The Secretary of State to the Embassy in the United Kingdom

No. 714

The Secretary of State refers to the Embassy’s report No. 1449, the Commercial and Economic Weekly for December 2, 1946.2

The Department has taken special note of the section in the foregoing report entitled “Export Drive and Dollar Parsimony,” in which the Embassy refers to recent pronouncements on the part of British Government officials dealing with the allegedly unsatisfactory dollar exchange position of the United Kingdom. In general, the Department is inclined to agree with the Embassy’s belief that this series of statements has been undertaken with an eye to the future rather than the present. The possible motives for such action advanced by the Embassy appear to be plausible. Another motive that had been suggested in the Department before receipt of the Embassy’s report was a possible desire on the part of the British to utilize the sterling balances as a means of strengthening the United Kingdom’s export position after the present seller’s market will have run its course. According to this view, the British may not object to the passage of some time before they reach settlements on the sterling balances. In the meantime, they will use those balances to maintain or extend the United Kingdom’s trade position in the creditor countries. It was also suggested that the recent emphasis on balance-of-payments difficulties might be a first step in an attempt by the British to obtain a concession with regard to Section 10 of the Financial Agreement,3 such concession to consist of the privilege of paying the funded part of the sterling settlements in inconvertible sterling, that is with British exports.

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For the confidential information of the Embassy two British officials, in conversation with officers of the Department, have already intimated that the United Kingdom may wish to postpone implementation of some of the provisions of the Financial Agreement.

Sir David Waley4 and Mr. Gordon Munro (the latter attached to the United Kingdom Treasury Delegation in Washington) met with Mr. Ness, Director of OFD, on November 21.5 Sir David reported the following area-by-area estimates of the gold and dollar deficits (–) and surpluses (+) anticipated in calendar 1947:

Billions of $
1. United States and Canada $-1.9
2. Argentina and other “hard currency” areas –0.4
3. Sterling-area dollar requirements –0.2
4. Gold from sterling area  +0.4
5. Total (net) $–2.1

He stated that because of political uncertainty in India, it was not deemed possible to approach that country for settlement before April, and that Egypt and other countries must be approached later. When Mr. Ness observed that this schedule left but little time before July 15, 1947, when the most important convertibility provisions of the Agreement go into effect, Sir David agreed and said that the United States might have to be prepared to consider postponement of these provisions under the “mutual agreement” clause. He alluded several times to the possibility that this Government might be asked to explain to the American people the difficulty under which the British are laboring. Mr. Ness observed that postponement would have grave political consequences here.

About a week before the foregoing conversation took place, Mr. Thompson-McCausland of the Bank of England spoke to Mr. W. G. Brown, Chief of CP, on the same general subject. Mr. Thompson-McCausland referred briefly to the sterling settlement negotiations and asked whether it would cause great concern in the United States if these negotiations were not concluded within one year from the date of the loan. He also asked what this Government’s reaction would be if the British Government should say that it would be of help to them in getting satisfactory results in their negotiations if they could use the convertibility of exchange arising from current transactions as an additional bargaining weapon. In other words, would the United States be willing to waive this provision of the Agreement for a while in order to assist the British in working out a more satisfactory overall [Page 3] solution of their financial problems. Mr. Brown stated that his immediate personal reaction was that this Government would find it almost impossible to agree to a modification of the Financial Agreement requirement that exchange from current transactions be made convertible within a year. Mr. Thompson-McCausland further said that he regretted that Lord Keynes, during the loan negotiations, had always talked in terms of sterling balances as a debt and in terms of funding a portion of them. Actually, they were not a debt; London was really holding the balances as banker. The balances were not blocked, but the British would want to control the rate at which they were expended in order to stop too great a drain on their production.

The Embassy’s further comments from time to time on this subject will be welcomed.

  1. Not found in Department of State files.
  2. For text, see Department of State Treaties and Other International Acts Series (TIAS) No. 1545, or 60 Stat. (pt. 2) 1841.
  3. Third Secretary, British Treasury.
  4. A memorandum of conversation, not printed, is in file 611.4131/11–2146.