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

247. Memorandum of Conversation¹

Washington, November 16, 1976, 11:00 a.m.–12:05 p.m.

PARTICIPANTS

• American

  • President Ford
  • General Brent Scowcroft
  • Robert Hormats

• British

  • Harold Lever, Chancellor of the Duchy of Lancaster
  • Sir Peter Ramsbotham, Ambassador to the US
  • William S. Ryrie Minister (Economic)

President Ford: I am delighted to see you. Jim Callaghan told me you were coming to give me his views on the British economic situation and I am pleased to have the opportunity to meet with you.

Chancellor Lever: Jim sends his best. He has a great deal of affection for you personally. You made a very deep impression on him and, I must say, on Denis Healey as well. In fact, Mr. President, if we took a vote in the Labour Cabinet you would certainly have been elected. I don’t mean to say that you are a Fabian, or anything like that, but the Members of the Labour Cabinet hold you in very high esteem.

President Ford: Thank you. I believe Jim and I have established a close personal rapport. We do not discuss philosophy, but problems and pragmatic solutions. I hope my successor will do the same. We live in a world of reality, not in the world of text books. We must look for practical solutions to difficult problems.

Chancellor Lever: Yes, we in the British Government also favor fact to fantasy. I must tell you that when this Cabinet came in there were mixed views on how to proceed. And in our first year we faced a special situation. There was a sense of change; some members were a little bit divorced from reality. A number were simply ready to write out checks, and may have behaved a little too irrationally. But I can tell you that now we are all concerned with the economic difficulties Britain is in. In the US, I am not certain that everyone follows the details with the same care and attention that we do. I believe there are many who are not aware of reality breaking in very firmly in the UK—the breakthroughs—for instance, in public expenditure and industrial relations. I was also concerned when I came in about strikes and irresponsibility among the labour union people. This relationship has been transformed in a short time. It is remarkable to see the transformation of people like Jack Jones and Hugh Scanlon. Jones was on TV and said that if he were a foreigner he would buy pounds. I don’t want to make too much of this, but the spirit is touching.

I don’t think this spirit is taken fully into account in the US, nor is its effect on industrial relations. They are better than they have been in the last 25 years. I have been on the factory floors. The men there identify themselves with their bosses and with the future of their companies. They know they don’t gain by wrecking the joint. I have never thought that the prospects were more hopeful than they are now. In addition, we have brought local government spending under control. It used to be a national scandal. Now the government has imposed cash limits. To be sure there are people who criticize limits on government spending saying you are too tough or are ruining services. But the Cabinet is determined in this area. The Cabinet has gone extensively into the area of expenditure control and has made considerable progress.

President Ford: I believe this is similar to the problem in New York City, but on a more limited basis. Unless we had stepped in and been firm, they would have kept going merrily on with mismanagement or ill-management.

Chancellor Lever: Has the trend reversed? I ask you this because I must say frankly that I still have some anxiety about our own affairs. But I feel now we have a grip on expenditure, but there is still room for some anxiety.

President Ford: Yes, New York is doing quite well. We loaned $1.2 billion to New York City this year and they have repaid with interest. We will provide an additional loan of another billion dollars. I believe they are living up to the things that had to be done. The third year may provide problems because the necessary measures are not absolutely assured. Now I understand that the new Administration is suggesting extending the conditions from three to five years.

Chancellor Lever: I must say that the performance of New York before that must have been extremely disturbing to everyone in public office. The UK is not as bad as that, even the local authorities. We have made the tough decisions and put an end to excessive borrowing, and it will stay at an end.

People are startled when they say we are living beyond our means. Britain is still a productive society, although many people do not think there is very much activity. We deliver more goods and services abroad today than at any time in the last 50 years. The problem is that the terms of trade have turned against us. For a time we were doing very well, but in recent months the success of our export efforts have been reduced due to hesitations in the markets to which we sell.

President Ford: Our pause has lasted longer than we anticipated or wanted. But the fundamental factors of recovery and expansion are in place. We believe that the latter part of the fourth quarter will again see us moving out of the pause and into recovery; 1977 will be a year of continued economic progress.

Chancellor Lever: When Jim Callaghan asked me to come over here, the letter he wrote, reflecting the views of our Cabinet, was a determination to remain firm to the Alliance and to adhere strongly to our relationship. Our Cabinet is not looking for soft options nor are we looking only to material issues. We see the need to keep alive in the UK a sense of responsibility to our history and to our world role. We want to play a role consistent with the great history we have—it is not a question of extra color TV sets or motor cars. What bothers the Prime Minister is the development of a focus too much on bread-and-butter issues, and away from the purposes of our peoples.

President Ford: What is the status of your discussions with the IMF?

Chancellor Lever: We are asking for a $3.9 billion standby agreement with the IMF, which will give us roughly $2 billion once we have repaid our standby credits to the US and other countries. But we have got to satisfy the IMF on terms before we get the loan. We are frankly not at a point where we know precisely what the terms are. But the terms in the air might amount to pressure for a severe further deflation—greater cutbacks in government borrowing. It is not a problem of money supply. We can probably meet the requirements of the IMF on money supply. But spending cutbacks are a problem. It would have a negative visible public impact on demand at a time of high unemployment. It seems to the Cabinet, indeed to most Members of the Cabinet including Healey and Shirley Williams, that this would not have economic justification. I should also note that I have discussed this with Members of your Cabinet. To the man, I have found a fond affection for the UK and a genuine desire to be helpful.

President Ford: For good reason.

Chancellor Lever: There is no disagreement between your Cabinet and us on what we should do. The question is one of timing. They felt that further sharp action was necessary. Their feeling is that even if tough measures hurt in the short-term, they are to our long-term advantage.

President Ford: I must say (pulling out New York Times) that recent statements by Mr. Dell have not been very helpful.

Chancellor Lever: I agree nothing is to be gained by this. If things need to be said of this nature, they should be said privately.

President Ford: What is particularly bothersome is that he is criticizing the one decision that, from his point of view, did not go right, and ignoring the 10 or 15 other decisions that were free-trade oriented. I have very strong views on free trade—as in the shoes and auto decisions. I hope you can convey to Jim Callaghan that it would be desirable if he (Dell) would not say such things.

Chancellor Lever: I will certainly do that, Mr. President. God gave Dell a very fine baritone voice, and occasionally he over-uses it. I understand your point. Let me say also that we would be better able to object if we had an unblemished record. I personally support free trade. I have fought against trade restrictions. Undeniably they are attractive to some people in the short-term, but in the long-term they are harmful.

With all due modesty I am glad to be able to claim that Chrysler is operating in the UK today because of my intervention. The Cabinet was toying with the market of quotas on motor cars. If Chrysler had failed there would have been a move to restrict imports of autos into Great Britain; the only alternative to this was to keep Chrysler going. I supported this because of the import restrictions which would have resulted from Chrysler’s failure. I must say that this was a first-class success. Not only is a great American company now succeeding in Britain, but it is selling more cars and reducing imports as well as creating jobs. I am happy to say that it is contributing to the UK’s economic welfare.

Dell is a good friend of mine; a close friend. But I certainly understand your point. I must say also, Mr. President, that he is the only Member of the Cabinet enthusiastic about taking additional deflationary action. Most Members of the Cabinet see this as politically disadvantageous and serving no economic advantage.

I must say also, Mr. President, as even our most pessimistic—most pessimistic—forecasts show, that we are going to have a current account surplus in 1978. They predict that by the end of 1978 we will have a current account surplus of $1.5 billion. Other responsible forecasters, such as the Bank of England, say this surplus is coming earlier.

President Ford: What is the timing of your negotiations with the IMF?

Chancellor Lever: I think they will be through fairly soon; I am not certain. But I hope we can do them promptly because I think after they are concluded we will be able to turn to sterling balances. When these negotiations are over, then we can deal with the problem of sterling balances.

I should tell you, Mr. President, that I am a defender of stable parities. I believe that many people in the UK have under-estimated the harm of the instability of parities. The bill for this instability has come in late and I must say, with all due respect to my colleague (Ryrie), that it probably took the Treasury relatively unprepared. The decline of sterling was far greater than was justified. And the problem of sterling decline caused inflation, so that the decline in sterling was self-validating. In my view, we cannot stabilize the parity of sterling without stabilizing sterling balances. With sterling unstable, we cannot sell bonds to dry up currency. If we do not deal with the over all problem, we will be in a situation where sterling balances will be cashed out, then we will have to come to other countries for more money; more will be cashed out and we will have to come back again. We must work on this problem rapidly, as soon as we get the negotiations with the IMF out of the way.

I ask you to trust us, to trust our sense of judgment on the issue of timing with the IMF.

President Ford: Where is the IMF putting pressure on you?

Chancellor Lever: On the public sector of borrowing requirement—which you would call your budget deficit. The IMF wants it further reduced. The problem is that when you reduce your budget deficit, it is very hard to program. It cannot be done immediately. But I can assure you, Mr. President, that we are determined to close the gap. There are differences of course on how to bring this about. If you do it wrong, if you put on the brakes too fast, you lose the gains we have so painstakingly made on incomes policy and the improvements we have made in the social and political process. This is important to us. For instance, the Confederation of British Industries, Trade Union Congress, and Government are all working together in a voluntary way. There is an atmosphere of determination. If we have too much of a deflation and workers suffer too much, the tasks of the union leaders will become impossible.

President Ford: What is the impact of budget limitations on defense?

Chancellor Lever: It is certain that if we are told to cut expenditures significantly at this time, a disproportionate share would be cut from the defense budget. I am strongly opposed to cuts in defense. In my view defense budgets are the expression of a united will of Europe to protect itself. I oppose cuts. I believe we have done too much already. If Prime Minister Callaghan came to the Cabinet now and said we must cut the budget because we have got to do it, the Cabinet would say let defense bear a heavy share. This is one of the central reasons for the Prime Minister’s anxiety.

Another part of the price of getting cuts through the Cabinet would be a lurch toward protectionism. People would argue that since we are taking deflationary measures which will add to unemployment, we should help to protect against unemployment by cutting down foreign goods. I would certainly not like to see this happen.

Third, because there would be less employment and less investment as a result of such measures, people will argue for providing more money to the National Enterprise Board. We are opposed to this, I should say I am opposed to this because this is not the Government’s point of view. If the Prime Minister would come to the Cabinet there would be strong emphasis on putting more money into the NEB. This is not desirable or particularly a positive way of attacking the problem, since it would shift investment from the private sector to the Government, distorting further the balance between public and private sectors.

I can assure you the Prime Minister hopes to avoid these things. But we are still faced with the problem of stabilizing our currency and after the IMF negotiations end to turn to the problem of sterling balances. All of the Cabinet is determined to make the necessary efforts to improve our economy.

The time may come when the Callaghan Government will be voted out of office; that is always possible. But it is important to the legitimate government which succeeds it that these problems are dealt with now. We want to be seen that the Labour Government has had a fair deal. We do not propose to say that tough bankers have smacked Labour around. There is still of course a 50–50 chance, or maybe better than a 50–50 chance that the Government will break up as a result of attempting to respond to too tough demands by the IMF. But what is probable is that the adverse impact will fall on defense, import barriers, and further discredit of the mixed economy concept.

President Ford: As I told the Prime Minister in Puerto Rico, there is great sympathy in the US for the stability for the UK’s economy. It is important from an international military, political, and economic point of view. We will do the very best we can. I told the Prime Minister I would drop him a line about my best judgments regarding this issue. On a personal basis, I will bend over backwards. As you know, there are pressures here which I have to deal with. But I am fully and deeply concerned about the UK and its ramifications on several other international problems. I will have to beat back some of the arguments that you are familiar with. I want to be as helpful as possible in enabling the UK to play the vital world role economically and militarily. I will do my best to be helpful. Please tell this to the Prime Minister.

Chancellor Lever: The Prime Minister has a great deal of confidence in you and a genuine feeling of affection. During the crisis he has turned instinctively to you as a friend. He hopes you will use your influence with the IMF.

I will certainly convey your best wishes to him.

1. Summary: Ford and Lever discussed the UK economic situation.

   Source: Ford Library, National Security Adviser, Presidential Country Files for Europe and Canada, Box 15, United Kingdom (10). Secret. The meeting took place in the Oval Office. Earlier that day, Kissinger told Ford: “I would not weaken now. Tell Lever you will think about it and then write Callaghan to negotiate with the IMF. If that fails, you may have to tell Burns to roll over the debt for a couple of months. I don’t think you should have this on your hands—possibly the fall of a government under very adverse circumstances.” Kissinger added, “If we turn down the British, it should not be to Lever—he has a monumental ego and we don’t want him going back saying he was kicked in the teeth.” At that point, Callaghan telephoned; Ford said that “he would be sympathetic” and would write Callaghan after hearing Lever out. After the call, Kissinger said, “I don’t know if what Burns and Simon want is doable politically. Maybe it’s necessary, but I don’t see why you should cram it down their throats.” (Memorandum of conversation, November 16; ibid., National Security Adviser, Memoranda of Conversation, Box 21) Lever briefed Kissinger on the UK economic situation on November 15. (Memorandum of conversation, November 15; National Archives, RG 59, Records of Secretary of State Henry Kissinger, Entry 5403, Box 19, NODIS Memcons, November 1976)