741.5/8–950: Telegram

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

top secret

820. 1. Following, except last paragraph, is Emb/ECA mission, service attaché analysis of Top Secret British memorandum re additional defense expenditures (Embtel 758, August 4, repeated Paris 215, Rome 56, Brussels 38, Hague 39, Copenhagen 30, Oslo 241). I agree with it and add my comments in paragraphs 12 and 13.

2. We believe a basic factor in British approach to rearmament effort is oral statement of Plowden at first meeting with Emb/ECA working party (reported Embtel 723, August 2) that ultimate objective of program is “peace not war” and similar assumption stated in paragraph 3 British memorandum. While this unobjectionable in principle we feel British planners have defined it as a mandate to develop rearmament program with strong “business as usual” flavor and lacking balance essential in fully adequate program.

3. British planners and Cabinet undoubtedly seized with alacrity Department’s recognition (stated in paragraph 7 Deptcirctel July 22, 1 a. m.) of importance of continued economic recovery and have produced program involving minimum economic dislocations. It seems clear from paragraph 3 of British memorandum that current HMG thinking contemplates little interference, by expanded defense program, [Page 1674] with economic recovery efforts. We recognize, however, that this and other aspects of program may be only “asking price” to establish bargaining position (a poisonous idea).

4. The requirement of substantial US aid, assured in advance and provided on current basis, reflects admitted British determination to prevent, if possible, recurrence of accumulation of external liabilities which UK experienced during last war. While this objective is understandable and desirable, we believe British program is below level attainable without serious adverse economic impact and is inadequate for present and foreseeable future needs.

5. Program in present form, with almost exclusive emphasis on material rather than balance between sufficient equipment and rapid development of larger more effective combat forces, would be of questionable adequacy even on basis of hazardous assumptions that (a) major war is improbable for several years, (b) defense preparations on this scale will be effective deterrent to Soviet aggression; (c) development of major emergency will be sufficiently gradual to enable UK transform training forces and reserves (other than meager strategic reserve) into effective combat units. These assumptions are naturally more acceptable to HMG than more stern criteria which, according to British view, would force UK to shoulder heavier defense burden necessitating reimposition of measures whose relaxation British public is just beginning to enjoy. Unless the assumptions are acceptable to us, however, efforts by US will be needed to persuade HMG that further steps to strengthen defenses are unavoidable and wholly necessary.

6. Despite comments in paragraphs 4 and 5 of British memorandum conveying impression that British armed forces, including general reserves, and existing training program are effective enough, the fact remains that the present troop strength of British military forces is wholly inadequate to meet domestic and foreign requirements and current NATO commitments. Despite low combat effectiveness of British forces and gravity of current situation British have no plans now to increase number of combat-effective units on troop basis. While planned expenditure of pounds 100 million for increased service pay and related expenditures will presumably raise service morale, it is too early to predict effect on recruitment to prevent run-down of military personnel strength. Conscripts form approximately 50 percent of forces in being. Their 18 months duty tour may be too short to permit assimilation of both individual and unit training and employment overseas for worthwhile period. But the present real deficiency is in regulars. Another 70,000 to 100,000 regulars and blowers [reserves?] would enable British so to reorganize available personnel as to have [Page 1675] several divisions and at same time to receive and train national service men. Long period required to prepare one brigade group for action in Korea points up absence of ready forces and accentuates problems that will persist under current policies governing military service which are essentially peace-time policies. Recruiting program for naval personnel is somewhat more effective.

7. It is our considered view that British program can be accomplished without reduction in domestic, non-military uses of resources including civilian consumption since probable annual increase in production should be more than enough to cover maximum annual proposed increase in military expenditure. British assume great inflexibility in use of resources. Basic British argument is that equipment must come from industries producing for export or domestic investments, that production for those purposes cannot be appreciably expanded because of labor shortage, and that increased military production therefore reduces exports and results in balance of payments deficit for which heavy US aid is required. We believe this argument weak in several respects.

8. While rigidity in labor mobility is real obstacle to expand production in industries which will bear brunt of expanded defense program, we believe British memorandum unduly stresses importance this point. We believe substantially greater flexibility can be introduced into British economy by appropriate measures. Increase of 250,000 workers in affected industries over program period without compulsion certainly seems possible under circumstances where industries concerned already have labor force of over 4 million and no serious non-pecuniary obstacles to labor recruitment exist such as are present in coal industry. British economic survey 1950 cites 4½ million job placements in 1949 as indicating “considerable movement of labor”. Rapidly rising productivity in UK should make possible selective wage increases so that significant relative wage changes as incentive to labor movements could occur. It would be desirable to have selective wage increases without general wage rise, but if only latter is politically feasible the benefits derived from a significant increase in the supply of needed labor may be worth the resultant inflationary pressure. Even if political obstacles to reallocation of labor are accepted as effective bar to increased production in these industries (and this influence may decrease appreciably as public sense of urgency increases) cuts in domestic investments rather than in exports appear possible. Effect of such cuts on rate of expansion in national output should not be severe, particularly if cuts made in investment items contributing least to industrial production. Inflationary [Page 1676] effects on increased military expenditures would then be offset automatically with little adverse effect on balance of payments.

9. British program contemplates charging to budget no more than pounds 950 million per year beginning 1951/52 against total military program of pounds 1070 million, pounds 1135 million, pounds 1195 million between 1951/52, 1953/54 inclusive. Clear implication is that British now contemplating part of military expenditures to be financed with sterling accruing to government as counterpart of requested US aid. Working party discussions with British indicated that amount of dollar aid requested was originally determined as representing difference between pounds 950 million figure of annual budgetary burden which UK economy judged capable of bearing and total value of military program planned. Do not believe that British likely continue to stress this budgetary justification in attempt to support request for pounds sterling 550 million equivalent in dollar aid since this would be well received. They will more likely emphasize type of balance payments analysis suggested earlier part of telegram. Subsequent paragraphs express our view that pounds sterling 950 million per year need not necessarily represent maximum defense budget.

10. British fiscal 1950/51 with pounds sterling 824 million for defense (British figure) should allow for approximate overall budget balance. Assuming pounds 950 million level of defense expenditure included in budgets each of three years following fiscal 1950/51, plus pounds 40 million for civil defense, and assuming fiscal policy of approximate overall budget balance, we find that:

Re taxation:
British need not increase present rates of taxation to finance increased defense program with balanced overall budget;
In fact, in fiscal 1952/53 and 1953/54, rates of taxation could probably be reduced—to yield same level of revenue as in 1951/52 since tax base will increase with rising national income;
If present rates of taxation maintained over program period, we expect approximate overall budget balance in 1951/52, and surplus in following two years.
Re civil expenditures, contemplated increased military expenditure and balanced budget would:
Require no reduction of existing program of social services (education, health, insurance, and cash benefits), and in fact allow for increase in expenditure comparable to growth in population;
Necessitate no large cut in subsidies (e.g. a 6 percent cut in 1951/52 and 1952/53; and no change in 1953/54, compared with 13 percent cut this year);
Involve some decrease in central government expenditures for housing below present level (about 8 percent cut in 1951/52, and constant thereafter);
Include expected continuation of postwar decline in expenditure for terminal war charges and war damage payments;
Involve not much change in total of other civil expenditure, after allowing roughly 2 percent annual increase for government salaries.

11. At meeting with British Government working party, members US working party referred to probable complications resulting from British insistence (paragraph 13 of memorandum) on assurances that part of “free dollars” (for definition of “free dollars” see Embtel 786, August 82) provided by US could be held as sterling area reserve to offset increased sterling liabilities. While recognizing technical difficulties which this would cause, British officials insisted that right to use dollars for that purpose was essential.

12. Concluding, British memorandum expresses UK determination to make “greatest possible contribution” to common cause and willingness make maximum diversion resources to wartime production that is physically possible short of placing nation on wartime footing. I do not believe that British program implements those expressions. I believe that amount and form of US aid requested is excessive for a program limited to production and not reflecting proper balancing of need both for material and for modest increase in an organization of effective forces to use that material. I believe serious consideration should be given to the risk inherent in premature acceptance or even tentative acceptance British program until careful US Government decision on this basic point has been reached. In my judgment most effective official US attitude at present would be to consider British program as preliminary indication of intentions and to concentrate on persuading HMG to recognize importance of striking balance referred to and planning such additional increases in defence production as US considers essential for both UK and for NAT collective forces. Amount and nature to be offered would be conditioned to British willingness to meet this position. Presume there will be careful integration of ECA assistance with MDAP assistance and adequate consideration of possible effects of increased US stockpiling to determine real British need for US aid and to prevent pyramiding of that aid.

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13. In view comments herein and plans for Department’s presentation at Senate hearings (indicated Depcirctel August 8, 6 a. m.3) where small amount additional British expenditures contemplated for fiscal year 1952 will be clearly apparent. Department may wish to instruct me to talk again with Attlee.

14. In reply to Depcirctel August 8 Embassy will indicate ratio between amount US aid requested by British and (a) contemplated British expenditure on additional defense production and (b) contemplated total additional British defense expenditures.

15. This appraisal does not view program in light of technical regional aspects which will probably strengthen many points made above. Bonesteel4 feels France and other NAT countries will use adequate British program as excuse for weakness of their defense efforts and that present low level of combined programs will seriously jeopardize NAT objectives. He concurs in analysis and my comments. Kenney,5 MA, NA, Air Attaché, Breithut,6 MAAG (UK), chairman Military Supply Board, concur.

Sent priority Department 820, repeated info Paris 216, Brussels 39, Rome 57, Hague 40, Copenhagen 31, Oslo 25.

  1. Not printed; it transmitted the text of the top secret British memorandum on additional defense expenditures (741.5/8–450). The original copy of the memorandum, handed to Baldwin by Plowden at 5 p. m. on August 4, and an annex containing a copy of the British statement released to the press on August 3, were transmitted as enclosures to despatch 826. August 17, from London, not printed (741.5/8–1750).
  2. Not printed; it reported that Gaitskell and Attlee defined the phrase “free dollars” to mean “dollars that can be expended by HMG without prior consent or supervision of the US or even post accounting anywhere in the world, or alternatively that can be put into the reserves for the sterling area.” (741.5/8–850)
  3. Not printed.
  4. Lt. Col. Charles H. Bonesteel, Special Assistant to the U.S. Special Representative in Europe.
  5. W. John Kenney, Chief of the Economic Cooperation Administration Mission in the United Kingdom.
  6. Richard C. Breithut, United States Treasury representative assigned as attaché at London.