48. Letter From the Under Secretary of State for Economic Affairs (Cooper) to Vice President Mondale1

Dear Fritz:

You asked me recently about the role of monetary policy in dealing with our balance of payments problem.2 As you know, the U.S. merchandise trade deficit has increased sharply to a projected $25 billion in 1977, due to higher oil imports, sustained economic expansion at home, and weak economic growth abroad. Our $11 billion surplus on service transactions has offset a sizable portion of the trade deficit. Voluntary capital inflows, largely from the placement of OPEC surplus funds, have provided financing for the rest of the deficit.

Administration strategy to deal with this problem has two major components: (1) press for the energy program to deal with the high cost of oil imports; (2) wait for changes in the business cycle at home and abroad to improve our exports relative to our imports, while pressing OECD countries to meet their growth targets. To the extent that these factors do not achieve a satisfactory result, the dollar will tend to fall in exchange markets and slowly produce a further improvement in our current account.

A key component of this strategy is continued reliance on voluntary capital inflows to finance the deficit. So far this year, these flows have been forthcoming in sufficient volume to finance the deficit without much decline in the value of the dollar. Obviously, the level of interest rates in the United States relative to those abroad can influence those capital flows. And foreign interest rates have been declining this year while U.S. rates have remained steady or risen somewhat, reflecting the differences in economic activity here and abroad. Thus the present course of monetary policy appears adequate to deal with the problem of assuring that our current account deficit will be financed.

Over the longer run, the rate of inflation in the United States relative to foreign inflation is a prime determinant of the value of the dollar. Clearly, monetary policy has a role to play in this area as well. Both our present and projected inflation rates and our monetary growth targets are on the low side of foreign experience at present. Thus monetary policy is already making its appropriate contribution to the longer-run stability of the dollar.

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Moreover, further tightening of money at this time would certainly brake and might bring to a stop the economic recovery. Slowing down the recovery would be a serious error, both domestically and in terms of badly needed buoyancy it provides to the world economy. Even if we had an overall balance of payments problem, which we do not, the U.S. should not halt the recovery of its economy, which is still far from fully employing our resources. Such waste of human skills and capital is not an appropriate answer to a weak balance of payments.

In sum, there is no reason, in today’s circumstances, to recommend tighter monetary policy for balance of payments reasons. Such a recommendation would only become appropriate if it became apparent that: (a) our energy policy was doomed to failure; (b) normal cyclical changes would not improve our current account; (c) adequate capital inflows did not appear to be forthcoming. Under such circumstances the dollar might begin to drop for a prolonged period. Then it might be judged that external factors required a tightening of monetary policy, but only after examining carefully the state of domestic production, unemployment, and inflation. Fortunately, the day when such choices must be faced is not imminent.3


Richard Cooper4
  1. Source: Carter Library, Papers of Walter F. Mondale, National Security Issues, Box 82, National Security Issues—Economic [2/5/1977–8/14/1977]. No classification marking. A handwritten notation reads: “Seen. File.”
  2. Not further identified.
  3. Mondale also requested the Department of the Treasury’s view on the link between monetary policy and the trade deficit. Bergsten and Brill forwarded a draft response to Blumenthal for his signature under cover of a July 29 memorandum. The draft asserts that the best way to address the deficit would be through “an effective energy program” and “continued vigorous growth and relative price stability for the American economy.” Asserting that “there is little justification on domestic grounds for a tightening of monetary policy,” the draft cautions against monetary contraction “purely for currency reasons,” unless, perhaps, “the dollar were to weaken so sharply as to cause (1) significant inflationary effects here and (2) important psychological effects internationally.” Blumenthal did not sign the draft memorandum. (National Archives, RG 56, Records of Assistant Secretary of the Treasury for International Affairs C. Fred Bergsten, 1977–1979, Box 1, IM–6 Balance of Payments 1977)
  4. Cooper signed “Dick” above this typed signature.