Foreign Relations of the United States, 1969–1976, Volume III, Foreign Economic Policy; International Monetary Policy, 1969–1972

13. Memorandum From C. Fred Bergsten of the National Security Council Staff to the President’s Assistant for National Security Affairs (Kissinger)¹

Washington, March 24, 1969.

SUBJECT

• German Offset Problem

Problem

The German offset problem arises because of the effects on the U.S. balance of payments of our military expenditures in Germany, which are approaching $1 billion per year. The Administration must negotiate a “good agreement” or risk: (a) heightened Congressional pressure for troop withdrawals, and (b) an increased balance of payments deficit which under the present international monetary system can cause us serious economic and foreign policy problems. Treasury, with Defense and State not far behind, wants to meet these problems by requiring Germany to spend in the U.S. roughly equivalent amounts of money, linked as closely as possible to military items (purchases of U.S. military equipment, training of German military personnel in the U.S., support costs for U.S. military expenditures in Germany, etc.).

The real issue is what constitutes a “good agreement” and to what end we should use the leverage with the Germans provided by our military position. The German Cabinet has decided to offer a package, for two years, which will offset about 75 percent (about $700 million annually) of our expenditures. It would include $350 million of military procurement, about $70 million of non-military procurement, and about $300 million of loans of various types. It is probable that most of the non-military procurement and some of the loans would occur independent of the offset arrangement, i.e. the U.S. would get no additional balance of payments benefits from them. Some of the military procurement would occur anyway too, but military purchases are conventionally accepted as true offsets and hence meet our domestic political problem.

Background

The previous Administration adopted a progressively tougher line with Germany on the offset. U.S. troop levels in the FRG were linked explicitly to German commitments to fully offset the resultant costs to our balance of payments. Accepted methods for achieving the offset evolved:

• —From military purchases which Germany would have made anyway, and which thus provided no additional real help for our balance of payments.
• —Through purchases of U.S. Treasury bonds which caused the Germans some pain, though not much because of the huge payments surpluses they were running, and which helped our balance of payments statistically but were criticized by many as only “postponing the problem”.
• —To commencement of efforts to get Germany to pick up a large part (perhaps $400 million annually) of our own expenditures in the FRG, which would clearly help our balance of payments but are seen by the Germans as politically indefensible support costs reminiscent of the occupation.

In addition, in 1967 Germany fully committed itself not to buy gold from the United States. This has no impact on our balance of payments statistics, but is by far the most important part of the “offset” package. It means that Germany, despite its huge and persistent payments surpluses, will put no pressure on U.S. reserves and thus reduces sharply the constraints generated by our payments deficits. There is no evidence of serious German unhappiness with this part of the package.

Our offset talks with Germany have proceeded largely independent of our over-all international monetary policy. In the latter context, we have pressured the Germans to eliminate their surpluses—most recently at the crisis conference in November when we took the unprecedented step of explicitly urging them to upvalue their currency.² We have given no indication to Bonn that cooperation on over-all monetary policy would affect our position on the offset.

Alternatives:

1. The U.S. could continue to link troop levels to offset expenditures in the U.S.:

(a) Achieved only through “real” devices such as additional military purchases and payment of support costs; or

(b) Achieved in large part through loans, i.e., accept the present German offer, or seek to harden it only marginally.

Pros

• —Especially if via (a), would undercut Congressional efforts to use balance of payments arguments to force troop withdrawals.
• —Would provide significant help for our balance of payments which is, of course, a continuing problem.

Cons (each much more serious if via (a))

• —Could further erode German confidence in our security commitment.
• —Could lead to eventual troop withdrawals since FRG unlikely to meet U.S. demands indefinitely.
• —Could cause FRG at some point to renege on gold commitment, which could seriously jeopardize U.S. financial position and hence produce, inter alia, massive domestic pressure here for troop withdrawals if Germany actually began to buy U.S. gold.

2. The U.S. could drop completely the link between troop levels and balance of payments effects.

Pros

• —Major payoff in relations with Germany (and perhaps some with rest of NATO).
• —Major restoration of credibility of U.S. security commitment (included in Soviet perception).

Cons

• —Would invite massive Congressional pressure for troop withdrawals.
• —Would completely ignore our international monetary problems.
• —As a result, and especially if we move toward elimination of our present capital controls, would generate widespread views that U.S. no longer cared about its balance of payments and hence could touch off a major financial crisis.
• —Would simply give away a major U.S. negotiating lever.

3. The U.S. could substitute for the explicit link between troop levels and German offset expenditures a request for sharply accelerated over-all German cooperation on international monetary matters, particularly agreement to:

(a) Press actively for early and sizeable activation of SDRs.

(b) Initiate meaningful studies of ways to improve the adjustment process including greater flexibility of exchange rates.

(c) Continuation of the gold commitment; and

(d) Possibly upvaluation of the DM after the elections in October.

Pros

• —Would increase credibility of our security commitment.
• —Should improve our over-all relations with FRG.
• —Could produce a major breakthrough in improving the international monetary system.
• —Would use our leverage with FRG in most profitable way.
• —Would avoid any budgetary requirements of the Germans.

Cons

• —Requires educational effort with Congress to avoid renewed pressure for troop pullbacks.
• —Risks inadequate German performance on over-all monetary policy and hence possibility of future serious bilateral problems.

Recommendation:

That we:

(a) Accept the German package for one year only;

(b) Indicate to them that for the future we will drop our insistence on military offsets per se if they provide satisfactory cooperation on over-all international monetary matters.

Germany is unlikely to accept “real” offsets to our military expenditures unless we commit ourselves to a fixed level of forces in Germany for several years and/or the President makes it his top priority requirement. If he were to do so, the credibility of our security commitment and political relations with Germany would suffer enormously.

Further loans would neither allay our domestic pressures for the longer run nor really get us very much help on the monetary front.

Complete abandonment of the issue gives away a major U.S. bargaining lever and risks major financial difficulty. We should thus change our offset policy to (a) reduce the political and security problems caused by demands for support costs and (b) to pursue positively our major international monetary objectives. These objectives are (a) assurance of sufficient international liquidity via Special Drawing Rights; (b) improvements in the adjustment process, probably including greater flexibility of exchange rates; and (c) restoration of stability in the exchange markets which will require an upvaluation of the DM. Active cooperation by Germany on each of these issues—on upvaluation after their election in October—is a necessary component of a satisfactory approach. It will be difficult to move the bureaucracy quickly in this direction but the potential gains in both political and economic terms are well worth it.

Because it will take up to a year to monitor German performance and to educate the American public on this approach, we should inform Germany at once of these changes in our position for the future, but accept their package for this year as a transitional device. (If they want to soften their package as a result, we should be willing to consider so doing.)

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Country Files—Europe, Box 681, Germany, Volume I, through 4/69. Secret. An attached memorandum from Kissinger to the President, undated, entitled “Preliminary U.S. Position on German Offset Problem,” refers to an “attached” memorandum from Secretaries Rogers and Kennedy and Under Secretary Packard (not found) proposing “that you authorize Under Secretary Volcker to take a ‘hard’ line on the offset question during a visit to Bonn next week for exploratory talks on a wide range of monetary issues.” No record has been found that the memorandum went to the President or that he acted on its recommendations.
2. Reference is to the G-10 meeting in Bonn in November 1968; see Foreign Relations, 1964–1968, vol. VIII, Documents 214–220.