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


  • The U.S. Balance of Payments

On September 10, I reported to you that the sharp decline in the U.S. balance of trade and payments requires our immediate attention.2 You agreed that Tony Solomon and I should work with Jim Schlesinger, Charlie Schultze, Dick Cooper, and Bill Nordhaus to review this matter. My summary of the outcome follows:

A. The Forecasts

The numbers have not materially changed from the picture I described earlier.3

($ billions)
1976 1977 1978
Trade deficit 9 30 33–36
Current Account deficit 1 18 21–24

These forecasts are:

(1) based on optimistic assumptions (e.g., no OPEC oil price increases in 1978).

(2) subject to the usual uncertainties, things could turn out better in 1978—or they could turn out much worse. (A trade deficit approaching $40 billion is conceivable.)

B. The Problem

The real danger remains the potential for serious problems in international financial markets engendered by these large deficits.

1. Markets have been nervous and the dollar has been under moderate pressure. Foreign central banks have intervened in considerable amounts, which, with continuing large private capital inflows, has maintained reasonable stability in the dollar exchange rate. A central [Page 225] factor has been the growing level of oil imports and, perhaps more importantly, fear that Congress will not pass a meaningful energy program to deal with the problem over the longer run.

2. Any single disturbance, or spreading international opinion that we cannot or will not act to deal with the trade and energy situation, could set off chain reactions difficult to contain. Real upheaval is a possibility and could cost much politically as well as economically around the world.


1. We cannot sit back and hope for the best.

2. We must be seen to be “doing something” about this problem.

3. Therefore, we must develop a program to:

a. Reduce energy import costs for 1978 through 1981 (until your longer term energy program begins to have an effect).

b. Strengthen our export position (without resorting to protectionist or other internationally irresponsible measures).

C. Possible Action

The following are possible components of a U.S. response:

1. Energy Related Measures

a. Slow down purchases for the Strategic Petroleum Reserve. Purchases in 1978 could be reversed or slowed by Congressional action, saving up to $3.2 billion in that year. Postponement of 1979 and 1980 purchases could save $1.5 and $2 billion respectively.

b. Reverse the decision to slow production at Elk Hills.4 This would save $0.6 billion beginning in 1978, rising to about $1½ billion beginning in mid-1980 if the Sohio pipeline is completed.

c. Encourage the owners of the Trans-Alaskan Pipeline5 to decide now to increase throughput capacity to the 1.6 million barrels per day capacity of the Prudhoe Bay main field beginning mid-1980—saving $2 billion per year. In light of a “glut” of oil on the West Coast, it might be advisable to give permission to have, for a temporary period, a trilateral “oil swap” (with Japan) for any Alaskan oil produced in excess of 1.2 million barrels a day.

d. Encourage Sohio and the State of California to resolve impediments which block the Sohio Pipeline project to Midland, Texas—allowing utilization of increased Elk Hills production, beginning mid-1980, and avoiding the need for a trilateral swap.

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There is also the radical action to restrict consumption of oil by limiting imports and rationing gasoline. You have authority to introduce gasoline rationing by Executive action, by declaration of national emergency. Certainly, this would restore U.S. credibility about dealing with our energy problem. Once in place, depending on the stringency of the program, rationing could save $5 to $10 billion a year.

There was general agreement among us that it is not desirable to take this step now. It could have an important negative economic impact on growth; it is doubtful that the American people are ready for it, and the political consequences could be extreme.

I nevertheless feel it desirable for you to order technical preparations to be worked out, and to continue to develop the political climate, so that this step could be taken with minimum delay. Moreover, I would recommend that we examine other longer-term measures, additional to those in your present energy package, for reducing our oil impact bill.

2. Non-energy Related Measures

In addition to continuing to press Germany and Japan to stimulate their economies, we could take the following actions to cut the trade deficit in 1978 and beyond:

a. Expand Ex-Im Bank operations by about $4 billion (which would provide additional exports at an increasing rate ranging from about $0.5 to $1.5 billion per year).

b. Expand CCC Budget by $1.5 billion per year (which would provide about $0.5 to $0.75 billion in additional exports per year).

c. Moderate expansion of military sales for off-the-shelf items (about $0.5 billion per year).

d. Sell some of our gold holdings on the private market (up to $0.5 billion per year).

If we took actions on all of these non-energy related areas, the maximum potential savings would amount to about $2 to $3 billion each year.

Each of the above actions raises other policy issues. For example, Ex-Im Bank options lie in areas that would involve easing some restrictions on nuclear sales. Similarly, expansion of military sales could partly conflict with your arms sales policy.6

D. Recommendations:

There is no agreement among your advisers on which steps should be taken to remedy the situation. For understandable reasons, Jim Schle [Page 227] singer does not favor delaying or stretching out the strategic petroleum build-up. Charlie Schultze is reluctant to look to anything that inhibits growth, and so forth. All of us agree, however, that the situation is serious and that actions on your part are required.

In view of the above, I recommend as follows:

1. That you meet as soon as possible with Jim Schlesinger, Charlie Schultze, Jim McIntyre, Tony Solomon and myself to agree on a course of action.

2. That you should announce within the next few weeks (after Congress enacts an energy legislation)7 a program of these shorter-term energy measures—and, in a lower key, export expansion measures—designed to reduce the deficits during the period up to the early 80’s, when your longer term energy program would take effect. (Any actions taken to increase military sales and to sell gold would not be announced as part of a balance of payments program.)

3. My recommendation would involve decisions now to slow petroleum stock purchases for 1978 through 1980; to adopt the other energy measures described above, except for import quotas and rationing; and to introduce a number of non-energy measures to improve the U.S. export position. (Table attached).8

4. That we engage in a diplomatic offensive to persuade OPEC not to increase the price of oil, at least through 1978.9

Although I have kept Arthur Burns informed generally, you and I should review our proposed program with him.

W. Michael Blumenthal10
  1. Source: Carter Library, Records of the Office of the Staff Secretary, Presidential File, Box 60, 11/23/77 [1]. Secret; Priority. A stamped notation reads: “The President has seen.” Carter wrote at the top of the page: “Confidential. To Stu. C” and “Yen 3.00 → 2.39 +22%.”
  2. Blumenthal’s report was not found.
  3. Carter wrote “dep $ affects oil prices in future; good crops—world; recovery here; oil imports” in the margin adjacent to the table.
  4. See footnote 3, Document 53.
  5. The Trans-Alaska Pipeline, which carries oil from the Prudhoe Bay in northern Alaska to the port of Valdez in the southern part of the state, became operative in June 1977.
  6. The text of Carter’s May 19 announcement of his conventional arms transfer policy is in Public Papers of the Presidents of the United States: Jimmy Carter, 1977, Book I, pp. 931–932.
  7. The National Energy Act, which Carter sent to Congress in April (see footnote 7, Document 25) was not passed until October 15, 1978. The President addressed the nation on November 8 on the energy crisis, the need for conservation, and the rising price of oil. For the text of his address, see Public Papers of the Presidents of the United States: Jimmy Carter, 1977, Book I, pp. 1981–1987.
  8. Attached but not printed is a table entitled “Maximum Possible Impact on U.S. Trade Deficit.”
  9. Blumenthal traveled in the Middle East October 22–29, meeting with leaders in Egypt, Kuwait, Iran, and Saudi Arabia to discuss oil pricing policy. See Foreign Relations, 1969–1976, vol. XXXVII, Energy Crisis, 1974–1980, Document 134.
  10. Blumenthal signed “Mike” above this typed signature.