277. Memorandum From the President’s Special Assistant (Rostow) to President Johnson 1
- Contingency Support For Sterling
At Tab A is Joe Fowler’s memo2 recommending an increase of $100 million in the funds he has available for market operations to support sterling.
What it comes down to is this.
Today’s increase in the discount rate is part of the last ditch British effort to hold the sterling rate. As you know, they moved strongly last year to support the pound: they deflated their economy, cut down foreign commitments and borrowed heavily abroad.
The program worked well through the first quarter of this year. They were able to pay off more than $1 billion in debt. Then they ran into bad luck:
- —disappointing exports, largely because of the recession on the continent;
- —the Middle East crisis and the closure of the Canal;
- —rising interest rates elsewhere while theirs were going down.
They began to lose reserves and had to draw heavily on their line of short term credits.
The increase in the bank rate is designed to draw funds back to London. The market’s initial reaction was slightly disappointing because some expected a higher increase in the rate. But sterling is holding steady because of support operations.
Through selective and carefully timed actions, we have operated successfully in the market in the past to keep the rate from worsening on bad news or to strengthen it on good news. We do so at our own discretion but in cooperation with the British.
We now have $160 million available for this purpose. Fowler recommends that you authorize him to make $100 million more available out of the Exchange Stabilization Fund. This would give the necessary leeway to have a maximum impact on the market-either to continue defensive operations or to take advantage of favorable opportunities.[Page 583]
These funds are guaranteed against loss from devaluation. There is no balance of payments effect. If the funds are used, it would in effect amount to an increase in our lending to the U.K.
This is a contingency investment that could be used very effectively to support sterling. I believe Fowler’s proposal makes sense. Deming, Okun, Daane and Fried who have gone into it carefully concur in the recommendation.
Your decision is needed as soon as possible so that our people in the exchange market will know how much ammunition they have and plan their operations accordingly from tomorrow on.3