Foreign Relations of the United States, 1969–1976, Volume E–15, Part 2, Documents on Western Europe, 1973–1976

257. Note From the Government of the United Kingdom to Secretary of State Kissinger¹

Washington, December 13, 1976.

THE PROBLEM OF THE STERLING BALANCES

1. The British proposal is for a “safety-net”, ie a line of credit on which drawings might be made to the extent that sterling balances fell below an agreed starting level. It would cover official and private balances, which at present total some £5.9 billion (say $10 billion). Drawings on the line of credit would be repaid for a period which might be 7 to 10 years. This would be like the arrangement in 1968 in which the US participated and which was managed by the Bank for International Settlements in Basle.

2. The object would be to remove a source of instability in the international monetary system and of potential pressure on the pound sterling which may be unconnected with the condition of the British economy. A significant part of the pressure on the pound this year has come from withdrawals by official holders of sterling.

3. Discussions involving the central banks of the main countries have been taking place in Basle this weekend about a scheme on these lines. The representative of the Federal Reserve, however, is attending these discussions only as an observer.

4. The alternative scheme outlined to British representatives for the first time yesterday by Mr. Yeo appears to be radically different. It would involve:

(a) a new “trust fund” in the IMF on which drawings could be made under conditions which would be like the most severe ones required in relation to IMF drawings;

(b) an agreed programme for the run-down of the sterling balances;

(c) an element of “funding” (ie conversion of the debt from short-term to longer-term) undertaken by the British themselves, eg by offering sterling holders dollar-denominated bonds.

5. The third of these points raises no problem and the British feel it could be included in a scheme. The others raise three major problems:

(a) a solution involving the IMF would almost certainly take many months to negotiate and would therefore not meet the immediate need, even if the negotiations eventually succeeded;

(b) a programme for the run-down of the balances would mean interfering with the freedom of people to hold sterling and the attempt to impose or negotiate this would create alarm and make the problem worse. It would mean setting up a system of controls and although the scheme would be intended to apply only to official balances, it would be impossible to do this without imposing restrictions on private holders also. This would hardly be consistent with London remaining a major financial centre;

(c) there is no logical reason why borrowings to finance withdrawals of sterling balances should be linked to IMF conditions relating to the British economy; and this would not be politically tolerable.

1. Summary: The note discussed the sterling balances problem.

   Source: National Archives, RG 59, Records of the Office of the Counselor, Helmut C. Sonnenfeldt, 1955–1977, Entry 5339, Box 10, POL 2 United Kingdom. Secret. Sent to Kissinger under cover of a December 13 letter from Ramsbotham that reads, “You asked this morning if I could let you have a note on the problem of the sterling balances: the “safety-net” scheme; the alternative scheme of Mr. Yeo; and what we could and what we could not accept of the latter. Here it is.”