841.5151/5–1149: Telegram

The Acting Secretary of State to the Embassy in the United Kingdom

top secret

1867. Urtel 1842, May 11.1 Exchange rate problem, especially question of sterling, under intensive consideration. Reur para numbered 1. Pursuant to IMF res reported in circtel April 12, Gutt, on way back [Page 398] from So Afr, expected visit various Eur countries ascertain views of Govts. Will probably be joined by members IMF Research Staff.

Reur para numbered 2. No firm position yet reached in any agency. Tentative positions in agencies mentioned subj thorough exploration of matter in NAG and adoption final Administration decision in that body.

Reur para 3. Departmental meeting May 17 reached tentative consensus fol points:

Economic conditions hitherto justifying maintenance admittedly unrealistic Eur rate structure no longer obtain or appear to be rapidly disappearing. Declining price trend US strengthens case for general readjustment.
Perpetuation present artificial rate structure wld stultify efforts achieve return to multilateral trade and convertible currencies. On other hand, more realistic rates during life ERP likely reduce burden US assistance to Europe.
Sterling focal point in whole problem not only because of own importance but because most Western Eur countries will be exceedingly reluctant to move until they know definitively what will happen to sterling. Thus clear and generally acceptable decision on sterling by UK in consultation with other Eur countries, US and IMF appears to be prerequisite orderly readjustment world’s currencies to accord more nearly with present and prospective conditions and needs.
Because of numerous unknown factors involved, precise quantitative measure present “true value” sterling will probably be impossible achieve. Available evidence points to overpricing of certain important UK exports such as cotton textiles and carbon steel in dol markets. Price comparisons also suggest that dol exports miscellaneous Brit manufactures in both consumers and capital goods categories might be increased with lower prices. Study made in Dept concludes that moderate devaluation sterling wld result in proportionately much smaller rise in UK price level and wld not be likely set off inflationary spiral. Desirability of continuing pressure on Eur costs still factor to be considered. Final US view as to when, whether, and how much sterling shld be devalued will necessarily be based in part on best collective judgment regarding future price trends, demand elasticities, etc.
In view present strong Brit opposition to devaluation and implied US commitment to await outcome of Fund review, “high pressure” or any action which wld force hands of Brit Govt wld be deeply resented, strain relations, and possibly jeopardize cooperation other issues. Hence shld be avoided. For this reason among others Dept strongly favors maintenance cross rates at least until question sterling rate has received further consideration, including discussion with Brit.
High level exchange of views between US–UK this subj urgently necessary. In such discussions US representatives wld advance general considerations favoring readjustment Western Eur rate structure; stress key position sterling; and set forth for Brit reaction our tentative conclusions as to whether and within what range it wld be desirable to devalue sterling. (It is of course assumed interested agencies will have reached agreed position on latter point.) We wld hope to elicit full and frank statement of Brit views to which we cld then give consideration before deciding further steps.

  1. Not printed; in it Douglas expressed concern at the way the exchange rate problem was developing. In the numbered paragraphs he asked (1) what action was being taken on an IMF resolution calling for a study of possible changes in exchange rates among the countries of the OEEC, (2) what was the latest thinking on the subject in ECA, the Treasury, and the Department of State, and (3) whether a memorandum of April 28 from Labouisse to Assistant Secretary of State Willard L. Thorp had produced any results. (841.5151/5–1149) The memorandum of April 28 has not been found in Department of State files.