245. Letter From British Prime Minister Callaghan to President Ford1
I was most grateful to you for agreeing that Harold Lever should come over to Washington at such short notice, and in particular for your willingness to see him yourself.
Harold comes very much as my personal emissary. He will not, of course, be expecting specific decisions during the course of his visit and we shall endeavour to play down the visit with the Press. Nevertheless the British Government is going to face critical decisions in the next ten days: and if we were forced to go in a certain direction it would be bad both for us and for the Alliance. I want you therefore to know what is in my mind and also the kind of help that would be most valuable.
At Puerto Rico I told you that we were determined to take firm action to get our economy back on course even if it meant delaying or sacrificing some of our political goals. We took this action in July when we chopped no less than £2 billion off the prospective Government deficit next year by cutting programmes and raising taxation. This was in addition to the £3 billion cuts made earlier in the year. In political terms this was difficult to do, particularly at a time of high unemployment: but nevertheless we did it, and hoped we were through the worst.
Since then, two things have gone against us. Firstly, the pace of world recovery has been less than we all expected and has thus helped us less: and due largely to the recession and the movement of interest rates, the Government deficit next year is now forecast to increase. Thus despite the July cuts we find ourselves running hard to stay in the same place. Secondly, we are living under the continual shadow of withdrawal of the sterling balances. As a result of these two factors we have had to apply to the I.M.F. in order to repay what we have drawn from the $5.3 billion stand-by and to finance the deficit we expect next year.
The I.M.F. team are currently with us and we are discussing the situation very frankly with them. It may be—although we have not con[Typeset Page 774]ceded this yet—that we shall have to take some further action to reduce the Government deficit. I am however quite clear about one thing: the orthodox approach of the bankers and monetarists to solve the problem through massive deflation would be catastrophic, not just for this Government but in a wider sense. If we were to undertake further significant deflation, the economy would be on an unacceptable downward ratchet, with revenues down, unemployment up, and production hardly moving. We should be pressed to look at a strategy of long-term protection with all that that would imply. But I think that it could also strain the social cohesion of our people to a very dangerous extent. We have often talked privately about the problems of the Southern Flank: and I do not think you would want to see us either irresolute as an ally or turning to political extremes of either Left or Right.
In fact, our prospects are good provided we can get through to 1980 when we shall reap the benefits, both of North Sea oil and our industrial strategy. Furthermore, I am determined to see this through. Our recent Parliamentary difficulties have been exaggerated out of all proportion in the Press. But if we are to pursue our present path steadfastly, we need a new factor in the situation, and we shall need help from the major contributors to the I.M.F. to ensure that the latter do not try to push us too far.
Even so I will have a big political problem in carrying with my Cabinet and my Party the decisions we shall have to take in the next week or so unless I can feel assured that the action we take will not thereafter be undermined by having pressure arising from the overhang of the sterling balances. Harold Lever can explain our ideas to you, both as regards method and timing.
You have been a good friend to us, and I know that you remain so. What I am asking is that you and Henry will take a close interest in the discussions of our economic problems over the next few weeks, to ensure that the orthodoxy of the monetarists is tempered by wider political considerations that can have an effect not only on Britain’s domestic scene but have repercussions in the broader world scene.
With warm regards
Summary: Callaghan discussed the UK economic situation.
Source: Ford Library, National Security Adviser, Presidential Country Files for Europe and Canada, Box 15, United Kingdom (9). Secret. A November 17 note from David Passage, Kissinger’s Special Assistant, to Sonnenfeldt attached to another copy of this letter indicates that Lever brought the letter with him from London to Washington. (National Archives, RG 59, Records of the Office of the Counselor, Helmut C. Sonnenfeldt, 1955–1977, Entry 5339, Box 4, Britain 1976) In a November 10 message to Ford, Callaghan proposed sending Lever to Washington to discuss the UK economic situation. (Ibid.)↩