394.31/11–3050: Telegram

The Chargé in the United Kingdom ( Holmes ) to the Secretary of State

secret

3193. For Perkins, Labouisse. No copies, no distribution. We and Batt1 considered it advisable for Winthrop Brown see Chancellor of Exchequer while in London. Brown, Baldwin visited Gaitskell yesterday.

Following Brown’s report of outcome Torquay consultations re sterling area dollar import restrictions Gaitskell expressed appreciation for position of US Government in matter and Brown’s handling of situation. He expressed hope he could talk frankly informally about a matter which he considered highly important. He then indignantly criticized what he termed “attack on sterling area” singling out for particular criticism IMF action in matter which he called another example of many difficulties which British had experienced as Fund member. When reminded that US did not request drastic changes in sterling area restrictions but only such selective relaxation as appeared warranted, Gaitskell said that any weakening of “common criterion” sterling area principle threatened continuance stability sterling area. He asked how any member sterling area which might possess dollar surplus could materially increase dollar purchases without affecting sterling area dollar pool and thus adversely affecting less fortunate members. He said unless decisions affecting sterling area were made on collective basis effective management of area and dollar pool would be impossible and area would dissolve. He said British believed maintenance sterling area essential and if “other countries” had contrary views they should say so frankly. Said criticism of sterling area “by theoreticians who often were ill-informed about operations of area” made more difficult position of British who were primarily responsible for operating area and for maintaining economic stability.

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Gaitskell expressed resentment over fact that while in Washington no US official discussed with him question of relaxation sterling area restrictions or point at which UK’s gold dollar reserves would justify such relaxation or be otherwise “adequate”. He said he and his colleagues found it difficult sometimes to understand exactly what US wished British to do. They were urged to make maximum defense effort while maintaining economic stability, and at same time were informed that gold dollar reserves had reached point where no further ECA aid was necessary and sterling area dollar expenditures should be increased. This at time when British uncertain over economic impact of defense program and increasingly concerned over economic outlook.

With some irritation Gaitskell said UK must be permitted handle sterling area problem as it saw fit, as UK bore primary responsibility in matter. He said no outside pressure to relax sterling area restrictions was needed as there was “sufficient pressure from inside area”. He said no one, certainly no member British Government, liked these restrictions; that increased dollar imports would have strong political appeal in UK and elsewhere but it was his duty as Chancellor to resist any proposal which UK could not now afford. He recognized that real problem is to find proper balance between necessary volume of reserves and volume imports which sterling area could afford and said this problem was receiving his constant attention.

While apologetic about vehemence his remarks Gaitskell said he was obliged to express frankly his feelings about matter. Because of his special responsibilities Gaitskell might be expected to be more disturbed about situation than other Ministers but there is no reason believe his attitude not shared by government in general.

During interview Gaitskell repeatedly referred to very serious raw materials situation. He said unless most acute commodity problem were relieved soon considerable unemployment would develop, defense production would be hampered, and efforts to continue increase in national product would be fruitless. In strictest confidence he expressed opinion that adverse turn in balance payments situation would develop within next six months or possibly longer even if commodities situation improved. He appeared seriously disturbed over economic prospects.2

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Sent Department 3193, repeated information Paris 1053 for Katz, Woods; Torquay 104 for Brown. Department pass ECA/Washington for Foster, Bissell; Treasury for Martin.

Holmes
  1. William L. Batt, Chief of ECA Mission, London.
  2. In a letter of December 1 to the Assistant Secretary of State for Economic Affairs (Thorp), the U.S. Delegation Chairman (Brown) wrote:

    “I think you should make a particular point of studying London’s telegram no. 3193 of November 30. This indicates the kind of thing we are dealing with. The telegram correctly reflects the violence of the Chancellor’s feeling. He certainly let us have it right from the shoulder and I certainly got the impression that he is the kind of man who should be dealt with with the cards, no matter how unpleasant they may be, face up on the table. The thing that would be most calculated to offend and alienate him would be if he were to get any suggestion that people were not dealing with him completely frankly.” (Lot 57D284, Box 165, Folder “Balance of Payments”)