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

CFM Files: Lot M–88: Box 177: WGB/Documents

Paper Prepared in the United States Embassy in the United Kingdom¹

secret

[London,] August 18, 1949.

Implications of the Sterling Area Crisis to the U.K. and the U.S.

1. During the past few weeks the Embassy, including of course, the Treasury Representative, and ECA Mission have been considering some of the broad implications of the current financial crisis in the sterling area. We submit the following analysis of what appears to us to be a likely course of developments in the coming months, together with a general appraisal of the situation, for consideration in Washington.

I. Importance of the Washington Meeting

2. The importance of the September meeting cannot be exaggerated. It will involve far more than the sterling area’s current foreign exchange crisis and the policies of the UK and sterling area. The gravity of the developing situation is such that the Washington meeting will take place in the shadow of:

a) The deterioration of sterling as an international currency, which, if not arrested, will undermine the sterling area and ultimately affect the British Commonwealth;

b) Prospects of an economic set-back in the UK and sterling area, which will have repercussions on Western Europe, the US, and other parts of the world; and, if steps are not taken, make impossible the achievement of our ECA objective of dollar viability by 1952;

c) A possible major break between the UK and the US on economic policy, which would have far-reaching effects on all our relations with the UK, as well as other countries, and require a reassessment and readjustment of our post-war foreign and defense policies.

3. The importance of the meetings has been enhanced by the public attention they have received in both countries. This publicity has created great expectations. At the same time recent press comments on the problems involved have produced an atmosphere of tension. In conducting the conference it will, therefore, be necessary to keep constantly in mind the psychological setting as well as the grave issues which overhang the discussions.

4. We must also bear in mind the delicacy of the psychological situation in the UK. Acceptance of financial aid is always embarrassing no matter how tactfully given. With a people as proudly independent as the British, the slightest hint of interference in their internal affairs turns the embarrassment into resentment.

5. Furthermore, we must remember that the meetings will be held on the eve of a British election campaign. Whatever action is taken by the US will inevitably become a factor in the election. This will add to the difficulties of the talks. If the British people come to believe that in the Washington discussions the US interfered with or attempted to dictate internal British policies, the British people will unit wholeheartedly in opposition to the US, and this may determine the outcome of the election. It is essential, therefore, that the US not only avoid telling the British what they should do in their internal affairs, but also avoid giving any impression that we have done so.

6. The risk of irreparable damage to Anglo-American relations which could result from this meeting is so great that it is imperative to create and maintain a friendly atmosphere in which a constructive discussion of our mutual problems and responsibilities can take place.

II. The Background of the Developing Crisis

7. As late as March or April, the prospects for the future appeared bright. The first year of ECA assistance to Europe had been enormously successful. The economic disintegration of 1947 had been arrested and there head been a slow steady climb in European production and trade. On the political side, the Communist tide in Western Europe had been turned. Through OEEC a beginning had been made in developing Western European economic cooperation. The Brussels Pact had laid foundations for political and military cooperation in Western Europe. The Atlantic Pact marked the beginning of US and Western European cooperation for mutual defense.

8. It seemed in March and April, as if the democratic West had at last found its feet and was making great and rapid strides in developing and consolidating its economic and political strength. The Soviet Union reacted to these signs of growing Western strength by asking for a CFM meeting and calling off the Berlin blockade.²

9. Despite these favorable developments, it was apparent early this year that some formidable problems lay ahead. The foremost of these was the growing difficulty experienced by the UK and sterling area and the OEEC countries, in maintaining, let alone expanding, their dollar exports and earnings—a difficulty which was bound to grow as the changeover occurred from a sellers’ to a buyers’ market.

10. It was apparent that the UK—whose economy is the most dependent on overseas and dollar trade, the most sensitive to changes in the international trade picture, and more intricate and complicated than any of the other OEEC countries—would be the first to feel these difficulties. Eventually the other OEEC countries would also feel them in varying degrees.

11. It was a growing appreciation of this which inspired much of the talk about the necessity for devaluing the soft European currencies including sterling, and which inspired a growing volume of criticism of the domestic policies of the European countries, especially the UK. Few people, however, foresaw the speed with which a crisis would develop—a speed greatly increased by the talk of devaluation.

12. The crisis began to manifest itself in the second quarter of this year in the form of an extraordinary drain on the sterling area’s gold and dollar reserves. These had only fallen by $326 million in the preceding twelve months. In the second quarter the reserves fell by $262 million, reducing them on June 30 to $1,636 million (exclusive of reimbursements due from ECA). The drain has since continued at a high rate. (August 7.)

13. The immediate causes of this extraordinary drain can be set out quickly:

a) A fall in UK and sterling area dollar sales arising from

i) tapering off of US Government stockpile purchasing;

ii) curtailment of private buying as a result of the slight US recession and the downward adjustment of US inventories; and

iii) postponement of private buying of sterling area products in the expectation that prices would fall further or sterling would be devalued in the near future.

b) A consequent fall in the price of important sterling area dollar earners, such as rubber, jute, cocoa, and wool.

c) Delay in remitting dollars and an extraordinary conversion of sterling into dollars in anticipation of sterling devaluation.

d) A programmed increase in UK imports from the dollar area to make up for the lag in imports earlier in the ECA fiscal year.

e) An unexpectedly heavy call for dollars by India, and to a lesser extent, Australia.

f) Unexpectedly large dollar tansfers to Belgium and Switzerland in accordance with existing bilateral agreements.

g) A diminution of sterling area dollar earnings arising from a decline in South African gold sales.

14. Thus, the exceptional drain on reserves during the second quarter was due to a whole complex of factors, and cannot all be laid at the door of the UK. In fact, an examination of the actual figures would show that the UK’s dollar imports over the year stayed within the program originally submitted to ECA, but there was an exceptional call for dollars in the second quarter owing to the short fall in imports during the previous eight months.

III. Emergency Steps To Arrest the Drain

15. No one can say what constitutes the minimum level of reserves necessary to operate the sterling area. So large a trading area must have a substantial reserve since it cannot live from hand to mouth. The smaller the reserves, the more important it is to defend them. The British Government at the outset of ECA aid stated firmly that a minimum reserve of $2 billion had to be maintained. A fundamental feature of British policy has thus already collapsed. Moreover, we think the reserves may fall to $1,400,000,000 by the time the Washington meeting takes place.

16. If the reserves had been allowed to continue their decline at the second quarter rate, they would be totally exhausted within twelve months. No responsible government could stand idle in the face of that prospect. On July 7, Cripps announced a virtual moratorium on UK dollar purchases for three months, and followed this on July 14 with an announcement that UK dollar imports would need to be cut by about $400 million in the coming year. An emergency conference of Commonwealth Finance Ministers in July agreed to examine their dollar expenditures with the view to cutting them by about $300 million in the next year.

17. The impact of these cuts on the level of production and the standard of living of the UK and the sterling area will not be immediate. This is because they can for a time use accumulated stocks; will be able to arrange for non-dollar sources of supply in a few cases and generally at higher prices; and will apply part of the cut to those imports that can be dispensed with without serious impairment to the economy. There will, however, be a gradual retarding effect on recovery. For any cut in the level of dollar imports must result in a definite set-back in UK and sterling area production and economic recovery, which will ultimately affect the recovery of other countries.

18. Certain of the factors which caused the drain in the second quarter will not operate, or will not operate to the same degree, in the coming months. On the other hand confidence in sterling and in the future prospects of the UK has been shaken by the fall in reserves and by continued talk of devaluation. On balance, we see nothing in the situation which will reduce the drain to minor proportions in the third quarter. On the contrary, there is every reason to expect, and we see no way of avoiding, a heavy drain on the reserves in this period. This will further shake confidence in sterling and may aggravate the developing exchange crisis as the figures become known. Action at the Washington conference to counteract this lack of confidence in the immediate future of sterling is, therefore, of the utmost importance.

19. The situation is so grave that if the drain on the sterling area gold and dollar reserves cannot shortly be halted, the UK Government, in our opinion, will be faced with one overriding necessity—to stop the drain at all costs. They may indeed be compelled to

a) declare a national emergency in the UK, vesting great powers in the hands of the Government; and

b) declare a moratorium on all gold and dollar payments including existing commitments, pending an examination of the whole UK and sterling area situation.

IV. The British Approach to the Washington Meeting

20. The British representatives will thus come to the meeting in a mood of desperation. Their major concern will be the deepening exchange crisis. They will stress that support of sterling and the maintenance of the sterling area are not only imperative UK objectives, but must be an important objective of American policy as well. Outside the US, the sterling area is the most important currency trading area in the world. Its preservation is essential to continued progress toward the restoration of a single multilateral world.

21. They will almost certainly point out that important sterling area commodities come from South East Asian countries—rubber and tin from Malaya and jute from India—which already have great internal difficulties, and will be increasingly exposed to the Communist threat both from within and without. It is, therefore, important that measures be taken to stabilize the income and maintain employment in these countries or the whole area may be lost.

22. They may also want to raise for discussion further steps which they may be compelled to consider to balance the sterling area dollar account. These steps may include

a) further cuts in UK dollar expenditures which go beyond those contemplated in July, and may extend to such important US exports as tobacco, cotton, oil and films;

b) pressure on sterling area countries to take additional measures beyond those contemplated in July to cut their dollar expenditures;

c) a search for non-dollar sources of supply even if this involves discrimination against the US, higher costs, and, in the case of Russia and Eastern Europe, political risks;

d) a refusal to make any new commitments which involve the risk of payment in gold or dollars; and

e) an approach to Canada to modify the existing wheat agreement in favor of payment in sterling, and ultimately to other hard currency countries to arrange trade on the basis of bilateral agreements involving no payment in gold or dollars.

23. The UK Government fully appreciates that such measures would not be constructive, for they would restrict international trade; would postpone further the eventual achievement of multilateral trade and convertible currencies; and would precipitate an immediate dispute between Britain and the sterling area on the one hand, and the US and certain other countries on the other with respect to world economic policy. The British situation is such that they may be compelled, however reluctantly, to adopt such measures in order to bring their dollar deficit under control.

24. Although the British representatives will be primarily concerned with the immediate crisis, they will also have in mind the need for affirmative and constructive action on the domestic front. The British recognize that their fundamental problem is to change from a policy of production regardless of cost, to a policy of producing goods that can compete successfully in buyers’ markets throughout the world. There is a growing recognition that there will have to be measures designed to

a) give incentive to economic production and competitive selling;

b) deal with the suppressed internal inflation; and

c) curb restrictive practices which increase costs.

The foregoing will inevitably involve, among other steps, reducing the cost of Government, reducing taxation, and readjustments in the tax structure.

25. The British will also have in mind the possibility of sterling devaluation, as a means of stimulating UK exports to the dollar area. But they will approach devaluation with great caution. They recognize that devaluation would encourage UK dollar sales, but when devaluation is looked at from the view point of the sterling area as a whole, the disadvantages may outweigh the benefits in terms of dollar earnings. Secondly, devaluation would aggravate the internal inflation and add new strains on the UK wage-cost structure. Thirdly, devaluation, prematurely introduced or in advance of measures to deal with the more fundamental causes of the UK’s persistent dollar difficulties, could give at best merely temporary relief and obscure the need for the more fundamental approach suggested in the preceding paragraph. For these reasons the UK will resist any pressure on them to devalue, although they may be compelled to do so by cricumstances outside their control, such as devaluation by other countries.

26. We do not know what decisions the British Cabinet may have taken or may be contemplating to deal with the internal causes of their recurring economic difficulties; i.e., inadequate incentives and pressures to cut costs and increase labor output, management efficiency, and voluntary savings. Nor do we know to what extent their representatives may be disposed to reveal their intentions in those directions or to embark on a discussion of them at the September meetings. We hope that they will give some indication of their thinking on these matters, which would contribute to the restoration of confidence in the UK’s determination to grapple with its problem.

V. The Uncertainties Ahead

27. It is impossible to predict with any certainty the future course of economic developments. The following section must not be viewed as a forecast but only as an attempt to formulate the possible results of failure to find effective and constructive measures for dealing with the fundamental difficulties on which the present crisis focuses attention. Without any desire to emphasize the gloomy aspect of the situation, it is necessary to state that it can take a course which could hardly be more serious.

a) It may be that the contemplated cuts in dollar imports announced in July together with further limited measures and the resumption of American buying of sterling area raw materials may meet the immediate emergency.

b) On the other hand it may be that further cuts must be imposed to balance the dollar account which will have a still further adverse effect on the level of economic activity. Next spring when the ECA appropriation is reduced, more of the dollar gap will need to be bridged with UK and sterling area dollar earnings or savings. Three cuts in dollar imports in less than a year would be difficult to absorb without a depressing effect on the standard of living, the level of production, or the level of investment, any of which might have far reaching consequences.
No one can foretell the consequences on the UK of dollar import cuts, for these would depend on what imports were cut and what other policies were followed. To the extent the cuts fell on import consumption goods, then production, exports and investments could be maintained. However, should tobacco or films be cut it would have adverse consequences on the budget, and force a curtailment of Government expenditures.^* If the cuts were divided between consumption and investment, then the modernization of British industry would be deferred to the detriment of Britain’s long term competitive position alternately housing and similar investment programs might be sacrificed. If, however, raw materials to industries were cut, there would be a direct effect on the level of UK production, in which case exports or the standard of living would suffer, or both.
Whatever choice of policy is thus actually decided on, the level of national income, tax revenue, the budget, employment, inflationary pressures, etc., etc. will be affected, and require greater or lesser adjustments in the internal financial and economic policies of the UK.
If, in addition, the UK is forced to devalue, this would enormously add to the complexity and intensity of Britain’s financial and economic problem.

28. In short, while it is impossible to forecast future events with any certainty, the prospects ahead for the UK are serious, and may take the form of:

a) a continued drain on reserves which cannot be halted by any of the steps so far taken, which may reach its climax in a few weeks or months, and require most drastic measures; and

b) alternatively, the situation may be stabilized in the near future. In that case what we may expect are continued dollar difficulties over the next year or two, possibly punctuated by recurrent foreign exchange crises, unless steps are taken to deal with the fundamental causes of the UK and sterling area’s persistent dollar difficulties.

29. Nor can Britain’s problems be isolated from other countries. Sterling area countries would be compelled to follow in the wake of the UK and pursue similar policies, particularly such heavy dollar users as India and Australia. The process of readjusting their financial and economic policies would impose internal strains. There would also be strains on the cohesion of the sterling area and the British Commonwealth (the two are not identical). Some countries, like South Africa or Canada, might be tempted to loosen their ties in one regard or other.

30. Should an economic recession occur in the UK and sterling area, It would affect other, particularly OEEC, countries, for it would tend to reduce their level of economic activity, jeopardize their recovery programs, and drive them to restrictive trade policies. Moreover, such countries as France or Italy with major Communist movements might be faced with intensified political difficulties.

VI. UK Politics and the Developing Crisis

31. It should not be thought that political changes in the UK can materially affect the outlook ahead. A general election must be held in Britain between now and August 1950. There is a good chance that the Labor Government may stage the election this fall, before an economic blizzard sets in. We think they have a fair chance of winning an early election.

32. Should Labor lose, however, it would be a mistake to believe that a change in Government would quickly alter the UK’s economic difficulties; change the character of the initial or short term policies which any Government would be compelled to follow; or materially lessen the coming strains on US-UK relations.

a) There are only certain methods of stopping a continuing drain on reserves and quickly reducing the current dollar deficit, whatever Government is in power. Any Government would be compelled to suspend dollar and gold payments, in the first instance, and then use such unconstructive methods as cutting dollar imports, and obtaining supplies through bilateral agreements which discriminate against the US.

b) The Conservatives, however, would be more readily disposed than Labor to follow this with classical economic measures to deal with the UK’s fundamental difficulties: i.e., deflate, raise interest rates, reduce taxes, cut Government expenditures, follow a stiff wages policy, possibly devalue sterling, etc. The consequence would be wide-scale strikes, a reversion to class struggle characteristic of Britain in the 1920s, and a threat to national unity. A Labor Government would be less willing to resort to classical measures and would do so only reluctantly under the compulsion of external economic forces. But in doing so a Labor Government could count on a large measure of support from the trade unions and its own ranks, and thus reduce the intensity of industrial strife and moderate the threat to national unity.

c) If it came to the conclusion that the multilateral road was barred, a Conservative Government would tend to seek a long-term solution by building up the volume of trade and investment in the Empire and by promoting Empire preference. A Labor Government would be similarly disposed, not so much on nationalist grounds, but more in terms of economic planning. The tendency would be toward economic autarchy in either case.

33. It is thus safe to say that there will be a strain on US–UK relations whatever Government is in power. Moreover, ideological differences would add to the strain. A Conservative solution based on the Empire would be as unpalatable to US opinion as Labor’s Socialist proclivities. However, we would probably be more indulgent, and less suspicious of a Conservative Government and vice versa, which would have a bearing on the cordiality of our relationship and on the degree of mutual confidence which existed.

34. The ideal solution for the UK would be a Coalition Government, but this does not appear to be politically feasible. We do not, however, eliminate it as an ultimate possibility.

VII. Implications for the US

35. For the US the sterling area crisis raises grave problems. In the first place the direct effects on the US of further UK and sterling area cuts in dollar imports—whether imposed suddenly in the near future or recurrently over a period of time—can be serious, for the cuts will begin to extend to such items as cotton, tobacco, oil, and films. Secondly, continued economic difficulties in the UK and sterling area which induce difficulties in other countries could make impossible the successful achievement of our ECA objectives by 1952, as well as have effects on the level of US economic activity.

36. But the trend of events goes beyond economic considerations. For one thing, how could the close cooperation between the US and Great Britain—a cornerstone of our general foreign policy—be maintained in the teeth of a series of major actions by the UK to which we would have fundamental objections. Specifically, how could the US continue to furnish the UK (and other OEEC countries) with hundreds of millions in ECA assistance over the next three years in the face of

a) Additional severe restrictions imposed on US imports that would hurt important and influential sectors of American agriculture and industry and would be regarded as discriminatory;

b) a series of actions by the UK (and other OEEC countries) intensifying trade restrictions and barriers, postponing multilateralism, and undermining controls over East-West trade, which would mean abandoning, for a time at least, policy objectives on which we had assumed full agreement existed between us; and

c) possible cuts in defense expenditure at a time when the US is being asked to furnish military aid to the UK and other European countries.

VIII. Our View of the September Meetings

37. It is evident from the foregoing that we will be in an extremely difficult position at the September meetings. We cannot allow events to take their course. On the other hand we cannot come to the rescue of the UK and sterling area by continually providing more dollars that apparently do little to prevent recurrent crises. To advance more dollars over and above those contemplated through ECA would merely postpone the crisis another six or nine months, or a year or two years hence, when we would be confronted by much the same problem. We, therefore, do the UK and the sterling area and ourselves no service by giving additional direct dollar assistance which merely postpones facing the real difficulties.

38. The Washington meeting must, therefore, come to grips with the fundamental causes of the recurrent crises and begin to lay the basis for a permanent solution. The causes of the crises are deep-seated and will require a broad approach on a variety of fronts.

39. In the first place the UK must take such steps as are in her power to deal with certain problems which have roots running far into the past. This is of particular importance because the UK occupies a unique position in the world. It is the hub of the sterling area, manufacturer, banker, and great trading center for much of the world. Unless the hub is sound, the spokes will come apart.

40. The UK must take steps either by deliberate design and selected policies, which, however painful, will get at certain of the fundamental causes of her dollar difficulties, and lay the basis for ultimate UK and sterling area economic solvency and political stability; or, economic forces will take control of the situation, in which case the adjustments will be just as, or even more, painful, and the end result may be economic and political retrogression.

41. It is not for us to tell the British how to increase production, cut costs, allocate her productive factors, or frame policies which will make the greatest contribution to economic solvency. Official UK reports, speeches and statements have repeatedly called attention to areas where more can be done. Responsible domestic critics have pointed the road.

42. The crux of the problem is the ability of the UK through economic production to compete successfully in world markets. Without this the UK will not be able to avoid continued dollar crises. To accomplish this, we think, the British must, by monetary and nonmonetary measures, create an economic environment in which the incentives to work, compete, save and invest—now frustrated—are strengthened and encouraged.

43. In approaching the Washington discussions, we should not be oblivious to the great effort and substantial progress and achievement of the UK since the end of the war. An impressive showing has been made by management, labor and the Government in raising production and expanding exports. The British people have accepted inconvenience, hardship and austerity. The trend to shorter hours has been checked, and in some cases reversed. British trade unionism is far more receptive to labor-saving devices than ever in its history. There is no basis for the charges that British labor is lazy or that management is incompetent, or that the Government has done nothing to tackle its problems, or that all of Britain’s troubles stem from the policies of the present Government.

44. What we are saying is that what has been done has not been enough considering the dimensions of the UK economic problem; that certain policies of the Government have been premature or unwise and have impaired the UK’s ability to produce and export; and that more can be done than has been done to achieve economic solvency.

45. As already stated, we must not enter the September discussions with any idea of imposing our views on the UK representatives. Nor should we conduct our side of the discussions in such a way as to give any impression that we have tried to interfere in their internal affairs. If an opportunity should rise, however—if, for example, they should ask our views—we might then state them informally, making it clear that we have no intention of exerting pressure on the UK to accept them.

46. The second front on which the UK dollar problem must be tackled is through the sterling area. It will be of little help for the UK to take a variety of measures designed to correct her fundamental difficulties, only to have the benefits dissipated by the imprudent or unwise policies of other members of the sterling area. Like the UK, certain of the sterling area countries must take steps to improve their competitive position, produce more dollar and dollar-saving exports, and live within their means. Reduction of barriers to trade and investment which have gradually grown up inside the sterling bloc and British Commonwealth over the last two or three decades would also be of long term benefit.

47. The third front on which action is needed is in Europe. What we have said about the steps the UK and sterling area must take applies in varying degrees to certain other OEEC countries as well. Their position vis-á-vis the dollar problem is different only in degree from the position of the UK and the sterling area. Also barriers to trade among the OEEC countries and between them and the sterling area must come down to encourage competition, bring down costs, and reverse recent trends towards the development of a high cost trading area.

48. The foregoing are not an exhaustive list of suggestions. They represent the kind of approach called for to get at the basic causes of the recurrent financial and economic difficulties of the UK, the sterling area, and the OEEC countries.

IX. The Responsibility of the US

49. We must frankly face the fact, however, that even if all these steps have been taken by the UK, sterling area and OEEC countries, they will not resolve the whole dollar problem. The US, too, has responsibilities from which we cannot escape. It is not a matter of altruism, but of self-interest. The rest of the world cannot be expected and is in no position to make all the adjustments that are necessary to bring the dollar and non-dollar world into balance, which is a prerequisite condition of multilateralism and convertible currencies.

50. We cannot achieve a stable solution to the dollar problem by maintaining or erecting trade barriers which prevent other countries earning dollars, or in the absence of American investment abroad. Sheer intellectual honesty compels us to say that the US favors multilateralism and non-discrimination in areas of trade where we are in a strong competitive position; but resorts to subsidies, protectionism and discrimination in those areas where we are competitively weak, as, for example, shipping, shipbuilding, tin smelting and, possibly, synthetic rubber production. We must either behave like a creditor nation, or face the prospect of continually making loans that cannot be repaid, giving our exports away, or letting our exports fall to the level of other countries’ gold and dollar availabilities.

51. The kind of actions we must consider to tide the UK and sterling area over the current crisis and to deal with the fundamental causes of the persistent world dollar shortage are the following:

a) As immediate measures we should:

i) consider the resumption and regularization of US Government strategic material buying;

ii) consider immediate steps to simplify our customs procedures and to reduce their costs, with the view to facilitating imports; and

iii) examine our administrative regulations with respect to the use of synthetic rubber, with a view to reducing the percentage required.

b) As long range measures we should:

i) encourage US overseas oil producers to expand their production and marketing of oil in sterling;

ii) examine our shipping policy in the light of the Atlantic Pact which has created a framework of military cooperation through which arrangements can be made for an allied shipping pool for purposes of defense. We would then be able to cut the cost of subsidizing and maintaining so large a shipping fleet, in order to relieve American taxpayers and, simultaneously, enable other countries to earn or save dollars;

iii) give urgent consideration to the President’s “Fourth Point”; and

iv) examine our tariff structure with the view to its selective reduction; and increase the tempo of our educational campaign to teach the American people the connection between tariff policy, world economic well-being and our national security.

52. The expansion of private American overseas investment is a more difficult problem. There will be no great volume of private investment until there is much more political stability in prospective investment areas. Nor will private investment begin to flow until a condition of economic balance has been created in the world that will begin to support multilateral trade and convertible currencies.

53. We are not suggesting that the Washington meetings can resolve all difficulties. What we are suggesting is that the UK and the US can and must begin to deal with fundamental causes of the recurring dollar difficulties. Meanwhile

a) We must face the prospect that under the best of circumstances and with the best of wills it will take time to correct fundamental causes;

b) We must face the fact that conditions have not yet been created which permit an immediate return to multilateral trade and convertible currencies. For some time other countries will have no alternative except to support themselves by means of agreements which discriminate against the US;

c) We must recognize that British economic difficulties will not be overcome by a mere change in Government. The roots of the UK’s difficulties are deeply embedded in Britain’s economic, social and political history, and in the great organic changes which have taken place ever since the 1914–18 war in the political, economic and social structure of the world and in Britain’s relations to that structure;

d) We must face the possibility of some economic set-back among the OEEC countries, and a possible reduction in the volume of world and US trade, while the world by design or under the compulsion of economic forces is making the adjustments necessary to establish a balance between the dollar and non-dollar areas; and finally

e) We must face the prospect that continuing dollar difficulties may have serious political repercussions abroad.

54. At the Washington discussions our concern should be to minimize the extent, duration and intensity of the world’s dollar difficulties, the period of adjustment and the political consequences, without recourse to additional direct dollar aid, beyond that provided by ECA. The dimensions of the dollar problem are such that it can be solved without continual recourse to direct dollar aid, providing there is but the will to solve it.

1. This paper was transmitted as an enclosure to a letter from Don C. Bliss, Counselor for Economic Affairs in the Embassy in the United Kingdom, to Paul Nitze, the Deputy Director of the Policy Planning Staff, August 19, not printed, (London Embassy Files, Lot 58F47: 501 Britain) It was circulated at a briefing, session of Acheson, Snyder, Bissell, Webb, Martin, and Foster on August 24 and incorporated into the documentation of the Working Group on Britain on August 25 as WGB D–4/7.
2. Documentation relating to the convoking of the sixth session of the Council of Foreign Ministers in Paris, May 23–June 20, and the lifting of the Berlin blockade is in volume iii.
3. One can get some inkling of what might happen by appraising the consequences of the single action of curtailing US tobacco imports. This cut alone might undermine the whole national budget of the UK. About $2,500 million or 16% of the UK’s total revenue comes from tobacco, of which more than $1,800 million, or 12% represents revenue based on American tobacco. [Footnote in the source text.]