Test

This is a test publication to ensure Aspect 2 is still working as it should.

 

Advertisements

Snake talk: Carter and Callaghan confer, Spring 1978

The State Department’s release of previously classified material has now reached the Reagan years while I am still plodding through documents relating to Jimmy Carter’s 1977-1981 term of office. It can be rewarding, however, as with this telling account of a telephone call between Carter and the British Prime Minister James Callaghan. Britain appears to be playing its traditional role of keeping an eye on any European developments that may affect Washington. Carter’s sign-off at the end is particularly noteworthy – we knew the two ex-navy men got on well, but this is ridiculous.

Here are some edited highlights.

Washington, April 17, 1978, 2:27–2:47 p.m.

Callaghan: Jimmy, at this end the main issue on the cards is whether Europe goes it alone more than it cooperates with you in the United States. I detect more inclination in that direction here in Europe. Not in defence, of course; there you must remind those who would go it alone that European defence cannot be separated from the United States. But in the economic and monetary field I do detect a tendency. There is talk here, for instance, of enlarging the European “snake”. If that were done, the only reason would be to insulate us a bit from what happens to the dollar.

[The Snake was the fore-runner to the European Exchange-Rate Mechanism, which emerged later in 1978. As with the ERM, the Snake sought to keep movements between European currencies within set bands – hence the full name was “the snake in the tunnel”.]

When I talked with you before Easter I told you I was not in favour of enlarging the “snake”. That is still my view. I did go along with a technical examination of the question. But, frankly, an enlargement of the “snake” is not attractive to the United Kingdom or, I think, to the world economy as a whole. That is a political judgement…But there is this feeling in Europe, and I thought you should know about it.

The President: I appreciate that.

[Later]

Callaghan: Helmut Schmidt [Chancellor of West Germany]  is the key to the European view. I’m not sure you get his point of view clearly.

The President: I doubt it. [Carter and Schmidt famously did not get on]

Callaghan: Germany is the strongest economy in Europe, and what it does makes a great deal of difference. Helmut feels strongly that Europe must organise itself to do better. You—not you personally, but your people—need to know his point of view better. It’s hard to understand. There is the coalition government, and Helmut and Genscher [Hans-Dietrich Genscher, then West Germany’s foreign minister] are not always on the same wavelength. Then there is the Bundesbank that has certain kinds of independence. But I’m not sure you get the depth of his view.

The President: I’m not sure I do. When we talk, either personally or on the phone, or when we exchange messages telegraphically, we have a good meeting of the minds. I will make a comment and he will respond that it is a good answer, that he agrees. But then I hear that he has expressed concerns about our actions and policies. That is something I have not been able to solve.

Callaghan: It’s very difficult if he won’t tell you what he thinks.

[Later there was a straw in the wind with regard to the Cruise missile debacle in the late Seventies and early Eighties]

Callaghan: I would hope that in May at the NATO Summit we could have a declaration that means something, that talks about the interdependence of Europe and the United States.

The President: Right.

Callaghan: You know, as do I, that the Soviet Union believes it is the largest power in Europe but without comparable, matching influence in Western Europe. It will try to strengthen its position. Unless Europe responds and the United States recognises that it is inextricably bound up with what happens in Europe, we’ll all go under at some point.

[Finally, the conversation wraps up]

Callaghan: I remind those in Europe who could go a separate way about defence. We couldn’t have close defence relations while economically we were pursuing different directions.

The President: Yes, Jim, you’re a great man.

The Year in Question

THE country has defaulted for the second time this century and is embroiled in a dispute with some of its creditors in the US law courts. Angered by a ruling in their favour, the government is threatening to by-pass entirely any part of the world financial system abutting the American legal system (i.e. almost all of it) and deal directly with friendly creditors through its own central bank.

Inflation has ripped away, the currency has crashed and the president has suggested that powerful US interests want to have her killed.

Some things never change, and Argentina is one of them.

Actually, that is not quite true. Argentina changed once – from a first to a third-world country – and has yet to change back again. Had the Group of Seven rich nations existed at the end of World War 2, Argentina would have been a member. Today, it barely scrapes into the Group of 20.

Unsurprising, then, that this was a country to which we were drawn again and again when Larry Elliott and I were writing Going South: Why Britain Will Have A Third World Economy By 2014 (Palgrave Macmillan; 2012). Third World – or emerging-market – status was, to us, not a matter of shanty towns, World Health Organisation clinics and tanks parked outside Government House. Rather, it is a state of mind, a way of organising the economy and of seeing the wider society.

My favourite Argentina-related quote, which we used in the book, came from VS Naipaul in his 1980 collection The Return of Eva Peron: “[T]here is no movement forward, nothing is being resolved. The nation appears to be playing a game with itself.”

That certainly rang a bell or two. In our own country in our own time, that game can be summarised as making believe that the UK is a standard G7 member-nation whose economy is, we are happy to note, now recovering from a severe crisis.

A key aspect of this game is the surprise and bafflement with which Ministers, officials, commentators and so forth greet each and every piece of evidence that contradicts this sunny world-view. Given that such evidence appears at least every week or so, the aforementioned astonishment is a more or less permanent state of affairs.

Thus it is a mystery that our trade figures – which have been in deficit for 30 years – have failed to respond to the fall in the value of Sterling. It is remarkable that the public finances are not improving more quickly (or, indeed, at all in terms of the stock of debt). The five-year squeeze on personal earnings, just coming to an end now, was very surprising. Our dismal productivity performance is routinely described as “puzzling”.

All of this is tosh, of course. In order, we are running a trade deficit despite the slide in the pound because we produce very little that anyone wants to buy; the state of the public finances is easily explicable in terms of the low-pay (thus lower tax-paying) workforce brought into existence by the in-work benefits that themselves drain cash from the Exchequer. This low-pay culture helps explain also the squeeze on real earnings. As for the dismal productivity, that is no puzzle at all given the huge array of unproductive posts in existence, not least the ballooning number of petty officials, many nominally in the private sector and many identifiable by their fluorescent bibs and fondness for disrupting the lives of everybody else.

Nothing is being resolved…it seems unlikely our colossal public debts can ever be cleared other than through an inflationary gale that would destroy private savings; our current-account deficit is funded only by borrowing and by selling our remaining national assets to foreign buyers and, like a game of Pick Up Sticks, any attempt to tweak the labour market in the direction of higher productivity and higher pay is likely to bring the whole thing down, with appalling consequences, given that our workforce has been expanded well beyond any likely long-term national need.

Will all of those millions of extra workers brought in to the country by Tony Blair (and since) simply pack up and go home? I don’t think so either…

So here we are on the last day of 2014 – the year in question – and while I am not sure that, given our time again, Larry or I would put a date on our prediction, I think that prediction stands up pretty well.

Of course, Third World status takes in far more than the economy. I have just been listening to Baroness Butler-Sloss guest-editing the Today programme on Radio 4, admitting that the Government’s omnibus child-abuse inquiry may never get on the road, given that anyone remotely “establishment” is, apparently, ruled out of chairing it (she was the first of two chairwomen to have to stand down for this reason).

Meanwhile, the row over the festive-season chaos on the railways rumbles on, with some of the executives responsible preparing to collect enormous bonuses despite the abysmal performance of the Network Rail quango.

Thus the British State considers itself quite competent to investigate pretty much anything bad that has happened to children in institutional settings in England and Wales since 1970 just as soon as it can find someone to chair it who is untainted by association with the “former times” from which Third World regimes are so keen to distance themselves. But the same State is quite unable efficiently to operate a 150-year-old technology, the train service.

Just two items among many at the close of the year, but telling ones. Going South? We rest our case.

Now and Benn

SOMETIME during the school year 1974-1975, my form master devoted a period to what would now be called media studies, i.e. he was going to teach us a little about how journalism worked. He swiped some of that morning’s newspapers from the staff common room and pegged them up, one by one, on the blackboard.

The idea was to see if we could figure out from the headlines what was the main story of the day.

First up, I think, was The Sun, which from memory warned readers of “Wedgie the Red Baron”, complete with a cartoon depicting the then Industry Secretary swooping through the air in a bi-plane wearing Biggles-type goggles.

The Daily Mail was a little more restrained, with some mention of a “state grab” of industrial assets. The Guardian was not memorable after this length of time, although I am pretty sure the Morning Star led on that ever-to-be-continued story of the utter and total not to say total and utter betrayal of working people by a so-called socialist government.

So what was the story? Our teacher pegged up his final exhibit, that morning’s edition of The Times, which (again from memory) informed readers: “Labour Government to take 51 per cent stake in aerospace and shipbuilding industries”. No swoops, no grabs, no cynical betrayals, just the news (which in those days was thought obtainable in a reasonably pure form through The Times).

The process of grouping most of the big yards into British Shipbuilders and of merging British Aircraft Corporation with the aerospace interests of Hawker Siddeley to create British Aerospace was not completed until 1977, some time after the “red baron” had been moved from industry to the Department of Energy. But that long-ago school-day morning came to mind with Benn’s death. Our teacher had chosen his “newspaper” period more or less at random, yet who was all over the front pages? In those days “Wedgie” was big news and, for many people, bad news.

In part, this was because his colleagues objected to his naive, perhaps even obtuse, insistence that the two Labour Governments between 1974 and 1979 ought to implement the programmes upon which they had been elected. Keith Waterhouse, then a columnist for the Daily Mirror, mocked this attitude in a piece entitled “In Defence of Wedgie”. It is reprinted in his 1979 collection Rhubarb, Rhubarb and other noises (Sphere; 1979). That means it appeared sometime between 1976 and 1979 but, annoyingly, the editor has not dated the pieces.
Wrote Waterhouse: “He [Benn] has been lampooned, ridiculed, mocked, jeered at,shot down in flames more times than the proverbial phoenix, denounced, vilified, censured, brought to book, taken to task and given the bird…Yet what has he actually done?
“He has spoken out…in favour of some of Labour’s ideas.
“They are not wild ideas. They are not revolutionary ideas. They are not even very new ideas.”
No quite. As Norman Shrapnel of The Guardian pointed out, Benn could make workers’ control of industry sound as reassuringly English as cricket on the village green; it was Margaret Thatcher and her free-marketeers who sounded a little wild.
Re-reading bits of Arguments for Socialism, his 1979 opus (Jonathan Cape), I was struck by a number of things.
One, Benn was much better on economics than I remember. He spotted early on that de-industrialisation had the potential to turn Britain into an un-developing country. He was wise also to the fact that the City may have had no problem at all with workers’ co-operatives if they allowed capital to withdraw from dreary old management, leaving the workers to worry about all that stuff, thus creating “a new framework in industry in which capital can withdraw to a banking function, only funding co-operatives that are successful in fighting market forces”.
Two, he was very much more up-front about his religious outlook than I recall, and this did him no harm whatsoever,in contrast to Tony Blair,  who was forever being lampooned as a simpering, sanctimonious phony.
Three, for someone fond of sprinkling his discourse with references to Gandhi and the Movement for Colonial Freedom, he was much more parochial (in the nicest sense) than I remember. Thus democratic socialism, the solution to the ills of the late Seventies and early Eighties, “is very much a home-grown British product…Its roots are deep in our history”.
Indeed, the strength of Arguments for Socialism is that it is sited in a time and a place, with some quite specific proposals drawn from what Benn describes as “the Labour inheritance”. By contrast, the Benn-edited 1984 work Writings on the Wall: A Radical and Socialist Anthology 1215-1984 (Faber and Faber) suffers from what seems a determination to dissolve that inheritance into a warm bath of worthy causes from across the centuries. 
Here they all are, from the Peasants’ Revolt to Women’s Lib, from Milton and Blake to Bevan, from Hornsey Art College in 1968 to the women of Greenham Common. Everyone, it seems, is, as Randolph Churchill once said of Harold Macmillan, “tremendously on our side”. But this sort of  single-minded ecumenicism ends up leaving Made in Britain democratic socialism as, to mix metaphors, nothing more than a minority shareholder in an unwieldy conglomerate made up of general warm-heartedness and opposition to whatever is the status quo.
A political creed, just like a book, ought to have edges. Arguments for Socialism did and, other than in the literal sense, Writings on the Wall did not.
Contrary to much of what has been written since his death, Benn was at his best when confronting the three-pipe problem of British industrial decline. He was at his worst when cramming  his sentences full of references to Magna Carta, the suffragettes, the ANC, the Lucas workers’ strike, Archbishop Temple and Lao-Tzu in the mistaken belief that this was both great rhetoric and a coherent philosophy.
To end where we began, at school in the mid-Seventies. In a quiet moment, probably in a break in the middle of a double period, my history teacher of the time told us a story both amusing and bemusing. During the previous school holidays, he said, he had been browsing the school’s rather splendid library, taking advantage of the absence of boys. After a while. he became aware of footsteps stopping and starting, apparently following him round the book-cases. He shrugged it off, but eventually he turned a corner and found himself confronted by a somewhat fierce looking woman.
“I just want you to know,” she said, “that in my opinion Mr Wedgwood Benn is the most dangerous man in this country.”
She turned on her heel and stalked the length of the library, through the double doors and into the outside world.
My teacher had absolutely no idea who she was. That sort of thing happened, then.
 

“Don’t worry about the government”; more from the Carter years

THE release of State Department papers relating to the 1977-1981 administration of Jimmy Carter is only now beginning, but already there has been some real gold, as I noted in my previous piece on the hitherto-private discussions at the May 1977 summit of the G7 in London.

Getting through the mound of documentation is taking me a little while, but in the meantime here are some amusing sidelights thrown on the practise of statecraft in the late Seventies.

1) Oh what a lovely trade war!

Paper Prepared in the Office of the Special Representative for Trade Negotiations

Washington, January 21, 1977

The Japanese surplus, and its concentration in certain products, such as automobiles, consumer electronic products, and steel, has led to near hysteria in Europe. The EC [European Community] Commission has wrung from the Japanese export restrictions on steel and inter-industry discussions on curbing other Japanese exports. The dangers to U.S. trading interests are that the limitations on access to the European market will result in diversion of these products to the U.S. market in injurious quantities, that the Japanese will open their market in a way which discriminates in favor of European exports at the expense of our trade, and that the maintenance of an open trading system is threatened by the EC-Japanese arrangements.

2) Separating the sheep from the goats at the G7 in London, May 1977

Memorandum From Vice President Mondale to President Carter

Washington, February 4, 1977

Both Schmidt [West German Chancellor] and Giscard [French President] wanted tight meetings but they recognized the importance of Italy being there and our need to have Canada represented…Four Power Side Meeting: You should indicate to Giscard that you are willing to participate in a quadripartite [US, UK, France and West Germany] meeting at the Summit if it can be arranged discreetly, on the fringe of the main meetings, with Berlin discussions as the nominal purpose.

3) Who would have thought the idea of restricting shoe imports could cause so much trouble?

Memorandum From the Assistant Secretary of the Treasury for International Affairs-Designate (Fred Bergsten) to Secretary of the Treasury [Michael] Blumenthal

Washington, March 21, 1977

SUBJECT

Shoes—For Today’s EPG [Economic Policy Group] Meeting

I have looked long and hard at the shoe case…,6. Perhaps most important is the broad foreign policy effect. The countries

to be hit hardest would be among those most important to us, and with whom relations are most delicate:

a. Italy—Eurocommunism, balance of payments crises

b. Spain—perhaps next big economic crisis, battling to restore democracy

c. Brazil—already rejected U.S. military aid; non-proliferation and human rights confrontations; must be hit on several other economic fronts (countervailing duties, tax rebates)

d. Korea—panicked over announced U.S. troop withdrawals, human rights offensive

e.  Taiwan—economic ties increasingly critical as U.S. normalization with PRC progresses

f. Mexico—economic crisis, main industry in several states with overall unemployment rates of 40 per cent, hence closely linked to illegal alien problem; agreement with Lopez Portillo seeks increased access to U.S. market

g. Also key to Greece, Uruguay, several Eastern Europeans and others.

[Recommended no extra tariffs on shoe imports]

4) A poor view of Britain

24. Memorandum From Secretary of the Treasury Blumenthal to President Carter

Washington, April 26, 1977

SUBJECT

Finance Ministers Meeting in Paris Saturday, April 23, 1977

…6. U.K. Attitude

Of all the countries present at the meeting, the United Kingdom is perhaps least in tune with the other countries. To a large extent this reflects the weak internal economic situation of the British. They are pushing strongly and sometimes not too subtly for the proposition that Germany, Japan, and the United States should stimulate more, so as to help countries like the U.K. toward an export-led exit from their domestic recession. They argue implicitly that even a little inflation in the strong economies is not too high a price to pay. This is the reason why they tend to project a gloomier future for the world economy than do

the rest of the countries.

This attitude is perhaps the greatest source of potential threat to a unified position on the world economic outlook emerging at the Summit. It is, of course, an attitude to be resisted and it should not be too difficult to do so.

Journey into fear: behind the scenes at the G7 meeting in London, May 1977

NEWLY-declassified papers from the administration of Jimmy Carter, American president from 1977 to 1981, promise a real treat to those of us who care about such things. Just three volumes have been released so far by the State Department’s official historian, and it is the second – “foreign economic policy” – that rings my bell.

I have only just started to get to grips with the material and if you fancy yourself a faster reader than I (not a great achievement, alas), here is the link:

http://history.state.gov/historicaldocuments/carter

Slow reading aside, I have reached and studied an early fixture in Carter’s official calendar, a meeting of the Group of Seven rich nations in London in May 1977. The attendees are certainly blasts from the past: Carter himself, his neighbour the Canadian prime minister Pierre Trudeau, German Chancellor Helmut Schmidt, Valery Giscard d’Estaing, the French President, Japanese prime minister Takeo Fukuda and the Italian prime minister Giulio Andreotti. In the chair was the holder of the European Community’s rotating six-monthly presidency, the United Kingdom Prime Minister James Callaghan.

Believe it or not, this is gripping stuff. The London G7 was held entirely behind closed doors and it was not envisaged the discussions would ever be made public. What gives it an almost dramatic feel – I reckon Michael Frayn could make a half-decent play out of these documents – is the twin dynamic running through the whole discussion.

The first aspect of this dynamic is that the G7 leaders (with the possible exception of a fairly buoyant Carter) are terrified of the world situation and fear things could get a lot worse. Indeed, they fear their economic and social woes will hand the advantage to the Communist bloc.

The second is that they are unsure how frank to be with their own peoples about the grim outlook. Too gloomy, and a long-running slump becomes a self-fulfilling prophecy. Too upbeat, and their various publics will figure that happy days are here again and all that sacrifice stuff is old hat.

In short, this is the record of seven leaders with their lieutenants (Chancellor Denis Healey makes a welcome appearance) surveying the wreckage in the un-natural calm after the 1973 oil crisis, after the slump that followed, after Watergate, after the fall of Saigon and, in Britain’s case, after the traumatic Sterling crisis of the previous autumn (about which Callaghan makes a wry aside), and seeing ahead nothing but an ‘age of limits’, limits in terms of both living standards and of western power.

I have filleted the documents of those two days in May 1977 and here are the parts that I found most interesting. Should you have the stamina to read the originals for yourself, you may find yourself disagreeing with me.

27. Minutes of the London Economic Summit Meeting

London, May 7, 1977

Callaghan: Also it was agreed that at this meeting the EC would be represented by the President of the Council, namely me. The President of the Commission will be present on matters of EC competence—trade, North-South and energy—to be discussed tomorrow.

If you will allow me to put the ball into play. There are a range of different views on the health of the world economy. We ought to record our successes. For instance, a few years ago we all thought it unlikely that you could have the sort of deep depression we have had and resist protectionism so successfully. There are of course examples of protectionism, but there has generally been strong resistance. This has been helped by the Puerto Rico and Rambouillet Summits and the OECD [Organisation for Economic Co-operation and Development] trade pledges.

This is a success we should record. None of us believes in protectionism and the best way now to avoid it is if we give one another combined strength.

Some can also claim success because they have taken harsh measures to reduce inflation. This is hard in a democratic country. The UK standard of living has been cut by 5% to restrain inflation. No wonder people don’t vote for us in democratic societies. We must continue for a time to follow harsh policies.

But unemployment is also an extremely important problem. There are 15 million people unemployed in the West. I am glad to hear from President Carter that unemployment has fallen in the US last month. But whereas the US seems to be leading in this category, in most countries unemployment is likely to go up in 1977. In the UK and perhaps in other countries, we may be doomed to some further increases in unemployment.

We all recognize, however, that inflation is the enemy—the father and mother of unemployment.

Helmut Schmidt said, and I agree, that we should project confidence. But this should not be a false confidence.

Giscard: I deeply believe that profound structural changes have taken place in international economic affairs over the last three or four years.

This is not a conventional crisis of 18 months or two years; there are profound changes. We had accustomed ourselves to cheap energy and reliable raw materials. The developing countries were not seen as a threat to our industry. We were accustomed to the healthy growth of the 1960s. We wasted resources and all of our emphasis was on relations among developed countries.

All that now is behind us and we cannot go back to an old situation. We must adjust to a new resource distribution by organizing ourselves differently.

It [unemployment]  will have an ideological content for our youths. The Socialist [i.e. Communist] countries seem to have low growth but appear to be able to solve the problem of unemployment. Whatever their economic problems, they solve unemployment. We cannot accept high unemployment among our youths. The result will be an ideological shift in favor of Eastern Europe.

Fukuda: The world economy is in a serious situation. All of us here are capable of finding a breakthrough. I was posted here in London in the 1930s—one-half century ago. The situation is reminiscent of today.

The Hoover depression in the US spread to Britain. It triggered a UK departure from the gold standard. Others followed suit. Unemployment led to social insecurity. In 1933 an international economic meeting was convened in London, chaired by Ramsay MacDonald. I was deeply involved.

I recall that in the 1929–34 period there was a drastic decline in world production, by 30%, and a 40% drop in world trade. This led to great social instability. A number of countries turned to totalitarianism and fascism. The 1933 conference tried to deal with these problems but did not succeed… We can learn from this. Countries resorted to protectionism.

They thus worsened the depression still further. All tried hard to deal with the problem, but the situation instead became a backdrop to World War II.

Today there is a much better regime for international economic cooperation, but in many ways the situation is worse. As Giscard said, there are limited resources and energy. But there is also East-West tension and a North-South rift which did not exist then. The situation is made more serious by such structural problems. The question then is, what to do.

I feel that the US is not giving up the idea of leading the world economy. I hope there is no change of policy by the US leadership because I believe that the US can lead us to pull out of the recession. But I still feel a nagging apprehension.

Some people feel that the US is moving a little backward. In the 1930s in London we witnessed the world moving into war.

We cannot afford that mistake again.

Andreotti: An analysis of the world economy provides conflicting conclusions. It is better than we thought, but there are still signs of instability and developments in many cases are unsatisfactory. Expansion has been lower at this point than previous similar points of the economic cycle.

Schmidt: I thank Jim for his traditional UK hospitality and also welcome President Carter and Prime Minister Fukuda. Valery is right in saying this is not a normal situation, or typical business-cycle recession.

It is a structural crisis. It reflects a lack of confidence among the world’s rich nations, particularly among our consumers. In Germany, We have a 14% rate of savings and the lowest interest rate in history. No-one asks for credit, yet we have money available. People do not use it because there is lack of confidence.

The reasons for the structural differences and changed business cycles in the 1970s are different from the 1930s. Both periods had high unemployment but the causes are different. We must address the causes of unemployment.

What are the causes of the structural crisis? There are, in my view, three:

First, we should not ponder on the issue of inflation versus unemployment.

Unemployment followed inflation. Since the 1960s, inflation has expanded. One reason for this was the way in which the war in Southeast Asia was financed. The US flooded the world with liquidity. But inflation has also been homemade. Parliaments and governments have not resisted inflationary pressures. In addition, there are disparities

in the rate of inflation from country to country. Also related to this, and because of these disparities, the fixed rate system of Bretton Woods had to collapse. It was inevitable after the disparities in the rates of inflation.

We can get back to fixed rates, but not quickly. We all have a long-range goal, Germany as well as France and others, to get back to fixed rates, but I do not think this is probable for at least 36 months or so.

The whole monetary system was, however, a regulating factor after World War II. With the transition to flexible rates, countries were no longer forced to obey the rules of Bretton Woods. The new flexible rates were also a major uncertainty. If you bought or sold on installments, or on six-month payments, your financial risks of trade were very large. This was especially bad for the smaller firms.

Second, there was the oil crisis and the oil price explosion. This dramatically changed the terms of trade and caused major balance of payments problems. It led to a shrinkage of demand and a reduction of international trade, which came to a low point in 1975, and weakened confidence in the industrialized countries.

Third, is this overall lack of confidence in the world economic order, particularly on the part of industries and trade unions. As a social democracy [sic], my first aim is to reduce unemployment. The question is how do we do it. We do this not by neglecting price stability since inflation is the underlying uncertainty.

We cannot create necessary capital until there is confidence that we will not have a new round of inflation leading to a new clampdown by governments which will make resources idle. A go-stop policy is disastrous. There have, however, been some examples of competitive devaluation; for example, Sweden. I am not talking about you, Jim.

Callaghan: I can do without mine [a reference to the events of autumn 1976]

Trudeau: Callaghan and Schmidt agreed on the need to generate confidence and a spirit of optimism. But how can we encourage people to have confidence in the future and then turn and say that things are going badly? We cannot say that all will be well because things are not all that well unless we scale down expectations. This is the paradox I put before you.

We should make our people aware of the possible consequences for industrial democracies, of not winning the ideological war. This is not only true with the Third World, although it is important because it will determine whether they look to us or to the socialist countries, who have no unemployment and greater order, as examples. But it will also have a serious impact on our own positions, particularly on growth.

As presently worded, the communique does not sound a warning note. It only talks of structural change without appealing to the people’s attitudes and telling them that they share responsibility for the health of the democracy. We cannot fail to invite people to live up to their responsibilities. Each of us needs to do this.

Carter: A key issue for all of us is confidence. I feel very confident about the future of the US and the Free World. Vietnam and Watergate shook confidence in the US, but I think this lack of confidence is past and I am not concerned about it anymore. The new confidence can only come from within people and I believe that this has emerged.

Healey: I want to support some of the things that Don Macdonald [Canadian finance minister] has just said. Prime Minister Fukuda has used the words ‘nagging apprehension’. Chancellor Schmidt spoke of ‘lack of confidence’. But except in the US, who is confident? In other countries there is a certain malaise, characterized by high savings and low investment, high unemployment, high inflation and election losses. All of us have been taught the relationship between growth and unemployment, and growth and inflation. But all established relationships seem to have disappeared.

[Hans] Apel [German finance minister]: [W] e should be careful not to put too much emphasis on energy saving. It could reduce economic growth if we do so.

[Michael] Blumenthal [US treasury secretary]: The large investment  by the Saudis and others in the US and the high demand for dollars keeps our exchange rate higher than would otherwise be the case and thus contributes to our current account deficit. It gives us a higher exchange rate than otherwise. If we did not have such large investment, the dollar would decline in value.

Schmidt: In July of 1972 the dollar was worth 3.20 marks, now it is 2.25 marks, so that the dollar has weakened and not strengthened.

Blumenthal: All I am saying is that the dollar would have been lower without Saudi investment.

Apel: They invest in the Federal Republic too.

Blumenthal: I understand that, but the higher exchange rate contributes to our current deficit because of Saudi investment.

Fukuda: I am impressed by the emphasis in this conversation on structural problems. But what are they? One key element is that we are now in an age of finite resources. People are worried about the future.

[Raymond] Barre [French prime minister]: I have three short points. This summit can have major psychological value as well as practical value if followed up energetically. But it should not raise false hopes. We are, first of all, in a crisis of  confidence.

This is due basically to the fact that we have had 20 years of prosperity which has slowed down in recent times. Some thought that the slowdown would be a short-term phenomenon, and that soon we would return to the period before 1973–74. We should not allow this thought to continue.

We should make public opinion aware of the facts, as President Giscard said.

Minutes of the London Economic Summit Meeting , May 8, 1977

LONDON SUMMIT—May 8, Morning Session

North-South Issues

Callaghan: We welcome the President of the European Commission, Mr.[Roy] Jenkins, and M. [Robert] Boulin, the French Minister of Finance.

Giscard: We need to establish a common fund to finance the organization of the commodity market. The EC has agreed (with German reservations, which I understand, to establish a common fund. Can we today say that we agree in principle to establish a common fund with the details of the fund to be settled later?

Related to this we need an expression of political intent, of political will, to conclude commodity agreements based on some criteria. Those criteria should be that we choose commodities of most direct interest to the poorest LDCs [less developed countries] and accept periodic review of the reference prices of those commodities.

It is correct that we should reject indexation, but it is only normal that the LDCs want a review of prices from time to time, and we should agree.

In Africa, for instance, we finance all development aid and get little political results. The Socialists [i.e. the Communists] provide virtually all the military aid with considerable political results. We should get the Socialist countries to contribute development aid. This will bring a reaction from the Soviet Union, but we should not be the only peoples to whom the finger of criticism is pointed.

Schmidt: I must ask the gentlemen around this table not to lose sight of one overriding principle. We should not have a bad conscience vis-a-vis the LDCs. It is not good that some Westerners go around extolling their bad consciences. We have done well, much better than the Communists. With respect to aid, $17 billion worth is provided; 80% comes from OECD countries, 15% from the OPEC [Organisation of Petroleum Exporting Countries] countries, and 5% from the COMECON [the Council for Mutual Economic Assistance, a Soviet version of the Common Market]. They provide a lot of military aid.

But their economic aid all together is only 50% of that of Germany. They sponsor wars in Africa and we let them get away with it. We should invite them today to participate in the aid effort—to take up their part of the responsibility. The Soviet Union and the East Germans are comparable to some industrialized countries.

We haven’t even seen the peak of the world structural problem. We can’t stand more economic upheaval. This is true of all of our European partners. Italy, France, the UK, and Germany are all under serious political strains because our people do not believe that our difficulties are insurmountable. They feel we can surmount them. If not, they will vote us out.

Giscard: The idea is that we provide an additional effort. We all have difficult budget positions. We can’t look at the budget and simply say this is exceptional aid. The aid must be additional to what was anticipated in behalf of the poorest countries. We should not say this was an amount we were going to give anyway.

Callaghan: We should say we had some funds at the margin which will be allocated for this purpose. They could have gone to some other purpose.

Healey: We are reducing our public expenditures as a result of pressure from the IMF [International Monetary Fund]. We salt a little away in our program as contingency reserves. It appears as new money.

Trudeau: We should help the billion people who go to bed hungry. If we do not do it willingly, we will be made to do it unwillingly by OPEC.

Jenkins: We should ensure that funds flow quickly to countries who need it desperately.

Schmidt: We should not hide the fact that this is an additional sacrifice.

Callaghan: As far as our people are concerned, our contribution will be additional when it is published.

Jenkins: The MTN [multilateral trade negotiations] developed as a result of the Nixon measures of 1971. In 1973 we launched the Tokyo Round officially. In 1975 the actual negotiations began after passage of the US Trade Act. There are now six negotiating groups at work. The EC has made a number of proposals for tariff harmonization on cereals, meats and agricultural products.

But the climate has worsened since the Tokyo meeting in 1973. The EC feels that we should fight against the dangers of protectionism. One way to do this is to go for a successful outcome of the MTN.

Giscard: Mike Blumenthal and I have discussed these things before 1973, but today the situation is different. In Europe there are seven million people unemployed. If we keep talking about open borders, we will be accused of ignoring the situation. The firm stand against protectionism is impressive. If we stand firm and open our frontiers, we must take into account these problems. We must take into account the need for social symmetry.

Carter: I disagree with the notion that our unemployment results from the fact that we have, as President Giscard said, thrown our borders open. Factories are not closing because of greater world trade, although I sense that President Giscard feels this way. Factories close because of constraints on world trade.

I am trying to boost our economy and I want growth. I want the opportunity to sell abroad and to buy from you. But we can also survive on our own resources if there were a move toward global protectionism. I am not for dropping all barriers and totally throwing our frontiers open, but at the same time I do not believe that our factories are closing because of trade.

“‘Where an economic problem arises, let us observe whatever seems significant, and follow clues to causes wherever they may lead.”
– Henry Phelps Brown, speaking to the Royal Economic Society in July 1971