841.51/6–2749

Memorandum by the Assistant Secretary of State for Economic Affairs ( Thorp ) to the Secretary of State

top secret

Subject: British Financial Predicament

Problem:

The British are now losing dollars net after ECA assistance at a rate (100 to 150 million dollars monthly) which they cannot permit to continue. Excessive drain first appeared in April.

[Page 794]

Basic to this difficulty is Britain’s inability to increase further, or even maintain, exports to hard currency areas because of her relatively high costs and inadequate marketing techniques.

The situation is aggravated (a) by the current recession in the United States with consequent falling off of demand for United Kingdom products and lower United States prices for United Kingdom and competitive United States products, and (b) by holding off of orders, acceleration of payments for imports, and delay in payments for exports as a result of current talk of impending devaluation.

Any real solution to this problem will require reduction in costs of production, improved marketing techniques, design of products, etc. Such measures cannot operate quickly enough to check the current drain.

Devaluation would contribute to an immediate cost adjustment. It is probably an essential element in any long-term solution. Thus far the British have resisted it inflexibly. Political considerations contribute largely to this attitude.

The British therefore propose, when they announce the facts on July 5, to announce simultaneously further drastic restrictions on United Kingdom and Empire imports from the dollar area, designed to reduce such imports by about $600 million a year.

The British have requested consultation with us, suggesting July 8 as a date, with Commonwealth consultation to follow on July 11.

Recommendations:

1.
We should accept the necessity for further drastic, and inevitably discriminatory, British import restrictions.
2.
We should not request postponement of the announcement or action proposed by the British for July 5 and should not try to negotiate on the substance of their action before July 5. We should, however, seek the fullest information as to their proposed action and should seek to influence the form of their announcement to see that it is the least unpalatable to United States opinion and does not in any way preclude a solution along lines we would regard as constructive.
3.
We should endeavor to get the British to couple their announcement of these restrictions with a statement of their desire to move immediately to improve their competitive position and to liberalize their trade by relaxing restrictions on imports from OEEC countries and sterling area countries in accord with the proposals they have made to the OEEC. Obstacles to the latter action exist in such agreements as Section 9 of the Anglo-American Financial Agreement and Section 5 of the Canadian loan agreement, except with respect to war devastated countries.
4.
The Secretary, Mr. Snyder and Mr. Hoffman should advise Congressional leaders immediately of the seriousness of the British situation, of the general nature of the measures the British propose to adopt, and of the impact on the United States, e.g. Section 9 of the Loan Agreement, effect on United States exports, and its relationship to ERP.
5.
It should be made clear to the leaders (a) that the British are trying to work out their problem without asking for more aid, (b) that any reduction in the ECA appropriation would only make matters worse, and (c) that Section 9 is outmoded, that the British are physically unable to comply with it, and that the Administration needs their informal assurance that they will support a recommendation that Section 9 be waived or amended sufficiently to permit British action necessary to meet the exigencies of the present situation.
6.
We should thereafter consult with the British in full detail on substantive measures for the solution of their problem. In this consultation we should be prepared to agree to their proposals for the expansion of their trade by the creation of a wide non-dollar trading area (including their proposals as to payments arrangements), provided we can be satisfied (a) that the area will be a genuinely European (or wider) project and will not be dominated by the United Kingdom, and (b) that it will be self-liquidating rather than self-perpetuating; there must be assurances of drastic steps to reduce costs within the area so that it can become competitive with the dollar area.
7.
In discussions with the British; we should stress, our conviction that devaluation is probably an essential element in the solution of their problem. They should not, however, be forced to devalue against their better judgment, or be given any excuse to justify devaluation to their public as something forced upon them by the United States.
8.
To these ends we should
a.
Ask Mr. Douglas immediately (i) to obtain from the British the fullest details of their proposed import restrictions and the reasons therefore, and (ii) to seek to influence the form of their announcement along the lines indicated in (3) above. (It would be useful to have a Departmental officer present to bring Mr. Douglas the latest Washington thinking and to bring back the fullest information for the Department’s use in future policy making.)
b.
Acquiesce in Mr. Bevin’s request for consultation about July 8. This consultation should be by a well-rounded team of representatives of State, ECA and Treasury. Messrs. Hoffman, Harriman, Snyder, Douglas and Thorp should participate.
c.
Clear this line of approach with the President, and consult promptly with the Secretaries of Agriculture and Commerce.
d.
Inform the Canadians fully of our attitude and proposed action. They should be present at our consultations with the British whenever appropriate.
e.
Before giving our assent to any proposals by the British which contemplate the formation of a European (or wider) trading area and a payments scheme such as they propose, consult the French and Belgians, whom we have hitherto been supporting in advocating a payments scheme along quite different lines.

[Here follows a discussion supporting the recommendations.]