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Anglo‐American Relations and International Monetary Policy, 1958‐69

Heide‐Irene Schmidt Most analyses of Anglo‐American relations after the Second World War argue convincingly that the so called “special relationship” reflects the British strategy to tie up American and British financial, economic, politi‐cal and security interests and thus participate in American world power projection.1 Britain no longer commanded the economic and financial re‐sources to pursue an independent global policy. It was therefore important to use the residues of its former position – political competence/influence and military presence – to make sure that the British‐American relation‐ship was of sufficient value to the US to be able to influence American political strategy in the light of British policy objectives.

The US administrations were only too aware of the motifs of the “spe‐cial relationship the British have with us.”2 As a matter of fact, however, the similarities that evolved between the US and the UK in the interna‐tional monetary system at the end of the 1950s, when the US developed a balance of payments deficit and had to ask for burden‐sharing within the alliance, created a communality of the Anglo‐Saxon powers vis‐à‐vis the continental European powers which the UK was able to use for promoting its interests. In return, the US recognised that “what we want from the British” would serve American world‐wide policy objectives in a way no other country was able to provide – the commitment “East of Suez” as well as the commitment to prevent sterling from destabilising the International Monetary System (IMS). The notion “communality of interests” implies that it is still difficult to determine who was more interested in pursuing these goals, but it is obvious that the Macmillan and Wilson government seized every opportunity to get maximum support for British national interests. 1 David Reynolds, Britannia Overruled: British Policy and World Power in the Twentieth Cen‐

tury (London 1991). Reynolds speaks about “power by proxy”. Alan Dobson, Anglo‐American Relations in the Twentieth Century (London 1995).

2 Summary Notes of the 587th NSC Meeting, 5.6.1968, Lyndon B. Johnson, Presidential Papers, 1963‐1969, Austin (LBJ), National Security Council Meeting File (NSF), Box 3.

Anglo‐American Relations and International Monetary Policy 177

This contribution is going to argue that the financial support required to make the UK fulfil its financial and military commitments was no longer a bilateral Anglo‐American affair but had a strong triangular bias which was as strong in financial and economic policy as it was in foreign and security policy.3 It took a multinational operation, and not Anglo‐American bilateralism, to protect the IMS against the deficiencies of the two key currency countries. This applies to the annual bail‐outs of sterling throughout the 1960s as well as to the reform of the IMS.

This contribution will also point to the fact that in financial and eco‐nomic matters the European Economic Community (EEC) moved into the position of the main negotiating partner of the US in the Kennedy Round, within the OECD (DAC) surveillance procedures and in the IMS. Con‐scious of its status as a country re‐applying for EEC membership, the UK chose a low key role in the GATT negotiations and in the discussions about the reform of the IMS.

The Shaping of the International Monetary System

Many aspects of Anglo‐American relations after the Second World War indicate a “special” character of this relationship apart from the famous and often quoted Churchill notion. The experience of the catastrophic con‐sequences of the financial and economic turmoil of the inter‐war period induced the two Anglo‐Saxon powers to create the structure of a new eco‐nomic world order destined to prevent the disaster that followed the First World War.

After the First World War, the US had quickly disentangled itself from the European peace order and post‐war economic reconstruction, leaving Britain to struggle with its economic and financial losses and interallied debt burdens.4 In an attempt to safeguard its world power position vis‐à‐vis the US, Britain finally had turned to protectionism and transformed the Commonwealth/Empire into a world‐wide economic bloc, installing the imperial preference system (1931‐2) and the sterling area (1933).5

3 Gustav Schmidt, “Vom Anglo‐Amerikanischen Duopol zum Trilateralismus: Großbri‐

tannien ‐ USA ‐ Bundesrepublik, 1955‐1967“, Amerikastudien 39,1 (1994), 73‐109. 4 Heide‐Irene Schmidt, “The Debate on Economic Reconstruction and Interallied Econo‐

mic Cooperation”, in: Hartmut Berghoff, Robert von Friedeburg (eds.), Change and Iner‐tia: Britain under the Impact of the Great War (Berlin 1998), 37‐66.

5 Thomas W. Zeiler, Free Trade Free World: The Advent of GATT (Chapel Hill, London 1999), 22 f.

Heide‐Irene Schmidt 178

The chain effect of the great crash of 1929 in the US had demonstrated dramatically the need for international cooperation as John Maynard Keynes had already requested during the 1919 Paris Peace Conferences. But the World Economic Conference that was summoned to London in 1933 produced no results to end the “beggar thy neighbor” policy that dominated the 1930s.6 When the US entered the war in 1941, it clearly stated which conditions would be attached to US financial and economic support to its allies. In the “Mutual Aid Agreement” of 1942 that was based on the “Lend‐Lease Act” of 1941, the US granted financial assistance to the UK on the condition that Britain committed herself to contingency planning for a post‐war international economic order. In addition, the US requested the British to drop discrimination against American exports, thus aiming at the demise of the imperial preference system.7 By inserting into Article VII the phrase that all measures should be based on “mutual advantageous economic relations,” the British signed the agreement on the assumption that after the war they would be able to trade imperial prefer‐ence for a reduction in American tariffs. At the first GATT Round in Ge‐neva in 1947, Britain – supported by its partners in the “Ottawa”system – actually succeeded in preserving the preference system while negotiating American tariff reductions.8

In negotiating a post‐war international financial order, both Anglo‐Saxon powers presented elaborate plans which reflected their anticipated position at the end of the war. As the international monetary system was supposed to be the anchor of a world economic system based on free and non‐discriminatory trade, the positions of the two key currencies, in which most of the world trade was denominated after the war, would be crucial for the system. Whilst the dollar would be a “scarce currency”, sterling balances would have to be blocked in order to prevent a run down on the currency in exchange for dollars. How to handle the position and obliga‐tions of debtor and creditor countries within the new monetary system was therefore central for the US and the UK. For Britain, it was essential to reconcile its claim to world power status with the fact that it was finan‐cially dependent on the US; by itself, Britain would be unable to provide the economic equivalent for the huge amount of sterling assets that Egypt, India, Malaysia and other members of the sterling area had accumulated during the war. Being a (net) debtor, the provision of “hard” currencies by 6 George Peden, (ed.), Keynes and His Critics: Treasury Responses to the Keynesian Revolution

(Oxford 2004), 9. 7 Ibid., 242‐43. 8 Zeiler, Free Trade Free World, ch. 7.


creditor countries was crucial for Britain to shield the fixed‐exchange‐rate system against the turbulences of payments imbalances. The United States, however, as a creditor nation would not subscribe to the doctrine that sur‐plus countries were obliged to correct the disequilibrium in the interna‐tional balances of deficit countries. The British Treasury accused the US of not having a clear understanding of the financial problems Britain would face in the transition period; it suggested a gradual implementation of any international currency scheme and substantial long‐term financing during the reconstruction period9 – a situation that actually occurred under the Marshall plan for Europe.

The international financial order that finally materialized in the Bret‐ton Woods Agreement of 1944 was based on a gold exchange system as conceived in the American (“White”) plan, making the dollar – fixed to gold – the referential currency of the new system.10 In his claim for “jus‐tice”, Keynes demanded nearly $10 billion in grants and long term credit for Britain to enable its participation in the international currency system and to keep its overseas commitments, thus sustaining Britain’s world power status.11 Although American financial assistance in return for the British ratification of the Bretton Woods Agreement was less generous than expected, Britain was not in a position to reject the offer. In order to attain the immediate implementation of the international financial system, the Anglo‐American Loan Agreement of December 1945 committed Britain to return to convertibility of sterling 12 months after the ratification by the U.S. Congress.12

The first major backlash to the new IMS and to British power projec‐tions came with the abortive attempt to make the pound convertible by July 1947. Britain lost 2/3 of its reserves despite massive US support. The amount of sterling circulating in the world’s largest trading bloc, i.e. the sterling area, and the lack of confidence in the British economy presented a major problem for the implementation of the Bretton Wood system.13

9 Sir Wilfried Eady to Sir Richard Hopkins, 2.2.1944, Public Record Office, London (PRO),

Treasury Papers (T), 247/27, in: Peden, 262‐65. 10 The British plan had favoured an artificial reserve asset (“Bancor“) that represented a

currency basket. 11 E. Johnson, D. Moggeridge (eds.), The Collective Writings of John Maynard Keynes, 1971‐89,

30 vols., vol. 24, 256‐95. 12 Harold James, International Monetary Cooperation since Bretton Woods (Oxford 1996), 65 ff.

Britain did not get the requested debt relief of $ 3 billion for purchases in the US prior to the lend‐lease and a much smaller loan ($3,75 billion) but on very favourable terms (2%, 50 years maturity), beginning 1951.

13 Ibid., 90 f.


The emergence of the Cold War, the reconstruction problems in Europe and a serious “dollar gap” changed the American position. With the European Recovery Programme (Marshall Plan) the US pushed West‐ern Europe into regional integration, willing to accept the economic costs for the prize of political cohesion. During the transition period, marked by discriminatory trade practices and exchange controls, Britain was able to clinch the biggest portion of American financial assistance not only in Europe, but also in South‐East Asia, where Britain used Anglo‐American cooperation in security matters to bargain for dollar assistance to the ster‐ling area under the Colombo Plan.14 In addition, Britain was able to use the assets that were accumulated in the Empire‐Commonwealth during the war for its reconstruction, especially the large dollar reserves. Economists predicted a world‐wide shortage of raw materials and shipping which would also benefit the British, since their overseas partners and posses‐sions produced these commodities and Britain had contracts with them for purchases below the world price level. Based on these strongholds, the Attlee‐Bevin government sought to maintain Britain’s world power posi‐tion, sharing it with the US even as a „senior partner“. Britain used the sterling balances and post war economic restrictions to exploit the “em‐pire” as never experienced before.15 As Reynolds criticises, however, the Labour Party government did not use this singular advantage over its European competitors to modernize the industrial structure, but instead launched the welfare state as promised during the war.16

While Britain tried to defend its world power status, continental West‐ern Europe turned its energies on domestic revival and within a decade not only shed its economic dependence on the US, but grew twice as fast, outproduced the US in steel and coal, drained American gold reserves and developed into a centre of innovation, closing the technological as well as the dollar gap.17 Consequently Western Europe developed into an equal partner of the US at least in terms of monetary reserves and foreign trade, a reality to which the US and the UK had to adjust in the 1960s. By then, the US was convinced that the future of the United Kingdom would lay with the European Community which would take care of Britain’s eco‐

14 Ursula Lehmkuhl, “From Conflict to Cooperation: Anglo‐American Diplomacy in Search

of a Postwar Design for Asia and the Pacific, 1945‐1953”, Amerikastudien 38 (1993), 83‐97. 15 David K. Fieldhouse, Black Africa 1945‐80: Economic Decolonization & Arrested Development

(London 1986), 6. 16 Reynolds, Britannia Overruled, 207. 17 Schlesinger for Ball, 12.2.1963, Kennedy Library Boston, John F. Kennedy, Presidential

Papers, 1961‐1963 (JFK), National Security Files (NSF), Box 412.


nomic and financial problems and thus relieve the US from supporting the British world power myth. From the perspective of Washington, the issue of fitting the UK into the European integration process was far more im‐portant than supporting British ambitions to safeguard the economic in‐terests of the Commonwealth. To put it in George Ball’s words: Britain had to accept that it was a European power with some world interests and not a world power with some European interests.18

The US administrations, however, did not state this that clearly or bluntly to their British partners, because Britain’s overseas military com‐mitments were still valued in American foreign policy scenarios. London clearly took advantage of this fact advocating a special relationship with the US. Whilst applying for accession to the European Community, the UK did not want to become what Prime Minister Harold Wilson called “a nar‐row, Europe oriented country without an Atlantic role”.19

The Implementation of the IMS

When it comes to the question how special the relationship between the two Anglo‐Saxon powers really was, most analyses point to the sterling‐dollar link in international monetary affairs in the 1960s.20 US – UK rela‐tions in the 1950s and 1960s were characterized by the fact that the UK displayed fundamental financial and economic weaknesses combined with sweeping ambitions concerning its European, Atlantic and global role. This contradiction strained relations with the US, but at the same time resulted in closer cooperation to ring‐fence the consequences of this di‐chotomy because of a lack of short‐term alternatives.

In the 1950s Britain had enjoyed the benefits of two multilateral pay‐ments systems in which a surplus with one could be used to meet the defi‐

18 George Ball, The Discipline of Power (Boston, MA 1968). 19 Memorandum of Conversation, Wilson visit to Washington, 29.7.1966, Johnson Library

Austin, Lyndon B. Johnson, Presidential Papers, 1963‐1969 (LBJ), National Security Files (NSF), Country Files, Box 216.

20 Catherine Schenk, “Sterling, International Monetary Reform and Britain’s Applications to Join the European Economic Community in the 1960s”, Contemporary European History 11,3 (2002), 345‐70; Raj Roy, “The Battle for Bretton Woods: America, Britain and the In‐ternational Financial Crisis of October 1967‐March 1967”, Cold War History 2,2 (2002), 33‐60; Francis J. Gavin, Gold, Dollars, & Power: The Politics of International Monetary Relations, 1958‐1971 (Chapel Hill, London 2004); Tim Bale, “Dynamics of a Non‐Decision: the ʹFail‐ureʹ to Devalue the Pound, 1964‐7”, Twentieth Century British History 10,2 (1999), 192‐217; Michael D. Kandiah, Gillian Staerck, “’Reliable Allies’: Anglo‐American Relations”, in: Wolfram Kaiser, Gillian Staerck (eds.), British Foreign Policy, 1955‐1964: Contracting Op‐tions (London 1999). 135‐70.


cit with the other. This helped to increase sterling area trade as “Empire” products were in demand for European reconstruction. In addition, credit and exchange clearing that were available between the UK and the Euro‐pean Payment Union (EPU) were as well available between the sterling area and EPU members.21 Britain did not use the transition period, during which the IMS was partly suspended, to reduce its sterling liabilities so that the markets would regain confidence in sterling as a reserve currency. To the contrary: the EPU allowed Britain to finance its European deficits more or less through an automatic drawing system financed by the Euro‐pean surplus countries (mainly Germany and Belgium),22 whilst IMF drawings covered the deficit with the dollar area. Britain ignored the fact that reserve currencies, being instruments of the world’s monetary and trading systems, carry with them complementary requirements in domes‐tic policy to protect the value of the currency. The US criticized that public spending and wage increases generated an expansionist economy and supported a higher living standard than Britain could afford.23

On the background of its economic and financial connections with the Commonwealth and trading with its colonies, the UK managed to main‐tain sterling as a key currency in the 1950s, but when its domestic priori‐ties ‐ nationalisation of industries; welfare state; deficit spending ‐ discour‐aged confidence in the viability of sterling, the economic and financial cohesion of the sterling bloc disintegrated. The Commonwealth countries were looking to the US and to continental Western Europe for enhancing direct economic partnerships with such steady and fast growing regions and their huge purchasing power. Whereas the economic benefit of the Commonwealth subsided, the liabilities of the sterling balances that were not covered by gold or foreign exchange reserves remained. In case of requests for their liquidation, the UK would be able to cover only 5s in the £‐sterling (i.e. 25%).24

Once the “Empire” had outlived its usefulness and turned into a bur‐den, Britain speeded up the decolonisation process and tried to engage other countries in foreign assistance for the newly independent countries.25

21 The Sterling area, 31.3.1958, Public Record Office (PRO), London, CAB 130/134, GEN

613/8. 22 Werner Bührer, Westdeutschland in der OEEC: Eingliederung, Krise, Bewältigung, 1947‐1961

(München 1997), 294‐309. 23 P. Burnham, “Britainʹs External Economic Policy in the Early 1950s: The Historical Sig‐

nificance of Operation Robot”, Twentieth Century British History 11,4 (2000), 379‐408, 385. 24 Macmillan (Chancellor of the Exchequers) comment on a letter from the Governor to the

Prime Minister Eden, 31.12. 1956, PRO, PREM 11/1826. 25 Fieldhouse, Black Africa, 7


In the monetary field, Britain became now dependent on IMS to get sup‐port for the reserve currency role of sterling, which would allow Britain to stay at the top table in world politics.

Having successfully externalised the problems of economic adjustment throughout the 1950s by using “Empire” resources and the EPU, Britain in the 1960s used the mechanisms of the IMF as well as US and European concerns, that sterling would damage the stability of the monetary system, to muster external support for its overrated currency and thus avoid the necessary adjustments to reduce the structural payments deficit.

Political misgivings contributed to the weakness of Britain’s monetary position. The vulnerability of Britain’s financial standing became obvious in 1956 when the US vetoed a British IMF drawing to force the Eden Cabi‐net to stop the Suez invasion. This event not only demonstrated the break‐ing point in Anglo‐American relations but brought home to the UK that it lacked the financial and economic requisites of political power. The disap‐pointment on the US side with Britain’s performance did not prevent the US from rescuing the sterling parity after the Suez crisis, but initiated an inner‐American discussion about the primacy of Anglo‐American partner‐ship in the Atlantic community.26

The Dollar‐Sterling Link

Little love was lost between the US and the UK in financial and economic matters when national economic or foreign policy objectives were at stake.27 While Britain accused the US “that their own economic policies are based on purely internal American considerations and take very little ac‐count of wider considerations or of the interests of foreign countries”28, the US regarded the sterling area as an exclusive bloc that discriminated against US exports, while targeting US markets with cheap products (tex‐tiles from Hongkong for example).

Taking into account that economic relations between the Anglo‐Saxon powers were always characterized by competition and conflict, it has to be explained why the dollar‐sterling link, especially the defence of sterling at any costs until 1967, was at the time and is now in historical analysis a synonym for Anglo‐American special relationship. One argument is that by protecting the parity of the dollar and sterling, the US and the UK de‐ 26 George W. Ball, The Discipline of Power (Boston, MA 1968), 76 ff. 27 Kandiah and Staerck, “Reliable Allies”, 47 f. 28 Minute of Gore‐Booth re visit of Sir Robert Hall to Washington, 1.11.1957, PRO, Foreign

Office Files (FO), 371/127198.


fended the IMS and the world trading system, against the weaknesses of the Bretton Woods System, even at the expense of their own economy as in the British case.29 Another argument states that the US used support for sterling as a leverage for getting Britain fulfil its foreign policy commit‐ments “East of Suez” and in NATO‐Europe.30 In reversing this argument, another thesis suggests that Britain was not only successful in persuading the Americans that “defense of sterling” was a shield against a speculative attack on the dollar, but that this was also a prerequisite for Britain to keep its world wide commitments.31

These arguments to a certain degree neglect the fact that the US was neither able nor willing to support sterling without substantial help from the other major financial powers. Throughout the 1960s the US empha‐sised that British financial and economic problems would better be solved by European cooperation, preferably by admitting the UK into the EEC as soon as possible. The US itself was exceedingly dependent on European willingness to finance US balance of payments deficits by stockpiling dol‐lars in their national reserves beyond their current account needs. The UK resented US endeavours to treat Britain as an ‘ordinary’ European power and insisted that the special relationship would remain an important ele‐ment of UK foreign relations even after becoming a member of the EEC. London reminded Washington that the UK – in contrast to the continental Europeans – was prepared to take worldwide responsibilities and to act constructively and complementary to US goals.32

The Macmillan – Kennedy Era

When the US developed a substantial balance of payments deficit from 1958 onwards, which resulted from adverse trade balances, the question of gold reserves that were to cover foreign‐hold dollars, raised concerns about the stability of the US currency. The UK, which had been haunted by these problems for quite a while, saw the chance to revive the special

29 Bale, “Dynamics of a Non‐Decision”; Catherine Schenk, “Shifting Sands: the Interna‐

tional Economy and British Economic Policy”, in: Kaiser, Staerck, British Foreign Policy, 19‐33.

30 Alan Dobson, “The years of transition: Anglo‐American relations 1961‐1967”, Review of International Studies 16 (1990), 239‐58.

31 Reynolds, Britannia Overruled, 226 f. 32 Conversation Kennedy – Macmillan, International economic problems, 5.4.1961, Wash‐

ington National Record Center (NA), RG 59, Presidential Memorandums of Conversa‐tion, 1956‐1964, Exekutive Secretariat, Boxes 1‐3, Box 1; Wilson visit, 29.7.1966, LBJ, Country Files, Box 215.


US‐UK relationship under the aspect that both countries were sitting in the same boat confronting the rest of the world. This was meant as well to prevent that the US would turn to Europe, especially Germany, as major partner in most policy fields but especially in financial and economic mat‐ters. The Macmillan Government tried to talk the Eisenhower and Ken‐nedy administrations into installing a number of high level, exclusively Anglo‐American, confidential working groups on a wide range of eco‐nomic issues: assistance to underdeveloped countries; fall in commodity prices; long‐term trends in financial and trade policies.33 The British inten‐tion was to develop a common Anglo‐American position before entering into consultations with the economically resurgent European countries,34 because recent developments in Europe and “future trends” seemed to be “running contrary to British interests. The movement for European unity is taking, in the Six, a direction which, if it continues, will damage our economic interests, weaken our political influence and undermine our special relationship with the US.”35 The US had agreed to an US/UK Eco‐nomic Warfare Group in 1957 to discuss counter‐measures in the context of what was perceived as a Soviet economic offensive in the emerging Third World.36 The British government, however, wanted to extend close consultations to all economic and financial fields. Although admitting that consultations would be useful in general, the US saw no point in “ganging up” with the British, who caused part of the problems, whereas other ma‐jor financial powers like Germany would be able to share financial and economic responsibilities in the international system, but would not use their economic power separately from or against the US.37

33 Minute of W. Hayter, 8.11.1957, PRO, FO 371/127198. 34 Rickett to Brook, Draft brief for the Prime Minister, Anglo‐American Economic Co‐

Operation, 18.10.1957, PRO, T 236/5329; Memorandum for the Prime Minister by Nor‐man Brooks, 6.3.1961, The East‐West Struggle. Political and Economic Co‐Operation, PRO, CAB 133/244.

35 Memorandum for the Prime Minister by Norman Brooks, Some aspects of our relations with the United States and Europe, 18.1.1961, ibid., 8.

36 Records of the Joint Economic Measures Committee in FO 371/133230, PRO. For Sino‐Soviet economic offensive see Heide‐Irene Schmidt, “‘Der regionale Aspekt in der ame‐rikanischen Außenwirtschaftsstrategie, 1955‐1960’: Die Rolle Deutschlands und Japans“, in: Gustav Schmidt, Charles F. Doran (eds.), Amerikas Option für Deutschland und Japan (Bochum 1996), 247‐340, 322 ff.

37 Memorandum of Conference with President (Goodpaster) on 22.10.1957, 31.10.1957, Dwight D. Eisenhower Library, Abilene, Papers as President of the United States, 1953‐61 (DDE), Office of the Staff Secretary: Records of Paul T. Carroll, Andrew J. Goodpaster, L. Arthur Minnich, and Christopher H. Russell, 1952‐61, State Department Subseries, Box 2.


During the Macmillan era, American and British ideas about how to handle their balance of payments deficits were hardly identical. The US preferred a short‐term swap credit system between central banks that was based on the “General Agreement to Borrow” (1961) between the major financial powers, constituting the Group of Ten (G‐10).38 That system, which provided mutual central bank credit lines to prevent that temporary balance of payments deficits would affect the IMS, was operated sepa‐rately from the IMF. Its drawings were unconditional in contrast to IMF drawing rights which required convincing economic and financial adjust‐ment measures to reduce the deficit.39

The British government was concerned that the balance of payments situation of the US might get out of hand in which case the US would very likely resort to unilateral action against which the UK had to protect itself. Thus, the Bank of England – like the Central Banks of France and Switzer‐land – refused to hold dollars in its reserves and drew heavily on the US gold reserves.40 In addition London increased the bank rate to attract capi‐tal from the US; with both measures the UK increased the US deficit, thus adding to Washington’s problems.41

British governments criticized the system of bilateral swaps between the central banks, which the US had arranged to neutralize the effect of the deficit on the exchange rate of the dollar and on the gold reserves. Al‐though the British benefitted from the swap system, they would have pre‐ferred an international, long‐term comprehensive solution which would have obviated the need for domestic stop and go measures to correct pay‐ments imbalances. The British favoured a World Economic Conference to reform the Bretton Woods System, including a realignment of currencies. In case the US would refuse to revalue the dollar in terms of gold, Macmil‐lan even envisioned a joint action of major currency countries, UK, Ger‐many and France, to enforce a new parity on the dollar,42 ‐ an idea that would have required a totally different British policy towards Europe.

“Talking the dollar down”43 was taken up by the British press which accused the US of supporting bilateral, national and piecemeal steps while

38 James, International Monetary Cooperation since Bretton Woods, 161 ff. The members of the

G‐10 were US, UK, Germany, France, Italy, Netherlands, Belgium, Sweden, Canada, Ja‐pan; Switzerland joined in 1964.

39 Only the drawing on the gold tranche was unconditionally. 40 Prospective gold losses, 16.1.1963, JFK, President’s Office Files (POF), Box 90; Dillon

Memo for the President, UK Request for Assistance from IMF, 28.7.1961, ibid., Box 89. 41 Gavin, Gold, Dollars & Power, 45. 42 Macmillan to Chancellor of the Exchequers, 23.6. 1962, PRO, PREM 11/4201. 43 Treasury Chambers, 14.9.1959, PRO, CAB 130/162, GEN 681/48.


public, multilateral, international and comprehensive action was re‐quired.44 The British Government proposed a long term solution based on an increase in international liquidity through a multilateral currency ac‐count (Maudling‐Plan) which would relieve dollar and sterling of their reserve status by creating a new reserve asset.45 This suggestion prompted heavy criticism from the US administration and Kennedy personally. It was seen as an attempt to dismantle the dominant position of the dollar which was the financial basis of American defence and foreign policy commitments.46

The recurrent sterling crises throughout the 1960s reflected the funda‐mental deficiencies of an expansionist British economy which became less and less competitive. When the major currencies had finally been made convertible in 1958, the financial markets, e.g. the infamous “gnoms of Zürich“, now decided on the value of a currency. While the late Eisen‐hower government had asked the British to deal with the domestic causes of the problem, the Kennedy administration was more sympathetic once the US itself developed a structural balance of payments deficit and ex‐perienced a drain on its gold reserves. This gave the British the leverage to declare the defence of the sterling exchange rate as first line defence of the dollar. The British governments always claimed that the dollar was meant when sterling came under attack by currency speculations. A defence of sterling was consequently a defence of the dollar.47 This argument of the dollar‐sterling link was successfully sold to the Americans who would not take the risk to let the markets decide that the problems of the dollar over‐hang was not identical with the sterling problems.

Wilson‐Johnson Era

The Labour Government under Prime Minister Harold Wilson that came into office in October 1964 immediately declared its intention to refute any suggestion to change the parity of sterling and defend its reserve currency status as the landmark of Britain’s world power status. This was not only welcomed by the Johnson administration knowing that – as the United

44 “Washington backs the wrong system”, Sunday Times, September 16, 1962. 45 “US Plans to Assure Nations of Supplies of Convertible Funds Gains Backing in IMF”,

Wall Street Journal, September 20, 1962; The Journal of Commerce, September 20, 1962. 46 Ormsby‐Gore to Home, 24.7.1962, PRO, PREM 11/4166. 47 Telegram From the White House Situation Room to President Johnson, From Prime

Minister to the President, 29.8.1966, Foreign Relations of the United States (FRUS), 1964‐68, vol. 8, Doc 103.


States Secretary of the Treasury, Henry H. Fowler, put it – „sterling is the major fundamental problem we share with the UK“,48 but as well by the other major financial powers in the Group of Ten. The IMF preferred a different approach to the “British problem” and had advised as early as 1961 a carefully prepared devaluation of sterling to remove the infectious effects of sterling’s problems on the IMS.49

The question is why most of the G‐10 countries would agree to partici‐pate in the defence of the parity of dollar and sterling, although it was obvious that both currencies were overvalued. Not only France criticised the key currency countries of financing their foreign policy objectives through deficit spending, but France accused in particular the US of fi‐nancing its hegemonic role with European money, and actively contrib‐uted to the dollar‐sterling crises by drawing heavily on US gold reserves.50 The French opposition to the “Anglo‐Saxon” IMS not only strained French‐American and British‐French relations, but also confronted Ger‐many with the dilemma of having to play a “global” role in international monetary matters without endangering the European integration process. The German position was crucial to the management of the IMS, especially to the defence of the two reserve currencies.

It is impossible to discuss the complicated interdependence in this arti‐cle, but it is necessary to understand the German motives to defend the IMS despite the “embarrassment” that was deriving from its position of strength.

1. The successful German financial and economic recovery, the “eco‐nomic miracle”, was based on the IMS with its fixed exchange rate sys‐tem. Its creditor position gave Germany a special responsibility in the international monetary and trade systems, but due to the political and economic legacies of the war it was unwilling and unable to take over the role of a key currency country in replacement of sterling – an idea that was occasionally ventilated in the Eisenhower administration.51

2. The international cooperation that was required to manage the inter‐national monetary system (IMF, OECD, G‐10) provided a platform for

48 Notes on Leadership Breakfast, 5.9.1968, LBJ, NSF, Box 3. 49 Short after the Wilson government took office the IMF tried again to persuade London

that a devaluation assisted by the IMF would be in Britain’s economic interest. James, 187.

50 French Position on intern. Monetary System, Summary of speeches given in 1963 and 1964 at the Annual Meeting of the IMF and in Paris, 11.2.1965, LBJ, Papers of Francis Fowler, Box 32.

51 Memorandum of 338th Meeting, 2.10.1957, DDE, NSC Series, Box 9.


German economic diplomacy to influence the US and the UK to pur‐sue “sound” economic policies.

3. As the second largest world trading country, Germany was interested in a stable, reliable currency system. Trade liberalisations under the GATT system as well as the development of a Common Market in Europe could only be achieved on the basis of fixed exchange rates.

4. Germany wholeheartedly agreed with the US that the strength of the Western alliance was based on its economic power. Defending the role of the dollar as a prerequisite for the worldwide US commitments in defence of the free world was in Germany’s national interest.

Having the second largest financial and economic power at their side, the Anglo‐Saxon powers found the international situation favourable to a defence of the reserve status of dollar and sterling.52 The Deutsche Bundes‐bank, being a major player in the IMS, strongly defended the parity of both reserve currencies. It gladly recurred to mechanical solutions of interna‐tional monetary problems, because the alternative of currency realign‐ments would have affected a wide range of issues such as military offset questions, common market harmonization problems etc. When the French rocked the system by drawing on US gold reserves, the Bundesbank neu‐tralized the effect by financial transactions. On the eve of the British elec‐tion in 1964, the German government and the Bundesbank informed the US and the UK that the Bundesbank had already taken precautions to support the parity of sterling in case that a Labour Party victory would result in the flight of capital.53

To prevent that any bail‐out of the sterling would have adverse effects on the US balance of payments, the US used its swap arrangements with the Bundesbank to refinance its disbursements to Britain in Germany with the effect that the German central bank financed the German and the American share of the GAB credits.54 What is usually interpreted as American support for the sterling was in fact a German‐led European backing for both reserve currencies. The autonomous status of the Bundes‐bank and Germany’s position as a country with the largest reserves next to the US made the Bundesbank a prominent partner for the UK and US gov‐ernments in financing their deficits through central bank credit facilities.

52 Dillon to President, Current balance of payments situation, 21.6.1963, NA, RG 56, Lot 198

D, Executive Secretariat Files of Douglas Dillon, 1961‐65, Box 12. 53 Roberts conversation with Blessing, 4.2.1964 , PRO, FO 371/177927, RG 1051/11. 54 See note 79.


Karl Schiller as Economics minister of the grand coalition government ended this “special relationship” in 1967 and asserted the predominance of the Economic Ministry in international monetary policy.55

In the 1960s, the US increasingly doubted whether the UK still had the capabilities to sustain its chosen world power role as its economic position was trickling away. The Johnson administration tried its best to get the message over to the Wilson government that support for sterling from outside could not relieve Whitehall from the responsibility for addressing its basic economic problems at home. As the recurrent sterling crises indi‐cated, the homemade recipes of the British government for bringing its house in order were not convincing to the outside world. To enforce the necessary domestic corrections, the US promised in the 1964 crisis to sup‐port sterling only after the Wilson government had agreed to a wage and price freeze.56 Nonetheless, London had no doubt that the US would bail them out in any crisis, mainly for two reasons:

1. Pointing to the fact that 40% of world trade was still denominated in sterling, the UK was able to convince the US and the Europeans that a depreciation of sterling would have serious effects on world trade and the monetary system. This argument became less viable when the Commonwealth countries shifted their reserves to dollar and gold and the sterling balances were guaranteed by international settlement in 1968.

2. The British took advantage of the fact that British defence commit‐ments “East of Suez” as well as in West Germany were indispensable for the US. Without international credit financing of the balance of payments deficit, the support of the sterling rate and the offsetting of troop costs for the British Army on the Rhine by Germany, Britain would have to reduce its military commitments both “East of Suez” and “East of Dover”.

The ”inextricable intertwining of economic and defense matters“ by the Wilson government created a linkage between support for sterling and British commitments East of Suez, in the Middle East and in Western Eu‐rope57 that was used by Washington to bring home to the British that “you

55 Schmidt, Heide‐Irene, Embarrassment of Strength, 190. 56 Johnson‐Ball conversation, Problems with the British, 25.11.1964, LBJ, Papers of George

Ball, Box 1. 57 The linkage between “Money and Security” has been addressed by a couple of recent

studies. Hubert Zimmermann, Money and Security: Troops, Monetary Policy, and West Germany’s Relations with the United States and Britain, 1950–1971 (Cambridge, MA 2002);


cannot be a great power on the cheap”.58 Britain had to put more of its own ‘money’ into where its ambitions were, or else associate with Europe’s middle‐powers. For the long term Washington had no illusions that, due to Britain’s deteriorating economic situation, the withdrawal of British troops was inevitable, but it should be delayed as long as possible (for another 2 to 4 years) to give domestic criticism in the US no chance to ask similar action pointing to the British example. This explains the obvious discrepancy between the blunt assessment of Britain’s capabilities and future role especially in relation to E(E)C–Europe and the de facto support of Britain’s position overseas and its importance for committing Europe to “Atlanticism”.

“The short‐term answer may lie in assisting and encouraging the UK to maintain its re‐sponsibilities in both Europe and Asia. In the long term, the solution may lie in a wider European sharing of the Asian burden. As a means of pursuing both these ends, it may be useful at some point to mount an informal trilateral US‐UK‐FRG review of military priorities and related financial problems, which would include needs in both Europe and East of Suez.”59

After the Labour Party came to power, the international financial markets tested the promise Wilson had given during the election campaign to de‐fend the sterling parity. To stop the haemorrhage of British reserves, an international support package of $ 3 billion by the central banks was put together. The imposition of a 14% import surcharge and an increase of the bank rate by 2% finally calmed down the markets. A standby credit of the IMF provided an additional fallback position.60 Because the British meas‐ures affected American efforts to curtail its own balance of payments defi‐cit, the US decided to raise the bank rate as well to prevent an outflow of capital to London.

When in 1965 the US balance of payments situation improved and it became less likely that the sterling would have an impact on the dollar, Johnson was advised by his staff to admonish the British that devaluation

Harald Rosenbach, “Der Preis der Freiheit: Die deutsch‐amerikanischen Verhandlungen über den Devisenausgleich (1961–1967)”, Vierteljahrshefte für Zeitgeschichte 46,4 (1998), 709–46; Gavin, Gold, Dollars & Power, ch. 6.

58 Letter of Lord Harlech (Ormsby‐Gore), British Ambassador in Washington commenting a Memorandum by the Planning Staff on an Anglo‐American Balance Sheet, 30.6.1964, PRO, FO 371/177830.

59 Atlantic Policy after German Election, 25.6.1965, LBJ, NSF, Agency Files, Box 52. On this subject see Gustav Schmidt, “Die Labour‐Regierung, die Bundesrepublik und Europa: ´The American Connection´”, in: Gustav Schmidt (ed.), Großbritannien und Europa – Großbritannien in Europa. Sicherheitsbelange und Wirtschaftsfragen in der britischen Europa‐politik nach dem Zweiten Weltkrieg, ADEF Bd. 10 (Bochum 1989), 253‐314.

60 James, International Monetary Cooperation since Bretton Woods, 187.


of sterling, although unwelcome, was no longer inconceivable. The John‐son administration wanted Wilson to show determination to correct the balance of payments situation. This was a necessary psychological meas‐ure to placate the markets. US officials complained that the British lacked the resolve to tackle the problem. There was, however, a tendency on the US side to let the Europeans put the hard facts to the British.

“Our posture should be that we are at the side of the United Kingdom but that they must take the lead in arranging multilateral financing and must carry out all the ar‐rangements. Thus, if hard conditions are put to the British, they should come from other people. Also, we should not take the lead in organizing a package for them.”61

The Europeans thought that it was important for Britain to solve its prob‐lems as quickly and substantially as possible. There was not much pres‐sure from the European countries (except France) for a devaluation of ster‐ling. From the perspective of Germany, such a step would be the old “beg‐gar‐thy‐neighbour‐policy” as an easy way‐out for the British to make their products more competitive on world markets; it would relieve Whitehall from the pressure to pursue a “sound economic policy”.62 The issue‐at‐stake was how to break the cycle between ever higher levels of demands and rising wages and prices. The British reproach that this would mean deflationary policy was dismissed by the Europeans as misleading and polemic. Labour was not prepared to tell the public that creditors wanted to see the British government impose restraints on demand.63

In May 1965, an entire meeting of the Working Party 3 (WP‐3) of the OECD was devoted to the British balance of payments problem, based on a report by the IMF.64 The discussion was meant to decide whether the situation would justify international action in form of a new credit pack‐age. The WP‐3 criticized the British answer to the IMF report as a mere letter of intent; in particular, the British projections of a 6% increase in exports were perceived as wishful thinking. All measures presented by the British representatives relied on forecast, chance, or hope, all of which had been proven wrong in the past. The US Undersecretary of the Treasury, Frederick L. Deming, left no doubt that the British had to recognise the

61 Interdepartemental Conference in preparation of talks with Chancellor Callaghan,

28.6.1965, NA, RG 56, 198 D Office of the Secretaries, Under‐Secretaries, and Assistant Secretaries, 1932‐1965. Executive Secretariat Files of Douglas Dillon, 1961‐1965, Box 34.

62 Manuscript of Gocht speech, August 1964, Bundesarchiv Koblenz (BAK), Akten des Bundeswirtschaftsministeriums, B 102/51027.

63 Meeting Cromer – Wilson – Callaghan, 24.11.1964, PRO, PREM 13/261. 64 WP‐3 meeting of May 5‐6, 1965, 14.5.1965, LBJ, Papers of Francis Bator, Box 22.


“seriousness of their problem and of the importance of international coop‐eration and advice in finding a solution”.65

Deming’s remarks were hitting at the fact that the UK did ask for help, but neither offered stringent measures for solutions nor felt obliged to accept recommendations or requests from creditor countries. The British complained that the discussion did not recognize that the Wilson govern‐ment’s attempt to meet the WP‐3 target were adequate. London asked to keep criticism private, but wanted public support from OECD countries in order to buoy up confidence on the financial markets of the world.

Despite the criticism voiced in the WP‐3 meeting and in various bilat‐eral meetings with the US66 and European governments, the British gov‐ernment was able to organize an international support package for sterling when the foreseeable sterling crisis hit the markets in August 1965. Al‐though the US after long internal discussions felt obliged to help organize central bankers’ support, the condition was that “the Europeans‐‐especially the Germans‐‐agree to go with us in a big way so that we are not left with an essentially U.S. defense of Sterling. It remains the flat opinion of all your advisers that it would be better to let Sterling go than for us to take on its defense without a major foreign contribution.” 67

Under the impression that Britain no longer supported US policy in Vietnam, the tone in Anglo‐American consultations got tougher.68 The July 1966 sterling crisis was seen as a further indication that Britain was loosing control over events and “ceased to play an important role in the world”.69 The US criticised Britain’s performance since the support operation of the G‐10 in 1965 as disappointing to themselves and to the financial markets. “If the United Kingdom is to avoid devaluation, maintain the pound as a reserve currency, restore its position, and avoid the risk of dangerous dis‐location of international financial affairs, much stronger stabilization measures than those presently invoked are required.”70

65 Ibid. The Chairman of the Committee, van Lennep, had asked Deming to speak up on

the issue, so that the fierce criticism of the British position would not give the impression of a ‘European’ onslaught.

66 Summary of Conversation of Undersecretary for Monetary Affairs, Deming, with UK Financial officials in London Feb. 22, 1965, 8.3.1965, LBJ, Bator Papers, Box 22.

67 Memorandum From the Presidentʹs Special Assistant for National Security Affairs (Bundy) to President Johnson, 5.8.1965, FRUS 1964‐1968, vol. 8, Doc. 66.

68 Sir Patrick Dean to Foreign Office, 6.8.1966, PRO, PREM 13/1212. 69 Conversation between J.A. Thompson and Bator, 19.7.1966, PRO, PREM 13/1212. 70 Telephone conversation Fowler‐Callaghan, 15.7.1966, NA, RG 59, Formerly Top Secret

Central Policy Files, 1964‐66, Box 1.


This time it was uncertain whether the Europeans would support ster‐ling, and under the impression of a deteriorating US balance of payments position, Fowler voted against “putting up a nickel on our own”.71 In the contingency planning the question for the US was who could fill in as a partner to share US global commitments and defence if the UK devalued its currency and reduced its commitments “East of Suez” and in NATO‐Europe to safeguard its balance of payments position. Lacking the ingredi‐ents of power, the UK might not only stay outside the EEC but disqualify as well for a special relationship with the US as a supplement. Very likely Germany as the financial powerhouse in the EEC and in the IMS would advance to a privileged partner of the US.72 For a couple of reasons this alternative did not look attractive in the summer of 1966. Although Ger‐many’s reserve position was strong as ever, the first major post‐war reces‐sion had caused budgetary restraints in Germany, and Bonn for the first time declared that it would be impossible to fulfil to 100% the offset agreement with the UK and the US in 1966. The Erhard government was perceived as weak and lacking self‐assertiveness.73

The double crisis of NATO and EEC that was caused by de Gaulle’s obstructive policies worked as a catalyst for closer Anglo‐American coop‐eration despite the criticism of Britain’s inadequate policies in the US ad‐ministration. During his visit to Washington on July 1966, Wilson suc‐ceeded again in stressing the “sterling‐dollar link”74; he emphasized his government’s resolve to tackle its balance of payments problems, as al‐ready indicated by a six month price‐wage freeze. He tried to persuade his American partners to establish closer bilateral consultation by offering a UK equivalent to the American “Dillon Committee”75 so that both commit‐tees could work together on balance of payments policies. But Fowler re‐minded Wilson of the importance of the other members of the G‐10 for supporting and defending sterling;76 exclusive “Anglo‐Saxon” collabora‐tion would be counterproductive and was not in America’s interests. The US also rejected British suggestions for secret consultations with respect to

71 Memorandum to the President. The sterling crisis and the US bargaining position vis‐à‐

vis the UK, 18.7.1966, ibid. 72 Ball Draft Memorandum, Program for Action, July 1966, NA, RG 59, Records of Under‐

secretary of State George W. Ball, 1961‐1966, Box 22. 73 Ed Hamilton Draft, Choices in Europe, 19.8.1966, JFK, Papers of Francis Bator, Box 20. 74 29.7.1966 NSF country files, Box 216. 75 The ‘Advisory Committee on International Monetary Arrangements’ is known as the

Dillon Committee after its Chairman; it met 33 times between July 16, 1965, and Decem‐ber 4, 1968, FRUS 1964‐68, vol. 8, Doc 64.

76 Conversation between Prime Minister and President, 29.7.1966, PRO, PREM 13/1083.


the IMS reform to outmaneuver the Group of Ten, which Wilson character‐ized as “a noisy forum” and its members as “self‐righteous … who do not have any responsibilities for world development, banking or military as‐sistance.”77

Without further debate, the European central banks renewed the swap agreements in support of sterling in July 1966. In conjunction with the drastic stabilization program of the British government, the situation for the UK improved considerably. In September 1966 the Federal Reserve Bank raised its swap facilities with the Bank of England from $ 750 million to $ 1,350 million as well as its swap agreements with European central banks78 to make sure that the US would not be forced to provide its own money for the support of sterling.79

The German default in offset payments at the end of 1966 affected the budgets and the balance of payments situation of the US and UK80 and resulted in trilateral negotiations.81 The German military offset since 1961 was directly related to the British and American balance of payments defi‐cit. Arguing that their balance of payments deficits and the German sur‐plus resulted mainly from financing troops deployment on German soil, they asked Germany to offset the foreign exchange costs by purchasing military equipment in the US and Britain.

Since the end of the 1950s, Britain used the threat to reduce the Rhine Army to put pressure on the US “to help us with the Germans” to extract payments from Germany.82 The British troops lost military importance when the Bundeswehr became the largest armed force in Europe and the fighting capacity of the BOAR deteriorated, but the psychological effect of Britain’s military presence on the European continent in peace‐time was all important for the Johnson administration to withstand congressional de‐mands to reduce US armed forces in Germany for balance of payments

77 Note by the Treasury: PM’s visit to Washington: General Brief on Economic Aspects,

July 1966, PRO, PREM 13/1261. 78 Robert Solomon, The International Monetary System, 1945‐1976: An Insider’s View (New

York, London 1977), 91 ff. 79 Vermerk, Pfundstützungen, 19.12. 1967, BAK, B 102/51254. 80 The German payments constituted a firm position in the budget of both countries. The

British government was concerned that the budget deficit for 1967 caused by the German problems to pay would affect the value of sterling in financial markets.

81 For the trilateral negotiations see Zimmermann, Money and Security. 82 “… if the U.S. wanted a continued British military presence East of Suez, they had to

help the UK more on Germany”. Conversation George Brown ‐ W.Bundy, 20.3.1967, PRO, PREM 13/1454.


reasons.83 The Wilson government used this American domestic constella‐tion as a tool to make the US urge Germany for a 100% offset or the UK would be forced to reduce the Rhine Army. Although annoyed by the British government’s narrow‐mindedness, President Johnson – with an eye on America’s own balance of payments problems – decided “to be hard on the Germans” and risked the fall of the Erhard government that was rated as pro‐American.84 The impression that the Anglo‐Saxons put money over friendship or alliance cohesion85 not only influenced the foreign policy of the Kiesinger‐Brandt government that followed the Erhard government in Germany or the French rebuff of the British application for EEC‐membership, but also shifted German emphasis in international financial matters to the European caucus in the IMS. The criticism of the new grand coalition government that the Bundesbank had too lavishly supported ster‐ling and thus helped to prevent necessary adjustments, including a depre‐ciation of that currency, already indicated that German support for sterling would not be as forthcoming as in the past.

Until March 1967, the British debt management improved but the Middle East crisis, the closing of the Suez channel and the surge in oil prices increased the deficit again, and the Bank of England had to interfere on the financial markets to sustain the parity of sterling. The dock strike in September 1967 and the largest trade deficit in British history nourished the expectation that the Wilson government would not be able to solve its economic problems. This time the US added to Britain’s problems by heav‐ily borrowing in the Euro‐Dollar market and raising the central interest rate – thus increasing the capital transfer from Britain to the US.86 Once again the question to bail out the British was put to the international finan‐cial community.

The British handling of the Middle East crisis had demonstrated Brit‐ain’s usefulness to the US as an “auxiliary power”, an argument that was

83 Memorandum From the Assistant Secretary of State for Congressional Relations (MacAr‐

thur) to Secretary of State Rusk, Informal Conversations with Senators Kuchel and Dirk‐sen regarding Senator Mansfieldʹs Resolution Calling for a Reduction of US Forces in Europe, FRUS, 1964‐69, vol. 13, Doc 199.

84 The warning came from Johnson closest advisors. Bator actually pleaded with Johnson to find a face‐saving solution for Erhard. Bator Memorandum for the President, Erhard visit. General Objectives [what they want–what we want], 25.9.1966. LBJ, NSF, Box 193.

85 John J. McCloy, the American negotiator in the trilateral talks, warned Johnson that he was putting the alliance at risk. President’s conversation with McCloy re tilateral Nego‐tiations, 2.3.1967, LBJ, Papers of Francis Bator, Box 18.

86 Solomon, The International Monetary System, 93.


used in the debate about another support package for the sterling.87 On the other hand there was a growing tendency in favour of a devaluation of sterling within both governments, although no clear decisions were taken for further action. It is obvious that the US was wary about the British ar‐gument that sterling was the first line of defence for the dollar.

As a result of the “Trilateral Talks”, the Kiesinger government and the Bundesbank (Blessing) had pledged to continue to support the position of the dollar and to abstain from drawing on the US gold reserves and keep dollars in their national reserve, as they had done in the past.88 Together with the decision of the annual meeting of the IMF in Rio de Janeiro in September 1967 to implement a system of special drawing rights to in‐crease liquidity and to provide reserve assets,89 the Johnson administration saw the dollar on relatively safe grounds whilst facing a possible deprecia‐tion of sterling. Fowler routinely demanded support for the sterling but did not offer any US assistance in addition to the swap lines. A devalua‐tion of sterling became unavoidable once the Europeans and the IMF fi‐nally drew the conclusion that Britain was unwilling to make the long‐term economic adjustments at home.90 The UK had worn out the patience even of the cooperative central bankers in Europe.

Wilson and Callaghan tried until the very last moment to blackmail the US into securing assistance for sterling. Sir Dennis Rickett (Treasury) and Jeremy Morse (Bank of England) were sent to Washington with the in‐struction to make “the flesh of the Americans creep”91, but as the Europe‐ans and the IMF denied assistance the US had no choice but to let sterling go.92 So finally the British made the decision to devalue their currency by 14,3% after suffering heavy losses in gold and currency reserves.93 Since the central banks expected that the markets would test the new parity,

87 Briefing for Wilson for talks with US government, 1.6.1967, PRO, PREM 13/1906. “Britain

stock has risen a good deal in Washington because of the Middle East. [...] a sort of quasi‐revival of the happy spirit of the “Special relationship“. In part, it reflects a rather spurious “bullishness” in the stock because of special operations in the market ‐ or to put it more bluntly, a determination, by constant praise for British initiative and British lead‐ership in the crisis, to make sure that we do not run out on them”.

88 Schmidt, Heide‐Irene, Embarrassment of Strength, 178. 89 See note 30. 90 The members of the “Pound Sterling Group” (Abs, Baumgartner, Bobba, Earl of Cromer,

Guth, Holtrop, Monick, Villiers, Agnelli, Camu) still believed that although Britain was ‐ according to the textbooks ‐ in an economic position in which devaluation would be helpful, it would postpone reconstruction of the economy. Notes on a meeting at the Ritz, Paris, 14.9.1967, BAK, B 102/51254.

91 Roy, “The Battle for Bretton Woods”, 42. 92 Rostow for President, 13.11.1967, LBJ, NSC History, Box 53. 93 Solomon, The International Monetary System, 93 ff.


they provided credit facilities of $ 1,5 billion for three months and the IMF added a stand‐by credit of $ 1,4 billion to support sterling.94 An emergency conference of the Six, Switzerland and the US called to Frankfurt took pre‐cautions that the gold‐dollar parity was kept on safe grounds by increas‐ing the swap facilities with the US to $ 1,75 billion.95

Wilson tried his best to sell the devaluation to his constituencies as an act of defending Britain’s sovereignty against the IMF and claimed that the margin of devaluation was chosen in the interest of the dollar, thus safe‐guarding his old argument that the sterling was a protective shield for the dollar and the dollar‐sterling link the basis of the “special relationship”.96

I would not call the devaluation of sterling, the following suspension of the gold pool in March 1968 and the establishment of a two‐tier‐gold system97 a turning point in Anglo‐American relations as Roy does98, but an important step in an adjustment process to live up to the new realities in Europe and the declining British capabilities to support American com‐mitments world wide. “Operationally, the U.S. and UK are working on fewer real problems. The concept of Atlantic cooperation could replace the special relationship. Close bilateral relations with the British, however, will certainly continue.”99 (Dean Rusk)

The Ultimate Crisis

The devaluation of sterling, the abandonment of the gold pool in March 1968, the increase of international liquidity through SDRs and the agree‐ment in Basle (BIS) in July/September 1968 to shore up the problem of ster‐ling balances for a five year period – these were all measures to prevent that the sterling problem would continue to have an unfavourable impact on the IMS. In the middle of 1968, when it was obvious that the British Government did not consequently pursue a policy to ensure confidence in the new parity,100 support of the UK was wearing thin even in US govern‐

94 See note 79. 95 Solomon, The International Monetary System, 97. 96 Roy, “The Battle for Bretton Woods”, 44. The experts of the IMF would have favoured a

higher devaluation to help the British economy, but the US had clearly stated that they would not accept this.

97 Split of the private and official gold price. 98 Roy, “The Battle for Bretton Woods”, 55. 99 Summary Notes of the 587th NSC Meeting, 5.6.1968, LBJ, National Security Council

Meeting Files, Box 3. 100 Edmund Dell, The Chancellors: A History of the Chancellors of the Exchequer, 1945‐1990

(London 1997), 355.


ment. In a National Security Council Meeting on US Relations with Great Britain, Secretary of Defence Clark Clifford stated that Britain was no longer a powerful ally of the US, because „the UK does not have sub‐stance, back‐up, hardware or funds to face up to any big problem in the world.“101

Nonetheless, the Fowler reflex to take care of British anxieties lingered on. This is demonstrated in the events leading to the famous – or accord‐ing to British memoirs: ill‐fated102 – G‐10 conference in Bonn in November 1968. Once again the outgoing US Secretary of the Treasury, Henry Fowler, succumbed to British threats and maneuvering. The Wilson gov‐ernment succeeded in dramatizing the Franc crisis into a life‐and‐death‐affair for the IMS and in involving the Johnson administration in an at‐tempt to enforce a revaluation of the DM on the German government.

This crisis was different from the many international monetary crises in the 1960s. For ten years France had fueled international financial turbu‐lences by challenging the predominant position of the dollar (and sterling) in the IMS (see below) and by accumulating gold. The political upheavals in France in the Summer of 1968 now led to a run on the so far stable Franc and to a reflow of gold to the US. The position of the dollar was substan‐tially strengthened when – as a consequence – the US balance of payments for the first time in eleven years showed a solid surplus, although trade balances further deteriorated. In addition, the splitting of the gold market in March 1968 had successfully stabilised the IMS, contrary to the predic‐tions of international experts.103 On this basis, the US successfully rebutted any suggestions towards a realignment of currencies, including the parity between dollar and gold.104 So when Fowler started his farewell tour to Europe in mid‐November, the dollar was on firm grounds whilst the ru‐mours about a revaluation of the DM caused volatile movements in Euro‐pean currency markets and pumped flight money into Germany.105 There

101 Notes of the National Security Council Meeting on US Relations with Great Britain,

5.6.1968, LBJ, National Security Council Meeting Files, Box 3. 102 Alec Cairncross, “From the Treasury Diaries of Sir Alec Cairncross: Four Anglo‐French

Conflicts 1967‐68”, Contemporary European History 6,1 (1997), 117‐32, 126 ff; Roy Jenkins, Life at the Center (London 1991).

103 Speech of Otmar Emminger at the Bankhaus Hardy & Co. in Frankfurt, 24.1.1969, BAK, Akten des Bundeskanzleramtes, B 136/14832.

104 The discussions on monetary reform which led to the implementation of special drawing rights within the IMF as reserve assets and the tendency towards a demonetarization of gold revealed the necessity to tackle the problem of an overrated dollar.

105 The German government since August had tried to discourage speculations on DM revaluation by confirming that Germany had no intention to change the parity of the


was not only a run on the Franc but also on sterling, because the markets expected another sterling‐devaluation reflecting the fact that the British economy had not been able to take advantage of the devaluation of ster‐ling in November 1967.

Threatening a floating of sterling, Chancellor of the Exchequer Roy Jenkins forced Fowler to put pressure on Karl Schiller as chairman of the G‐10 to call a meeting of this group at very short notice, closing the mar‐kets at the same time.106 Before sending out the invitations, the German government announced its intention to submit a law to the Bundestag which would raise the border tax on imported products by 4% and reduce tax rebates on exports by 4% for a period of fifteen months. This was meant to discourage speculation on a DM revaluation and stop the move‐ment of funds from France and the United Kingdom to Germany and Switzerland.107

In a hectic, even hysterical action, the British government told the German ambassador that the announced German measures “were not only inadequate but were irresponsible in terms of the free world as a whole.” If the Germans failed to revalue the Mark substantially, it would become difficult for Britain “to maintain a military presence in Germany”, and the consequences of the present international monetary crisis would be “to weaken the strength and solidarity of NATO”.108 When it seemed unlikely that the German authorities would budge, the British Government now tried to persuade Fowler to call off the meeting, because it would be unlikely to have the desired result and rather demonstrate to the world’s public the German power to withstand the joint pressure of the US, the UK and France. Now Washington got extremely worried about the British “over‐reaction”.109 Fowler insisted that it should be possible to achieve a rational decision‐making process in a multilateral setting by the ten major financial powers with the participation of the IMF; it was impossible for him “to spin around as fast as the British seemed to be spinning in their

Mark. Inner‐German discussions on the consequences of a DM revaluation in: 3.9.1968 Hankel‐Artikel im Handelsblatt, DM Aufwertung ist keine Lösung, BAK, B 136/3323.

106 Fowler‐Jenkins telecom, 19.11.1968, LBJ, Papers of Henry Fowler, Box 63. 107 Finanzministerium an Bundeskanzler, Entwurf eines Gesetzes über umsatzsteuerliche

Maßnahmen zur außenwirtschaftlichen Absicherung, Begründung, 21.11.1968, BAK, B 136/14832.

108 Record of Conversation, Prime Minister, Secretary of State, Chancellor of the Exchequers and Blankenhorn, German Ambassador, 12.30 a.m, 20.11.1968, PRO, PREM 13/2054. Prime Minister Wilson called the German ambassador, Herbert Blankenhorn, in the middle of the night to Downing Street and asked him to deliver the message to the Ger‐man Chancellor how desperate the British situation was.

109 Telegram Dean to FO, 19.11.1968, call from Rostow today, PRO, PREM 13/2054.


positions”.110 Nonetheless, at the conference in Bonn Fowler supported the British and French demand for a revaluation of the DM to the annoyance of the German side who claimed that, in contrast to Britain and France, German cooperation in international monetary matters had always been substantial and forthcoming, saving the position of dollar and sterling on more than one occasion.111 The US tried to play this tune when President Johnson instructed Fowler to let Chancellor Kiesinger know that “we be‐lieve we must, as we have in the past, handle monetary problems on a multilateral and cooperative basis. We must do everything we can to avoid a unilateral French action [devaluation] of this kind.”112 On the other hand Johnson issued a warning to Fowler not to go into the meeting with the feeling “that if the Germans could not be persuaded into doing all that we might think they should, all was lost.”113 The pressure should be directed more on the French to agree to a small devaluation in the light of the Ger‐man propositions that amounted to a de facto 4% revaluation and an addi‐tional financial rescue package. Confronted with French objections to make a binding statement of what they were going to do as well as with the irrational British insistence that only a revaluation of the DM would be acceptable, the US delegation finally supported the German suggestions for border tax measures which were accompanied by an international res‐cue package for the Franc.114

In his press statement Fowler praised the result of the conference as a powerful example of international financial cooperation,115 still not know‐ing whether the French would devalue and at what percentage. When de Gaulle finally decided not to devalue at all, the US took pride in having saved the Franc as well as the sterling, whilst the press reported that the Germans for the first time had publicly demonstrated their financial clout.116

110 Memorandum of Conversation with Chancellor Jenkins and the Governor of the Bank of

England, 19.11.1968, LBJ, Papers of Henry Fowler, Box 63. 111 Fried’s Notes on Meeting between Fowler and Kiesinger (Lodge, Deming, Fried, Schiller,

Strauss, Schöllhorn, Karstans und Prass), 19.11.1968, LBJ, Papers of Henry Fowler, Box 63.

112 Memorandum of Conversation with Chancellor Jenkins and the Governor of the Bank of England, 19.11.1968, ibid.

113 See note 110. 114 The press suspected a “Machiavellian plot” by de Gaulle. “The Three Hectic Days of the

Negotiations in Bonn”, New York Times November 26, 1968. 115 Statement of Fowler at the end of the Bonn meeting, 22.11. 1968, LBJ, NSF, Memos to the

President, Box 42. 116 Press coverage was unusual and enormous. The press criticised the Wilson government

for its attempts to blackmail the Germans and cover their own economic mismanage‐


It is obvious that the French strategy in handling this currency crisis was to find out whether the US would do for them what they had done for the British in the past years.

“When the U.S. balance of payments was in difficulty, there was great stress on interna‐tional monetary cooperation. […] When UK were in difficulties there were numerous credit packages arranged – the last one being the sterling Balance Credit Package which in effect provided credit to the UK against decline in sterling balance. […] Yet when France was in difficulty she was expected to make her own way. There was an obvious discrimination in the situation as France saw it.” 117

The US Under‐Secretary of the Treasury, Deming, rejected this accusation by pointing to the fact that the major financial powers had arranged a $ 1,3 billion credit line for France and that the US had increased its swap at French request to $ 600 million. He had to admit that the swap drawings had to be accompanied by a transfer of gold.118

The French need for international monetary assistance in 1968 and the outcome of the G‐10 conference in Bonn substantially improved the US bargaining position in international financial matters, because the loss of reserves by France meant that de Gaulle no longer posed a threat to the dollar – to the contrary, the US believed that they had saved the Franc and now had something good from the French.119 The British government was surprised but pleased with the French decision not to devalue and calcu‐lated “[…] that we should have a very good chance now of pulling the Germans in with us in giving General de Gaulle a troublesome time unlike in the past when they have felt rather cagey about upsetting de Gaulle.”120 This was certainly not on the mind of the US administration which saw a chance to improve relations with France which had been marred by de Gaulle’s attempt to destroy what he regarded as a hegemonic position of the dollar, and to reshape the IMS in conformity with his views.

The Reform of the International Monetary System

The Bretton Woods system was more than a system of fixed exchange rates. The logic of the system lay in international surveillance of economic

ment. “Behind closed doors. An Unauthorized Version of what goes on at Bonn”, Herald Tribune , November 22, 1968.

117 Deming Conversation with Larre, 12.11.1968, LBJ, Papers of Henry Fowler, Box 63. During his talks in Paris with the French government, the question was frequently raised whether the US would act in the Franc crisis the same way as in the Sterling crises.

118 Ibid. 119 Shriver (Paris embassy) to State, French reaction to Johnson letter, 25.11.1968, LBJ, NSF ‐

Memos to the President, Box 43. 120 David to Halls about a Palliser phone call, 23.11.1968, PRO, PREM 13/2055.


policies of member countries as incorporated not only in the IMF proce‐dures, but also practised in the WP‐3 of the OECD. The system was based on the assumption that adjustment processes in parities and economic policies on the basis of intense international monetary cooperation would provide a sound and fair basis for international economic growth and world trade. Many authors support the argument that the struggle for the dollar and sterling parity was a fight to prevent the collapse of an interna‐tional monetary system, which seemed to be inadequate for a growing world economy.121 But the central point is that the US and the UK as key currency countries refused to play by the rules which asked for corrective monetary and economic measures when the balance of payments was in a serious structural deficit.

The dollar exchange standard that developed after the war supported the dominant position of the US and its domestic and foreign policy objec‐tives, and even after the US lost its economic predominance and turned into a global debtor, it was able to command support from the European economic strongholds which were reluctant to endanger the position of the dollar as the leading currency of the world economy. Being criticized to exploit the system to its advantage, the US resorted to the argument that the imbalances were not the result of their expansive economic policies but rather a consequence of “[…] our assumption of international responsibili‐ties for economic development and defense of the free world.”122 The US and the UK claimed that the repercussions of these world‐wide responsi‐bilities on the IMS in form of currency and gold crises should be neutral‐ized by the other major financial countries. The mounting balance of pay‐ments surplus of Germany was seen as the reverse side of the deficits of the US and the UK. It was therefore deemed just and logical that the US and the UK requested burden‐sharing, such as military offset and foreign assistance to the Third World.

The European countries – most explicitly France – regarded the British and American deficits as a result of overflowing liquidity in the US, look‐ing for high interest investments abroad, and the pursuit of expansive and inflationary policies at home. By running huge deficits, the UK and US were able to absorb “significant volumes of real resources from the rest of

121 See note 29. 122 Memorandum for the President (Heller?), The Future of the Dollar, 15.9.1962, JFK, POF,

Box 73.


the world”123 and even asked this drain to be financed through credit fa‐cilities necessary to stabilize the exchange rates of deficit countries.

The British government had always stressed that the system of credit facilities (GAB) was an effective but informal and short‐term construction and would have to be transferred into a long‐term credit device to relieve the key currency countries from the need to impose restrictive short‐term measures in their national economies in order to reduce the imbalances.124 The underlying idea was to extend the IMF into an international bank, based on a currency account system which would be able to furbish a sub‐stantial increase in international liquidity sufficient to finance the world’s fast growing trade, and would at the same time alleviate the status of dol‐lar and sterling as reserve currencies.

Even though the Kennedy administration under long‐term aspects sympathised with the argument, that the considerable rise of world trade had to be matched by an increase in international liquidity, it strongly resented any attempt to diminish the status of the dollar by aiming at a new “supranational bank” and accused the British of trying to bring the dollar down to the sterling’s level.125 Nonetheless the massive loss of gold in 1961/62 induced the Kennedy administration to look forward to a “long‐term reorganisation of the international monetary machinery which would relieve us of the responsibility for carrying single‐handed the burdens of being the Free World’s banker”. 126 Because a reform of the IMS would require careful preparations and negotiations with other financial powers, the US administration ventilated the idea of an “interim international monetary arrangement” or “standstill monetary agreement” to overcome the current gold problem, asking dollar holders to abstain from gold con‐version and agree to a fixed gold ratio (1/3) in their reserves. The US would buy time for an orderly and constructive adjustment of its balance of payments and the monetary system could be defended against rumours and speculations. This plan drew sharp criticism from the Chairman of the Federal Reserve Bank, William McChesney Martin, who warned that the markets would hit and run if this plan would become public. “If US credit is that weak, then we are indeed at an end of an epoch as a great world 123 Patrick Karl O’Brien, “The Pax Britannica, American Hegemony and the International

Economic Order, 1846‐1914 and 1941‐2001”, in: idem and Armand Clesse (eds.), Two He‐gemonies: Britain 1846‐1914 and the United States, 1941‐2001 (Aldershot 2002), 50.

124 Final Note for the Prime Minister, International Liquidity, 11.7.1963, PRO, CAB 21/5559. 125 Kennedy instructed Treasury Under‐Secretary for Monetary Affairs, Robert Roosa, to

publish an article rejecting the British initiative. Solomon, The International Monetary Sys‐tem, 64.

126 Carl Kaysen Memorandum for the President, 16.8.1962, JFK, NSF, Box 320.


financial power.”127 He regarded the swap arrangement between the cen‐tral banks as adequate for short‐term actions and advised the US Treasury to take advantage of the IMF drawing rights. To foreclose a confidence‐destroying effect on the dollar, President Kennedy made clear that offi‐cially any initiative for an “interim arrangement” should come from the Europeans and any appearance of pressure from the US should be avoided. The British position was to be agreed with the Six, especially with France.128 Although the French Finance Minister Giscard dʹEstaing had told Kennedy that the time was ripe for an agreement on international monetary matters between the US and Europe, the initiative as such re‐ceived a cool reaction in Europe. Whilst the US and the UK stressed the inadequacy of the international monetary system to deal with payments disequilibrium, most of the European countries saw only deficiencies in the willingness of deficit countries to adopt and implement an overdue economic adjustment process.129

The Group of Ten finally agreed at the IMF Annual Meeting in 1962 to study the question of international liquidity as a long‐term aspect of the monetary system. Even the US stressed that there was no immediate con‐cern about a lack of liquidity in relation to the world’s economic growth and that current imbalances should be financed by raising IMF quotas, adding new currencies as reserve currencies and making adequate use of the international credit facilities.130 For the British this was just a semantic distinction and they left no doubt that they were seeking an expansion of international liquidity for handling their payments deficits. They criticized the slow progress the G‐10 was making in discussing the various schemes which reflected fundamentally different approaches to a reform of the IMS.131

In the sterling crises of 1964 and 1965, Wilson tried to push for an An‐glo‐American initiative overriding the G‐10 consultations, but the US gov‐ernment had already decided in 1962 not to initiate any action until the

127 FED Martin, Commentary on “An Interim International Monetary Arrangement“,

20.8.1962, JFK, POF, Box 89a. 128 Kennedy Memorandum for the Secretary of the Treasury, Under‐Secretary of State and

Chairman of the Council of Economic Advisors on talks with the Europeans on interna‐tional monetary matters, 28.8.1962, JFK, POF, Box 89a; as well in FRUS, 1961‐1963, vol. 9, Doc. 58.

129 Bericht über die Jahrestagung 1963 des IMF in Washington, 30.9.‐4.10.1963, von Dr. Hanemann, Deutscher Exekutivdirektor im IMF, 28.10.1963, BAK, B 102/51027.

130 International Liquidity, 13.11.1963, Office of the Executive Secretariat, Conference Files 1949‐1972, NA , RG 59, Box 331.

131 Treasury Memo for Prime Minister, International Liquidity, 15.5.1963, PRO, PREM 11/4201.


balance of payments situation had considerably improved. Washington wanted to refute the argument that the reform proposals were intended to shore up the dollar and save its dominant position in the IMS. A favour‐able prognosis for the US balance of payments situation in the second half of 1965 encouraged Fowler in July 1965 to demand in a public speech the convening of a “World Monetary Conference”, setting the IMF meeting in Rio de Janeiro in 1967 as a dead‐line for presenting a reform concept.132 This sudden move took even the British by surprise but Prime Minister Wilson immediately supported the proposal.133 The Fowler “ultimatum” caused angry consternation in the Group of Ten in which monetary reform had been discussed over the last two years.134

A French proposal to create a Collective Reserve Unit (CRU) tied to gold had been on the table for quite a while. It was rejected by the US and the UK, because its purpose was to replace the dollar and sterling as re‐serve currencies. Furthermore CRUs would hardly increase international liquidity since they also depended on the supply of gold. In its discussion on international liquidity, the G‐10 splitted into various factions: In con‐trast to the French plan which was publicly announced in a press confer‐ence by de Gaulle, the Anglo‐Saxon powers favoured a reserve unit as an unconditional asset which would be directly and independently transfer‐able between central banks for reserve purposes and not tied to gold or other assets; this reserve unit would only be a supplement to the dollar.135 The German government was unspecific in the early stage of the discus‐sion, but came out against a gold coverage of the new asset; it favoured a scheme that would gradually extend the IMS, but would not transform the IMF into a liquidity centre as intended by the British government.136 At a more advanced stage Germany and later on France opted for Special Drawing Rights (SDRs) within the IMF which would have the character of credits and rest on similar conditions as the regular IMF drawings rights. Additional liquidity in form of credit, which would have to be repaid, was not to the liking of the US or the UK. The Germans, being aware of the enormous weight of the US in international finance and trade, thought it

132 “Timely Action”, The Washington Post, July 13, 1965. 133 “Fowler Plans win Support of Wilson”, The Washington Post, July 2, 1965. 134 Emminger as Chairman of the deputies of the G‐10 rushed immediately to Washington;

Memcon Ball, Solomon, Leddy, Springsteen, Caplan, Discussions with Emminger on Proposal for International Monetary Conference, 20.7.1965, JFK, NSF, Country Files, Germany, Box 186.

135 Fowler to Schiller, 6.4.1967, BAK, B 102/51170. 136 Fragen des Internationalen Währungssystems, Memorandum für Staatssekretär (in

preparation of a Deming visit), 18.2.1965, BAK, B 136/3322.


would be fatal to relieve the US from its obligation to pursue “sound” economic and fiscal policies to safeguard the reserve position of the dol‐lar.137

The controversies about an IMS reform not only embraced the compo‐sition of new reserve assets, but also the questions whether they should be available only to a limited group of countries and managed within or out‐side the IMF. This issue was closely linked to the question what to do about the claims of the enlarging group of new states (G‐77). One of Fowler’s arguments was that the increase in international liquidity was required to finance economic growth in the newly independent develop‐ing countries (LDCs). He reacted to the demands of the LDCs, presented at the UNCTAD conference in 1964, that the international economic order should be adapted to meet the requirements of this new large group of states. The British Treasury ventilated the idea of linking the new reserve asset to the financing of aid, thus hoping to gain votes in favour of the extension of liquidity against the Six. But this proposal was rejected by the Europeans and not supported by the US, arguing that “just as a new re‐serve asset cannot and should not be designed to facilitate the solution of the payments problems of individual countries, it cannot and should not be designed to carry any specific portion of the development burden […].” 138

An additional “complicating” factor in the IMS reform was the obvi‐ous intention of the EEC members not only to reach a common position among themselves about a monetary reform, but also to insist on a voting procedure within the IMF that would give them a veto and put them on the same footing with the US. This was the more important for the Euro‐peans as Fowler’s call for a “World Monetary Conference” rose suspicions that he intended to use the votes of the newly independent countries, to enforce an increase in international liquidity on the reluctant Europeans. Therefore the European members of the Group of Ten insisted that any decision about an IMS reform had to be reached within this group and that the creation of a reserve unit should be restricted to a limited group of major participants.139

137 Memorandum des Wirtschaftsministeriums, Zehnergruppe, Probleme der internation‐

alen Reserveschöpfung, 9.1.1967, BAK, B 136/3322. 138 Dillon Lecture of 8.7.1966 quoted by Peterson, 6.10.1966, PRO, T 312/2062. The folder

contains the Treasury discussion on a link between aid and liquidity. 139 Report on the Meeting of the Deputies of the Group of Ten in Paris, 13.11.1965, NA, RG

56, Office of the Assistant Secretary for International Affairs (OASIA), Box 15.


The various plans that were discussed in the G‐10 were not helpful to bridging the gap between the Anglo‐Saxon and the French position, espe‐cially when France changed its position, questioned any form of contin‐gency planning and opted for a very limited additional liquidity on a con‐ditional credit‐like basis. The US strategy now tried to isolate France and get the Germans into the Anglo‐Saxon camp, because a reform could be implemented without France, but not without Germany.140 The German Economic Minister, Karl Schiller, accused the US of ignoring that the bal‐ance of financial economic power had shifted and that Europe was now on the same footing with the US. Schiller refused to let the US divide the EEC in such an important matter as monetary policy.141 He succeeded in getting France to accept a common European position at a conference of EEC Min‐isters of Finance and Economics in Munich in April 1967, which drew heavy criticism from the US side, because the US wanted the Germans “to bring along the French” and not compromise to the French position.142 At the Ministerial Meeting of the Group of Ten in July 1967 Schiller de‐manded to omit the notion “reserve unit” which was preferred by the US, and substitute it by “Special Drawing Right” which was acceptable to France. In addition, the Europeans insisted on a 85% majority for the acti‐vation of new reserve assets ‐ this gave the EEC a veto position, if its members voted en bloc. Although Fowler complained “that the rest of the world will not stand there with a pistol to its head”, the G‐10 agreed to compromise on both points.143

At its last G‐10 meeting in London before the IMF conference in Rio in September 1967, an agreement about the creation of new reserve assets in form of special drawing rights within the IMF was finally reached. This time Schiller, supported by Johannes Witteveen (Finance Minister of the Netherlands), did not allow the French to pull back on a position that was already agreed.144

140 U.S. negotiators have been aware that the key decision was one for the Germans to

make. Technically, at least, it was possible to make a monetary agreement without par‐ticipation of France. ʺBut with the Germans supporting the French, … it would be im‐possible.ʺ Press clippings, Washington Post, German Rebuff Dismays U.S., 19.4.1967, LBJ, Papers of Francis Bator, Box 17.

141 Schiller an Fowler, Internationale Liquidität, 21.4.1967, BAK, B 136/3322. 142 Telephone conversation Deming‐Heller on Heller conversation with Schiller, 10.4.1967,

LBJ, Papers of Francis Bator, Box 9. 143 Memcon Fowler‐Schiller, Ministerial Meeting of Group of Ten, 17.7.1967, LBJ, Papers of

Francis Bator, Box 9. 144 Telegram on Group of 10 ministerial meeting in London, 29.8.1967, PRO, PREM 13/2050.


President Johnson praised his Finance Minister and called the deal reached in London “the greatest forward step in world financial coopera‐tion in the 20 years since creation of the International Monetary Fund it‐self”.145 This eulogy could hardly conceal that the result was not what the US and the UK had expected to achieve with this reform in order to relieve the reserve position of their currencies.146 They had to give up their joint plan for a reserve unit “as good as gold” that would be freely transferable between the central banks of major financial powers. The idea of the An‐glo‐Saxon plan to provide additional but separate drawing rights for all other countries was dismissed as discriminatory for the developing coun‐tries who had lobbied for an increase in liquidity for development pur‐poses.147 Instead the new reserves would consist of “Special Drawing Rights” within the IMF, conditional, credit‐like with interest rates, repay‐able, and still linked to gold. Their activation would be dependent on a 85% majority.148

The British government admitted that this was not what they had worked for over the last years, but better than what could have been ex‐pected in the light of the French obstruction. The scheme agreed upon would alter the shape of the fund facilities “in the direction originally ad‐vocated by Keynes.”149 The British position in the whole process had been highly ambivalent. Although originally supporting the US plan, the British negotiators privately explained to the governments involved that, in the light of the British application to join the EEC, London would keep a low profile on the conflicting issues.150

At the annual IMF and World Bank meeting in Rio, September 25th‐29th 1967, the member states unanimously decided to create Special Drawing Rights and asked the Executive Board of the IMF to present the statutory alterations until May 1968. At the conference in Stockholm at the end of March 1968, the French played the same game as before the Rio Confer‐

145 “LBJ Praises Fowler’s Monetary Achievement”, The Washington Post, August 29, 1967. 146 It is difficult to follow the judgement of Schwartz that “the United States did compro‐

mise on minor issues, but [that] the American position prevailed on the most important matters.” Thomas L. Schwartz, Lyndon Johnson and Europe. In the Shadow of Vietnam (Cambridge, MA 2003), 179.

147 Gocht an Minister und Langer, Bericht über den Stand der Arbeiten der Zehnergruppe, 29.6.1966, BAK, B 136/3322.

148 For details see James, 170‐74. 149 Telegr. on Group of 10 ministerial meeting in London, 29.8.1967, PRO, PREM 13/2050. 150 FS vom 2.5.1967 von der Deutschen Botschaft in London, Reform des Internationalen

Währungssystems, BAK, B 102/51171.


ence, and Schiller again played the mediator to achieve a compromise, a role which was highly praised by both sides.151

Conclusion

Not only John F. Kennedy believed that what really counts in international politics is the strength of the currency. A world‐wide accepted currency was perceived as an indispensable basis of global power and the rate of exchange as a status symbol. From a national as well as international point of view the stability of the US currency was an absolute necessity to the security and economic development of the Free World ‐ a perception that was shared by the governments of the major financial powers.

While the American world power position rested upon a thriving economy and stable financial basis, Britain lacked the means to discharge a global role but still retained the will to do so. Despite rapidly declining economic and financial means, the UK was able to take advantage of the fact that its residual imperial power in form of military presence, sterling bloc and political and economic ties were useful to supporting American foreign policy objectives in Europe and world‐wide. In addition, the US administrations for too long saved themselves the illusion that the British partner would be able and willing to live up to the economic and financial requirements of its power ambitions. So when Wilson decided that Brit‐ain’s world power status had to be defended by sustaining the sterling area and the value of the pound, he could be sure to muster American support. It was obvious from the experience of the last 15 years that the UK would be unable to do this by itself. Wilson was convinced that the balance of payments problems of the US, which had resulted in a gold crisis in the early sixties, would make the US more accessible to the argu‐ment that the defence of dollar and sterling was inseparably intertwined. In British eyes the joint defence of sterling and dollar in the 1960s consti‐tuted a revival of the “special relationship” between the Anglo‐Saxon powers that had evolved during the war but subsided in the post‐war period.

The junctim created by the British government between the status of sterling and Britain’s ability to act worldwide as a partner of the US pro‐vided the American administration the leverage to ask Britain to live up to its commitments when the Wilson government, despite support for ster‐

151 Schiller an Kiesinger betr. Stockholmer Treffen der 10, 1.4.1968, BAK, B 136/3336; Fowler

to Schiller, 1.9.1967, BAK, B 102/51174.


ling by the major financial powers under US leadership, tried to reduce commitments for balance of payments’ reasons. It was obvious to the US that Britain in the long term would be unable to keep its commitments. But on the background of the Vietnam War and growing resentments within American society against US word wide commitments the psychological effect of a British retreat “East of Suez” would undermine the domestic support for the foreign policy objectives of the Johnson administration. This explains the conflicting strands in American policy, sending the wrong signals to the British – and the Europeans – that the US supported the “special relationship”.

In the 1960s both Anglo‐Saxon powers had to adjust to the fact that the balance of financial and economic power had shifted towards Europe which now had a major say in the international economy. The US used this fact to engage the Europeans in the defence of the key currencies to save the IMS which had worked as a comparative advantage to the resurgence of European economic power. The UK still nourished the idea that it could generate support for a special British role in relation to the US as well as the European Community. It can be interpreted as a stunning loss of real‐ity when Britain, being a “client” of both sides for substantial financial support, tried to attract the US with its “European role” while trying to impress the Europeans with its “Atlantic” role.

The ambiguity of their bilateral relations had serious repercussions on the relations of the US and the UK with third countries. It is interesting that both countries at the end of the 1960s recognized that they had mis‐handled the growing importance of Germany in the international scene. Siding with British interests in international monetary and common de‐fence matters in the alliance, the US had seriously strained its relation with pro‐American Germany, taking the mostly silent and efficient German support for granted. The handling of issues like the Multilateral Force (MLF), the Non‐Proliferation Treaty (NPT), offset questions, international monetary reform and the British‐American attitude at the Bonn Confer‐ence led to a deterioration of German‐American relations. In a memoran‐dum on Germany for the President elect Richard Nixon, the US ambassa‐dor in Bonn, Henry Cabot Lodge, harshly criticized the downward spiral in German‐American relations since 1961 which might have an impact on Germany’s Atlantic posture in the light of the new Ostpolitik.

“If they [the Soviets] are successful in bringing Germany into the Soviet orbit, neither the United Kingdom, as an offshore archipelago, nor France, as part of a coastal strip, would count for much. The Soviet Union, for the first time ever, would in this event be stronger


than the United States. We would then await their decision concerning our fate. Avoid‐ance of this state of affairs must be basic American policy.”152

As David Reynolds observes, the resurgence of German‐American rela‐tions under the Nixon administration was directly related to a waning of Anglo‐American special relations.

152 Henry CABot Lodge, Top Secret Memorandum on Germany for President elect Richard

Nixon, 10.1.1969, NA, RG 59, Central Foreign Policy Files, 1967‐1969, Box 2117.

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