Foreign Relations of the United States, 1964–1968, Volume XII, Western Europe

248. Memorandum From Secretary of the Treasury Fowler to President Johnson¹

Washington, August 6, 1965.

SUBJECT

• British Crisis

ALTERNATIVE COURSES OF ACTION RELATIVE TO STERLING PROBLEM

There are three main possibilities:

1. Maintenance of present rate, which probably will require some further outside assistance

2. Moderate devaluation (10-15 per cent)

3. Large devaluation (20-30 per cent)

A. Maintenance of present rate

In our judgment, this is the preferable course. The present British program probably would produce equilibrium if left to work without speculative raids. However, it is unlikely that raids will cease until people become convinced that the program is working. Therefore, there is likely to be need for additional finance and for additional measures on their part—partly to secure the additional finance and partly to convince people that Wilson is determined to save sterling.

Our judgment is that we should insist on a wage-price-dividend freeze in order to obtain more finance—from us and the Continent—and to give confidence a boost. Our share of a proposed finance package of $2.5 billion would be $700 million. We would acquire Sterling up to this amount. It would be guaranteed as to exchange value. The cost to us would be small.

B. Moderate devaluation (10-15 per cent)

If devaluation could be kept to a moderate figure and if industrial Europe, Japan, and Canada did not follow, the costs of a small devaluation—while greater than the cost of saving Sterling, would not be unacceptable.

It would not seriously damage our trading position. Our major concern would be with the derivative effects—

the danger of depreciation by Canada, Japan, and the major Continental countries; financial speculation against the dollar and buying of gold by nervous central banks. We would take the following action:

1. Seek a formal public pronouncement, during the crisis weekend, that the Group of Ten will maintain their exchange rates. Such announcements would be concerted either by telephone or by urgent sessions. There is a good chance that the Group of Ten could be persuaded to stand firm. Canada, Japan, and Sweden would require particular attention.

2. We would maintain close contact with all major countries to assure cooperative action in reassuring markets, handling hot money, and avoiding conversions into gold—being careful to avoid any impression that gold is not available on demand.

3. Since the broad theme of this approach would be to restore as quickly as possible the atmosphere of “business as usual,” the United States would announce no change in its policy of gold conversion and be ready to meet any demands for gold from any central bank. This might result in a considerable amount of gold loss, at least temporarily, but would permit the present monetary system to operate until we are clear what improvements are desired.

4. In line with this approach, the gold pool should continue its operations in the London Market, though perhaps permitting wider fluctuations in the price of gold, under careful control.

5. The Treasury would indicate to the United Kingdom that we would expect them to take Roosa-type bonds or to hold dollars rather than buy gold with any return flow of capital.

The costs of devaluation not followed by the major countries probably would be nervous foreign exchange markets and some conversion of dollars into gold—perhaps of the order of $1 to $2 billion.

If other industrial nations followed the costs to us would be far greater—— both in terms of trade position and in terms of gold loss. The consequences would be essentially the same as of a large devaluation.

C. Major devaluation (20–30 per cent)

If the United Kingdom devalued by 20 per cent or more, most major and minor countries would follow. The costs would be unpredictable, but certainly very great. In our judgment a major devaluation of Sterling would cost far too much for us and for the world.

But if it happens, the following steps would be necessary:

1. Suspension of gold sales but no change in the dollar price of gold. In essence, this would leave the dollar to float free against other currencies.

2. An attempt to negotiate new exchange rates with major countries, and reciprocal credit arrangements to protect the agreed rates.

3. Be prepared to threaten retaliation if others impose trade restrictions.

A large devaluation would put in jeopardy the entire structure of trade and payments which we have worked so hard to build since World War II. It could easily have serious long—term consequences for the U.S. domestic economy as well as for our world trading position. With skill and courage, we could perhaps put the system back together. But it would not be easy.

Henry H. Fowler

1. Source: Johnson Library, Fowler Papers, International Classified Materials. Secret; Sensitive.