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

240. Telegram From the Embassy in Germany to the Department of State¹

Bonn, August 1, 1972, 0935Z.

10466. Subject: Conversation with Economics and Finance Minister Schmidt.

1. The new FRG Economics and Finance Minister Helmut Schmidt used the occasion of my first call on him on July 31 to press home his views on the international monetary situation. He began by saying that, although he had had good and full conversations with Secretary of the Treasury Shultz, Federal Reserve Board Chairman Burns, Peter Flanigan, Henry Kissinger, and others, during his recent visit to Washington, there had since been a further evolution in his thinking which he wanted to bring to our attention. Since we had known each other personally for nearly 20 years,² he felt he could be absolutely frank.

2. He could not understand the passivity of the US in the international monetary field during recent months. This had made it extremely difficult for our European friends to believe that the US really wanted to adhere to the Smithsonian Agreement. The recent intervention of the Federal Reserve on behalf of the dollar had been a good thing psychologically, even if it had but only a symbolic effect quantitatively considered, but even that would be lost quickly if it were not repeated from time to time. One point on which he wanted to be absolutely frank was that, if a heavy flow of dollars into Germany should resume for whatever reason, he would not hesitate to impose controls even though these would inevitably also have some trade impact. The former Minister of Economics and Finance had fallen on precisely this issue. He had been opposed by the majority of the Cabinet and the German banking community.

As far as Schmidt was concerned, he approached this whole question from the viewpoint of a politician who had not asked for his present post but had accepted it out of a sense of obligation to his party. The political stakes were simply too high to leave the subject to the technicians or even to a conventional Minister of Finance. This was the position he had taken with Brandt before the Schiller showdown and was one he would maintain in his present office. There were two major reasons why he could not accept the possibility of a further German float and would have to resort to exchange controls if necessary: (A) the “already not so good prospects” for Brandt in the forthcoming elections would be completely ruined if the European Summit were not to take place, and it could not take place unless the German position on dollar inflow were to come closer to the French, and (B) the long-range requirements of the German economy and its export potential likewise were not compatible with a further float.

3. He was aware of course, Schmidt continued, that no fundamental action could be expected in the monetary field before the American and German elections, but he was concerned about the possibility that pre-electoral rumors, perhaps in October, would set off another wave of speculation against the dollar. This would trigger the kind of German reaction which he had indicated he would be forced to take. If it were possible to get through the fall period without such a development, then 1973 would be a year in which there would be real need for an inconspicuous but real American leadership in the international monetary field. Without it, any hope of basic reform would be illusory. He was not certain, after his visit to Washington, which line of thinking would prevail, but it was clear that it was in our common interest to change a situation which, from the European point of view, had become untenable.

4. I observed that since he had had an opportunity, during his recent trip to the US to receive at first hand the views of the senior American officials whom he had met, there was little I could add at this time to what they had told him. We are not indifferent. We too consider international monetary reform and trade negotiations a matter of urgency and want to get on with them as expeditiously as possible. I would report his views and hoped that he would feel free in the future to convey any information or thoughts which he might have through me to my government. He said he would not hesitate whenever he felt it necessary to get in touch with me immediately. Comment: It is clear that Schmidt is not particularly happy in his new role as Minister of Economics and Finance. I believe he is sincere in saying that he took this position mainly out of loyalty to his party and to the Chancellor. He would be the first to acknowledge that his understanding of the complexities of international finance is still elementary, but he is a quick learner as well as one of the most articulate politicians on the current German scene. His influence with the Chancellor will be very great in the months to come, and the views he expressed will carry much weight in cabinet deliberations. In talking about his health, Schmidt could only say that while he felt better than he had in many months, he had come to appreciate that he is no longer a young man. He intended to go off on a month’s leave immediately after his appointment with me, but added, somewhat apologetically, that he would be in constant touch with his Ministry and prepared to return to Bonn at any time if necessary.

Hillenbrand

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 356, Monetary. Secret; Exdis. Attached to an August 2 memorandum from Hormats to Kissinger apprising Kissinger of the increase in the free market price of gold to $70 per ounce and reminding him of the need to contact Schmidt, pursuant to his July 25 conversation with Arthur Burns, regarding U.S. willingness to defend the dollar lest the Europeans come “to believe that we are returning to Connally’s policy of letting them bear the sole burden of defending the Smithsonian rates.” See Documents 235 and 236. Kissinger wrote on Hormats’ memorandum: “Hormats—Let’s do it. Draft something.” No record of a written reply has been found. On August 9 Hormats sent Kissinger a briefing memorandum for his August 10 breakfast with Shultz, which inter alia, suggested he sound out the Secretary on his agreement with Burns to commit a “sizable amount” to support the dollar. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 299, Treasury Volume III) No record of the August 10 meeting was found, but on September 1 Hormats sent Kissinger talking points for his meeting with Ambassador Pauls, indicating that Kissinger had discussed the international monetary system with Burns and Shultz and the United States would cooperate in the effort to defend the dollar rate, including, when appropriate, selling currencies drawn under swap agreements. The talking points continued: “However, the major responsibility for defending present rates should continue to lie with nations whose currencies might be under upward pressure in the market.” (Ibid., Country Files—Europe, Box 687, Germany Volume XII 5/72-12/72)
2. A career member of the Foreign Service, Ambassador Hillenbrand had been assigned several times to posts in the Federal Republic of Germany, including Deputy Chief of Mission at the Embassy in Bonn in the mid-1960s.