841.5151/11–349: Telegram

The Ambassador in the United Kingdom (Douglas) to the Secretary of State


4402. Re Embtel 4161, October 17.1

The current British scene is dominated by two outstanding features: Devaluation of sterling, necessitating an immediate complementary economic program; the imminent general election, making the months from September to next April a period when party politics have inordinate importance. The exact significance of current developments is thus doubly difficult to evaluate.
Devaluation has mitigated but has not removed entirely the necessity for other economic adjustments essential to long-term recovery. Furthermore the inflationary forces released by devaluation and the tapering off of US aid will both require direct counteraction. Maximum foresight might dictate the earliest possible application of strong measures to meet all of these requirements. Given the imminence of an election, however, the imposition of severe measures at this time was not considered politically feasible. Nor was it considered necessary by government technicians who devised the program, [Page 851] who count on natural disinflationary forces coming into effect in the second half of the budget year to stabilize the situation until next spring. Until then the government’s program will have only mild disinflationary effects. The economic program announced for the immediate future should, therefore, be regarded as an interim program to serve the needs of the economy until next spring. It should not be misinterpreted as representing all that a British Government can or will do to meet longer-term economic requirements.
The Labor Party’s reputation for political integrity was at stake in this matter, and it was felt necessary to announce the economic program well in advance of the election date, which we now believe to be March. The result has been some political disadvantage, since the economic measures so far announced are open to criticism as inadequate for the country’s longer-term welfare. The manner in which the program was presented has added other political handicaps.
The economic measures complementary to devaluation were sketched only roughly at the time of the devaluation announcement, their nature was outlined more clearly in government statements during the parliamentary debates at the end of September, but certain substantiative actions to be taken were not revealed until nearly the end of October. This evolution of the economic program in stages, with considerable intervals for speculation by the press, the markets and the general public, has produced a sense of confusion which would have been avoided if a definitive program could have been announced at the time of devaluation. The impression has been created of a government uncertain of its course and now committed to measures drafted under pressure, as though devaluation had caught the cabinet unaware.
In the course of this evolution, the government led the country and the world to expect more drastic measures than it was in the end prepared to institute. Devaluation was originally presented as a calamity, attributable in large part to external influences beyond British control. It was indicated, then and later, that painful measures would be required to control the inflationary forces created by devaluation. No apparent attempt was made to correct the over-emphasis given to these possibilities by the press. As a result, when unexpectedly moderate steps were finally announced, the impression was created of a government unwilling to put through measures vital to the welfare of the country.
This maladroit management stems from the uncertainties of the political situation. The initial delays and postponements can be explained only on the ground that, at the time of devaluation, the possibility of an early election was under consideration. Subsequently the cabinet found it difficult to work out an agreed program in view of serious differences of opinion as between the ministers responsible for [Page 852] economic operations and those more preoccupied with politics. In the final analysis, no government could be expected to come up in an election year with an avoidably severe economic program, and this one did not.
Originally the government, faced with an increasingly urgent problem of balancing its international hard currency accounts, rejected outright the possibility of meeting the situation by severe domestic deflation. Instead it is relying mainly on devaluation to achieve a diversion of exports from soft currency markets and from the home market to the hard currency markets.
We have good reason to believe that Cripps and some others in the cabinet wanted a greater measure of deflation, but were unable to carry a majority of the cabinet on this issue. There was in fact little opportunity for deeper or more immediately effective cuts than those actually taken unless the government applied the axe to food subsidies, public housing, defense, or the national health service. With the general election probably planned for March immediate drastic action along such lines might risk alienating votes.
In the end a compromise was reached in which Cripps achieved the minimum disinflation he regarded as essential to tide the country over the next few months and through the general election. We think he also obtained an understanding that more vigorous measures would be instituted if necessary. A hint of further cuts was made by Morrison in the October 27 debate.2 We would certainly expect considerably more vigorous measures to be instituted in the April budget. (Should the Conservatives be returned they will have the same problems and must take much the same measures.)
Our conclusion is that the current economic program, therefore, represents a compromise between economic and political considerations. However, in seeking adequate disinflation without deflation the government is dealing with intangibles impossible to measure precisely. The margin of safety is not great, and the cabinet is perhaps risking not only the economy but its political future in cutting its program so fine. Nevertheless it seems to us there is a fair chance that devaluation, plus the supplementary measures already announced, may carry the economy through until April or May without serious danger of another foreign exchange crisis or of uncontrollable internal inflation.

Pass Treasury and ECA.

  1. Not printed; it reported that an assessment of the post-devaluation situation in the United Kingdom would not be sent pending revelation of further details by the British Government. (841.5151/10–1749)
  2. For statements by Herbert S. Morrison, Lord President of the Council and Leader of the House of Commons, and by others, see Parliamentary Debates, House of Commons, 5th Series, vol. 468, cols. 1529 ff.