The British Ambassador (Lothian) to the Secretary of State
The British Ambassador appreciates the understanding shown in Mr. Cordell Hull’s memorandum of February 21st, 1940, of the grave conditions with which Great Britain is confronted in financing its maximum war effort and of the reasons which compel the United Kingdom Government to reduce imports of non-essential products in order to conserve its resources for the procurement of commodities essential to Great Britain in time of war. He also fully recognizes the concern of the United States Government over the loss of export outlets for its agricultural products in the United Kingdom, and about the dislocation which may consequently be caused to American agriculture.
With reference to sections I and II of that memorandum it should be stated that the object of the Embassy memorandum of February 14th40 was not to give an exhaustive picture, accurate in every detail, of Britain’s economic position, but to set forth the main features. Whether the amount of Britain’s foreign capital assets, and the amount of her adverse balance of payments, are taken at the highest or at the lowest estimates, Britain has to face the possibility that her foreign capital assets may be wholly exhausted before the war is over.
The decision which has just been taken in principle to adopt a supplementary Anglo-French programme of aeroplane purchases in the United States, costing perhaps $1,000 million for that purpose alone, brings the exhaustion of our resources measurably nearer, and shows how the scale of war requirements is capable of rising.
The amount of the capital assets and of the current balance of payments alone do not give the whole picture. There is always the possibility of the loss of foreign currency through evasion of the British regulations, and—more important—it is not known to what extent United States citizens or others will take advantage of their freedom to withdraw their balances and investments from the United Kingdom.[Page 102]
These considerations already answer in some measure the enquiries in sections I and II of the State Department memorandum of February 21st. But some further answer to the detailed questions may still further clarify the position.
foreign exchange resources of the united kingdom
- Short-term balances are always set off, in part at least, by short-term obligations. Britain’s short-term obligations to the United States at the end of August, 1939, were estimated at $67 million. Further, banking relations generally require the maintenance of certain minimum balances, so that the short-term balances referred to could not be available in full for expenditure. The passage of the Neutrality Act has caused the withdrawal by the United States of an unknown but substantial amount of short-term credit formerly available to the United Kingdom. Lastly (a special feature) the London exchange market was over-sold on United States dollars when the war broke out to the extent of $107 million, and this had to be covered shortly after by the sale of gold.
- (b)and (c).
- It may, as suggested, be necessary at a later stage to consider the realization of British “direct” investments in the United States, and of British assets in third countries; even perhaps of British assets within the Empire. But it is impossible to say at present how far such assets may be saleable at all in the United States at proper prices, or to make any estimate of their total realizable value.
The very fact that Britain may be forced to sell such assets as these, representing in the main the results of decades of saving and enterprise, should be sufficient to show how essential it is for Britain to conserve to the utmost her resources.
The more Britain is impoverished by the war, the less will she be able after the war to maintain the import surplus which has been the counterpart of the export surplus of other countries.
It should be noted that the United States statistics certainly include, as part of United Kingdom holdings of investments and short-term balances, substantial amounts which are in fact held for the account of third parties.
It should also be noted that, since there are substantial foreign investments in the United Kingdom (including some $500 million of American investments), the net foreign income of the United Kingdom will vanish before all her foreign investments are sold.[Page 103]
balance of payments between the “sterling area” and the united states
While the British Government must be in the best position to estimate the effect of the war on the balance of payments, it is true that the figures of necessity be liable to large margins of error in either direction. There seem, however, to be good grounds for the variations assumed from the pre-war balance of payments, and there is no reason to suppose that the estimated adverse balance of $470 million could possibly be so much as $100 or $150 million too large. It should be noted that no allowance has been made for contingencies in the form of additional purchase requirements which are bound to arise. The adoption of the new aeroplane programme alone will probably make the present estimate too small, and will seriously affect the position in the second year of war.
- 1 (a) and (b).
- The approximate accuracy of the British estimates of the dollar value of United States imports from the United Kingdom and from the rest of the sterling area during the first year of war can only be known when the respective trade returns are available. It is greatly to be hoped that the possibility indicated in the memorandum of their being substantially in excess of the estimates may be realised. These returns are of such importance to an informed consideration of the whole problem under discussion that the British Embassy would be grateful if it could be supplied month by month, if that is possible, with the earliest advance figures of both classes of imports, and at the same time with the corresponding figures of United States exports by classes of merchandise.
- 1 (c).
- The net balance of invisible exports is bound to fall very substantially owing to the effect of the war and of the Neutrality Act on American travelling abroad, (including the prohibition of travelling on belligerent ships), and apparently on British freight earnings. Other service items will also be adversely affected, though economies may be possible in certain directions.
- The British Ambassador is not in possession of full details of the adverse balance of the sterling area with countries other than the United States. But from the information at present in his possession it appears that the only case where gold or dollars are being used in any sense to purchase agricultural products which could alternatively be purchased in the United States, is that of Turkey, where imperative political necessities arise. Apart from political necessities, it is in such cases as the hire of neutral ships, where the United States is closed as a source of supply by the Neutrality Act, that the British Government have been unable in many cases to resist the demand for payment in dollars.
Where payments are thus made in gold or dollars, they increase of course the ability of the receiving country to purchase in the United States goods which they are unable, owing to war conditions, to obtain from their usual sources. This is part of a diversion of trade in favour of the United States which is inevitably brought about by the war.
the situation in agricultural products
It is noted that the State Department is currently giving attention to the individual agricultural and forest products discussed in the Ambassador’s memorandum of February 14th and hopes that more complete and definitive talks will be held upon the arrival of Mr. Ashton-Gwatkin. Mr. Ashton-Gwatkin, however, will not be empowered to discuss increased British purchases of agricultural products, although Viscount Halifax has telegraphed that he welcomes the opportunity for Mr. Ashton-Gwatkin to hear and report to him personally the American point of view on current trade and economic problems generally. It will rather be the joint task of Messrs. Ashton-Gwatkin and Rist to explain the reasons for which the Allied Governments are constrained to abstain from purchases in the United States other than those required to cover their minimum needs.
With regard to agricultural products in general, Lord Lothian is unable to agree with the argument in the first paragraph of III of the State Department memorandum that the loss of United States export trade to the United Kingdom is caused in considerable part by British measures for the control of trade, by policies of diversion to other sources of supply, and by the fact that the United States is in a position to supply other products which are necessary to the British Government for the purposes of the war. In his opinion the reasons are those set out at length in the Embassy memorandum of February 14th, which are briefly that British consumption of and dollar expenditure on non-essential agricultural products must be increasingly restricted as an imperative condition of financing the war until it reaches a successful conclusion. There can be no ground for suggesting that if the United States had not been in a position to supply other products which are of the utmost importance to the British Government, the purchases of these non-essential agricultural products would not have been restricted and these losses would not have occurred.
Lord Lothian fully realises Mr. Cordell Hull’s apprehension in regard to diversion of certain United Kingdom agricultural imports from the United States to other countries but such diversion is imposed by imperative political considerations and war necessity. The trade value of the reduction in United Kingdom imports from the United States of agricultural products due to diversion arising from these political [Page 105] considerations is small in comparison with the reduction due to the reasons given in the preceding paragraph.
The loss to American agriculture is likely to be heaviest in exports of the non-essential products referred to in the second and third paragraphs but these include tobacco and it would be premature to assume that the discussions and consultations referred to in the Embassy memorandum of February 14th will fail to produce any alleviation of this exceptional problem.
Against the loss of exports of these agricultural commodities should be considered the maintenance and even increase of others, also the indirect benefit of the stimulation of domestic consumption of all farm products brought about by heavily increased British purchases of industrial products and aircraft and other military supplies. This indirect benefit is bound to become an increasingly important factor as these purchases expand under the programmes which are contemplated. Public speakers of all shades of political opinion, including spokesmen for the trade agreements programme, have constantly emphasized the benefit to agriculture of increased industrial production.
The reference in the Embassy memorandum of February 14th to the “cash” and “carry” requirements of the Neutrality Act for the conduct of British wartime trade with the United States was intended to apply not only to the relatively small volume of imports diverted but also to the whole volume of imports from the United States of agricultural and other products which must necessarily be restricted for economic reasons flowing from the “cash” requirement. That necessity was recognized in the statement of the Secretary of Agriculture made to the House Committee on Agriculture on February 15th, 1940, that for farm products Great Britain and France must turn wherever possible to countries other than the United States where they can acquire these commodities “in exchange for their own goods or buy them with sterling or on credit.”
The reference to the “carry” requirement is that United States ships are prohibited from carrying agricultural or any United States products purchased by the United Kingdom and that the United Kingdom is compelled to provide for their transport in British or other ships, under the limitation imposed on shipping by German submarine, mine, and aerial attack. The loss of exports to the United Kingdom of United States lumber and cotton which has been and may be increasingly occasioned by this shipping situation will no doubt be made apparent in the detailed examination of individual products which the State Department has undertaken. Moreover, although not relevant to this requirement, the disabilities placed on British ships as a result of Section 2, subsections (c), (g) and (l) of the Neutrality [Page 106] Act, as regards the shipment of cargoes from the United States to belligerent territories in the “(g) areas”, result in loss of earnings which would have contributed to British dollar resources for purchases in the United States, in the perhaps permanent loss of established British shipping connections, and to strong feeling in British shipping and other circles.
Lord Lothian fully realises the force of the last sentence of Mr. Cordell Hull’s memorandum and can only draw his attention to the Prime Minister’s speech of January 31st last,41 expressing the hopes and intentions of His Majesty’s Government in regard to multilateral trade after the war. But the probability of its being possible to return to multilateral trade will obviously depend upon the duration and the result of the war.
The broad position would seem to Lord Lothian to be as follows:—
- As a result of the war United Kingdom purchases in the United States will increase very largely. The pre-war average was $460 million a year. Present estimates are that purchases will amount to at least $720 million in the first year of the war, and well over $2,000 millions in the first two years of the war. These are only minimum figures; substantial new requirements are bound constantly to arise and are already arising. The increase in purchases will be represented in the main by aircraft, engineering products and munitions. There will be no equivalent increase in United States purchases of British goods.
- There will be a reduction in the purchase of agricultural products and in particular products this reduction may be a considerable portion of the normal pre-war export. The total value of agricultural and lumber purchases by the United Kingdom in the first year of war, based on the estimates communicated to the State Department, seems likely to be more than 80 per cent of a five-year average of pre-war United States exports to the United Kingdom. If so, the reduction in agricultural purchases will be of the order of $55 million per annum as against the increased purchases of $250 million in the first year of the war and $1,500 million in the second, as above, for other commodities. There will be in addition a substantial indirect benefit to agriculture from the increase in domestic purchasing power in the United States as a result of the vast increase in British industrial purchases in the United States.
- A reduction in the purchase of aircraft, engineering supplies and munitions would not have the effect of increasing British purchases [Page 107] of agricultural products for the reason that the reduction in such purchases is in the main the consequence of the need for rationing and the reduction of consumption in Great Britain, among other domestic measures regarded as necessary for winning the war and to the necessity for purchasing some of these products in other countries for imperative political reasons, e. g. Turkish and Greek tobacco. The only result of cutting down British engineering and munitions purchases would be to run the risk of prolonging the war or even possibly of losing it.
- If the war goes on for much more than two years the United Kingdom will have transferred to the United States all of its easily negotiable dollar securities, most of its gold and (if the necessity arises which is suggested on page 2 of the State Department Memorandum) a part at least of its “direct” investments in the United States and of its assets in other countries outside the United Kingdom. A large part of British foreign investments and foreign income will thus be lost, and the consuming power of the British population, and thus their ability to purchase American agricultural products, will be correspondingly reduced.