281. Telegram From the Embassy in the United Kingdom to the Department of State 1
London, November 24, 1967, 1144Z.
4172. Pass Treasury for Deming from Griffin. Following is memcon your meeting with Sir William Armstrong November 17:
- Frederick Deming and James Griffin accompanied Sir Denis Rickett from London Airport to U.K. Treasury at 9:30 PM, Nov 17. On meeting there with Sir William Armstrong, Joint Permanent Secretary to the Treasury, Mr. Deming was informed that U.K. had decided to devalue to $2.40 or 14.3 percent. Deming then listed countries which his understanding would hold their exchange rates in event of U.K. devaluation as follows: U.S., Common Market countries (although France had indicated might also move if hurt too much), Sweden, Norway, Japan, Canada, and Switzerland. Deming indicated Denmark would follow U.K. and probably Spain and Austria. He did not know about Australia but Armstrong felt they would hold, although he could not be sure. Deming said Kashiwagi had said Japan’s rate would be tied to that of the dollar.
- Armstrong said Maude of U.K. Emb Washington had informed Secy Fowler of move Friday afternoon, London time, and Amb Deane had called on Pres Johnson to inform him.2 Armstrong said had informed Schweitzer at IMF that U.K. would request $1.4 billion stand-by from IMF. Armstrong said Schweitzer said he would at 9 AM inform Executive Directors of special meeting and give them paper on proposed devaluation at same time and convene meeting to discuss it at 11 AM. Schweitzer estimated would take Board three hours to discuss, thus not have decision before 2 PM, Washington time, 7 PM London time. Schweitzer was sending Fund mission led by Goode. Armstrong said Callaghan had telephone conversation with Fowler at about 3:30 PM London time on Friday but was not clear whether Fowler had been informed at that time. Since telephone line not secure, discussion had been on very guarded terms and Callaghan not clear on Fowler’s understanding of some points made in the conversation. Schweitzer informed British it could be end of following week before stand-by credit could be granted, thus Armstrong said U.K. would need a large reflow of short-term funds which had gone out Thursday and Friday or short-term help from major countries.
- Deming stated major countries had come to him in Paris on Thursday and Friday volunteering short-term credits to U.K. which along with U.S. contribution totalled some 13.75 billion dollars. Deming said these offers had been extended on assumption of no devaluation, thus he could not be sure how many would still be available, but he thought most if not all would be.
- Armstrong said U.K. tentatively estimated devaluation would improve B/P by pounds 500 million, although this somewhat hasty estimate which would have to be refined. This improvement would not become fully effective until end 1968 or beginning 1969 since effect on exports could not be immediate. U.K. had forecast large B/P deficit for 1968 without devaluation and B/P in next few months would still be in deficit. He said for near term they now relying on large reflux of capital.
- Armstrong gave accompanying govt program as follows: reduction in govt expenditures of pounds 400 million of which pounds 100 million defense, 100 million abolition export rebate (which Armstrong was sure would please U.S.), 100 million abolition set premium payments, 100 million reduction other govt expenditures mostly investment expenditures by nationalized industries; raise bank rate to 8 percent; credit squeeze with virtual ban on personal loans for consumption and reduction in bank lending ceiling from 105 percent to 100 percent with exemption for export credits; increase in corporate tax of 2-1/2 percent, increase in heavy fuel oil duty of one penny per gallon. Armstrong said this would take out from home resources pounds 500 million by end 1968 or beginning 1969. This would offset inflationary impact of anticipated 500 million B/P gain which was net of gross gain of 800-850 on exports partially offset by 300-350 deflationary effect from imports.
- Governor O’Brien of BOE,3 who had been called earlier by Armstrong, joined the meeting. Deming repeated for O’Brien his assessment of countries which would hold rate and gave O’Brien list of countries who had offered credits totalling some $1375 million. O’Brien said “we” had felt U.K.’s short-term indebtedness already quite enough and felt they should not take on any more (this was in regard to defending old parity, not in new circumstances). O’Brien computed total short-term help now available at $3275 million, including 1375 bilateral credits as reported by Mr. Deming, 1400 from IMF stand-by, and 500 from U.K. dollar portfolio. O’Brien said he felt these countries should now come to him rather than he going to them, and he hoped to be taking [Page 589] telephone calls from them on Sunday. He said U.K. would declare bank holiday on Monday.
- Discussion then reverted to timing of announcements. U.K. tentatively planning to make announcement at 9:30 PM Saturday but would much prefer to make it earlier if possible. However, must wait for IMF Executive Directors’ decision which Schweitzer said could not come before 7 PM London time and possibly not before 8 PM London time. Deming questioned need for such long period deliberation in IMF and thought timing could be pushed up. Armstrong said earlier announcement would be much better for press and TV coverage in UK. It was also tentatively agreed with U.S. Treasury that Secy Fowler would make announcement at 6 PM Washington time.4 In any event, however, U.K. would have to sustain selling pressure from Middle East markets which open on Saturday. U.K. would inform European countries of decision just before IMF meeting and Armstrong felt sure could not avoid some leak getting to Middle East countries. However, they were resigned to these losses and since Middle East banks had limitations on amount of dollar holdings, losses would be limited.
- Armstrong and O’Brien expressed gratitude to Deming for his efforts and for what he had reported to them. They also expressed their gratitude for U.S. Govt’s cooperation through entire crisis period and Fowler’s attitude, who as reported by U.K. Embassy Washington, received news “without animosity.”