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

252. Memorandum From Secretary of the Treasury Simon to President Ford¹

Washington, undated.

SUBJECT

• Visit to London

My contacts and those of my colleagues included talks with Karl Otto Poehl, State Secretary of Finance (Germany), and Alan Whittome, Director, European Department, IMF; private talks with Gordon Richardson, Governor, Bank of England, and Sir Derek Mitchell, H.M. Treasury; as well as the publicized meeting with Denis Healey, Chancellor of the Exchequer.

These conversations, plus a number of informal talks, produced the following impressions.

1. Chancellor of the Exchequer Healey is not far from the IMF, both in terms of overall approach and in terms of specifics. He would agree with the IMF that policies have to be put into effect that will enable the UK authorities to regain control over the rate of monetary expansion, shift resources from consumption to investment and export sectors, and restore confidence. Healey feels that a reduction in the budget deficit (which now equals over 10.5% of GDP) is essential to regain control over monetary policy. He also feels that this has an important effect on the exchange rate and on overall confidence. He is concerned about the durability of his incomes policy if economic results in terms of financial stabilization and economic growth are not forthcoming. In short, Healey sees the UK at a crisis point, with its international credit almost exhausted and the long-postponed adjustment and restructuring impossible to avoid—the only question remaining is whether it will occur in a deliberate way and in constructive channels.

While Healey and the IMF team agree on overall approach there is some disagreement on:

a. Reductions in the budget deficit—which the Treasury estimates at 10.5 billion pounds for ’77/’78 (a private estimate places the likely outcome at 8.3 billion pounds). The Fund is asking for a slightly larger reduction than the 1.5 billion that Healey has offered—bargaining is continuing on this subject but both are agreed that the reduction in the deficit should not come about as a result of an increase in taxes.

b. Front end loading—the question is how much of the $3.9 billion which the UK hopes to borrow from the IMF should be available immediately. Here there appears to be a wide disparity in positions—the UK asking for $2.5 billion—the Fund thinking in terms of just a fraction of that.

c. Duration of the program—The Fund has pushed for a two year program, arguing that the nature of the changes required are in large part structural and that a one year program is inadequate.

d. Exchange rate policy—The British feel that the IMF is trying to force them to pursue a policy of depressing the exchange rate in order to maintain constant competitiveness. The IMF on the other hand fears that the British will try and support sterling at unrealistic levels—wasting a lot of their borrowed reserves in the process—and ultimately fail.

I did not get drawn into a discussion on any aspect of the four basic areas of negotiations with the IMF. We made it clear that the negotiations were between the IMF and the UK. The need for a two year program does seem clear and I underlined that point with Denis Healey. I also suggested that Denis ought to regard the front end loading question as tradable and relate this to other elements in the negotiations.

2. Healey is in trouble with the cabinet although the degree of difficulty is hard to evaluate. Prime Minister Callaghan has involved the entire cabinet in the exercise, almost from the start. For weeks the cabinet was unwilling to authorize any substantive negotiation by Healey with the IMF. Finally, mid last week it permitted Healey to negotiate. The cabinet is divided into three segments, those who support Healey, those who want to do very little—such as Harold Lever—and the far left identified with Wedgewood Benn. The position of the Prime Minister is pivotal—if he put his full force behind a program he can probably command overall cabinet support. Even if there were defections from the cabinet the defectors would not necessarily vote against the Government in Parliament and thus bring it down. The Prime Minister has played his hand very closely. The Lever group has been very articulate, first arguing that Lever could borrow billions of dollars from the Americans and thus obviate the need for any change in policies. Secondly they have argued that budget cuts per se are “deflationary” and the British economy is already in desperate condition and does not need additional deflation. Thirdly, they are arguing that by selling a special price indexed bond the deficit need not be cut in order to regain control of monetary policy.

On the first, Lever was asked to validate his argument by obtaining the money—in fact he returned empty-handed. The second point is subject to much debate, although the evidence strongly suggests that careful deliberate cuts would not be deflationary. Indexed bonds would not pose a solution to the problem of control of monetary policy.

3. Healey asked if once they have reached an acceptable agreement with the IMF we would be willing to start discussions on “funding” sterling balances. I said we would abide by the President’s decision. I continued that it was my belief that if good policies are established I did not believe there would be a pound overhang.

Conclusion: Discouragement, even despair is dominant. The Government’s public support is badly diminished. The Labor Party is tortured by the tensions between the ideals embedded in its heritage and the cumulative evidence of a failure to get things right in terms of economic policy. The Conservatives appear unable to offer a coherent and integrated alternative.

William E. Simon

1. Summary: Simon reported on his recent trip to London.

   Source: Ford Library, L. William Seidman Papers, Economic Policy Board Sub-ject File, Box 77, Memoranda to the President, June 1976–Dec. 1976. No classification marking.