Foreign Relations of the United States: Diplomatic Papers, 1943, The British Commonwealth, Eastern Europe, the Far East, Volume III

800.24/1212½

Memorandum by the British Treasury²⁵

The Overseas Assets and Liabilities of the United Kingdom

I. The Overseas Financial Policy of the United Kingdom.

1. The passage of the Lend-Lease Act early in 1941²⁶ and the assistance given by Canada from 1942²⁷ onwards have dealt most liberally with the more recent financial requirements of the United Kingdom in North America. These measures are well known and widely appreciated. In most other parts of the world, however, His Majesty’s Government have to pay for the war by acquiring local currencies against a liability to repay sterling and are thus incurring unfunded indebtedness on a vast scale. It would not be possible or reasonable to continue this policy indefinitely without having some proportion of liquid assets out of which the more pressing part of the liquid indebtedness could be discharged if called for from time to time. It has, therefore, been our deliberate policy to accumulate a reserve (though, relatively, a small one) against these liabilities—not out of our net external earnings because, of course, there are none—but partly by ad hoc capital transactions and partly by holding on to a portion of such current dollars and gold as come our way (mainly from other parts of the Sterling Area) instead of using the whole of them to meet our liabilities. The dollars acquired from other part of the Sterling Area, however, have to be paid for in sterling, which increases our overseas indebtedness. This system has, therefore, the effect of increasing our gross indebtedness but does, at least, mean that we hold something against it. For example, it has seemed to us more advisable to borrow in the course of the year (say) $3,200 million and retain $800 million to meet pressing claims, than to borrow $2,400 million and retain nothing against it.

2. The recent increase in British liquid assets is thus an essential component in a careful (though nevertheless vulnerable) financial policy by which, though with the most dangerous risks to our postwar, position, we have managed to finance a vast war expenditure in India, the Middle East and elsewhere—an expenditure which is, of course, vitally essential to the prosecution of the war. To set a limit to our assets while disregarding the growth in our liabilities would tear this delicate system to pieces. Only if we are left free to pursue our existing policy can we hope successfully to finance our vast and essential commitments outside North America.

[Here follows section II, “Statistics Illustrating the Overseas Financial Policy of the United Kingdom”. An extended synopsis and some of the statistical material are printed in Hall, North American Supply, pages 282–284.]

III. The Adequacy of the United Kingdom’s Quick Reserves.

16. Having regard to the size of the quick liabilities, it is obvious on any criterion that the quick reserves are seriously inadequate. But there are also certain other considerations which are, in greater or less degree, relevant to this question.

(a) The liabilities are liabilities solely of the United Kingdom and not of any other part of the Sterling Area. But the quick assets cannot be regarded as wholly available for the United Kingdom’s requirements. A large part of them has been acquired under the pooling arrangement referred to above by which all parts of the Sterling Area (other than some of the temporary adherents) sell to the United Kingdom for sterling any dollars which they earn in excess of their own small direct requirements. These arrangements carry with them an implied obligation on the U. K., so far as is possible, to provide dollars for other parts of the Sterling Area, which have retained no significant dollar holdings of their own, when subsequently they have a legitimate need for them.

(b) The quick liabilities are the more burdensome because of the disposal of many of the more saleable capital assets, which otherwise would have served as a second line of defence. As the table above shows, the total loss of assets and increase of liabilities so far suffered by the United Kingdom during the war has amounted to 10½ billion dollars. In this respect our position is unique amongst the United Nations. In fact more than 90 per cent of this loss has accrued to the advantage of other members of the United Nations, many of whom have improved their overseas position during the war. The United Kingdom alone has been expected to mortgage the future on a large scale by incurring overseas liabilities. During the earlier period of the war, expenditure in North America was the main cause of the deterioration of the United Kingdom’s financial position. More recently her responsibility for meeting the greater part of the local cash expenditures in the whole area of hostilities from Tunis to Burma has been the main influence. At the present time the United Kingdom’s local cash expenditure in Egypt, the Middle East and India, over and above the supplies shipped across the seas, is amounting to some $2½ billion annually, the greater part of which has to be borrowed from the countries concerned. Between the beginning of the war and the end of 1943, for example, it is estimated that we shall have incurred an indebtedness to India of some $3,750 million, of which some $1,200 million will have been used to discharge her Government sterling debt and the balance will remain owing to her.

(c) In judging whether, in spite of the above considerations, the United Kingdom is nevertheless accumulating unnecessarily large quick reserves it is relevant to consider the relationship between the United Kingdom’s resources as shown above and those of other members of the United Nations. For example, the gold and dollar reserves of the U.S.S.R., which are not published, are estimated by the United States Treasury at $1,600 million and those of China at $750 million. The corresponding figures of France can be put at $2,875 million, of the Netherlands at $690 million and Belgium at $870 million. None of these countries have any significant amount of overseas quick liabilities against these reserves. The figures for the United Kingdom (which in respect of dollars include the whole of the Sterling Area) are at present, as shown above, about $1,000 million with sterling liabilities seven times this amount against them. The net gold reserves of the United States (i.e. after deducting all foreign balances held in United States) are about eighteen times the gross reserves of the United Kingdom (i.e. before deducting the sterling foreign balances held in United Kingdom which are seven times as great as the reserves).

17. If, therefore, in spite of a progressive deterioration in her net position, the United Kingdom is in a position, as we hope, to increase her quick reserves above the present figure by retaining certain liquid resources earned outside our balance of trade with the United States instead of applying them forthwith to a reduction of her liabilities, this cannot be judged, in the light of the above considerations, to be a matter for criticism or open to legitimate objection.

[ London ,] 14 February, 1943.

25. Transmitted to the Department of State under a covering letter from the British Minister (Campbell), September 16, 1943.
26. March 11, 1941; 55 Stat. 31.
27. “The Canadian Government announced in January [1942] that sterling funds accumulated by Canada in London were being converted into an interest-free loan for the duration of the war to the amount of $700 million. It was further announced that as from December 1941 all munitions and war supplies, including food, produced in Canada for the United Kingdom would be an outright gift to the extent of one billion dollars.” Quotation is from H. Duncan Hall, North American Supply (London, Her Majesty’s Stationery Office, 1955), p. 240; for further details, see ibid., pp. 224–242.