867N.51/2–2048
Memorandum by the Director of the Office of Financial and Development Policy (Ness) to the Director of the Executive Secretariat (Humelsine)
Subject: British note on the Palestine Sterling Balances1
Our comments on the above subject follow, for transmission to the Secretary for such other use as may be necessary prior to his weekly press conference.
I. Background
On the 20th of February Ambassador handed the Secretary a note regarding the sterling balances of Palestine and Palestine’s position in the sterling area. This note stated that on Sunday, February 22, the UK Government would block Palestine’s sterling balances, amounting to about £100 million, except for £7 million which would be available [Page 635] for working balances and for current needs until the middle of May. The disposition of sterling balances after the middle of May will be the subject of consultation between Sir Alexander Cadogan and the UN Commission for Palestine and later will be the subject of negotiations with the joint economic board which is to be established under the terms of the U.N. resolution.
The note further stated that as of February 22 Palestine will no longer be a member of the sterling area. However, should the successor governments desire it, the British will be ready to discuss with them the question of readmission to the sterling area.
II. Problems Raised by This Action
(a) Effect on U.S. interests.
There appears to be no immediate or serious effect on U.S. economic interests. In the long run, the possible decreased availability of sterling for current purposes might increase both Palestine’s need for financial assistance and pressure on the U.S. to provide it.
(b) Relation to the Anglo-American Financial Agreement. Section 10 of the Anglo-American Financial Agreement calls for free convertibility of all sterling balances released after July 15, 1947. Since the balances to be released to Palestine will not be convertible, there is a technical violation of the agreement. However, this same problem has existed generally since the suspension of convertibility on August 20, 1947 and no new problem is raised in connection with the financial agreement.
(c) Effect on Palestine of blocking balances.
- 1.
- The superficial effect of this action is to limit the availability of sterling to Palestine. However, in the past there has been an effective limitation in the use of sterling balances through the British operation of the import control mechanism of Palestine.
- 2.
- The provision of £7 million between now and May 15 should be (according to oral statements of British Treasury representatives) more than adequate to take care of Palestine’s needs of sterling during this period when export earnings are seasonally high because of heavy citrus exports. We are not prepared at present to endorse or to criticize this figure.
- 3.
- The availability of sterling after May 15 will be the subject for future negotiation. If there are to be any adverse effects on Palestine, they are likely to follow from the later negotations rather than from this action. Although the note does not say so, the negotiations will probably cover the question of scaling down balances as well as the question of periodic releases.
- 4.
- There is a strong possibility that the results will be beneficial after May 15 when the present important mechanism is replaced by an administration of unknown competence. The blocking of balances will prevent the frittering away of reserves.
- 5.
- This action was not altogether unexpected. In a letter to the Export-Import Bank on January 23,2 the Economic Advisor to the Jewish Agency stated that he would normally expect that drawings against sterling balances in 1948 would be limited to a rate lower than his estimate of £12.5 million for the present fiscal year.
(d) Effect on Palestine of removal from sterling area.
- 1.
- While all the technical details are not clear to us, we believe that there would be more difficulty in effectively preventing capital movements, even of blocked sterling, if Palestine remained in the sterling area. Logically, it should be possible to block sterling accounts in sterling area countries for either current or capital transactions, but the British evidently feel that this would not be consistent with the conception of the sterling area. Consequently, in order to have effective blocking for capital transactions Palestine may not remain in the sterling area. We have been informed by the British that capital movement from Palestine to South Africa have recently been on a fairly large scale.
- 2.
- By leaving the sterling area, Palestine will no longer be able to draw on Britain for her dollar needs against sterling, nor will she have the obligation of turning her dollars over to the UK for sterling area use. In the past, Palestine has been a heavy net earner of dollars for the sterling area, but we are informed that in the last two or three months dollar remittances from the U.S. for the use of the Jewish Agency have been held in New York and, therefore, have not been turned into the dollar pool.
III. Recommended Action
- (a)
- That no reply be made to the British note at this time.
- (b)
- If you are questioned regarding the British action on the Palestine sterling balances it is recommended that you say that this Government was informed by the British Government of its intention to make this announcement, that we recognize the desirability of taking any necessary steps at the present time to insure the maintenance of Palestine’s reserves, and that we will follow developments with interest. Specific comments cannot be made until the results of future negotiations are known.