244. Memorandum of Conversation1

SUBJECT

  • U.K. Defense Review

PARTICIPANTS

  • U.S. Side
    • Secretary McNamara
    • Under Secretary Ball
    • Ambassador Bruce
    • Assistant Secretary Leddy, EUR
    • Assistant Secretary Solomon, E
    • George Springsteen, U
    • Benjamin Caplan, OFE
    • Francis Bator, White House
    • J. Harold Shullaw, BNA
  • U.K. Side
    • Chancellor of the Exchequer James Callaghan
    • The British Ambassador
    • Sir William Armstrong
    • Sir Denis Rickett
    • R. R. Neald
    • I.P. Bancroft

The Chancellor began the discussion by a reference to the recent U.K. Cabinet decision to the effect that by 1970 the U.K. will be operating within a defense budget of two billion pounds at 1964 prices. At the present time a number of defense reviews are under way which will be completed and brought before the Cabinet in a few months time. The defense budget for this year has been brought down to 2.2 billion pounds within existing commitments by overhauling defense procurement and by deferring for five years payments for the planes being procured from the U.S. A number of options have been considered, but not yet by the Cabinet, with respect to further reducing the current 2.2 billion to 2 billion pounds. The Chancellor gave the assurance that the problem was being approached with a sense of responsibility and the U.K. Government would consult with the U.S. at regular intervals. The Chancellor was complimentary about the efforts of Henry Kuss both as a salesman and in attempting to facilitate U.S. purchases from the U.K. The Chancellor said that the Minister of Defense, Mr. Healey, was considering appointing someone on the British side with comparable responsibilities. The Chancellor referred in this connection to the possibility of the U.K. building ships for the U.S.

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On German offset purchases, the Chancellor said that a report just received from Mr. Diamond who has been discussing the problem in Bonn indicated some progress had been made. Sir Denis Rickett said the Germans have agreed to extend the offset agreement until April 1967 and to make an advance payment to the U.K. for offset purchases of 600 million DM. The Germans have also agreed to assist German importers with credit arrangements. Sir Denis said that he lacked information at the present time with which to assess the degree of assistance provided by these arrangements.

In summarizing the foreign exchange aspects of the British defense burden the Chancellor said that it was costing 85 million pounds to maintain the BAOR. Military aid and various other stationing costs in the Middle East and Far East brought the total to 304 million pounds. In addition the U.K. is providing 195 million pounds in economic loans and grants. The total of foreign exchange cost of defense and economic aid expenditures amounts to 500 million pounds per annum.

Secretary McNamara said that there are two aspects of the U.K. defense problem—one is budgetary and the other is with respect to the balance of payments. He said that we strongly urge the U.K. to achieve its reduction of the defense budget to the 2 billion pound level without altering any of its political commitments. Secretary McNamara said he was convinced this could be done, that we were prepared to be helpful in discussing ways of eliminating duplication of effort between the U.S. and the U.K. He mentioned informally in this connection the possibility of eliminating the present duplication of effort of our two navies in the Greenland North Cape area. Secretary McNamara stressed again in the strongest terms the fact that our people will not permit us to become in the future the sole policeman of the world. If the U.K. were to cut its political commitments in Germany or in the area between Aden and Hong Kong we would have to readjust our alliance obligations with deleterious effect on our own, on U.K. and on free-world interests.

Secretary McNamara described the decision of Defense Minister Healey on the cancellation of the TSR-2 as courageous politically and at the same time absolutely right. He suggested that other, similarly difficult decisions would have to be taken by the U.K. For example, a decision to reduce naval costs through readjustments in deployment would undoubtedly be difficult politically. We would be prepared to inform SACLANT if the U.K. were to so decide that the U.S. would take over sole responsibility for maintaining the naval barriers in the North Atlantic.

On the foreign exchange aspects of the defense problem Secretary McNamara said that the U.S. accepts the British objectives and is prepared to help by buying more from the U.K. In order to counteract domestic [Page 495]political pressures it will be necessary for us in explaining increased U.S. purchases from the U.K. to publicize the amount of U.K. purchases from the U.S. He said he knew this would cause problems for the U.K., but it was necessary domestically. We can buy more from the U.K., and we are prepared to re-examine existing credit arrangements with a view to improving the terms. Secretary McNamara said that everything he had said about our being helpful was conditional on there being no change in Britain’s world-wide political commitments.

Under Secretary Ball said he fully agreed with what Secretary McNamara had said. While Western Europe has been growing in economic strength an attrition of these countries’ commitments around the world has created a series of power vacuums which we have had to fill. We recognize the British problem, but we cannot accept a further extension of our own commitments.

The Chancellor stressed that he regards the British defense problem as primarily a foreign exchange problem at the present time. He said he was mindful that the evil day had only been put off by the arrangements for purchase of U.S. aircraft. If the foreign exchange burden cannot be borne, this will have the most serious consequences not just in the defense field but across the board. He said he would speak as frankly as Secretary McNamara had done. The U.K. cannot continue to carry the present foreign exchange burden and it must come down. It affects the entire British economy. At the same time the Chancellor emphasized that he wants the U.K. to go on playing its role—there is no other country prepared to do what the U.S. and the U.K. are doing.

The Chancellor referred to the possibility of developments in Aden and Malaysia making it more difficult for the U.K. to continue to discharge its responsibilities in those areas. He mentioned that the Tunku had not always had his present attitude toward the British presence. Secretary McNamara interjected at this point the observation that absolutely and without any qualifications the U.S. could not accept any further commitment with respect to Malaysia. We are already over extended in Asia. He said that both Australia and the Philippines could do more than they have been doing.

The Chancellor referred to Secretary McNamara’s remarks about the BAOR and asked what we would regard as an unacceptable reduction in its strength. Secretary McNamara replied that he saw no room for a reduction, although he could envisage the possibility of temporary withdrawals at the brigade level to deal with emergencies elsewhere. He said NATO would collapse militarily if during the next three years French pressures to change its organization coincided with British pressures to reduce the BAOR.

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Mr. Leddy suggested the possibility of a greater German contribution. Secretary McNamara agreed that the Germans could help more with the costs of the BAOR but not by replacing it. He also suggested that the U.K. might have been more active in pushing sales to the Germans and so resisting the recent one million DM reduction in the Federal Republic’s defense budget. He urged that after the German elections the U.S. and the U.K. should together press the Federal Republic to do more than it has been doing.

In response to a question from the Chancellor, Secretary McNamara said that he was not sure about economies which might be achieved through US/UK cooperation with respect to the Army and Air Force. However, he mentioned the big increase in our air lift and air refueling capabilities and raised the possibility of the U.K. contracting with us for provision of services of this character.

The Chancellor said he would faithfully report this discussion to the Defense Minister on his return to the U.K. He gave the assurance that there would be no suddenly-announced British decisions in the defense field and that there would be plenty of time afforded for Secretary McNamara to express his views.

  1. Source: National Archives and Records Administration, RG 59, Central Files 1964-66, DEF 1 UK. Secret. Drafted by Shullaw and approved in U on July 14. The meeting was held in Under Secretary Ball’s office.