The Chargé in the United Kingdom (Holmes) to the Secretary of State
3242. 1. This refers to immediately preceding Embtel 3241, December 3. It contains our comments about certain aspects UK economic situation which we believe will be most prominently involved in President’s talks with Attlee.
2. Current British official attitude on economic matters strongly influenced by following basic considerations:
- Determination, in accomplishing rearmament program, to avoid if possible repetition of economic consequences of last war which left British economy feeble and dependent;
- Growing apprehension over unfavorable developments in UK economic situation and belief that undue emphasis is being placed on favorable elements with effect of obscuring what British consider danger signs in situation.
3. British officials realize that UK economy, always highly dependent upon imports and thus particularly susceptible to external influences, is tight, finely balanced, lacking in resilience, and thus sharply responsive to pressures which a better-cushioned economy could absorb without difficulty. We believe this is a valid cause of concern. There have been recent instances of abrupt and unexpected deterioration of British economic situation. We believe some basic causes of former set-backs are still present and could, if not controlled, produce reverses in British economy which would be particularly unfortunate at this time.
4. British attitude toward economic aspects rearmament program including amount nature US aid dominated by still poignant memory of their plight in 1945 and 1947 and fear of losing economic gains achieved after long hard period of adversity and dependence upon [Page 1704] US aid. While government’s caution in certain economic aspects rearmament effort influenced by reluctance to jeopardize full employment and social welfare program, more important influence is fear of economic difficulties which would bring return of straightened circumstances so recently alleviated. Thus both economic and psychological factors are inter-related and must be recognized.
5. Also influencing British economic thinking is their sincere desire to lessen their dependence upon US. Hence, their current advocacy of multilateral administration of economic aid for NATO defense program. British find themselves in paradoxical position of wanting and needing substantial US aid and at same time endeavoring free themselves from condition of direct dependence which bilateral aid arrangements inevitably foster. Washington talks may afford opportunity to strengthen British confidence in our understanding of their misgivings and problems concerning defense production effort and in our willingness to assist them in solving problems beyond their control. It may also be possible to develop some arrangement for handling our aid to Britain in manner which will minimize to greatest possible extent British feeling of direct dependence.
6. British economic situation in general has undoubtedly improved since devaluation but beneath surface indications of improvement serious weaknesses are developing which, unless checked, may strongly shape future economic trends. Paradoxically important factors in the improvement have led to severe stresses within the economy which now becoming evident. Contributing heavily to improved balance of payments situation has been continued restriction of imports. Drain on stocks of raw materials caused by rising production has not been met by commensurately higher volume of imports.
7. This situation has been and is being aggravated by rise in prices of British imports which have outpaced increase in British export prices. Progressive deterioration in British terms of trade has made necessary continually increased exports to pay for needed imports. Rising import prices have already created serious wage problem and threaten to accelerate upward wage-price spiral which would accentuate already difficult task of holding inflationary pressures in check.
8. Substantial increase in British gold dollar reserves to which much importance is being attached, is not unmixed blessing. Considerable part of increased monetary reserves attributable to recent inflow short-term capital, some for speculative purposes, and too drastic reduction dollar imports. Government economizing on imports to build up reserves, and postponement of importing on pre-Korea falling market, have caused depletion some inventories and accentuated raw [Page 1705] materials shortages. Essential rebuilding of inventories at present high prices will inevitably require use of gold and dollar resources to some extent.
9. While superficially British economy may appear more resistant to shock than year ago unfavorable factors mentioned are of such importance to UK, which is primarily a processing economy, that they must be clearly recognized as potentially capable of disrupting delicate balance in British economy and causing serious difficulties. There is growing belief in British Government that recent favorable trends in balance of payments will be sharply reversed in period of 6 months to year. This reversal, they believe, will make impossible undertaking of inevitable heavy defense expenditures without substantial US assistance. Their uncertainty over economic impact rearmament program has been accentuated by lack knowledge re extent US aid and they will undoubtedly seek reassurance on that score in Washington.
10. In our opinion most immediate serious element of situation, and one causing greatest concern to British Government now, is shortage essential raw materials especially cotton, nonferrous metals, sulphur, wood pulp. British believe many shortages could be materially relieved by prompt and effective US action. Best informed officials are certain that unless more ample supplies most critical materials become available soon production of both military and civilian goods will be reduced and unemployment will result. Their opinion appears to be correct.
11. We believe Attlee will make special effort to obtain US cooperation in relieving most critical raw materials shortages, particularly where US assistance could be decisive factor. He will probably refer to need for review of US stockpiling policy and reduction in rate of procurement of those commodities where current requirements exceed available supply. Substantial and immediate US cooperation in both directions would constitute not only material and badly needed economic assistance to Britain but would have beneficial public relations effect. Tone of extensive press comments about raw materials shortages have placed blame on US and accentuated public awareness seriousness of situation.
12. In setting forth above points of British concern it is not our purpose to appraise validity or endorse all aspects British position on economic matters. We think that certain measures, including for example reduction in civilian budgetary expenditures, may have to be taken by British Government to relax some tightness in economy and thus enable it to carry additional burdens including those resulting from rearmament effort. Even if this were done, however, British [Page 1706] economy would still be exposed to external influences over many of which British have little if any control. It is obvious that factors other than US stockpiling have contributed to present British raw materials shortages. We are confronted, however, with difficulties which must be faced in British economic position, whatever the causes.
Sent Department 3242, repeated information Moscow 117, Frankfort 511, Paris 1080.