841.5151/11–547: Telegram
The Ambassador in the United Kingdom (Douglas) to the Secretary of State
us urgent
5894. For the Secretary and Lovett from the Ambassador. 1. Purely personal and informal discussions have been had with Bevin, and on one occasion with Attlee, Bevin, Cripps and Dalton, on the British financial position and the ways of supplementing British dollar resources during the interim period before Congress shall have approved, if it does approve, a program for European recovery. Following these discussions, a personal memorandum summarizing the present British position and suggested methods of reinforcing the British dollar resources during the period in question, was submitted to me. I should emphasize that the British Cabinet, as a whole, has no knowledge neither of these discussions, nor of the memorandum [sic]. The British officials referred to are extremely anxious that the suggestions be guarded with the greatest discretion.
2. This memorandum suggests loan by Export-Import Bank of $700 million against collaterals now held for RFC loan, which would provide new money. I informed the British that even though the suggestion, in principle, were acceptable to us, I had grave doubts that the [Page 89] collateral would justify a loan of this size, and that the principal amount of the loan would necessarily have to be less. It is my further thought that if such a loan were made by the Export-Import Bank, the terms of the RFC loan should be altered so that the present principal amount secured by the collateral would remain in the RFC, and so that the Export-Import Bank would advance only the new funds, taking a secondary position to the loan remaining in the RFC. This would conserve bank funds, which I realize are short. The income from the collateral could be used first to pay interest on the two loans and secondly to repay principal on RFC loan until it is repaid.
3. British memorandum assumes interest at 2 per cent. Interest rate in excess of 2 per cent not desirable since this is rate on unsecured $3,750 million credit. British indicate that loan of $700 million would be extinguished in 22 years.
4. Memorandum also suggests loan should be untied, but, if not, should be available for purchases by rest of sterling area as well as UK.
5. I plan no further discussions as to the practicability of the suggestion put forward until I hear from you. I feel, however, that it has merit and should be explored with Secretary Snyder and Martin of Export-Import Bank. The suggestion seems to provide a method by which the British reserves can be substantially protected, thus avoiding imposition of greater restriction on imports, and the danger of change or modification of foreign policy which a shrinkage of reserves to a dangerous level would, I believe, probably entail. At the same time it avoids the necessity of going to Congress for an outright interim appropriation as is necessary in the case of both France and Italy.
6. Memorandum states British gold and dollar reserves for sterling area amounted to pounds 574 million on October 25, and that continued decline is expected because of dollar needs of UK and sterling area. Argument made that if reserves fall below pounds 500 million stability of UK and sterling area economies will be endangered.
7. On basis present British calculation reserves will fall to pounds 310 million by June 30, 1948. This estimate allows for:
- (a)
- Drastic cuts in food imports recently announced which will reduce food consumption to or below lowest level reached in the war.
- (b)
- Maximum development of exports to dollar destinations involving further cuts in home consumption and severe cuts in investment process including housing.
- (c)
- Big reduction in dollar deficit of rest of sterling area.
- (d)
- No dollar expenditure for Germany.
- (e)
- Net dollar expenditure by UK and sterling area in first half 1948 at only half present rate.
Estimate does not include pounds 80 million South Africa loan, which for purpose of estimate is set aside as cushion for excess expenditure [Page 90] over estimates. Further drawings on IMF in first half 1948 also excluded.
8. On basis these estimates British calculate reserves can be prevented from falling below pounds 500 million, if (a) remaining $400 million of financial agreement credit is released, (b) Export-Import Bank loan proposed this cable is made.
9. British have agreed to supply US with monthly statistics on their financial position. First figures in this series will be cabled soonest.
10. The British Embassy in Washington is being informed of the personal discussions that have been had here, but is being advised toward the matter with great secrecy and to take no action.
11. Will appreciate your comments on the proposal in principle.1
12. Dalton is writing a personal letter to Snyder.
- Marginal notation: “No action required. Problem discussed with Douglas 11–15 N[orman] T. N[ess]”.↩