Policy Planning Staff Files: Lot 64D563: Box 732
Position Paper for the Discussions With the British and Canadians on Pound-Dollar Problems, Prepared by the Policy Planning Staff1
1. In determining our course of action in the forthcoming talks, the first consideration that presents itself is the extent of uncertainty about what the British will say, and the extent to which our own position will be affected by this variable.
2. Close examination reveals that our position must be importantly influenced by our impression as to the adequacy of the British approach to the problem, particularly as reflected in the immediate measures they themselves propose to take in the following fields:
- Creation of incentives for lowering of costs and orientation of exports toward dollar market;
- Sterling balances; and
- Disinflationary measures in the U.K.
3. These fields are all intricate and complicated ones; and there is some interaction between them. British assurances will certainly not meet our views 100% as to what would be adequate. On the other hand it is not to be expected that we will draw a complete blank and that they will refuse to take any action along these lines. What we are going to be faced with, therefore, is something between a full meeting of our views and nothing at all, and we will then be obliged to make a judgment of this “something” from the standpoint of the determination of our own position.[Page 823]
4. The variables in the British program are so many that it is impossible to chart out in advance any arbitrary line of which we could say that action falling short of it would be inadequate or action surpassing it adequate. Certainly a program which did not include early devaluation of a satisfactory character and degree could not be considered an adequate one. But devaluation alone would not insure adequacy. Nor would action in any other single field.
5. Plainly, we will be able to make our judgment, in this instance, only on the basis of an actual knowledge of the thoughts and program of the British leaders.
6. It is evident, therefore, that the talks should be so planned that when we have had an opportunity to take the measure of the British position we can sit down among ourselves and arrive at a judgment as to whether the US can, in effect, give a qualified blessing and support to the British program and take measures designed to enhance its chances for success, or whether we must recognize it as a plainly inadequate one, not warranting our support. Our conduct throughout the remainder of the discussions must be determined accordingly.
7. Before examining how we can best elicit from the British a picture of their frame of mind and their program, and without trying to lay down an arbitrary line between what would be satisfactory or unsatisfactory, we might examine in somewhat greater detail what we would expect the British to be ready to do under each of these four headings.
8. (a) Devaluation.
It would be necessary for the British to indicate to us, at least on the very top level, that they did definitely propose to take action along the line of devaluation of the pound, but not in such a way as to establish another rate inadequate to the needs of the situation to which their prestige would again be engaged; rather, the rate should be experimental and subject to relatively easy readjustment in case it proves inadequate, and they must be willing to make this publicly clear. It will not be necessary for us to know the precise rate to which they propose to devalue or the precise day on which they would expect to make their approach to the International Monetary Fund; but on both of these points we should have a rough idea.
It is possible that the British will try to make devaluation conditional either on an increase in our price of gold or on some stabilization credit or on their total impression of our own attitude and position.
We should not accept any conditions with respect to devaluation; particularly not the two mentioned above. Devaluation falls into the [Page 824] category of things which we think the British Government should be prepared to do not as a concession to us but in its own interest, if it has a realistic view of its own situation.
9. (b) Creation of incentives for lowering of costs and orientation of exports toward dollar market.
Among the measures which it might be expected that the British Government would take in the immediate future to meet the short-run dollar problem is the putting into effect of the administrative arrangements designed to strengthen the incentive to export to the dollar area. Such arrangements might include permission to exporters to retain for unrestricted use part of their dollar exchange earnings or the allocation of additional amounts of scarce raw materials as a reward for exceptionally good performance in the promotion of dollar exports. They might also include special tax incentives, so long as these would not give rise to charges of dumping. It is not within the province of the United States Government to suggest the form that such arrangements should take. It is recognized, however, that there is tremendous scope for greater effort by private sellers in the United Kingdom and the sterling area to invade dollar markets, that the direct effort required must be made largely or wholly by private sellers, but that it should be the objective of the United Kingdom Government to provide powerful, positive incentives to private sellers to make such an effort.
10. (c) Sterling balances.
The existence of the equivalent of $13.5 billion of unfunded foreign holdings of sterling, largely accumulated during the war, unquestionably plays an important role in: (1) the demand of the rest of the sterling area for dollars; (2) the United Kingdom export surplus with the sterling area, with its substantial indirect dollar cost; (3) the direction of British export trade as between dollar and non-dollar areas; and (4) the pattern of investment.
The handling of these balances is important both with respect to Britain’s short-term problem as well as in the long run.
While mindful of the political difficulties associated with the handling of the balances and of the probability that no uniform pattern of arrangements with holders of sterling can be achieved, nevertheless, we feel that Britain should undertake negotiations country by country for the purpose of funding a substantial portion of the balances and establishing firm maximum rates at which such balances can be utilized for current transactions.
11. (d) Disinflationary measures in the U.K.
The British ought to show some readiness to take domestic measures of a deflationary nature, such as cutting government expenditures, modifying full employment policies, etc.[Page 825]
12. Our estimate of the adequacy of their program must rest on our judgment of the combination of what they are prepared to do in these four fields.
13. Our next problem, then, is how we are to obtain a clear picture of British thinking and intentions on these points.
14. It is to be expected that the British will open the conversations with a detailed statement of their position which would doubtless throw some light on the above. It is also to be expected that this detailed statement will leave considerable gaps in our knowledge, and that further questions will be in order. In particular, it is doubtful that the British will include, in such an initial statement, an indication of their intentions with respect to devaluation.
15. To some extent, it may be possible to bring out much by questions. It would not, however, be advisable to place direct questions to the British about devaluation in the initial stages of the official talks. This should be done in a more private and informal atmosphere, and preferably in a company not going beyond persons of cabinet rank. Here, our interest in the subject should be stated frankly to the British and we should not hesitate to tell them that a lack of readiness on their part to devalue, of their own accord and in a helpful and effective way, would decisively affect our judgment on whether they themselves were prepared to take adequate measures to meet their situation. The nature of this conversation would probably be such that we would also have to tell them basically what this would spell for us in our own position. (This will be treated below.)
16. In trying to define our position, and the extent to which it would be affected by the British position, we find that there is an area in which it will not be affected at all. Whether the talks are successful or unsuccessful, it will be desirable for this Government to make a show of an earnest effort to facilitate a solution of the world’s currency difficulties, particularly with relation to the immediate future. There are a number of measures we can take along this line which could not be other than helpful and desirable even though the British program should turn out to be quite inadequate. In fact, to the extent that the reaction of the British to their present difficulties is unsatisfactory and the future is dark and troublesome, there is a virtue in being able to demonstrate that we did what we could, anyway, to ease the situation and that the principal blame therefore does not lie with us. To the extent that we can determine upon helpful measures and make known at the outset of the conversations with the British our readiness to take these measures, we can avoid the charge that we put pressure on [Page 826] the British and that we have thereby incurred a share of the blame for their failure.
17. We must distinguish sharply those measures which we can with safety take independently from those measures which, unless coupled with and designed to support an adequate British program, would merely compound confusion and encourage unrealism and procrastination in the British.
18. The measures which we feel we can safely decide to take, and state at the outset of the conversations our intention of taking, are the following:
- Subject to some modification or delay in the light of the situation in Congress with respect to the present ERP program, affirmation of the determination of the Executive Branch of the Government to see the ERP program carried through to the end as contemplated. In this connection, we could state that the President would urge that the program be so handled that the accumulation of reserves by individual OEEC countries would be recognized and encouraged and would not lead to a cutting of allocations in the remaining years of the program. Similarly, we could state that the President would urge that in the remaining years there be maximum freedom of disposition, on the part of the OEEC countries, of the dollars to be made available to them (i.e. that they should have a far greater proportion of free dollars at their disposal).
- A formal statement of our intention to explore exhaustively all means of revising by administrative action our customs practices, from the standpoint of facilitating imports, and our intention of seeking new legislation designed to complete the achievement of the type of procedure we desire.
- Whatever we can do in the line of freeing dollars for purchase of Canadian wheat, and similar off-shore items (possibly wool) in terms of the present arrangements.
- Such action as we are able to take with respect to rubber.
- The announcement of the intention to appoint a representative U.S. committee to study ways in which this Government could facilitate the earning of dollars in this country by foreign governments, as set forth in the draft of the possible final communiqué, attached.2
19. The talks should be scheduled and planned in such a way that we can make known our decisions on these subjects to the British during the initial session, before any real give-and-take has occurred, making it clear, however, that this is not necessarily the sum total of what we can do but only represents a number of measures which we have already determined upon.[Page 827]
20. In the light of the above, we should plan on the following:
- Initial sessions at which we would hear the British opening statement and make an opening statement of our own, including the announcement of such measures as we were prepared to take at once, and possibly explore Britain’s commitments to the sterling area and other countries.
- A private meeting of Ministers without any other persons present to discuss devaluation and other matters.
- Opportunity for thorough examination within the U.S. group of the picture as revealed to date and determination as to future position.
- Resumption of official discussions with British and Canadians.
21. From then on, our conduct would depend upon our judgment as to whether the temperature of British intentions was above or below the freezing point of adequacy. These two contingencies must therefore be separately examined.
22. On the assumption that we found the British attitude on balance adequate to warrant our support, we should take the following position:
23. (a) Action in the Monetary Fund.
Assuming that devaluation had been satisfactorily carried out and that other monetary adjustments would follow that of sterling, we would agree that our director on the fund would not adhere rigidly to the rule excluding ERP countries from access to the fund. That would not mean that we would go to the opposite extreme. We continue to feel that ERP countries should generally operate within the limits of ERP aid; and we would question sharply the purpose of any proposed drawings. We would have to continue to insist that the fund’s resources should not be used for the correction of basic disequilibria. Nevertheless if a realistic pattern of exchange rates is achieved, we would not insist on waiting for the completion of the whole process of restoration of general financial stability before permitting the fund to be used. We would be prepared, in these circumstances, to adopt the approach of examining individual situations on their merits instead of the blanket approach now being practiced. Clearly, of course, we cannot undertake any specific engagements with respect to use of the fund, and such relaxations as we might agree to: would have to come severally, in the light of the regular operations of the fund and of the situation of the moment.[Page 828]
24. (b) International Bank and other credit facilities.
While this subject is not so directly linked to devaluation as is our position in the fund, we could afford to be more forthcoming and helpful in questions involving international finances, if we felt that the British program was generally an adequate and hopeful one.
25. (c) Attitude toward British restrictive measures.
We must assume that the U.K. will state the specific cuts in U.K. dollar expenditures which they intend to make in implementation of the program announced in July, and perhaps going beyond it. These will affect important U.S. exports. They are dollar saving measures. If our general view of the British progam is that it is an adequate one, i.e. that these dollar saving measures are adequately balanced by measures looking toward increased facilities for earning of dollars (which would include devaluation, etc.), then we can give at least our tacit, if reluctant, sanction of these U.K. measures and refrain from making issues of them with respect to the loan or otherwise.
26. (d) Impression to be given to public.
If we consider the British program in general an adequate one we can go along with a final communiqué of a hopeful and encouraging nature indicating, within limits, our confidence in an eventual overcoming of the difficulties.
27. (e) Continuing facilities for liaison.
We would be prepared, against a favorable background of British intentions, to join with the British in establishing some sort of continuing facilities for liaison on matters which are the subject of these talks, and particularly their problem of day by day decisions affecting their role as purveyors of dollars to other countries. It would not be necessary that these arrangements be extensively formalized. It would also not be the thought that they should cut in to the functions of any other existing organizations to which the British and ourselves both belong. But they should include some sort of a secretariat to serve as a registrar of the developing factual background and the services of one or two officials high enough and influential enough to discuss profitably, in their broadest political and financial aspects, current problems arising for the British, and in some instances for ourselves, in the demands of other countries for dollar and sterling exchange.
28. (f) Economic union.
We would be prepared, in the event that the British ask for this, to join with them in setting up a committee to study problems of economic union or closer political association. In accepting any such suggestion on their part, we would make it plain to them that we do not regard closer institutional association between the two countries (or the three countries) as a development which could substantially mitigate the [Page 829] hardships involved in an adjustment of the British economy to that of the dollar area. On the contrary, to the extent that union might demand the early removal of British protective measures against our economy, it might cause them to face these difficulties more rapidly, and in more extreme form, than would otherwise be the case. We should not dismiss, however, the positive value of such a program as a framework in which the reduction of our own barriers to imports and to the acceptance of services from Britain could take place, and we should show ourselves ready to examine the problem if the British wished to do so. We should also put the British on notice that in any such study we would have to examine whether institutional changes of this nature could be limited, in their applicability, to the U.K., or the U.K. and Canada, alone, and whether they would not have to be extended to include other countries, either in the Commonwealth or the OEEC group, or both.
29. If our analysis is that British intentions and program are simply inadequate, and that the British do not intend to balance the forthcoming dollar saving measures with any adequate program to improve their dollar earning power, then our position would be roughly the converse of that just set forth. In this case, not only would we have to indicate that there could be little or no change in U.S. policies on use of the Fund and on international credit in general, but we would have to make it clear that we took a decidedly pessimistic view of the future, and that honesty to our own people would compel us to make that plain, if only by indirection, in the handling of the publicity about the talks. It would have to be made clear to the world, in this case, that there was very little this country could do, beyond the measures indicated at the outset of the talks, to assist the U.K. at this juncture with her problems, and that we could only stand by to be of service if at some future date the British were able to adopt a program which we felt we could support with some prospect of success and without creating a misleading impression among our own people. In the absence of such a program, there would be no point in our entertaining projects of economic union or of a continuing institution for the handling of our political-financial problems.
30. It is probable that we will find the British unwilling to make, at the outset, any unconditional statement of their position; that they will rather say that the tenor of their action depends on our own attitude and how much we are prepared to do for them. This concept must be firmly but tactfully rejected. They cannot have it both ways. The problem at hand is primarily a British problem; and it is intimately [Page 830] related to action they take in the domestic field. They cannot ask us to refrain from “telling them what to do” and at the same time maintain that what they are going to do is dependent on our attitude. To the extent we gain the impression that they are making a determined and realistic attack on their own problems, we will be able to use our influence to support them in that effort; but the determining factor will be, and must be, the quality of the program they themselves propose to undertake.
- On August 31 the Policy Planning Staff had prepared an earlier version of this paper entitled “Policy Relating to the Financial Crisis of the United Kingdom and the Sterling Area” (PPS 61), not printed, which discussed the dollar drain, its implications, and the possibilities of United States assistance (841.5151/8–3149). Kennan then discussed it with Secretary Acheson, and revised it in light of that conversation and of certain further suggestions from the Treasury.↩
- No draft communique was attached to the source text; however, among the papers supplied to Snyder, Acheson, and Hoffman on September 7, in preparation for the tripartite economic conversations, was a four-page draft entitled “Possible Final Communique of US–UK–Canada Financial Talks” prepared by the Policy Planning Staff on August 29, not printed (841.51/9–749).↩