840.50 Recovery/3–348

Memorandum by the Assistant Chief of the Division of British Commonwealth Affairs (Fales) to Mr. Henry R. Labouisse, Jr., Special Assistant to the Director of the Office of European Affairs (Hickerson)

secret

I. Summary of London’s Replies to Deft’s Circular 224 [244], January 241

The British reaction to a possible postponement of ERP until July 1, 1948 is contained in London’s despatch 232 Jan. 29, 1948.2 The British view is set forth in documents which the Embassy characterizes as “in effect imploring the United States to meet the April 1 date if possible”. The British feel that, having stood aside in favor of more needy countries in connection with interim aid, their situation is desperate and the UK is now in line with other countries seeking American aid. The British state, “It is of crucial importance to us that … we should be able, when the aid became available, to use it for making good the drain on our reserves between April and July so that we may have some chance of maintaining our reserves until the end of the year at a tolerable level.” The British add, “The uncertainties introduced by the method for the devaluation of the franc, which will of course be enormously magnified if other European countries follow France’s example, make it all the more important that we should preserve considerable gold and dollar reserves.” The Embassy observes that Great Britain could probably get through the second quarter more easily than could France or Italy, for example. The Embassy adds “It all seems to come down to the question of whether or not sufficiently firm assurances of adequate ERP aid on July 1 can be given to justify the drawing down of reserves to dangerously low levels.” The Embassy does not feel that any direct change in the political situation, domestic or international, would result from delay but “any added hardships imposed on the British people by a postponement of ERP might well have seriously adverse effects on labor morale and hamper the development of production.”

II. OFD Allotment of ERP Funds

a)
The OFD memo 2/27/483 assumes that 395 million dollars will be needed to prevent retrogression with $100 million additional to initiate recovery, for a total of $495 million for April–June 1948. The [Page 1079] memo suggests an allotment of only $250 million, which will require drawing on reserves to the extent of $245 million.
b)
The British are extremely sensitive in regard to the state of their gold and dollar reserves. Cripps has referred to them as their last bastion. They are the reserves for the entire sterling area (except South Africa) and since the costly experiment in convertibility, their reserves have been husbanded with greatest care. It is desirable that the U.S. should avoid action which would tend to increase the strain on the sterling area reserves and which would further decrease world confidence in sterling. It is the view of BC that a drawing on reserves to the extent of $245 million during the April-June quarter might seriously further weaken the position of the U.K. as center of the sterling area and increase the pressure for devaluation of the pound which the British so desire to avoid.

British reserves on April 1 will as estimated be $2,375 million. With a dollar drain at the rate of 50 million a week and an allotment as contemplated by OFD of only 250 million the reserves would then be $1,975 million June 30.

It is the view of BC that it is desirable to avoid this reduction in British reserves and that an allocation to maintain them even at the April 1 estimate should if possible be made. This would involve an allocation in the nature of 400 million or more, rather than the 250 million suggested by OFD.

The British have set a level of $2,000 million as the minimum below which the British should not allow their reserves to fall. It is the feeling of BC that if their reserves should be allowed to reach that point serious pressure might arise and it is therefore recommended that the British reserves be maintained at the level which it is anticipated they will reach April 1.

BC cannot adequately appraise the need for ERP funds in other countries but BC feels it most desirable that the UK receives an allocation of between $400 and $425 million for this quarter.

  1. Not printed, but see footnote 1, p. 1067.
  2. Not printed; for a summary of the British reaction, see telegram 340, January 28, from London, p. 1067.
  3. Not printed.