The Department of State to the British Embassy


It is recognized that the British Ambassador’s memorandum of February 14, as amended by the memorandum of February 16,37 is [Page 97] tentative in its various estimates. The following comments are likewise in part tentative and in any event would be subject to amendment to correspond to any further changes which might be made by Lord Lothian in his memorandum.


foreign exchange resources of the united kingdom

The great importance to the United Kingdom of its gold and foreign capital assets is fully understood. It may be inquired, however, why the estimate of “the total capital assets of Great Britain” which is given on page three of the Ambassador’s memorandum should include only gold and negotiable dollar securities and should omit

The British short-term balances in this country, estimated by the Federal Reserve Board to have been 595 million dollars at the end of August, 1939.
The British “direct and other investments” in the United States cited in the same survey.
British direct and security investment in third countries which if liquidated at all are likely to be sold to American investors.
The central gold reserves of the rest of the sterling area (a half-billion dollars).

Further, although the memorandum justifiably does not include the gold, dollar balances and American investments of Canada and France, it may be noted that these amounted to over 4.5 billion dollars and constitute a fund which in some measure undoubtedly will be available, directly or indirectly, for the needs of the British Government in a protracted war.

These inquiries and comments are put forward in our endeavor to appraise whether the “total capital assets of Great Britain” may not lie somewhere above the 2,735 million dollars cited in the Ambassador’s memorandum.


estimated balance of payments between the “sterling area” and the united states

It is the estimate of the memorandum that, omitting the sale of newly mined gold, the “sterling area” will have a negative balance of payments with the United States for the first year of the war (September 1939–August 1940) of 117 million pounds sterling or 470 million dollars. Considerations of caution would obviously indicate the wisdom of making such an estimate on a most conservative basis. However, it would appear that, even on a conservative basis, the net result presented by this estimate may overestimate the prospective net adverse British balance—perhaps by as much as 100 to 150 million dollars. Without entering into detailed discussion, it would seem pertinent to inquire: [Page 98]
Whether it is justifiable to assume that American imports from the United Kingdom will be as low as in 1934 or the exceptional year of 1938, as is done in the British estimate.
Whether the dollar value of American imports from the rest of the sterling area is not likely to be substantially in excess of the 1939 value, which is the value assumed in the British estimate.
On what basis the British Treasury has reduced the “net balance of invisible exports” to the United States to 5 million pounds (20 million dollars) when, according to our estimates, the “service” items in the balance of payments between the two countries has varied between 66 and 134 million dollars annually in the past six years (always in favor of the United Kingdom).
It would be useful to have more information on the state of the adverse balance of the sterling area (as defined) other than the United Kingdom for which the newly mined gold will be required.

Since most of this newly mined gold will undoubtedly be sold, directly or indirectly, to the United States Government, it is pertinent to inquire why the dollar exchange proceeds cannot be spent for American agricultural products instead of diverting the British purchases of the same products to other countries, paying therefor with the proceeds of American purchases of newly mined gold (assuming of course that American prices are competitive world prices).


the situation in agricultural products

The American Government is aware of the gravity of the British foreign exchange problem and fully understands that the British Government has strong reasons for reducing imports of non-essential products in order to conserve its resources for the procurement of commodities essential to Great Britain in time of war. With respect to any particular product, the cogency of the British position is such as to command the sympathetic understanding of the American Government. Unfortunately the cumulative effects of British measures for the control of trade bring direct loss and curtailment to American agriculture, which has a longstanding interest in the maintenance of foreign markets, while fostering an ephemeral trade in certain products directly related to the prosecution of the war, and for which the demand will largely cease with the end of the war. Hence, although fully understanding the position of the British Government, this Government cannot avoid concern over the loss of export outlets for its agricultural products in the United Kingdom. This loss would furthermore appear to be in considerable part the result not of reduced total British imports and consumption of such products, but of policies of diversion from American to other sources of supply. The United States is faced with the danger that its agricultural products [Page 99] may be shut out of their normal market in Great Britain because the United States is in a position to supply other products which are of the utmost importance to the British Government.

Approximately 35 percent of American agricultural exports (about 50 percent, excluding cotton) normally have gone to the United Kingdom, and a considerably higher percentage in the case of a number of individual products. For example, almost half of the total of American tobacco exports and about 85 percent of our ham exports are normally sent to the United Kingdom. It appears that various measures adopted by the British Government have completely closed the British market for American products which in recent years have accounted for almost half of our agricultural exports to the United Kingdom, that the trade in a number of other products has been severely curtailed, and that the outlook for the other agricultural products is far from reassuring.

The Department is currently giving attention to the various individual agricultural and forest products discussed in the Ambassador’s memorandum. It would not appear to serve any useful purpose to enter into discussion of the details of the Embassy’s comments, pending the more complete and, it is to be hoped, definitive talks which will be held upon the arrival of Mr. Ashton-Gwatkin. It may be remarked in general, however, on the basis of such incomplete information as the Department has been able to obtain from London and other sources, that the outlook for American agricultural exports to the United Kingdom (with the possible exception of cotton) is decidedly uncertain, particularly with respect to tobacco, fresh fruits and pork products.

Finally, note may be taken of the Ambassador’s statements that “… cash purchases of non-essential American agricultural products and even of those now regarded as essential, must be reduced to a minimum” (page 16), that “imperative political considerations …37a may necessitate the diversion of purchases of some agricultural products from the United States to other countries” (page 17), and that diversion of trade from the United States to other countries “is imposed on us by war necessity and by the ‘cash’ and ‘carry’ requirements placed on Great Britain for the conduct of its wartime trade with the United States” (page 17).

It is true that loans to belligerent governments are prohibited. But it may be observed that it is unjustified to conclude that this imposes trade diversion upon Great Britain and the British Empire.

The memorandum claims that the sterling area has large adverse balances elsewhere for which it has to reserve the equivalent of its new gold production. Since these balances are not settled by credits [Page 100] or even by bilateral barter, there can be no economic reason (even of a wartime character) for diverting trade in agricultural products from the United States to these other countries. In either case the balance has to be met out of British resources.
It is stated that Great Britain is making loans for “imperative political considerations” to third countries and diverting trade from us in order to be repaid.
It is stated that Great Britain is buying in other countries to keep them out of the German orbit or to keep goods from getting to Germany.

Actions (b) and (c) may be understandable enough for a nation at war. However, it cannot be maintained that the diversion is due to American legislation. Even if American loans were legal and American investors were willing to extend such credits, it would appear that the British Government would still be motivated by the same political and strategic considerations and would still be trying to divert trade in important products away from the United States. And such diversion may or may not “come to an end when the war is over”. The experience of countries which have embarked upon bilateral arrangements and trade diversion under the plea of emergency needs bears witness to the fact that such systems of trade tend to create their own justification for continuance and although the “emergency” may change in nature, it seldom passes.

  1. Neither memorandum printed. In presenting the memorandum of February 14, the British Ambassador explained that it was not an official document and that his Government had not seen it. The memoranda gave information to show the necessity of the British Government to control agricultural purchases to conserve gold and dollar resources.
  2. Omissions indicated in the original memorandum.