255. Memorandum of Conversation1
PARTICIPANTS
- Dr. Henry A. Kissinger, Secretary of State
- Denis Healey, Chancellor of the Exchequer
- Peter W. Rodman, NSC Staff
[After the Prime Minister’s dinner in honor of the Secretary and Mrs. Kissinger at Number Ten, the Healeys escorted the Kissingers through the passageway to Number Eleven and on a tour of the rooms. After general conversation, Mr. Healey and Dr. Kissinger spent about forty minutes on the economic problem, as follows:]
Kissinger: You think you’ve told Hal [Sonnenfeldt] everything.
Healey: Yes, let me tell you what the main problem is.
We got het up about sterling balances two months ago. Jim [Callaghan] raised it with President Ford and Helmut Schmidt and they took an interest in it.
Kissinger: In Puerto Rico.
Healey: That’s right. Schmidt started working on it. But Arthur Burns took the view that sterling balances hurt you only if you were making a mess of your economy, and if you weren’t making a mess he thought they help you.
But Jim has committed himself to this. What we are seeking is a safety net—a pledge to replace deposits, if they fall below a certain level, with short term lending. It is not the same as funding the balances; it’s less complicated.
We pursued this in the B.I.S., the Bank of International Settlements, which produced a good paper which will be discussed Monday at a meeting in Bâle. The Germans are behind it. It’s the sort of thing that has been done before. We agree with it. The Dutch Central Banker is for it.
[Typeset Page 798]With your country, the problem has been that neither Treasury nor the Fed was willing to talk about it until we had an agreement with the [International Monetary] Fund.
Kissinger: Yes.
Healey: When on Wednesday Witteveen agreed the measures we’ve taken were adequate . . . .
Kissinger: Have you announced your measures?
Healey: No, next Wednesday. That unlocked the American door.
First of all you have a constitutional problem whether you can do it at all without using your . . . .
Kissinger: Exchange Stabilization Fund.
Healey: Yes. There might be problems with doing it with the Fed even if Arthur is willing; it might have to be done through Treasury and the Congress. I don’t know.
I had a morning with Bill Simon when he was here on his trip to Moscow. I gave him and Ed Yeo this paper [Tab A]—it’s about getting countries with reserves to accept a contingent liability. [He hands the Secretary Tab A, and the Secretary reads it.]
Kissinger: [Referring to paragraph 2(b) of Tab A:] Our people say we shouldn’t cover private holdings.
Healey: They’re going up. So they’re not the problem. The problem is official holdings which are going down.
Confusing things have been happening. First, there was this leader in the Times [New York Times article by Edwin Dale, Tab B] which must have come from Ed [Yeo]—that the Administration doesn’t know whether to do it by funding or by a safety net. And second, what is offensive is that it implies we were fuzzy about our own ideas.
Kissinger: [Reads over Tab B] Nor is it true we are not yet committed to anything. The President ordered us to work on the safety net.
Healey: The work that has been done by the B.I.S., which is to be discussed in Bâle on Monday and Tuesday, has had no U.S. input. But I know you have contingency plans for everything, worked out by very clever chaps. The leader suggests your people are thinking in terms of the more ambitious idea of funding—which would require the help of sterling holders, the Arabs.
But Jim needs something by Wednesday. The idea that we’re fuzzy about what we want is the reverse of the case. It’s been worked out by the B.I.S.
The latest is Derek Mitchell is flying over tomorrow to talk to Yeo. Poehl, who is Schmidt’s confidant, is coming over.
Kissinger: They now say they’re taking their time. We got word the Germans were cool on it. Scowcroft wondered if I shouldn’t call Schmidt.
[Typeset Page 799]Healey: That’s not the case. The Germans want to get it settled.
I think Ed [Yeo] is working to help us.
Kissinger: I think so. Maybe more so than Bill.
Healey: I don’t know. He was helpful when I called him on this.
On Tuesday, deputies from the Bundesbank and the Bank of England will fly over to talk to the Fed. I don’t want all this jeopardized by Treasury by trying to divert everything to the funding of balances, which could take months—which is still compatible with a safety net. We would like to get an agreement in principle on the safety net, which we could explain would operate in such and such a way as explained in the paper. I’m worried that we will get such a degree of delay that Jim will be uncertain on Wednesday.
Jim has a major problem in selling this to the party and unions. His view has always been that we needed three legs to the stool—something on imports, funding of balances, and the safety net. We dropped something on imports, and we have only a safety net. If he doesn’t have this, he has nothing.
What I’m asking is when you go back, you get Arthur to help us on the B.I.S. formula, which is already worked out. His man Wallich, who is already attending at Bâle for the Fed, is going as an observer. This is progress. But we want him to be there as a participant.
So what we would like is that you:
—Talk to Arthur so that Wallich takes a constructive role in Bâle.
—Second, that we get something done by Tuesday with the B.I.S., so Jim can have something by Wednesday.
Jim has committed himself to this so it’s a matter of his political credibility.
Jim has agonized over it, and he was worried about whether he could carry the unions and the party.
Kissinger: Why?
Healey: There was the mistaken belief they could ignore the money element in all this. Once he decided it has to be done, he’s been brilliant in handling the Cabinet on this. We have not been offensive in how we went about the cuts in specific areas.
Kissinger: Would you be in more trouble if Heath were the opposition leader?
Healey: No, his position is weak. He is irrelevant.
I’m really worried, Henry, that the world economy may be heading in the direction of a downturn like the 30’s.
Kissinger: Really? Why?
Healey: If you look at the indicators in most countries. First, too much attention is paid to Milton Friedman, and there is a pervasive lack of confidence. It’s true even in Germany.
[Typeset Page 800]Second, politically, it is likely in the 80’s that the Communists will be in power in Italy and even in France, particularly if Chirac and Giscard tangle. Portugal and Spain, you know as well as I.
If we get this together next week, we could be the only country headed in the right direction in a few years’ time.
The French are going to hell in a handbasket.
Kissinger: Really?
Healey: Productivity is down.
The point I make is that it’s very important if we can get an agreement in principle to move in this direction. And it doesn’t rule out moving in a more fundamental direction eventually. But that requires the cooperation of sterling holders, which means negotiation with OPEC countries, which would take longer.
Do you think it is worth Jim asking Schmidt to send a letter to the President?
Kissinger: Yes. That would be even better than a letter from Jim.
Healey: I thought it was a mistake for Jim to send the letter last week.
Kissinger: No, it was helpful. A letter from Schmidt would help us.
Rodman: It would end this confusion about what the Germans want.
Kissinger: It would end this confusion and it would also carry great weight.
Good.
[The discussion ended.]
-
Summary: Kissinger and Healey discussed the UK economic situation.
Source: Ford Library, National Security Adviser, Kissinger-Scowcroft West Wing Office Files, Box 25, UK (23). Secret; Nodis.All brackets are in the original. The meeting took place in 11 Downing Street. Attached but not published is Tab A, a November 25 memorandum entitled, “Aide Mémoire on a Safety Net for the Sterling Balances;” and Tab B, a reprinted version of a December 9 article by Edwin Dale in the New York Times entitled “British Sterling: Officials of U.S. Face 2 Options.” Kissinger was in London from December 10 to 12, where he discussed Rhodesia with Crosland.
↩