The Ambassador in the United Kingdom ( Douglas ) to the Secretary of State
3499. For Eyes Only of Secretary, Acheson, Lovett and Snyder from Clayton and Ambassador. Reference Embtel 3475, June 25. 1. British have now presented us with two additional preliminary tables relating to their international financial position. Copies of tables are [Page 29] being sent air mail. One table sets forth estimates of dollar drain for last half 1947 and first half 1948 while other table gives various data relative to course of British trade in recent periods as compared with 1938.
2. Estimates for 1947–48 based on imports at 80% of 1938 volume. This import program designed to maintain present level of food consumption and provide essential raw materials, machinery, etc., for industry and agriculture. Estimates also rely upon expansion of exports to 140% of 1938 volume by second quarter of 1948. On production and commercial grounds this level of exports considered by British possible of achievement but would not be achieved if world shortage of foreign exchange intensifies causing other countries to restrict imports from UK.
3. On this basis balance of payments deficit of pounds 325 million expected in second half of 1947 and deficit of pounds 125 million in first half 1948 giving total deficit of pounds 450 million in coming year.
4. In second half 1947 total payments deficit with western hemisphere which can be met in US dollars or equivalent expected to reach $1,350,000,000. Moreover, dollar drain of transactions with eastern hemisphere estimated to involve additional dollar drain of $150,000,000 giving total dollar drain of $1,500,000,000. British indicate this is optimistic estimate involving average dollar drain of $60,000,000 per week compared to present rate of $80,000,000. When asked about this discrepancy, British indicated primary reliance on estimate rather than present rate of drain. British estimate that $1,500,000,000 drain may be met as follows: $150,000,000 from Canadian credit, $150,000,000 from sale of public utilities to Argentina and $1,200,000,000 from US credit. This would leave $500,000,000 of US credit for 1948. At present rate of drain, however, US credit would be exhausted by end of 1947.
5. In first half 1948 payments deficit with western hemisphere placed at $1,050,000,000. No attempt is made to estimate effect of transactions with eastern hemisphere on dollar position but is pointed out that if there is no net dollar income from this area, remaining part of US credit and significant part of reserves will be exhausted by middle of 1948. In this period British expect to be able from production standpoint to export enough to achieve near balance of current payments. Thus, British consider that their position depends primarily on their ability to earn gold and dollars from trade with eastern hemisphere.