The Ambassador in Canada (Atherton) to the Secretary of State
Sir: Contributing further to the Embassy’s previous reports on the Canadian financial and economic situation, I have the honor to emphasize the seriousness of the rapidly developing United States dollar crisis.
Although Canada currently enjoys a slightly favorable balance on her global trade—at the end of the first six months of 1947 $88,500,000—she had an adverse balance with the United States of $488,000,000 at the end of the same period. At the end of the calendar year Canada’s adverse trade balance with the United States will exceed $1,000,000,000 U.S.
Canada entered the present year with gold and United States dollar reserves of $1,244,900,000. It is known that these reserves have been very heavily depleted. Making allowances for United States dollar funds which Canada may obtain from the United Kingdom and other sources, it is increasingly evident that when the balance is struck at the end of the present calendar year Canada’s gold and United States dollar reserves will be approaching the vanishing point.
Canada does not have sufficient United States dollars to finance purchases from the United States at their present volume. There is no single avenue at present open through which she can obtain these dollars. Relief, which must come unless a major crisis is to be suffered, may well be furnished in part from various sources which in the aggregate may be sufficient to ease the burden. Canada can restrict purchases from the United States and buy more from sterling areas. This she can do, however, only to a limited extent without causing harm to the domestic economy and forcing a lower standard of living. Canada can increase her exports to the United States, although she cannot go too far in this direction over and above her present volume at a time when she is enjoying the peak of industrial and agricultural production. The main immediate hope lies in diverting to the United States and dollar areas agricultural, mineral and manufactured products which in the past and even now are going to sterling areas.
Although the average Canadian official and man on the street is critical of alleged high United States tariffs, it is only too evident that the United States tariff wall is not responsible for the failure of Canada to export even vaster quantities of materials to the United States. Since the war United States tariffs have remained constant, whereas commodity prices have soared. The element of duty in an imported product is consequently less than formerly. It is not unlikely [Page 122] that in relation to price, United States tariffs have actually decreased by at least 50 percent. As a matter of fact, approximately 75 percent of all Canadian exports to the United States enter free of duty. The average rate, figured on an ad valorem basis, on those dutiable, taking into account present expanded prices, runs substantially less than 25 percent. Certainly on most agricultural products the disparity in price between Canada and the United States is such that they would find ready acceptance in the United States and other dollar areas were it not for the fact that exports have been subject to special restrictive license in order that Canada might be able to fulfill her commitments to the United Kingdom. It is not a valid argument that a further reduction of United States tariffs would be of material benefit to Canada or, conversely, that present tariffs are a serious detriment to her export position vis-à-vis the United States. The Embassy is completing a despatch going into detail on the subject of tariffs which will be forwarded within the next few days.1 Although Canada cannot be regarded normally as a supplier of wheat to the United States, she could dispose of wheat in other areas in exchange for United States dollars if it were not for United Kingdom commitments. With the removal of export restrictions against poultry, large volumes are now moving into the United States in exchange for United States dollars. Canada’s foreign fiscal policies rather than United States tariffs must bear the responsibility for the deepening dollar crisis.
As of the end of the fiscal year 1946–1947 (ended March 31, 1947) Canada had loan commitments to the United Kingdom of $1,250,000,000 and to other countries, including Belgium, China, Czechoslovakia, France, the Netherlands and the U.S.S.R. of $594,500,000, a total of $1,844,500,000. Appreciation of the significance of these credits may be had by comparing the volume with Canada’s total national income, which for 1946 was $9,212,000,000. The simple fact is that Canada, through external credits, has diverted to debtor countries a large volume of available exports for which she will presumably one day be repaid but from which she is presently failing to receive the United States dollars of which she is in such dire need. The countries to whom Canada has extended this credit, prior to the war supplied her with sufficient dollars to balance her United States account. These areas are themselves today critically short of dollars and their ability to have supplied any substantial number of dollars over the past two years is open to question.
A United States dollar loan, if available, would protect the Canadian gold and dollar reserves by exactly that amount. It would [Page 123] not go to the root of the question. At this point it is difficult to see how a loan could be extended to Canada at a time when it has been made clear to Latin American neighbors that they cannot expect help until the European situation is better.
Although the Embassy is fully conversant with the Department’s desire to encourage multilateral trade as well as to discourage government-to-government trading, it is submitting to the Department under cover of a separate despatch2 a list of agricultural, industrial and military items which can be had through the Canadian Goverment’s Canadian Commercial Corporation, the purchase of which might be consummated under the Marshall Plan with resultant immediate benefit to the Canadian Government.
The Embassy wishes to point out that in the situation shaping up here there are elements of discord which might not only impair Canadian-American relations at a time when solidarity is essential but which might conceivably present us with an unpleasant economic situation immediately across the border rather than on the other side of the Atlantic. Unfortunately government circles appear unable or unwilling to face the situation and evolve some plan of action to correct it before it is out of control. The Honorable John Bracken, Leader of the Government’s Opposition, referred in a radio address last night to this attitude of the Government as a “Micawber attitude” hoping that something would turn up.
The radio address of Mr. Bracken last evening is the first serious public examination into the mounting dollar crisis which has been made by any of the Canadian leaders. He attributes much of it to inept fiscal policy. Unfortunately he suggested no remedy other than the unpalatable one of a customs union with the United Kingdom, as suggested by Foreign Secretary Bevin, or the devaluation of the Canadian dollar.
It is the Embassy’s earnest desire that on our part consideration be given the dollar situation on a high level in order that we may move promptly and effectively when called upon. It is most probable that Canada herself will take no action until the termination of present economic discussions3 at London and the results of the Geneva talks,4 both as to tariffs and the ITO charter, are made public.