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

102. Memorandum of Conversation Between U.S. and British Officials¹

Washington, July 29, 1966, 12:15 p.m.

SUBJECT

• International Monetary Situation

PARTICIPANTS

• See attachment²

The Prime Minister said there had been general agreement in recent years about the need to increase liquidity. This was required by the rapid increase in world trade; moreover, the successful completion of the Kennedy Round would require greater liquidity.

The Prime Minister spoke briefly on the meetings of the Group of Ten, saying that Secretary Fowler gained an important procedural victory at The Hague but there is still a danger of being sabotaged by divisions among some of the members of the group as well as by the outright obstruction of France. Nevertheless, he hoped that the Group of Ten could agree and that this agreement could be expanded “from the 10 to the 100 countries”.

The Prime Minister said that one problem the British have, as well as the United States, is that of the balance of payments; we must correct this. Otherwise, the two great reserve currencies of the world will be driven into a corner by the self-righteous members of the Group of Ten who do not have any responsibilities for world development, banking or military assistance.

The Prime Minister noted it would be useful if we could start to do some thinking in the event that we fail to make progress in the Group of Ten. He knew that we had our Dillon Committee and the British have a counterpart of this committee. They should get together and the staffs should talk purposefully about their problems.

The Prime Minister stressed that the British intend to solve their balance of payments problem. They are some 200,000,000 pounds short and it should be possible to overcome this gap.

Secretary Fowler commented that we should concert on the timetable in connection with our efforts concerning the liquidity problem. He was satisfied by the report of the Deputies, which will be made public August 25; he felt that the public would be gratified at the measure of agreement reached by the Deputies. Even the technicians of the Bank of France had found a substantial measure of agreement. Secretary Fowler thought there had been sufficient agreement at The Hague meeting to enable us to move into the IMF. This can be a very significant step, since the question of liquidity must be resolved in a broader context rather than in the secret deliberations of the Group of Ten.

Secretary Fowler continued that there is agreement among the Group of 9 on the need for machinery for achieving liquidity. A decision to activate the machinery is a different matter—much will depend on the U.S. and the UK bringing their balances of payments into order. Early activation is very important to help finance expanding world trade, to make reserves available for orderly balance of payments adjustment, particularly since sharp deflation is not an acceptable method of adjustment. Another, and very basic reason for moving in this direction is that it will provide a means of reducing the vulnerabilities of the UK and U.S. currencies. We should press hard with the idea of establishing machinery for handling the liquidity problem in time for the IMF meeting in September 1967.

The Prime Minister said that it was good to move on procedural matters but that it was important to agree between ourselves on the problem before September 1967. Our currencies are vulnerable and can be affected adversely by political and by economic speculation. The French have acted in this sense by selling sterling at the time of the bombing near Hanoi and Haiphong; in doing this they were really aiming at the United States.

Secretary Fowler said that the only rationale for French policy on gold is a political one. The events at The Hague meeting indicated that we have to keep the pressure on the Dutch, Italians, Germans and Belgians to hold them firm in connection with the French.

The Prime Minister said that the French policy in economics was the policy of Rueff, which is outdated and, in fact, was outdated before 1931.

The Prime Minister said that he would proceed firmly to defend sterling.³ He was grateful for the help of the Federal Reserve System and the superb operations they had mounted. The more the world understands that the dollar and sterling are linked together the better it will be. But if necessary, the British will stay up on their own. They are not going to bring the dollar down with them.

Secretary Fowler stated that the other seven countries—Germany, Italy, Holland, Belgium, Japan, Canada and Sweden—must share in the multilateral defense of sterling. They cannot go their own way since their whole position would be threatened if sterling were endangered.

1. Source: Department of State, Central Files, POL 7 UK. Confidential; Exdis. Drafted by Walter J. Stoessel, Jr. (EUR) and approved by S and U on August 4, Bator on August 15, and Widman (Treasury) on August 24. The meeting was held in the Cabinet Room of the White House. The source text is labeled “Part 5 of 6.” Prime Minister Wilson visited Washington July 28–29. In preparation for President Johnson’s meeting with Wilson, Secretary Rusk, on the morning of July 29, discussed over the telephone with the President several subjects for discussion. Concerning Wilson’s financial program, the President observed that “he’s biting some bullets and has some tough days ahead and so have we.” He said that he would listen to the Prime Minister and if any U.S. financial involvement or public commitments were required, he would suggest talks on a multilateral basis and with “our financial people.” The Secretary agreed. (Johnson Library, Recordings and Transcripts, Recording of Telephone Conversation between President Johnson and Secretary Rusk, July 29, 1966, 10:40 a.m., Tape F66.18, Side B, PNO 1)
2. The attached list is not printed. The President; Secretaries Rusk, Fowler, and McNamara; and Under Secretaries Ball and Deming participated for the United States. Prime Minister Wilson, Denis A. Greenhill of the British Foreign Office, and British Ambassador Sir Patrick Dean participated for the United Kingdom.
3. The Prime Minister’s assurances notwithstanding, the Treasury Department, presumably in collaboration with other interested agencies, was giving considerable thought to what might be done if sterling were devalued. In a July 18 paper entitled “Contingency Plans for Use in the Event of a Sterling Devaluation,” four options were summarized. Subsequent papers fleshed out these options, went into an analysis of their economic implications, and set out operational plans, including lists of key contacts in 20 countries and the IMF and draft messages to Embassies and guidance for Ambassadors. (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, Secret-Contingency Planning, 1966–67) The dated papers range from July 18 to August 14, 1966. The papers are not addressed to any particular individual and do not contain drafting information. They are arranged in their folder under cover of an index headed “Contingency Planning.”