560.AL/5–1849: Telegram

The Ambassador in the United Kingdom ( Douglas ) to the Secretary of State


1953. For Department only. Following comments arising out of Annecy 961 and other discussions of devaluation problem submitted in response Deptel 1164, May 13.2 Sent Department only, but we have no objection limited distribution Treasury, ECA and Annecy in Department’s discretion.

UK perennially conscious of inability compete with US in US market but British believe they can in the long run compete on a nondiscriminatory basis in most third markets. Certainly if UK unable to do so it is inconceivable that other European countries could be induced indefinitely or even for very long to maintain high price area in the UK interest. We feel that high price area is probably temporary phenomenon arising out of circumstances other than deliberate policy of mutual price protection.
European costs and prices for decades have been at such a level and European output is even now of such a nature as to preclude balance with US in any bilateral pattern. Undoubtedly there is basic need for reduction European costs and prices and we believe considerable water can be squeezed out of them as they stand. The developing buyer’s market may go far to bring this about. We have already expressed [Page 392] the view that any pressure we can exert to this end should be maintained. Currency devaluation at this time would nullify such pressures for it would tend to support existing European cost and price structure.
On the other hand we agree that progress toward conditions permitting reduction in discriminatory controls is disappointingly slow. British and others clearly not immediately concerned to eliminate controls with maximum speed. The problem as they see it is rather to work first toward conditions which will make controls unnecessary. Foremost objective is achievement of dollar balance soonest possible by exporting maximum for dollars and cutting dollar imports. The latter necessarily involves a degree of discrimination. ECA pressure to attain dollar viability in three years practically enforces this.
As far as UK is concerned, and to extent that UK policies have produced a sterling trading area, we feel that it is probably the cumulative product of many different ad hoc arrangements devised as expedients to meet given situations. A review of British international economic policy in the last two years supports this interpretation. At various times, as necessity dictated, UK has adopted measures to cut its own dollar expenditure, to eliminate Palestine and Egypt from sterling area, to cut South African dollar drain, to pledge Dominions to stronger dollar conservation, to control flow of capital to sterling area, to line up cross-rates, to limit use of cheap sterling. Mingled with these have been a hundred shifts of policy on minor matters affecting security switches, gold points, tourist allowances, transferable accounts, etc. Even if all these are regarded as fitting into a larger pattern it is not the result of a deliberate long-range policy and the pattern itself is not immutable. It shifted radically from 1947 to 1948, and in 1949 it is still flexible and adjustable.
In short British are feeling their way and working in terms of immediate emergencies. We doubt that Cripps or any other British official under present conditions feels that he can see more than six months ahead. Certainly none of them has a clear idea of what economic pattern will emerge in UK or in Europe or in the world in 1952. Nor can it be said that UK is working toward any specific goal by that time, unless a strong determination to be free of dependence on the US can be so regarded. In these circumstances UK commitment to support multilateralism and non-discrimination becomes a goal to be achieved when economic conditions which make it attainable are more clearly apparent. British do not believe that non-discrimination at this time will of itself create those conditions, and feel it might indeed have retarding effects.
From the US viewpoint the question arises whether currency adjustments at this time, presumably by widespread devaluations against the dollar, would contribute to our immediate objectives as well as our long-term objectives or would possibly compromise the long-term in the interest of the short-term. Answer depends on a number of nice judgments as between alternatives. We must ask ourselves:
Is the balance of advantage in favor of leaving most exchange rates as they are for a while longer, in order to maintain pressure on Europe to keep down costs and reduce prices (in the interest of longer term trade position)? Or is it in favor of widespread devaluation against the dollar to make European exports more competitive in the US at least temporarily (in the hope that the dollar gap can be reduced by an expansion of exports rather than by the administrative import restrictions threatened by OEEC)?
The balance of advantage must also be weighed in terms of our objectives as between progress toward non-discrimination and progress toward European recovery. Presumably devaluation is intended to eliminate or at least reduce necessity for discriminations against dollar imports by correcting price disparities, thereby using prices mechanism to discourage imports from US. However, unless European production radically increased as a direct consequence of devaluation (which is dubious) effect of devaluation would be to narrow the dollar gap rapidly and necessarily reduce commodity availabilities in Europe to the disadvantage of recovery.
Another comparison is necessary as between advantage to US export trade of at least partial removal of administrative restrictions against dollar imports and disadvantage to US exports of the generalized price barrier resulting from devaluation. While we agree with the goal of non-discrimination it must be appreciated that approach to this goal through the device of devaluation does not provide the answer for US exporters currently complaining of discrimination. For one thing we could not expect immediate removal of all restrictions, and many significant trade barriers would remain. For another the price obstacle would automatically apply to the whole range of US exports and many US products now acceptable might be priced out of the foreign market.
The timing of a general revaluation of currencies involves the nicest judgment of all. We agree that the sooner the better if the US is taking the initiative and the responsibility right now, while we still command the leverage of ECA and before politically powerful US groups representing both protectionist and export elements develop resistance in their own interests. However, US initiative at this time involves moral responsibility of our government before the world to refrain from subsequent compensating adjustments of the dollar and to resist the increasing pressures in this direction which will inevitably develop if we suffer protracted economic recession.
The question of timing also involves an appraisal of relative advantage. Pressures for immediate action seem to come from US export interests impatient in the face of trade restrictions, but we have suggested in (c) above that immediate gains from removal of [Page 394] trade barriers may be nullified or outweighed if achieved via devaluation. While we agree that postponement of action may tend to solidify the present pattern, establish vested interests and perpetuate bilateral arrangements, we doubt that the entrenchment would be so solid as to make the eventual achievement of multilateralism and non-discrimination significantly more difficult. On the other hand postponement might do much to help consolidate the recovery gains already recorded and contribute to a better climate in which to attack the problem of discriminatory trade barriers.

In conclusion, as the questions we have raised indicate, we are far from certain that the balance of advantage is right now in favor of widespread currency adjustments. We would be inclined to push economic recovery along more fundamental lines and await developments. Particularly we would want to see more clearly the pattern in which east-west trade3 develops in Europe, and to have a firmer basis for judgment as to economic recovery in Germany and the manner in which the German economy will fit into the European picture.

  1. Not printed; in it the Chairman of the U.S. Delegation at the Third Session of the Contracting Parties to the General Agreement on Tariffs and Trade (Willoughby) reported on various views attributed to British officials (London Embassy Files, Lot 58F47, 510.1 ITO). Documentation on the GATT conference at Annecy, France, is scheduled for publication in volume i.
  2. Not printed.
  3. Documentation on this subject is included in the compilation on U.S. policy on trade with Eastern Europe and the Soviet Union, scheduled for publication in volume v.