88. Message From the President’s Deputy Assistant for National Security Affairs (Aaron) to President Carter 1

WH70679. Subject: Message From Helmut Schmidt.

Attached is an urgent message from Chancellor Schmidt which seems to have no immediate operational implications. We will continue to monitor the international monetary situation and if there are any sudden developments will notify you immediately. We will also prepare an appropriate response to the Chancellor concerning his views on the timing of the upcoming summit. I will share the relevant portions of this message with Secretaries Blumenthal and Vance.

Federal Republic of Germany
The Federal Chancellor
His Excellency
Mr James Earl Carter,
[Page 276] President of the United States of America,
Washington, D.C.
Mr. President,
Dear Jimmy,

The development on the foreign exchange markets during the past few months fills me with growing concern. From the public statement you made yesterday, 21 December 1977,2 I take it that you have similar worries. I therefore hurry to give you directly and without delay my assessment of the situation.

From my discussions with my colleagues in the European Council I know that they, too, share this concern. In my view, this development is not just a transitory disturbance but possibly the beginning of a crisis of considerable dimensions.

If this development continues it may lead to a renewed recession and grave structural distortions, initially in the countries mainly affected, but ultimately with an adverse effect on the whole world economic system. This gives the problem a crucial political significance over and above its economic repercussions.

As regards the economic problems, I quite appreciate that it will not be possible for the United States Government to predict an early reduction of its current account deficit. A decisive factor in this respect is your energy programme, which I hope will soon be adopted by the legislative bodies. Otherwise, I see a danger of capital flows from the OPEC countries slowing down as well, money which, up to now, has financed part of the US deficit.

As you know, a considerable proportion of the US current account deficit has been financed not by the reflow of capital to the United States by the private financial markets but by central banks, principally in Europe. To support the exchange rate they have bought in 1977 more than 30 billion dollars and channelled them back to the United States. Should the central banks stop absorbing these dollars then there would be a great danger of liquidity in the Asian and European dollar market being further inflated, which would mean an alarming growth of the present world-wide inflation potential.

Further pressure on the dollar could, moreover, ruin our joint efforts to exhort the OPEC countries to pursue a moderate price policy for the sake of the world economy which appear to be successful at the present time.

The overvaluation of some currencies as a consequence of dollar undervaluation raises the danger of recessive world economic tend[Page 277]encies regaining the upper hand. This applies to Europe particularly and is by no means restricted to the Federal Republic. It would foil our jointly elaborated growth strategy and I fear it might give more stimulus to protectionist tendencies. In such a process the European snake3 would also be in danger—with all the risks this entails for the future of the European Community. I am deeply convinced that the necessary leading role of the United States and the strength of the American currency are inseparably linked with one another. I am confident, Jimmy, that you share this view. Our common interest therefore makes it necessary in public as well we should very seriously plead the cause of a strong dollar. I therefore welcome what you said on this point yesterday. A high rate of employment and reasonable economic growth are still priority objectives of my government’s economic policy. The Federal Government has already drawn the necessary consequences from this and embarked on a considerably more expansive course of credit and financial policy. The combined deficits of the public budgets for 1978 have therefore been put at a good 4 per cent of the GNP. We hope that this policy will also help improve the international balance, in the way you intend with your energy policy and proposed tax programme. In keeping with this, further success on the price front should continue to be our aim because it is precisely inflationary tendencies which undermine confidence in the currency.

Secretary Blumenthal has informed me about your proposed economic policy measures.4 I welcome them just as much as the fact that in the meantime further contacts have taken place between our Ministers of Finance and Central Bank Governors. I have encouraged the German Central Bank President and Finance Minister Apel to keep on fostering this fruitful co-operation.

With regard to the date for the next Economic Summit, it seems to me at the moment, as I explained in my talks with Mr Brzezinski 5 and Secretary Blumenthal, that mid-July would be the best time. I am pre[Page 278]pared to suggest Bonn as the venue. Before July it would hardly be possible to make a genuine reassessment of economic prospects for 1978/79 since all governments are currently doing their best to enter 1978 with a vigorously expansive economic and financial policy. July would also suit the British and French Prime Ministers, with whom I discussed the matter on their recent visits to Bonn. For the time being it would perhaps be better not to make our plans for a meeting of heads of state and government public so that, as on previous occasions, we shall be able to make our final decision in, say, May in the light of the preparatory work undertaken by our personal representatives, without being committed.

Your visit to the Federal Republic, Jimmy, without any connection with an Economic Summit, would be most welcome to me, the Federal Government and the citizens of this country, already in the first half of 1978 if this is convenient to you, and I wish to renew herewith my cordial invitation to you which you have, in principle, accepted.

Should you not be in a position to schedule your visit to the Federal Republic of Germany for the first half of the year, may I suggest that you perhaps make a two-day visit directly before the next world Economic Summit?

Finally, I want to tell you how very much I admire the energy with which, in spite of unavoidable setbacks and delays, you continue to pursue your policies, not only in the economic sphere. I very much want to see you succeed because Europe, too, depends upon reliable and credible American leadership.

With kind regards,

Yours ever,

(sgd.) Helmut Schmidt

  1. Source: Carter Library, National Security Affairs, Brzezinski Material, President’s Correspondence with Foreign Leaders File, Box 6, Germany, Federal Republic of: Chancellor Helmut Schmidt, 5–12/77. Secret. Sent with the instruction to deliver to Philip Wise immediately. Carter, who initialed “C” at the top of the page, was in Plains, Georgia. (Carter Library, Presidential Materials, President’s Daily Diary)
  2. See footnote 2, Document 86.
  3. On March 11, 1973, six members of the EEC—Belgium, Denmark, the Federal Republic of Germany, France, the Netherlands, and Luxembourg—announced that after March 16 the values of their currencies would jointly float vis-à-vis the value of all other currencies, while remaining relatively fixed vis-à-vis one another. That is, their currencies would form a “snake,” whose value in relation to non-snake currencies would be determined by market forces.
  4. Blumenthal met with Schmidt in Bonn on November 2. A memorandum of conversation of the meeting is in the 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 1, Memoranda of Conversation RNC—Aug.–Dec 1977.
  5. Brzezinski met with Schmidt in Bonn on September 27. A memorandum of conversation of the meeting is in the Department of State, Office of the Secretariat Staff, Records of Cyrus Vance, Secretary of State, 1977–1980: Lot 84D241, Box 7, Western Europe. It is scheduled for publication in Foreign Relations, 1977–1980, vol. XXVII, Western Europe.