The Chargé in the United Kingdom (Holmes) to the Secretary of State
London, September 20, 1949—5 p.m.
3772. Pass ECA. Following is our appraisal effect devaluation on political developments, here:
- Devaluation well received in most responsible quarters except trade unions. Communists were of course delighted and expect to capitalize on it, but we do not think they will have much success for a time at least. Trades Union Congress General Council, which, along with Federation of British Industries, was told of move Sunday in advance Cripps broadcast, meeting today. It will almost certainly [Page 840] issue statement endorsing action and expressing confidence in government.1
- Trade union leaders, however, in great difficulties. They are already under heavy pressure from ranks for higher wages, and they know pressure will be intensified as result effect of devaluation on cost of living. They appreciate danger of inflation if new wage demands are pressed, but are fearful they will not be able restrain their members.
- A major weakness in Cripps broadcast and press conference was absence of any change in government’s wages policy. Such references to wages as were made still do not go beyond appeal for wage restraint. Exhortation in past has had only moderating effect on wage demands and will be even less effective in coming months. Unless devaluation accompanied by stiff wages policy and other measures, benefit of devaluation to Britain will eventually be cancelled out. This was theme of nearly all newspapers today.
- Well informed minister, whose judgment we respect, in private conversation with Embassy official said he expects three to five percent increase in cost of living in next six months. Our studies earlier this year on basis 20 percent devaluation suggests increase will reach upper figure. Minister does not think general pressure for higher wages will become serious before next spring, owing time lag between rising-prices, formulation wage demands and interval for negotiations. We concur.
- Minister said he hopes Prime Minister will decide on autumn election. Devaluation will result immediate improvement in gold and dollar reserve position and stimulation exports. If election can be held on this rising tide and in advance substantial increase in cost of living and next spring’s labor troubles, he thinks Labor can win. He doubts if they can win if they delay election until next spring.
- Foregoing view, which is also held by other members of government, seems to be growing, but some party leaders are lukewarm to [Page 841] early election. They do not believe dispute with trade unions will take critical form. They believe common sense of trade union ranks and their loyalty to government will prevail. Secondly, they believe at least three to six months are needed to demonstrate beneficial effect of devaluation.
- Our own view is that devaluation has increased odds in favor autumn election, not only for reasons set out paragraph 5, but also because government will be in grave difficulties if it tries to carry on during next six or eight months without a fresh mandate. There are a number of additional decisions government must take as result of devaluation, involving budget and fiscal policy, taxation, control of inflation, level of investment, and if country is to reap full benefit of devaluation, wages. These decisions will be unpopular. Government will have a very rough time if it tries to carry them out without a new mandate.
- Conservatives and Liberal leaders asked Prime Minister yesterday reconvene Parliament immediately instead of October 18. Since devaluation is a step of utmost seriousness, government is morally obligated to reconvene Parliament and will be subject to heavy criticism if it refuses.2
Airpouched Paris for Embassy and OSR, ECA.
- In telegram 3788, September 21, from London, not printed, Holmes reported that the Trades Union Congress General Council failed to endorse devaluation as he had anticipated, declaring only that it was satisfied that the government would not have taken “… so grave a step without careful assessment all factors.” The Council wanted information on the reasons for devaluation and was arranging a meeting with Cripps after which it would formulate its position. Holmes also reported that a notable feature of the Council’s discussion was a “… tendency to lay blame for Britain’s recurrent difficulties on US and absence of confidence in US. US post-war inflation and deflation was attacked as disturbing force post-war world, along with our tariff, shipping, synthetic rubber, etc. policies.” Some members of the Council expressed the view that Britain should abandon its policy of working with the United States to create a single multilateral trading world and should embark on a new policy of trying to create a third trading area independent of the dollar. Finally Holmes stressed that although these views were not official it would be a mistake for the United States to ignore the strength of this feeling in the United Kingdom. (841.5151/9–2149)↩
- In telegram 3790, September 21, from London, not: printed, Holmes reported a conversation with Eden in which the Conservative leader stated that he agreed that the gold and dollar position of the United Kingdom was such that devaluation was necessary. However, the Conservatives would attack the government on the grounds that it had been in power since 1945 “… with ample opportunity to achieve economic stability and situation requiring devaluation result of government’s bad management.” (841.00/9–2149)↩