800.6354/111
The Secretary of State to the Chargé in the United Kingdom ( Johnson )
Sir: The Department’s instruction no. 397 of December 5, 193863 enclosed a draft statement of comments of this Government regarding the memorandum of July 19, 1938 on Stocks and Prices,64 prepared by the Statistical Office of the International Tin Research and Development Council. Consideration of this draft was delayed until it could be examined by Mr. William B. Todd, the American consumers’ representative on the Advisory Panel of the International Tin Committee. Mr. Todd is now in this country and has studied the draft. He is in agreement with the text presented below, which also embodies substantially the suggestions made by Mr. Butterworth65 in a letter63 to Mr. Veatch of the Office of the Adviser on International Economic Affairs.
Unless the Embassy wishes to suggest further changes, the following text should be incorporated in a note to the British Government.
“From the initiation of the present International Tin Agreement,66 my Government has been greatly concerned regarding the restrictive control of stocks and prices placed in the hands of the International Committee, although it took cognizance of the fact that the Governments parties to the Agreement accepted responsibility for its operation, and it was hopeful that the interests of consumers would be given full protection.
“My Government has been forced to the conclusion, however, that the administration of the Agreement has been unduly dominated by producing interests and, from the standpoint of consumers, has been more arbitrarily administered than in the case of any of the other international control agreements. The particular form given to the arrangements for a buffer stock of tin and the method in which this stock is to be controlled have not been reassuring and have not served to modify the general conclusions set forth above.
“My Government is of the opinion that the best interests of producers as well as of consumers could be served by a considerable modification in the operation of the tin restriction scheme. It is believed [Page 907] that the Governments parties to the International Agreement might well give fresh attention to certain phases of its administration, especially in view of the effects upon the consumption of tin resulting from the increased experimentation with and introduction of substitutes in various uses, and of the danger inherent in any action bringing stocks to low levels at a time when world conditions are as uncertain as they are today. It is believed, therefore, that it would be helpful, both to the British Government and to this Government, if an early occasion could be afforded for a discussion of this entire subject. Officers of the Embassy will be prepared to engage in such discussions in advance of the next meeting of the International Tin Committee on March 15, 1939, if such an arrangement is convenient to the British Government.
“I am instructed to express the appreciation of my Government to the British Government, and in turn to the International Tin Committee, for making available a memorandum of the International Tin Research and Development Council with respect to certain observations of this Government contained in a note presented to the British Foreign Office on June 17, 1938.
“The memorandum of the Research Council presents information which is interesting and in many ways useful in reaching an understanding of the tin situation and the operations of the International Tin Agreement. My Government believes that it would be of some value to the British Government, even in advance of the oral discussions suggested above, if brief reference and comment be made with respect to certain statements and contentions in the memorandum of the Research Council, namely,
“1. That statistics for the year 1926, or for the period 1925–8, form a fair and reasonable basis for comparison or for determining the objectives of the governmental control scheme with respect both to prices and to stocks.
“That period has been widely recognized as a ‘boom’ period in tin and it would seem as reasonable to regard it as equally abnormal on one side as the later ‘depression’ period was on the other. From the point of view of consumers, stocks during that period were far from adequate, and prices reached an excessive level.
“2. That large stocks ‘exert a great influence upon the stability of the tin price’ and that therefore stocks should be reduced to a low level in the interest of stability of price.
“It may be readily agreed that stocks affect the level of price and that extensive fluctuations in stocks tend to create or to accompany fluctuations in the price of tin. It would appear to be difficult, however, to maintain the contention that large stocks in themselves create instability in prices. At least it would seem to be just as logical, and perhaps more convincing, to support the contention that consistently low stocks, narrowing the margin for trading, would encourage speculation and uncertainty with respect to price, especially if traders or operators of private pools should yield to the temptation to seek control of the market.
[Page 908]“3. That consumers need harbor no fear that stocks will be reduced to too low a level as the result of low quotas during 1938, especially in view of the accumulation of the buffer stock.
“The memorandum of the Research Council presents a convincing résumé of the demonstrated failure of the tin control scheme, operating without a buffer stock, to meet adequately unexpected changes in consumers’ requirements. The memorandum, however, does not clarify the relation between the buffer stock now being built up and uncontrolled stocks available to the market. The experience of 1936–7 is fresh in the mind of consumers since the scheme as it was then operated (relying only on so-called ‘normal’ stocks and the quota system) was unable to cope adequately with the rapid increases in demand that developed during that year. It seems obvious that if the buffer stock is to form an insurance against a repetition of that experience, it must be held over and above the usual stocks available to the market and must be of sufficient size to meet unexpected demand over a period of several months while the required additional supplies from producing countries are made available by the more slowly working machinery of the scheme. Furthermore, it would appear to be obvious that the reserves of the buffer stock should be held in the principal consuming markets if they are to be made promptly available in the event of sudden increases in requirements.
“4. That the price of tin should be stabilized in the vicinity of £220 per ton in order to bring out all of the tin required.
“It may well be argued that a particular price is required to bring out a given amount of tin over a given period of time, although changing circumstances within the tin industry and within the economic system as a whole might lead to a considerable modification of such a price over different periods of time.
“It is quite another proposition, however, to maintain that a relatively rigid price is required month in and month out, year in and year out in order to bring out all of the tin that is required. The economic system itself does not operate in such a way as to lead to stability in the requirements of tin or other materials, and as a result the demand in one period may be a mere fraction of that developed in other periods. The view that the price which would bring out the small quantity of tin, or any other material, required in a depressed period would be the same as the price needed to bring out a much larger quantity in a more prosperous period, is open to serious question.
“The statistical data presented by the Council with reference to this point indicates that in the past prices have risen whenever, due to unusual demands, or difficulties in producing areas, higher returns were necessary in order to bring out the amount of tin required. No action on the part of the international control scheme would seem to be required, therefore, to provide a price sufficiently high to bring out tin in times of unusual demand. It seems apparent that the proposed action of the Committee with respect to price is directed mainly toward maintaining prices at a comparatively high level in periods when, because of decreased economic activity or other developments, [Page 909] tin requirements are relatively low. It is unconvincing, however, to maintain that such action is necessary to bring out the small amounts of tin required at such times, when the general price level is depressed.
“Apparently the position is taken in the memorandum of the Research Council that a price in the neighborhood of £220 per ton is required to meet legitimate costs of production and returns on capital. If this point is pressed with respect to short-run periods, then the logic of the argument would lead to the contention that even higher prices should be received in time of depression than in prosperous times due to the fact that greater returns per unit of production would be required to meet full capital charges and overhead cost.
“There is no intention of challenging the desirability of securing greater order and stability in the tin industry but a program of seeking this objective by maintenance of prices at a relatively rigid and high level certainly is open to question. In this connection, however, it is considered unlikely that governments will lend support to the argument so often advanced by producers, and referred to in the Research Council’s memorandum, to the effect that prices for tin are relatively unimportant because tin forms such a small proportion of most finished products in which it is employed. If it be argued that for this reason consumers have little interest in the level of tin prices, then the same logic would appear to indicate that they should also have small interest in fluctuations of tin prices. As a matter of fact, of course, both the level of price and the movement of price, in the case of tin as in the case of other raw materials, are of definite importance to manufacturers requiring these materials.
“5. That the desired price level is fully justified by the facts regarding the cost of production of tin presented in the memorandum.
“As the memorandum indicates, there is inadequate information regarding the costs of production of tin. Furthermore, the available information may include such a liberal estimate of certain phases of costs and of capital charges that it would be wholly unsuitable for determining a level of price which consumers might recognize as fair and reasonable.
“There appears also to be the tendency to maintain that the costs of marginal producers, those who for one reason or another may be considered the least efficient in the industry, should be regarded as the proper basis for determining prices. The most telling argument advanced in support of this thesis is usually the contention that prices must be held at a sufficiently high level to keep all mines open, even in time of relatively low production, so that all of the tin required would be forthcoming in periods of greater demand. In this regard it is understood that the actual experience of the industry under the working of the present regulation scheme has been the concentration of production in the relatively best favored mines in each area during periods of restricted demand, partly no doubt as a result of dealing in production quotas within those areas.
“6. That the international regulation scheme should be so operated as to achieve for tin a more or less stable price level similar to that which already has existed for years past for nickel.
“International programs for the regulation of the production and marketing of essential materials have been viewed with suspicion because of the fear that their objectives might include the kind of unchecked monopolistic controls of supplies and prices achieved by private action in a limited number of raw material industries where concentration of control made such action possible. The favorable view taken in the Research Council’s memorandum regarding the price practices followed in such highly ‘integrated’ industries as nickel and aluminum is in no sense reassuring. Unchecked private monopoly does not serve public interest. The responsibility of governments for virtual monopolies created by their action should afford more nearly adequate safeguards of the interests of consumers and of the public generally, but certain aspects of the international tin control scheme and the general record of its administration to date give rise to doubts as to the extent to which government responsibility has been accepted and exercised in this case.”
It is suggested that this note be presented, either to the Secretary for Foreign Affairs or to a high official of the Foreign Office, and that arrangements for a conference with officials of the Foreign Office be discussed in a preliminary way at that time.
It is understood that Mr. Todd expects to be in London again by March 1; if there is any change in his schedule the Embassy will be informed. A special committee representing the principal tin users in this country has been established to cooperate with him, and he expects to have factual information regarding stocks and consumption requirements in this country which has hitherto been unavailable. It should be helpful if members of the Embassy staff could confer with Mr. Todd in advance of the proposed conference with the British officials. It would be desirable, however, to set a date for the conference as early in March as possible, so that there would be ample time for a readjustment of the British position before the March 15 meeting of the International Committee.68
Additional material and suggestions will be forwarded later as a basis for the conference with British officials.
The American Legation at The Hague is being informed69 that you will furnish it a copy of the final text of the note you are to present to the British Government, sufficiently in advance of the presentation to make it possible for the Legation to present a similar note, with appropriate changes, to the Netherlands Government at the same time.
It is not intended that oral discussions be held in The Hague until after the outcome of the discussions in London is known. You are requested to inform the American Legation at The Hague directly regarding the results of your discussions.
Very truly yours,
- Not printed.↩
- Not printed. See note from the British Secretary of State for Foreign Affairs, August 4, 1938, and footnote, Foreign Relations, 1938, vol. i, p. 943.↩
- Second Secretary of Embassy at London.↩
- Not printed.↩
- Signed January 5, 1937, British Cmd. 5879, Papers Relating to the International Tin Control Scheme.↩
- On February 28 the Department was informed that the meeting had been postponed to March 22.↩
- Instruction to the Minister in the Netherlands not printed.↩