Foreign Relations of the United States: Diplomatic Papers, 1945, The British Commonwealth, The Far East, Volume VI

841.51/6–2545

Memorandum by the Assistant Secretary of State (Clayton) to the Director of the Office of War Mobilization and Reconversion (Vinson)¹⁶

[Washington,] June 25, 1945.

The British financial problem is admittedly the greatest present barrier to rapid progress towards free multilateral payments and relaxation of barriers to trade. It threatens not only delay but, indeed, the ultimate success of our economic foreign program. It is, therefore, definitely to our interest to give Britain the financial help required to bridge the transition to peacetime equilibrium.

It would be quite unwise, however, to consider making Britain an outright gift of the required several billion dollars, as has been recently suggested by certain critics of Bretton Woods. It would be unwise even to supply the funds as a credit without laying down conditions that would insure a sound advance towards our post-war objectives.

On the other hand, it will be difficult to persuade the British to accept dollar credits rather than work out their financial problems within the Sterling Area by the devices of blocked balances, exchange control, exchange pooling, bilateral clearing arrangements and forced exports in liquidation of sterling balances. Hence the terms of the credit we offer Britain and the conditions we lay down for granting it must be devised very carefully, with a view to Britain’s position as well as to ours.

I believe we should offer Britain a dollar credit of as much as $2 or $3 billion as required, repayable over 30 years, but with an option on the part of the British to make prepayments at earlier dates. The amount granted must be sufficient to meet Britain’s adverse dollar balance under multilateral current payments, as laid out in the section on conditions below.

In view of British reluctance to borrow, and the fact that they are able to finance themselves to a very substantial extent by blocked sterling at a fraction of 1 percent, we must be prepared to grant them credit at the lowest possible rates. A rate of 2% percent, such as we have used on 3c Agreements under Lend-Lease would, in my judgment, be high enough, and possibly we should go as low as 2 percent. The British will want even lower rates. Interest charges would, of course, apply only on balances actually outstanding.

British reluctance to incur dollar indebtedness could be appreciably reduced, and possible stifling effects of service and repayment at later times be avoided, by provisions that if, because of a slump in world demand, Britain’s balance of payments became unfavorable, Britain would not be considered in default. The possibility of the U.S. accepting limited amounts of sterling as repayments under certain circumstances might be considered.

I would propose the following conditions for the granting of the above financial aid:

1. Upon the granting of the credit, the Sterling Area dollar pool arrangement is to be terminated and sterling proceeds thereafter acquired on current overseas account by non-residents of the United Kingdom are to be made convertible into dollars, at the option of the holder, for current transactions.

2. A substantial funding of the abnormal sterling balances which have arisen from the war should be required. In the case of India, Egypt and certain other areas, substantial writing down of these balances is justified and to the best interest of all concerned. European and Latin American balances should, on the other hand be funded to a larger extent. It need not be required that all balances be funded, and Britain might be left free to repay agreed portions thereof by exports during the transition years, so long as sterling proceeds of current trade are kept convertible into dollars.

3. Elimination of Empire preferences, probably as one term in a new reciprocal trade agreement reached under the strengthened act or as part of a multilateral trade convention. The British will resist this most strenuously. Perhaps a substantial reduction of preference is all we can hope.

4. Britain must continue domestic import controls over non-essentials to reduce the transitional strain upon her balance of payments and hence the amount of financial aid required. She will undoubtedly wish to do this in any case.

5. Canada, and perhaps other countries whose international financial position will be strong at the end of the war, should also grant transitional financial aid to Britain. India, for example, might be asked to make her contribution in the form of sharp reduction of her sterling balances.

The above proposals will be recognized as a compromise between full-fledged freedom of payments and the strict wartime controls. Aside from the elimination of Empire preferences, their main effect would be to secure substantial compliance with conditions laid down in the Bretton Woods Agreements very shortly after the war rather than at the end of a transition period of five years or more. It is nevertheless of the utmost importance to accelerate Britain’s reconversion to multilateralism in this way, both because of the danger that bilateralism and restrictionism might otherwise become firmly imbedded in British policy during the transition, and because the American business public will demand early evidence that Britain is going to go along with us in our post-war trade policy if they are to continue to support it.

16. Transmitted with a covering letter dated June 28, 1945, not printed.