deficit to Drop Sharply in 1979,” The Washington Post, September 27, 1978, p. D8; “Blumenthal Sees 30% to 40% Narrowing Of Deficit in U.S. Payments Next Year,” The Wall Street Journal, September 27, 1978, p. 3)
4. Carter made a checkmark in the margin adjacent to this paragraph.
5. Carter made a checkmark in the margin adjacent to this paragraph. For the text of his remarks before a September 27 fundraising dinner for the Democratic National Committee at the Washington Hilton Hotel in Washington, see Public Papers of the Presidents of the United States: Jimmy Carter, 1978, Book II, pp. 1645–1650.
6. Carter made checkmarks in the margin adjacent to this and the next two paragraphs.
7. Blumenthal signed “Mike” above this typed signature.