Foreign Relations of the United States, 1964–1968, Volume VIII, International Monetary and Trade Policy

198. Telegram From the President’s Special Assistant (Rostow) to President Johnson, in Texas¹

Washington, June 1, 1968, 1657Z.

CAP 81212. Following is Secretary Fowler’s memorandum recommending an increase of $150 million in the authorization of the Exchange Stabilization Fund to buy guaranteed sterling.

Treasury purchase of additional guaranteed sterling would be part of a package to exchange some of the UK’s short term debt for intermediate term credit. This would give the British necessary time for their balance of payments program to work. The Europeans are doing their share.

The British have drawn $1.8 billion of their $3 billion line of credit from the U.S. They have drawn $2.4 billion of their $2.8 billion line of credit from the Europeans.

They now propose to draw their standby credit of $1.4 billion from the International Monetary Fund. They will use $700 million to mop up short term credit from the U.S. and the other $700 million to mop up short term credit from the Europeans.

As part of this package, we would convert $400 million of their remaining short term debt to the Federal Reserve into guaranteed sterling—which has no maturity date. This could be done through the proposed increase of $150 million in the Treasury’s authority to buy guaranteed sterling together with the existing authority the Treasury and the Federal Reserve now have to buy such sterling.

We would probably hold this sterling for about three years, but it could be cashed on demand if the UK position turned around more rapidly than we expect.

The package as a whole has two benefits for us:

• —A U.S.-European-IMF funding of a major share of the UK short term debt is essential to avoid a sterling crisis. A sterling crisis now would be unjustified in view of the UK program.
• —The $700 million the UK will pay us out of its drawing on the IMF will increase our reserve position in the Fund and will mop up some dollars held by other Central Banks.

This sterling is guaranteed against devaluation. Treasury purchases of such sterling have neither a balance of payments nor a budget effect.

Secretary Fowler discussed the general outline of the UK package with Chancellor Jenkins when Jenkins visited in Washington in April.²

I believe the package makes sense. Deming’s inter-agency group (Duesenberry, Tony Solomon, Daane, and Ed Fried) have gone into it carefully and concur in Secretary Fowler’s recommendation.

MEMORANDUM FOR THE PRESIDENT³

Subject: Funding of British short-term credits

The U.K. program—sterling devaluation and austerity—has not yet had time to convince the world that it will work. Consequently, there has not yet been a reflow of funds into sterling that would enable the U.K. to repay her short-term liabilities to us or to the European central banks. In fact, the gold crisis, the French crisis, and general uncertainty in the world have led to sporadic losses of U.K. reserves and fairly extensive recourse to additional short-term credit.

It is our judgment—and that of European treasury and central bank authorities—that the U.K. program will work if given time. U.S. fiscal action is expected to improve general confidence and help sterling considerably. The problem—as we and the U.K. authorities see it at present—is to provide some time by “funding” some of the short-term credits and extending the remainder.

To accomplish this, the U.K. will draw its standby credit on the IMF of $1.4 billion and apply $700 million to repaying a like amount of short-term swap credit to the Federal Reserve. The remaining $700 million will repay short-term European central bank credits. Since the IMF drawing has a three to five year maturity, rather than the 3 to 6 month maturities of the swaps, this will automatically “fund” the short-term credits into intermediate-term credits. The presently outstanding credits to the U.K. by both U.S. and others are as listed on the attached table.⁴

Incidentally, to the extent we share in the IMF drawing, our own IMF position will improve. Present prospects are that our share will be $250 to $300 million.

The total U.K. drawings on the Fed swap line are now $1.2 billion, so the application of $700 million will still leave $500 million “unfunded.” We are proposing to “fund” all but $100 million of this by taking on “guaranteed sterling”—sterling guaranteed against devaluation. We presently hold $260 million of such guaranteed sterling and would increase our holdings to $650 million. Of this $650, the Fed would hold $250 million, the Treasury $400 million.

Guaranteed sterling is really a demand credit in the sense that we can cash it in at any time. Nevertheless, we would not expect to do this—we would probably hold it for about three years. It is a perfectly good asset—we could use portions of it, if we needed to and if its use would not put undue pressure on U.K. reserves.

To do this, we need your authority to increase the amount of sterling that the Exchange Stabilization Fund, under the September, 1965, credit arrangement with the U.K.,⁵ may purchase from our present authority of $300 million to $450 million. I recommend that you authorize me to do so.

Henry H. Fowler

Approve:⁶

Disapprove:

1. Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. V [2 of 2], Box 3. Secret; Sensitive. The telegram was received at the LBJ Ranch Communications Center on June 1 at 12:50 p.m. (CDT). A handwritten notation on the source text reads: “6–2–68 Jones told Brom Smith.”
2. No record of this meeting has been found.
3. A copy of Fowler’s memorandum to the President, June 1, is ibid.
4. Attached to the copy of Fowler’s memorandum, ibid.
5. On September 10, 1965, the Bank of England announced that the Central Banks of the United States and nine other countries (not including France) had agreed to extend to it a package of additional financial aid to bolster the pound in exchange markets. For text of the statement, see The New York Times, September 11, 1965, pp. 1, 37.
6. This option is checked.