232. Memorandum From the President’s Assistant for International Economic Affairs (Flanigan) to President Nixon1
RE
- Floating the English Pound
The British government announced early this morning (June 23rd) that the English Pound would be permitted to float. This action was [Page 628] taken after the Bank of England had bought $1 billion of pounds on Thursday, half that amount on Wednesday, with total Bank support during the week estimated by the Fed at $3 billion.2
The cause of the speculative run on the pound has been the decline during the past several months of Britain’s visible trade balance from a healthy surplus to no surplus, the competitive prospect associated with entering the European Community, and the recent threat of a dock strike. The action is taken, however, when Britain’s current technical position in terms of reserves and balance of payments had been considered relatively strong.
The British action shows the wisdom of U.S. refusal to consider convertibility until a new and stable monetary system is in place. The European community announced two months ago narrower bands for exchange rate parities between currencies of the ten members. These good intentions did not prevail against the massive movement of short-term funds, as the community had devised no mechanisms to give economic validity to the new parities. The central banks of the members did attempt to support the pound, with the Germans having bought $500 million worth on Thursday. It will be interesting to see to what extent the other central banks continue to support the pound.
The British action will have some negative effect on the U.S. balance of payments, undoing to some extent the effect of the December actions.3 Arthur Burns expects the pound to devalue 5% to 8% against the dollar. The Smithsonian Agreement resulted in a revaluation of the pound by 8.6%.
Among other results of the pound float, the Irish pound will undoubtedly follow the English pound, as may some Scandinavian countries, Portugal, and some others. The Community will clearly have to rethink its monetary arrangements. Arthur Burns is concerned that speculation against the lira could come shortly. George [Page 629] Shultz will head a small group considering what actions by this government are appropriate.4
- Source: National Archives, Nixon Presidential Materials, NSC Files, Country Files—Europe, Box 729, UK Volume VII 9/71-9/72. No classification marking.↩
- In a June 24 telegram to President Nixon (dispatched at 1430Z and sent directly to the White House), Prime Minister Heath told the President that the Secretary of the Treasury and Federal Reserve Chairman had been informed of the decision to float late Thursday (June 22) night. The Prime Minister said that during 5 working days the outflow from sterling had reached $2.5 billion and the rate of outflow was accelerating. The Prime Minister concluded that this episode showed how urgent it was to achieve radical reform of the international monetary system. (Ibid.) Prime Minister Heath sent a follow-up telegram directly to President Nixon at the White House on June 26 (1620Z) emphasizing the need “to think in terms of much more radical changes than we have as yet envisaged” and the need to shorten the time frame for such reform from “that to which we are at present working.” Prime Minister Heath indicated he would be interested in hearing President Nixon’s thinking on substance and timing. (Ibid.)↩
- Reference is to the Smithsonian Agreement reached on December 18, 1971; see Document 221.↩
- George Shultz was sworn in as Secretary of the Treasury on June 12, replacing John Connally whose resignation had been announced May 16. The Shultz group, in effect chaired by Volcker, included Secretary of State Rogers, Federal Reserve Chairman Burns, CEA Chairman Stein, CIEP Chairman Flanigan, and the President’s Assistant for National Security Affairs Kissinger or his designee. Secretary Shultz and the Shultz group increasingly became the forum for decisions on international monetary reform.↩