Memorandum by the Secretary of State to President Roosevelt 11

Lend-Lease and General Economic Relations with the United Kingdom in “Phase 2”12

The most important international economic problem of the transition and post-war periods will be the situation of the United Kingdom: the sterling-dollar relationship, the change in Britain’s creditor position, the prospects for British export trade, and the commercial and financial policies which she will adopt in the light of the situation. This problem has its long run aspect—associated with the loss of overseas investment; the probable reduction in shipping, international banking, and insurance earnings; and the difficulty of reestablishing and expanding British export markets in the post-war world. The main outlines of this problem have been developing for several decades, although war has accentuated the difficulties. It is the Department’s view that it is in the best interests both directly of the British and of the world in general if this long run problem is attacked by the adoption by the British of a liberal [Page 54] commercial policy with foreign exchange and investment operations handled in accordance with the principles of Bretton Woods.13
Nevertheless, strong economic and political pressures will be brought to bear upon the British Government to adopt restrictive policies of commerce and finance, and these pressures will be in considerable measure induced by pressing, critical, short run problems of British economic adjustment at the close of the war. The United States can contribute greatly to the possibility of Anglo-American collaboration in sound post-war economic policies and relationships and to the attainment of high levels of economic activity and international commerce in and between the two nations and the rest of the world, by doing everything in its power to permit and assist Britain to enter “Phase 3”14 on as sound an economic foundation as possible.
The potentialities of Anglo-American and general international economic collaboration in the reconstruction and development of the world economy in “Phase 3” are large. They include the establishment of the Fund and Bank blueprinted at Bretton Woods,15 and the setting up of machinery for collaboration in the commercial policy field. Direct assistance, largely of a financial character, will in all probability be essentially on a loan and repayment basis. The institutions for carrying out these programs have yet in the main to be created.
In “Phase 2” there is more which we can do quickly and directly to set the stage for a favorable but slower development in the postwar period.
Turning first to the military situation, I must of course defer to the armed forces in matters of strategic policy and decision. Nevertheless it is clear that one of the most important objectives of United States policy must be to bring the British into the war operations in the Far East to the greatest possible extent. The advantages of such a course are obvious in producing an early end of the war, with the resultant saving in human and material costs. The disadvantages of the failure of the British to participate to the full in the war in the Far East deserve special emphasis:
Political—any indication that British participation in the Far Eastern struggle is at a rate below their utmost capabilities will produce immediate and hostile public reaction in the United States.
Economic—a great expansion of British exports with relatively weak British participation in the Far Eastern war will stir up the resentment of our export manufacturers and traders.
Lend-Lease—a failure to obtain full British participation in the Far Eastern military operations will be regarded as at least a partial failure of lend-lease policies and will create unfortunate circumstances in which to arrange for lend-lease settlement.
General Post-War—all of these factors will combine to produce the most difficult of circumstances in which to attempt to build Anglo-American and general political and economic collaboration to face the problems of the post-war world.
The economic problem then in “Phase 2” will be to permit a reasonable degree of reconversion in the United Kingdom, to be divided among reconstruction, the satisfaction of domestic needs, and the reestablishment of exports to pay for the imports which are essential to the economic life of Great Britain. This must be done in such a way as to:
Meet the immediate British problem of avoiding economic disaster.
Avoid the creation of obligations that will later plague Anglo-American relations.
Reduce to a minimum tendencies towards the adoption of discriminatory trade policies by the British.
Be politically acceptable to the American public.
It has been indicated that in “Phase 2” American production for war may be reduced by as much as 40 percent with a resultant reconversion to meet domestic civilian demands as well as to permit some increase in commercial exports. It is essential that there be a synchronized British reconversion program. The strain of five years of war, with bombing, severe rationing, and the dislocation of life produced by national service, will require, from the point of view of any government in the United Kingdom, substantial improvement in the conditions of civilian life. The necessities of British physical reconstruction and balances of payments will almost certainly mean that British civilian standards will remain far below those in the United States. This should be recognized here as a laudable determination of the British to restrict consumption in accordance with the realities of their economic position.
If British reconversion is coordinated with our own, it will be right and proper, and it should be possible to justify to the Congress and the American people, to continue lend-lease aid on a reasonable scale to the British during the continuance of the Pacific war. It is my understanding that the British as yet have made no definite proposals for their overall lend-lease needs in “Phase 2”, as they feel that the nature of these proposals must depend to a large degree on the strategic plans for the Far Eastern war. In view of the speed [Page 56] of military developments in Europe it is most important that we come to an early understanding with the British on this matter, so that a program of lend-lease can be worked out that will be fair to all concerned.
I therefore recommend the adoption of the following key economic policies with respect to the British in “Phase 2”:
Synchronization of the American and British reconversion programs, recognizing that a greater proportion of the British productive capacity released from war production will be devoted to exports.
Maintenance of lend-lease deliveries to the United Kingdom in “Phase 2” reduced by about one-third overall. Lend-lease deliveries upon such a scale would recognize the continued British production for war, would not hamper reconversion in this country, and through the continuance of civilian items such as food (many items of which are likely to be in surplus in this country) would assist British reconversion without assuming responsibility for it.
These efforts to assist the British to enter “Phase 3” on as sound an economic foundation as possible must be accompanied by vigorous British efforts to join with us in pressing a world-wide program of multilateral reduction in barriers to international trade. The Bretton Woods agreements with respect to exchange manipulations, restrictions, and discriminations constitute a very important part of our commercial policy program. The British must be urged to implement these arrangements, and to join with us—through the Article VII conversations and otherwise—in thorough consideration of the remaining elements of our international economic program. It is of fundamental importance to the interests of the United States and to the establishment of the kind of economic conditions which we hope to see prevail in the post-war world that in formulating a lend-lease policy for “Phase 2” which will further these objectives we have assurances from the British that they will actively cooperate with us in achieving them. You are aware of the political situation in the British government which has impeded this, and I know you will agree that it is time that some forward steps be taken to resolve it.
C[ordell] H[ull]
  1. Copy obtained from the Franklin D. Roosevelt Library, Hyde Park, N.Y.
  2. Phase 2 designated the period of the war between the surrender of Germany and the surrender of Japan.
  3. See vol. ii , section entitled “United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire, July 1–22, 1944”; also, Proceedings and Documents of the United Nations Monetary and Financial Conference, Bretton Woods, N. H., July 1–22, 1944 (Washington, Government Printing Office, 1948), vols. i and ii.
  4. Reference is to the period following the surrender of Japan, during which the war economies of the Allies would be fully reconverted to the purposes of peace.
  5. Reference is to the International Monetary Fund and the International Bank for Reconstruction and Development.