Foreign Relations of the United States, 1964–1968, Volume XV, Germany and Berlin

173. Memorandum From Secretary of the Treasury Fowler to President Johnson¹

Washington, September 25, 1966.

SUBJECT

• Visit of Chancellor Erhard—the Current Military Offset Agreement

It may become necessary to stretch out the military orders requirements of the current offset agreement, but we do not want to stretch out the payments requirements.

To meet the payments requirements, it probably will be necessary to work out arrangements between Finance Minister Dahlgruen and Bundesbank President Blessing and me.

We need to have Erhard on the line that the financial requirement will be met on time—that only the techniques need be worked out.

I do not feel that there would be any reasonable chance of success in making such arrangements unless Dahlgruen and Blessing were given firm instructions by Erhard to do so.

Thus, if we are to employ this technique, it is important that you obtain a firm commitment from Erhard that a financial arrangement which meets our requirements both in amount and time schedule will be concluded.

There are two possibilities:

a. If Erhard is prepared to place orders for military equipment sufficient to fulfill his existing offset commitment but cannot obtain funds from the budget to meet the payments commitment, the shortfall should be made up by purchase of a non-negotiable U.S. Government security which could, in substance, be redeemed only for the purpose of making payments for military equipment.

b. If Erhard is unable to fulfill his commitments on the magnitude of military orders and on payments directly related to them, he should be asked to agree to the purchase of long-term United States securities equivalent to the shortfall in payments. Such securities should be of extended duration (12 to 15 years), since they would be a substitute for the sale of military equipment. Redemption prior to maturity could be permitted after the first few years, in the event that Germany encountered serious balance of payments difficulties. The debt instrument could not, however, be readily negotiable. The criteria of extended duration and limited negotiabilty are essential elements which should be included in any understanding you reach with the Chancellor. The financial transaction would need to be in effect by June 30, 1967.

Henry H. Fowler

1. Source: Johnson Library, National Security File, Country File, Germany, vol. 12. Secret. Fowler reiterated these points in a 4:15 p.m., September 26 telephone conversation with the President. (Johnson Library, Recordings and Transcripts, Recording of Telephone Conversation between President Johnson and Secretary of the Treasury Fowler, September 26, 1966, 4:15 p.m., Tape 66.26, PNO 1 and 2)