200. Memorandum for the Record1
SUBJECT
- Meeting with The President—Sterling Balances Problem, July 1, 1968, 6:00 p.m.
(PARTICIPANTS
- Secretary Fowler, Deming, Chairman Martin, Vice Chairman Robertson, Gene Rostow, Okun, Fried)
At the President’s request, Secretary Fowler outlined the problem:
- —There were more than $10 billion in sterling balances. About $5 billion was held in official reserves by sterling area countries; $3 billion in private holdings in sterling area countries; and almost $2 billion in public and private holdings in non-sterling area countries.
- —The sterling area countries were becoming increasingly uneasy about their official holdings. They had lost as a result of the November devaluation. Most of these countries preferred to move out of sterling reserves—in whole or in part—primarily because they were not confident [Page 564] that the new sterling rate would hold. Some were liquidating their holdings gradually.
- —Liquidation of these sterling balances put additional pressure on the UK. The British redeemed the sterling for dollars which forced them to draw down their credit facilities. Thus, even if the British improve their current position, the move out of sterling balances could keep them in serious trouble and add uncertainty to the system as a whole.
- —This action also put pressure on the dollar and the U.S. gold stock. Countries liquidating sterling shifted their reserves partly to gold which they got from the U.S. by asking for dollar conversion.
We needed to stop this process and remove the threat of sterling balance conversions as one step in our program to strengthen the international monetary system. The Central Bankers meeting at Basel, under the Bank for International Settlements (BIS) have been working on the problem for some time. They now had under consideration a British proposal which we had helped to shape and which we believe is feasible. The basic elements are:
- —The British would offer an exchange guarantee to governments for most of the official sterling balances.
- —The major industrial countries would provide a long-term credit of $2 billion for use as a “safety net”. It would be drawn on only to the extent that the governments holding sterling reduce their balances—despite the British exchange value guarantee.
Our share would be a maximum of $700 million and possibly less—depending in part on whether the French were full participants. The remaining $1.3 billion would be taken up by the continental European countries, Canada and Japan. We could meet our obligations through the Exchange Stabilization Fund and through help provided, as necessary, by the Federal Reserve Board.
Under Secretary Deming added that the Basel group of Central Bankers were meeting this coming weekend (July 6–7) to take a position on the proposal. Vice Chairman Robertson would represent us. If the British got a green light, they would start sending their people on missions to the sterling area countries to outline the proposal and seek their cooperation. If all went well, the “safety net” would not only stabilize the sterling balances, but for the most part probably would not have to be used. This, in turn, would ease the pressure on our gold stock and on the system as a whole.
We have been pushing the British hard to move actively on this problem. Their decision to give an exchange value guarantee had been long in coming but they now recognize it is important to move fast.
[Page 565]Stabilizing the sterling balances would help to reduce the pressure on the system resulting from the troubles of the French franc and, at the same time, lessen the danger of a floating rate for sterling.
Gene Rostow said he supported our participation in the package. This would bring more confidence to the system. His main concern was whether the package was big enough to do the job.
He stated that he and Deming had discussed these matters with Blessing, Chairman of the German Central Bank, after the recent offset negotiations. Blessing had strongly supported action on the sterling balances and stressed that it should be done fast under the leadership and through the mechanism of the Central Bankers.
Chairman Martin said that action of this kind was essential to avoid a serious international monetary crisis. He recognized that the means of U.S. participation posed some problems. But he believed that if the President approved our participation the means could be managed through Treasury-Fed cooperation. The Fed and Treasury had cooperated in the past on previous sterling support operations and he believed his Open Market Committee would approve Fed participation in this package if it were clearly a U.S. Government position endorsed by the President. He urged the President to approve our participation and to authorize Governor Robertson to take the lead in supporting it at the Basel meeting over the coming weekend.
Governor Robertson said he saw no alternative to our supporting sterling through these means. If the sterling balance problem got out of hand the entire system would be in danger.
Fried said we had to recognize that the British were heavily mortgaged. They had accumulated a very large amount of debt and would need time to pay it off. On the other hand, their balance of payments program was a good one. Their measures were severe and over time their situation would improve.
The present proposal to stabilize sterling balances was a good one. Others were taking up far more of the contingent liability than was the U.S. If we did not act now we would be putting the international monetary system to serious risks, with consequences for our own economy.
Okun agreed that U.S. participation in this package was very much in our interest. We were buying time for the UK and for the international monetary system, and, at the same time, reducing the risks for our own economy.
The President asked whether the British were doing all they should be doing to bring their house in order. Secretary Fowler said the UK suffered from structural weaknesses—such as labor practices—that were going to take a long time to correct, but their program looked good. They had increased taxes and were trying to keep both wages and prices in line so as to cut domestic consumption and make room for increased exports. [Page 566] Okun supported this judgment and added that the British measures had received the approval of the International Monetary Fund and had been discussed favorably in the working group in the OECD. British trade figures so far had been disappointing. It was taking longer for devaluation and the British program to work. But he believed that the results would eventually be seen.
The President said that unpleasant as the choices were he saw no alternative to going ahead in support of the program. He approved U.S. participation and our leadership in getting the support package into operation.
- Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. V [1 of 2], Box 3. Secret. Drafted by Fried on July 2.↩