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241. Memorandum From the Under Secretary of State for Economic Affairs (Cooper) to Secretary of State Muskie 1

Domestic Economic Policy and Foreign Policy

You have been inundated by briefing materials on all manner of foreign policy issues, and I hesitate to add to the load.2 But I am writing about a topic not likely to be covered in the voluminous briefing books, namely the relationship between our domestic economic policies—especially regarding energy and overall monetary-fiscal policies—and foreign policy.

Macroeconomic Policy

It used to be said that when the U.S. sneezes the rest of the world catches pneumonia. That is not as true as it was 25 years ago, but it still contains a strong element of truth. If the United States is in economic recession, and if Europe and Japan do not at that moment happen to be having a boom, then most non-communist countries (and even a few communist ones) will find themselves in economic difficulty for reasons beyond their control. Because of the recession they will be selling less directly to the United States, and in addition the prices of the raw materials they sell, which are sensitive to U.S. recessions, will be reduced to all customers. These factors will of course be aggravated if, as in 1975, Europe and Japan are also in recession.

These days, in non-affluent countries, economic difficulties spell political difficulties. Political unrest mounts, sometimes explosively, and it becomes much more difficult to preserve or to restore democratic government.

The difficulties can be postponed to some extent by borrowing from abroad, and that is what many countries did in 1974 to 1976. But if the external situation does not improve, such borrowing only postpones and aggravates the agony.

The lesson that I draw from this is that there are strong foreign policy reasons (quite apart from the usual domestic reasons) for avoiding a deep and prolonged recession. It is up to the United States, with such help as it can get from other major countries, to maintain a [Page 698]degree of buoyancy in the world economy. A pause in economic activity may be necessary now to break inflationary expectations; but it should only be a pause. A corollary of these concerns is that we should keep our markets open to the products from developing countries so they can earn the foreign exchange they need to buy food and capital goods and to repay their debts. If these two conditions are not met, carrying out our foreign policy will be very much more difficult in many parts of the world.

Energy Policy

We are probably more vulnerable today to foreign threat than at any time since General Howe landed in New York and set out northward to divide the American colonies. The danger now is not from physical attack, but from an attack on our economic well-being (and our political cohesion) arising from our extreme dependence on oil imported from politically unreliable and possibly unstable countries. What happens in the world oil market is vitally important to four of our cherished aims.

—It is important for macroeconomic policy, since rapidly rising oil prices virtually assure both recession and inflation.

—It is important for the well-being of other developed and developing countries who cannot easily stand the strain of inflation, severe balance-of-payments difficulties, and low growth.

—It is important for preservation of unity between us and our major allies, for, as within the United States, nothing is more divisive politically than a scramble over limited supplies of oil.

—It is important for maintaining our freedom of action in foreign policy and for garnering allied support for that policy, e.g., with respect to the Soviet Union or the Middle East, because Japan, Europe and even some Americans feel hostage to our current dependence on Middle East oil.

I conclude from this that we need a major domestic effort to reduce our dependence on imported oil. Only by reducing this dependence can we abort the threat and restore the confidence within the United States and with our allies that is necessary for an effective foreign policy. As with macroeconomic policy, domestic energy policy is a crucial element of foreign policy.

We must also press, through the International Energy Agency and the Venice Summit, other major countries to conserve oil as well. Our main energy efforts must be in the consuming countries. For reasons I can spell out if you wish, I am deeply skeptical about striking a “global bargain” on oil prices and oil supply with the OPEC countries, although of course we should maintain our good relations with Saudi Arabia and other OPEC moderates.

  1. Source: National Archives, RG 59, Office of the Secretariat Staff, Records of the Under Secretary of State for Economic Affairs, Richard N. Cooper, 1977–1980, Lot 81D134, Box 7, E—Memoranda of Conversations, Jan. 1980–June 1980. Confidential. Muskie initialed “EM” at the top of the page.
  2. Muskie was appointed Secretary of State on May 8 and entered on duty that day.