The British Embassy to the Department of State 1


United Kingdom Financial Position and the World Dollar Shortage

1. This is an account of how the United Kingdom Foreign exchange position has developed since the Anglo-American Financial Agreement was signed in December, 1945; of the situation which now faces us, and of the relation of this to the world dollar shortage.

[i.] the exhaustion of the credit

2. In the loan negotiations we estimated our 1946 balance of payments deficit at pounds 750 millions, to be followed by a further deficit of pounds 500 millions in 1947 & 1948 and some deficit in 1949 & 1950 before stable equilibrium could be reached. Thus we expected a cumulative deficit of some dollars five billion (pounds 1250 millions) by the [Page 18] end of 1948 and a further deficit in the following period. Against this, we had gold and dollar reserves at end of 1945 of nearly dollars two and a quarter billion (after allowing for payment of subscription to International Monetary Fund), plus the United States credit of dollars three and three quarter billions plus the subsequent Canadian credit of dollars one and one quarter billion—dollars seven and a quarter billion in all. The margins were already narrow, and it was likely that we should be dependent upon our reserves by the end of 1948. But the underlying assumption was that the world would then be well on the way to recovery and that our own resources (together with International Monetary Fund etc.) would cover us until we reached a stable equilibrium.

3. The results of the year 1946 were, in fact, much better than expected. The deficit was only pounds 400 millions, instead of pounds 760 millions. This was because:—

Exports recovered very fast, and in 1946 averaged nearly 100 percent of 1938 volume.
Imports were restricted by world supply shortages to 65–70 percent of 1938 volume; this gain was illusory, for we had to draw heavily on our stocks of food and raw materials, which we must later replace at higher prices.

4. The position in 1946 seemed to develop even more favourably than the total deficit implies, for the net drain upon our ultimate resources—our gold and dollar reserves and the United States and Canadian credits—was only pounds 227 millions. The remainder of the pounds 400 millions deficit was financed by growth in sterling area and other countries sterling balances, etc.

5. The drain upon our ultimate resources, however, was tending sharply upwards towards the end of 1946 and this year has accelerated rapidly:—

Net drain upon reserves and credits ($Millions a month)

1946 1st quarter 31
2nd quarter 82
3rd quarter 70
4th quarter 123
1947 January 137
February 224
March 323
April 307
May 334

Net monthly outgoings of gold, United States dollars and Canadian dollars.

The result is that we have now used over one-half of the United States and Canadian credits. At the end of June, we shall have gold [Page 19] and dollar resources of about $2.4 billion, undrawn United States credit of $1.7 billion, and undrawn Canadian credit of $0.57 billion—total resources of some $4.7 billion.

6. If the present drain of over $300 millions a month continues, not only will the United States and Canadian credits be gone in a few months time, but also our reserves will be down to $1 billion by the middle of 1948. If we were unable to draw upon the Canadian credit and the Canadians’ difficulties are such that they cannot afford to allow us to draw on the credit as we please—our effective reserves would be exhausted even earlier.

7. Our reserves are those of the whole Commonwealth (except Canada), the financial strength of which is essential to world stability. We regard pounds 250,000,000 ($1 billion) as a final reserve to be used as a war chest against international political crises and the like. Our effective reserves are the excess above this figure, and in order to have sufficient financial strength to meet the uncertainties of the next few years, we regard a further $1 billion as essential.

8. We are, of course, taking measures to deal with this critical situation—cutting imports, devoting more of our production to exports, etc. but our reserves at the middle of 1948 will certainly not exceed $2.5 billion (compared with the present $4.7 billions) and they may be substantially below this figure. Even the higher figure, however, leaves us little margin for 1948–49—a year in which the world will still be very far from recovery.

9. These are the facts. There has been a real change for the worse in the last six months.

ii. the causes of the drain

10. This worsening of our position results partly from our fuel and raw materials crises and partly from the unfavourable development of the world economy. We attach the greater weight to the latter, for in a favourable world background we should have much more time in which to solve our internal problems; in an unfavourable world background, on the other hand, even the best possible development of our own industry would leave us very badly placed.

The fuel crisis

11. Six months ago, we were well satisfied with our reconversion. We had reached a level of business activity which compared favourably with that of a good pre-war year. The ordinary indicators—steel consumption, railroad traffics, power output and the like—all pointed the same way. There were bad spots—in particular the industries which had been disrupted by the war, such as coal and cotton textiles. It was becoming apparent that the real losses caused by war-time deferment [Page 20] of maintenance were greater than had previously been believed. But nevertheless progress was good and compared favourably with that of any other country which had been in the front line. In particular, the record of industrial peace which had been achieved was second to none, and the system of rationing and other internal controls, while preventing the superficial appearance of prosperity which was apparent in many other countries, was ensuring a much fairer distribution of the available goods and was, in fact, providing a higher standard of living than ever before for the poorest sections of the community.

12. As shown above, the recovery was particularly marked in exports. We were working to a target of 150 percent of 1938 volume by the second half of 1947, and this looked wholly practicable, for a level of 110–115 percent was established in the latter part of 1946, and the labour force engaged on work for export was rising at the appropriate rate.

13. The February coal and power crisis—the result of unprecedented weather conditions impinging upon a critically low stock position—has set this process of recovery back. It has left in its wake a continuing shortage of coal and steel, which will continue to hamper output for the rest of this year, despite the encouraging coal output figures for the first weeks working of the 5–day week, and the continuous efforts which are being made to save coal.

14. These are grave difficulties. But there is no reason to suppose that they are permanent. The crisis has set back the export drive by nine months in a period in which time is of the utmost importance. But, as far as exports are concerned, its effects can be and are being offset to some extent by a further diversion of supplies from the home market to export, which primarily means a postponement of increases in civil consumption. The loss of exports resulting from the fuel crisis—and particularly from its delayed effects over a period of several months—is an important factor in the dollar drain, but it is not a decisive one. Indeed, our exports have already recovered to the level reached before the fuel crisis.

The rise in prices

15. The rise in world prices is of more far-reaching importance. We are now feeling the full impact of the price increases in world markets which begin to develop seriously in the second half of 1946. These increases are now costing us $60–70 millions a month—a large item in the figures in paragraph 5 above. Indeed, the 40 percent increase in the United States wholesale price index since the loan negotiations really means that the buying power of the credit is about $1 billion less than it was at the time of the negotiation.

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16. This element in the situation can completely distort all forecasts. The loan negotiation forecasts of our balance of payments assumed sterling prices double pre-war. The prices which we are now paying, over our whole import programme, are over 250 percent of 1938. The prices of exports have not improved to nearly the same extent—they are about 220 percent of 1938. This deterioration in the terms of trade is crucial to us. It reduces our purchasing power by the last 10–15 percent of our import programme which makes all the difference between getting along quite comfortably and drastic restriction.

Slow world recovery

17. Our expectations at the time of the loan negotiations have been even more seriously falsified by the disappointing speed of world recovery. Two years have elapsed since VE–Day, and Europe’s recovery has hardly begun. Nearly two years have passed since VJ–Day, and no significant supplies have yet come forward (except of rubber) from the whole South East Asia Command Area. The world food situation has hardly eased at all; the raw material situation has become worse rather than better.

18. Our interests in world recovery are probably greater than those of any other country. We have made available huge resources to foster it. We have contributed to relief and rehabilitation, in loans and gifts, some pounds 750 millions—equivalent, in proportion of national income, to a contribution of some dollars 15 billions by United States. But this has done little more than shore up the disrupted economies of Europe and Asia.

19. The importance to us of world recovery is threefold:—

The failure of recovery of primary production is a basic cause of world price inflation. Moreover it is keeping us short of food and raw materials; the cereals crisis of the last two years has prevented us from restoring our own livestock, and forces us to choose between doing without bacon, eggs and meat or importing them at high prices.
We are unable to get enough supplies from our traditional suppliers and are therefore compelled to depend to a far greater extent upon Western Hemisphere supplies than we can afford.
We have difficulty in getting acceptable payment for our exports to European and Asiatic countries. Our economy is the bridge between the Western and Eastern Hemisphere. Traditionally we have deficits with the West which are financed by surpluses with the East. The effect of the world supply crisis is that our deficit with the West is inflated to quite unmanageable proportions, while we are unable to get full benefit, in goods or in gold, from our surplus with the East.

20. We are seeking to right this, as far as we can, by developing sources of supply in the Eastern Hemisphere, and by increasing our exports to the Western Hemisphere. But the scope of the former is very limited in a short period of time and we cannot, in fact give more [Page 22] than indirect stimulus to our exports to the Western Hemisphere. A system of comprehensive export licensing control is clearly out of the question on administrative grounds and we can, therefore, seek to influence exporters’ choice of markets only by exhortation and by such indirect means as are open to the Government.

21. There is no manipulation, indeed, which can solve this problem for us. The only solution to our problem is in the recovery of these disrupted territories to bring the world supply structure back into balance again. We cannot afford to contribute more to the financing of this recovery ourselves.

22. In financial terms, the situation described in the previous paragraphs is that we have rapidly growing deficits with the Western Hemisphere—which require to be settled in dollars or the equivalent—while we are unable to secure dollars in settlement of our surpluses with the Eastern Hemisphere (because these countries have no dollars to provide). This is the central explanation of the growing drain upon our gold and dollar resources, and it is intimately related to the world supply of dollars.

iii. the world dollar shortage

23. This is the crux of our problem. The increase in our dollar drain from less than dollars 100 million a month in the second half of 1946 to over dollars 300 million a month in April and May 1947, corresponds with the rapid growth in the United States surplus of exports over imports from less than dollars 400 million a month in the second half of 1946 to over 700 million dollars a month in the first quarter of 1947 and nearly dollars 800 million in April.

24. The facts of the developing shortage of United States dollars are, of course well known to the United States administration; we are only concerned here to explain the impact upon us. The dominating consideration for us is the appearance of a world dollar shortage. This is critical for United Kingdom for the following reasons:—

It hampers the growth of production in Europe and the East and thus prevents us from reducing our huge import bill with the American continent.
It prevents us from securing enough dollars from the rest of the world to finance our deficit with the American continent.
It threatens to make convertibility a serious drain upon our resources. If countries are short of dollars they will conduct their affairs so that they can earn sterling from us and convert it into dollars and so pass their dollar difficulties on to us.
Our interests lie in the expansion of multilateral world trade which is impossible if the world is short of dollars.

25. In fact the shortage of dollars affects us wherever it occurs.

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26. We explained earlier the difficulties created for us by the slowness of European recovery, which prevents us from getting urgently needed supplies from Europe and also prevents us from securing effective payment for our exports to Europe. In addition to this is the increasing drain which Germany makes upon our dollars.

27. We would emphasise that if the European countries are so short of dollars that they must use them exclusively for buying the basic essentials of life, they are unable to buy the supplies they need for reconstruction, thus prolonging the crisis and preventing any effective solution.

28. Furthermore, their shortage of dollars involves us in grave risks that convertibility will be a heavy drain upon us, for this is one source of dollars for them. This difficulty arises in the stronger countries of Europe such as Sweden as well as in the weaker, for Sweden’s lack of dollars compels her to seek to earn more convertible sterling by cutting down her imports from us, and in this way we are caught up in a declining spiral of trade.


29. A similar problem arises for us in the belt of countries stretching from the Middle East to Indonesia. Supplies from this area are of paramount importance fats, sugar, fibres, etc. To set these supplies moving again involves large work on rehabilitation which is proceeding only very slowly. These countries are all faced to a greater or lesser extent with acute economic difficulties.

At present their economies are under-pinned by their ability to draw upon their sterling balances. It is only by this means for example that India can buy cereals and materials which she must have to avert calamity. We cannot afford to continue to provide this substantial assistance. It not only represents a direct drain upon our dollars (e.g. for United States wheat for India and Japanese textiles for our Far Eastern colonies), but it also means that we are supplying exports without securing effective payment. The supply of financial resources to the countries in this belt is as important to us as the reconstruction of Europe.

Western Hemisphere

30. The shortages of United States dollars in Canada and Latin America also affect us severely. Our deficit with them is as large as our deficit with the United States. The effect of Canada’s shortage of United States dollars is that we are unable to draw as much as we need from our Canadian credit and in effect have to pay Canada United States dollars for our supplies from her. Latin America is also running short of dollars very fast and this means that these countries will have [Page 24] to take full advantage of our convertibility obligations to convert their earnings from us into dollars. Their balance of payments difficulties indeed are forcing them to cut down their imports from us in order to secure as large a surplus of sterling as they can for conversion into dollars to meet their deficits with the United States.

31. The Western European countries will be confronted with similar difficulties in financing their payments to Canada and Latin America.

Multilateral Trade

32. These are illustrations of the difficulties which the world dollar shortage creates for us. Our whole economy depends upon multilateral trade—that is on being able to earn dollars from the rest of the world in order to finance our trade with the American continent. If there are not enough dollars in the world to enable us to do this, our position becomes critical. Either we are forced into import restrictions on a scale which would make it impossible for us to provide for our people even their present threadbare standards, or we are compelled to abandon the whole concept of multilateral trading and seek to eke out a painful existence on the best terms of bilateral trade which we can secure. Neither of these prospects is tolerable to us. But unless sufficient steps can be taken to fill the gap in the world’s dollar supply we shall be confronted with the choice as a hard fact which has to be faced.

  1. This memorandum was delivered under cover of a note from the British Ambassador, Lord Inverchapel, to the Secretary of State, dated June 18th, 1947. In this note Lord Inverchapel said: “His Majesty’s Government hope that there will be time for this memorandum to be studied by the United States Administration before Mr. Clayton leaves for London.” An accompanying chit bears the following handwritten notation by Mr. Edward Thompson Wailes, Chief of the Division of British Commonwealth Affairs: “After discussion it was decided that no reply was necessary in light of the Clayton talks etc.”