THE SECRETARY OF STATE
WASHINGTON

December 30, 1973

Dear Bill:

I apologize for such a tardy reply. It was very
good of you to write me on my nomination. Your
support and good wishes mean a great deal to me,
as they always have.

With my warmest regards to you and your family.

Mr. William Bacherman,
- 16716 Shea Lane,
Gaithersburg, Maryland.

[LC]

Dear Sir,

My family and I are thrilled with your nomination. Continued success and more important, good health for many years to come. Take good care of yourself.

May this accomplishment
lead to even greater success.

CBS

CBS Inc., 51 West 52 Street
New York, New York 10019
(212) 975-5152
John D. Backe, President

October 28, 1976

Dear Mr. Secretary:

We were deeply appreciative of your appearance on FACE THE NATION Sunday, October 24, and so was the national audience of the CBS Television Network and the CBS Radio Network. Though we won't have precise audience estimates for a week or more, the indications are that more than four million people watched or listened as you discussed United States foreign policy.

It occurred to us that though the live and unrehearsed format of FACE THE NATION makes it a particularly valuable medium of information, it also prevented you from listening to your own remarks. So we asked our engineers to prepare this tape recording of your interview for your library. It can be played on any tape cassette player. We hope you will accept it as a small reminder of our gratitude for your appearance.

With all good wishes.

[LC]

MRS. ROBERT LOW BACON
1801 F STREET, N. W.
WASHINGTON, D. C. 20006

19 June 1975

The Honorable
The Secretary of State
U.S. Department of State
Washington, D.C. 20520

Dear Mr. Secretary:

I am wondering if you
and Mrs. Kissinger would like to
join the friends of the Ortonas in
presenting them with a parting
gift, at $30 per couple, which will
be presented to them here at 5:00 pm
on the 30th of June.

Knowing that Mrs. Ortona
was looking for a cherry corner cup-
board we have been lucky in finding
a museum piece which we can all be
proud of as representing the esteem
of their American friends.

Hoping to see you then,

8

Pt II—Tues., Sept. 21, 1976

Los Angeles Times

# NATO Marines Land in Norway
Start Games; Russ Snub Invitati

BY DON COOK
Times Staff Writer

PARIS—Thousands of marines stormed ashore Monday on the central coast of Norway in an exercise demonstrating the military prowess of the North Atlantic Treaty Organization. It also showed the Soviet Union's continued resistance to a key element of last year's Helsinki accords on European security.

The Kremlin had been invited to send observers to the war games under terms of the Helsinki agreements, but it declined the invitation and criticized the exercise—code named Teamwork '76—as "aggressive" and "hostile to the Soviet Union and the other European Socialist Countries."

In this season of military maneuvers in Europe—by both NATO and Warsaw Pact powers—the Soviet Union has been consistent in ignoring one of the more hopeful provisions of the Helsinki pact—the invitation of observers from one side to view exercises by the other, and prior notification of the games.

Instead of sending observers, the Russians are sticking to their traditional method of observing NATO forces in action: At least six Soviet intelligence gathering vessels, plus

In accordance with the Helsinki agreements, signed a little over a year ago, the Norwegian government sent out advance notice of the maneuver on its territory, and invitations to other countries to send official military observers. Of the Warsaw Pact countries, Russia and Poland were invited, along with three neutral nations—Finland, Sweden and Austria. The other invitations went to NATO countries.

Last week, on the eve of the deadline for acceptance, Moscow sent an abrupt reply to Oslo, simply declining the invitation without any explanation. Poland, waiting for the Soviet lead, did not reply at all.

The Russians previously declined a West German invitation to send observers to three different war exercises taking place earlier this month in northern, central and southern Germany. In this case, the Russians used the excuse that they did not yet have a military attache at their embassy in Bonn, and therefore had nobody to send. Last year, they had simply ignored a similar West German invitation, a month after signing the Helsinki agreements.

NATO diplomats in Brussels agree that the obvious reason behind the Soviet refusal to send ob-

other participating military maneuver in the Baltic than 25,000 troops, has kilometers of the border territory state.

Nobody can force live up to the Helsinki agreements, nor can they be nored or selectively both of these provisions of 1976, they notified each other. Not all the countries the Helsinki accord maneuver in southern near Turkey's eastern border, invited the Turks to vers, which they did.

Then in June of this year again gave selective a military maneuveringgrad, near the Fırat and invited Norway, Denmark, Poland and Eastern Europe. They accepted and reported they were kept under escort throughout.

The spent four days in that region of the Baltic. No fact were allowed the maneuver itself for more than four hours. During that time, they moved from one facility to another, were allowed to work with the participating units, and saw no use in use.

NNNN

095827 MAYD
248346 STATE URMD
248346 STATE UR

ZCZC YWB433 RMF5608 GTY905 DP8911G037
URWN CO DPBN 037
BONN/TLX 22 27 1343

HERRN
AUSSENMINISTER HENRY KISSINGER
STATE DEPARTMENT
WASHINGTON/D.C.

ALLE GUTEN WUENSCHE VOR ALLEN DINGEN GESUNDHEIT
ICH MACHE MAL ETWAS PAUSE
HERZLICH EGON BAHR

Empaasay of the Netherlands.
Age R. Tuumenome Bakker,
His Excellency

Persoonal Assistant
Suzanne B. McFarlane

Sincerely,

I hope a very much to be able to see it.
between our two countries, and Secretary Klaaijger
understands the strength and depth of the historic ties
from her private collection. It is an exhibition which
Majestät the Queen has made available one of the drawings
centennial than this most important exhibit to which her
Nothing could be a more fitting opearance of our Bl-
cription "The Dutch Republic in the Days of John Adams."
to him the catalogue of the splendid Netherlanda, ex-
hibits very sincere appreciation of your kindness in sending
Secretary Klaaijger has asked me to express

Dear Mr. Ampasaasdor:

October 22, 1976

ONE WILLIAM STREET
NEW YORK

May 3, 1974

Dear Henry:

I returned last night from a protracted overseas trip that included a few days in the Middle East. The impressions I gained there were encouraging -- the feeling that you had persuaded Sadat, and even Assad, to make such a commitment to the negotiating process that neither could easily turn back. If you can maintain the momentum, while engaging the Russians to the point of neutralizing them, you may well bring off a lasting settlement -- for which even I will say nice things about you.

Meanwhile, it is essential that a bloody-minded Congress be persuaded to provide the $250 million requested for reopening and developing the Canal and the surrounding area.

I feel strongly about this, and if, at any point, you would deem it useful, I would be glad to spend a few days on the Hill.

I await your command if needed.

Your obedient servant,
George W. Ball

The Honorable
Henry A. Kissinger
Secretary of State
Department of State
Washington, D.C. 20520

June 20, 1974

Dear George:

Thank you for your good letter of May 3. I regret that my recent travels have delayed this response but want you to know how much I appreciate your views on the importance of reopening and developing the Suez Canal.

I also appreciate your offer to spend a few days on the Hill. Your efforts could be most helpful.

I, of course, leave it to you to decide on whom you may wish to call. On our part, we stand ready to provide background or offer suggestions which could be helpful to you. You may wish to get in touch with Larry Eagleburger who will be happy to work with you on this matter.

The Honorable
George W. Ball,
One William Street,
New York, New York.

When Bankers Trust first established its principal branch in London in 1924 the Western nations were facing complex economic and financial problems, and, with unerring precision, were making every possible mistake. Resolutely turning their backs on reality, they rejected the advice of a remarkable man who had foretold the future with uncanny perception. It had been only five years since John Maynard Keynes had published his brilliant essay on "The Economic Consequences of the Peace", a work that holds a pre-eminent place among history's most prophetic documents. Keynes saw not only that what Winston Churchill described as the "malignant and silly reparations" imposed on Germany by the Versailles Treaty would lead to defaults and a German financial breakdown but that financial chaos in Germany could set in train forces that might bring about a second stage of European war. Thus, he wrote "If we aim deliberately at the improvement of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final civil war between the forces of reaction and the despairing convulsions of revolution, before which the horrors of the late German war will fade into nothing, and which will destroy, whoever is victor, the civilization and progress of our generation."

A half century later these words are still poignant with the regret of what might have been. Harsh reparations, imposed largely at French insistence, tore apart the social fabric of Germany, destroying the currency and with it the German middle class, while a half dozen years later the Depression set the stage for disaster. By 1932 six million Germans -- four out of ten German workers -- were unemployed, and in the July elections that year the Nazi Party gained its electoral highpoint. A few months later Hitler achieved power through an accumulation of stupidities -- the inept intrigue of the

- 2 -

Nationalist Party, the senility of Hindenburg, the divisions among
democrats, and the cynisism of the Communists. Let us never
forget that the Nazis would today occupy only an obscene footnote
in history had the world economy not been a ghastly mess and the
German middle class, haunted by the nightmare of another 1923,
frightened and rattled. More than anything else it was bad economics
that produced Hitler and the Second World War -- and the leading
nations of the West, including my own country, the United States,
should never forget their share of responsibility for that egregious folly.
Not only did our leaders talk nonsense, but worse than that, we
Americans compounded the damage done by reparations which drained
Germany of capital by insisting on trying to take that capital in
payment of war debts with interest. And while we were accumulating
most of the world's gold in a hole in the ground at Fort Knox, we
imposed grotesquely high tariffs that effectively precluded Europe
from earning the foreign exchange required to maintain those payments.

I mention all this because the point that Western statesmen
persistently misunderstood was not only the significance of the capital
flows created by reparations and war debts but what Keynes called the
"transfer problem" -- which is what we today, in a different context,
glibly refer to as the problem of "recycling". Moreover, what the
peacemakers of 1919 utterly failed to realize was that the most vital
questions confronting them were, in Keynes words, "not political
or territorial, but financial and economic".

Prophets are notoriously unpopular, particularly if events prove
them right. Yet, though Keynes was shunned and castigated for his
somber advice, the world finally came to accept his wisdom. America
did not finance the allied effort in the Second World War by war debts
but by Lend-Lease, and, faced with a capital-depleted Europe in the

- 3 -

late 1940's, we did not build tariff walls against European produce
but recycled funds into that capital-anemic continent through the
Marshall Plan -- an act of statesmanship to which we all owe much
of the prosperity we have enjoyed during these past three decades.

Keynes, thou should'st be living at this hour; the world has
need of thee !

For today we are confronted by capital flows of greater magnitude
and almost certainly of greater duration than those experienced after
either of the great world wars. The question we now face is whether
we will deal with that formidable problem with the wisdom of the late
1940s or the fatuity of the 1920s. History has shown again and again
that nations and peoples have short attention spans, and that wisdom
once gained is frequently forgotten. So you will forgive my anxious
comments this morning if I question whether either the financial
or -- even more important -- the potential political significance of
the massive capital flows just now getting under way is fully understood
in responsible circles in the capitals of the major powers, including
Washington, in view of the fact that responses so far have been little
more than primitive nationalistic reflexes.

Yet these capital flows threaten the financial life of great states
such as Italy, inviting political changes that may result in a drastic
shift of power from left to right, or vice versa. They exacerbate already
established inflationary forces, weaken the world banking and financial
structure, and, hence, conjure up the spectre of worldwide depression.
They are depressing further the standard of living of nations already
desperately poor.

- 4 -

The economic consequences of the current high oil prices illustrate a phenomenon all too frequently ignored -- the phenomenon of time-lags. The primary reason the four-fold increase in oil prices threatens such disasters is not so much that it has occurred but that it has occurred abruptly. Phased over five or ten years, such a drastic price change could be absorbed with only minor dislocations. Toward the end of that period, progress in the development of alternative sources of energy would tend to exercise a restraint on oil prices. Nations would have time to change their habits of energy utilisation progressively adopting conservation policies that would either reduce demand, or at least, slow, or stop, its rate of increase. Improved financial facilities could be gradually perfected to recycle the excess funds accumulating in the oil-producing countries, while the nations of the Middle East, together with other oil-producing areas of the world, could increase their capacity to "absorb" revenue as they developed their infrastructure and established a broader base for industrial and agricultural expansion. Finally, the oil-producing countries could overcome the deficiency that today most severely inhibits them from making intermediate - and long-term investments - the lack of an adequate number of personnel trained in complex investment decisions and competent to manage capital funds of tremendous magnitude. As a new generation acquired the requisite skill in those arts, the outflow of funds into investments all over the world would greatly increase.

In economic matters time-lags work both advantageously and disadvantageously. In seeking to speed or slow economic growth, dampen inflationary forces, or accelerate recovery, the monetary and fiscal instruments available to governments -- particularly in a vast economy such as that of the United States -- take time to operate.

- 5 -

To use these instruments effectively, political leaders must be ready and able to persuade the people to accept protracted periods of discomfort while remedies are being applied -- and that is anything but easy, especially in nations just growing accustomed to relative affluence. All too often, public impatience triggers reactions that neutralise economic medicine. The familiar simile of a giant ocean liner incapable of precise navigation in a narrow channel illustrates the problem.

In our present predicament, the abruptness with which oil prices increased has, therefore, been the principal source of difficulty. Yet that is now an economic and political fact the consuming countries have little ability to control. No matter how much wishful thinking we may engage in, the only prudent working assumption is that current high prices will continue and, as we feel the cumulative impact of a massive one-way flow of capital, the major consuming nations will be faced with a hard choice. Either we will respond to an enormous challenge with initiatives of comparable scale and scope or we will inevitably fall back into the old defensive, restrictive, nationalistic habits that could Balkanize our economies and precipitate a tragic depression.

What I now detect is not encouraging. Instead of facing our difficulties frontally, there is a disturbing tendency to echo the fatuous confidence of Mr. Macawber that "something will turn up". Since the financial projections carry such baleful implications many of us comfort ourselves by concluding that they must be wrong -- such curves never continue as predicted. Since no one can foresee clearly how the world can extricate itself from its present predicament, we

- 6 -

fall back on the hope that circumstances will magically change.
The OPEC countries will lower the price of oil because they must.
Or the problem of recycling has been gravely exaggerated; in fact,
the commercial banking system can handle it without undue strain.
Or circumstances will persuade the oil-producing countries to
make large-scale investments in countries experiencing the most
severe balance of payments deficits.

So far, the response of the governments of the oil-consuming
countries has been almost exclusively at the national level. The
United States Treasury, for example, has arranged to sell certain
oil-producing countries a special issue of Treasury bills, and other
governments appear to be following similar courses.

Such bilateral dealings ignore and even complicate the solution
to long-range problems. If the United States concentrates on
channeling excess OPEC funds into its own treasury it will be faced
with a responsibility for recycling far greater than it is now ready
to assume. To the extent OPEC funds are attracted to the United
States -- and no adequate multilateral mechanisms are established --
we will have to become an international lender on a vast scale
providing credits to poor countries at concessionary rates. Today
there is a great deal of talk that the bulk of OPEC funds may
ultimately come to rest as deposits in American banks and investments
in American real estate, in the ownership of at least minority interests
in American companies, and in large portfolio investments in American
equities. Yet already we hear cries of outrage at the exaggerated
fear that control of large sectors of American industry may fall into
OPEC hands. That is atavistic frog-croaking reminiscent of America's
isolationist past when our political leadership erected high tariff
walls that effectively prevented the payment of the First World War
debts on which they were vehemently insisting.

- 7 -

To be sure, long-term OPEC investment in American industry will not solve the recycling problem. The funds will still have to be made available through something other than commercial channels to countries facing large balance of payments deficits. But it will certainly be far healthier for the American financial structure that funds be invested long-term than merely swell short-term deposits in American banks. In fact-- if we do not frustrate the trend by obstructionist actions -- a substantial flow of OPEC capital into new investment in American enterprises could materially ease the equity needs of American industry at a time when our capital markets are unable to satisfy them.

But that still leaves the need to recycle funds to the countries suffering heavy deficits, and if America is unprepared to assume the major responsibility for that task -- which will involve providing a vast volume of funds at concessionary rates -- we shall have to show far more imagination and initiative than has so far been evident. Up to this point the consuming nations are still temporising -- devising short-term palliatives and neglecting longer-term solutions. Central bankers are discussing ways and means by which they can shore up the private commercial banking system by becoming lenders of last resort for banks otherwise vulnerable to the withdrawal of large deposits from the OPEC countries. There is talk of relaxing regulations and rules and loosening up rediscount procedures so as to encourage commercial banks to extend credit to countries with balance of payments deficits even though such countries would, by normal criteria, be regarded as doubtful risks.

All this, of course, is useful but it does not address the longer-term problem, and, it would, in my view, be questionable wisdom to encourage commercial banks to make bad loans in the hope that they could thus finance the balance of payments deficits of

- 8 -

countries in serious trouble. Not only would that weaken the banking system but such loans would require such high interest rates as to impose an impossible burden of debt service on the borrowing countries. No doubt, until a better mechanism is devised, the few Western countries whose balance of payments are still manageable will have to carry a major share of responsibility through whatever arrangements can be improvised, although we shall have to consider carefully what that means in practical terms. But in my view, bilateral improvisations cannot provide solutions of adequate depth and breadth.

How can the problem be solved by the oil-consuming nations, even if they act together without undue damage to the world financial structure and serious danger of social, economic and even political repercussions? By themselves the oil-consuming countries can never do more than achieve an immediate short-term amelioration of prevailing pressures -- they can find only bridge solutions. We will be able to work out a long-term solution for what is a long-term problem only when we seriously seek to identify the major desiderata of the OPEC countries, establish our common interest with them and theirs with us in preserving a healthy international financial structure, and then by combined effort, develop cooperative mechanisms.

So far two prevailing attitudes have inhibited such an approach. First, Western governments -- and particularly my own government -- have rejected a multilateral approach on tactical grounds. They have regarded it as unwise to try to deal *en masse* with the OPEC countries, and particularly the Arab nations, since they have feared that the more moderate governments would be pushed toward harder positions

-9-

by their more activist neighbours. Certainly this has been the
underlying tactical assumption of the American government in
seeking a solution of the Arab-Israeli conflict. Yet such a policy
will no longer be available even in that context. Though it may
have worked effectively in negotiating military disengagements, our
negotiators must now come to grips with hard substantive issues
such as Jerusalem and the status of the Palestinian people which
engage the interests of all Arab states. But if bilateral arrangements
cannot resolve these major political problems neither can the
financial problems resulting from high oil prices be settled
through bilateral discussions or bilateral institutions.

A second argument sometimes put forward for rejecting a
common approach has been that we should not try to meet the OPEC
countries on their own terms. They deserve to be paid off in the
inflated currencies they are helping to produce. That is not so much
a reasoned view as an emotional reaction; it springs from resentment
that the West is being held up -- "blackmailed" or "held to ransom"
are the current phrases -- and the belief that the industrialised
countries have the clout to force them to more tractable positions
if they would only use it. Just what that clout consists of is never
fully disclosed. Certainly it is not enough to suggest that the goal
could be achieved by economic sanctions or the denial of military
hardware; that would give the Soviet Union an unparalleled chance
to extend its power and influence. Nor can we exploit the fear of
the USSR on the part of certain rich but military weak oil-producing
states since that would only invite counter-pressures from neighbouring
OPEC countries. Thus, when pressed, the advocates of a solution
through pressure fall back on vague mutterings about possible military
adventure which means that the United States (and no one else) may
in their view ultimately have to launch some kind of undefined expedition
to secure the oil.

- 10 -

What an archaic fantasy! This, after all, is no longer the
nineteenth century. It is a period of nuclear parity and strategic
stalemate. There is a powerful Soviet fleet in the Mediterranean,
Soviet missiles targeted on major Western capitals, and a compelling
Soviet interest in the Middle East. There is, moreover, the absolute
assurance that any military move by one superpower in that area
would be countered by the other, as was demonstrated last October
at the time of the American worldwide military alert. So let there
be no mistake: No responsible government in Washington will turn
the oil-producing areas of the Middle East into a nuclear Armageddon.

Why then have we not approached the problem with the kind of
spacious imagination that was displayed in the postwar years?
Perhaps it is because in America our self-confidence has been too
badly shaken by the divisive effects of the Vietnam adventure and the
searing aftermath of Watergate; perhaps because our most able
and imaginative practitioners of foreign policy are trained in the
traditional arts of diplomacy and illiterate in financial and economic
matters.

In my view we will never find a satisfactory long-term solution
to the problem of rechannelling capital flows except by the collective
endeavour of all nations having a major stake in world financial
stability. What we must do is to seek, by a combined effort of
oil-producing and oil-consuming nations, to buy time required for
the world to adjust to the increased cost of energy.

That the OPEC countries have a vital stake in preserving a healthy
international financial environment and preventing a world depression
goes without saying. Moreover they know it. We do them a grave

- 11 -

injustice by assuming *a priori* that because they are unprepared
to reduce oil prices they would be unwilling to join in a cooperative
effort to find a long-term solution to the havoc such prices cause.
From my conversations in the Middle East I am convinced that they
would respond to a well-considered approach.

The problem is to design that approach. Obviously there are
several possibilities, but whatever course is followed, certain
political, economic and historical factors must be considered. The
most obvious way to provide an international mechanism for recycling
excess funds would be through the Bretton Woods institutions -- the
International Bank and the International Monetary Fund, But, since,
under the voting structure of these institutions, the Western
industrialised countries have clear control, the oil-producing
countries would presumably be unwilling to entrust a large portion
of their funds to an institution in which their own influence is
subordinate. They have already shown their lack of enthusiasm for
Mr. Witteveen's initiative.

It seems sensible to consider, therefore, the creation of a new
institution which might be established alongside the Bank and Fund
and for the time being operated by seconded personnel. The
subscribed capital, as well as the voting rights, would be equally
divided between two groups. The OPEC nations would hold a fifty
percent interest with the remaining fifty percent divided among seven
or eight leading non-Communist industrial powers. It should be left
to the OPEC nations themselves to determine the appropriate
distribution of capital subscriptions and voting rights among their
own members. The need for accountability to the less developed
countries, not members of OPEC, might be met through systematic

- 12 -

reporting to, and consultation with, the appropriate arm of the
International Monetary Fund. In other words, the relation of the
new institution to the International Bank and Fund would be roughly
similar to the relation of the Bank and Fund to the United Nations.

It is an essential feature of any such proposal that the OPEC
nations play a co-equal role in the design and construction of an
institution to which, it is hoped, they might entrust a reasonable
part of their excess capital -- an institution that would belong to
them as much as to the Western nations and Japan.

As I envisage it, the international institution -- which we
might call the Fund for Capital Recycling -- would issue some form
of debt instrument designed jointly with the oil-producing countries
to try to meet their requirements. One suggestion made to me by a
thoughtful and experienced financial expert is that these instruments
might be patterned after British Consols -- a kind of perpetual
debenture -- since that would relieve the institution of meeting principal
maturities and amortization -- and it seems at least possible that this
might be acceptable to the oil-producing nations. Their principal
concern is that, after the exhaustion of their oil reserves, they will
need alternative sources of revenue, and Consols issued by an inter-
national institution might well meet that need. Such Consols would
be held by oil-producing nations so long as their oil revenues
substantially exceeded their absorptive capacity. As that capacity
increased with the development of more adequate infrastructure and as
they began to develop greater confidence in their own ability to make
long-term investment decisions, they might progressively dispose
of those Consols by selling them to other central banks.

- 13 -

The equation oil-producing nations must solve is complex, with several variables. How high can oil prices be maintained without unduly hastening the development of alternative and competing energy sources? At what level should they maintain production so as to secure an optimum price while still assuring that their oil resources will enjoy the longest practicable productive life? Is keeping oil in the ground the best way to assure against inflation on the assumption that oil prices will rise with a general world increase in commodity prices? These are some of the questions preoccupying the OPEC governments and if we are to persuade them to cooperate in recycling their excess funds, we must provide a debt instrument sufficiently attractive for that purpose. Since several of the OPEC nations have, during the past two or three years, suffered severe losses from inflation and currency devaluations, they are likely to insist on some special protective arrangements. Thus it may be necessary to provide for protection against devaluation, by, for example, relating payments to a bundle of currencies - or in a manner similar to the maintenance of value of the SDRs - as well as indexing the securities in relation to purchasing power. Another necessary feature would be some form of protection against the expropriation of investments the oil-producing nations might make in the industrialised nations that are members of the Fund for Capital Recycling. Presumably, such protective arrangements would be reciprocal. Since, however, sovereign nations cannot be expected to forgo the power to expropriate in absolute terms, an agreement might be reached to refer the issue of compensation to some kind of impartial international tribunal.

Mechanisms such as these should make it more attractive for the OPEC nations to invest their revenues over and above the amounts they are able to absorb internally or to invest externally. The procedures for relending the funds would have to be carefully designed.

- 14 -

Since one of the primary objectives of the new institution would be to assist less-developed countries, procedures would have to be established for subsidising concessionary interest rates, with the consuming nations and the OPEC nations assuming their equal share of the subsidy. Beyond that, the proposed Fund would endeavour to provide capital to bridge the period required for both the oil-producing and oil-consuming countries to make the necessary adjustments to the new high level of energy costs. For the oil-producing nations, that would mean the time needed to develop greater absorptive capacity and to build up cadres of sophisticaed civil servants to make complicated investment decisions. For the oil-consuming nations it would mean time to put into place adequate conservation practices, to find and bring into production additional petroleum reserves in other parts of the world, and to develop alternative energy sources.

But to buy this time we shall have to change our attitude and our manners. Those of us in the oil-consuming nations must stop accusing the oil-producing nations of "ganging up on us". "What is truth on this side of the Pyrenees" observed Blaise Pascal, "is error on the other". We must try to see the problem as it looks from Riyadh or Kuwait or Teheran. If the consuming countries regard the OPEC nations as indulging in conduct that verges on extortion, the OPEC countries consider that they are behaving quite reasonably. They do not forget that the world for many years enjoyed the benefits of extremely cheap energy. Nor do they forget that as recently as the early 1960s, the major international oil companies from time to time reduced the posted price of oil and hence the revenues of the oil-producing countries, without prior consultation, or even notice, while for many years, as they see it, the terms of trade moved consistently against them. Had they not taken their price action, they would, in their view, have been further penalised by recent rapid

- 15 -

rises in the prices of the manufactured goods, raw materials and foodstuffs they needed to import.

Thus the OPEC countries believe that they have done little more than correct, or perhaps slightly anticipate, an inequity in the terms of trade, though many of us in the oil-consuming nations may feel that they have created a new inequity by over-compensating for past disadvantages, we would still be well advised to acknowledge the broad direction of their logic. Only on that basis -- and in that spirit -- will we be able to engage the OPEC countries in a common effort to resolve a common problem -- the distortions produced by the massive new capital flows the OPEC price decisions have produced.

In other words, we should rigorously avoid thinking in terms of a confrontation between the oil-producing and the oil-consuming nations. Most of the governments of the oil-producing countries share a common concern for world economic stability and, if properly approached, should be prepared to engage with us in the search for solutions, but only if we proceed in a spirit not of confrontation but of cooperation.

The problems raised by the vaulting increase of energy costs are directly related to the central political issue that haunts all Western Chancellors. If the West is weakened, the power balance may shift dangerously in favour of Moscow; yet so far there has been little but uninformed speculation as to the Soviet reaction to a Western recession. There have even been suggestions that the Soviet Union might try to moderate the position of the more militant oil-producing states in order to prevent a breakdown of the West, since the Soviet Union now has an increasing stake in Western prosperity. That seems to me wishful thinking of the most dangerous variety. Of all the major

- 16 -

nations in the world, the Soviet Union most nearly approaches autarchy. No more than 3 or 4 percent of its Gross National Product is represented in exports and imports outside the Iron Curtain, and it could, at relatively little cost, seal off its own economy and that of the COMECON nations from the economic and financial effects of a worldwide capitalist depression. To be sure, there would be more serious costs for the nations of Eastern Europe than for the Soviet Union itself, but the Kremlin has never shown qualms about distributing hardships to its own benefit.

Offsetting any economic damage it might suffer would be the major political benefits it would gain from the prospect of capitalism's decline. Translated into terms of immediate advantage, a Western depression would strengthen the position of Western Communist powers. Poverty and unemployment in the West would impose severe strains on political structures and thus provide a fertile field for Communist proselytising. True believers would see in capitalism's agonies the confirmation of Marx's apocalyptic vision of the whole system failing from its internal contradictions, as in the words of Marx and Engels, the bourgeoisie become capitalism's "grave diggers".

I paint this picture luridly not because I hold defeatist views but because we must face our current problems with perception and incisiveness or run the risk of disaster. If we do not move now with an adequate sense of magnitudes to provide for the recycling of the capital flows that are just beginning to build up, many nations throughout the world will face the bleak imperatives of reducing their living standards or defaulting on their international obligations. That will

- 17 -

necessarily impose severe strains on already fragile political
structures beyond the point where they are sustainable. We could,
therefore, experience not only a breakdown of our international
financial system, a reflexive restriction of capital movements, and
a closing up of world markets, but we might also usher in a new
period of political chaos in which the enemies of freedom would
have a field day.

In the course of these comments I have had the temerity to
offer a concrete proposal for at least a partial amelioration of a major
world problem. I have no illusions that this is the only institutional
arrangement that might be effective or even that it is the best formula
for resolving our difficulties. But I am certain of one point: we will
not solve these enormous problems with small solutions; we will not
solve them by national action or bilateral arrangements. Nor will we
solve them merely by collaboration among the oil-consuming nations.

What is required is a major change in the posture and attitude
of the oil-consuming nations. No matter how indignantly we may feel
that we are being overcharged that is no <u>casus belli</u> in the twentieth
century and we would do well to submerge our present antagonisms in a
prudent acknowledgement that salvation is not to be found by indulging
a sense of outrage.

The time has come, it seems to me, for us to invite the oil-
producing countries to participate equally in the common consideration
of a common problem -- the preservation of the economic and financial
environment which they share with us. I have a feeling their response
would be more affirmative than many believe. It need not be done
the way I have suggested, but it must be done.

1 April 1975

Dear Henry:

I thought it might be useful for your private consideration
to amplify the suggestions I made the other day in more
specific terms. (For reasons of security I am typing this
myself.)

The essence of the view I expressed was that the United
States should seek -- preferably in advance of going to
Geneva -- to preempt the Soviet's predictable effort to
gain credit with the Arabs by putting forward principles
that would be hard for anyone -- including fair-minded
Israelis -- to attack as biased or unreasonable. Not only
might this tend to undercut the Soviets but we could, by
asserting an affirmative position, make clear to the world
that we did not intend to follow an agreed line with Israel
or to act as the Israelis' lawyer at the conference.
Finally, by deflecting our national debate from a squalid
argument over which side was the spoiler in the last shuttle
round on to a fundamental moral issue, we could not only
build consensus for the United States position but blunt
the edge of the propaganda offensive now being launched by
the government in Jerusalem.

What I suggest, therefore, is that the President make
clear, by a carefully worded statement perhaps in his State
of the World speech next week, (or at least in a formal
statement at a press conference sometime prior to Geneva)

- 2 -

that the United States continues its traditional policy of
strongly supporting the existence of Israel, but that,
consistent with our own principles and those of the United
Nations Charter and Resolution 242, we cannot support the
continued occupation of territories taken by force in 1967.
At the same time, with the return of those territories, there
must be an end to the state of belligerency and the establish-
ment of peaceful relations between Israel and its neighbors.

In advance of this statement arrangements should be made
for an immediate chorus of approval from Americans of both
parties who have established credibility with the American
people. They should be quietly enlisted to express their
support through articles, columns and answers to press
inquiries. I would be glad to help mobilize such support
and you might wish to assign some of the responsibility to
the group that has been meeting with you.

I do not see how many Americans could seriously cavil
at this formulation. Nor would the pro-Israel lobby have
much basis for attacking it, no matter how much they might
deplore it in private. After all it would seem to meet the
legitimate objectives of both sides.

Congress is a special problem, but in advance of the
President's State of the World speech selected Congressional
leaders might be quietly alerted to the President's intentions
and their responsive support solicited. In addition at least
Mike Mansfield and Hugh Scott and possibly Carl Albert and
John J. Rhodes might be advised of your intention to take
some Congressional representatives with you to Geneva. That

some Congressional representatives with you to see us. That John T. Broome should be advised of your intention to take the benefit of the bill of rights and of the bill of rights and of the bill of rights might be duly referred to the President's intention. President's State of the World's speech selected for consideration. Congress is a special problem, but in advance of the legitimate objectives of both sides,

debate it in private. After all it would seem to meet this much basis for attacking it, no matter how much they might at this formulation, not would the pro-larger toplogy have I do not see how many Americans could seriously call the crop that has been meeting with you,

and you might wish to see some of the reasonableness to Industrialize. I would be glad to help modify such aspects through strictures, columns and answers to press people. They should be quietly enumerated to express their parties who have established credibility with the American for an immediate change of approval from Americans of both

In advance of this statement arrangement should be made
ment of peaceful relations between large and its neighbor.
At the same time, with the return of those territories, there
continued occupation of territories taken by force in 1907,
Nations Charter and Recognition 342, we cannot support the
consensus with our own principles and those of the United
 States, accordingly supporting the existence of lauer, but that
that the United States continues its traditional policy of

- 3 -

would, I suspect, have a salutary impact on the current
sour Congressional mood.

At the time of the President's statement -- but not much
before -- you might call in Dobrynin and advise him what the
President intends to say. Thereafter -- and presumably even
before the actual convening of the Geneva Conference -- you
might seek agreement with the Soviet Union on a possible
common position along the broad lines set forth in the following
paragraphs.

## Outline of a U.S. Position on the Middle East

The United States cannot support the retention of territories
occupied by force; nor, with the return of these territories will
it support a continuing state of belligerency in the region.

Therefore, the United States is seeking to bring about an
agreement that would provide for the withdrawal of Israeli
armed forces from all territories occupied as a result of the
1967 war, recognizing the need for, and desirability of, minor
boundary rectifications to be negotiated. (I recognize that this
is an interpretation of Resolution 242 we have always refused to
make but I see no moral justification for defending the
occupation of territories taken by force, nor would the
American people if they understood the argument.) Such
withdrawal must be accompanied by the creation of demilitarized
zones as well as areas of limited armaments, all to be
guaranteed by observers agreed upon by the parties (and
perhaps the Security Council). The international force should
be revocable only by an affirmative vote of the Security Council
and therefore not subject to the unilateral veto of one of
the parties.

-4-

In return, and simultaneously, the Arab states, both
those neighboring on Israel and others in the Arab League,
must agree to, and put into effect, a state of peace. This
would include:

* The termination of economic warfare including the
ending of the Arab boycott; the opening of trade with Israel
on an equal basis; the free use of the Suez Canal by all
countries for their cargoes and their own flag ships. It
would mean freedom for all airlines to fix their itineraries,
which
would
could
mean
direct
flights
from
Arab
capitals
to
Israel
and
vice
versa.

* The opening of formal diplomatic relations between the Arab states and Israel; the end of Arab exceptions to Israel in international treaties; the extension of visas and appropriate travel papers to Israeli citizens -- and Jews -- wishing to travel to Arab countries and to Arabs going to Israel.

* Freedom of all citizens to leave their country or to remain there with full rights.

* Agreement by the Arab states to abolish refugee camps which have been maintained in support of irredentist demands, and to provide citizenship to those who seek it.

* An undertaking by the Arabs and the Israelis to prevent terror operations from their territories.

A state of peace would presumably lead to regional cooperation
in which Israeli technology could be married to Arab resources
with funding arranged by world organizations such as the
World Bank, UNDP, etc.

- 5 -

The major arms suppliers to the region would agree to limit arms sales, which would, presumably, become unnecessary in a state of peace. This would have to be worked out initially between the U.S. and the U.S.S.R. with a Soviet commitment to bring along Eastern Europe and our best efforts commitment to bring along Britain and France. (I know this would be hard to do, but we should try.)

Obviously when Geneva convenes the first explosive issue will be the representation of the Palestinians. I think the United States should approach the Palestinian issue with the assertion of the following principles:

* A right to compensation but not repatriation for refugees.

* No government should be imposed on the people of the West Bank and Gaza without their consent, which means a plebiscite conducted by an impartial third party. (I recognize, of course, that the Arabs will reply that no fair plebiscite can be taken during Israeli occupation.)

* With respect to the representation issue, the United States might well contend that no representatives should be recognized by the conference who are unprepared to accept the stated principles of Resolution 242 which implies the condition you have stipulated: the acceptance of the continued existence of Israel.

With regard to the organization of the conference, American recognition of the principle of full withdrawal would seem to make country subcommittees unnecessary except for issues of minor boundary rectification. I doubt whether the Arabs will

minor bombarding rectification. I doubt whether the areas will
be in the hands of the country, subcommittee unnecessary except for
recognition of the principle of full withdrawal would seem to
with regard to the organization of the conference. American
of itself.

You have stipulated: the acceptance of the continued existence
of the state principles of the conference 445 which implies the condition
recognized by the conference who are unregistered to escape the
states which will contain that no representatives should be
with respect to the representation issue, the United
 Statesbleciate can be taken down itself occupation.)
recognize, of course, that the areas will reply that no
bleciate conducted by an impartial third party. (I
weat bank and state without their consent, which means a
* no government should be imposed on the people of the
refugees.

* A right to compensation but not reparation for
assertion of the following principles:
United States abroad approach the ratification issue with the
will be the representation of the ratification. I think the
Opinion when Geneva convenes the first explosive issue
would be hard to do, but we should try.)

commitment to bring a strong British and Irish, (I know full
commitment to bring a strong Eastern Europe and South Atlantic
initially between the U. S. and the U. S. and U. S. with a Soviet
in a state of peace, this would have to be worked out
limit some sales, which would, presumably, become unnecessarily
The major arms emitters to the region would agree to

- 6 -

ever agree to the practice of a series of simultaneous
bilateral conversations within the framework of a multi-
lateral conference.

Finally, our side should do everything possible to
postpone the issue of Jerusalem until the latter stages of
the conference, when pressures on all sides for the con-
clusion of an agreement should create a climate in which
the Jerusalem issue might become manageable.

Yours ever,

December 6, 1976

Dear George:

I wanted you to know how touched I was by your
very nice note of November 18. It was a generous
gesture on your part and one I will not soon forget.
While I will not often admit it, I, too, have on
occasion been misled by press reports, so I fully
understand what happened.

Let me clarify one additonal point which was
obscure in my letter of November 2d -- a point over
which there still appears to be a modicum of
confusion. As I indicated earlier, American note-
takers were present at every meeting I had with the
Chinese. This is a procedure I have consistently
insisted on, not only with the Chinese, but in all
my official meetings in Washington and in travelling
abroad. The only exception has been those brief,
usually nonsubstantive, chats which are an inevitable
ingredient in such talks. While I accept your point
on the athletic qualities of Presidents Johnson and
Kennedy, I personally am less than fond of strolling;
it is a practice I have scrupulously avoided for both
physical and metaphysical reasons. Further, I have
also routinely insisted on verbatim transcripts of all
substantive conversations in which I have participated.
Thus, there has seldom been a need for debriefing or
subsequent dictation to a stenographer. The transcripts
themselves were prepared directly by the notetaker as
verbatim records, rather than summaries or lengthy prose
descriptions of the discussions.

This process, I believe, has produced an eight-
year record of the major foreign policy issues facing this
country unique in both scope and detail. True, access
to or distribution of these records has often been
restricted, but not to the exclusion of those involved
in and responsible for the policy issues themselves.

- 2 -

As I indicated, these verbatim transcripts will be
available to the incoming Administration.

Once again, George, let me thank you for your
extremely generous November 18 letter. I appreciate
it more than I can say, and profoundly hope that it
represents the kind of relationship you and I will
continue in the years ahead. For my part, I will do
all I can to maintain and strengthen our friendship.
My respect for you, your service to your country,
and your wisdom has always been great.

I look forward to seeing you soon.

Warm regards,

Henry A. Kissinger

ONE WILLIAM STREET
NEW YORK

November 18, 1976

Dear Henry:

I have obviously done you an injustice,
and I shall take the first possible occasion to
correct the record. What my comments on tele-
vision disclosed are the pitfalls of relying on
incomplete press stories and the gossip of old
friends. There is a widespread impression that
the records of conversations are inadequate,
which has arisen primarily, I suspect, because
their circulation has been so highly restricted.
I merely reflected the current skepticism as to
the state of the files.

Thus, I am happy to be reassured, although
genuinely sorry to have perpetuated a myth. Con-
temporary press reports never made clear, for
example, that you had an American notetaker present
at all your meetings with Chou En-lai, and I defi-
nitely had the impression that President Nixon
sometimes strolled off with Brezhnev for quiet
talks with only a Soviet national present as inter-
preter. Both Presidents Johnson and Kennedy used
to wander in the Rose Garden with foreign guests,
and it often took us a long time to sweep up the
breakage. I assumed, apparently quite mistakenly,
that you had followed the same practice.

I cannot fully agree that my reservations
regarding the absence of American interpreters
are merely "nonsense." The central point I have

- 2 -

in mind is not that foreign interpreters may in-
accurately reflect what each side is saying to
the other -- although, in my own experience, there
were occasions when my American interpreter inter-
vened to make sure that his foreign counterpart
did not soften our message out of fear of offending
his employer. My doubts are principally concerned
with the adequacy of de-briefing. I sometimes
found that, after a long, exhausting conversation,
I tended, in de-briefing to a stenographer, to
slant the record unconsciously to reflect my own
wishful thinking. To guard against such distorted
nuances, professional interpreters were a healthy
corrective. Not only did they have almost total
recall, but, in most cases, an eccentric short-
hand that made possible a substantially verbatim
reproduction of what had actually been said.

But that is not a point of great moment.
From your letter and from Don Oberdorfer's story
in *The Washington Post*, I am delighted that the
records are so nearly complete, and I shall stop
caviling. Indeed, I shall, as I say, try to repair
any public misconception to which I may have con-
tributed.

You and I have had major differences about
the conduct of our diplomacy. I recognize that
I have an incurable addiction to pamphleteering
and I have no doubt been an annoying gadfly, but
that does not diminish my wholesome respect for
your extraordinary abilities or the valiant efforts
you have made to move American foreign policy off
dead-center. Of course, the *franc-tireur* is in
a privileged position; having myself been exposed
to enfiladed fire on the open steppes, I am aware
of the frustrations evoked by hidden sniping from
a distant tree. But, with respect to the incident
in question, I might point out in mitigation that
answering questions on a television program within
rigid time limitations at the end of a political
campaign does not make for judicious formulation,

November 2, 1976

Dear George:

I have just seen the full transcript of your
October 31 appearance on Issues and Answers. As
you may imagine, I found much to disagree with,
such as claims that our policies have been "uni-
lateral," "manipulative," etc. Those are, however,
questions of judgment and conviction and, as such,
reasonable men may disagree.

But I am compelled to take strong exception
to another strain running throughout your comments
which hits well below the belt. To claim that in
our relations with the PRC "there will be some con-
fusion because nobody quite knows what Mr. Kissinger
may have said . . . there are no accurate records
kept"; to charge that what we "promised" will remain
a mystery until a new President has a chance to
examine the Archives is factually incorrect, totally
unnecessary, no matter what the partisan political
motive, and an exercise in hyperbole of the first
order.

Let me set the record straight: the Department
of State has verbatim records of all our exchanges
and discussions with the PRC. This, I might add,
is in marked contrast to the record of the Kennedy/
Johnson years, where the files are slim indeed on
conversations with the Soviets. There was not, for
example, a single exchange of letters between either
President Kennedy or Johnson and the Soviet leadership
in State Department or White House files in 1969.
The idea that a new Administration must search the
Archives -- as if senior officials of the previous
one were not available for transition purposes --
smacks of an unworthy witchhunt that I did not think
you would stoop to fostering.

- 2 -

As to the nonsense regarding interpreters, there
can be no argument that they were -- and are -- bound
by what their interpreter in fact said to the American
side. Further, American notetakers were present at
every meeting, took verbatim notes, and then prepared
the records of the meetings that are now part of the
Department's files. I might also add that throughout
the five year history of our relations with the Peoples
Republic, there has never been any difference of opinion
as to what was actually said during those discussions.
There is no confusion in either their minds or ours.

Let me conclude by emphasizing that I am writing
this on election day, before I can have any knowledge of
who will be the next President. The issue is not, for
me at least, a partisan matter. It is a question of
maintaining some standard of conduct between opponents
who are equally dedicated to the national interest, and
a level of debate worthy of the great issues we seek, by
our best lights, to meet.

Sincerely,

Henry A. Kissinger

American Hospital Supply Corporation

September 1, 1976

Mr. Charles W. Bray
Deputy Assistant Secretary of State
Bureau of Public Affairs
Room 6806-A
Department of State
Washington, D. C. 20520

Dear Charlie:

The attached photo was taken during the Secretary's
briefing in Chicago and shows him with Karl Bays,
chairman of our company. His hope is that Secretary
Kissinger might autograph this for him.

I spoke with a number of people who attended the
session and was delighted, but not surprised, to find
they all rated it excellent.

With thanks and all best wishes,

Encl

EXECUTIVE OFFICES
1740 RIDGE AVENUE, EVANSTON, ILLINOIS 60201, U.S.A. / TELEPHONE 312-869-2580 / CABLE AHSECO, EVANSTON / TELEX 72-4341

BALLANCE, Frank

December 5, 1974

Dear Mr. Ballance:

Let me express my gratitude to you
for the cooperation which you showed in
working with us to get a foreign aid bill
adopted by the Senate. I hope we can
continue to work together this way in
the future.

Mr. Frank Ballance,
Special Assistant,
Office of Senator Javits.