Current Economic Developments, Lot 70D467
Current Economic Developments
No. 152
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Together with other interested agencies, the Department is examining the problem of dollar deficits of certain countries not participating in the Recovery Program outside the Western Hemisphere which are mainly members of the British Empire or Commonwealth, or are in the sterling area. Under existing sterling area arrangements, the dollar deficits which they may incur are met from British reserves. Planning for the Recovery Program envisaged US financing of no more than the Western Hemisphere deficits of UK and its dependent territories. No provision was made in the program for the dollar drain on the UK of the independent sterling area countries outside of Europe. Of the total membership of the sterling area, only three independent members, the UK, Ireland and Iceland are included in the Program. The other self-governing members. South Africa, India, Pakistan, Ceylon, Burma, Australia, New Zealand, Southern Rhodesia, the Faroe Islands and Iraq are excluded from the Program and their dollar deficits are met from British reserves.
The Problem. In a recent memorandum to the US the British stated that prospective Recovery financing will not supply the margin required to cover their estimated hard currency requirements for 1948–49. They propose that, in order to maintain their gold and dollar reserves at their present level of about $2.2 billion, they will meet the dollar demands of the sterling area countries by diverting their current dollar receipts, probably retarding recovery in the UK by lowering consumption and investment levels.
In effect, the sterling area problem constitutes a three-fold drain on UK resources: 1) direct furnishing of dollars to meet the Western Hemisphere deficits of these countries; 2) supplying exports against previously accumulated sterling balances. While these exports result in a reduction of UK sterling obligations, they bring no payment to [Page 443] the UK in either goods or foreign exchange; 3) transferring large amounts of British capital. During 1947 more than $700 million of British capital was transferred to the sterling area.
Although the British have said that they will attempt to minimize these drains on their resources, nevertheless they will have to be met out of current income, Recovery Program assistance, and/or other foreign credits. The British estimate that during 1948–49 dollar needs of of these non-participating independent sterling area countries will amount to $300 million.
Department Views. In an effort to reduce the dollar needs of this group we believe that the British should attempt to eliminate nonessential dollar imports of the sterling-area countries, and to obtain an increase in their dollar exports. Our present thinking is that the remaining deficit could be met through credits (for example International Bank or Eximbank loans) to sterling area countries, liquidation of assets, and by reduction in the UK reserves. Although maintenance of participating countries’ reserves is one of the stated objectives of the Recovery Program, we think that the UK reserves of a little less than $2.2 billion can be reduced moderately without serious damage to the UK financial position.
The UK’s role in maintaining the multilateral trade area of the sterling countries is important but the UK must also play a leading part in the economic recovery of Europe. The British must be convinced that continued American interest in European recovery depends in large part on the boldness, imagination, and vigor with which the Europeans themselves attack their problem. We expect them to devote their own resources to the fullest extent possible to the primary objective of European recovery. This would mean cutting down on all unnecessary leakages to non-participating areas, and for the British would involve reducing their exports against previously accumulated sterling balances, and limiting their capital transfers to the sterling area. While these transfers result in British investments in the sterling area, there is no assurance that all will go into productive enterprises, nor that, in any event, the UK can afford to make all of even the most profitable kinds of foreign investment at present.
With regard to the problem in future years, we believe that nothing can be done until more information is available on the magnitude and duration of future deficits. In studying the problem for future treatment, consideration should be given among other things to: 1) specifically including the sterling area net dollar requirements in the next Recovery Program appropriation request as a part of the UK deficit; and 2) taking steps to increase US imports from the sterling-area.