CAB129-53 — Page 114

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Page 114

Rågsihk The Plan in the Appendix presupposes that we should aim at

Seat of exchange as stable as possible by cofstructive use of

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the reserves. The Government would have power to decide from time to time whether or not to use the reserves to support the rate; but our reserves are not large enough to enable us to support a rate which is clearly unreal. If it were agreed that the plan should go forward, I would pursue enquiries about securing a line of credit from the International Monetary Fund (I, M, F.) to be announced, if possible, concurrently with the Plan.

10.

I now come to the timing of any plan such as the attached. It has emerged from discussion with my advisers, and in particular with the Governor of the Bank of England, that the time for a change is now rather than later. The position cannot be better in three months' time than it is now. It may well be worse. Furthermore, the annual meeting of the I. M, F. in September is bound to give cause to a great deal of speculative talk which could be damaging to us. We still have a chance of making a change in

circumstances which:-

(a) will show that we are taking a positive step and not acting from

weakness;

(b) will give a change the best chance of success by announcing strong

internal action at the same time;

(c) will provide sufficient time for consultation with the Commonwealth

and others.

I am bound to warn my colleagues that some action is necessary and that if we delay action, we run a grave risk that we shall have to make a change in the worst possible circumstances, i. e. when we are forced into it by a crisis with no adequate time to consult. We have to weigh the value of positive action, with all its risks, against the great objections of appearing to be forced into action.

11.

I must make it quite clear that I do not regard this plan as a means of righting our current balance of payments. If adopted, it should in due course have favourable effects upon the whole sterling area's current balance of payments with the rest of the world, for if the pound falls this will tend to discourage foreign exchange expenditure of all kinds, not only in the United Kingdom but also in the rest of the Sterling Area. This would also be a stimulus to our competitive power and to exports. Thus, the operation would act upon the whole of the sterling area's balance of payments and not merely on the United Kingdom's imports. The main purpose of the Plan would be to change our external financial system in a way which would enable us to continue without these crises it deals with the capital position, so to speak, and not with the current position.

12. fail.

༞

But obviously the Plan if it is adopted could not be allowed to It is absolutely necessary to reduce the overload on the economy and to help to put right the current balance of payments, whether we adopt the Plan or not.

But I could not recommend the Plan unless it were accompanied by:-

(a) definite and effective reductions in the Defence Programme;

(b) an adaptation of the investment programme, putting more emphasis

on productive industry and less on social investment, including housing;