611.4131/116½

Memorandum by Mr. Alvin H. Hanson of the Tariff Section

General Statement. British officials have stated that the United Kingdom is not particularly interested in a trade agreement with the United States at present. This attitude is in part due to the unsatisfactory situation with respect to currency and the war debt. Doubtless it would greatly facilitate the early realization of a trade agreement with the United Kingdom if these two other problems could be cleared away. Moreover, the whole program of trade agreements would be greatly accelerated and promoted by settlement of the currency and war debt problems.

The suggestion has been made that we might effect a general solution of our relations with the United Kingdom by simultaneously attacking three problems: (a) currency stabilization, (b) war debts, [Page 799] and (c) trade agreements. It is to be noted that in Section 3 of the Trade Agreements Act of June 12, 1934,5 it is specifically stated that “Nothing in this Act shall be construed to give any authority to cancel or reduce in any manner any of the indebtedness of any foreign country to the United States.” While it is clear that the authority given the President under the Trade Agreements Act does not involve trading war debts in any manner in connection with a trade agreement, and that any arrangement made with respect to war debts must be approved by Congress, it is nevertheless quite feasible to consider these two problems simultaneously, though the final authority in the two cases is separate, the trade agreements being exclusively under the control of the President and the war debts being jointly under the control of the President and Congress.

Currency Stabilization. With respect to currency stabilization, the question arises whether it is preferable: (a) to limit the stabilization agreement to the United States and the United Kingdom, or (b) to include in the agreement France, Italy, and Japan.

In support of limiting the agreement to the United States and the United Kingdom, the following arguments might be advanced: (a) The United Kingdom would find such an agreement to her advantage in that it would serve to protect her against a further devaluation of the dollar relative to Sterling; (b) both countries would be in a stronger position to adjust themselves to whatever changes were made in the currencies of the gold bloc; (c) the stabilization of the dollarsterling area covers such a huge part of the commercially important world that this achievement would constitute a very important forward step toward world-wide monetary stabilization and would bring stronger support to world-wide recovery; and (d) by limiting the agreement to these two countries, it might be argued that a settlement would be more feasible.

In support of the inclusion of France, Italy, and Japan in a stabilization agreement, the following arguments might be advanced: (a) Without this inclusion the United States and the United Kingdom could not safely stabilize in a definitive way, in view of the possible devaluation of the gold bloc countries; (b) a general all around stabilization at once would remove the uncertainty with respect to the future of the gold bloc and force at once the issue upon them whether to remain at the current gold parity or to devalue moderately; (c) without a general settlement a large measure of monetary uncertainty would still prevail; (d) the United Kingdom would be reluctant to return to gold without substantial assurance that the general monetary situation would warrant risking such an important step, particularly in view of the general belief that England committed a [Page 800] grave error in returning prematurely to gold in 1925 under worldwide conditions which did not at that time justify such a step.

On the whole, it appears preferable to attack the problem of stabilization, in the first instance, at any rate, by means of a joint agreement limited to the United States and the United Kingdom. Such an agreement might involve the following: (a) The retention of the current price of gold in terms of the American dollar, viz., $35.00 an ounce; (b) the revaluation of the pound sterling at a point which would reestablish the old parity with the dollar, viz., $4.86; and (c) in the event that the gold standard countries do not join in the stabilization agreement, the United States and the United Kingdom would reserve for themselves freedom of joint action, should the gold bloc countries devalue to a point which would prove dangerous for the stability of their currencies.

Once agreement has been reached along the lines indicated between the United States and the United Kingdom, an invitation might then be extended to France, Italy, and Japan to join in the stabilization agreement, the United States and the United Kingdom agreeing, however, that should such an international agreement break down, the two countries would proceed with joint stabilization on the lines indicated above.

A joint declaration reserving the right of the United States and the United Kingdom to take joint action should the gold bloc countries devalue would act as a restraining influence on the gold bloc countries to act with moderation in the event that they are forced eventually to devalue. Moreover, it would be reassuring to the public both in the United States and in the United Kingdom, and protect against any serious situation which might develop from excessive depreciation on the part of the other countries.

Unless overpowering arguments can be shown to the contrary, it would seem to be advisable to approach the United Kingdom, in the first instance, with the proposal to limit the stabilization agreement to the United States and the United Kingdom.

War Debts.6 If anything is to be done with respect to war debts, the first question that arises is, should any proposed settlement be limited to the United Kingdom or be extended to include all countries? The problem is an extremely difficult one, and it would enormously complicate the issue to include all the various countries involved. This is particularly true because of the inequitable treatment of the different countries in the settlement arranged in the decade of the twenties. A settlement with the United Kingdom alone would be far easier and would serve as a starting point from which to attack the general problem, [Page 801] and would, moreover, offer some indication to other countries of what they might expect in the final all around settlement.

Whether or not the war debt question ought to be tied in with currency stabilization and trade agreement at the present time is a serious question. In conjunction with a currency stabilization agreement we could: (a) do nothing with respect to war debts; (b) offer a two- or three-year moratorium; or (c) make a definitive settlement.

A definitive settlement is difficult to make in the midst of a great depression. A two- or three-year moratorium would remove the issue during the interval when other difficult problems are attacked such as trade agreements and currency stabilization. Conceivably, a moratorium would be more acceptable to Congress than any definitive settlement that would be at all acceptable at the present time. On the other hand, a moratorium appears to be a rather weak solution from the standpoint of the United States, in view of the fact that the debts are already in default. A moratorium would probably be regarded as a weak recognition on our part of the status quo.

The war debts have come to be regarded, both in this country and in England, as more or less of a dead issue and certainly do not have the vital significance for economic welfare that currency stabilization and a trade agreement offer. While the United Kingdom formerly regarded clearing of the debt settlement as imperative, in anticipation of currency stabilization and a trade agreement, it is not likely that such is the case at the present time, in view of the generally accepted status of the current default. Moreover, it is important that in the negotiation on the strictly economic issues of currency stabilization and a trade agreement, all emotional factors, such as those which inevitably are stirred up in connection with the war debts, be eliminated. Everything considered, it would seem preferable to omit from the proposed negotiation with the United Kingdom any consideration of the war debt problem. Should the United Kingdom, however, respond to the proposal to negotiate on currency stabilization and a trade agreement by raising the war debt question, this country might then discuss the advisability of a two- or three-year moratorium.

Trade Agreement. The British Empire Committee has recently completed a preliminary study of the possibilities of a trade agreement with the United Kingdom. This involves a consideration of specific items which might be included in the concessions made on either side. In the interests of an early currency stabilization, it would seem desirable to make a trade agreement with the United Kingdom even though it were partial in character. Subsequently a more complete agreement could be effected. If in any manner a trade agreement with the United Kingdom at the present time would facilitate the general problem of stabilization, such an agreement would [Page 802] certainly be worth making, even though it were less thorough-going and complete than might be possible if it were postponed until some later date.

  1. 48 Stat. 943.
  2. For correspondence concerning intergovernmental debts, see pp. 543 ff.