265. Memorandum of Conversation1
- The Prime Minister, the Chancellor of the Exchequer, Sir William Armstrong of H. M. Treasury, and the Prime Minister’s Private Secretary; Secretary Fowler, Under Secretary Ball and Mr. Deming
1. International Liquidity
Secretary Fowler said he was pleased with the results of the Hague meeting.2 What we had attained was procedural rather than substantive, but it represented a real gain. The discussions and negotiations were now in the larger group, and there was hope of more progress on substance. He hoped there would be an IMF resolution supporting the procedure at this Fall’s meeting, and his timetable for agreement in substance was the IMF meeting in September, 1967. The time for activation, of course, was open. It would depend on circumstances as they developed.
The Prime Minister said he hoped the U.S. and U.K. would continue to work together, and anything the U.K. could do to help get the 1966 IMF resolution approved, they would do.
2. U.K. Program
Secretary Fowler said that he thought the U.K. measures had been well taken. He referred to the comments he had made about them and the comments made at the Hague by the other finance ministers.[Page 556]
The Prime Minister said that the measures had gone further than any others so far and that he believed the wages/prices measures would have to go further still. He doubted that they could rely solely on the voluntary program. They needed additional statutory powers and probably would seek them. Among such powers were those to literally break strikes. The problem was very tough—particularly so for a democracy.
He referred to the will of the U.K. Government to stand up and take a hard line. He noted that, by so doing in the seaman’s strike, it had hurt sterling because the strike dragged on. He thought the general comment on the strike settlement had missed this point—the Government really had been tough and had insisted on less than the employers were willing to pay. Yet comment on the settlement seemed to indicate that the Government had been too easy.
He referred also to the problem of sterling balances and the apparently general feeling that these were the cause of the present weakness. He noted that this simply was not so. Selling of sterling had come from the private side, including selling from the U.K. itself.
He reiterated his belief that there was absolutely no point in devaluation. It would solve nothing. He wished the world—and some elements in the U.K.—would understand that.
Secretary Fowler noted a point that had been made at the afternoon meeting at the Treasury—that the wage/price pause could have an important long-run effect. If the spiral of wage increases at a rate well above productivity increases could be broken (as it had been in the U.S. in the late 1950’s), it could lead to cost stability for some time. This was a very important factor.
He went on to say that the U.S. now faced a problem of preventing a breakout of wage and price increases. The U.S. problem was to orbit out of a 5-1/2-6 percent real growth rate that was no longer sustainable as our slack was being used up—to a rate of 4-1/2 percent, which would be consonant with a low level of unemployment and high degree of capital utilization. It was a difficult job.
The Prime Minister said he saw no real demand-pull inflation in the U.S. as yet, but undoubtedly the seeds of cost-push inflation were there.
3. Conversations in Russia
The Prime Minister said that he had had 9 hours with Kosygin—5 hours alone, except for 2 interpreters. Kosygin had been very frank. The Prime Minister had asked if he wanted to be quoted to the President. Kosygin had said that he did not, but he thought it would be useful if the Prime Minister reported his own appraisal of Kosygin’s statements to the President.[Page 557]
The Prime Minister said that he had stressed that the U.S. meant business and that Hanoi had no hope of a U.S. weariness which would produce withdrawal from Vietnam. He said he made this point a number of times. He would be reporting to the President in detail about the conversation.
4. U.K. Role in the World
The Prime Minister said he also wanted to discuss broadly U.S.-U.K. relationships. In a sense, the U.K. was at a crossroads and had to come to some conclusions about her future role.
George Ball said that he believed the U.K. had to define—perhaps redefine—its role in the world. For his part, he saw the U.K.’s major role as leadership in Europe.
The Prime Minister said that he did not want to be corralled into an inward-looking Europe.
Ball said that he visualized the U.K.’s leadership as taking Europe out of its inwardness.
The Prime Minister said he had asked Pompidou directly if the French price for entry into the E.E.C. were political and if it involved the U.K. turning its back on the U.S. He got no real answer.
Secretary Fowler said that he believed the U.K. should go into the E.E.C. from a position of strength rather than weakness.
The Prime Minister agreed with this view.
Ball said that he didn’t know the strategy or the timing but that the U.K. and U.S. should begin to work out jointly the U.K.’s role in Europe.
The Prime Minister said he was skeptical. His own posture was Atlantic. He noted that the U.S. seemed to be shifting from an Atlantic to a Pacific posture.
Secretary Fowler said his only advice was “don’t go in on French terms.”
Ball said that everything could not be agreed in advance. Maybe it was better to get in and then negotiate.
The Prime Minister appeared unimpressed.