London, 18 November 1967
This is a very secret message for your own eyes alone. But I wanted to let you know personally at the earliest opportunity that the Government have decided to devalue the pound this week and that this decision will be announced at 21.30 GMT on Saturday evening, to take effect immediately.
Your people will be able to give you all the technical details; 1 but I felt that I must send you this message as well, because I know that the decision will be unwelcome to you, as to all our friends in the Sterling area, and I wanted to assure you that we should not have taken it if we had not first considered both the alternatives and the implications very carefully.
You know how hard we have tried to avoid this step since we took office three years ago: and you know the series of hard and unpopular decisions which we have taken in order not only to hold the pound but also to transform the economy and the technological and industrial base of British society. But the effect of these measures has been periodically interrupted by recurring waves of uncertainty leading to immense pressure on Sterling: and the past few weeks have seen one of the gravest of these.
By this summer we were in fact practically in balance, and ready to move into surplus, when the ground was cut from under us by events in the Middle East.2 This disrupted our trade and surcharged our imports, through the high cost of the extra transport needed in a volatile tanker market: the denial of traditional oil supplies, based on the great lie of Anglo-American involvement in the fighting: the price of having to replace that oil from high cost areas: and the temporary loss of Middle Eastern markets. Serious though these consequences were, they were exaggerated in their effects by a continuous wave of speculation against the pound which was aggravated by the disproportionate impact of the dock strikes here and the general rise in world interest rates.
In these circumstances we have had to make a decisive choice between two options. It might have been possible once again to obtain from our friends help in the relatively short term. But our contacts indicated that this was not an option on which we could rely with any confidence for more than a month or two at a time: and the Government unanimously rejected it. We have therefore chosen the alternative course: and we are also adopting a package of further measures designed not only to maintain confidence in the new rate but, even more, to switch resources towards the thrust for greater exports and for the leaner, but more muscular, base on which the future of this country depends. This has been a very hard decision: and you will realise how reluctantly we have reached it. But I am sure that it is right and that, if we hold firmly on the new course which we have set ourselves we shall succeed in restoring stable confidence in Sterling and give fresh vitality to the British economy.
There are two things in particular that I want to say to you. First, we have tried throughout to have the fullest regard to all our friends in the Sterling area: indeed the interest of Sterling holders was one of our strongest reasons for trying so hard and so long to avoid taking the step which we have now taken. But, bearing in mind both the rates of interest which they have earned in recent years and the fact that their purchasing power in Sterling terms will be maintained, I am sure that no one need regret having held reserves in Sterling over the years or be in any doubt about the advantages of continuing to do so, It is in the common interest of all of us that the strength of the pound at its new parity should be established quickly and beyond doubt: and I am sure that during the weeks ahead we can count on you and other members of the Sterling area to give us the same support and cooperation which you have always given us in the past. I want you to know that we have thought very carefully about the rate of devaluation. We are confident that the 14.3%. which we have chosen will not (repeat not) be large enough to disrupt world trade and payments or require changes in parities of other major currencies.
Second, I must admit that there have been moments during these past weeks when 1 doubted whether, in taking the measures necessary for putting the economy right, we could possibly avoid some really damaging effects on our posture in the world outside.
The essence of the domestic package we have decided on is the release of resources from the home market to make possible full deployment of resources on increased exports. The underlying philosophy will be the need to trim our home market economy so as to live and be seen to be living within our means. But after all our people have had to take in the past eighteen months—and this has had a pretty debilitating effect on national morale, not only politically—I would have found it impossible to ask for further belt-tightening without meeting a strong riposte from our own people, right, left and centre, that the first belts to be tightened should, in their view, be those of the military. With the best will in the world a week ago, I could not see how this could be achieved without major changes in our defence posture going far beyond the decisions announced in our Defence White Paper four months ago.3 And I was only too well aware of what this would have implied, particularly if it meant our having to withdraw much earlier than planned from Singapore.
I am happy to say that this is not the case and I can assure you that, provided, as we confidently believe, the pound can now again become a strong currency and our economy forges ahead in the new circumstances, while inevitably making some reductions in defence expenditure we shall nevertheless be able to maintain, both in Europe and east of Suez, the policies set out in our most recent Defence White Paper.
For reasons which you will well understand I must ask you to treat the contents of this message as most secret right up to the time of the announcement.
1 A more detailed message was sent simultaneously by Chancellor James Callaghan to the Australian Treasurer, William McMahon (UKNA: DO 126/29, Callaghan to McMahon, 18 November 1967).
2 The Six-Day War, 5–10 June 1967.
3 See Documents 80–82.
[UKNA: DO 126/29]