London, 27 February 1968
Secret
I should like to report the great anxiety I have been feeling since devaluation at the outflow of currency for portfolio investment in the overseas sterling area, and in particular in Australia. According to figures in the attached article in the last issue of the Economist, £162m. sterling has gone to Australia in the last quarter of 1967 and the first month of this year. We have no reason to disbelieve these figures, but I have asked for them to be checked. I may say that they fit in with my impression of what is happening in the City. I have also asked for any figures of movements of funds to other sterling Area countries since devaluation.
If the figures are only broadly right—as I feel they are—it will not require many more months like January of this year (£47 m. sterling alone) to bring about an intolerable situation if, as l assume, the Australians are not adding to their sterling balances. On the basis of what has occurred, it is difficult to imagine achievement of the balance of payments surplus predicted for 1968, and if the outflow of investment funds continues at anything like the present state we will have not a surplus at the end of the year but a massive deficit.
Three remedies appear possible, each with its difficulties:–
(i) Exchange control on movements of sterling to Australia and possibly to other members of the Sterling Area;
(ii) Urgent pressure on the Australian authorities to hold additional sterling balances equivalent to the inflow of funds for portfolio investment;
(iii) An appeal to private investors to accept the restraint of the voluntary programme.
I will explore these remedies with officials urgently. But I feel that you ought to know without delay of the probable outflow of funds on this scale, and of its consequences if it is allowed to continue.
[UKNA: T 295/384]