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

235. Information Memorandum for the Record¹

Washington, July 20, 1972.

SUBJECT

• Meeting between Helmut Schmidt, Minister of Economics and Finance, Federal Republic of Germany and Dr. Kissinger, July 20, 1972, 2:40-3:30 p.m., Dr. Kissinger’s Office (Also present were Rolf Pauls, Ambassador to the United States, Federal Republic of Germany, and R. G. Livingston, NSC Staff (note-taker))

Minister Schmidt: I want to discuss international monetary affairs. We are facing a very bad situation.

Dr. Kissinger: The Minister now has an opportunity to talk with one of the leading experts in this field. But you probably don’t know much more yet than I. Whenever you come through Washington you should come in for a talk. I value your opinion on the German and US political situation. If the monetary situation was indeed becoming very bad, I could help perhaps.

Minister Schmidt: It is bad and could become worse. I thought that even ten days ago before I took on this portfolio. Last year I tried to make you understand the political effects in Europe of Secretary Connally’s actions. The United States cannot embark on international monetary reform before its elections. Nor is this necessary.

[Omitted here is discussion of the political situation in Germany.]

Minister Schmidt: I have a personal rule never to mind what others make of comments of mine which leak to the press. I want to turn the conversation back to international monetary issues, however. Billions of dollars are floating about the world and Germany is taking in too many of them.

Dr. Kissinger: What is the cause of this?

Minister Schmidt: The US economic situation is improving. Within two years or so this may have an impact on the US trade balances. Meanwhile, there are too many dollars circulating in the world. New York bankers are selling dollars and the German Federal Reserve System is having to buy them up at a fixed rate to prevent the dollar from falling below 3.15 against the DM. The German Federal Bank is handing out far too many DMark, billions in a week. This has a very bad internal effect. The German price level is rising far too fast. The inflation rate is 5.4 percent at present. This will be the number one campaign issue. If I am to survive politically, I will have to do something about this as Minister of Finance and Economics.

Dr. Kissinger: We want you to survive, which is not to say, necessarily that we want your government to do so. We appreciate how much you have done as Defense Minister.

Minister Schmidt: My main objective is to have US-German cooperation survive. The dollar problem remains and the German inflation rate may reach 6 percent. To prevent this I may have to cut off the purchase of the dollars “immediately.” This will be done by means of regulations on capital inflows and corresponding regulations on trade.

Dr. Kissinger: Like the French.

Minister Schmidt: There is no other way. Schiller was against that but the whole cabinet was for it. That is why Schiller had to go. Last year there had been a DM float and DM revaluation. There can be no revaluation this year. I want you to understand the situation and the background to the action I may have to take.

Yesterday, however, Chairman Burns has done what I came to the United States to ask him to do. By intervening in the international monetary market to sell DM he took an action which serves as a token of US determination to defend the Smithsonian Agreement.² That is essential: to defend the Smithsonian Agreement and not let the situation get out of control.

There has as yet been no German cabinet decision to stop buying dollars. I am not going to ask for one, if the United States government continues actions such as the Federal Reserve Bank’s of yesterday. The difficulties may be ironed out in that case. The problem is the rumor mill among international bankers. The meeting of the EEC finance ministers July 17-18, and the rumors coming out of it has made the July 19 intervention of the Federal Reserve Bank necessary

Ambassador Pauls: The Fed’s action has raised the dollar by a point and a half.

Dr. Kissinger: Last year the situation had to get very bad before I was able to intervene within the government. Then the crisis was brought under control. You should know that Secretary of the Treasury Schultz thinks that floating is the right policy. However, I understand that a US float will make it impossible for the German government to control inflationary pressures. The Germans are saying to the US that either you defend the Smithsonian Agreement by intervention of your own to strengthen the dollar or we will defend it by means of controls.

Minister Schmidt: That is the choice. An important aspect is the psychological impact of US action on bankers in New York and in Frankfurt, whose psychology I do not understand very well.

Dr. Kissinger: I cannot give you an answer right now. What is required is day-to-day actions, a series of them. This is not an issue which you can bring up to the President in the form of a single paper to be signed. Secretary Shultz and Chairman Burns will have to take actions daily. It is the totality of these, no single action, which is important. This is different than the situation last year. Then there was a concrete set of decisions to be taken.

I will talk with Secretary Shultz and Chairman Burns. I need two weeks time for this.

Minister Schmidt: I want the White House to understand that even a strong supporter of cooperation with the United States such as I am may have to act suddenly in the international monetary field.

Dr. Kissinger: Our situation with the Europeans is precarious. I know that. A unilateral European move in the monetary field could trigger an unexpected reaction in the United States. Strangely, the old internationalists in the United States have now become isolationists. And the old isolationists, who have become internationalists now, are good on defense but remain isolationists at heart in economic affairs. I hope you will hold off any restrictive move for at least ten days.

Minister Schmidt: I am not going to act within the next ten days.

Dr. Kissinger: I know that you are meeting with Shultz and Burns today. I will call Shultz and explain to him that you are no anti-American economic nationalist. Mr. Burns needs no convincing. The problem with him is the way he presents his views. He is a difficult personality to orchestrate in a coordinated policy. However, Burns favors the Smithsonian Agreement and the need to defend it.

Minister Schmidt: The Agreement must be defended until the elections.

Dr. Kissinger: After I have been in touch with Burns and Shultz I will inform you confidentially of the outcome through Rolf Pauls. That way the communication will remain completely private.

What do you think about European-American relations?

Minister Schmidt: The greatest present uncertainty is how soon the European Community will clarify its views on relations with third countries, particularly the United States, on European economic and monetary union, and on European political consultations. None of this depends on the United States; it depends on Pompidou’s interpretation of France’s interests and on the strength of the British Pound. I don’t understand the significance of the French Cabinet reshuffle.

Dr. Kissinger: It may be a move in the Gaullist direction.

Minister Schmidt: The central problem is whether the European Community would be outward-looking, as Germany wants, or inward-looking, as the French want. Germany does not want the European Community to become a currency bloc against the dollar. Schiller’s problem was his inability to deal with the French tactfully on this issue. As Economics and Finance Minister I will try to establish cooperation with Giscard as I did with Debre.

Dr. Kissinger: I want you to know that we will miss you in the Defense Ministry. As far as you personally are concerned, I am happy you can leave this suicidal post.

What do you think of US policy?

Minister Schmidt: You made two mistakes in 1971, the first in handling of Japan and the second in handling the Europeans until Secretary Connally was called home.

Dr. Kissinger: To some degree the Japanese are making a profession out of being hurt. What could we have done to handle them better?

Minister Schmidt: When I was in Japan I got the impression that the Japanese are somehow stirred up, intrigued with the potentiality of relations with mainland China. They couldn’t seem to see that mainland China can’t buy any more from Japan, that it is no bigger a market than Taiwan. Somehow the Japanese have lost direction and feel dropped by the United States.

This year the United States has done well—with the Moscow Summit and the Berlin Agreement, on which the Germans and the Americans had cooperated. You helped Brandt to carry out his Eastern policy while strengthening the security foundation in the West.

Dr. Kissinger: We helped the Eastern policy as much as we could without going public about it.

Minister Schmidt: We have nothing to complain about.

Dr. Kissinger: As far as our handling of the Europeans last year is concerned, you should understand that Texans like Secretary Connally are used to dealing with problems in a forceful way. The Secretary is a strong, able, and attractive man.

Minister Schmidt: Yes, he is. I advised the Chancellor last year that financial and economic matters should be taken out of the hands of men like Connally, Giscard and Schiller and put into the hands of statesmen. With billions of dollars floating around, the monetary crisis of 1971 can easily repeat itself.

Dr. Kissinger: Give me two weeks time to determine attitudes in the United States on international monetary policy. I will let you know candidly about these attitudes.

[Omitted here is discussion of the U.S. presidential campaign and Vietnam.]

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Country Files—Europe, Box 687, Germany Volume XII 5/72-12/72. Secret; Sensitive. Drafted by Robert G. Livingston on July 22. Attached to a July 22 memorandum from Livingston to Kissinger that indicates Kissinger’s approval. As background for Schmidt’s visit to Washington Ambassador Hillenbrand, on July 18, sent a telegram [text not declassified] to the White House that noted that on the economic side Schmidt was keeping his Washington appointments but had missed an EC Finance Ministers’ meeting until he knew his new portfolio better. This gave the United States an opportunity to get across U.S. monetary and trade views before Schmidt was “subject within the EC to French conceptions.” Ambassador Hillenbrand reported that Schmidt “told his Economics Ministry staff that his Washington discussions would be get-acquainted visits in which he himself would not raise specific issues.” (Telegram [document number not declassified] from Bonn; ibid.)
2. In a July 20 memorandum to Kissinger with “Additional Information” for his meeting with Finance Minister Schmidt, Hormats reported that on July 19 the U.S. Government for the first time, through the Federal Reserve Bank of New York, sold German Marks to buy dollars to help sustain the Smithsonian exchange rates. Hormats noted that this was “a departure from the Connally position, which had been that the Europeans should continue to bear sole responsibility for maintaining the Smithsonian rates.” (Ibid.) On July 29 the Embassy in Paris reported that the Governor of the Bank of France thought the current calm in foreign exchange markets was due both to the strong support of European monetary authorities for the Smithsonian rates and U.S. moves to support the dollar and reopen the U.S.-German swap line. The Embassy also reported the irritable and disgruntled Governor had “no sympathy” with France’s passively and unconditionally buying “inconvertible” dollars, which put him on a different course from Finance Minister Giscard d’Estaing and probably President Pompidou as well. (Telegram 14554 from Paris, July 29; National Archives, RG 59, Central Files 1970-73, FN 10)