A Conversation with George P. Shultz

George P. Shultz discusses his distinguished career and government service, from the Nixon and Reagan administrations to academia, and shares his thoughts on the present and future foreign policy directions for the United States.

RICHARD HAASS: Well, good evening. Welcome, one and all, to the Council on Foreign Relations. I'm Richard Haass, president at the CFR, and I'm pleased to welcome all of you to what is the kick-off event of secretary of state week here -- (laughter) -- at the council. And from that reaction, as many of you seem to know, Secretary of State Clinton will be here on Thursday, but tonight, however, we have the privilege of being with a former secretary of state, a former secretary of labor, a former secretary of the treasury and a former director of the office of management and budget, all for the same price. (Laughter.)

GEORGE SHULTZ: Oh, there's a price. (Laughter.)

HAASS: There's no such thing as a free meeting. (There we go ?). (Laughter.)

It's great to have my old friend and my former boss George Shultz here in Washington. I'm told this is the seventh time he has spoken at the council. And I would simply tell you something that I think everyone in this room knows, that he is one of this country's most distinguished public servants. He served in three administration -- if our research is right -- the Eisenhower, Nixon and Reagan administrations, and was involved intimately in everything from international economic policy to the modern history of the Middle East and Asia, and obviously critical moments in the -- in the Cold War. And in between these stints in public life, the secretary sat back and ate bonbons, and he did easy things like running the University of Chicago's Graduate School of Business, leading Bechtel or being a pillar of the intellectual community that is Stanford.

And let me just try to sum him up, someone I've known now for several decades, this way. From all I know about George Shultz -- I'm not sure if I hope not to embarrass you or embarrass you here -- he's a gentleman of principle, of integrity, of conviction, of curiosity and of loyalty. And I've been around enough to know that such packages are as rare as they are -- as they are valuable.

I just also have one housekeeping note before we get started, that tonight, CFR members from around the country and the world are listening in via teleconference. And we're also making history tonight -- maybe in more than one way, depends what you have to say -- but this is the first-ever council meeting to be broadcast live online. And what we're doing is, we're streaming video of this event on this council -- on CFR's YouTube channel, all of which is to say everything you say can and will be used against you. It is very much on the record.

So one and all, please join me in welcoming George Shultz. (Applause.)

SHULTZ: I'm especially glad to have a chance to be here because I see so many people that we served together, went through a few tough times together, worked them through. So there's a little bit of a reunion quality, at least with many of you. So I'm very glad to see you all.

HAASS: (Audio break) -- those of you who are nostalgic for the good old days of interagency meetings, here's your chance. (Laughter.) I'm sure you miss them as much as I do.

Let's start, if you will, where we are now. And here we are, we're, what, 12 (percent), 13 percent into the new century, but most of your career was really during -- against -- done against the backdrop of the four decades of the Cold War. What's your sense of the character that's beginning to emerge? It's now been really 25 years, essentially, since the end of the Cold War, since the end of the other era. And you were there at the end of it. What's your sense? What have you -- what have you concluded about this new epoch, this new era of history we find ourselves in?

SHULTZ: Let me set a strategic challenge that we face as I see it: First of all, let's do a little recollecting. At the end of World War II, some gifted people got together -- mostly U.S., a few others, Britain -- and they looked back. And what did they see? They saw two World Wars, first one settled in rather vindictive terms that helped lead to the second one; 70 million people killed in the Second World War, who knows how many injured, how many homeless. The devastation in many places was appalling.

They saw the Great Depression. They saw the protectionism and the currency manipulation that aggravated it and made it worse and also kind of enhanced the nationalistic feelings that were rising. They saw the Holocaust, and they said to themselves: What a crummy world. And we're a part of it, whether we like it or not. Whether we like it or not, we're a part of it and it's a crummy world.

So they set out to do something better, and then along comes the realization that the Soviet Union was a hostile, aggressive force. So they developed ideas and institutions. They created the International Bank for Reconstruction and Development -- now the World Bank, but initially it was for reconstruction -- the IMF. They created the idea of containment and NATO. And these ideas and the work on them was sustained by a group of democracies, of growing numbers of democracies over a long period. In effect, they created what we might call a global economic and security commons. And everybody benefited from it -- especially us, but everybody.

I can remember in the early '80s, I was in Beijing and had the privilege of talking to Deng Xiaopeng. And he said, well, we've come a long ways in China and we're ready for two openings, remember this, two openings. One opening was inside China so people could move around, and the other was an opening to the outside world. They said, I'm glad there's a reasonably coherent outside world to open to. So all of that happened.

Now, where are we? We are in a world awash in change and we have to be very careful that it doesn't just become chaotic. The global economic and security commons is coming apart at the seams. And we have to ask ourselves why, what's going on analytically, then see what we do to try to get more stability in it.

Let me tick off the things I think are causing this world awash in change: Number one is demography. The face of the world is radically different than it was 50 years ago, and it's continuing to change. In Japan and Germany, they have low fertility, rising longevity and older an older population, a declining population -- still very capable people but a very different picture. They could no more stand off the world as they did in World War II, not a chance.

Russia has a demographic catastrophe with low fertility; the longevity of men in Russia barely exceeds 60. It's appalling. They have, of course, they have practically an open rebellion in the Caucasus. They have a long border with China. The -- many of their best young people are leaving. It's still a bear, but it's a wounded bear.

Then you look across into Asia. Korea's the same. China has one of the most interesting demographics because beginning about 30 years ago, fertility dropped like a stone. What that has meant is that they've had a quarter of a century of a rising labor force and a shrinking number of people the labor force had to support. Now, that's about to change almost like throwing a light switch and suddenly, their labor force will start declining. The number of people the labor force has to support will start rising fairly rapidly. It won't be as sharp as I've studied it, because there's so much underemployment in China, and they still have room to move from rural to urban. So I think they probably skimmed the cream off of that movement.

Then you look across at North Africa and the Middle East. Fertility has come down but not that much. So fertility, relatively speaking, is still high. Longevity is not much, so these are very young societies. And to a very great degree, in too many of them, young people don't have anything much to do, no jobs.

It's worth reminding ourselves that the little guy who sparked the Arab Awakening -- now, it was just a spark, oh yeah, I'm not certainly arguing it's the whole story -- but was a little entrepreneur in Tunisia. He wanted to start a little business selling fruits and vegetables, and he was squashed. He said, why are you doing this to me? All I want to do is work. They wouldn't let him work. Just remember, work attaches you to reality and it gives you some dignity because I get something because I deserve it. So you have that.

Then you have the information and communication age. I don't think any of us can appreciate the depth of the impact of what's going on. I've been following this for quite a long time. In 1962, I wrote a book called "Management Organization and the Computer," -- '62 -- and the argument was you guys are using this device to do payrolls and personnel records but look out, it's going to change the way you run things. My mother bought a copy of the book but she didn't read it. (Laughter.) And that was the extent -- it didn't go anywhere. (Laughter.)

But this has really penetrated, and it's affecting everything. You put it together with what the unemployment in -- that I described in the Middle East, North Africa, and it's a toxic mix because people anywhere can find out important things. They also can organize, they can communicate with each other.

It used to be that the sovereign had a semi-monopoly over information and ability to organize -- no more. So we not only see this in terms of the chaos in much of the Arab world, but Mr. Putin is fighting it off right and left. The Chinese are having -- they're trying to suppress the Internet -- it's a losing battle. It changes everything, changes our own, changes the way you try to run something. So this is a very deep, penetrating thing.

Then we have terrorism and sort of the random violence. We have paid a very heavy price in this country in our response to it. Personally, I think much too heavy. We've got to rearrange our thinking and have a much more precise strategy for dealing with the areas it rises mostly from violent brand -- some kind of brand of Islam. But it's there. It isn't going to go away, but we have to have a way of dealing with it that's -- Iraq and Afghanistan can't be even close to the template for how we go about it.

Then you have sovereignty. It's not what it used to be. There are large areas on the globe where somebody put a circle around something and a name, but there's very little sovereign authority being exercised. Then you have other countries -- you can name them all -- where there is a kind sense of a country, but yet it's so divisive, so maybe different pullings and haulings that if you wanted to go and make an agreement, there's -- you wouldn't know where to go.

Then you've got the ancient space of Europe. They have a national capital. They have given away trade policy and, to a certain extent, immigration policy to Brussels. They've given away monetary policy to Frankfurt, and in the process of putting a fixed exchange rate system in the euro over very different economic units, they have predictably created the chaos they're now living with.

But at any rate, where is the sovereignty? So when you have a world where you don't have the sovereignty that you've been accustomed to, it's hard to know just how you deal with it. And then, of course, we have the economic -- the fact that our own economy here is in such dismal shape, and we seem to be -- we're displaying a kind of inability to cope with it in any reasonable way. Many European economies -- (inaudible) -- and you have a world of (Washington ?) change, and there's nobody -- no country, no group of countries seemingly aware of what's going on and trying to put it together as the World War II post-generation did.

And I have to say, having been through several crises of one kind or another, that if the United States is not there, it's unlikely that you'll see anything very consequential happen. So that's part of why the world is in turmoil.

HAASS: And in this world of some disarray and potential chaos, one of the mechanisms that we used during the Cold War to help manage things -- it wasn't just simply U.S. leadership on its own; it was alliances. What's your sense about the continuing role of alliances in such an era as we now live in?

SHULTZ: Well, it's essential that we have the ability to reach out to other countries and try to emphasize the common stake we have. Look at what's happening now to -- let's just take the exchange rate system as one example. What's happening? It's -- a sense of stability and of not using -- manipulating exchange rates is beginning to disappear.

One of the greatest culprits in this is the United States. That is, we have a monetary policy that makes us awash in liquidity, and we keep interest rates down to practically nothing. So the money goes elsewhere. And what does that mean? (Bids ?) up the price of those currencies, and those people don't like it, so they engage in a counter-effort.

Then you get things in particular companies -- the Japanese -- the new prime minister, Abe, has practically announced that they're going to take the end down as best they can. So this realization of people at the end of World War II -- that currency manipulation was a bad thing -- and they tried to do something about it and did do something about it -- is beginning to -- (inaudible).

HAASS: One subject you didn't get to in your "tour de reason," and I know it's one you think a lot about and care a lot about, is energy. Given what's going on with -- here in 2013, we're going to mark -- out of the last 25 years, it'll be our greatest year of oil production and our lowest year for oil imports; we have the natural gas -- the shale revolution -- or transformation -- what is your sense -- have you thought through what you think are some of the consequences -- what they should be or will be -- of this change?

SHULTZ: I think the energy picture, right now, offers us a golden opportunity to develop resources ourselves, but also to work with others to change the energy landscape in a very constructive way. And let me -- if I can take a minute and develop this point -- when I was secretary of labor, for some reason, the president asked me to chair a cabinet task force on the oil import control program. President Eisenhower -- me -- secretary of labor -- what am I doing? I had a committee consisting of the secretary of defense, the secretary of state -- all reporting to the secretary of labor; what a deal. (Laughter.)

But anyway, President Eisenhower thought that if we imported more than 20 percent of the oil we use, we're asking for trouble in national security terms. It was obvious about then that this was not going to be able to hold. So we studied it, and we made a report. We -- for instance, we said the security problem doesn't look to us like it's going to be from some armed force, but rather, likely, erupting from the Arab-Israeli tensions. We said we ought to create some sort of a petroleum reserve. There was no Energy Department and the people who were administering the -- (inaudible) -- were not very many, they said, they ought to -- we ought to have more attention somehow to this. Anyway, the president said thank you very much, nice report. It was published, I testified, nothing happened. Nobody did anything.

So 1973, I'm secretary of the Treasury, on comes the Arab oil embargo. Why? Because we resupplied the Israelis in the '73 war. It was interesting how they applied it because the British and the French wouldn't allow us to use their airfields in resupplying, but the British and French got plenty of oil and we got nothing.

At that time, a lot of electricity was produced by oil, so it had a deep impact on our society. Christmas lights were practically -- couldn't have them. Gas stations were asked to close on Saturday afternoon and Sunday to keep from -- (inaudible). It was a huge thing and our economic was hit.

So I learned from that, this subject is a strategic subject, big time. It's a subject of tremendous economic importance. I also learned something that seemed in our report like an obvious strategic set of things we should do, nothing got done until something happened. And then people said, what to do? At the same time, people would come in and they had ideas about alternatives. And I could see they were good ideas, but there was very little content to it.

Anyway, the crisis passed, the price of oil went back down, and everything stopped on looking for alternatives. But we've been through that cycle a few times. Now, there are two things that have happened that can change the landscape if we pursue them, and the issues are political, not technical. The science, I had -- I chair of the advisory panel for the Stanford work on energy. There's a huge body of science, and I chaired the MIT one, so I listen to these guys and what they're talking about. So there's a lot going on there. I'll mention -- I'll develop that a little bit.

Then we have this fracking technology that has opened up dramatically gas and oil in this country, but of course, it's applicable all around the world. Now, why do I say political? Because it's really important that there are problems connected to the fracking. You get methane releases, you have a lot of wastewater to deal with. And unless you deal with those things properly, the whole thing can blow up in your face.

I'm convinced that people know how to do it right. It isn't like it's a problem we can't solve. It's a soluble problem. The Environmental Defense Fund is doing a good job of studying this. And there are companies doing it right, but there are also people who will maybe do it -- and all it takes is some big blowup and it sets us back. So we've got to get ourselves the right kind of regulatory process that will keep this going, because it can do so much good for us.

At the same time, always in the past when the fossil fuel picture looked better, all the effort on the R&D stopped. We've got to not have that happen because that's the longer-run future. And here are some of the things that I see going on in the scientific community: Solar panels are pretty close to being competitive with the grid today. You talk to the guys working on it and they're full of ideas of what they call efficiency. And over half the costs today are installation costs that they -- (inaudible). So I say to them, why don't you work on making things that are easier to install?

Then we have batteries. A couple of weeks ago at Stanford at SLAC, it was an announcement of a discovery of something to do with lithium ion batteries that will improve their ability to operate by an order of magnitude. That's huge when it comes to electric cars. There are some very capable people working on the subject of large-scale storage.

Now, large-scale storage, think of the implications if we can get there. It takes the intermittency problem out of solar and wind. It also does something else we've got to pay attention to, and that is it gives you distributive power. And our grid is very vulnerable to cyberattack and to natural disasters. So we better learn how to produce energy closer to where we use it.

So people are working on these things and many others, the fuel cell development is -- there's a company that produces fuel cells out of common sand, so they got plenty of raw material. And they've configured them in something the size of a pickup truck. And they have their computer program over them. You put natural gas over this process, they get pretty good scale power.

There are also people working on how you get hydrogen out of water inexpensively. And I keep arguing with this company, you ought to work on that because you can put hydrogen over these fuel cells and get electricity and potable water -- think of what that would do for us in a military operation in some far-off place.

So there's a huge amount -- a huge amount going. And first-class science and first-class engineering. And it's vital that we keep adequate the sustained support for this effort because this is what in the long run is going to turn things around. So it's right there in our hands if we have the sense of strategy and the sense of political will to see that we stick to it.

And I think also -- I know of -- I read in Washington nobody thinks there's any global warming. Let me tell you, it's not a matter of science or extrapolation or anything. Just go up north -- there's an ocean being created that wasn't there before -- an ocean! And now they're arguing, is it a Canadian river or a navigable waterway or what -- who's got control of this that and the other thing. To think it's all because an ocean is being created. It's a matter of observation. So we better get with it.

And one of the interesting things -- I see Gary Roughead is here. He has a little -- it's kind of a movie of sea ice over, I think, around a 15-year period. And the disappearance as the climate goes like this, and then about 2007, I think it is, Gary, it takes off. So you have to watch out because there are some nonlinear possibilities here that you have to watch out for. And if they take hold, then you can be too late. So I think this is something we need to be working on hard.

So possibilities are there. Any of these things that I've talked about are applicable anywhere. And we're leading the way in the R&D. We've led the way in the fracking technology. I was in Beijing in a little group that Henry Kissinger lead earlier this year -- or 2012. And we met with the man who's going to become premier. And I brought up fracking technology, he was all over it like a tent.

He knew a lot about it; he wanted to learn more. He detailed places in China where he thought it would be applicable. I guess their situation is very different from here, but it isn't like this is the only place in the world that has these deposits. So this is a big thing. The question is not, is the science there -- it's there. The question is, will we have the political capability of exploiting this opportunity.

HAASS: Since you've now alluded to it, let's come to the question of politics for a second, which is here you are, you're back in -- you're back in Washington even though you live roughly 3,000 to the -- to the west of here. It's a very different city than the city you worked in back in the six and a half years that you were secretary of state.

To answer your own question, in a sense, do you think the politics are such that they do allow us to take necessary decisions to make some rough trade-offs, whether it's dealing with the energy questions or entitlements or climate change? When you -- when you look at our political process, do you despair?

SHULTZ: No, I think it's a piece of cake. (Laughter.) The answers are so obvious that sooner or later even the people in this town will get it. (Laughter, applause.) It's obvious. I know I -- obviously, it's almost a quarter of a century since I've been in office here and I don't come very often. But I know quite a few senators and members of the House personally. They're terrific people -- smart, good people, patriotic.

And somehow, that's the same as it's always been. And I have to believe that somehow or other, people will put this piece together, because the needs -- the problems are very clear. The opportunities are there. What we need to do is clear, and we've just go to get around to it. That's all.

HAASS: Two last questions -- though let me say, the optimism is as refreshing as it is rare. (Laughter.) One is from your book -- from your memoir. And there's -- at times, you sound like -- a little bit -- there's a -- there's a connection between you and Chauncey Gardiner in the movie "Being There," and I mean that in the highest possible compliment -- (laughter) -- which is, you draw a lot of analogies between diplomacy and gardening.

And you talk here -- and you said, from all my experience, I appreciate how important it is to see people on their own turf, where they feel at home and where you meet the people with whom they work. I call this kind of work gardening, and it is one of the most underrated aspects of diplomacy. The way to keep weeds from overwhelming you is to deal with them constantly and in their early stages.

SHULTZ: It's true. (Laughter.)

HAASS: You wrote it; I'm glad you think so.

SHULTZ: But it's obviously true in a garden. But I think it's true in all kinds of other human relationships. If all you do is come to somebody when you've got a big problem, then you're never -- that's the only time you'll see them. It's not going to be anywhere near as good as if you get to know them and listen to them -- hear their problems, let them hear yours, and you develop some sort of a relationship, and then, when you've got a problem, you have things to work from.

So I like little analogies like that. Two others that I like are -- when I was in the Marine Corps boot camp, sergeant hands me my rifle. He says, take good care of this rifle; this is your best friend. And remember one thing: never point this rifle at anybody unless you're willing to pull the trigger. No empty threats.

Now, I told this to President Reagan once. He kind of blanked on it, and I said, Mr. President, we need to be very careful in what we say. Because if we say something is unacceptable, that means there have got to be consequences if it happens. You say something is unacceptable, and it happens and you don't do anything, nobody pays attention to you anymore. You know, we've got to watch that process.

The other thing I learned from -- in the Marines -- we had taken this island out in the Pacific, and there was a -- there were adjacent islands, and we were there after the invasion was over. And their natives were over on the other island, and we knew they made grass skirts and little canoes and so forth. And the Marines liked to go and buy them and send them home for souvenirs. So we had a deal where the Marines could go over and they could spend two hours on the island. So I'd go over and I'd watch what happened.

Of course, the Marines wanted to buy stuff. And I couldn't help but see that the natives, they enjoyed the process of bargaining. It was fun. The last thing in the world they wanted to do is make a deal. They wanted to keep the process going. (Laughter.) So guess what happens to prices?

So remember that when negotiating. You cannot want a deal. If you want the deal too much, you're going to get your head handed to you. I remember a lot of times -- some of you people remember -- I'd be testifying, and somebody would say, aren't you worried that -- you haven't made a big deal with the Soviets. And I would say, I'm not interested in deals; I'm only interested in good deals. And when we have a good deal, we'll take it, but not -- we don't -- we want to be sure they know that we don't want any deal. We're not that anxious. So these little things sometimes teach you a lot.

HAASS: I like that.

A good place to make a transition. Let me open the floor up to questions from our members. What I ask them to do is wait for a microphone and identify themselves and let us know what you do. And if you keep your questions short, and depending upon how succinct our guest is tonight --

SHULTZ: Was that a hint?

HAASS: No. (Laughter.) I am incapable of subtlety. So -- no, actually, Elaine (sp) -- Barbara, I'm sorry.

QUESTIONER: I know I look like her, but I'm not.

HAASS: I apologize. (Laughter.)

QUESTIONER: Barbara Slavin from the Atlantic Council. Mr. Secretary, great honor to have you here. You have spent a lot of your career, certainly as secretary of state, dealing with the Middle East. And I'm wondering if you have any advice for the Obama administration on how to deal with Egypt, Syria and Iran.

HAASS: (Off mic.) (Laughter.)

SHULTZ: Well, I think we have to sit back and say, what is our strategy going to be -- not just what our day-to-day tactic -- (inaudible) -- what's our overall strategy? We'd like to see Egypt be a country with a reasonably representative government, that has had an extreme Islamic past to it. It's likely to morph into more or less terrorist things. We have to watch out for that.

In Syria, personally I think we've been a little bit behind the curve, but at least we should say to our friends in Turkey and Jordan -- and I think we are beginning to do that -- that you're seeing this flood of refugees, we'll help you. We're on your side.

With Syria, I have no information. I have no exposure to any intelligence. All I know is what I read. But obviously, they have chemical and biological weapons. I suspect they got some from Iraq when our invasion started, but anyway, they have them, and that is a big-time danger. I hope we know where they are.

I hope we have some people poised to go do something about it if needed. What you see is that the longer this goes on, the more influence Syria are radicalized groups. If they get their hands on the chemical and biological weapons, it's very bad news. So we need to be really worried about that, big time.

How to moderate what's happening in Turkey is a question my colleague, Fouad Ajami's written a brilliant book on the subject. But Syria, as you know, looking back historically, it's an odd country. It was put together of very disparate parts. I don't think it is beyond imagination that it could fall apart, that is the Kurds in Syria, they would just as soon be independent, and they have a lot of sympathetic Kurds in Iraq and Turkey, for that matter.

How this could possibly work out is obviously a very tentative thing to watch out for, but I don't think it's a bad thing if a contiguous ethnic group kind of formed themselves into something. They don't have to be a country, but at least have some identification.

(Audio break) -- wrote a book about, oh, you've got that issue of Iran -- well, the sanctions that have been applied, from what I read, are obviously having a big effect. Iran is a country that has been ruled very poorly from the standpoint of the population. They just haven't had good governance.

And so there's a lot of pressure there, but I think anybody that thinks they aren't trying to get a nuclear weapon must have holes in their head -- that's what they're going for. And I think that would be a calamity as you have proliferation of weaponry taking place. And we have to prevent it.

So there are all of those things, but so you can see there's a lot of strategic elements in this, not just tactics of what you saw. I think it is very important that we strategize before we tacticalize.

HAASS: (Audio break) -- ask lots of follow-ups, but I -- anything in the back? Then we have -- (audio break) -- gentleman, sure.

QUESTIONER: I'm Bob Bestani, I just left Stanford to join the Department of Energy. And I wanted to ask you, as the former chairman --

SHULTZ: How could you possibly leave Stanford -- (laughter) -- to go to the place --

QUESTIONER: It happens in the best of families. But I wanted to ask you, as the former chairman of Bechtel, how do you think with the federal government out of money, with the states out of money, with the municipalities out of money, that America can come to grips with its infrastructure crisis that we're facing?

SHULTZ: I've read reports of groups like the American Society for Civil Engineers and people like that who've looked at this. And there seems to be little doubt that our infrastructure is going down and is in bad need of repair. So it seems to me, we need to have a program for that that's not a sort of tactical program to do something this year, shovel ready, it's more a long-term strategic program to get this right.

And there are various ways of going about it. Of course, the most important way is for our federal government, our state governments, our city governments to get their house in order. They've all overpromised. And we have to get it under control. And there are many states and cities that are making heroic, tough-love type efforts to deal with it. And it looks to me like those people are beginning to be reasonably successful.

There are also ways of going about the financing that are tricky, but do able, called public-private partnerships. And what that means is you get private money to come in and help develop this infrastructure. And you know that that can only happen if the private money sees that there can be a reasonable rate of return on their investment. So the public has to be ready to accept the fact that, yes, somebody's making money on whatever it is that you're trying to do.

I do remember once when I was at Bechtel, the Manila, Philippine water system was in terrible shape and they asked us to come in on a private-public partnership basis. And we did it. It was a mistake because here's what you learn right away in something like that. A lot of the water disappears. Why? Because people are deliberately tapping it and getting it. And so if you go around, as good engineers, and shut that off, you got a rebellion on your hands.

So I've always said, if you're going to have a public-private partnership, you got to have the public side face up to problems like that before you start so you can make it work. But there are lots of examples of success in this kind of thing. And some things are relatively easier to do than others -- toll roads -- well, right now, the Golden Gate Bridge, the Bay Bridge, we have tolls and they've risen and they're in pretty good shape.

So I think the answer to your question, from my standpoint is, yes, the premise is right. Yes, we should do something about it. I believe it should be done on a strategic basis and not on a sort of let's do whatever's shovel ready -- most of the things aren't shovel ready, anyway -- basis, and get the job done.

HAASS: Ma'am.

QUESTIONER: I'm Priscilla Clasp (sp), retired from the State Department, like you.

SHULTZ: A little louder, sometimes my ears aren't so good.

QUESTIONER: Sorry. I'm sorry. Priscilla Clasp (sp), I'm retired from the State Department, like you. You said that Iraq and Iran -- I mean, I'm sorry -- Iraq and Afghanistan are not really the best way to deal with an Islamic terrorist threat. Do you have any ideas about what we should be doing?

SHULTZ: First of all, we need to have good intelligence. And probably that means, to an considerable extent, human intelligence. That's hard. I don't know what the state of it is at the CIA, but I know it's hard because to do it right you have to have people who are willing to be palling around with some unsavory characters.

And then we have to resist saying, you palled around with an unsavory character, we're going to throw you in jail or something. (Laughter.) But that's not going to work. So there's a certain sophistication there. We have to learn how to be in good collaboration with other intelligence agents.

I think we need a much more aggressive and thoughtful sort of public campaign about the subject that reaches into the Islamic world. Here's something that we did at Hoover. We have wonderful archives at Stanford's Hoover Institution, where I spend my time. And so out of the blue, the Radio Liberty/Radio Free Europe presented us with their archival material some years ago.

So we had people study it. And we had a conference and people who had studied this archival material, people who ran BBC, Voice of America and some people from behind the Iron Curtain -- officials and others that were the target countries -- and we had about a day and a half conference on did anything work? If so, what, and what do we learn from this?

And what came out of it was, a lot worked. And there were a lot of lessons to be learned about what worked and what didn't work and how you -- the things you had to cope with and so on. And then we had another one about six months later, and we had people who knew about the Islamic world present. And we said, well, here are these things that worked, and here's what we learned is applicable. And we thought there was a lot applicable.

And we tried to call that to the attention of Uncle Sam. And we didn't get anywhere. We didn't get any takers. I don't know what people are trying to do. I know Dick Fairbanks is -- a wonderful man who is ill right now -- but he started something, but I think we should have a much stronger effort to reach out and tell our story and so on, as we did in World War II.

And then, I guess you have to say to yourself that our ability to be precise when we do have the intelligence and take things out is something we have to do in now, but the idea of going somewhere and sticking around forever is a loser. It's a lesson I learned from our peacekeeping operation in Beirut. It was there too long. It's -- as I look back on my years of service, that's the thing I second-guess myself the most on.

HAASS: All the way in the back. Yes, sir.

QUESTIONER: Back to Iran, again. Around town --

HAASS: What is -- I don't --

QUESTIONER: I'm Jim Gilmore from the Free Congress Foundation. Around town, there's some thinking right now that an assault on Iran, if they persist in trying to get a nuclear weapon, is just too terrible to contemplate, and it might ignite something that we just can't control. Therefore, there's a growing sense that we should be planning to conduct a policy of containment like we did after World War II with the Soviets. What do you think about that?

SHULTZ: Are you kidding? (Laughter.) I was glad to hear Secretary of State-tantamount Kerry, in his confirmation hearings say that our policy is not containment. Those were good words. Here's something that I think we should do different with Iran. Iran is a very aggressive country -- does constantly things that are out killing people, including Americans. To take an example, I read recently that they shot at an unarmed drone in international waters. What did we do? Protested. That's nothing.

Here's an example of something we did under different circumstances. In -- I think it was about 1986, the Iranians were messing around with Kuwaiti shipping. So as you remember, we reflagged the ships to our flag so we could defend them. When the president of Iran was somewhere making a speech saying the last thing Iran would do would be to mine the Persian Gulf -- our Navy was taking pictures of them doing it. So we boarded the ship, took off some mines, took off the sailors, sank the ship, took the sailors to Dubai and said to Iran, come and get your sailors and cut it out.

So we exposed their lie, we let them knew we understood what they were doing, and there were consequences. And they cut it out. So I think that there is something between sanctions and an all-out war that we're not exercising. And I might say, from the standpoint of international law, if you want to think of such a thing, if you take the kind of actions I'm describing, it's in self-defense, which completely is OK.

There will be a lot of kerfuffle about a major attack. But I'm not -- but I don't agree with your premise that we'll just have to learn to contain them because look what happens. Then you have fissile material lying around, you have other states getting nuclear weapons. And the probability of a nuclear weapon going off somewhere rises to practically one. And then what happens? I remember when the Chernobyl accident happened, and it was a giant problem. And they're still coping with it, still going on today.

And the first meeting I had with Mikhail Gorbachev after that, I found out that he had asked the same question I had: What's the relationship between what happened at Chernobyl and what would have happened if it had been one of our nuclear weapons? The answer is it's not even a close comparison. I think that had an impact on Gorbachev's thinking. But once a nuclear weapon goes off somewhere, I think people will say, what good are governments if they can't prevent something like this?

So I think that we've got to stop it -- gone too far already. North Korea is a problem. The most dangerous place in the world right now, I think, is India-Pakistan. We've had -- I see Craig -- (name inaudible) -- is here. He's helped us at Hoover, we've had -- we, Bill Perry and I, had quite a few India-Pakistan-type, track two-type things. And those people cut each other up to ribbons in the most elegant fashion, but they still cut each other up.

And you can easily imagine, and they easily imagine that some semi-rogue group pulls off another Mumbai and India won't be so -- won't be so careful, and all of a sudden, you can have something get out of control, shooting each other in the Kashmir just the other day.

So this is a very dangerous moment, and if Iran gets a nuclear weapon and that spreads more, then all you have to do is get a hold of the fissile material and then a good MIT student can help you make a bomb. The fissile material is the most difficult part. And if you get enriched uranium to weapons-grade, that's a lot easier than trying to make it out of plutonium. I don't know this, but my physicist friends, that's what they tell me.

And you know, the Hiroshima bomb was never even tested. It was an enriched uranium bomb. So the physicists didn't think they needed to bother testing it, they were so sure it would work. So I think this is a critical moment. And I've been working on this issue, you probably know, with Henry Brinton -- Henry and Bill Perry and Sam Nunn and I and a whole bunch of other people working on this, and I think we've got a lot of attention, but it's in a holding state right now.

I think President Obama, one of the things he did that was really good in this was he convened this group in Washington, I think, of around 40 heads of government to concentrate on the subject of getting better control of fissile material. Then there was a follow-up meeting in Seoul, same thing, and I think something like 50 heads of government came to work on this.

So I think that's a good pattern, and if somehow we could have emerge out of that the kind of a joint nuclear enterprise and this group take on subject fissile material, so on, there are a lot of different subjects. And if you get a hold of any one of them, the world is a little safer. And to start moving in that direction, it would be a very constructive thing.

But containment of Iran? Give me a break.

QUESTIONER: Mike Mosettig of PBS Online News Hour. You had a pretty strong critique of the euro. What suggestions do you have to the EU to get out of the mess that you said they've created?

SHULTZ: I think they'll have a hard time as long as they keep that structural problem in place. There seems to be a dedication to the euro. It stems from the concern in Europe over war. And this is all about trying to create a Europe, embedding Germany in it, so that you don't have that break out again.

I was in Berlin about two or three months before the euro was put into place. I was then chairman of the JP Morgan International Council. And we were discussing the euro. Marty Feldstein, a really terrific economist, was among those present of the financiers present. Everybody was criticizing. They were saying, look, if you're going to do it, this and this and this is going to happen.

And -- (inaudible) -- to our meeting, and he listened to this for a while, and he got up and he said, a decision has been made. It's a matter of war and peace. It's up to you to make it work.

Well, I think in the effort to construct a Europe, you have to do things that are compatible with the diversity of Europe. And if you make the assumption that Italians are going to become like Germans, that's not a good assumption. (Laughter.) And so now they have got this problem and they want to keep the idea of a euro. OK, well, then why not develop a soft euro and a hard euro or something like that and let people move around?

They had a good currency system in Europe. It was created by my friends -- (inaudible). It's called the European Monetary System, EMS. And you remember they had some countries that they recognized were -- couldn't be tightly bound together, so there was a very loose system. They called it the tunnel. And then inside, among a few countries, there was the snake in the tunnel. Do you remember that? That worked pretty well. Do you remember the British got out of whack and they withdrew? It was not a big deal. I mean, there were problems, but it was not any big deal.

So that was a perfectly workable system. I think, in a way, it illustrates a common governance problem that we have all around the world. We have it in the United States. It's a very diverse world. In the United States, we're probably the most diverse country in the world. We have people here from everywhere. I think the governance trick is to allow expressions of diversity to go right ahead, at the same time emphasizing the common things.

I live in the Bay Area. In San Francisco, we have Chinatown. I think it's something like 20 percent of the population is ethnic Chinese. And this is an expression of their culture, and everybody kind of likes it. It's a great place to go and have Chinese food. It's -- but -- and now we have a Chinese-American mayor, but he isn't part of a Chinese (map ?) yet. He's governing the whole city. He's doing it very well, I think.

But -- so you're recognizing diversity. Don't try to suppress it, say we shouldn't have a Chinatown. That will get you trouble. And I think that it's this blend that's needed. And the Europeans and the euro stepped over the line on this. And how they get it back is hard. They obviously don't -- I mean, they're struggling. And there's a tendency to go even further in greed, which I don't think -- it won't fix the problem. So I'd rather say, well, if you must have the euro, why don't we try to have a soft euro and a hard euro or something? That would kind of go back to a different nomenclature for the tunnel and the snake.

HAASS: Last question, James Mann, and it's a short question. And we'll -- I apologize in advance to the many people I haven't been able to get to.

QUESTIONER: James Mann, author, Johns Hopkins SAIS. I wanted to ask one question about Asia. You know, when you -- shortly after you became secretary of state, there was -- the regional magazine Far Eastern Economic Review ran a cover cartoon that showed either George Shultz or Uncle Sam at a street corner pointing towards Tokyo and Seoul, with Beijing (at its backward ?).

And you used to argue that our relations with China improved when they were -- we were not too overly involved or eager for them. I wondered if you could apply that to now. It appears to me as though the Clinton -- I mean, excuse me, the Obama administration has gone through kind of the same sort of development -- that they are suddenly beginning to orient themselves more towards the other countries in Asia than to China. But I would -- I'd love to hear your views of the current situation.

SHULTZ: Well, I think that you better pay attention to China and not just the other countries. But going back to the time you referred to, when I first took office as secretary of state, 1982, our China relations were kind of rocky. And I tried to figure out why. And it dawned on me, rightly or wrongly, I thought it was being run by the old China hands. And these people were preoccupied with the relationship. And the Chinese are smart, and they understood this.

So if we wanted to do something, they would say, oh, you better not do that; it might ruin the relationship. Or, if you didn't like something they did, well don't -- it'll ruin the relationship. I said to myself, you know, I've seen this movie before. A few careers ago, I was the labor secretary. And right after World War II, there were lots of strikes.

And people were writing about strikes and why the strikes, but there were also -- were places where labor and management were getting along pretty well. And so people commissioned studies of -- were called the causes of industrial peace under collective bargaining, and as a young assistant professor at MIT, I wrote a couple of the case studies explaining, how did this happen?

And then a few years later, you look back, and quite often, these relationships had deteriorated. So we studied, why did they deteriorate? And the answer was always the same: They came to value the relationship too much. And some guy would have a grievance, and the shop steward would say, cool it. We've got a great thing going in here; don't rock the boat. And the same on the other side. And that accumulates, and pretty soon, this whole relationship is not serving the interests of the people in it. Too much emphasis on the relationship.

So I had a trip to China in early '83 -- to Japan and China. And I'm going to end with this -- you said this was the last question -- I want to end with a story about Paul Wolfowitz, who is here, I think. Where are you, Paul? Are you here somewhere? There you are.

Anyway, I went to China strategizing with the president on this, and basically, I said, you put on the table anything you want to talk about. I'll put on the table anything I want to talk about. Let's form that into an agenda. And then I will come here at least once a year, and you, my counterpart, Wu Xueqian -- you come to the U.S. at least once a year. And at probably two or three places -- times a year when we'd go to the same meeting and we'll make a point of setting aside three or four hours for just the two of us.

In the meantime, staff work can be done on this agenda. And if we can take advantage of opportunities and get problems solved, we'll have a good relationship. If we can't, we won't. And that worked. They liked it. And I think it's fair to say -- even Henry Kissinger has told me that that period of time, the Reagan period, was a good period in China-U.S. relationships. So I think that that's the kind of thing we should follow. But on this trip, Paul had just become the assistant secretary for that part of the world. And he we had this long trip. We'd leave here and we'd fly to Alaska and then to Tokyo, and we'd get there in the afternoon.

And of course, the foreign minister immediately has a dinner. And he gives a toast that's dull. It's translated. I give a dull toast. It's translated. And Paul Wolfowitz falls asleep while I am giving my toast. (Laughter.) So my assistant, a man named Ray Seitz, who later became ambassador to the U.K., but he was a terrific foreign service officer -- he was my executive assistant.

So he pokes Paul, and he says, Paul, good advice for a new assistant secretary, don't fall asleep in the secretary's toast. (Laughter.) So Paul says, well, how did you stay awake? (Laughter.) And Ray Seitz says -- Ray Seitz says, diplomacy is a cagey craft. I was sitting on my fork. (Laughter.)

HAASS: Hard to top that off. (Applause.)

I want to thank Secretary Shultz, in part for tonight but, again, for a career over the decades where he has given so much to this society and country in ours in so many different ways. And again, thanks for a wonderful evening and conversation tonight.

And I look forward to seeing many of you back here Thursday night when we will have another soon-to-be former secretary of state, in this case Hillary Clinton, give a -- give her final address as secretary here.

So thank you very much. (Applause.)

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