Foreign Relations of the United States, Diplomatic Papers, 1933, General, Volume I

550.S1/671

The British Embassy to the Department of State ¹⁹

British Policy on Economic Problems

1. It is a matter of vital moment to the peoples of the United Kingdom, as it is to the people of the United States of America, to counteract the present world depression, to relieve the constant pressure of unemployment, to restore the level of prices and to revive prosperity. It becomes more and more clear that the operation of normal economic forces cannot be relied upon to bring this about in any reasonable period and that positive action by Governments is called for to expedite it. But in fact the efforts made by each Government up to the present time have been singularly ineffective and there is growing impatience on the part of the ordinary man and woman in all countries at the apparent inability of their Government to master the blind forces which seem to be working relentlessly to a general breakdown of the financial, economic and social structure of society. The fact is that the depression cannot be effectively remedied by isolated action on the part of individual Governments: it is essentially international in its character and requires for its solution international action on a very broad front. It will therefore be necessary to secure concerted measures on the part of all the principal countries of the world and the World Monetary and Economic Conference offers an opportunity for devising such measures. But it would greatly help towards success in that Conference if the attitude of His Majesty’s Government and the United States President were similar towards the objectives to be promoted at the Conference, and His Majesty’s Government for their part will gladly enter into an exchange of views to this end.

2. The Report and Agenda for the World Conference, recently elaborated by the Preparatory Commission of experts appointed by the League of Nations, affords a useful basis for this discussion. The Report of the Commission, accepted unanimously by eminent experts of seventeen different countries, including all the principal countries of Europe, the United States of America, the Argentine, China and India, as well as by representatives of the Bank for International Settlements and other international institutions, sets out in a clear and concise form the actual position and the programme which the Governments have to face, followed by an annotated agenda summarising the detailed issues involved. Taking this programme as the basis, His Majesty’s Government propose to indicate the general lines on which they would envisage co-operation between the United States of America and the United Kingdom in promoting a solution of the world economic problems.

Rise in the Level of Prices.

3. It is accepted in all quarters that an increase in the general level of world prices—and, more particularly, in the prices of farm commodities—is highly desirable. His Majesty’s Government are in entire agreement with this view and have repeatedly declared that it is one of the main objects of their policy to secure a rise in wholesale prices, especially in the wholesale prices of foodstuffs and raw materials, not only in Great Britain but throughout the world. While the export trade of Great Britain is mainly in manufactured goods, His Majesty’s Government are convinced that no real prosperity can be secured by the manufacturing interests until the primary producers in all countries are once more in a position to recommence normal purchases.

A vivid sketch of the existing price situation is given in the introduction to the Report of the Preparatory Commission. Wholesale commodity prices in general have fallen by over one-third since October 1929, while raw material prices have dropped by from 50 to 60 per cent, since that date. The remedial measures which appeared to the Preparatory Commission to deserve consideration are mentioned on page 8 of the Agenda, while a fuller analysis is given on pages 18 to 20.

4. Monetary action is, in the view of His Majesty’s Government, necessary to secure a rise in prices. It is a question whether monetary action is sufficient by itself to raise prices without long delay, which the condition of the world hardly permits, but that does not alter the fact that monetary action is necessary to create the conditions in which a price rise can take place. His Majesty’s Government believe that many valuable results have been achieved by the measures taken both in the United States of America and in London to ensure the provision of cheap and abundant short-term money, but on the other hand, they are convinced that well co-ordinated action between the leading Central Banks is likely to have more effect in improving world conditions than isolated efforts by particular countries. His Majesty’s Government would be happy to co-operate in any measures which the United States Government might think well designed to secure this object.

5. Monetary action, however, operates only to increase the supply of credit, and simultaneous action is required to increase the demand. Monetary action would require to be supplemented therefore by action to restore the purchasing power of debtor countries, to promote international trade and in some cases to regulate production. All these interconnected problems are dealt with in the Agenda and must receive detailed consideration at the World Economic Conference. The concerted action of many countries is required for success, but, as already indicated, His Majesty’s Government are of opinion that a preliminary survey by the two Governments would be most helpful.

Stabilisation of Currencies.

6. Among the difficulties confronting international trade a prominent place must be assigned to currency disorganisation. The world crisis which commenced in the Autumn of 1929 has now lasted for more than three years. For the first two years of that period practically the whole world remained on the gold standard. But the continued disastrous fall in prices and the steady and rapid diminution in trade made currency breakdown inevitable. With the international economic system in course of rapid destruction it was impossible that an international currency system should survive. Very few countries now retain free gold standard currency systems. A large number have remained nominally attached to gold, but only by imposing restrictions which are destructive of trade and financial intercourse between nations. Other countries have abandoned the gold standard.

7. A general return to an international monetary standard would be welcomed by His Majesty’s Government, but they fear that this will not be a practical possibility until some degree of health has been restored to the international economic system. The experience of the first two years of the crisis indicated the defective conditions under which the international monetary standard then worked, while the struggle of so many countries to remain attached to that standard by the adoption of deflationary measures and by placing growing restrictions on trade was a powerful factor in accelerating the collapse. A general return to the gold standard, so long as that is only possible by deflationary measures or by imposing fresh restrictions on trade could but do harm.

On the other hand, provided that a reasonable degree of equilibrium between prices and costs can be restored and the defects which have shown themselves in the working of the Gold Standard are removed by suitable international co-operation, His Majesty’s Government, as at present advised, see no reason why the way should not be open to the re-establishment of an international system.

Exchange Controls.

8. The Exchange controls recently imposed by many countries and the Clearing and compensation agreements to which they have given rise, have proved a most serious obstacle to international trade. His Majesty’s Government would gladly co-operate with the Government of the United States in pressing for the abolition of all such measures. It must be recognized, however, that many of the countries which have adopted these controls will plead their inability to remove them, unless they are first assured against a collapse of their currencies by the provision of additional foreign exchange reserves or by the readjustment of their external commercial debts. The United Kingdom and the United States of America have in the past been the largest international capital markets, and they have common interests in securing that these difficulties are wisely dealt with. Owing to the collapse of confidence, it is hardly to be expected that the flow of international capital can be resumed in the near future through the ordinary market channels, and it may be necessary to contemplate special measures (such as have been set on foot in the United States for internal purposes) to facilitate the revival of international credit. Any such action would largely depend on the possibility of securing co-operation between Central Banks, with a view to putting into circulation resources which are at present immobilised, and the precise method by which this could best be done would require careful investigation by the financial authorities of the principal creditor countries.

His Majesty’s Government would willingly associate themselves with the United States Government in furthering such an investigation, as it appears to them that a restoration of world prices must depend in a large measure on the possibility of restoring the purchasing power of the debtor countries, whether in Europe or overseas.

Relaxation of Trade Barriers.

9. The Preparatory Commission points out that one of the most significant features of the present crisis is the fall which has taken place not only in the value but in the quantum of international trade. Apart from exchange controls, the principal reason for this fall seems to be the growing network of quantitative restrictions on international trade in the form of prohibitions and quotas on imports which have recently been imposed.

These restrictions on imports have proved a far greater obstacle to international trade than any tariffs, and His Majesty’s Government would gladly co-operate with the United States Government in pressing for a general agreement with a view to their relaxation and their abolition as soon as possible, particularly as regards manufactures. As regards farm products, and particularly meat and dairy products, exceptional measures may be required to cope with the present glut, and the possibility of relaxation will depend largely on the possibility of ensuring a better regulation of production (see paragraph 13, below).

Tariffs.

10. His Majesty’s Government would also favour a general agreement for the reduction of tariffs and for the maintenance of a more moderate tariff policy in the future. They have in the past supported the most unconditional interpretation of the most-favoured-nation clause, and their existing treaty obligations render it difficult for them to accept proposals which might conflict with most-favoured-nation rights. They would, however, be ready to consider co-operation with the United States with a view to securing (a) a general Gentleman’s agreement under which no country would increase its actual tariffs above their existing level pending the outcome of the Conference, and (b) an arrangement for the gradual reduction of high protective tariffs to a more moderate level. As regards any tariff truce, it must be remembered that the British tariff represents a comparatively low measure of protection and it would not be possible for His Majesty’s Government to tie their hands for an indefinite period by adopting an arrangement which stereotypes the existing position. As regards reduction of tariffs, it must be borne in mind that the national budgets of many countries depend on high revenue duties on spirits, tobacco and other luxuries.

Anglo-American Tariff Discussions.

11. As regards direct American trade with this country, it is obvious from the figures that His Majesty’s Government are not in a position to offer any substantial advantages over and above those which America already enjoys. For the year 1931 British imports from the United States of America amounted to £104 million, while the exports of British domestic products to the United States were £18 million; for the year 1932 British imports from America were £84 million, and domestic exports only £15 million. There is, therefore, an enormous excess of United States exports to this country over British exports to the United States. As it is essential to restore equilibrium in the balance of payments if sterling is to be stabilised, the United Kingdom can obviously not afford to buy larger quantities of United States goods unless the United States offer greatly increased outlets for the manufactures of this country. His Majesty’s Government will, however, gladly enter into discussions, if and when the United States so desire, with a view to concluding a tariff agreement on the basis of reciprocity.

Silver.

12. As regards silver, the Preparatory Commission point out that such schemes as bimetallism, etc., are impossible of adoption, and His Majesty’s Government assume that the United States concur in this view. The Experts also agreed that what is required is not a rise in the price of silver as such (which would involve great economic difficulties for the silver-using countries, particularly China), but a rise in the general level of commodity prices which would bring up the value of silver at the same time. The criticism levelled against the Indian Government in connection with silver is largely due to misapprehension. The Government of India has made no radical alteration in its currency system during the last forty years, but it has been greatly embarrassed by the surplus silver flowing into its reserves following upon the fall in commodity prices. It would not be possible for the Government of India to agree to restrict sales of silver from these reserves while there was no similar restriction on sales by the silver producers. It may be pointed out that in fact, on balance, over the last few years the Government of India has increased, not decreased, the stocks of silver held in its reserves. The most that could be said on this subject is that the Government of India have expressed their readiness to discuss an arrangement with the silver producers with a view to some general regulation of sales of silver.²⁰

Regulation of Production.

13. While the regulation of production has many critics, it appears to His Majesty’s Government that some measure of this kind may be justified and helpful in the case of certain primary materials, especially where large stocks are overhanging the market. Regulation schemes are already in existence for sugar and tin, and His Majesty’s Government are proposing to call a Conference in order to secure an agreement for the regulation of production in the meat trade. They are also contemplating further agreements in respect of dairy produce.

As regards wheat, His Majesty’s Government are not directly interested, as the United Kingdom is an importing country, but they agree that the Economic Conference should consider the possibility of an international agreement²¹ between the main producing countries for a restriction of acreage in those countries coupled with a reduction in the excessive tariffs on wheat now imposed in some of the more important consuming countries.

14. In this connection His Majesty’s Government would like to point out the particular interest which they have in seeking to put the shipping industry on a more economic basis. At the present time the subsidies to shipping given by many countries has led to the construction and the working of a much greater tonnage than is required by existing international trade, so that in many countries shipping has become a burden on the national economy, instead of a contribution to its prosperity. They will welcome the co-operation of the United States Government in securing a remedy for this situation.

15. His Majesty’s Government have here outlined the objectives which they would aim at securing by the World Economic Conference, and they trust that the Government of the United States will find it possible to support similar objectives. But it is essential to stress throughout that any hope of arriving at better conditions is dependent on a satisfactory settlement of the War Debts question²² having been reached, or at least assured. The existence of these debts constitutes, as the Preparatory Commission have said, an insuperable barrier to economic and financial reconstruction, and there is no prospect of the World Economic Conference making progress if this barrier cannot be removed.

[Washington,] February 1933.

19. Memorandum attached to the original: “April 15, 1933. The attached memorandum, entitled ‘British Policy on Economic Problems’, was, as nearly as Assistant Secretary Moley can recall, handed to Secretary Hull by the British Ambassador shortly after the Ambassador’s return from England and sometime just before March 4, 1933.”
20. For correspondence relating to an international agreement on silver negotiated at London, see pp. 763 ff.
21. For correspondence relating to negotiation of a wheat agreement, see pp. 787 ff.
22. For correspondence relating to the payment of war debts by various governments, see pp. 826 ff.