840.50 Recovery/6–1148: Telegram
The Ambassador in the United Kingdom (Douglas) to the Secretary of State
2589. 1. I agree with principle that US cannot acquiesce to British Government proposal to reduce its own dollar expenditures below the total of ECA allocation plus current dollar earnings during the first year of ERP. (ReDeptel 2116, June 7) Legislative history of ECA including my testimony before Congressional committees was consistent with stated principle. I believe, however, that the above method of stating the principle is to be preferred over the statement in paragraph two of your cable, in spite of the fact that the two are in essence identical, because statement above emphasizes determination to prevent undercutting British recovery whereas statement in reference cable carries implications that US objects in principle to operation of basic elements of sterling area, and proposes to police individual dollar payments and receipts.
2. If British proposal to reduce imports could be implemented to the extent suggested this would result in receipt of more dollars than required to cover projected balance of payments deficit of UKTF and DGT as a group. ECA would have greatest difficulty in explaining this unless it could be maintained that extremely exceptional circumstances warranted deviation from principles established during Congressional hearing. It follows that only possible source of dollars for sterling area requirements is the reserve, which will have to be drawn on despite declared British policy of maintaining reserves intact. I believe this necessity will constitute strongest possible incentive for British to [Page 1090] exercise strict economy and it will support them in inducing Dominions to do likewise. British might even welcome this necessity as strengthening their hand in negotiations with Dominions.
3. I believe that underlying principle which should guide approach to this and other problems is that US assistance, while it should be adequate, should not be so large as to enable any government to postpone the necessity of facing up to the fundamental economic problems of the UK itself. These problems include the necessity to reorganize the economy to reduce costs: (a) through tax reforms to encourage capital formation, and (b) through measures to divert resources to productive uses. These readjustments necessary to the economic stability of the UK after 1952 and, in consequence, to world confidence in sterling and the strength of the sterling area. I recognize that the determination of what is an adequate amount of assistance, and what would be an excessive amount, involves an exceedingly fine judgment. In any event we should avoid giving impression that we are attempting to embarrass existing government and bring about its fall.
4. Preceding paragraph should not be interpreted to mean that direct or indirect assistance to sterling area countries to meet reasonable needs on current account in succeeding years of program is thought unwise. Desirability of such assistance will have to be decided on basis of developing economic situation and in light of political and strategic considerations specifically omitted in memorandum1 referred to in paragraph one your cable. But such assistance, if deemed advisable, should not be so generous as to permit relaxation of economic recovery efforts on the part of the British. I agree with statement under (b) on page 4 Treasury memorandum May 14 that provision of US funds for sterling area demands must depend upon the essentiality of their requirements.
5. In view of the delicacy of UK/Dominion political relationships and sensitivity of British to US attitudes toward sterling area the presentation to British proposed paragraph four reference telegram should be made carefully and any documents given British or for publication should be drafted with great care to avoid unnecessary offense to British pride. At best our attitude represents bitter pill for British to swallow. Suggest approach based on first paragraph sub-section 2 of section III of Treasury memorandum May 14. We are particularly conscious of the need for some flexibility in laying down principles and criteria.