233. Message From Prime Minister Wilson to President Johnson1
I feel that I ought to let you know that we are facing a serious situation on sterling.2 The pound has been under strong pressure for several days, and although the last two days were better, we cannot be sure that this improvement will continue. The pressure is coming from a number of sources, including the Continent, and probably for a variety of motives.
We intend, as you know, to draw at the beginning of next month enough of our I.M.F. standby to repay the short term credit we have received from the Federal Reserve and the other central Banks. We [Page 473] might perhaps then expect to have a little over $300 million left in our standby. We shall also have reconstituted the swap facility with the Federal Reserve; the other central Banks also may be willing to give further short term assistance, though this cannot be certain in present circumstances. But, if the run on sterling continues at anything like Monday’s rate, we shall have exhausted the credit facilities at present available to us in a matter of weeks. We are being advised that, if we raised the Bank rate this week, we should probably halt the drain. But we are very reluctant to do this since it would run counter to the long-term policies we are developing for dealing with our basic economic problems; and I have no doubt that these are on the right lines and will be successful if only they are given time to work.
Moreover, I believe that an increase in our Bank rate would be as unwelcome to you as it would be to us. Am I right in thinking this? Of course, if you are intending shortly to raise your own discount rate for your own reasons we shall reluctantly have to follow you; and I would hope that we could then make this a concerted operation. But if, as I believe, this is not in your mind, we for our part will do our best to withstand the pressure.
In any event, however, recent experience has shown that, if we are to outmanoeuvre the speculators in the short term and to give our longer term policies the chance to mature, we need substantial reinforcement for sterling as rapidly as possible. We therefore have it in mind to approach the I.M.F. for a further standby of $1,000 million; and we shall greatly value your support. In order to take the necessary soundings Sir Eric Roll is returning to Washington today. He will be able to give you, if you wish, a fuller explanation of our thinking; and I shall be most grateful if you can let me have your reactions as soon as possible.