(c) crown copyright
Catalogue Reference:CAB/128/60/11
Image Reference:0001
D O C U M E N T IS T H E P R O P E R T Y O F H E R B R I T A N N I C M A J E S T Y ' S G O V E R N M E N T
J?*(7o) 3 3 r d
cl Bion
C o a
U
COPY NO
B
77
CABINET
C O N C L U S I O N S of a M e e t i n g of t h e C a b i n e t
h e l d a t 10 D o w n i n g S t r e e t o n
T U E S D A Y 23 N O V E M B E R 1976
at 10.00 a m
P R E S E NT
The Rt Hon J a m e s Callaghan M P
P r i m e Minister
? J * Rt Hon M i c h a e l Foot M P
^ " i P r e s i d e n t of t h e C o u n c i l
The Rt Hon Lord Elwyn-Jones
Lord Chancellor
"5* Rt H o n D e n i s H e a l e y M P
^ * ^ c e l l o r of t h e E x c h e q u e r
The Rt Hon Anthony Croeland M P
S e c r e t a r y of S t a t e f o r F o r e i g n a n d
Commonwealth Affairs
:
:
e
Rt H o n M e r l y n R e e s M P
* e t a r y of S t a t e f o r t h e H o m e D e p a r t m e n t
The Rt Hon Shirley Williams M P
S e c r e t a r y of S t a t e f o r E d u c a t i o n a n d
Science and P a y m a s t e r G e n e r a l
Rt Hon Anthony Wedgwood Benn M P
* e t a r y of S t a t e f o r E n e r g y
The Rt Hon E r i c V a r l e y M P
S e c r e t a r y of S t a t e f o r I n d u s t r y
Rt H o n P e t e r S h o r e M P
* e t a r y of S t a t e f o r t h e E n v i r o n m e n t
The Rt Hon Roy Mason M P
S e c r e t a r y of S t a t e f o r N o r t h e r n I r e l a n d
Rt H o n B r u c e M l l l a n M P
* e t a r y of S t a t e f o r S c o t l a n d
The Rt Hon J o h n M o r r i s QC M P
S e c r e t a r y of S t a t e f o r W a l e s
Rt H o n F r e d M u l l e y M P
"*etary of S t a t e f o r D e f e n c e
3
The Rt Hon Albert Booth M P
S e c r e t a r y of S t a t e f o r E m p l o y m e n t
fctHon D a v i d E n n a l s M P
: **tapy of S t a t e f o r S o c i a l S e r v i c e s
The Rt Hon Edmund Dell M P
S e c r e t a r y of S t a t e f o r T r a d e
i
Rt Hon L o r d P e a r t
^ r d I*rivy S e a l
The Rt Hon John Silkin M P
M i n i s t e r of A g r i c u l t u r e , F i s h e r i e s a n d F o o d
^
Rt Hon Roy H a t t e r s l e y M P
Secretary f s t a t e for P r i c e s and
Consumer P r o t e c t i o n
The Rt Hon William R o d g e r s M P
S e c r e t a r y of S t a t e f o r T r a n s p o r t
J * * Rt Hon Stanley O r m e M P
Minister f o r S o c i a l S e c u r i t y
The Rt Hon Harold Lever M P
C h a n c e l l o r of t h e D u c h y of L a n c a s t e r
0
The Rt Hon Reginald P r e n t i c e M P
M i n i s t e r for O v e r s e a s D e v e l o p m e n t
ALSO PRESENT
The Rt Hon Michael Cocks M P
P a r l i a m e n t a r y Secsftt&ry, T r e a s u r y
SECRETARIAT
Sir
Mr
Sir
Mr
Mr
John Hunt
D le B Jones
Clive Rose
J A Marshall
C Wilson
(Item
(Item
(Item
(Item
2)
1)
2)
1)
C O N T E N T S
Item
Subject
1.
RHODESIA
2.
IMF NEGOTIATIONS
Page
1
1.
The Cabinet had before them a m e m o r a n d u m by the
F o r e i g n a n d C o m m o n w e a l t h S e c r e t a r y ( C P ( 7 6 ) 110) on t h e B r i t i s h
r o l e in R h o d e s i a during the i n t e r i m p e r i o d ,
THE PRIME MINISTER said that t h e r e bad been a p r e l i m i n a r y
d i s c u s s i o n of t h e s u b j e c t i n t h e M i n i s t e r i a l G r o u p on S o u t h e r n A f r i c a .
O p i n i o n b a d b e e n f a i r l y e v e n l y d i v i d e d on t h e F o r e i g n a n d
Commonwealth Secretary's proposals.
Some M i n i s t e r s had
a r g u e d t h a t t h e r i s k s a n d c o n s e q u e n c e s of a b r e a k d o w n f o r w h i c h w e
w o u l d b e b l a m e d w e r e s u c h a s t o j u s t i f y a l i m i t e d m o v e on t h e l i n e s
proposed.
A s against t h i s , there w a s a substantial view that once
we h a d m a d e a m o v e it would be difficult to avoid f u r t h e r
i n v o l v e m e n t a n d t h a t w e s h o u l d t h e r e f o r e r e f u s e t o d o s o , e v e n if
t h i s r e s u l t e d in our being b l a m e d for a b r e a k d o w n .
All those
p r e s e n t h a d a g r e e d t h a t , if w e w e r e t o p l a y a r o l e i n R h o d e s i a
d u r i n g t h e i n t e r i m p e r i o d , i t s h o u l d go n o f u r t h e r t h a n p r o p o s e d
i n p a r a g r a p h s 9 a n d 11 of t h e F o r e i g n a n d C o m m o n w e a l t h S e c r e t a r y ^
memor andum.
1
T H E FOREIGN AND COMMONWEALTH SECRETARY said that the
p o s i t i o n i n G e n e v a w a s t h a t e i t h e r t h e r e w o u l d b e a g r e e m e n t on t h e
i n d e p e n d e n c e d a t e i n t h e n e x t few d a y s o r , if t h e r e w a s n o t , t h e
C h a i r m a n w o u l d , on h i s i n s t r u c t i o n s , a d j o u r n t h e t a l k s f o r a w e e k
o r ten d a y s .
In e i t h e r c a s e , a d e c i s i o n h a d t o b e m a d e on t h e
British role during the interim period.
He w a s c o n v i n c e d t h a t
t h e r e w o u l d h a v e t o be a B r i t i s h p r e s e n c e of s o m e k i n d .
We h a d
a c o n t i n u i n g r e s p o n s i b i l i t y u n d e r t h e 1961 C o n s t i t u t i o n , w h i c h h a d
been r e c o g n i s e d by s u c c e s s i v e B r i t i s h G o v e r n m e n t s .
Public
o p i n i o n w o u l d n o t e x p e c t o r w a n t u s t o w a s h o u r h a n d s of t h i s ,
A f r i c a n G o v e r n m e n t s , the C o m m o n w e a l t h S e c r e t a r y G e n e r a l and
o t h e r s , a l l c o n s i d e r e d t h a t a s o l u t i o n of t h i s i s s u e w o u l d d e t e r m i n e
w h e t h e r the c o n f e r e n c e b r o k e down o r n o t .
T h i s w a s b e c a u s e of
t h e f u n d a m e n t a l d i s t r u s t b y t h e B l a c k N a t i o n a l i s t s of M r S m i t h a n d
the African view that, without a British p r e s e n c e , Mr Smith might
t r y t o b a c k o u t of a n y a g r e e m e n t r e a c h e d a t G e n e v a .
If t h e
c o n f e r e n c e w e r e t o b r e a k d o w n in c i r c u m s t a n c e s i n w h i c h w e w e r e
b l a m e d , we should l o s e o u r influence and goodwill in B l a c k A f r i c a ;
r e l a t i o n s with our E u r o p e a n p a r t n e r s would be s o u r e d ; the effect
on o u r r e l a t i o n s w i t h t h e U n i t e d S t a t e s w o u l d b e d i s a s t r o u s ; a n d
t h e r e w o u l d b e an e s c a l a t i o n of t h e g u e r i l l a w a r , w i t h t h e S o u t h
A f r i c a n s c o m i n g i n on o n e s i d e a n d t h e C u b a n s on t h e o t h e r , w h i c h
w o u l d m a k e a s h a m b l e s of R h o d e s i a .
We should t h u s be faced
w i t h e v e r y t h i n g w h i c h , w h e n e m b a r k i n g on t h e p r e s e n t i n i t i a t i v e ,
we h a d hoped to avoid.
He r u l e d o u t a n y p o s s i b i l i t y of s e n d i n g
B r i t i s h f o r c e s o r o f f i c i a l s t o R h o d e s i a , o r of a s s u m i n g d i r e c t o r
sole responsibility for maintaining law and o r d e r .
M o r e o v e r , if
we w e r e t o a g r e e to a B r i t i s h p r e s e n c e , it would have to be m a d e
a b s o l u t e l y c l e a r t h a t i t w o u l d b e w i t h d r a w n if t h e i n t e r i m g o v e r n m e n t
1
should b r e a k down.
Subject to t h e s e p o i n t s , he p r o p o s e d t h a t the
offer of a B r i t i s h p r e s e n c e s h o u l d b e m a d e on t h e c o n d i t i o n s t h a t
g u e r i l l a activity should c e a s e a s soon a s the i n t e r i m g o v e r n m e n t
had been e s t a b l i s h e d ; s a n c t i o n s should be lifted when t h e i n t e r i m
g o v e r n m e n t w a s l e g a l i s e d ; a n d t h e c o s t of t h e B r i t i s h p r e s e n c e
should be b o r n e by the i n t e r i m g o v e r n m e n t .
On t h e s e c o n d i t i o n s
he p r o p o s e d t h a t we should offer to p r o v i d e a B r i t i s h r e p r e s e n t a t i v e
w h o w o u l d p l a y an a c t i v e p a r t i n n e g o t i a t i n g t h e i n d e p e n d e n c e
c o n s t i t u t i o n and a c t a s t h e c h a i r m a n of t h e c o n s t i t u t i o n a l c o n f e r e n c e .
The B r i t i s h r e p r e s e n t a t i v e would have r e s p o n s i b i l i t y for e x t e r n a l
affairB u n d e r t h e 1961 C o n s t i t u t i o n a n d w o u l d h a v e u l t i m a t e
responsibility for defence and I n t e r n a l s e c u r i t y which would extend
t o e x e r c i s i n g a v e t o o v e r c e r t a i n a p p o i n t m e n t s a n d d i s m i s s a l s in
t h e a r m e d f o r c e s a n d h a v i n g p o w e r t o c o n v e n e a m e e t i n g of
M i n i s t e r s i n t h e e v e n t of a m a j o r t h r e a t t o l a w a n d o r d e r , at w h i c h
he m i g h t have a c a s t i n g v o t e .
I t w o u l d o n l y b e a c c e p t a b l e fox t h e
British r e p r e s e n t a t i v e to e x e r c i s e this ultimate responsibility
p r o v i d e d t h a t e i t h e r a C o u n c i l of S t a t e w a s e s t a b l i s h e d w i t h
e x e c u t i v e r e s p o n s i b i l i t y in t h e f i e l d s of d e f e n c e a n d l a w a n d o r d e r
o r a g r e e m e n t w a s r e a c h e d i n G e n e v a o n t h e i d e n t i t y of t h e M i n i s t e r s
who would e x e r c i s e day to day r e s p o n s i b i l i t y in t h e s e two f i e l d s .
The C o m m o n w e a l t h S e c r e t a r y G e n e r a l had suggested that t h e r e
s h o u l d b e s o m e s y m b o l i c C o m m o n w e a l t h p r e s e n c e i n s u p p o r t of
t h e B r i t i s h r e p r e s e n t a t i v e a n d t h a t t h i s m i g h t t a k e t h e f o r m of
m i l i t a r y a d v i s e r s from, say, Canada, India and N i g e r i a ,
This
w a s a helpful suggestion.
T h e r e was no certainty that a package
on t h e l i n e s h e h a d p r o p o s e d w o u l d s e c u r e a g r e e m e n t .
What was
c e r t a i n , h o w e v e r , w a s t h a t if w e w e r e n o t p r e p a r e d t o o f f e r
s o m e t h i n g on t h e s e l i n e s , t h e c o n f e r e n c e w o u l d b r e a k d o w n .
There
w e r e s e r i o u s r i s k s and he u n d e r s t o o d the a r g u m e n t t h a t if we w e r e
to go t h i s far we would be p r e s s e d to go f u r t h e r .
The r i s k s could
b e m i n i m i s e d if we d e c l a r e d i n a d v a n c e t h e l i m i t s of w h a t w e w e r e
p r e p a r e d to offer.
We w o u l d t h e n b e In a p o s i t i o n t o c l a i m t h a t
o u r offer w a s a r e a s o n a b l e o n e a n d , if w e c o u l d d o t h i s , t h e p r e s s u r e s
on u s w o u l d b e m u c h r e d u c e d .
In d i s c u s s i o n i t w a s a r g u e d t h a t w h i l e w e s h o u l d b e v e r y c a u t i o u s
about extending o u r involvement, it w a s c r u c i a l l y i m p o r t a n t that
t h e G e n e v a c o n f e r e n c e s h o u l d b e g i v e n e v e r y c h a n c e of s u c c e s s .
We h a d c o n t i n u i n g r e s p o n s i b i l i t y f o r R h o d e s i a : a n d i t w o u l d b e
quite w r o n g for u s not t o take such s t e p s a s lay within o u r p o w e r to
achieve a peaceful settlement.
F u r t h e r m o r e this issue was not
i r r e l e v a n t t o t h e d i s c u s s i o n w h i c h t h e C a b i n e t w o u l d Bhortly b e
h a v i n g a b o u t t h e l o a n f r o m t h e I n t e r n a t i o n a l M o n e t a r y F u n d : if
other c o u n t r i e s w e r e p r e p a r e d to h e l p u s in our e c o n o m i c difficulties
this w a s at l e a s t p a r t l y b e c a u s e we stood for s o m e t h i n g in t h e w o r l d
and f u l f i l l e d o u r r e s p o n s i b i l i t i e s .
The African P r e s i d e n t s w e r e
a w a r e of t h e l i m i t a t i o n s of B r i t i s h p o w e r .
They knew we could not
2
send t r o o p s and did not want u s to do so.
But they looked to u s
to take the l e a d and p r o v i d e the focal point on which s u c c e s s o r
failure might t u r n .
F u r t h e r m o r e t h e c o n s e q u e n c e s of f a i l u r e
j u s t i f i e d o u r t a k i n g s o m e r i s k s : i n d e e d if w e d i d n o t a c c e p t a
B r i t i s h r o l e w e w o u l d s t i l l f a c e s e r i o u s r i s k s b u t w i t h o u t a n y of
the opportunities.
T h e r e would however be advantage in s o m e
f o r m of a C o m m o n w e a l t h p r e s e n c e a l o n g s i d e o u r own i f t h i s c o u l d
he a c h i e v e d .
Although we could not g u a r a n t e e s u c c e s s and m i g h t
in t h e e n d b e f o r c e d t o p u l l o u t a n d a d m i t f a i l u r e , i t w o u l d b e
shameful to do s o a t t h i s s t a g e .
It w a s h o w e v e r p o i n t e d o u t t h a t w e s h o u l d h a v e c o n s i d e r a b l e
d i f f i c u l t y i n s e c u r i n g f u l f i l m e n t of t h e c o n d i t i o n t h a t g u e r i l l a
activity m u s t c e a s e .
Indeed the people with whom we would be
negotiating a British p r e s e n c e might not t h e m s e l v e s have the
p o w e r t o c a l l off t h i s a c t i v i t y c o m p l e t e l y .
We s h o u l d c e r t a i n l y
e n s u r e that o u r r e q u i r e m e n t w a s u n d e r s t o o d and a c c e p t e d by the
Nationalist p a r t i c i p a n t s in the i n t e r i m g o v e r n m e n t a s w e l l a s by
the African P r e s i d e n t s .
W e s h o u l d i n s i s t on a p u b l i c s t a t e m e n t
from P r e s i d e n t s N y e r e r e , Kaunda and S e r e t s e K h a m a , though
probably not from P r e s i d e n t Machel, a s well as from the
N a t i o n a l i s t l e a d e r s i n G e n e v a , t h a t t h e y w o u l d t a k e a c t i v e s t e p s to
d i s c o u r a g e t h e c o n t i n u a t i o n of g u e r i l l a a c t i v i t y .
But even with
s u c h a s t a t e m e n t t h e c o n d i t i o n c o u l d n o t b e an a b s o l u t e one,,
W h e t h e r a n y c o n t i n u a t i o n of g u e r i l l a a c t i v i t y w o u l d m a k e i t
n e c e s s a r y t o w i t h d r a w t h e B r i t i s h p r e s e n c e w o u l d d e p e n d on t h e
scale.
Giver, the c i r c u m s t a n c e s we would n o t be a b l e to p r e v e n t
a c o n t i n u a t i o n of m i n o r a c t i v i t y on a s p o r a d i c b a s i s .
A g a i n s t a B r i t i s h p r e s e n c e it w a s a r g u e d t h a t i t s o b j e c t i v e s could
o n l y b e a c h i e v e d b y a m a j o r e x e r c i s e of p o w e r w h i c h w e c o u l d n o t
and s h o u l d n o t e x e r c i s e .
It w a s no good saying that we should put
a B r i t i s h r e p r e s e n t a t i v e i n R h o d e s i a i n c h a r g e of d e f e n c e a n d t h e n ,
when R h o d e s i a n t r o o p s w e r e fired on, pulling h i m o u t .
Inevitably,
a B r i t i s h p r e s e n c e would r e s u l t in R h o d e s i a n politics becoming
B r i t i s h p o l i t i c s and we should be i n c r e a s i n g l y involved, with
probable d e t r i m e n t to o u r r e l a t i o n s with Black A f r i c a .
There
c o u l d e v e n b e a r i s k t h a t a B r i t i s h C o m m a n d e r i n C h i e f w o u l d find
h i m s e l f i n c o m m a n d of W h i t e R h o d e s i a n f o r c e s a g a i n s t B l a c k A f r i c a n s
which would be both politically and m i l i t a r i l y u n a c c e p t a b l e .
We
w e r e a l r e a d y on a s l i p p e r y s l o p e in t h a t t h e C a b i n e t w a s p r e p a r e d
t o a d m i t t h a t w e c o u l d n o t m a k e t h e c e s s a t i o n of g u e r i l l a a c t i v i t y an
a b s o l u t e c o n d i t i o n of a B r i t i s h p r e s e n c e .
T H E P R I M E M I N I S T E R , s u m m i n g u p t h e d i s c u s s i o n , s a i d m a n y of
t h e C a b i n e t h a d e a r l i e r b e e n o p p o s e d t o t h e i d e a of a B r i t i s h p r e s e n c e
in t h e i n t e r i m g o v e r n m e n t .
T h e r e w a s however now a large majority
in the Cabinet that felt that, provided we could s e c u r e the right
3
conditions, the r i s k s could be m i n i m i s e d and should be r u n in the
h o p e of a c h i e v i n g a l a s t i n g s e t t l e m e n t .
The Cabinet w e r e
accordingly p r e p a r e d to e n d o r s e the F o r e i g n and C o m m o n w e a l t h
5 e c r e t a r y ' s p r o p o s a l s on t h e l i n e s of p a r a g r a p h s 9 a n d 11 of h i s
m e m o r a n d u m , on t h e c l e a r u n d e r s t a n d i n g t h a t w h a t w a s i n v o l v e d
w a s t h e p r e s e n c e of a n i n d i v i d u a l B r i t i s h r e p r e s e n t a t i v e a n d n o t a
military force.
But, b e f o r e we finally c o m m i t t e d o u r s e l v e s to
t h i s , t h e r e m u s t b e a g r e e m e n t on t h e s t r u c t u r e of t h e i n t e r i m
g o v e r n m e n t a n d t h e c o n d i t i o n s l a i d d o w n in p a r a g r a p h 7 of t h e
m e m o r a n d u m m u s t be fulfilled.
Ja p a r t i c u l a r w e s h o u l d m a k e i t
c l e a r b o t h i n G e n e v a and t o t h e A f r i c a n P r e s i d e n t s t h a t if t h e
i n t e r i m a d m i n i s t r a t i o n b r o k e down the B r i t i s h r e p r e s e n t a t i v e
w o u l d b e w i t h d r a w n a n d t h a t t h e s o l e p u r p o s e of t h e B r i t i s h p r e s e n c e
w a s t o a s s i s t i n t h e m o v e m e n t t o w a r d s i n d e p e n d e n c e b y M a r c h 1978.
We s h o u l d s t a t e p u b l i c l y t h a t t h i s w a s why w e w e r e p r e p a r e d t o
accept a r o l e in R h o d e s i a during the i n t e r i m p e r i o d .
The Foreign
and C o m m o n w e a l t h S e c r e t a r y s h o u l d c o n s i d e r t h e b e s t t a c t i c a l
m e t h o d of p r e s e n t i n g o u r o f f e r a n d s e c u r i n g a c c e p t a n c e of t h e
conditions under which it was m a d e .
The Cabinet ­
1.
T o o k n o t e , w i t h a p p r o v a l , of t h e P r i m e
M i n i s t e r ' s s u m m i n g u p of t h e i r d i s c u s s i o n ,
2.
Invited the F o r e i g n and Commonwealth
Secretary to proceed accordingly.
N^QTIATIONS
&t ,.
6
c,
2,
The Cabinet d i s c u s s e d the negotiations with the International
Monetary Fund.
T h e i r discussion and the conclusions r e a c h e d a r e
recorded separately,
*en eC
C a b i n e t Office
23 N o v e m b e r 1976
4
THIS
D O C U M E N T I S T H E PROPERTY O F HER BRITANNIC M A J E S T V S
GOVERNMENT
The circulation of this paper has been strictly, limited.
It is issued for the personal use o f . . & & . & ^ . . J . . £ / & n i t
T O P SECRET
Copy
No...A.L
CABINET
LIMITED CIRCULATION ANNEX
CM(76) 33rd C o n c l u s i o n s , Minute 2
T u e s d a y 2 3 N o v e m b e r 1976 a t 1 0 . 0 0 a m
SATIATIONS
/**ious
fencer
c J ) 32nd
fusions,
3
7 6
T h e C a b i n e t b a d b e f o r e t h e m a m e m o r a n d u m b y t h e C h a n c e l l o r of
t h e E x c h e q u e r ( C P ( 7 6 ) 111) a b o u t t h e n e g o t i a t i o n s w i t h t h e
I n t e r n a t i o n a l M o n e t a r y F u n d (IMF) o v e r a p o s s i b l e d r a w i n g on t h e
F u n d b y the United Kingdom,
THE PRIME MINISTER said that he m u s t e m p h a s i s e to his
c o l l e a g u e s t h e n e e d f o r a b s o l u t e s e c r e c y of t h e d i s c u s s i o n s t h e y
w e r e a b o u t t o h a v e ; a n y l e a k s of v i e w s e x p r e s s e d i n C a b i n e t c o u l d
only b e harmful to the country and to the Government.
The Cabinet
faced a v e r y s e r i o u s question: did they think that they could and
should afford to pay the p r i c e the IMF w e r e asking for a loan; and
if n o t , w h a t w e r e t h e c o n s e q u e n c e s ? If t h e y f a i l e d t o r e a c h a g r e e m e n t
w i t h t h e I M F , t h e G o v e r n m e n t f a c e d t h e r i s k of t h e e x c h a n g e r a t e
f a l l i n g o u t of c o n t r o l , w i t h r e s e r v e s t o t a l l y i n a d e q u a t e f o r t h e
p u r p o s e B of i n t e r v e n t i o n , w i t h i m p l i c a t i o n s f o r p r i c e s a n d u n e m p l o y ­
m e n t which could b r e a k the p a r t n e r s h i p between the Government a n d
the unions.
O n t h e o t h e r h a n d , if a n a g r e e m e n t w e r e r e a c h e d o n t h e
lines a t p r e s e n t envisaged by the I M F , this too could s t r a i n the
G o v e r n m e n t ' s r e l a t i o n s h i p with the t r a d e union m o v e m e n t beyond
b r e a k i n g point a n d put the Social C o n t r a c t a t r i s k .
The situation
w a s not made e a s i e r b y the need to take v e r y e a r l y d e c i s i o n s .
He
e n j o i n e d u p o n h i s c o l l e a g u e s m a t if t h e y r e j e c t e d o n e c o u r s e t h e y
m u s t b e r e a d y to c o n s i d e r what the a l t e r n a t i v e might b e .
THE C H A N C E L L O R O F T H E E X C H E Q U E R s a i d t h a t the s i t u a t i o n w a s
v e r y d i f f i c u l t , b u t i t w o u l d b e w o r s e if t h e n e g o t i a t i o n s b r o k e d o w n .
The IMF supported the Government s broad economic strategy; but
the difficulty w a s that the G o v e r n m e n t would b e unable t o finance
e i t h e r the i n t e r n a l o r e x t e r n a l deficit over the next y e a r without the
loan.
T h e p r e s e n t p o s i t i o n with the F u n d w a s a s follows.
In the
v i e w of t h e F i m d staff, t h e o b j e c t i v e s h o u l d b e t o g e t t h e p u b l i c Bee t o r
b o r r o w i n g r e q u i r e m e n t (PSBR) down to £ 6 ^ billion i n 1978-79, which
F o r 1977-78
w o u l d m e a n a c u t of £ 3 b i l l i o n o n t h e p r e s e n t f o r e c a s t .
the p r e s e n t f o r e c a s t w a s £ 1 0 £ billion a n d the I M F would like t o s e e
1
this reduced to something lower than £9 billion, although he
b e l i e v e d that it would p r o b a b l y b e p o s s i b l e through negotiation to
get them to accept £9 billion.
T h a t m e a n t a t o t a l r e d u c t i o n of
£ l £ b i l l i o n ; a n d if £ ^ b i l l i o n c o u l d b e o b t a i n e d b y t h e s a l e of s o m e
B r i t i s h P e t r o l e u m s h a r e s , this would leave a f u r t h e r £ 1 billion to
find.
He thought that the I M F would want this to be obtained a l m o s t
wholly by public e x p e n d i t u r e r e d u c t i o n s .
The further reduction in
1978*79 would be a s s i s t e d b y the fact that the r e d u c t i o n in 1977-78
would l e a d to r e d u c e d d e b t i n t e r e s t p a y m e n t s the following y e a r to
t h e e x t e n t of s o m e £ j b i l l i o n . A f u r t h e r £ ^ b i l l i o n c o u l d b e s e c u r e d
b y a d o p t i o n of h i s p r o p o s a l s f o r c h a n g e s i n t h e p r e s e n t e x p o r t c r e d i t
a r r a n g e m e n t s (but t h i s w o u l d r e d u c e t h e P S B R i n 1 9 7 7 - 7 8 o n l y b y
£100 million).
He s h a r e d the F u n d ' s view that the m o r e which
c o u l d b e d o n e i n 1 9 7 7 - 7 8 , s o t h e b e t t e r t h e e f f e c t on c o n f i d e n c e
would b e , the e a s i e r the p o s i t i o n in 1978-79 would b e c o m e , and the
l e s s w o u l d b e t h e r i s k of h a v i n g t o t a k e a f u r t h e r b i t e a t p u b l i c
expenditure.
The p r o p o s a l s w o u l d m e a n t h a t t h e g r o s s d o m e s t i c
p r o d u c t (GDP) would g r o w a t s o m e 1-1^ p e r c e n t in 1977-78, and
3^-4 p e r c e n t in 1978-79.
The lower PSBR would lead to a fall in
i n t e r e s t r a t e s , which would h e l p i n v e s t m e n t .
It w o u l d m e a n the
a d d i t i o n of a b o u t 70, 000 t o u n e m p l o y m e n t a t t h e e n d of 1 9 7 7 - 7 8 ,
over and above the i f million a l r e a d y forecast.
T h e b a l a n c e of
p a y m e n t s would be in s u r p l u s on c u r r e n t a c c o u n t by the second half
of 1 9 7 7 , i n s t e a d of i n 1 9 7 8 a s f o r e c a s t o n p r e s e n t p o l i c i e s .
He
p o i n t e d out t h a t if e v e n t s p r o v e d t h a t t h e T r e a s u r y f o r e c a s t w a s t o o
p e s s i m i s t i c , it would be possible to feed d e m a n d into the economy b y
t a x c u t s i n t h e 1977 B u d g e t ,
In his v i e w the d e s i r a b l e deadline for
a n a n n o u n c e m e n t about the I M F loan would be 7 D e c e m b e r (before
t h e p r e s e n t s t a n d b y h a d t o b e r e p a i d on 9 D e c e m b e r ) , o r a t w o r s t on
15 D e c e m b e r , s o t h a t t h e P a r l i a m e n t a r y D e b a t e c o u l d t a k e p l a c e
before Christmas.
I t w a s t h e r e f o r e a m a t t e r of s o m e u r g e n c y t o
r e a c h a g r e e m e n t with the I M F on the t a r g e t s i z e for the PSBR, and
v e r y b r o a d l y on the e x t e n t to which i t would b e achieved through
taxation or through expenditure adjustments.
He reminded his
c o l l e a g u e s t h a t , if n e g o t i a t i o n s w i t h t h e I M F f a i l e d , t h e r e w a s n o
h o p e of o b t a i n i n g b i l a t e r a l a i d f r o m o t h e r c o u n t r i e s ; w h e r e a s If
a g r e e m e n t w e r e r e a c h e d t h e r e w a s a r e a l p o s s i b i l i t y of g e t t i n g a n
a g r e e m e n t on the s t e r l i n g b a l a n c e s which could be announced
simultaneously.
The a d j u s t m e n t he w a s p r o p o s i n g would be painful
b u t i t w o u l d b e m a d e w i t h t h e full e n d o r s e m e n t of t h e I M F a n d o u r
m a j o r a l l i e s . It could t r a n s f o r m our i n t e r n a t i o n a l position and have
a v e r y i m p o r t a n t effect on d o m e s t i c confidence.
2
THE F O R E I G N AND C O M M O N W E A L T H S E C R E T A R Y said t h a t the
p r o p o s e d r e d u c t i o n i n the P S B R i n 1 9 7 7 - 7 8 c o u l d n o t b e d e f e n d e d o n
any reasonable grounds.
I n t e r m s of r e s o u r c e a l l o c a t i o n t h e r e w a s
c l e a r l y no n e e d to r e l e a s e f u r t h e r r e s o u r c e s for e x p o r t s whilo
unemployment was so high.
I n t e r m s of t h e f i n a n c i a l a r g u m e n t ­
that the G o v e r n m e n t would b e unable to finance the p r o s p e c t i v e
P S B R - n o o u t s i d e f o r e c a s t of t h e 1 9 7 7 - 7 8 P S B R w a s a s h i g h a s t h a t
of t h e T r e a s u r y , a n d t h e N a t i o n a l I n s t i t u t e £or E c o n o m i c a n d S o c i a l
R e s e a r c h had recently reduced their estimate to £ 8 . 3 billion.
This
e s t i m a t e w o u l d b e p u b l i s h e d a t a b o u t t h e s a m e t i m e a s the a n n o u n c e ­
m e n t of t h e p r o p o s e d m e a s u r e s .
In t e r m s of a c h i e v i n g a s u r p l u s
on t h e b a l a n c e of p a y m e n t s , i t w a s c l e a r t h a t p r e s e n t p o l i c i e s w o u l d
a c h i e v e t h a t s u r p l u s i n 1 9 7 8 , a n d t h e o n l y e f f e c t of t h e I M F p r o p o s a l s
w o u l d b e t o b r i n g t h a t i m p r o v e m e n t f o r w a r d i n t o t h e l a t t e r p a r t of
1977,
In t e r m s of t h e i n d u s t r i a l s t r a t e g y , t h e e f f e c t of t h e l o w e r
i n t e r e s t r a t e s w h i c h w o u l d flow f r o m t h e I M F p r o p o s a l s if i m p l e m e n t e d
would be a s nothing c o m p a r e d with the effect upon productive i n d u s t r y
of t h e i n c r e a s e i n u n e m p l o y m e n t a n d t h e r e d u c t i o n of t h e g r o w t h r a t e
to something not m u c h above z e r o .
I n t e r m s of t h e S o c i a l C o n t r a c t ,
t h e r e w a s a b s o l u t e l y nothing to be said for the p r o p o s a l .
The c a s e
f o r a r e d u c t i o n i n p u b l i c e x p e n d i t u r e h a d n o t b e e n m a d e out; a n d t h e r e
w a s a n i m p r e s s i v e b o d y of o p i n i o n a m o n g e c o n o m i s t s of a l l p o l i t i c a l
s h a d e s a g a i n s t *such a m o v e .
F u r t h e r public expenditure cuts would
have a d i s a s t r o u s effect upon the public s e r v i c e unions, and the
Social C o n t r a c t would c e r t a i n l y b r e a k down a s far a s the public
sector was concerned.
In the P a r l i a m e n t a r y Labour P a r t y
opposition would c o m e not only f r o m the left wing but a l s o f r o m the
Manifesto Group.
On the o t h e r hand he a c c e p t e d that the
G o v e r n m e n t f a c e d t h e q u e s t i o n of m a i n t a i n i n g m a r k e t c o n f i d e n c e ,
and for that r e a s o n a l o n e , e v e n though they might m i n k f u r t h e r
deflationary steps otherwise wrong, it might be n e c e s s a r y to take
some action.
He t h e r e f o r e s u g g e s t e d , a s a n a l t e r n a t i v e to the
C h a n c e l l o r of t h e E x c h e q u e r ^ p r o p o s a l , t h a t t h e G o v e r n m e n t s h o u l d
tell the I M F that they would b e p r e p a r e d to r e d u c e the p r o s p e c t i v e
P S B R i n 1977 - 7 8 t o £ 9 ^ b i l l i o n , i e a c u t of £ 1 b i l l i o n w h i c h w o u l d b e
m a d e u p a s f o l l o w s ; tj b i l l i o n f r o m t h e s a l e of B r i t i s h P e t r o l e u m
s h a r e s ; £ j b i l l i o n f r o m c u t s of a k i n d w h i c h h a d n o e f f e c t on d e m a n d
o r e m p l o y m e n t ; a n d S.\ b i l l i o n f r o m r e a l c u t s i n p u b l i c e x p e n d i t u r e .
T h e I M F s h o u l d b e l e f t i n n o d o u b t t h a t t h e c o n s e q u e n c e s of p r e s s i n g
for m o r e could only be t o d r i v e the G o v e r n m e n t into a p r o t e c t i o n i s t
a t t i t u d e w i t h s e r i o u s i m p l i c a t i o n s f o r t h e f u t u r e of t h e E E C a n d f o r
world trade.
The United K i n g d o m ' 8 w e a k n e s s w a s i n fact its
s t r e n g t h , a s long a s the G o v e r n m e n t k e p t t h e i r n e r v e , s i n c e the IMF
could not afford not to m a k e the l o a n a v a i l a b l e .
I n d i s c u s s i o n t h e r e w a s c o n s i d e r a b l e s u p p o r t f o r t h e p o i n t of v i e w
put forward by the F o r e i g n and Commonwealth S e c r e t a r y .
It w a s
a r g u e d that the G o v e r n m e n t simply could not face publishing a
f o r e c a s t f i g u r e of 1 ^ m i l l i o n f o r u n e m p l o y m e n t a t t h e s a m e t i m e a s
they w e r e announcing m e a s u r e s which would add to, not r e d u c e , that
figure.
T h e r e w o u l d b e n o h o p e of t r a d e u n i o n c o - o p e r a t i o n i n s u c h
3
a situation.
Nor was t h e r e a n y p r o s p e c t that the G o v e r n m e n t could
obta&ft t h e a p p r o v a l of the H o u s e of C o m m o n s f o r t h e C h a n c e l l o r of
the E x c h e q u e r ^ p r o p o s a l s .
In p a r t i c u l a r , the s u g g e s t i o n that the
n e x t u p r a t i n g of s o c i a l s e c u r i t y b e n e f i t s s h o u l d b e r e d u c e d o r
e l i m i n a t e d - a p r o p o s a l which would r e q u i r e l e g i s l a t i o n - would be
q u i t e i m p o s s i b l e t o c a r r y i n t h e H o u s e , s a v e p e r h a p s a s p a r t of s o m e
t o t a l l y n e w p o l i c y s u c h a s a 12 m o n t h s f r e e z e on w a g e s a n d p r i c e s .
T h e r e w a s no e c o n o m i c g r o u n d on which s u c h a d e f l a t i o n a r y change
of p o l i c y c o u l d b e j u s t i f i e d a n d i t w o u l d s p l i t t h e L a b o u r P a r t y a n d
d e s t r o y the G o v e r n m e n f s r e l a t i o n s h i p with the t r a d e unions.
The
G o v e r n m e n t needed m o r e t i m e in o r d e r to c o n s u l t the T r a d e s Union
C o n g r e s s ( T U C ) , t h e N a t i o n a l E x e c u t i v e C o m m i t t e e of t h e L a b o u r
P a r t y a n d the P a r l i a m e n t a r y L a b o u r P a r t y .
To a g r e e to w h a t the
I M F h a d p r o p o s e d , if C a b i n e t d i d n o t b e l i e v e t h a t p r e s c r i p t i o n t o b e
r i g h t , w o u l d b e a b e t r a y a l of t h e n a t i o n a l i n t e r e s t a n d w o u l d d a m a g e
national confidence.
If t h e G o v e r n m e n t b e l i e v e d t h e i r p r e s e n t
p o l i c i e s w e r e r i g h t , t h e y s h o u l d s a y s o a n d m a k e i t c l e a r t h a t , if
other c o u n t r i e s w e r e not p r e p a r e d to help, then the United Kingdom
w o u l d b e r e a d y t o d e f e n d h e r s e l f , if n e e d b v b y a d o p t i n g a n a l t e r n a t i v e
strategy involving i m p o r t controls.
Nevertheless, there was a
b r o a d m e a s u r e of a g r e e m e n t t h a t i t w a s n e c e s s a r y f o r the U n i t e d
K i n g d o m t o g e t t h e l o a n a n d f o r t h i s r e a s o n i t w a s e s s e n t i a l t h a t the
G o v e r n m e n t should go b a c k to the I M F to s e e k to negotiate m o r e
acceptable t e r m s .
At the s a m e t i m e the P r i m e Minister should
p e r h a p s t a k e t h e m a t t e r u p w i t h t h e H e a d s of friendly g o v e r n m e n t s ,
to i m p r e s s upon t h e m the s e r i o u s n e s s with which the Cabinet viewed
the IMF position, and to s o l i c i t a n y h e l p they could offer.
Against this it was questioned whether there was any viable a l t e r n a ­
tive to the C h a n c e l l o r ^ p r o p o s a l s .
F u r t h e r m o r e it was argued
that, quite a p a r t f r o m the I M F t e r m s , s o m e r e d u c t i o n in the P S B R
w a s e s s e n t i a l a n d t h a t i t w o u l d b e b e t t e r t o g o f o r a f i g u r e of
SLBj b i l l i o n i n o r d e r t o o b t a i n t h e m a x i m u m a d v a n t a g e f r o m i t .
It
h a d t o b e r e m e m b e r e d t h a t i t w a s not only the I M F w h i c h had to b e
p e r s u a d e d to accept s o m e l e s s d r a s t i c figure; t h e r e was a l s o the
q u e s t i o n of m a r k e t o p i n i o n .
Unless the a g r e e m e n t r e a c h e d was
o n e w h i c h c a r r i e d c o n v i c t i o n w i t h t h e m a r k e t s , i t w o u l d b e of n o
use.
E c o n o m i c policy had for y e a r s b e e n m i s t a k e n b e c a u s e it had
placed too g r e a t an e m p h a s i s on a r g u m e n t s about r e s o u r c e s .
The
t r u t h w a s t h a t t h e G o v e r n m e n t w a s f a c i n g t h e q u e s t i o n of i t s own
survival.
If a P S B R of £85 b i l l i o n i n 1 9 7 7 - 7 8 w a s r i g h t , t h e n t h e
G o v e r n m e n t s h o u l d s e t o u t t o g e t t h e s u p p o r t f o r i t of t h e
P a r l i a m e n t a r y L a b o u r P a r t y ; failing t h a t it should get the p r o p o s a l s
t h r o u g h w i t h t h e s u p p o r t of o t h e r p a r t i e s ; o r i t s h o u l d m a k e w a y for
another Government.
4
T H E PRIME MINISTER, s u m m i n g up the d i s c u s s i o n , s a i d t h a t the
G o v e r n m e n t had always to k e e p i n mind both d o m e s t i c opinion ­
w i t h o u t t h e s u p p o r t of w h i c h t h e G o v e r n m e n t c o u l d n o t c a r r y i t s
p o l i c i e s t h r o u g h - a n d o v e r s e a s o p i n i o n , s i n c e t h e c o n f i d e n c e of t h e
m a r k e t s w a s a l s o of c a r d i n a l i m p o r t a n c e .
T h e d e g r e e of i n t e r ­
dependence in the developed w o r l d was now s u c h that it w a s e s s e n t i a l
t o h a v e a t l e a s t t h e a c q u i e s c e n c e of the U n i t e d K i n g d o m " s p a r t n e r s i n
any action which she might take.
Defirtnce w o u l d n o t d o .
It w a s a
m a t t e r of j u d g m e n t , n o t of k n o w l e d g e , h o w f a r t h e p o s s i b i l i t i e s w h i c h
they had b e e n d i s c u s s i n g would in fact satisfy e i t h e r o v e r s e a s
g o v e r n m e n t s o r m a r k e t o p i n i o n : a n d if the I M F w e r e p e r s u a d e d t o
m o d i f y t h e i r t e r m s t o o f a r a s a r e s u l t of p o l i t i c a l p r e s s u r e t h e
o u t c o m e would not n e c e s s a r i l y satisfy the m a r k e t s .
Reference had
b e e n m a d e t o t h e p o s s i b i l i t y of a n a l t e r n a t i v e s t r a t e g y of i m p o r t
c o n t r o l s ; b u t it had to be r e m e m b e r e d t h a t s u c h a s t r a t e g y would
a l s o b e difficult to c a r r y politically and would in a n y c a s e take
twelve m o n t h s to work during which time we would have to continue
to finance the deficit.
H e did not think the Cabinet could r e a c h a n y
final conclusion that day. T h e r e was w i d e s p r e a d a g r e e m e n t that the
G o v e r n m e n t m u s t have the l o a n f r o m the I M F , and he had r e c e i v e d
i n d i c a t i o n s f r o m P r e s i d e n t F o r d a n d o t h e r s t h a t , if a g r e e m e n t w e r e
r e a c h e d with the I M F , s o m e a r r a n g e m e n t over the sterling balances
could b e a g r e e d quickly in o r d e r to be announced simultaneously.
This was an important advantage.
The C h a n c e l l o r d e s e r v e d c r e d i t
for the p r o g r e s s a l r e a d y m a d e in negotiations with the I M F .
N e v e r t h e l e s s m a n y of t h e C a b i n e t a t p r e s e n t f e l t t h a t t h e s c a l e of
the public expenditure cuts a t p r e s e n t proposed was too g r e a t to
accept.
B o t h h e a n d t h e C h a n c e l l o r of t h e E x c h e q u e r w o u l d t h e r e f o r e
t a l k f u r t h e r t o t h e l e a d e r of t h e I M F m i s s i o n w i t h a v i e w t o g e t t i n g
a g r e e m e n t on a P S B R i n 1 9 7 7 - 7 8 of £ 9 j b i l l i o n , a n d a t t h e s a m e t i m e
he would s e e k to r e i n f o r c e the United K i n g d o m ' s position by sending
m e s s a g e s direct tb^Presldent F o r d and Chancellor Schmidt asking
t h e m t o b^ing^pre^a a u r e t o b e a r o n t h e I M F .
The Cabinet could then
c o n s i d e r the m a t t e r further a t t h e i r meeting on T h u r s d a y w h e n he
a n d t h e C h a n c e l l o r of t h e E x c h e q u e r w o u l d h o p e t o m a k e a j o i n t
r e c o m m e n d a t i o n to t h e m .
It would h o w e v e r then be e s s e n t i a l to
r e a c h a c o n c l u s i o n on t h e b r o a d s h a p e of a n a g r e e m e n t w i t h t h e I M F ,
including the question w h e t h e r that a g r e e m e n t would c a r r y conviction
i n t h e m a r k e t s a n d b e c a p a b l e of g a i n i n g t h e s u p p o r t of t h e P a r t y .
H e w a s s e e i n g M r L e n M u r r a y of t h e T U C thfct a f t e r n o o n , a n d w o u l d
mention the situation to h i m in a suitably d i s c r e e t m a n n e r .
All that
should b e said to the P r e s s w a s that p r o g r e s s w a s being m a d e .
The Cabinet T o o k n o t e , w i t h a p p r o v a l , of t h e P r i m e M i n i s t e r ' a
s u m m i n g u p of t h e i r d i s c u s s i o n .
C a b i n e t Office
24 N o v e m b e r 1976