West. There is now a half century or more of tradition
that each articulate, organized interest group can expect
and lay claim to a rising share of the nation's finite
material output.

These aspirations, in part, lead to, and were
dealt a severe blow by, the interruption of growth in
the mid-seventies. Expansion came to a halt in country
after country, in large part though not entirely because
of the increase in imported energy costs of which I
have spoken. To the extent that public sector
expenditure increases were postponed, there was increased
competition among interest groups intent on protecting
their own claims. Though it was fortunate in the extreme
that the financial mechanisms of the world could meet
the demand, the fact that governments had to bridge
the financial gap by borrowing incurred double
difficulties -- domestically in fueling inflation,
internationally by straining the creditworthiness of
some. With the economic downturn, one after another
of the major industrial powers of the world -- the United
Kingdom, France, Portugal and Italy -- began to

12/40

experience domestic strains and international balance
of payments crises.

12/41

The world learned from the experience of the
Depression of the 1930's that economic vitality
determines the health of political institutions. The
inflation and unemployment in the 1930's created
unprecedented tensions on the fabric of democracy in
western Europe, as well as the United States. The social
and political divisions which followed radicalized
Germany, destroyed the moral fiber of France, traumatized
Britain and brought on a crisis in this nation.

Confidence was at an end. Throughout the west, people
were either prepared to accept defeat or driven to a
politics of madness. The increased economic and
political tensions within and between nations which
grew out of the economic disasters of forty years ago
eventually lead to the greatest war in mankind's history.

12/42

The difficulties of the past three years are
in some ways reminiscent of the 30's. Again, the
downturn has had major political consequences. I do

- 29 -

not mean to suggest that the horizon is darker everywhere
than it has been before; the changes in the Iberian
Penninsula and in Greece have been a heartening
demonstration of the continued vitality and attraction
of western democratic institutions. Nevertheless, there
is, in nation after nation of the West, a sense that
the system is incapable of firm public policy resolution,
and, so, unworthy of support. Parties have become more
fractionalized. Party loyalty has weakened. There
is no majority government in all of Western Europe;
coalitions rule everywhere, and it is a teaching of
history that European coalitions are transient. Young
educated people are disaffected, in nation after nation,
by their inability to find meaningful employment. There
is a widespread disillusionment, and loss of faith and
confidence -- a sense of the legitimacy of government
and authority has eroded.

12/43

As a result, we face the possibility of
fundamental change in the domestic structures of one
or more of the nations in Europe, and perhaps even in
Japan. This is a time of political crisis in the West

12/44

and this political crisis is a direct result of the
massive economic changes of the last half decade.

It serves no purpose, either here or in Europe,
to deny the significance of the changes in domestic
structures which threaten. A realignment of political
power in any of the significant nations of the West
which would allow Communists into executive power for
the first time since the war would constitute a
fundamentally new departure in modern European political
history.

It is true enough that Communism in the West
today is garbed in a dazzling array of forms, ideologies,
claims, dogmas and arguments; the capacity of Communists
to argue theology among themselves is a source of
constant wonderment for those who are products of Western
political discourse. And, indeed, there have been
serious and legitimate examples of independence of the
Soviet Union by Western European Communist leaders of
late. But we must not, from this, conclude that they
have suddenly been transfored into Social Democrats.

12/45

- 31 -

Their movement is outside the western tradition of
bourgeois democracy. In the face of a century of
denunciation of representative parliamentarianism, it
is difficult to assume that they are now prepared to
lay down the revolutionary role they have so long
assigned themselves, and take on the responsibilities
and constraints of other parties who have not been
chosen, as they conceive they have, for the exalted
role as catalysts of history.

12/46

The effect on Europe itself would be matched
by equally serious consequences for our own relations
with Europe. Our continued capacity to cooperate with
Europe in the search for solutions to the problems of
world order would be severely compromised. Communists
sharing cabinet responsibility in France, for example,
would represent a far different set of strategic and
tactical challenges to U.S. foreign policy than
Communists in power in Peking. For there is a difference
between managing competition with adversaries, and
continuing and strengthening an alliance and a
comprehensive program of cooperation with friends.

12/47

If the cabinet of a major West European nation is opened to Communist leadership, our continued relationship in NATO would be at risk; nor can we expect to continue the parallelism, the close coincidence of views, the careful consultation in matters affecting Africa, the Middle East and South Asia, which has become such a central thread of our post-war international policy.

In short, the crisis of democracy in Western Europe is a crisis for the whole world, and for our relations to it.

What is our course?

12/48

In the first instance, of course, the decisionmakers in the West are now challenged to find the precise domestic economic policy mix best suited to each country at this particular moment. The choice is not a simple, linear trade-off between inflation and unemployment. Rather, if the Summit Conferences on long-term growth strategy have done anything, they have reinforced the general understanding that there is no quick fix; the best prospects for expanding

employment as well as output over the long-term lie
in non-inflationary growth. So it is the first test
of the industrial nations to maintain cohesive strategies
to that end.

Second, we must focus in each of the
interdependent industrial democracies on the intersect
point of the public and private sectors.

12/49

There is growing evidence that the failure of
the industrial countries to resume the growth momentum
of the 1960's is in major part due to the low level
of fixed investment. If the reason for this is lack
of confidence about the future environment for long-
term plant and equipment commitments, then there is
good reason to suggest that investment certainty must
rank high on the agenda of priorities for the
policymakers and voters throughout the west. Inflation,
of course, is a major cause for the lack of confidence,
but the uncertainties on the political horizon are also
important. Political doubts, in other words, contribute
to investment constraints, which lead to unemployment,

12/50

which in turn increases social unrest, which contributes
to the drive for radical solutions -- whose new support
only feed back into the system to generate more political
uncertainty. So this vicious political-economic cycle
must be a primary target for the policymakers in each
of the nations of the west.

Finally, however, the industrial democracies
must reaffirm the cohesion of their common purpose.

It has been our central objective for thirty
years to assure the strength and political unity of
the West. Our agenda with Europe and Japan has expanded
in these three decades from a narrow interest in security
and collective defense to include economic policy,
diplomacy to reduce tensions throughout the world and
the improvement of the dialogue with the developing
world. Our cohesion now is the marriage of convenience
and ideals; of interest and moral purpose. We must
continue that policy and enrich it, by a new dedication
to the vitality of the Western tradition, and a new
effort to insure the common prosperity.

12/51

Economic cooperation must be central. Just
as the present political crisis of Europe is rooted
in economic conditions, so we must strengthen our
capacity to work together in the search for solutions
to the economic crises which challenge us all. Prophecy
is impossible; we cannot know precisely how the issues
of growth, employment, inflation and money will affect
political events. But we can be sure that they will;
it is a certainty that the political destinies of the
democracies will be a function of their capacity to
build a new tradition of economic cooperation.

12/52

Specifically: we must carry the practice of
summit consultation on domestic economic policy a major
step beyond where it is today. It is the challenge
of statesmanship now to learn to harmonize the growth
policies of the nations of the west; separate national
fiscal and monetary decisions, no matter how sound,
are no longer enough. Precisely because of the intense
interdependence of our economies today, sound national
policies can be frustrated by equally sound, though

12/53

unsynchronized, national policies next door. We must
turn to increased coordination so that national policies
complement and reinforce each other.

The chief of state conferences at Rambouillet
in 1975, Puerto Rico in 1976, and London in 1977 were
beginnings. They established the tradition of systematic
consultation at the economic summit. The challenge
now is to go beyond the form and practice of
consultation. The experience since London has
demonstrated that a rhetoric of mutual interest is not
enough. We have had to fall back on jawboning each
other about growth policies. Such public jawboning
has been less than totally effective; at times it has
even seemed to underline the inadequacy of our present
mechanisms. Pleas from one national capital to another
to alter or expand growth rates can even be dangerous
and destabilizing for exchange and capital markets.
And when they fail to meet with favorable and effective
responses, they can feed the national sense of isolation,
which only increases the temptation to desperate,
national measures of protectionism.

- 37 -

In short, the incentive in present circumstances
to shift problems to our partners is overwhelming, as
long as nations are unwilling to subject traditionally
domestic economic decisions to international processes
and constraints. Yet it may be that the very survival
of democracy in western Europe is at stake. To achieve
real coordination, therefore, must be a paramount goal
of our foreign policy, for we must do all we can to
insure that the massive economic strengths of the nations
of the West not work at cross purposes, in this moment
of challenge, but instead reinforce each other.

12/55

The need now is for new boldness and a new
creativity -- a confidence that the nations of the West
are indeed masters of our common destiny and that we
have the wit, the wisdom and the willingness to meet
the assaults of economic circumstance. There can be
no higher imperative to our global interests than this
in the months and years ahead.

12/56

[Peroration]

Address of Henry A. Kissinger
to the Community Exchange
---
"International Economics"
---

September 21, 1977

Ladies and Gentlemen, I am honored that you
should invite me to meet with you. [It is notable that
you should do so.] Even my notorious mutility does not
blind me to the fact that Secretaries of State speaking
about international economics has not exactly been an
every day event in our history.

We can be morally certain that yetternich was
never asked by the corn and pig iron producers of the
Austro-Hungarian Empire to discuss the interrelationship
of international politics and global economics. I doubt
if the utility of such a meeting would have occurred
to Bismarck either. That supreme writer on diplomacy
of our century, Nicholson, resented business and trade
as quite beneath the concerns of states-men. And I
confess that when I came to Washington almost nine years

12/2

ago, the linkage of politics and economics was not
perceived as a major issue in foreign policy, nor was
the U.S. government
well organized to implement it in practice.
the corresponding geo-political scene of our age.

-2-

in our tradition business was a matter for the private sector, and

> *not only were politics and economics our own diplomatic history also reflects a conceptually separate, but in policymaking there was tradition of conceptual separation of politics and economics* -- a division often reflected in conflict between the Department of State and the Department of the Treasury. During the 19th Century, until the Spanish-

12/3

American war, while our political horizons rarely extended beyond this hemisphere, American commerce and business were felt in every corner of the globe, opening Japan, dominating the world grain trade, leading the advance of industrial science and technology. Even in the era of our political isolationism between the wars in this Century, we still played an active role in the financial and monetary affairs of the West. And, most

even in the great initiatives of such as the Marshall Plan, dramatically in the post-war era, our foreign policy

Our economic initiatives were seen as temporary was conducted as a remarkably distinct exercise, with governmental efforts designed for a special

no overall strategic concept; the structure of political emergency and a finite period of time. Economic peacekeeping laws were made for the United Nations in San and monetary policy -- the enterprise of Bretton

Francisco, and the fabric of economic relationships Woods -- was a distinct and separate set of established at Bretton Woods, were perceived as two instruments and body of expertise.

almost unrelated efforts by the states on the day.

Not really true of Marshall Plan. Our aid programs had a political

vast male, too if naive.

today, we live, however, in a different age.

The changes in the political map since 1945 are evident. When the United Nations was organized at the end of World War II, there were only 51 geographic entities equipped to act as nation states. Since then membership in the world community has tripled.

But the war of global economics has altered at least as radically. In 1945, ours was the only major industrial nation to emerge from the war with a flourishing, vigorous economy. We were the single pillar of the world's economy; the dollar was the linchpin of world finance. Nothing was possible without us.

We alone could finance and equate the rebuilding of world industry and trade after the war; we alone were a source of capital and technology for the new peoples living in poverty. But today, economic power and influence are just as diffuse as political significance. The oil exporters of the Middle East, Africa and Latin America have become major contenders in the economic arena. Their financial cooperation, for the first time

12/5

in history, is essential to the maintenance and future of the
financial system. The Communist nations are now important
systolic change.

The Communist nations are now important trading partners of Europe, and are becoming major debtors by building up massive cessions to western banks as they finance that trade. A number of other economic powers have emerged outside the traditional zones of Northern Hemisphere industrial concentrations; Brazil, Taiwan, Mexico, Israel, South Africa, Singapore, Colombia and Korea. All are laying claim to a greater role in world finance and trade.

12/6

The post-war economic system which emerged from Bretton Woods served us remarkably well. The world experienced, in the past thirty years, an unprecedented expansion in the output of its goods and services. The results of this production explosion have been masked in part by a simultaneous and equally extraordinary demographic explosion. The fact is, nevertheless, that mankind was able, thanks to the organization and management of international commerce and finance, to Standards increase the levels of living at large numbers of people, and expand the sense of hope and opportunity for hundreds

12/7

of millions.

The post-war economic system which worked so well was based on four central elements:

- a liberal trading system, and a rapid increase in trade opportunities and exchange;

- the free movement of investment capital and technology;

- ready access to cheap energy and other raw materials; and

- effective institutions of international economic cooperation.

12/8

as a result of the oil crisis, In the early seventies, however, the world economic system was assaulted by a wave of inflation, which followed by the most severe recession since 1945. Slowly, against the accepted mythology, prices and unemployment both began to rise everywhere. Real rates of growth in the major economies have still not resumed their pre-1973 levels. And they look less healthy

now than they did even a few months ago.) Unemployment
is high. Inflation on the average is twice the level
of the sixties. And it is apparent that there is no
easy solution at hand; any direct effort quickly to
expand employment by public sector expenditure increases
would lift those inflation rates even higher.

In short, the world economic structure is faced
with unprecedented challenges. Each of the four central
elements of the postwar economic system is under assault:

- liberal trade is challenged by the increased
drive for protectionism in the United States, in Europe
and throughout the world, as a result of the recent and chronic recession;

- there is a growing sense that the world
financial system, which survived the strains imposed
by the recycling of the OPEC surpluses, could prove
unequal to the financing requirements of the decade
ahead;

- since 1973, we have had some hard lessons
in the classroom of experience that energy is not

12/9

inevitably cheap, or infinitely available, and the
developing world is experimenting with ways to transfer
those petroleum lessons to other commodities;

12/10

-- finally, these challenges in trade, finance,
and the postwar political evolution,
technology and raw materials, will severely test the
international economic institutions with which we have
lived for thirty years. Our capacity for economic
cooperation will be challenged but not proof as never before.

I would like to address today three aspects
of this contemporary international economic challenge.

-- First, in terms of the relationships between
the developed and the developing nations;

-- second, and perhaps of even more
ominously direct significance to us, the international
energy crisis; and

12/11

-- third, last and closest to home, the
industrial democracies themselves and their hopes of
managing and their economies in ways which will maintain
the vital social and political equilibrium of Europe,

Japan and the United States.

The Industrial Democracies and the Struggle
for Development

I turn first to the challenge of
international economic development --
the challenge, if you will, to define the proper role
for this nation, and for the industrial democracies
as a cohesive force, in the struggle for growth in the
poor nations of the world. The issue, it is clear, can
no longer be ignored:

12/12

-- half of the peoples of the world live in
misery and destitution:

-- in large parts of the world, there is greater illiteracy today than ever before;

-- with few exceptions, the populations of the
developing nations are increasing more rapidly than
those of the industrial countries, and their rates of
demographic growth are a chronic burden on their hopes of
economic and social advance. Not really true every day.

Yet the future resource requirements of our
own industrial plant, and our needs for coherent
solutions to such global problems as pollution, the
oceans, energy, food and human rights, to name a few,
demand that the North and the South find new ways to
cooperate.

12/13

As Robert Asher has said:

"As sources of imports, as markets for exports, as keepers and breakers of international peace, as claimants on the consistence of mankind, and as trade unions that must be dealt with, the developing countries have become more important to the United States than ever before."

At times in recent years, however, the developing
countries seemed bent on wrecking what slim prospects
for cooperation there were. They perfected a practice
of bloc denunciation, stating their claims for a
renovation of international economic relations with
a stringency which went far beyond the needs of their
case. There were times when the dialogue between the
rich and the poor seemed to deteriorate into

12/14

institutionalizes confrontation and conflict.

Such a result would have been a tragedy for all. In a sense, The United States is less vulnerable than most; an era of hostility and autarchy, and the outbreak of economic warfare between North and South, would injure others more than us, and it could hurt the poorest the most. But it would have damaged our well being, without a doubt, and could have become a permanent challenge to the commitment throughout the industrial democracies to liberal trade and the open financial system which have nurtured the prosperity of

all nations for a generation and a halt.

12/15

A series of international meetings in the last three years, however, arrested that determination. The World Food Conference was convened in Rome in 1974 at American initiative. At the meetings of the Seventh Special Session of the United Nations General Assembly in 1975, however,

gave rise to that process, and new possibilities for consultation began to emerge, at the United Nations Conference on Trade and Development at Nairobi "in the spring of 1976." Starting then at the North-South dialogue conducted at Paris in 1974 and early 1975, and

At each of these meetings, the United States

- II -

put forward a series of responsible proposals to meet
these challenges.

to the challenge of global poverty. These proposals

were international
represented a serious effort to redirect the relationship
efforts toward constructive, realistic, achievable
goals. of the North and the South into new, more productive
channels. We took the initiative:

to organize multilateral energies on the problem of raising
agricultural productivity in the developing countries;

-- to expand and liberalize the compensatory

12/16

financing facility of the International Monetary Fund
at a time of severe decline in commodity export earnings,
with the result that increased financial resources were
available to the developing countries when they needed
those resources most desperately. As of April of this
year, almost $3 billion was outstanding from the expanded
facility, the great bulk to the developing nations;

we took the initiative to increase

-- to increase the future overall levels of

official development assistance, generally:

trading

-- to draft new rules for access to markets
and supplies in the framework of the multilateral trade
negotiations in Geneva:

-- to expand access to eastern capital

- 12 -

(Y)

markets;

12/17

-- to accelerate the transfer of technology; and

-- to reach new international understandings
on the appropriate role and function of the
transnational corporation in the global development
process.

It is a matter of satisfaction to this nation
that progress has been made on a number of these
initiatives. The North-South dialogue, just recently
completed in Paris, was marked by advance on a number
of fronts, including the flows of official development
assistance.

However, the issue will not rest where it is.
The Paris dialogue is over; no new mechanism is proposed
to replace it. The agenda for the future relationship
between the North and the South is for the moment a
clean slate. We should approach that agenda in realistic
terms:

12/18

-- Too long we have tended to express our own

national interest in global development in terms of
quilt. Too many justifications for aid have been
constructed from the simple fact that we were rich and
they were poor. I do not deny the moral dimension of
poverty in the world, but I think it essential that
the American people understand that more is at stake
than ethics. It is in the most material sense in the
national interest of the United States to encourage
and develop nations into a cooperative world community,
and stimulate the development process throughout the
world. This is essential for the health and future potential of the world economy.

-- By the same token, we must rise above the
notion that all underdeveloped countries are alike and
that their interests are identical. A number of the
nations of the developing world have begun to assume
international significance: Brazil, Mexico, Taiwan,
Nigeria, for example. All are nations which, though
at the beginning of the industrial process, and though
still poor in per capita terms, nevertheless count on
the global scale of things. And there are also other
vital distinctions among the more than one hundred poorer
countries of the world which a realistic policy of

12/19

development must take into account, some developing
nations are energy sufficient; some are heavily dependent
on imported petroleum. Some are commodity producers
and exporters; some are not. A considerable number
have begun to manufacture and export textiles, shoes
and other light consumables into world markets; a large
number are still in the pre-industrial stage. Some
are able to finance their needs in private capital
markets; a large number cannot. These are differences
in the fundamental interests of the developing nations.
Our policies must take account of these differences.
A single program for all will not serve.

12/20

-- we should also avoid the assumption that
a modest level of economic generosity will buy political
cooperation. Politics and economics are a seamless
net, for developing countries as for us. It is an error
to assume that because they are poor and need our
assistance to meet their growth aspirations, they will
mortgage their political interests for our aid.

12/21

-- It has been suggested of late that our

development efforts should concentrate on meeting basic human needs -- of ameliorating the worst aspects of absolute poverty around the globe within our lifetimes.

I applaud the establishment of measurable human life benchmarks -- in terms of life expectancy, literacy, food consumption and mortality -- against which we can test our cooperative efforts to meet the challenge of

world poverty. But it is a fact that the momentum of growth is strong in some but not in all the countries; it is also a reality that some nations, and some sectors within nations, have done better than others, and that they will probably continue to outpace the average. There is much to be said for assisting growth in the countries of greater potential, so that they will be in a position to help others and that we can learn from their example. Our development objectives should be ambitious

12/22

We should not, however, confuse objectives with means. Though our aim may be to ameliorate world poverty, the means to that end may not necessarily be a sole to the root. There is a profound question whether, for example, direct international social transfers can give the same impulse to the expansion of national economies as other forms of assistance.

- 10 -

12/23

-- Finally, however important official aid may be, it is in the area of trade opportunities where the greatest hopes for development lie. And commodity policy is key.

There have, I need hardly tell this audience, been major changes in the commodity field in the last two years. In 1976, the debate reached a climax at the Nairobi meeting of UCTAD, where the bulk of the membership pushed for the ambitious membership support of the Integrated Commodity Program of the UCTAD Secretariat. We and other developed countries voted for the proposal, but in our case and several others, with important reservations as to buffer stocks, we did indicate, however, that we were prepared to consider specific buffer stock arrangements on their merits, and in addition, that we would cooperate further in discussions and participate in meetings to examine the common funding of such buffer stocks.

Since then, the new Administration has moved swiftly, as fresh waves of inflation and currency appreciation hit the same lines as frosted flowers by its predecessor. It has some so with it a the practical. The issue is not an ideological one

between the United States and other developed countries on one hand, and the mass of developing countries on the other. We have gone beyond the abstract question whether we can sign an article of faith in support of a ill-defined, awesomely described, single Common Fund. The Administration has demonstrated that the United States is prepared to examine specific commodity market proposals on their own merits. The question has descended from the summit of abstract principle to the plain of reality. In some cases, in fact, developing countries have found themselves more opposed to certain stocking proposals than the developed countries. It is now apparent that, of the almost three dozen commodities which the Secretariat of UNCTAD had said might be eligible for buffer stock arrangements, not more than five in the near future will actually produce a buffer stock agreement. By the same token, we have also developed a considerably prearranged position on the post-Kairobi issue of a funding interrelationship between possible commodity buffer stocks.

12/25

12/26

It is not certain how the commodity issue will

- 18 -

work out. But I think it is fair to say that, while
before Nairobi, it threatened to cause an ideological
confrontation between two camps, the Nairobi Conference,
enuing discussions
and what has ensues, have moved community policy issues
in a series of practical and realistic discussions of
the substantive merits of the various proposals.

This is beneficial, and
It is incortant, that this shall be so. For
the world could not have tolerated for much longer the
tactis of bloc confrontation by the developing countries
becoming a tradition in the early 1970's. The beligerent
ideological denunciations,
declaration of ideologies, the rising demands for
redistribution of
massive, automatic resource transfers, the efforts to
instill a sense of guilt in Africa by the South -- these
were only serving to outrage the very constituencies
in the developed world who were most interested in
speeding the development process. The tactics of blackmail were firmly resisted.
requirues that the developed and the development countries
work together in practical and realistic ways. Unless
I misperceive, we have begun to see. in these last
several years, new real possibilities for exactly that.

12/27

It is none too soon, for this nation and the
world have a vital interest in meeting the challenge
of poverty around the world.

The International Energy Crisis

Next, and even more evidently vital to our long
term economic and political interests, is the
international energy crisis. It is difficult to
overestimate the significance for this nation, and for
world economies, of the fourfold increase in the
international price of petroleum. That increase dampened
industrial activity throughout the industrial world,
put hundreds of thousands out of work here and fueled
the fires of inflation everywhere. We are only now
beginning to work our way out of the immediate effects;
the industrial countries are just beginning, and not
everywhere successfully, to achieve something of the
growth momentum of the 1960's, before the energy price
increase.

12/28

I have spoken elsewhere about the vital
importance of an effective domestic energy policy.

12/29

Iarlplaua the Administration's efforts to raise the
consciousness of the American people about the grave
circumstance in which we now find ourselves. I embrace
its proposals for a major effort to conserve energy;
but I have urged a more vigorous program of expanding
alternative sources of energy, in this nation and around
the world.

Here, I would like to add some further comment
about the international financial and economic
significance of the energy crisis.

The energy crisis, which began in 1973, created
a massive strain on the international system. When
prices first began to climb, most experts were concerned
that the facilities of financial intermediation might
not serve, ~~as~~ that the private credit machinery of the
industrial nations would not be able to recycle the
surpluses which OPEC nations were earning. These
predictions were wrong. The world financial system
worked remarkably well in the immediate aftermath of
the price increase. Furthermore, although total debt

12/30

of the developing world has increased alarmingly during the period, there is considerable evidence that only a few countries are now overextended. The international banking system, the first in short, has survived phase one of the OPEC oil crisis.

But this success has tended to mask the underlying difficulties.

12/31

We put together in the years just before the OPEC price rise a revolutionary change in the post-war economic system by abandoning the Bretton Woods fixed exchange rates and introducing floating rates. This made for an enormously important and flexible new element in the world's economic system. The system permits a form of automatic and measured adjustment to trade imbalances and avoids the need for official and sometimes radical disturbing exchange rates.

It was fortunate indeed that we moved when we did. For had we been saddled with fixed rates during the oil crisis, the strains would have been intolerable.

But the important contribution of the new

12/32

exchange practices during the financial crisis beginning
in 1973 must not obscure the fact that floating rates
are not enough to cope with the international financial
consequences of the energy crisis. Adjustment to the
new conditions of world finance cannot come through
exchange rate changes alone. The United States, long
an oil exporter, is now importing about a quarter of
its petroleum requirements. There is every likelihood
that, if current trends continue, both our relative
and our absolute imports will increase in the years
ahead. We face the prospect, in short, of $100 billion in
annual oil import bills, and a total import bill over
the next decade for oil somewhat equal to our present
annual GNP of $1 trillion plus.

In short, oil imports will actuate our import
accounts for years to come.

Furthermore, if present trends continue, oil
imports will prove relatively inelastic in the future
as they have in the past. That means that even though
relative prices for imported energy will go up in this

country, our demand will not decline correspondingly.
As a result, our international payments will be thrown
further out of balance. In short, price changes and
the terms of our trade will not alone automatically
lead to the kind of adjustment we must have to meet
the energy crisis.

We may not feel the financial strain as acutely
as others, since our oil instalances will probably
continue to be offset by other financial inflows. But
we will sense the effects, and our allies in Europe
and Japan will be subject to major pressures.

12/34

We met the financial effects of the energy crisis
over the past five years by virtue of the new exchange
floating and the fact that the public and private
institutions of international finance could Marshall
the resources to meet national payments difficulties.
But the radical shift in the international energy market,
the massive increases in oil imports into the United
States which are likely in the future if present trends
continue, and the resulting accumulation of industrial

12/35

country deficits may cause us all to the outer edge of
the effectiveness of the international monetary and
financial system. And make no mistake. This nation,
not Japan or Europe will be the primary cause of the
problem.

If we continue on this course -- of massive
imports into the United States at high
producing countries trade deficits -- we will be
driven, and we will drive others, to seek solutions
in other sectors of the international system. The
temptation and incentive to try to reduce
protectionist of all sorts will arise; there will be
new pressures to stop the import of shoes from Brazil,
handbags from Uruguay and textiles from Iran, and
our relations with these significant developing countries
will suffer, and their own prospects for economic advance
troubled. We will be increasingly threatened, by the
same token, to close off our purchases in the industrial
democracies. The effects on recovery in Britain, France,
Portugal and Italy could be disastrous for democracy
in Europe and Japan.

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In short, the oil crisis is challenging the
and our role of
United States to consummate global leadership and
sacrifice. Whether this nation can resolve itself to
accept an effective national energy policy is central
not only on our own economic future but to the health
of the entire world economy. We must, I repeat,
understand that an effective national energy policy
for the United States is vital not only to our own
national interest, but only
to the viability of the global
world economic system, because
the global balance of security has rested for thirty years.

12/37

This leads me
to the industrial democracies, which
must be at the center of our attentions in the years
immediately ahead.

The future of the world economy -- and
so the future of the world and our place in it -- will
turn on what happens in the industrial democracies.
Western Europe, North America and Japan produce some
two-thirds of all the world's goods and services. They

12/38

account for 75% of its trade. They are the world's bankers and the world's inventors.

The West has not been without its critics. There is a tradition on the left, in East Europe and in Africa, Asia and Latin America, of disparaging the West. There is also irony in the fact that they turn to the industrial democracies for the scientific knowledge and practical know-how, the techniques of management, planning and analysis, the systems of production and the marketing which modern economies demand.

And yet, successful and equated as the industrial democracies are, there are signs of deep stress.

For half a century, the nations of the West have been expanding public sector expenditures and enlarging social services. Almost everywhere, these expenditures have grown more rapidly than national production. This has been both the cause and effect of a revolution of rising expectations throughout the

12/39

led
These aspirations, in part, led to, and were dealt a severe blow by, the interruption of growth in the mid-seventies. Expansion came to a halt in country after country, in large part though not entirely because of the increase in imported energy costs of which I have spoken. To the extent that public sector expenditure increases were postponed, there was increased competition among interest groups intent on protecting their own claims. Though it was fortunate in the extreme that the financial mechanisms of the world could meet the demand, the fact that governments had to bridge the financial gap by borrowing incurred double difficulties -- domestically in fueling inflation, internationally by straining the creditworthiness of some. With the economic downturn, one after another of the major industrial powers of the world -- the United Kingdom, France, Portugal and Italy -- began to

12/40

- 2k -

MASSIVE
experience domestic strains and International balance
of payments crises.

12/41

The world learned from the experience of the
Depression of the 1930's that economic vitality
determines the health of political institutions. The
inflation and unemployment in the 1930's created
unprecedented tensions on the fabric of democracy in
western Europe, as well as the United States. The social
and political divisions which followed: radicalized
Germany, destroyed the moral fiber of France, traumatized
Britain and brought on a crisis in this nation.

In many countries,
Confidence was at an end. In many countries, people
were either prepared to accept defeat or driven to a
decisive war of annihilation.

12/42

not mean to suggest that the horizon is darker everywhere
than it has been before; the Charles in the Iberian
Peru

has

Greece

by their inability to find meaningful employment. There
is a widespread disillusionment, a loss of faith and
confidence -- a sense of the legitimacy of government
and authority has eroded.

As a result, we face the possibility of
political
t fundamental changes in the domestic structures of one
or more of the nations in Europe, and perhaps even in
Japan. This is a time of political crisis in the West

12/43

12/44

and this political crisis is a direct result of the
massive economic strains of the last half decade.

It serves no purpose, either here or in Europe,
to deny the significance of the changes in domestic
structures which threaten. A realignment of political
power in any of the significant nations of the west
which would allow Communists into executive power for
the first time since the war would constitute a watershed in
postwar history and a crisis in the relationship between
Fascist Germany and the United States.

It is true enough that Communism in the West
today is carried in a dazzling array of forms, ideologies,
claims, ideas and arguments. The capacity of Communists
to argue theology among themselves is a source of
constant wonderment for those who are products of western
political discourse. And, indeed, there have been
serious and legitimate examples of independence of the
Soviet Union by Western European Communist leaders of
late. But we must not, from this, conclude that they
have suddenly been transferred into Social Democrats.

12/45

- 31 -

Their own authoritarian organizational structure still demonstrates their rejection of democracy.

Their movement is outside the eastern tradition of western democracy. In the face of a century of denunciation of representative parliamentaryism, it is difficult to assume that they are not prepared to lay down the revolutionary role they have so long assigned themselves, and take on the responsibilities and constraints of other parties who have not been chosen, as they conceive they have, for the exalted role as catalysts of history.

12/46

They would represent a tragedy for the effect on Europe itself, would be watched by equally serious consequences for our own relations with Europe. Our continued capacity to cooperate with on defense matters and Europe in the search for solutions to the problems of world order would be severely compromised. It is sometimes said that if we can deal with Communists sharing cabinet responsibility in France, for example, in Peking and Moscow we can deal with Communists in Rome, Paris, Lisbon, or Madrid. But there is a monumental difference in power in Peking - for there is a difference between managing competition with adversaries, and continuing and strengthening an alliance and a comprehensive program of coordination with friends.

It is difficult to see how the American people can Congress would be willing to keep American power in Europe to defend some Communist countries - even if it would still be in our interest in crude balance of power terms.

12/47

- 32 -

Running full employment committees is not purposeful life.

If the cabinet of a major West European nation is opened to Communist leadership, our continued relationship in NATO would be at risk; nor can we expect to continue the parallelism, the close coincidence of views, the careful consultation in matters affecting Africa, the Middle East and South Asia, which has become such a central thread of our post-war international policy. International balance of power-

What is our course?

12/48

In the first instance, of course, the leaders of decision-makers in the West are now challenged to find solutions to the economic problems of our countries the precise domestic economic policy best suited to each country at this particular moment. The choice is not a simple, linear trade-off between inflation and unemployment. Rather, if the Summit Conferences of President Ford and Carter on a long-term growth strategy have done anything, they have reinforced the general understanding that there is no quick fix: the best prospects for expanding

Second, we must focus on each of the
interdependent industrial democracies on the intersect
point of the public and private sectors.

12/49

There is growing evidence that the failure of
the industrial countries to resume the growth momentum
of the 1960's is in major part due to the low level
of fixed investment. If the reason for this is lack
of confidence about the future environment for long-
term plant and equipment contracts, then there is
good reason to suggest that investment certainty must
rank high on the agenda of priorities for the
policymakers and voters throughout the rest. Inflation,
of course, is a major cause for the lack of confidence,
but the uncertainties on the political horizon are also
important. Political doubts, in other words, contribute
to investment constraints, which leads to unemployment,

12/50

Finally, however, the industrial democracies must reaffirm their cohesion and their common purpose. On this all other objectives depend.

world. Therefore our cohesion now is the marriage of convenience and ideals of interest and total purpose. We must continue that unity and enrich it, by a new dedication to the vitality of the Western tradition, and a new effort to insure the common prosperity.

12/51

12/52

Specifically: we must carry the practice of summit consultation on domestic economic policy a major step beyond where it is today. It is the challenge of statesmanship now to learn to harmonize the growth policies of the nations of the world: separate national fiscal and monetary decisions, no matter how sound, are no longer enough. Precisely because of the intense interdependence of our economies today, sound national policies can be frustrated by equally sound, though

12/53

launched by President Ford
continued by President Carter in
1975, 1976, and 1977 were
beginnings. They established the tradition of systematic
consultation at the economic summit. The challenge
now is to go beyond the form of practice of
consultation. The experience since London has

demonstrated that a rhetoric of mutual interest is not
enough. We have had to fall back on jargonizing each
other about growth policies. Such public jargonizing
has been less than totally effective; at times it has
even seemed to underline the inadequacy of our present
mechanisms. Fleas from one national capital to another
to alter or expand growth rates can ever be dangerous

and destabilizing for exchange and capital markets. If our

12/54

- 37 -

In short, the incentive in present circumstances to shift problems to our partners is overwhelming, as long as nations are unwilling to subject traditionally domestic economic decisions to international processes and constraints. Yet it may be that the very survival of democracy in Western Europe is at stake. To achieve real coordination, therefore, must be a paramount goal of our foreign policy, for we must do all we can to insure that the massive economic strengths of the nations of the West not work at cross purposes. In this moment of challenge, but instead reinforce each other.

12/55

The need now is for new boldness and a new creativity -- a confidence that the nations of the West are indeed masters of our corner of the world and that we have the wit, the wisdom and the willingness to meet the assaults of economic circumstance, there can be no higher imperative to our global interests than this in the months and years ahead.

12/56

We can take heart from the extraordinary creativity and productivity that are still the hallmark of our free societies. The nations of the Communist world and the developing world know that it is the West that is the vanguard of modernization. The unfettered talents of free peoples are the greatest engine of productivity known to human history. If our qualities of statesmanship can show the same capacity for innovation and dedication as our qualities of entrepreneurship, then the West can Marshall its energies and control its own destiny. I am confident that we can do so.

Thank you.

- 8 -

-- a billion of the world's people live in
absolute poverty;

-- there are more illiterates in the world today
than ever before;

-- the populations of the less developed nations
are increasing more rapidly than those of the industrial
countries, and the highest rates of fertility in the poor
countries are in poorest parts;

-- the developing countries of Africa use one
sixty-fifth as much energy per capita as we;

-- nearly a half billion people are hungry most
of the time.

- 12 -

William D. Rogers' Commodity Exchange Speech

There has been progress on a number of these initiatives in the last two years. The North-South dialogue in Paris, which came to an end in June, marked several important advances, including commitments to increase the flows of development assistance by the industrial countries of the world. However, the Paris dialogue was by no means a success in the terms which were originally proposed for it by the LDC's. There is dissent and disappointment in the developing world that more was not done. It is clear, in other words, that Paris did not produce a definitive blueprint for the pattern and programs of cooperation between the rich and the poor for the decade to come.

I would like to discuss here two aspects of those programs -- first, whether and to what degree we should focus on development effort on basic human needs, and second, how we should address the central issue of commodities.

-- to escalate the transfer of technology, and

-- to reach new international understandings as to the appropriate role and function of the transnational corporation in the global development process.

- 13 -

As to the first, it has been suggested lately that our development effort should concentrate on meeting basic human needs. This is usually explained as the reorientation of the development effort to the amelioration of the worst aspects of absolute poverty.

-- to make it our major effort objective in the words of the President, that we insure "the basic right of every human being to be free from poverty and hunger and disease and political repression."

To implement this objective, a large increase in aid has been proposed, with the understanding that *The* increase be targeted entirely to the poorest billion of the world's people, along with a redirection of a portion of our existing concessional assistance now aimed at the middle income countries.

I applaud the establishment of measurable human life bench marks of progress; I agree that the countries of the developed world should make it their common national objective to help raise life expectancy, expand literacy, increase the consumption of basic foods and improve the hopes of life of the newborn of the world. Such defined goals can provide firm and understandable measures against which we can test our cooperative efforts to meet the challenge of world poverty in the years ahead. Our development objectives should be both ambitious and tangible.

- 14 -

We should not, however, mix objectives and means.
Though our aim may be to ameliorate world poverty, the BEST
means to that end is not a direct dole to the poorest.
There is little likelihood that international social
transfers give the same impulse to the expansion of
national economies as other forms of assistance. It
is a fact that the momentum of growth is strong in
some but not in all LDC's; it is also a reality that
some nations, and some sectors within nations, have
done better than others, and that they will probably
continue to outpace the average. Basic human needs
must, of course, be met. Man is the measure of all we
do, in the end. But basic human needs must be met, first
and foremost, by the increase in domestic production --
of food, of housing, of medical services with each
nation. The role and purpose of external assistance,
indeed the role and purpose of the full range of the
development effort in trade, technology and international
finance as well as aid, must be to quicken the process of
change and growth within the developing countries so that
they are better able to meet the aspirations of their
citizens.

- 15 -

At the present time, three fourths of the current official development assistance that flows from the donors go to the middle income countries -- countries, that is, whose per capita incomes exceed $200 per year. It is these countries, by and large, which show the greatest promise for rapid growth in the near term future.

Congress, however, mandated in the 1975 International Development and Food Assistance Act that no more than thirty percent of our concessional food aid could be directed to nationwide other than those most seriously affected -- those, that is, with incomes of more than $200. There is little doubt that this structure resulted in the diversion of development resources away from projects and programs which could use them most efficiently. It is a straitjacket, not a road map.

Furthermore, to allocate our direct and multilateral aid to meet human deprivation ignores the significance of our aid programs to national strategic objectives. Today, a large proportion of each year's appropriations go to Israel and the Middle East. The previous administration proposed, and the present administration is supporting, a major new $1 billion program for southern Africa, to ease the process to majority rule in Rhodesia and assist the neighboring nations whose development aspirations have been disappointed by the continuing conflict throughout the region.

- 16 -

The recent Panama treaties were accompanied by proposals
for new assistance programs to that nation. In these and
other nations, we have particular strategic concerns;
their growth and development is especially important
to our international policy for legitimate moral
reasons above and beyond our concern with global
deprivation. To concentrate our assistance on the
poorest nations, and the poorest within nations, as
the Congress has mandated, is to ignore these particular
interests, and isolate the development effort from our
overall foreign policy.

We have learned from historic experience that a
foreign policy, to be successful, must be coherent. The
mangers of our international relations today must bring
to their task a comprehensive, strategic view of
objectives and means, and carry with them the
authority and power to bring national purposes and
the political, economic and military instruments to
achieve those purposes into balance. We should
consider carefully whether a concentration of our
development assistance efforts on human deprivation,
to the exclusion of other goals, which is the essence
of what Congress is beginning to exact, truly serves
the national interest.

(Return to Page 16 of earlier draft)

(Insert into the middle of page 25)

We must also insure that the institutions of
international financial are adequate to the challenges *ahead*,
*abroad*, and that the sources of finance available to
them are equal to the needs which can be anticipated
in the future. It is clear that there will be payments
imbalances for the major trading nations for some years
to come. This means that the demand for international
liquidity, which is already high, will continue strong,
*limits to the extent to which the prudential*
and probably increase. There are *distinct institutions* -
banks *can undertake the balance of payments finance*;
there will be an inevitable expansion of public sources
if we are to meet the needs *of which will emerge in the
future*.

The recently arranged Witteveen Facility in the
International Monetary Fund is an important step in that
direction. The increase in the Fund's resources through
the next quota increase will help, as well. But there
is a question whether these measures will be enough.

Last year, the Administration proposed a new
source of finance, to be administered through the OECD,
and on a scale compatible with the possible financing
needs of the major industrial nations. The proposal

was put forward, not only because we anticipated large
demands for new balance of payments financing by these
nations, but also because we recognized that the OPEC
nations, which had built up substantial reserves through
deposits in Western banks, had not yet, but might, attempt
somehow to use those reserves strategically, and for
broader political purposes. It is true, of course,
that conditions have changed since that proposal was
put forward; the sterling crisis is behind us, the
balance of payments of France and Italy are better than
they were a year ago, by far. Nevertheless, it seems to
me, we must look far down the road. If an OECD
administered facility is no longer appropriate, then
some other additional source of financing must be put
together -- a facility which will not only have the
advantage which the IMF has of reinforcing incentives
to effective borrowing policy but which as well could
meet and adjust to a major change in the policy of
managing OPEC country surpluses or other like
distabilization of the existing world financial system.

ARNOLD & PORTER

September 21, 1977

MEMORANDUM

TO: Henry A. Kissinger

FROM: William D. Rogers

SUBJECT: The Commodity Exchange Address Statement

I have talked with Suzanne, and informed
myself of the circumstances of the invitation
that what I gave you is not the right speech for
the occasion.

-- The group has been advised that you would
not have a prepared text.

-- They are expecting something 15 to 20
minutes long, followed by questions. What I put
together is too big.

-- Those who are attending the dinner are
commodity traders, a genus somewhat different from
the genus investment banker, the genus scholar or
the genus corporate president.

Attachment

Talking Points
Commodity Exchange

Introduction

-- I am delighted to be here

-- Finally, since you have the choice, I would
prefer not to give a major address, back to back with
what you did for Salomon. Two reasons. First, I
think that two comprehensive addresses in one week
might overdo it. Second, Salomon might take it that
the importance of his evening had been diluted.

I suggest you work from talking points. I
have prepared some on a narrower canvas -- North-South
relations. They are attached.

Introduction

— I am delighted to be here

-- Frankly, when you asked me to come, I asked myself why. It was apparent that you did not want to hear from me about shorting silver. I concluded that it may have had something to do with the fact that I am one of the few people to have served eight years in high position in Washington who is not now in jail, running for elective office again or writing for TV serials.

Continuity in Foreign Relations

-- It is difficult for me to say this, but in spite of my notorious humility, you should not over-estimate the importance of what happened last January 20th to our foreign relations.

-- There is and must be a basic continuity to our policy. We do not go back to the drawing board every year divisible by four, no matter what the Constitution may imply. There are realities in the world in which we live, realities which compel us to a permanent policy, realities which command the attention and respect of the managers of our foreign relations no matter what their political party.

- 3 -

-- It is essential that we avoid the impression
abroad that our international posture and position are
a function of personality.

North-South Relations

It is within this framework of policy continuity
that this nation has turned its attention to the issue
of North-South Relations within recent years.

-- I need not stress to this audience how
significant are our interests in the developing
countries of this world.

-- We shall depend on those nations for a major
share of our commodity import needs in the years to
come. Leaving petroleum aside, we will be dependent
on the LDC's for something in the years ahead.

-- This means, as I need not tell you, that
this nation has a vital interest in the peace, security
and freedom of Africa, Asia and Latin America.

-- The question of the organization of commodity
markets took on further importance at the Nairobi
meeting of the UNCTAD in April of 1976. At that
time, the UNCTAD Secretariat proposals for Integrated
Commodity Program became a center of concern. It was
our position that we would be prepared to examine
pragmatically proposals for the organization of
commodity markets, if they were aimed at and could
effectively ameliorate cyclical swings of prices

- 4 -

and production, but that we would not favor commodity
programs which were intended to alter or distort
long-term market trends.

-- Since then, the new administration has
moved forward through the CIEC meetings in Paris and
in the various meetings on specific commodities, with
commendable pragmatism.

-- I believe that it continues to be in the US
interest to indicate that we are willing to examine
proposals, including proposals for buffer stocking,
though I believe that there will be very few such
proposals which will prove to be practical. I also
believe that we should continue to examine notions
for the cooperative funding of stocks. I say this,
however, not because I believe that the issue is one
which is to be settled by resort to doctrine or
ideology, but in terms of the practical and
realistic world of commodity trading in which all of
you live, and in recognition of the fact that
improvements in the structure and behavior of the
production, pricing and marketing of raw materials
is essential to the long term interests of all the
nations of the world.

- 5 -

(N)

## Our Development Strategy

- Trade, including commodity and raw materials trading, as well as manufacturers, is the first and most important avenue to development for the LDC's. Aid, however, will play an important role for many years to come.

- Because of the vital importance of the developing nations of Latin America, Africa and Asia to our own national interests, I believe we should speed the development process by increasing our assistance programs.

- However, the Congress and a body of scholarly opinion has recently proposed that we reorient our assistance efforts to direct them at the poorest of the poor.

- Congress has mandated this priority, both within countries and among countries.

- I am persuaded that, beyond the basic minimum of humanitarian considerations, massive charity is not the answer to world poverty.

- It is hardly any secret to this audience that there is no substitute for production.

- 6 -

-- In my judgment, foreign assistance has an important role to play, in subsidizing and supporting those national efforts directed at expanding each nation's capacity to take advantage of the real opportunities for growth which lie before it.

-- As in all foreign policy, so in our development strategy we must continue to maintain an equilibrium between the moral and practical, between our ethical goals and what we can achieve. But to direct our assistance at those sectors where it can be efficiently employed to expand growth is not to turn our backs on morality. The larger moral dimension of development is that the more quickly we can enable people to lift themselves from poverty and the more opportunities we can create for mankind the greater the moral sum of our accomplishment.

## Panama

I turn now to a third element of our current policy toward the developing countries, and indeed to world order in the largest sense -- the Panama question.

- 7 -

-- I have supported the new treaties not primarily because of our relations with Panama but because endorsement of the new treaty will, in the eyes of the Latin Americans, be taken as the renunciation by us of power in our North-South dealings.

-- It will forestall the organizing of all of the governments of Latin America against the maintenance of the present relationship, and it will open a new chapter of opportunity in our relations with this Hemisphere.

## Conclusion

-- Our relations with the developing world of Africa, Latin America and Asia in the years ahead will not be easy. There is a residue of resentment for supposed past injustices on their side. Political and economic uncertainties abound in Southern Africa, in the Subcontinent, and in major parts of Latin America.

-- Nor is the need for order and progress in the poorest regions of the world served when the Soviets deploy satellite forces as surrogate policemen. Our relations with the Soviet Union cannot be built on the acceptance of one or the other that one or the other cannot take unilateral advantage.

- 8 -

-- I am persuaded, however, that we can, with
statemanship and vision construct a world order in
which the developing countries have the opportunity
to play the role to which they aspire, and to
achieve the levels of growth and prosperity which
is their right. It is in the vital interests of all
the nations of the world that we do so.