Foreign Relations of the United States: Diplomatic Papers, 1943, The British Commonwealth, Eastern Europe, the Far East, Volume III

023.1/8–1858

The British Chancellor of the Exchequer (Wood) to the Secretary of the Treasury (Morgenthau)¹⁴

[London,] 3 September 1943.

Dear Mr. Morgenthau: In my message to you of the 23rd August¹⁵ I said that I would give close personal attention to the aide-mémoire on Reciprocal Aid which our Embassy received on the 18th August and would write to you about it. I am now taking advantage of Sir David Waley’s return to Washington to send you this personal letter as it seemed to me best that I should acquaint you myself with the position as I see it. In doing so, I know I can count on the ready understanding with which you have approached the problems of my country in the past.

I should first tell you that my Government have now given instructions for the reply to the State Department on the aide-mémoire which the Embassy received from them. I think it will be found convenient that our reply should be given orally in the first place; discussions as we both know often prevent misunderstandings. Moreover the representatives of our Departments in Washington will then be competent to settle the administrative procedure for the new arrangements and thus to save time in bringing them into effect. Afterwards, if it suits you, our agreement might be appropriately recorded in an exchange of notes which could be published for the information of our peoples.

When I learned at the beginning of June that you had in mind proposing that raw materials should be given as Reciprocal Aid, I viewed the idea with immediate sympathy. It was a natural development of the pooling of resources between our countries, which is illustrated by the Lend-Lease system, and on behalf of the United Kingdom and the Colonies, I obtained the concurrence of my colleagues to the general principle underlying your proposal.

The question of our gold and dollar balances, which I know has been causing you some concern and which I had been hoping to discuss with Sir Frederick Phillips, seems to me a separate question and I can perhaps refer to it more conveniently later in this letter.

As regards the proposals for raw materials, the Governments of Australia and New Zealand have their own Lend-Lease Agreements with the United States Government, and the Union of South Africa is negotiating such an Agreement. While the Government of India have no Agreement, they are giving Reciprocal Aid, they have direct relations on Lend-Lease with the United States Administration and they are, as you know, fiscally independent. The position is therefore that all these Governments will expect to be approached direct on the programme as it affects each one of them and to give their own answer. When the proposal was specifically made to us at the end of June, we naturally told the Dominions and India of our own policy in regard to it. We are, of course, also keeping them informed of the subsequent developments and, while you will appreciate that I cannot speak for them, I am not unhopeful of the attitude which they will take up.

When we received the provisional list of raw materials¹⁶ I assumed that this was the development of the more tentative suggestions which Dr. White had made to Sir Frederick Phillips at the beginning of June. But we did not regard the list as being more than a good illustration of the scale of the programme contemplated, and I certainly agree with your view that the mutual aid system should be kept flexible and ready to meet changed needs. We are therefore ready to regard our offer as elastic and covering all the procurements by the United States Government of essential requirements for war needs of foodstuffs and raw materials, in so far as they can be supplied from the United Kingdom and the Colonies. Some precision in the programme is necessary for smooth working, but this can no doubt be achieved in the same way as in the case of Lend-Lease, through the submission to us of programmes and requisitions which may vary from time to time and which, I can assure you, we will examine in the same way and with the same desire to help as the Lend-Lease Administration have always shown in dealing with our requirements of United States resources.

As regards the date of the 1st October. This was only suggested by us to give time for the arrangements which would be necessary for the switch-over from direct procurement by the United States Government to procurement by us. It was not our intention that you should complete all your contracts outstanding on that date. We are perfectly ready to make such arrangements as will permit supplies under Reciprocal Aid to commence at the earliest possible date.

On these lines, which will be discussed with the Administration by Sir David Waley and his colleagues, I should expect that a satisfactory arrangement between our two Governments could speedily be made.

It seems to me, however, that the proposal in the aide-mémoire that financial reimbursement should be made to the United States Government, retrospectively to the 1st July, for all deliveries covered by the new arrangements which were made between the 1st July and the date on which the new arrangements come into force, has really no place in any scheme for the mutual free exchange of raw materials on Lend-Lease lines. I would suggest that this raises rather the question of the size of our gold and dollar balances, to which I referred earlier in this letter.

Here I should be doing less than justice to the closeness of our relations if I did not write plainly. I understand that Congress takes an interest in these balances and that their apparent growth might give rise to criticism about our receipt of Lend-Lease on the present scale. I suggest that such a criticism may well be due to lack of appreciation of the much greater liabilities against which these reserves are held, of the inexorable growth of the liabilities which is much more rapid than that of the reserves, and of the war circumstances out of which this position has directly developed.

In the North American Continent our financial problem has been largely solved by the generosity of the United States Government and of the Dominion of Canada. In many other parts of the world, however, we have to provide the finance for the war. We can only do this in the main by borrowing local currencies against a credit in sterling to the respective countries, and thus we are incurring unfunded indebtedness on a vast scale. We could not continue this policy indefinitely without having some proportion of liquid assets out of which the more pressing part of the liquid indebtedness could be met if called for from time to time. But our liabilities, which are liabilities of the United Kingdom alone, are several times as great as our reserves, and the disproportion between our reserves and liabilities is also reflected in their growth.

Moreover, the gold and dollar balances, which are shown as United Kingdom balances, are not in fact our reserves alone; they are the pooled reserves of the sterling area. As you know, the members of the sterling area turn over to us their surplus dollar earnings in exchange for sterling credit. But this carries with it an implied obligation on our part to turn back, so far as we can, the sterling into dollars when other parts of the sterling area need them.

Facts such as these can surely seem irrelevent only to those whose attention is concentrated mainly on the balance between the value of Lend-Lease and Reciprocal Aid. But that is not the whole story. We are asking and receiving Lend-Lease aid on the present scale because our whole resources, physical and financial, are already devoted as far as they possibly can be to the waging of the war and to its equipment. Our whole war effort, which in a common and total war seems to me the only significant concept, will I think you will agree bear comparison with that of any of our Allies; and on the criterion of equality of sacrifice, in the words of your President, we have done our full share.

I cannot honestly believe that once the facts are fully told and the background fully explained any misunderstanding of our position should continue.

You may remember that towards the end of January Sir Frederick Phillips delivered to you a message from me on a proposal that Lend-Lease might be restricted if our reserves rose above a certain figure.¹⁷ It was, I think, on the 15th February that he gave a note to the Treasury briefly explaining the position. It is clear to me that possibly because the discussions on the subject so far have been incomplete, we have not been successful in demonstrating how we view this matter or the principles involved in it. I have therefore given instructions that the particulars in the note which Sir Frederick Phillips gave to the Treasury in February should be brought up to date, and I am arranging that a fuller confidential statement should be delivered to you for your consideration, and for discussions between the representatives of the United States Administration and our representatives in Washington.¹⁸

When you have studied this statement I am sure you will understand me when I say that my Government could not regard it as reasonable that a limit should be placed to our gold and dollar holdings which pays no regard to our liabilities and their growth, or to the war circumstances which have brought about this position, particularly the fact that we have to finance practically the whole of the war expenditure in the Middle East and India. Indeed I feel entitled to hope that when the whole position is discussed and is clear, we may count, while the war circumstances remain as they are at present, upon the continuance of Lend-Lease on its present lines.

Our external financial position naturally gives me ground for concern and in my Budget Speech on the 12th April¹⁹ I outlined to Parliament the present position. This statement aroused wide interest and Parliament is paying increasing attention to the whole subject; Parliament is aware, for example, that our gold and dollar balances are held against very much larger liabilities which are rapidly increasing. We recognise that it is necessary that we should take steps of various kinds and at different times to discharge some of these liabilities, through the use of our gold and dollar balances. I shall welcome a full discussion on the problem and our representatives have instructions to disclose the whole situation to the United States Administration. I cannot say here and now what we shall find it best to do, but I shall keep you informed of the lines on which we are proceeding.

As regards the publication of Reciprocal Aid figures, I think that it is necessary to publish a White Paper here as soon after the reassembly of Parliament in the latter part of September as is found convenient. Parliament and our people are entitled to know of the magnitude of our effort and of the burden it entails. A copy of the White Paper in its present form has been given confidentially to the United States Treasury and to other representatives of the United States Administration and I shall be glad to consider any suggestions you or others may make on it. Then when we have it in the final form in which I think it should be presented to Parliament, I will arrange that you are given an opportunity of seeing it before it is published.

I have tried in this letter to give you a broad outline of our position, as I see it, without troubling you with unnecessary detail. Even so the letter has perhaps become overlong. Circumstances, however, unfortunately make it impossible for us to sit down together and talk over this important subject. I am particularly anxious that you, who have so clearly understood our financial position in the past and gave us your help at a difficult time, should have a full story and should have it direct and in a personal way from me.

With all good wishes

Yours Sincerely

Kingsley Wood

14. Copy obtained from the Treasury Department. Receipt of this letter was acknowledged by Mr. Morgenthau on September 20, 1943, in a letter to Sir Kingsley Wood transmitted by Sir David Waley.
15. No copy found in Department files.
16. Not printed.
17. See Sir Frederick Phillips’ letter of January 28 to Mr. Acheson, p. 52.
18. For a copy of this statement, see memorandum by the British Treasury, September 14, p. 82.
19. Parliamentary Debates, House of Commons, 5th series, vol. 388, col. 938.