The Ambassador in the United Kingdom ( Douglas ) to the Secretary of State
3475. For Eyes Only of the Secretary, Acheson, Lovett1 and Snyder from Clayton and Ambassador. Beginning last Friday, British Treasury began to supply promised data relative British international financial position. Please guard this information with extreme secrecy and take every possible precaution to insure against leaks. Four tables covering period ending June 30, 1947 have been presented and further tables relating future prospects will be forthcoming soon. They are not final but they reflect critical dollar exchange position. Copies of tables are being sent airmail.2 Following is summary of information received.
Table 1 analyzes British operations in US dollars in considerable detail. Not only have UK direct dollar expenditures gone up considerably in first half 1947 as compared with second half 1946 but also allocations of dollars to sterling area for transactions in US and western hemisphere have considerably increased. In second half 1946 net dollar outgoings were 510 million dollars compared to drawings on US credit of 600. In first half of 1947 net outgoings were 1510 million dollars compared to drawings on credit of 1450. While there are certain non-recurring items in first half of 1947 British expect they will be offset by other adverse factors and that therefore the rate of draw down of dollar credits will not change in next six months.
Table 2 analyzes drawings upon resources of US and Canadian dollars and gold. It is estimated that gold and dollar reserves on June 30 will amount to 2400 million dollars while undrawn portion of credits will be 2250 million dollars giving total ultimate reserves of 4650 million dollars. The decrease in ultimate reserves from 7040 million dollars on June 30, 1946 is analyzed in terms of transactions with US, with Canada and Latin America, with sterling area, and with other countries. Important feature is fact that sterling area has changed from net contributor of 135 million dollars in the last half of 1946 to net drawer of 100 million dollars so far in 1947.
Table 3 presents UK balance of payments by six months periods for 1946 and first half 1947. Deficit on current account in first half 1947 estimated at 375 million pounds compared to total deficit in 1946 of 400 million pounds. In first half of 1947 imports (fob) estimated at 792 million pounds while net government expenditure placed at 141 [Page 28] million pounds giving total payments of 933 million pounds. Exports and re-exports expected to yield 515 million pounds while net income from other sources placed at 43 million pounds giving total of 558 million pounds. British admit that actual deficit may well be less than 375 million pounds since import target may not be reached by as much as 40 million pounds. They, however, point to uncertainties in estimates of net income from invisibles.
Table 4 attempts to reconcile dollar drain and UK balance of payments. It is pointed out that dollar drain exceeds balance of payments deficit by 20 million pounds. Sterling balance picture shows that in first quarter 1947, sterling balances of sterling area countries decreased by 12 million pounds while balances of non-sterling countries increased by 58 million pounds. At the same time, RFC loan and Canadian interest free loan were reduced by 11 million pounds. Thus net change in current liabilities of UK in first quarter was increase of 35 million pounds. British state that further fall in sterling area balances likely in second quarter, that there will be further decline in obligations under RFC loan and Canadian loan but that no net decline in non-sterling area balances is expected. Figures for second quarter will not be available for some weeks after end of second quarter. British estimate that over half year period net current liabilities as a whole are likely to have increased by about 15 million pounds. This increase, plus 20 million excess of dollar outpayments over current deficit, is accounted for primarily in terms of British overseas investment. British state that net investment outside sterling area is not likely to have been significant. However, there is no control over capital transactions between UK and sterling area and overseas investment in sterling area likely to have been of magnitude of 35 million pounds. One big element is purchase of South African securities which is estimated at about 10 million pounds in 1946 and has probably been at substantially higher rate so far this year.