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

65. Memorandum From the Under Secretary of State (Ball) to Secretary of the Treasury Fowler¹

Washington, July 28, 1965.

SUBJECT

• Some Thoughts on the British Crisis

Tony Solomon and John Leddy have been keeping me informed of the talks in Treasury on the UK situation. My own thinking is running along the following lines:

1. If the new program fails to convince and a massive run on sterling threatens or develops, we should then tell HMG that we will do everything possible to round up maximum multilateral support, provided they take the further internal measures we deem necessary. We should be very tough in our demands, even though we cannot expect full performance—including a freeze—or partial freeze—on wages and prices, stiff down payments on hire purchase, use of the so-called “regulator” to increase the purchase tax. By “maximum multilateral support,” I mean something like $3–4 billion, of which we would have to provide 50% or maybe 75%. This would be a short-term arrangement—say 6 months—to give everyone a chance to assess the longer-term situation.

I understand this is substantially the proposed line of action shaping up in the Treasury talks.

2. The procedure for carrying out 1, above, will probably require telephonic exchanges with the other members of the Group of Ten. (We talked about this yesterday.)² I can’t see any other practical way of raising the money. If the UK were to ask for a meeting of the Group of Ten in Paris, the visibility of a conclave of Finance Ministers and Central Bankers would probably touch off a further run. The French would be given a golden opportunity to wreck the operation if that is what de Gaulle decides he wants. And the representatives at Paris would be out of touch with their heads of state and other officials whose support for the operation is essential.

I would concur, therefore, in what I understand to be Fred Deming’s view—that we try to round up short-term funds over the wire. This would begin with the most willing (the Germans) and wind up with the least (the French). The Group of Ten should meet afterwards and quickly to sort out the longer-run problem.

I believe that this procedural point is also in accord with the consensus of the talks at Treasury.

3. But I am frankly appalled at the thought, put forward during the Treasury talks, that we should suggest to the British, at any point, that we would tolerate the devaluation of sterling. I think we should let them know in no uncertain terms that any change in the sterling rate is out of the question.

I know the technical arguments for a mild devaluation of, say 10% to 15%, for which everyone else, or nearly everyone, would be expected to stand still. But I think it is politically unrealistic to expect any British Government to take a half-measure of this kind—particularly since it would have to take some further internal steps to give it credibility. I believe the British will either take their political medicine internally or make a big move externally and hope to muddle through in the scramble to pick up the pieces.

If they should make a big external move they would wreck much more than the monetary system. Our foreign political and defense policies would be badly mangled. The United States, as the leading Western power, could not engage in economic and financial warfare with other major trading nations of the world and still maintain functioning military alliances—or, in fact, effective cooperation of any kind. The devaluation of sterling would set in train forces that could complicate the crises in both the Far East and Europe.

4. Ever since 1961 I have been beating the drums for reform of the international monetary system. But we must avoid at all costs achieving reform through the process of chaos. A substantial devaluation of sterling—in my judgment the only kind of devaluation politically possible for the UK—would result in just that. Monetary infighting through floating rates, threats of countervailing duties, the suspension of gold purchases and sales, and the ensuing collapse of the IMF and Kennedy Round would not only louse up world trade but would shatter the free world political and defense system that is already seriously strained by Viet-Nam, the stresses in Anglo-German relations, the hardening of the Soviet line, the crisis in the Common Market, and the vagaries and intransigence of the Master of the Elysee. A “monetary conference” under these circumstances would—by comparison—make the World Monetary Conference of 1933 look orderly and constructive.

5. I conclude, therefore, that

(a) We should insist that sterling be held at $2.80—and use all necessary instruments of persuasion to back up that insistence.

(b) We should be prepared to offer necessary financial assistance ourselves, and necessary help in rounding up funds from Europe.

(c) We should insist that in order to accomplish (a) and (b) the British finally face up to the need for adequate internal measures.

(d) We should insist that they maintain their political and defense commitments in Europe and East of Suez.

(e) We should tell them that failure on their part to proceed along these lines could entail a collapse of the existing monetary, political and defense structure of the Free World and put an intolerable strain on our relations.

George W. Ball ³

1. Source: Department of State, Ball Papers: Lot 74 D 272, Fowler Memorandum. Secret; Personal.
2. This exchange has not been further identified.
3. Printed from a copy that bears this typed signature.