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


  • Chancellor Callaghan’s Visit

The Chancellor’s schedule now contemplates meetings with Under Secretary Ball (Secretary McNamara or his representative joining for part of the discussion) and with Mr. Ackley, in addition to the Treasury. The Chancellor will also call at the International Bank, International Monetary Fund, and the Federal Reserve Board.

Messrs. McNamara, Ball, Bundy and Ackley and I met on Saturday in preparation for the Chancellor’s visit2 and our discussion has provided a background for the Chancellor’s visits to the various agencies.

Callaghan has cited the international liquidity question as the principal reason for his visit. This, however, appears to be largely for public consumption since it is now apparent that his attention will center on Britain’s financial needs over the next few months.

As regards the liquidity question, which we certainly will touch upon and again consider at the annual meeting of the Bank and Fund in September, we will expect to learn the results of the Chancellor’s recent meeting with French Finance Minister Giscard d’Estaing.3 We will also probably resolve to hold further bilateral discussions in quiet fashion at the staff level to coordinate our thinking—but without the danger of inciting continental European suspicions that an Anglo Saxon scheme is being contrived.

As you know, Britain’s position over the past two decades or more has been so weak, its reserves so low, and its liquid debts so heavy that it has been plunging repeatedly into payments crises. So sensitive and fragile is the world’s confidence in sterling that the publication a few days ago of disappointing trade figures for one month triggered losses of nearly $200 million in three days.

With a country virtually evenly divided politically, no government has been strong enough to carry out the economic policies required to [Page 491] eliminate this basic weakness. The British public remains, even today, apparently unconcerned at the bleak outlook. Wilson and his colleagues have taken one measure after another since coming into office in October. A listing of these actions sounds imposing, but the measures have been taken in bits and pieces as forced on them by the continuing deterioration of the payments situation, and each has been cut short of the degree of severity which the international financial community thought necessary. Wage settlements continue to provide for increases of more than six percent per year. Prices are still rising about 4-1/2 percent. There are more job vacancies than unemployed.

At the end of May the Government of the United Kingdom had external debts of more than $16 billion, including more than $8 billion net in liquid sterling liabilities. Official reserves were $2,850 million and there were fairly readily realizable assets of about $2,350 million—about $5.2 million in all. These second-line assets included a U.S. dollar securities portfolio worth about $1,350 million, a short-term line of credit with the Federal Reserve System of $750 million, and a general loan commitment from the Export-Import Bank of $250 million. The British have, for all practical purposes, exhausted their recourse to the International Monetary Fund and have been told by European officials that it would be politically impossible for them to extend further credit under present circumstances.

Wilson has set as his target payments equilibrium in the second half of 1966. Six weeks ago, British authorities were estimating that $800 to $900 million would be needed to meet Britain’s own basic deficit in this period and the calls upon the United Kingdom by other countries in the sterling area. A revival of confidence in sterling could bring large reflows of funds but continuing speculation could greatly enlarge the requirement.

The outlook is not very promising in the absence of more decisive British measures to correct its position, measures that will prove convincing to the continent—the source to which both the British and we must look for credit to finance some substantial part of our respective deficits. I think it would be a mistake to concentrate in our discussions on the short-run problem and will therefore seek to focus discussion on the British outlook over the next two or three years. I intend to draw attention to the fact that our capacity to give financial assistance is quite limited and that the approach toward a multilateral solution which could materially ease the British position for a two or three-year period, while simultaneously handling its shorter term problem, should be undertaken. We will support British initiative to gain this end and cooperate with other countries in making financial resources available. The British will undoubtedly face continental resistance toward giving it assistance in the absence of further firm measures—but these are in [Page 492] all likelihood necessary in any event and an early approach by the British to the continent is most important and appropriate.

A multilateral approach on a longer term program, say, three or four years financing, would buttress British reserves and thus help also to meet more immediate pressures on sterling that now seem quite likely to develop. It would also assist in removing the recurrent sterling problem as a factor restraining discussions on international liquidity needs.

To ease its problem, the British officials may also seek added help in meeting its defense commitments around the world. Secretary McNamara is very firm that the United States cannot take over any part of these British commitments, although we will in close cooperative fashion seek to work out a program which will assist in financing British military costs in a way which does no substantial damage to our own balance of payments position.

British determination and initiative, together with our strong support might secure on a multilateral basis the substantial amount of medium-term assistance that Britain requires. I will want to emphasize that no time should be lost in organizing this program.4

Henry H. Fowler
  1. Source: Johnson Library, Bator Papers, Callaghan Visit. Confidential.
  2. No record of this meeting was found.
  3. A memorandum of a June 30 conversation between Under Secretary Ball and Callaghan on this subject is in the National Archives and Records Administration, RG 59, Central Files 1964-66, POL UK-US.
  4. A memorandum of Fowler’s conversation with Callaghan, July 1, is in the Johnson Library, Bator Papers, Callaghan Visit.