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

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

Washington, February 7, 1968.

There is some belief in financial circles, particularly in the City of London, that a new international financial crisis may occur in March. This belief seems to be based on the following series of points:

(1) The present parity of sterling, $2.40, is not supportable without a very strong domestic economic program—significant budget cuts, higher taxes, and a continued strong wage/price policy.

(2) There is a significant body of opinion in the U.K. that sterling should have been devalued more than it was, or that it would have been better for sterling to “float,” that is, not to have a fixed (e.g. $2.40) rate which can vary only between $2.38 and $2.42, but one that could vary much more widely.

(3) The new Chancellor of the Exchequer, Sir Roy Jenkins, is a very able man, but, according to some, he is not strong enough to carry through a tough austerity program or, according to others, has designs on Party leadership. Under either assumption, he would be expected to sponsor a less austere program than needed.

(4) Therefore, the British budget, to be announced as of March 19th, is not likely to be tough enough. And, to try to compensate for this, it is likely that the U.K. would announce a floating rate for the pound—perhaps from $2.30 to $2.50.

(5) This would not be acceptable to the rest of the world; there would be a wave of devaluations, and another international financial crisis.

I want to stress that this is all gossip, primarily coming out of the City of London. Each of the points noted above may contain some truth, but it is the chain of reasoning that produces the belief in a financial crisis.

We do not get any sense that this kind of belief is held widely in Continental Europe. Our representatives have not heard any gossip from the Continent on this question.

There is, of course, some doubt in the minds of the Continental Europeans as to whether the British program will be tough enough. Nevertheless, they do not seem to be looking for an early crisis.

The Europeans probably are convinced that the U.K. would not try to “float” the pound. They made quite evident to the U.K., at the time of devaluation, that there would be no help from Continental Europe if the devaluation were too big or the pound “floated.” The U.K. apparently gave some fairly hard assurances on this matter.

Furthermore, the exchange markets do not seem to be looking for an early crisis. Sterling is not as strong as we would like, but it has behaved fairly well and U.K. reserves have strengthened somewhat.

In sum, I think the probability of a March crisis is not all that great, but I think it well for you to have this background as you talk to the Prime Minister.² I do not think, however, you can go directly to this point with the Prime Minister. Furthermore, I doubt that he will be in a position to give you hard facts and numbers about the budget, because it is still being worked on.

Nevertheless, I hope that you could press him fairly hard on—(a) his candid appraisal of U.K. prospects; (b) his frank judgment as to how the devaluation has worked; and (c) what he can tell you about the British budget. It would be useful to get from him a hard personal appraisal about prospective measures and their ability to do the job.

Henry H. Fowler

1. Source: Johnson Library, National Security File, Country File, United Kingdom, 2/7–9/68, Visit of PM Wilson, Briefing Book, Box 216. Secret; Sensitive.
2. A summary record of Prime Minister Wilson’s visit to Washington, February 7–9, is scheduled for publication in Foreign Relations, 1964–1968, volume XII.