370. Memorandum for the Record1
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 [Page 1042] 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.2 Last year I tried to make you understand that the political effects in Europe of Secretary Connally’s actions.3 The United States cannot embark on international monetary reform before its elections. Nor is this necessary.
Dr. Kissinger: Nor desirable. Will there also be elections in Germany in the fall which will have a bearing on the situation?
Minister Schmidt: It is 99% sure that elections will take place, probably the first Sunday in December. Schiller’s resignation has damaged the government coalition and will damage it further. The government has a chance—which I put at 51 to 49 percent—to win, however.
Dr. Kissinger: Is there any chance that the government would have to resign before December?
Minister Schmidt: Probably not. If there is a change in government, however, foreign, defense, financial, and European Community policies will remain unchanged. The changes will be in personalities and domestic policies only.
Dr. Kissinger: Will the FDP change sides?
Minister Schmidt: The FDP cannot switch without losing its credibility. In the public eye, it is too committed to the Social Democrats. The FDP will get at least five and maybe more than seven percent in the national elections.
Dr. Kissinger: The CDU/CSU will in this case have to come out way ahead of the SPD in the elections and win an absolute majority.
Minister Schmidt: If the present government wins again it will form the same coalition. Brandt will be Chancellor and Scheel Foreign Minister. This will be the outcome if the FDP/SPD wins 20–25 additional seats and even if the CDU does not get more than 12 additional seats. If the CDU should win 20 more seats, however, it will form the government.
Dr. Kissinger: What about the Minister’s own plans after the elections?
[Page 1043]Minister Schmidt: Until 10 days ago I had fully expected to return to the Bundestag as floor leader of the SPD. Wehner had planned to give up this job six months or so after the elections. The plan had been to make Arndt Economics Minister and another man Finance Minister. But Schiller’s resignation occurred after the Bundestag had recessed. Had the Chancellor wanted to name a replacement who was not now in the cabinet, he would have had to recall the Bundestag, since the constitution provides that ministers must take the oath before it. Brandt did not want to recall the parliament. So he was obliged to replace Schiller by a man already in the cabinet.
Dr. Kissinger: I know your replacement as Defense Minister. [Georg] Leber is very solid although he doesn’t know much about defense.
Minister Schmidt: He knows enough about the Alliance, however.
Dr. Kissinger: One can’t conduct policy in Washington because statements made in interdepartmental meetings keep getting into the press. Any sarcastic remark I make is written down by the agencies’ note-takers and, misinterpreted and distorted, finds its way into the press.
Minister Schmidt: Bonn is worse in this respect.
Dr. Kissinger: The situation is impossible here. Even remarks made at cabinet meetings appear in the papers soon afterwards. In this room and within the NSC itself the record on leaks is very good: We have had none. Maybe the way is to tell the bureaucracies nothing.
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.
[Page 1044]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.4 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 Shultz 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.
[Page 1045]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.5
[Page 1046]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.6
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.
[Page 1047]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.
Minister Schmidt: How influential is Mr. Eberle?7 He seems to understand these problems.
Dr. Kissinger: Eberle is somewhere between the first and second levels in the government structure. He does indeed understand the problems but he is not too influential.
Turning to United States election politics, I think that McGovern will either win or else lose disastrously. Our internal, unpublished, polls are so favorable that they scare one. It is eerie. The polls give the Republicans a 20 point lead, and they could win every state, except South Dakota.
McGovern is a phenomenon like Goldwater. His constituency has never before been represented in national affairs. It is undefinable, a group which is united only by its frustrations. McGovern’s supporters have never dealt with the problem of managing a bureaucracy.
I know and like McGovern. But his election could be a disaster, for he means exactly what he says. The important thing about (Ted) Kennedy is that he is not a loser, although he is not quick to learn. McGovern can’t learn and he can’t change his mind. He is a missionary. His present constituency is up in arms, its expectations in McGovern are high. Among my friends in the film industry who support him, there is a feeling of exaltation. In America today the family, the Church, and even psychiatry are losing their appeal. The institution of the Presidency is the focus of exaggerated expectations. If McGovern wins and is unable to meet these expectations—and no man can meet them—his constituency might turn on him.
Despite the indications of the private polls, I would not rule out that McGovern might find 10 million voters whom nobody knew were there. Muskie, Humphrey, or Jackson, wouldn’t be able to find these voters. But I would not be astonished if McGovern could.
Minister Schmidt: Both West German parties, the SPD and the CDU, look to President Nixon, although not necessarily to the Republican Party. We like the calculability of the present Administration.
Dr. Kissinger: No professional can figure out how McGovern might win.
Ambassador Pauls: There is a desire for change in this country, however.
Dr. Kissinger: Two important facts in the primaries have been overlooked. First, McGovern’s opponents together got more votes than he.
[Page 1048]Second, McGovern lost as many primaries as he won. He was, however, clever in picking his primaries. Muskie, on the other hand, was foolish to get into the Florida primary where he had no chance. He wasted a month there. McGovern ran a smart primary campaign but won only a single two-man race, California, where his vote was less than had been expected.
Minister Schmidt: What about Vietnam?
Dr. Kissinger: Were it not for our election, I am certain that the war could be settled within six months. There are several reasons for this. First the North Vietnamese have been “stopped” militarily even if one could not yet say they had been defeated. We are likely to see a big attack within the next two weeks. I regard this as a sign of despair. If the North Vietnamese can take Hue it will be worth it. If not, it will be a very bad setback. The North Vietnamese are strapped for manpower. They are moving their 320th training division south, a division which they have never used before and which consists of new recruits who have never fired a shot in anger. If we cannot stop them with air power and with four of the best South Vietnamese divisions, we can never stop them.
The North Vietnamese have not won a battle since May. When they were winning it was very costly for them. We thought at one juncture, and I told the President, that they might take Kontum within four days. We didn’t know when we made that estimate that the North Vietnamese had already lost two thirds of a division which was attacking the city. They were being defeated by the second worst South Vietnamese division. In some ways, without being tactless, one can compare the North Vietnamese situation today with that of Germany at the time of the Battle of the Bulge. Even if they score a limited victory, it will be a defeat.
Secondly, the North Vietnamese are isolated politically. You have just to read what the Chinese and the Soviets are saying. The North Vietnamese Ambassador the other day presented a list of charges to the Chinese leadership. What did Chou reply, according to Peking radio? That the Chinese supported their North Vietnamese people in their just struggle. Imagine if we should give such a reply to one of our allies asking for help!
The Chinese are giving the North Vietnam supplies but no diplomatic support. And they are not giving enough supplies to reverse the situation. After their next offensive has been stopped the North Vietnamese will have used two dry seasons worth of supplies. That means that they cannot launch another attack until February, 1974.
What the North Vietnamese do have going for them, however, is that McGovern is offering to give them their maximum program. So perhaps they believe they should wait. But the North Vietnamese must [Page 1049] consider that the polls show that McGovern won’t win, that the North Vietnamese forces have been seriously weakened, and that they cannot be sure that McGovern will actually do for them what he says he will do. A Chinese commentary is very interesting in this respect; it says that the American domestic structure won’t permit McGovern to scale down our military support. I like such commentaries, for their impact in Hanoi.
I think that there is a 50–50 chance of a Vietnam settlement before the elections and a four to one chance of one afterward. We will be down to 39,000 troops, all volunteers, by September 1 and down to 35,000 by November. We have withdrawn 525,000 troops since the present Administration came in.
Minister Schmidt: You fail to exploit these facts enough with the European publics, who are down on you because of Vietnam. Your figures are unknown, especially to young people in Europe.
Dr. Kissinger: How can we exploit these facts with the European publics?
Ambassador Pauls: You are doing better in Vietnam than you are in selling that policy in Europe.
Dr. Kissinger: Everybody in this country said that the Administration’s decision to blockade Haiphong would ruin the Summit.
Minister Schmidt: Bonn hasn’t said that.
Dr. Kissinger: We have no complaint about the Germans on this score. Since the blockade, the North Vietnamese have become more flexible. We are still not sure if they want to settle before the elections, however. There has been only one meeting with them in Paris, the one of yesterday.
Minister Schmidt: You are not fully aware of the growing proportion of Europeans who dislike the United States because of Vietnam. You must tell these Europeans more about your withdrawals.
Dr. Kissinger: And about what we have offered the North Vietnamese. The only thing we have not offered is to collude with them in the overthrow of a government that is allied with us. What would the Europeans say if we did that? Perhaps a few months after the settlement they would be saying that the United States, when the going really gets tough, simply jettisons the governments of its allies. It is strange that the men who resist are always those who are vilified by the left wing. It was the same with Adenauer at the time of the Berlin crisis in 1961.
Minister Schmidt: It is not governments to whom you need to explain these things but to the European publics. You need to show in some dramatic way how much you have done to get your soldiers out.
[Page 1050]Dr. Kissinger: I hope that we can count on seeing you when you come through Washington again in September.
I will try to call Secretary Shultz before your appointment at 4 this afternoon.
The meeting ended at 3:30.
- Source: National Archives, Nixon Presidential Materials, NSC Files, Box 687, Country Files, Europe, Germany (Bonn), Vol. XII. Secret; Sensitive. Sent for information. Drafted by Livingston on July 22. According to an attached routing slip, Kissinger approved the memorandum on July 26.↩
- Schmidt, who had been Minister of Defense, was appointed Minister of Economic Affairs and Finance on July 7; his predecessor, Karl Schiller, had resigned on July 2 due to differences over economic and monetary policy.↩
- Reference is presumably to the New Economic Policy, which Nixon announced, at the urging of then Secretary of the Treasury Connally, on August 15, 1971. The policy included a 90-day freeze on wages, rents, and prices; an end to the convertibility of dollars into gold (the Bretton Woods system); and a 10 percent surcharge on imported goods. Connally resigned from Treasury on May 16, 1972; he was replaced on the same day by George P. Shultz, former Director of the Office of Management and Budget.↩
- The Smithsonian Agreement, signed in Washington on December 18, 1971, realigned the currencies of the so-called Group of Ten, the United States, Canada, United Kingdom, France, Belgium, Netherlands, West Germany, Italy, Sweden, and Japan; the agreement included a 8.57 percent devaluation of the dollar.↩
- Jacques Chaban-Delmas resigned as French Prime Minister on July 5; the next day, Pierre Messmer, a close associate of the late Charles de Gaulle, formed a new Cabinet.↩
- Valéry Giscard d’Estaing, French Minister of Finance and National Economy; and Michel Debré, French Minister of State for National Defense.↩
- William D. Eberle, Special Representative for Trade Negotiations.↩