The Ambassador in the United Kingdom (Douglas) to the Secretary of State
3393. For State and Treasury. Reembtel 3347, June 18. Peterson and Gunter discussed with Clarke and Grant1 of British [Treasury] factors leading to drain British dollar resources. Following summary:
- We presented analysis indicating at least one-third 1947 dollar drain attributable to factors other than current deficit. British agreed this roughly correct. Our figures put current deficit at pounds 215 million for 5 months, leaving pounds 116 million to be accounted for.
- We discussed possible causes of this drain, including use of accumulated sterling balances, British exports against inconvertible sterling and against proceeds of sales of sterling securities, and accumulation of monetary reserves in gold and dollars by other countries in British Commonwealth. British stated that inconvertible currency factor negligible, that sales of sterling securities important only in French case, and that any increase in gold and dollar holding of Commonwealth outside UK was very small.
- British agreed only possible explanation seemed to be drawing down of sterling balances. They claimed not to know just what is happening, since sterling balance figures for end first quarter 1947 do not indicate drain from this source. Balances held by sterling area declined by only about pounds 12 million, while non-sterling-area balances increased by about pounds 47 million. (Transfer relative to sale of Argentine railroads has not taken place.2) Bank of England is working on study apparently designed to clarify what is happening which is expected to be ready soon. We will be informed. Later figures on sterling balances will be included.
- We asked if capital transactions could obscure drawing down balances for current transaction. British stated capital outpayments [Page 26] by UK residents to rest of sterling area could occur without knowledge of British Treasury, since no control of these transactions.
- Estimates of size of 1947 deficit in current payments also discussed briefly. British stated their estimate of pounds 650–700 million did not contemplate price increases in imports above 250% of 1938 and in exports above 220%. They now place cost of import program contemplated in economic survey3 at pounds 1600–1650 million. We pointed out this seemed high on their price assumptions and questioned possibility of importing volume of goods planned, since even at high level of imports in April and May they probably hadn’t reached annual rate contemplated in economic survey. We pointed out also that they apparently hadn’t allowed for any effect of price increases on income from exports. They did not dispute any of these statements.
- Additional information will be cabled as it becomes available. This will be of interest to Harriman personally.