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

841.5151/2005

Memorandum of Conversation, by Mr. Eugene V. Rostow, Assistant to the Assistant Secretary of State (Acheson)

[Washington,] December 16, 1943.

Participants:	Secretary Morgenthau and Mr. Harry D. White of the Treasury Department;
	Mr. Stettinius, Mr. Acheson and Mr. Rostow of the State Department;
	Mr. Crowley, Mr. Currie, Mr. Oscar Cox and Mr. Coe of the Foreign Economic Administration.

The meeting was held in Secretary Morgenthau’s office at his request to consider a memorandum (attached) which had been prepared by the Treasury and had been agreed to by Mr. Crowley. It had not been previously submitted for our consideration. Secretary Morgenthau stated that he was concerned over the failure to carry out certain directives of the President contained in the memorandum of January 1, 1943, on the relationship between lend-lease policy and the financial resources of our Allies, and particularly with reference to Great Britain. He said that he had been “kicked around” for eleven months on this subject and was anxious for decisive action. He had called the meeting because he was desirous of reaching agreement if possible with all the parties concerned before proposing a policy to the President. He did not wish to be unreasonable, and would be glad to afford us time for the consideration of the memorandum. He would cheerfully agree to revise the analytical statements in the beginning of the memorandum. But he warned us that he would be very difficult to persuade if any changes in the recommendations were proposed.

Discussion was had first as to the factual correctness of paragraph 3, in so far as the Lend-Lease Administration was concerned. Mr. Stettinius pointed out that he had taken the initiative more than a year ago, as Lend-Lease Administrator, in seeking to obtain a definitive clarification of lend-lease policy in relation to British and other Allied dollar assets. It was agreed that appropriate revisions would be made in this section of the memorandum to reflect the facts more accurately.

Secretary Morgenthau then stated his views in the following terms: As Administration spokesman at the time of the original hearings on the passage of the Lend-Lease Bill in January, 1941, he had taken a position in Congress which he interpreted as a moral commitment to the effect that in so far as the British could pay for American supplies, they would do so.⁶⁵ He had never changed his testimony, and felt that a continuation of the present trend in British finances would be in some sense a betrayal of his pledge. He was therefore anxious to see to it that the policy of the January 1 directive was strictly carried out, and the British gold and dollar position reduced to a billion dollars.

Mr. Stettinius requested Mr. Acheson to comment. Mr. Acheson said that it was of course well understood that Secretary Morgenthau had taken the lead during 1940 and 1941 to arrange for all possible aid to the British and French Missions, and that he had taken considerable initiative with reference to the Lend-Lease Act. Without going into the content of Secretary Morgenthau’s testimony in January, 1941, in detail, its significance had to be considered in the light of other aspects of the legislative history of the Act. Secretary Morgenthau testified almost a year before Pearl Harbor. Our entry into the war, and other developments in the gradual evolution of Lend-Lease policy had worked great changes in our lend-lease program. The President in his quarterly reports to the Congress had made many of these changes clear. The Lend-Lease Agreements with countries receiving Lend-Lease aid set forth principles at variance with Secretary Morgenthau’s interpretation of his testimony of January, 1941. These matters were specifically considered and approved by the Committees of Congress at the time the Act was renewed in January and February of 1943, and on the four separate occasions when further appropriations were made for lend-lease purposes.

Now that we are in the war, lend-lease is not regarded as the aid of a neutral to a friendly belligerent. It is an integral and indistinguishable part of our own war effort. It makes no difference to the war as a whole that we send tanks abroad which are manned by Allied soldiers, rather than by our own soldiers. Lend-lease and lend-lease in reverse, it has been emphasized over and over again by the President and by the Committees of Congress, is a device for pooling Allied resources in the war. We no longer think of our lend-lease exports as a part of the British or Soviet war effort. They are a portion of the share of our war production which we devote to the war. The Congress has approved the idea that the costs of the war will be fairly distributed if we pay whatever expenses are necessarily incurred in dollars, and the British pay whatever expenses are necessarily incurred in pounds. The British are devoting to the war as large a share of their national income as we are, if not a larger one. Their tax burden and war costs, in relation to population and national income, are as great or greater than our own. For us to request the British, therefore, to pay in dollars for a part of American production used in the war is in effect to shift to the British part of the financial costs which are properly ours. It is incorrect to think of lend-lease, as it has evolved with Congressional approval, as a device for shifting to the American taxpayer part of the British or Russian financial burden of war.

Mr. Crowley sought to define the issues between Mr. Acheson and Mr. Stettinius, on the one hand, and Secretary Morgenthau on the other. It was made clear that Mr. Acheson favored a reconsideration of the directive of January 1, 1943, on the ground that circumstances had substantially changed since that time. He pointed out that the recommendation of January 1, 1943, was “that in the light of present circumstances”, lend-lease be regulated so as to keep the British dollar position between $600 million and $1 billion. He said that the great rise in British non-dollar obligations during the year, associated with British war expenditures in the area between Suez and Singapore, constituted a change in the circumstances with reference to which the original memorandum was agreed upon. He said that the ceiling policy had proved to be an unnecessary and serious affront to the British, and had outlived its usefulness. Secretary Morgenthau agreed that the ceiling policy would seriously embarrass the British Treasury in its war finances. He regretted the result, he said, but felt it was inevitable in view of his commitment to Congress. Mr. Acheson stated that he favored a changed directive which would eliminate all reference to a ceiling, and would permit the ad hoc solution of lend-lease problems which seemed politically or otherwise undesirable on their individual merits. He pointed out that most of the cases listed in paragraph 1 of the Treasury recommendations were already being satisfactorily dealt with. It was not correct to conclude that the President’s directive had not been enforced. If the British position was accepted on the $365 million in gold held for specific gold obligations, the British position was between $1.2 billion and $1.3 billion, a figure which would probably be reduced as a consequence of the expansion of British reverse lend-lease for raw materials.

It was agreed that the State Department would consider the Treasury memorandum and prepare its views for a definite submission at a further meeting to be held in Secretary Morgenthau’s office on next Tuesday afternoon, December 21.⁶⁶

[Annex]

Draft Memorandum for President Roosevelt⁶⁷

[Washington,] December 16, 1943.

1. In January 1943, you approved the following recommendation of a committee consisting of representatives of the Departments of State, Treasury and War, the Office of Lend-Lease Administration and the Board of Economic Warfare.

“It is recommended in the light of present circumstances, that the United Kingdom’s gold and dollar balances should not be permitted to be less than about $600 million nor above about $1 billion.”

2. Notwithstanding the directive, the British Government’s liquid dollar exchange assets have continued to rise and are now over $1,650 million, or $1,300 million more than at the time the Lend-Lease Bill was presented to Congress in January 1941.

In addition to the gold and dollar holdings of the British Government, residents of the United Kingdom hold $320 million of private dollar balances and about $1,150 million of long-term investments in the United States. Of the latter assets, $500 million are pledged with the E.F.C.⁶⁸ against the $350 million loan.

3. Within a few months after your directive was issued, a division of opinion developed within the Committee concerning its proper implementation. In these discussions, the Treasury and the Board of Economic Warfare, with the support of the War Department, urged its literal interpretation; the State Department and Lend-Lease, on the other hand, favored a more liberal interpretation.

During the ensuing months, the Treasury and the Board of Economic Warfare pressed for a reduction in civilian lend-lease as a means of implementing your directive, but the State Department and Lend-Lease Administration were reluctant to recommend such a step in the absence of an exhaustive reexamination of our policy of financial assistance to the British and of Britain’s over-all international financial position. It was finally agreed to request the British for strategic and other materials as reciprocal aid, estimated likely to amount to $200–$300 million during the ensuing year. This proposal was immediately placed before the British. Several months elapsed before the latter agreed to the proposal in principle and even then only after considerable prodding. Several more months have been spent in an endeavor to arrive at methods of implementing the proposal. We are disappointed with the progress made to date and we think there is little reason at present to be hopeful that this device will in effect yield anything like the amount needed to carry out your directive.

4. The British Government has strongly objected to a policy which prohibits an increase in their gold and dollar assets. They emphasize that the rise in their holdings of these assets—which may be expected to continue at an annual rate of at least a half billion dollars unless steps are taken to interrupt this trend—is only a fraction of the increase in their short-term indebtedness to overseas countries other than the United States.

They assert first that $365 million of these liabilities represent a specific claim against an equivalent amount of dollars and that that sum must be subtracted from their total holdings in order to obtain the correct figure of their available gold and dollar reserve.

Secondly, they claim that their short-term sterling liabilities to overseas countries are five times the amount of their gold and dollar holdings and that these liabilities are increasing at a rate of $2.5 billion a year.

The British claim that they should be permitted to accumulate gold and dollars as a necessary reserve against these growing liabilities. They assert that the continued accumulation of gold and dollars is a prerequisite to the continuation of the policy by which they have managed to finance their war expenditures in India, the Near East and other overseas areas.

Finally, the British fear that their mounting liabilities to overseas countries will place them in a very vulnerable position after the war and jeopardize their chances of a speedy post-war recovery.

5. There is merit, of course, in the British position but we feel that neither Britain’s international financial position outside the United States nor its post-war needs were among the considerations which prompted Congress to pass the Lend-Lease Act. In our opinion, Lend-Lease aid to Britain was instituted in order to enable her to obtain those goods and services essential to the prosecution of the war for the purchase of which she lacked the necessary dollars, and that therefore to administer the Act in such a way as to help underwrite Britain’s short-term indebtedness to other countries or to improve her post-war financial position is not in accord with Congressional intent. The British concede that this narrower purpose may have been the original objective, but they believe that our entry into the war alters the situation.

It is our view, however, that if we are to administer the Lend-Lease Act so as to provide Britain with more dollars than are required for the purchase of essential war goods and services, Congress should be informed and given an opportunity to indicate its attitude toward such a change in policy.

6. Our interpretation of Congressional intent seems to be supported by the report of the Truman Committee entitled “Outlines of Problems of Conversion from War Production” and submitted to Congress on November 5, 1943.⁶⁹ To quote from page 13 of this document:

“In the latter connection, we should never forget that lend-lease was originally authorized by the Congress, solely because the English and others whom we desired to assist did not have sufficient American exchange to purchase materials needed by them. Lend-Lease was never intended as a device to shift a portion of their war costs to us, but only as a realistic recognition that they did not have the means with which to pay for materials they needed.

“Before authorizing lend-lease, the Congress expressly requested and received assurances that lend-lease assistance would be extended only where the recipient was fully utilizing all of its own resources.”⁷⁰

Recommendations

Eleven months have passed since you signed the directive to keep the British balances between $600 million and $1,000 million. During this period we have attempted to develop a program designed to keep these balances from rising above that ceiling. To date we have not been successful in securing the necessary cooperation of the British Government for the effective implemention of this objective.

In our opinion, nothing has happened during the past year to warrant a change in the policy laid down in your directive. The considerations which prompted the Committee’s recommendation last January appear to us to be as valid today as they were then.

Therefore, unless you indicate to the contrary, we propose to take the following steps to reduce the British balances to within the range indicated in your directive.

1. Discontinue certain transactions which would never have been undertaken except for Britain’s acute shortage of dollars, and which experience has shown are opposed by considerable sections of public opinion. Among the transactions which it is proposed to cut are: (a) long-term capital installations; (b) off-shore purchases such as Iceland fish, Caribbean sugar, and oil from outside the U.S.; (c) civilian goods to the Middle East; (d) all goods to South Africa; (e) small requisitions, and (f) certain other controversial civilian items.

2. Since these measures may be insufficient to bring Britain’s balances down to the agreed upon maximum of $1 billion, it is further proposed to have the British pay for as large a proportion of civilian goods obtained in this country as is necessary to help reduce the British Government’s gold and dollar holdings to, and keep them at, about $1 billion.

[Agreement concerning the acquisition by the United States of raw materials as reciprocal aid from the United Kingdom, Southern Rhodesia, and the Colonies was effected by an exchange of notes on December 17 and 27, 1943, between Lauchlin Currie, Deputy Foreign Economic Administrator, and Robert H. Brand of the British Supply Council in North America. The dates set for application of the new agreement were July 1, 1943, for raw materials procured from official sources, and November 11, 1943, for such materials previously purchased under private contracts. (841.24/2169½)]

65. See Lend-Lease Bill: Hearings Before the House Committee on Foreign Affairs, 77th Cong., 1st sess., on H.R. 1776, pp. 55, 61, 63–65, and 69; and To Promote the Defense of the United States: Hearings Before the Senate Committee on Foreign Relations, 77th Cong., 1st sess., on S. 275, pp. 21, 25, 26, 46, 47, 48, 66, and 70.
66. No record of such a meeting has been found in Department files; inquiry at the Treasury Department has indicated no record of a meeting on this date in the Treasury Department files.
67. Prepared by Mr. Harry Dexter White, Assistant to the Secretary of the Treasury.
68. Reconstruction Finance Corporation.
69. Senate Report No. 10, pt. 12, 78th Cong., 1st sess. Senator Harry S. Truman was Chairman of the Senate Special Committee Investigating the National Defense Program, usually referred to as the War Investigating Committee.
70. In commenting upon this quotation, in a memorandum of December 17, 1943, Assistant Secretary of State Acheson said: “The remarks quoted by the Treasury memorandum (p. 3) from a Truman Committee Report are incorrect, were inserted without hearings in a Report on another subject, and we are informally advised are not to be treated as the final view of the Committee.” (841.5151/2010)