The Secretary of State to the Chargé in the United Kingdom (Atherton)

No. 1130

Sir: I am bringing to your attention a matter which is of the highest importance to us and I am going to ask you to spare no effort to bring our views to the attention of Mr. Eden8 and any other members of the British Government who, in your opinion, should be acquainted with them.

The memoranda enclosed herewith of my conversations with the British Ambassador9 will give you the general tenor of our thoughts and will place you in a position to open preliminary conversations. The somewhat lengthy document which I also enclose is a technical survey of the entire subject and may be used by you whenever you feel that it should be presented. A copy of it will, in due course, be handed to the British Ambassador.

My thought is that it would be best for you to seek an interview with Mr. Eden and endeavor to obtain his interest and support without, however, burdening him with the technical details. You might say that I have learned with a great deal of pleasure and satisfaction of Mr. Eden’s cordiality to Mr. Phillips10 and of the desire which he expressed with regard to the relations of our two countries. You might then point out that we have been for some time considerably disturbed by what appears to us to be a trend in the policy of the British Government which, in view of its tendency to force trade into closely controlled bilateral balancing, may check all efforts to revive world trade on a general scale and that our misgivings on this score were greatly increased by the conclusion, on January 6, 1936, of a clearing agreement between the United Kingdom and Spain.11

[Page 636]

Further, we are somewhat fearful lest, for reasons given in the memorandum, this nascent British policy may thwart our own effort under the Trade Agreements Act and cause troubling divergences of policy contrary to Mr. Eden’s hope and mine with regard to our mutual relations. I know Mr. Eden will fully agree with my judgment that the most promising way to soften at least some of the present discontents would be to bring depressed peoples into active trading relations with one another.

I do not think it desirable at the present stage to address a note on this subject to His Majesty’s Government. It would seem to me preferable to ascertain first whether Mr. Eden and Mr. Runciman were aware of the divergent trend of policies of the two Governments and, if so, whether they could not find some means to lessen our apprehension so that the two leading commercial nations of the world could go forward on a liberal and farsighted commercial policy in an effort to restore international trade throughout the world.

Very truly yours,

Cordell Hull


For more than six years the world has suffered from an economic depression of unparalleled severity among the major characteristics of which have been the collapse of international trade and the protracted inability of Governments to re-create the conditions in which it can recover. The shrinkage of foreign trade has deprived of their means of livelihood millions of workers who, despite the efforts of their Governments to create domestic prosperity in the midst of international stagnation, are still for the most part the objects of public assistance. Increasingly Governments are tempted to find relief from pressure and distress at home by recourse to military adventures abroad.

Deeply impressed by the seriousness of these conditions, the United States inaugurated in the summer of 1934, and has since then energetically pursued, a policy designed to restore international trade by a reduction of the barriers that hamper its natural flow and by its liberation insofar as possible from the many extraordinary restrictions and handicaps which have been placed upon it in recent years. The United States attaches the greatest importance to this effort in the belief that the economic rehabilitation of the world, on which the hope of durable peace depends, is impossible without a substantially larger flow of international trade than is taking place today.

[Page 637]

The success of this effort depends in large measure upon the adherence and support given by the major commercial nations to certain fundamental principles. A full restoration and substantial future development of international trade require not only a reduction of trade barriers, but also the replacement of the existing network of discriminatory practices by a régime of equality of treatment in international commercial relations. Hence, while negotiating mutual customs concessions, the Government of the United States has steadfastly held to the principle of equality of treatment in connection with the trade agreements into which it has entered. Not only do these agreements provide for reciprocal unconditional most-favored-nation treatment, but the United States extends the concessions granted in them to all countries which do not, in fact, discriminate against its commerce.

The treaties and agreements negotiated by the British Government during the past three years also contain reciprocal pledges of most-favored-nation treatment, and the concessions granted in these treaties and agreements are freely generalized by the United Kingdom to other countries. The policy of the British Government in this respect was stated as follows by the Parliamentary Secretary to the Board of Trade, speaking in the name of his Government, before the Second Committee of the Assembly of the League of Nations on September 23, 1935:12

“… The imperative necessity of bringing about a freer flow of trade throughout the world has always been recognized by His Majesty’s Government. Our markets, freed as they are from purely internal restrictions, operated under conditions which permit of prompt payment without exchange control, are of supreme importance to the traders of other countries, and His Majesty’s Government in the United Kingdom have been able to make a number of agreements resulting in some breaking down of the barriers opposed to ourselves. We cannot in this way break down the barriers against the trade between other countries, barriers which impoverish them and render them less able to purchase our goods. But what we have done is, by adherence to the most-favoured-nation principle, to secure that so far as other exporting countries are interested in those categories of goods for which we may accord concessions in our trade agreements, those concessions are shared by such of them as are entitled to most-favoured-nation treatment. At this point I should perhaps utter a note of warning; I think it must be remembered that if the most-favoured-nation principle is to have its full usefulness no country can sit back and hope eternally to receive its benefits without itself actively contributing. The principle must be based on fair treatment. We believe that the principle of the most-favoured-nation clause, so practised, is of the greatest value to international trade as a whole [Page 638] because it tends to make every agreement for the reduction of trade barriers redound to the benefit of trade generally and not merely of the parties to the agreement, although naturally they benefit most directly since the agreement is designed with that object. Above all do we consider this principle of importance in a period during which we hope and trust that there will be a lowering of trade barriers in many countries.”

The establishment of an effective régime of equality of treatment, however, requires not only that nations refuse to grant preferences in their own markets, but also that they refrain from seeking a preferred position in the markets of other countries. The pursuit of exclusive advantages tends to render it difficult and, in certain cases, impossible for the country which grants them to extend equally favorable, and hence non-discriminatory, treatment to the commerce of all other nations. In this respect, the practice followed in recent years by the Government of the United Kingdom appears to have diverged, in several important instances, from essential adherence to the principle of equality of treatment.

An examination of a number of the agreements into which it has entered reveals that, while the British Government has refrained in general from measures which would discriminate in the British market between countries not members of the British Commonwealth of Nations, it has obtained for the commerce of the United Kingdom in foreign markets advantages which, by their very nature, could not be extended to all third countries.

For instance, in agreements with several North European countries, the balance of trade between them and the United Kingdom is referred to and made to serve as the basis for undertakings on their part to encourage imports of British goods. Such commitments manifestly constitute especially advantageous treatment which cannot be extended to all third countries. In fact, if these undertakings are implemented, some, if not all, third countries, and particularly those with which the nation in question has a passive balance, must inevitably suffer through the resulting diversion of trade. This tendency toward bilaterally balanced trade or payments which is manifesting itself so strongly at present is highly unfavorable for the recovery of international trade, and for this reason, should not be encouraged, particularly by countries with world-wide commercial and financial interests.

Of even more serious nature, from the standpoint of their divergence from the principle of equality of treatment, than these commercial agreements, are the agreements concluded by the British Government relating to exchange and payments on international accounts. The [Page 639] United Kingdom has entered into agreements on this subject with the following countries:

  • Argentine Republic
    • Convention relating to Trade and Commerce, signed May 1, 1933;13
  • Germany
    • Payments Agreement, signed November 1, 1934;14
  • Italy
    • Exchanges of Notes of March 18 and April 27, 1935, regarding Trade and Payments;15
  • Turkey
    • Agreement respecting Trade and Payments, signed June 4, 1935;16
  • Uruguay
    • Agreement regarding Trade and Payments, signed June 26, 1935;17
  • Rumania
    • Payments Agreement, signed August 3, 1935;18
  • Spain
    • Payments Agreement, signed January 6, 1936.

With reference to arrangements relating to clearing and exchange, Dr. Burgin said, in his statement at Geneva mentioned above:

“To turn to clearing arrangements, His Majesty’s Government are in general agreement with the report of the Joint Committee. These clearing agreements are no doubt designed with the intention of bringing about a balance of payments but they appear in practice to have the effect of forcing trade into purely bilateral channels and they inevitably tend to mate the desired balance at a low level. Equilibrium of itself is obviously not the end in view: one may reach equilibrium with nothing passing either way but that is clearly not the end desired. His Majesty’s Government obtained from Parliament some time ago authority to impose a clearing in those cases where exchange restrictions in foreign countries might render such a course necessary but they have been reluctant to exercise that power and hitherto have not found it necessary to do so, although they have in the case of certain countries entered into agreements designed to secure the liquidation of outstanding commercial debts and at the same time provide better conditions for the conduct of current trade.”

No exception can be taken to the objectives described by Dr. Burgin provided they are sought without prejudice to the position and interests of other nations and without impairment of the principle of [Page 640] equality of treatment. It appears, however, that in each of the abovenamed agreements, the United Kingdom has sought to secure for its own purposes a large proportion, and in some instances almost all, of the exchange created by its purchases of that country’s goods. This action has necessarily reduced the share of that country’s current receipts of foreign exchange available for payments to nations which are not in a position to take similar action or which are unwilling in principle to do so. The result is inequality of treatment: preferential for the United Kingdom and discriminatory against some, if not all, other nations, in that the foreign exchange receipts of the country in question are not divided among its creditors on current account in proportion to the size of their claims, but according to an arbitrary plan.

In the Report of the Joint Committee for the Study of Clearing Agreements,19 with which Dr. Burgin states the British Government is in general agreement, the disadvantages of the clearing system are stressed and the recommendation is made not only that the system “should not be extended” but also that “it should … be abolished as soon as possible”. Yet of the arrangements which the British Government has made with the above-mentioned seven countries regarding exchange, three have the character of clearing agreements and have been concluded since the date of the above-mentioned report. As defined by the Joint Committee, a clearing agreement may be said to exist when payments for exports are received, and for imports are made, in domestic currency through local agencies in both countries, the out-payments of these agencies being offset and only the balance requiring transfer or other disposal. The agreements between the United Kingdom and Italy, Turkey, and Spain are of this nature.

The manner in which current payments are dealt with in these three agreements and in those with the other four countries (Argentina, Germany, Uruguay, and Rumania) is materially different, even though the term “payments agreement” or some similar expression containing the word “payments” has been applied equally to the three which embody the clearing mechanism and to those with Germany, Uruguay, and Rumania which do not. Furthermore, the manner of handling current payments in the agreement with Argentina seems similar to that employed with Germany, Uruguay, and Rumania, despite the fact that the latter are termed payments agreements while the former bears a different title. The essential difference between the two groups of agreements appears to be that in those with Italy, Turkey, and Spain, the clearing mechanism is present, whereas under those with the Argentine, Germany, Uruguay, and Rumania, payments [Page 641] from the United Kingdom are remitted in the usual manner to these countries which then dispose of their receipts of sterling exchange according to a prescribed plan.

Despite the fact that a distinction has been drawn by the British Government between exchange agreements based on the clearing mechanism and those that are not (which latter, for the purposes of this note, may be termed payments agreements although this name has been applied to agreements of both sorts), several of the characteristics which are widely regarded as undesirable in the former are also present in the latter.

Payments, like clearing, agreements tend to place the weaker participant in a position where it is unable to grant equal treatment to all third countries. The object of one, as much as of the other, appears to be the securing of treatment which is by its nature preferential.

Payments agreements, it is true, may leave to the weaker participant a freer hand than do clearing arrangements in the disposal of the net balance of exchange, so that this balance may be employed for payments due to other countries. However, even this distinction does not always hold good. The payments agreement entered into between the United Kingdom and Rumania on August 3, 1935, provides that almost the entire balance of [Rumania’s current receipts in sterling above the amount allocated for payment of imports shall be applied to divers other payments due in the United Kingdom. Thus tacit support is given to the tendency now widely manifest for nations to deal with their foreign trade or with their total external financial transactions on a bilateral basis.

Another feature which payments agreements have in common with clearing agreements is the tendency to divert trade from existing channels. Importers in a weak currency country are prompted, either by the exchange control authorities or simply by the greater facility which they know they will have in obtaining exchange, to direct their purchases to the country with which a payments agreement is in force since the current receipts of that country’s exchange are of limited availability for purchases from other countries.

For these reasons primarily, although not alone because of them, it is difficult to make an important distinction between payments and clearing agreements other than in their technical aspects. The pursuit of special advantage by the one method as by the other creates fresh obstacles to the development of world commerce and, by restricting the opportunities of other nations, contributes to preventing a relaxation of the present international tension.

In addition to the preferential treatment with respect to payment for current commercial transactions secured by the United Kingdom [Page 642] in the agreements regarding exchange concluded with the seven countries mentioned above, the British Government has obtained other advantages of a nature such that their extension to all third countries is impossible. In the agreement with Germany and the earlier agreement with Rumania, signed on February 8, 1935, arrangements were made for the liquidation of outstanding debts, by the immediate provision of a lump sum followed by periodic payments, that appear to disregard the relation between the debtor nation’s total exchange assets and liabilities.

In the agreement with Germany, moreover, the British Government dissociated itself from the position taken by the United States Government in demanding equality of treatment of all holders of the German Government seven per cent External Loan of 1924 and the German Government international five and one-half per cent loan of 1930 regardless of their nationality. Instead, the British Government secured from the German Government the undertaking that it would continue to provide sterling for the purchase of the coupons of these two loans in the ownership of British holders. The German Government in this agreement also undertook as regards other medium and long-term obligations to offer to British holders funding bonds in respect of interest, dividends and other regularly recurrent payments of a similar nature.

Policies directed toward the creation of exclusive bilateral preferences, of the type embodied in the recent agreements concluded by the British Government, cause injury to the interests of nations other than those immediately concerned. Moreover, they tend to strengthen those elements within individual countries which seek a perpetuation and extension of the existing narrow and short-sighted policies and measures—to the inevitable long-range detriment of the countries applying such policies and measures and of the world as a whole.

So far as the United States is concerned, the policies pursued by the British Government are having precisely this effect. American interests have suffered over the past three years through the pursuit of these policies. The position of American exporters to, and creditors of, a number of countries has been prejudiced by the discrimination to which they have been subjected by reason of the preferred treatment which the British Government has obtained for similar British interests.

The policy of the British Government has added to a considerable degree to the strength of those forces in the United States which have opposed the policy of granting and of seeking only equal treatment. The action of the British Government in securing preferential treatment in the allocation of exchange, first from the Argentine and later [Page 643] from other countries, has provoked numerous and persistent demands in the United States that the American Government take similar action with certain other countries, in particular Brazil. Although it has been done only with difficulty and although the cost has been considerable, the Government of the United States has resisted these demands in the belief that the fundamental long-range interests of the United States, with which those of Great Britain are believed to be in harmony, demand that no further obstacles, even though they be of temporary self-interest, be placed before the development of international commerce.

The particular features above alluded to of the commercial and exchange agreements entered into by the British Government, moreover, have rendered it more difficult for the Government of the United States to carry out its trade agreements program. The countries which have granted such special advantages to the United Kingdom frequently find themselves unable to grant treatment to American trade which is substantially non-discriminatory. The prospect that the United States may be able to negotiate trade agreements with such countries providing for mutual reductions in trade barriers is thereby materially impaired.

An illustration in point is provided by the Payments Agreement recently concluded between the United Kingdom and Spain which has rendered more difficult the conclusion of a trade agreement between the United States and Spain, although prior to the action of the British Government in securing from Spain preferred treatment as regards exchange such an agreement was on the point of being concluded. Checks such as this to the attempt now being made to bring about a reduction in trade barriers and a return to more liberal commercial principles throughout the world may have most unfortunate consequences upon the future course of world trade and hence upon international relations generally. These consequences may be regarded as substantially more serious than even the immediate injury to American national interests.

As was pointed out at the beginning of this memorandum, the policy of the United States is based on the belief that a general return on the part of the major commercial nations to the broad, liberal principle of seeking and of granting only equal opportunity and treatment with the commerce of other nations, combined with the gradual reduction or elimination of the numerous restrictions now throttling trade, offers the surest, if not the only way, of restoring international commerce. Were the United States and the United Kingdom, the two leading commercial nations of the world, to stand united on this liberal, farsighted policy in all its essential respects, the outlook for world peace and prosperity would be brighter by far than it is today.

  1. Anthony Eden, British Secretary of State for Foreign Affairs.
  2. Ante, pp. 629 and 633.
  3. William Philiips, Under Secretary of State; delegate to the London Naval Conference, 1935–1936 (see pp. 22 ff.).
  4. League of Nations Treaty Series, vol. clxvi, p. 283.
  5. See League of Nations, Official Journal, Special Supplement No. 140, pp. 35 ff.
  6. The Roca-Runciman agreement, League of Nations Treaty Series, vol. cxliii, p. 67.
  7. Ibid., vol. clxiii, p. 79.
  8. Ibid., vol. clx, pp. 289, 296, and 306.
  9. Ibid., vol. clxvii, p. 91.
  10. Ibid., vol. clxxvi, p. 153.
  11. British Cmd. 4976, Roumania No. 2 (1935): Anglo-Roumanian Payments Agreement [With Annex], London, August 3, 1935.
  12. League of Nations, Enquiry Into Clearing Agreements (Official No.: C.153.M.83.1935.II.B.), pp. 7 ff.