Foreign Relations of the United States, 1949, Western Europe, Volume IV

London Embassy Files, Lot 58F47, 500 Marshall Plan: Telegram

The Administrator for Economic Cooperation (Hoffman) to the United States Special Representative in Europe (Harriman), at Pans

secret

[Washington,] August 5, 1949—9 p. m.

Torep 6935.¹ Rptd London, Ecato 1236. Ref Repto 5378² not rptd Paris, Repto 5434, and Repto 5468 rptd London Repto 723, Repto 5468 not rptd Paris. From Bissell.

1. We strongly endorse your view that disequilibrium underlying Brit submission is an OEEC problem. This problem cannot be left exclusively to Brit-Can-Amer discussions in Wash next month, since all members of OEEC are vitally concerned and shld therefore participate in review.

2. Country programs shld be realistic, as the Brit claim their program is, but it is more important that the programs shld also reflect imaginative and aggressive measure to increase dollar earnings. It seems to us that the Brit program is realistic only in the negative sense. The present rate of dollar earnings seems to us an indication of what is possible despite an overvaluation of sterling vis-à-vis the dollar, despite bilateral trade agreements, large releases of blocked sterling to India, Egypt and Burma, and other policies, all of which conspire unwittingly to minimize exports to North Amer. It is not an indication of what Brit might achieve if it really undertook to expand dollar earnings.

3. The principal explanation of the poor showing of the UK with respect to dollar earnings appears to us to be the fact that Brit goods are increasingly overpriced. To take the view that the sterling–dollar rate is solely a Brit problem is an abdication of OEEC responsibility. Moreover, by yielding to Brit insistence on orderly cross-rates, this abdication is extended to responsibility for the dollar rates of all currencies of member countries.

4. Level of investment and govt expenditure in UK appears in excess of what economy can afford at projected consumption levels; hence, there is inflationary pressure which directly and indirectly dampens competition and incentives to raise productivity; and thereby tends to offset beneficial effects of investment program itself. This problem also seems relevant to extent of present dollar gap.

5. We think it is mistaken to explain the drop in Brit exports to US solely in terms of the recent decline in Amer industrial production. Actually, many Brit exports that have declined so sharply are goods the Amer demand for which has not fallen. For example, automobile production and sales in US are higher than ever before, higher even than in the spring of 1929. Retail sales in June were only 1 or 2 percent less than in June 1948. New construction in June was slightly higher than in June 1948. Business expenditures for new plant and equipment in the third quarter are expected to be only a few percent below the very high rate achieved in the third quarter of last year. To be sure, there have been widespread and substantial inventory adjustments that have undoubtedly caused a reduction in orders for Brit textiles and other products, but in view of the fact that disposable incomes in the US have not decreased and that expenditures of the types mentioned above have held up, there appears to be no firm basis for predicting a substantial decline in the Amer demand for Brit goods.

It is important to recognize that Brit exports in 1948 represented a very small fraction of total Amer purchases of goods that Brit can produce—small as judged even by the pre-war relationship. Consequently, a small change in Amer gap shld not preclude an expansion of Brit exports to US, except during short periods of inventory adjustment.

6. Foregoing considerations lead us to conclusion that we cannot attempt to meet Brit crisis by substantial increase in amount of ECA aid above that previously scheduled. Believe $920,000,000 nearly adequate and about as much as we can afford. Extremely difficult to justify figure above $1,000,000,000. This conclusion is for your info and any comment you wish to make to us. Leave it to you whether you communicate it to Brit or others.

7. You may wish informally to call attention of certain members. OEEC Secretariat and Delegations to considerations stated Paras 1 through 5 above and to suggest that amount of aid allotted to UK shld reflect OEEC’s judgment of extent to which Brit position could be improved through policies designed to maximize dollar earnings.

8. Re Para 3 Repto 5434. Agree this might be occasion for OEEC study of underlying UK problems as part of deeper issues of reconstruction and readjustment. But we recognize that division of aid will have to occur before Brit could submit revised program based on appropriate policies to maximize dollar earnings. Therefore believe basic UK problem shld be studied in connection with distribution of aid but that division of aid shld not await protracted reexamination of programs and policies.

9. See also Torep 6850 rptd London Ecato 1230.³ [Bissell.]

Hoffman

1. The text printed here is from telegram Ecato 1236 to London.
2. Not printed, but see footnote 1 to Repto 5434, July 28, p. 408.
3. Not printed; in it ECA pointed out that the British request for an allotment totalling over $1.5 billion raised again the question whether ECA should finance the dollar deficit of nonparticipating countries, especially those in the sterling area. ECA took the position, on both economic and legal grounds, that its funds should be used only for the recovery of Europe and not to meet the dollar needs of the rest of the world. ECA accordingly suggested that Harriman might appropriately inform the British and the OEEC that any allowance for nonparticipating sterling area dollar deficit that was “taken into account in division of aid should be related to, and certainly not exceed, the NPSA current account surplus with participating area.” (ECA Telegram Files, FRC Acc. No. 53A278, Paris Torep)