295. Paper Prepared in the Department of State1


Britain’s severe economic problems have shaken the international monetary system and sealed a historic transformation of British foreign policy.

The financial pressures of last November forced the UK to devalue the pound (from $2.80 to $2.40). That decision marked the failure of Labour’s previous policy of demi-austerity and necessitated severe budget cuts. Devaluation was followed by another rejection by De Gaulle of the UK’s Common Market bid. These setbacks led to a widespread public loss of confidence in Labour and in Wilson. A change in Labour leadership in the coming months, though remote, is no longer out of the question.

The British Government’s vital objective is to make a success of last November’s devaluation. Britain is seeking to achieve a 1,000 million pounds ($2.4 billion) turnaround in its balance of payments, i.e. to move [Page 619] from a deficit of over 500 million pounds in 1967 to a sustained surplus at the rate of 500 pounds million beginning in 1969.

The necessity of success has produced new policies far from Labour’s socialist ideology: curtailed public spending, even in the welfare sector; a mandatory prices and incomes policy closely correlated to productivity; and rigorous measures to reduce domestic demand in order to shift resources into exports and private investment. Cooperation from the domestic sector and the patience of the international financial community are vital to Britain’s success, but these factors are not assured and the outcome therefore is in doubt.

Since November, the direction of Britain’s defense and foreign policy has become clearer and firmer. The Government has accelerated curtailment of world-wide commitments and clarification of its policy toward Europe. Still, the process is far from complete. Continued frustration of Britain’s new European vocation nourishes traditional British parochialism, resentment toward France, and suspicion of Germany. Conservative Party leaders have attacked the Government’s “retreat from East of Suez,” but before they can come to power, the cutbacks will probably have gone so far as to be irreparable. Thus, we can see the Britain of the future as, at best, a middle-sized, European power, albeit one with a nuclear capability, a residual sense of extra-European responsibility, and a continuing, if diminished, status as a favored partner of the US.


We can expect British governments gradually to attenuate the “special relationship” as the prospect of achieving their aims in Europe becomes more credible, but they will not repudiate it entirely as long as it has advantages for them.

The UK continues to have economic and political assets which can provide valuable support for our own foreign policy objectives; for example, the British desire to play a constructive role in Western European political affairs and to provide substantial amounts of foreign aid in the less developed world. In addition they still have extensive Commonwealth contacts. These assets would probably be strengthened by a victory in the next General Election of the Conservative Party, which is currently running far ahead of Labour in by-elections, local elections, and public opinion polls.


A. The Problem of Sterling

No one can be certain that the post-devaluation economic program will succeed in producing the necessary, enduring balance of payments [Page 620] surplus. The basic positive factors are: the competitive edge provided by devaluation, the buoyancy in Britain’s main export markets, and bold fiscal and monetary restraints on the domestic economy.

The negative factors are: a history of repeated crises; organized labor’s reluctance, if not unwillingness, to accept wage restraint; archaic labor and management practices; a stubbornly high level of import demand; high interest rates in the US and in Europe; Britain’s precarious liquidity position; continuing nervousness about sterling; and the generally precarious international monetary situation.

The financial world so far has patiently awaited evidence that the UK is gradually moving toward surplus. Such patience is not unlimited and could be cut short by widespread strikes this summer or the collapse of the wage restraint policy. Then the financial world may well conclude that Britain’s economic program is not going to succeed. This could lead to speculative selling of sterling, including further switching out of pounds by sterling area central banks.

Britain has substantial resources in standby credits and swaps to help meet such an eventuality. In a severe crisis they would need augmentation.

US Position: It is important to us that the British economic program succeed. The consequences of failure were portrayed last November, when the fall of one reserve currency, sterling, led to severe pressure on the dollar, to the gold crisis, to the forced termination of the “Gold Pool” arrangements, and to a large decline in US gold reserves. If Britain fails to achieve its balance of payments objective, there could be another deep sterling crisis which would put renewed pressure of the most serious kind on the dollar.

B. Britain and European Defense

On February 19 HMG announced that its defense will in the future be concentrated mainly in Europe and the North Atlantic area. On May 10 Defense Minister Healey announced that withdrawals from the Far East and the Persian Gulf have enabled HMG to make an immediate contribution to strengthening NATO’s forces in Europe and the Mediterranean along the following lines: (1) a mobile task force (some 20,000 men) will be stationed in Britain but available for NATO defense; (2) an amphibious task force will be stationed in European waters; (3) two frigates will be kept in the Mediterranean; (4) a squadron of reconnaissance aircraft will remain in Malta until 1970; (5) in 1969, the UK is prepared to send a commando carrier with troops embarked to participate in NATO exercises in the Mediterranean.

The UK is also exploring the possibility of some modest first steps that might evolve into a kind of European defense organization in the NATO framework. The British have in mind initially talking with the [Page 621] European Community members (less the French), and perhaps the Danes and Norwegians, about the possibility of cooperation in the defense production and procurement field. Subsequently, they would hope to see a kind of European caucus in NATO under which the nations concerned could concert their positions on force levels, strategy, and other questions in advance of discussions with us.

Thus, by working quietly within the established NATO framework, the UK hopes to be able to avoid another head-on collision with the French which would in turn frighten off the Germans and other European Community members. This approach also assures a close institutional link between any future European defense organization and the United States, as well as with the other allies.

US Position: We have been quietly encouraging the British in these efforts as they are consistent with our long-standing attitude favoring Western European cooperation and unification. If the British succeed, the result would be an improved political balance in the Alliance. It would also improve prospects that the European members together could pick up more of the burden of their own defense. Care must be exercised to avoid the appearance of an Anglo-American initiative.

C. The UK and the European Communities (EC)

The United Kingdom is maintaining its application for full EC membership. It has not endorsed recent proposals from among the Six for interim commercial arrangements. Foreign Secretary Stewart said recently that the UK would only be interested in “proposals coming from the Six as a whole which are clearly and unmistakably connected with our full membership in the European Economic Community.” The British see little prospect that the Six will be able to agree on acceptable interim proposals.

The French veto on British membership has not diminished support within Britain for full membership. The British Government and, in general, the public seem to realize that there is no viable alternative to entry into the Communities. Proponents of a North Atlantic Free Trade Area (NAFTA) have generated little British interest, in or outside the government.

The British are expected to make some new move to maintain forward movement on membership, perhaps this summer. Britain is most likely to propose collaborations on military-political matters and technology which are outside the clear responsibility of the Rome Treaty and which it would be easier for the Five to act upon without openly provoking De Gaulle.

US Position: The United States has long opposed EC preferential trading arrangements with other European states unless these lead to full membership within a reasonable period. Thus we welcome the [Page 622] British stand against interim arrangements with the Community. We do not believe that NAFTA is a practical or desirable alternative to British membership in EC.

D. Middle East

Britain no longer has the will, or can afford, to play a major security role in the Middle East.

In continuing the pursuit of its economic interests, however, HMG can be expected to rely increasingly on its diplomatic resources, mutual economic interest, and placating the Arabs on the Arab-Israeli issue.

US Position: We can constructively use Britain’s residual political and economic influence in the Middle East, particularly with the Arab states, as part of our common desire to seek an equitable and enduring settlement of the Arab-Israeli conflict and to resist rising Soviet influence. In the Persian Gulf, we specifically wish to (a) encourage the British to maintain as much of their present special role as long as possible; (b) encourage the Saudis and Iranians in particular to settle outstanding differences; (c) encourage greater regional economic and political cooperation among the Gulf states; and (d) avoid an undue military buildup by littoral states while recognizing that some increase in indigenous forces is no doubt inevitable.

E. UK Withdrawal from Malaysia/Singapore

Last January 16, Wilson announced the withdrawal of all British military forces from the Malaysia/Singapore area by the end of 1971.

The British declared that they would continue to meet their SEATO obligations after 1971 within the limits of their resources and would retain a “general capability for deployment overseas” if HMG judged such deployment necessary. However, they have declined to be drawn out on the nature of this capability or how it will be brought to bear in Southeast Asia.

The phase-down is calculated to minimize adverse effects on the economies of Malaysia and Singapore, and give them time to build up their own forces. A working group of the UK, Malaysia, and Singapore has begun discussing a proposed air defense system. A five-nation Defense Ministers’ conference will be held in Kuala Lumpur in early June.

Australia and New Zealand are unlikely alone to fill the vacuum which will be created by the UK’s departure. They look forward to a Commonwealth effort in this area.

US Position: We regret this removal of an important element of military and economic stability from Southeast Asia at a critical time. We have no intention of expanding our commitments or responsibilities as [Page 623] a result of the British decision, but we maintain a keen interest in the efforts of the Commonwealth partners to work out security arrangements necessary to assure continued stability in the area.

F. Southern Rhodesia

The UK, rejecting the use of force, has been unable to bring an end to the illegal regime of Ian Smith in spite of discussions, the UN voluntary sanctions program (November 1965), or the limited UN mandatory sanctions program (December 1966). The sanctions program suffers from the refusal of South Africa and Portugal to participate and from lax or incomplete compliance by Japan, West Germany, France, and other industrialized countries. The British insist that the best method of bringing pressure on Smith is through UN sanctions, and the Security Council is considering making selected mandatory sanctions more comprehensive.

US Position: We are continuing to cooperate with the British and the UN on sanctions and will support a UN decision to make selected mandatory sanctions more comprehensive. Any lessening of US support for such a UN resolution would have serious consequences for US relations with the UK, other countries of Africa, and in the United Nations generally.

G. US-UK Nuclear Cooperation

Various termination provisions in the 1958 US-UK Agreement for cooperation on the uses of atomic energy for defense purposes will soon come into play. The intent of either the US or the UK to terminate the exchange of information on nuclear weapons and/or military reactors must be accompanied by notice to this effect to the other party by December 31, 1968. Lacking such notice, that part of the Agreement dealing with cooperation on information will continue in force for at least five more years. Continuation of cooperation on the exchange of materiel beyond the end of 1969 will require a new agreement.

In spite of their parlous financial-economic condition, the British intend for political reasons to retain membership in the nuclear club. They are currently considering alternative improvements which will enable their Polaris missile force to penetrate Soviet missile defense systems. We expect that this summer they will ask us for additional and continuing assistance in these endeavors.

US Position: The question of future US policy in this field is now under review in the IRG/SIG mechanism. Some of the long-term factors which we must evaluate in reaching a decision include (1) future US-UK bilateral relations; (2) UK’s future relations with the EC; and (3) the prospects of a future European defense organization and European nuclear cooperation.

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H. UK and France

HMG probably has a mixed reaction to the current French crisis. The British may be expected privately to consider that De Gaulle’s difficulties should serve as a salutary shock to his reputation. On the other hand, they would be apprehensive about the uncertain effects of political and economic instability in France.

Current troubles in France are not likely to help the near-term British economic position since (1) any tremors in the international monetary system seem to reverberate against sterling; (2) a reduction in French economic activity will hurt British exports to France; and (3) weakness of French exports in third markets will offer Britain new opportunities only over the longer term.

If, as seems likely, the French response to recent internal developments produces an expansionary, inflationary situation in the country, over the longer term the balance of payments impact would be adverse to France and presumably help to reduce the US and UK balance of payments deficits. Though we can visualize some weakening in the French balance of payments, it is too early to judge whether recent events will force the eventual devaluation of the franc. We should note that France has large reserves of gold and dollars with which the franc can be defended.

  1. Source: National Archives and Records Administration, RG 59, Central Files 1967-69, POL 1 UK. Secret. An attached memorandum from John P. Walsh, Acting Executive Secretary of the Department of State, to Bromley Smith, June 1, stated that the paper was prepared for submission at the June 5 meeting of the National Security Council. On June 3 the Department forwarded to the NSC a supplementary memorandum for inclusion, entitled “UK and France.” It is printed as section H at the end of this memorandum.