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

66. Memorandum From the President’s Special Assistant for National Security Affairs (Bundy) to President Johnson¹

Washington, August 5, 1965, 9:30 p.m.

SUBJECT

• The Sterling Crisis Deepens

1. The British have been into us on three wires today reporting their growing concern for the very near future of Sterling—and we think they are right to be worried. Cromer at the Bank of England has called Martin repeatedly, Callaghan at the Exchequer has called Fowler, and Derek Mitchell in the Prime Minister’s office has just talked to me for a half-hour on the secure direct line.²

2. In essence, the situation is this. There is heavy pressure against Sterling from a variety of sources. They lost $80,000,000 yesterday and $180,000,000 today. Estimates of possible losses tomorrow run between $300,000,000 and $500,000,000. If it goes on at this rate into next week, they would literally run out of reserves and be forced into devaluation in a very few days.

3. This situation has triggered intense trans-Atlantic discussion of the basic proposal discussed with you by Joe Fowler a week ago.³ The essentials of this emergency deal are three: first, that the British take action which we can responsibly report to central bankers as proof of their readiness to make an effective defense of Sterling over time: second; the U.S. takes the lead in organizing a central bankers’ defense; third, the Europeans—especially the Germans—agree to go with us in a big way so that we are not left with an essentially U.S. defense of Sterling. It remains the flat opinion of all your advisers that it would be better to let Sterling go than for us to take on its defense without a major foreign contribution.⁴

4. The British know that this is our position. Their difficulty is in finding the right proof of their continued determination. Of the available measures, only one meets their double requirement: that it pleases the bankers and also makes sense economically; that one is a wage-price freeze. Such a freeze requires legislation, and Parliament rose today! Still more serious, from the Prime Minister’s point of view, is the fact that, in his judgment, he simply cannot unilaterally announce a wage-price freeze in the first week of August without losing an intolerable amount of his union support. The unions will feel betrayed, because the Trades Union Congress meets in September, and this issue should be settled between the government and the congress there, democratically, not now, by fiat. Mitchell says that the Prime Minister would rather devalue and go to the country than try to impose a wage freeze now.

5. The best the British seem prepared to do is to give us private assurances now that they will get a wage-price freeze in September—either by agreement with the TUC or by legislation obtained in spite of union resistance. (It seems clear to me that Wilson believes that he can get union support in September and then put it through Parliament in a special session. This is what he is prepared to promise, with ifs, ands, and buts still undefined.)

6. We have not yet focused sharply as a government on the question whether such assurances would give us enough to take to the European central banks. Francis Bator’s first guess is that it could be done this way if the assurance is strong enough for Bill Martin to believe in it. We will know more on this tomorrow when Deming gets back from London tonight and Callaghan gives more details to Fowler.

7. Meanwhile there are two special problems:

• First, tomorrow itself may produce a deadly hemorrhage of Sterling. The best we can do to guard against this is for the Fed to act on its own in local defense measures of a straight short-term sort. This Martin has already undertaken to do.
• Second, Mitchell made it very clear in his talk with me that if the Prime Minister is faced with imminent devaluation, he will try to come over here and dump the problem in your lap, no matter what stage of agreement or disagreement the two governments may be at. I have told Mitchell in the strongest possible terms that there should be no such visit unless we agree to it, and that I do not myself see what the virtue of it is. I told him that if we had an understanding the visit was unnecessary, and that if we did not have one, I would think it very dangerous indeed. I am sure the Prime Minister will not come without further consultation (he is in fact on a train to the Scilly Isles, because if he changed his plans and stayed behind it might deepen the panic for tomorrow). But we may have to make our point with them again tomorrow.

8. Francis Bator is watching this problem through the night. In particular he will meet Deming’s plane at midnight and arouse us all if there is a need for nighttime action. Otherwise, we will be on deck early to watch the London market. Then we will meet with Fowler at 10:00 a.m. and be ready to report to you at 11:00 a.m, when Fowler already has an appointment with you.⁵

McG. B.

1. Source: Johnson Library, National Security File, Country File, United Kingdom, Trendex (Burke Trend), 4/65–8/65, Box 215. Secret.
2. For a British Treasury official’s view of the crisis, which was not alleviated until the central banks in the Group of Ten (except France) provided credit to the United Kingdom on September 10, see Alec Cairncross, The Wilson Years, pp. 65–77.
3. No record of this conversation has been found.
4. Strategies for dealing with a Sterling crisis were under active consideration in the Deming Group. Papers for the Group by George H. Willis include “Emergency Financial Assistance for the United Kingdom,” July 27, and “Contingency Planning for Emergency Phase of Sterling Problem,” August 20. (Washington National Records Center, RG 56, Assistant Secretary for International Affairs, Deputy to the Assistant Secretary and Secretary of the International Monetary Group: FRC 83 A 26, Contingency Planning 1965–1974, Cotingency Planning for Emergency Phase of Sterling Problem 8/20/65)
5. The President met with Fowler, Ball, Deming, Gardner Ackley, McGeorge Bundy, and Bator on Friday, August 6, from 11:10 to 11:35 a.m. (Johnson Library, President’s Daily Diary)