Foreign Relations of the United States, 1948, Western Europe, Volume III

811.5151/5–1448

The Secretary of the Treasury (Snyder) to the Under Secretary of State (Lovett)

Washington, May 14, 1948.

Dear Mr. Lovett: As you know, the dollar requirements of the United Kingdom presented to Congress in connection with the European Recovery Program did not include the dollar deficits of those independent sterling area countries which are not participants in the Program. The British have been attempting to meet this deficit problem through the use of their own resources. The British have now stated that they must maintain their gold and dollar reserves at their present level and therefore propose to meet the dollar demands of the sterling area countries by diverting their current dollar receipts. Since it has been assumed in the ERP calculations that these receipts would be used to finance essential imports into the United Kingdom, this proposal is tantamount to one involving a diversion of ECA funds.

As a result, we are faced with a problem which has a very direct bearing on the success of the Recovery Program and which has broader policy ramifications of an economic, financial, and political nature. It seems clear to me that a plan must be devised to deal with the essential dollar requirements of these sterling area countries without burdening the United Kingdom to the point where its own recovery will be seriously retarded. I suggest as an initial step to interdepartmental consideration of this problem that senior representatives of your Department, the Economic Cooperation Administration, and the Treasury confer at the earliest possible moment.¹ I am enclosing a memorandum prepared by my staff which I feel furnishes a basis for such discussion.

I am sending a similar letter to Mr. Hoffman.

Sincerely yours,

John W. Snyder

[Enclosure]

Memorandum Prepared in the Department of the Treasury

[Washington, undated.]

The Dollar Problem of the Self-Governing Sterling Area Countries

i. the problem²

The British Government has placed squarely before the United States Government the problem of the dollar requirements of the independent sterling area countries not included under ERP. Of the total membership of the sterling area, only three independent members, the United Kingdom, Ireland, and Iceland, lie within the Recovery Program. The other self-governing members of the area, South Africa, India, Pakistan, Ceylon, Burma, Australia, New Zealand, Southern Rhodesia, The Faroe Islands, and Iraq, are excluded from the Program, although under existing sterling area arrangements, the dollar deficits which they may incur are met from British reserves.

In approaching this problem with a view to determining whether and to what extent the United States can assume responsibility for the dollar requirements of these countries, either within or apart from the ERP, there are far-reaching strategic and political considerations as well as economic considerations to be taken into account. In this paper there is no attempt to appraise these political or strategic considerations which are essential to a final determination of U.S. policy on this problem. The recommendations set forth herein approach the problem from the standpoint of economic considerations exclusively and are based upon the following broad assumptions:

1. The independent sterling area countries will, over the ERP period, face serious dollar problems, the precise magnitude of which cannot be determined except by studies comparable to those made for the CEEC countries.

2. The dollar requirements of these countries cannot be met by the United Kingdom over the next four years without jeopardizing the success of the British recovery program.

3. If the dollar requirements of these countries are met over the ERP period, some form of assistance will be required from the United States and/or from international lending agencies.

ii. background

1. The British Government, in its response to a request for a detailed import program for the first quarter of ERP operations, has set forth a policy of maintaining the country’s gold and dollar reserves at their present level throughout the ERP period while continuing to meet the dollar demands of the self-governing sterling area countries. This policy implies that the dollar deficits of such of these countries as are not included under ERP will be financed from current British dollar receipts, thus lowering the attainable levels of consumption and investment in the United Kingdom.³

The British Government has taken the position that a continuing decline in reserves would (a) weaken confidence in the British economy, (b) leave the U.K. with inadequate strength to face the period when ERP assistance was no longer available, (c) force the U.K. to adopt policies which would undermine the general economic objectives shared by the U.K. and U.S. governments, and (d) leave the U.K. with insufficient economic strength to play a strong part in Europe and the world as a whole.

The British Treasury estimates that the British Government will be required to make net gold and dollar payments to self-governing sterling area countries of about $300 million in fiscal 1948–1949. Although the amount may be somewhat less in subsequent years, a substantial drain is expected to continue throughout the ERP period. Nevertheless, the U.K. proposes to meet these demands, even at the risk of delaying recovery in the U.K. itself, because of the long-run strategic importance, both economic and political, of preserving the sterling area arrangements.

2. In the presentation of the ERP to Congress, it was postulated that the CEEC countries would use their current earnings in the Western Hemisphere, plus those of their dependencies, to finance their own essential imports from the Americas, U.S. aid being provided only to the extent required to supplement such earnings and other Western Hemisphere credits. Consequently, on the principle of fungibility, the use of current dollar earnings to finance deficits of the independent sterling area countries would have the same significance as the use of ECA funds. The use, by the British, of current dollar receipts from Western Hemisphere transactions for sterling area needs would thus represent a diversion of resources which, under the Program, had been allocated to the rebuilding of the British economy.

iii. conclusions

1. The policy which this Government adopts in dealing with this problem prior to March 31, 1949 must be conditioned by the terms of and the legislative history of the Foreign Assistance Act of 1948, unless it should appear feasible to refer this problem to the Congress during the present session:

(a) At no time during the presentation of the ERP to the Congress was it indicated that self-governing countries outside Europe might become participants;

(b) The dollar requirements of the United Kingdom, as presented to the Congress, were based upon the estimated net Western Hemisphere deficits of the United Kingdom and its dependent territories and did not recognize the need of the United Kingdom to make payments to self-governing sterling area countries out of current dollar receipts;

(c) The total expenditure authorized would not be sufficient to achieve the levels of consumption and investment assumed to be essential to European recovery if the U.K. were allowed to make such payments out of current dollar receipts. Such a practice would be more serious if, as now appears likely, the ERP authorization is not adequate to cover fully the requirements of the participating countries themselves.

Therefore, it would not be appropriate for the United States to sanction the use by the U.K. Government of the dollar proceeds of current exports of goods and services to the Western Hemisphere for the purpose of meeting dollar demands of the self-governing sterling area countries during the first year of the operation of the ERP. Since the U.S. has been advised that the U.K. intends to adopt this practice, it would appear necessary that the British be informed of U.S. disapproval at the earliest possible date.

2. However, since it is in the interest of this Government to strengthen the economy of the U.K. and to enable the U.K. Government to play a leading role in the world economy, it would appear desirable to discuss this situation fully with the British and to offer a constructive program for assisting the British in meeting this problem. The U.S. should recognize that the British have proposed to use a portion of their current dollar earnings to meet the demands of sterling area countries only because the alternative solutions appeared to present even more serious problems. It should be recognized that, as a prudent government, the Government of the U.K. must preserve the maximum degree of flexibility possible in its financial position and keep in mind the fact that the U.S. has not as yet given full assurance that assistance will be available after March 31, 1949.

To minimize the impact which rejection of the British proposal must have upon the U.K. position, the U.S. should be prepared to offer the following program of action by this Government:

(a) For the initial year the U.S. should adopt the following approach to the problem:

(1) Support of requests by the sterling area countries for drawings on the IMF within the framework of policy which has been recommended to the U.S. Executive Director;

(2) Consideration of requests by these countries for loans from the International Bank and the Export-Import Bank;

(3) Allocation of ERP assistance to the U.K. in such amount as to make unnecessary the use of reserves to meet any portion of the Western Hemisphere requirements of the U.K. itself;

(4) Exploration of possibilities for ECA procurement in sterling area countries insofar as may be made in conformity with the general objectives of the Program.

(b) For the subsequent years of the Program, the U.S. should give consideration to other possible actions, assuming that an examination of the economic positions of the various sterling area countries indicates that assistance from this country is warranted. U.S. action might take either of the following forms:

(1) The self-governing sterling area countries could receive U.S. aid directly either within or apart from the ERP;

(2) Their requirements could be recognized as legitimate demands upon the U.K. and the U.K. might be (a) allocated ERP funds to meet those demands, (b) authorized to divert a portion of its current dollar earnings, or (c) authorized to divert the net earnings of the U.K. dependent overseas territories.

It must be clear that the ability of the U.S. to provide funds, directly or indirectly, for meeting sterling area demands, will depend upon the essentiality of their requirements. Consequently, in any case where U.S. funds or where current dollar earnings of the U.K. were to be utilized to meet sterling area demands, the United States might wish to participate in determining the amount of dollars to be provided either by the U.S. or by the U.K. to each of these countries.

3. It would seem neither necessary nor appropriate to attempt at this time a determination of the approach which might be used in bringing this problem before the Congress or of the form of assistance which might be afforded the self-governing sterling area countries. It would appear desirable, however, that the British Government be asked to submit detailed information concerning the dollar requirements of these countries in order that this Government may judge for itself the nature and extent of their essential requirements.

4. In any discussion of this problem with the British there should be an exploration of the efforts which the sterling area countries are making to reduce their dollar deficits. It should also be made clear that the way in which the British and the other self-governing sterling area countries cooperate with the ERP must, inevitably, bear some relation to the ability of the United States to assist in meeting the requirements of the sterling area countries in subsequent years. The U.S. must expect that:

(a) The U.K. Government will give full consideration, in reviewing its export policy, to the needs of other countries participating in the ERP for essential commodities and for sterling credits.

(b) The U.K. Government will take effective steps to curb movements of capital which may have an adverse effect on receipts of gold and dollars. In this connection the U.K. should be expected to institute direct controls on all sterling transfers to South Africa.

1. In his reply to this letter, May 20, not printed, Lovett stated that the Department of State would be glad to participate in any further discussion of this question and would be represented by J. Burke Knapp, Director of the Office of Financial and Development Policy (811.5151/5–1448).
2. At this point in the source text there was a footnote referring to an NAC document, not printed.
3. At this point in the source text there was a second footnote referring to an NAC document, not printed.