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November 1 2 ,








S t e r lin g C r is is

B r it is h C hancellor o f th e Exchequer Callaghan se n t one o f h is p r in c ip a l
a id e s , S ir D en is^ R ick ett, along w ith a to p o f f i c i a l o f the^Bank o f England,
t o see me y e ster d a y on s t e r lin g .
The m essage was th a t th ey were a t th e end o f th e l i n e , u n le s s
th ey have assurance o f s u b s ta n tia l long-term c r e d it soon.
They may be forced t o devalue — perhaps w ith in a week.
The B r i t is h , as you w e ll know, have come in fo r h e lp b e fo r e , but th ey
have never p r e v io u s ly in d ic a te d so c le a r ly t h a t , w ithout h e lp , th ey w i l l be
fo rced t o ta k e th e p lu n ge.
The a u s t e r it y program imposed by th e B r it is h l a s t year brought s t e r lin g
out o f i t s summer c r i s i s and v ery co n sid era b le g a in s were made in r e s to r in g
B r it is h r e s e r v e s and repaying sh ort-term c r e d it s . This fa v o ra b le p ic tu r e
p r e v a ile d through th e fou rth quarter o f l a s t year and in t o A p r il o f 1967 .
The B r it is h p r e d ic te d a s iz a b le b a la n ce o f payments surplus fo r th e y e a r.
A sharp r e v e r s a l took p la c e in May, fo llo w in g poor A p r il trad e f ig u r e s ,
accen tu ated by th e M id-East c r is is * The B r it is h r e se r v e s s u ffe r e d from seme
movement o f M id-East fu n d s, accompanied by oth er s p e c u la tiv e f l i g h t from
s t e r lin g and, more fundam entally, due t o c lo su r e o f th e Suez Canal and
r e la te d a sp e c ts o f th e M id-East c r i s i s . In a d d itio n , th e hop ed -for r esu r ­
gence in U. K. ex p o rts d id not ta k e p la c e , due, in la r g e p a r t, t o th e
sta g n a tio n in Germany and slow-downs elsew h ere, in c lu d in g th e U. S . , in th e
e a r ly p a r t o f th e y e a r. F in a lly , in t e r e s t a r b itr a g e r e la t io n s h ip s were
turned a g a in s t th e B r it is h , as in t e r e s t r a te s in th e U nited S ta te s r o s e .
The f a c t i s th a t th ey are now scrap in g th e bottom o f th e b a r r e l. They
have alrea d y used $2 b i l l i o n in sh ort-term c r e d it s , which m ortgages n ea rly
a l l t h e ir t o t a l r e s e r v e s . They have l e f t o n ly $600 t o $800 m illio n in sh o rt­
term c r e d i t s , which could go in th e attem pt t o defend th e r a te over th e next
few w eeks. The market could go h e a v ily a g a in st them n e x t week, when th ey
announce some v e ry bad trad e fig u r e s fo r O ctober. Everyone ex p e cts th e s e
fig u r e s t o be bad because o f th e dock s t r ik e , b u t, even s o , th e impact o f
th e a c tu a l numbers i s l i k e l y t o be a d v erse.

E.O. 12958, See, 3,6
NLJ ^S-ji'7
. NAIU Date


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If they have to conclude that devaluation is inevitable, they would
rather act now, while they still have some cash and credit left to defend a
new parity rate.
It might seem tempting to settle this perennial problem now and let
sterling go. The arguments for this policy are:
— If the devaluation were modest (10 - 15 percent).

If everybody cooperated (the Common Market, Japan, Canada, and
Australia held — and few devalued).

— If Wilson were able to hold his foreign commitments — Germany
and East of Suez.
— If, and this is the big if, Wilson can maintain his Government
and the movement were not wasted because of internal British
Then it might be desirable to relieve sterling's long agony and try to get
the U. K. economy on a more solid basis.
But the risks for us are just too great to take this gamble if we can
find another alternative.
-- While we believe the Common Market would hold, there is some evidence
that France would try to follow the U. K. — in an effort to attack
the dollar and try to force a gold price increase. Japan, Australia,
and Canada probably could be held, although Japan, itself, would
face great pressures.
But even if all this worked out:
— the dollar would come under attack;
— the gold market would come under very great pressure — and might
— the world might not believe a "modest" devaluation would be adequate
and pressure on sterling could continue.
The British would prefer to hold the rate, for political and economic
reasons! To do so, they tell us they need a $3 billion package of longterm help. I believe they hoped for a multi-governmental loan at long-term,

.S. E C R


- 3 but we told them that such an approach was not feasible — at least now,
with all governments having budget problems. Their other proposal was for
a multi-governmental (U.S., Italy, Germany) agreement to hold guaranteed
sterling. This avoids any fixed date of maturity. It would have no balance
of payments or budgetary effect. They said that they had some favorable
response from Germany on this proposal.
We suggested a package as follows:
— $1.4 billion IMP credit, which technically they can get by drawing
their full line;
— $1 billion guaranteed sterling, if Germany and Italy would take
— perhaps some private bank credits.
Central bank governors met at Basle this weekend — their regular
monthly meeting — and came up with a different approach. They believe
it would be the best course to have the IMP give the U. K. a $3 billion
standby commitment and announce it. This would do two things:
— announce to the world that the IMP thought the present parity
was right;
— provide — on a standby basis — a lot of money to underwrite
the present parity.
These are the negative factors;
— The U. K. would be drawing a lot more than its regular credit ling.
This can be done technically but may cause some problems. Neither
Schweitzer nor the U. K. seem to favor this approach.
— This would require use of almost all GAB resources and would make
it difficult for the U. S. to make a big IMP drawing if we need to.
- The operational and procedural matters will require five to six weeks
to clear up before a firm announcement can be made.

8HB-0 R E -g___


Even with an IMF standby, there may be a short-term cash problem for
the U. K., since the 33® package cannot be used until it is finally approved
near the end of the year. It may be necessary for the U. K. to get seme
additional short-term credit soon, which could be liquidated when the IMF
was drawn on. SBSould that need develop, I believe we should participate.
This would involve no direct balance of payments or budget costs.
It is important to understand that even the IMF standby might not hold
sterling. Our judgment is that it would give them a real chance for getting
through the next two months, which are crucial for them, and gives some hope
that they could hold on through 1968. We believe this is an important
factor. And there is at least some prospect that, if they get through 1 9 6 8 ,
either they could hold longer or take the plunge under better circumstances.
If your schedule is manageable, I would like to go over this problem
with you on Monday. We need to get your reactions to ppssible approaches/
The Federal Reserve Open Market Committee meets on Tuesday and would want to
consider the guaranteed sterling question then. The situation is developing
rapidly. Fred Deming will be talking to Rickett by phone at noon to get the
current U. K. feeling. Schweitzer is coming to lunch with me and Bill Martin
It would be useful to have Bill Martin (or Dewey Daane), Gene Rostow,
Deming, Okun, Fried, and Walt there.

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102