Foreign Relations of the United States, 1951, Europe: Political and Economic Developments, Volume IV, Part 1

No. 442

841.00/8–2751: Telegram

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

secret   priority

London, August 27, 1951—11 a.m.

1047. Pass Treasury and ECA/W.

1. Fully comprehensive survey Brit economy impossible now because some basic data not yet available. Forecasting hazardous under these circumstances and even key Brit officials appear uncertain about outlook beyond near future. We shall on basis available info cover points mentioned Deptel 967, Aug 15¹ and give our best estimate future trends (further info being air pouched).

2. Both internal and external financial situation at present constitutes serious problem warranting careful watch our part. Brit Govt had forecast serious deterioration over last year on both fronts, but developments in this direction have been of even greater magnitude than original Brit expectations.

3. Internal inflationary situation.

(a) While inflationary developments are greater, and considered by Brit more serious, than originally anticipated situation cannot be characterized as showing signs of getting out of control. There are indications which at present seem to improve future prospects somewhat suggesting abatement of increasing inflationary pressures.

(b) A fundamental element in present Brit financial policy is to allow increase in prices (arising from costs inflation) to restrict effective purchasing power over real resources, and so facilitate allocation of resources from expansion of real consumption toward defense, export and investment programs. Economic survey estimated 7.6 percent increase in prices of consumption goods and services. Our projection for 1951 gives about 9 percent increase over 1950. While increase in cost of living politically damaging to govt most of increase was foreseen in economic survey. Govt spokesmen have forecast considerably smaller rate of increase in retail prices in remaining months of year than experienced thus far in 1951 (increase to July was 9.5 percent). They also forecast levelling off of cost of living increase out [at?] end of year, on basis downturn earlier in year of prices some imports. Hopeful sign supporting govt forecast is small drop July wholesale price index, first decline in two years. Intensification of effect of policy mentioned above, resulting from gap between cost of living and wage increases, will be ended when loss of real wages is regained, presumably in relatively short time.

(c) Wage increases have not kept pace with increase in retail prices in 1951. Wage rate index through July rose 5.3 percent. Proportional increase in wage earnings was greater, but considerably behind rate of increase in retail prices. Evidence points to probable further round of wage increases. Unions now demanding further increases, and govt position does not seem to be against another round but calls for reasonable wage claims. Thus it seems likely that further wage increases, with consequences of widespread increase in costs, will come after abatement of rise in cost of living to catch up with loss in real wages. We do not believe another round of wage increases necessarily implies upward spiral. Severe rank and file pressures now on trade union leaders but success in gaining another round may strengthen moderate elements who followed wage restraint policy in past. Moreover, TUC lays great stress on real wages and recognizes inequities and complications inherent in wage price spiral. Govt has fully accepted, if not condoned, further round of wage increases. There are signs that govt moving into low gear to obtain another period of stability after this round of wage increases and is making efforts to moderate this round. This may have been purpose of Gaitskell’s reference, in statement re dividend limitation, to additional price controls and consideration extension subsidies if they could have substantial effect at little cost.

(d) Personal consumption in first quarter 1951 five percent greater than in same period 1950. This increase mainly attributable to anticipation of higher prices and reduced supplies and speculation about budget tax changes. Rate of increase in first quarter mainly due to temporary factors not now operative. Thus we expect rate of increase in consumption for whole of 1951 to be considerably below first quarter rate. Evidence available but incomplete shows reduction in rate of increase in real consumption in second quarter compared with first. Very tentative projection for remainder 1951 gives some increase in real consumption in whole 1951 over 1950, primarily attributable to upsurge in first quarter.

(e) During first half 1951 industrial production 5 percent above same period last year. Economic survey forecast 4 percent gain for year. Allowing for increasing interference with expansion of production for remainder of year (shortages of materials, manpower), it seems that Brit 4 percent estimate for 1951 increase may be achieved. Thus we estimate that no additional real resources domestically produced will be available to economy over govt estimate for 1951. We estimate only small increase over Brit estimate for import volume; thus we foresee no appreciable increase in total available resources above economic survey estimate. Increased consumption (compared with estimated slight reduction in econ survey) will mean smaller real resources available for exports, govt expenditure (including defense) and home investment. Probably major portion of prospective worsening of balance of payments as compared with econ survey forecast will be attributable to increased prices of imports and decreased invisible earnings. While increased deficit due to these wld be financially disinflationary, it wld provide no real resources available to meet higher than estimated level of consumption.

4. External financial situation. Fol are tentative conclusions of study now in preparation re overall balance of payments and sterling bal increase for calendar 1951 and sterling area gold and dol position fiscal 1952:

(a) Brit overall balance of payments deficit calendar 1951 appears in neighborhood of pounds 300 million. This figure includes purchases for strategic stockpile and latest Brit estimate of approximately pounds 400 million net invisible earnings taking account of payments in full on dol loans. Insufficient material now available to permit useful estimate fiscal 1952 deficit.

(b) Our forecast of 1951 deficit implies that Gaitskell’s pounds 1600 million export target July-December will not be achieved. As percentages 1950 our estimates for calendar 1951 indices are: Export price 121, export volume 104, import price 135, import volume 110. Comparable Brit figures in econ survey were 119, 104.5, 120, 108. 4. July 26 Gaitskell revised import price forecast to about 134. He has not specified how he expects to increase export value pounds 150 million above economic survey target. Our estimates imply improvement terms of trade to 93 percent of average 1950 in July-Dec compared 86 percent Jan-June.

(c) Imports—we are assuming modest decline raw material import prices and moderate rising other import prices during remainder 1951. July-Dec import price index 138 compared 132 Jan-June and 140 second quarter. (Assumption that import prices during last half 1951 will not be higher than mid-year level basic to our entire analysis.) Import volume Jan-June was 111.4 and we expect about 109 in second half. Econ survey forecast 108.4 for year with no increase in manufacture category. Largest percentage increase first half was in this category and leads us expect years total import volume to be higher than econ survey prediction. No really firm seasonal import volume weights appear to be available and in view of expected lower import prices and present low level Brit raw material stocks we believe volume in second half will be higher than available seasonal weights wld suggest.

(d) Exports—export price index 113.5 in Jan-June and we predict 128 average for July-Dec. Our forecast implies early leveling off textile prices and perhaps decline later due our expectation of tight market. Continued rise other export prices expected on basis higher level Brit costs. Export volume matter of great uncertainty. Gaitskell’s pounds 1600 million target for value exports second half appears to imply much larger volume than now seems likely. Jan-June volume was 103, about 1½ percent short of economic survey target. At present we are assuming 105 percent in second half. This based on assumption roughly no change engineering exports in second half and continued increases in textiles and other exports. If auto production continues at rate first half, exports might increase about 16 percent volume and go far to offset decreases other engineering exports.

(e) We foresee no sudden overall B/P crisis provided no serious interruption Brit production due say crisis in coal, steel or imported raw materials and provided fon demand Brit exports remains firm in face of higher prices. Clearly, however, Brit B/P very vulnerable to such unfavorable contingencies.

(f) Sterling area gold and dollar position—our analysis fiscal 1952 very broadly supports Brit estimates sent in Toeca 654, July 6, 8 p.m. and Toeca 694 July 19, 6 p.m.² However, we see possibility RSA may deteriorate more than Brit forecast in Toeca 694 July 19 due scissors effect lower raw material prices and high level RSA dol imports. If so, we foresee possibility Brit may wish sponsor sterling area dol restrictions to protect reserves in face large Brit dollar deficit. This might strain sterling area ties at a time when RSA not in heavy dol deficit on its own account as it was in 1949.

(g) Sterling balances—we believe only small increase likely in second half calendar 1951 over level sterling balances June 30, 1951. This forecast based in part on expectation some improvement in Brit non-dol current account B/P, sharp deterioration in RSA net dol balance, liberal use of EPU credit facilities by sterling area. (See Embdes 5175, Apr 17, 1951³ for framework of this analysis.) We think main sterling area strain might arise as indicated para 4 (f) above instead of due likely size of sterling bal holdings as such. Some major sterling creditor countries may prove willing to hold sterling bals since latter not depreciating in value relative creditors currencies as shown by comparison of progress of their inflations with Brit inflation.

(h) Re diversion exports to RSA from other markets—frequent official statements during past year have stressed importance exports to dol area and RSA but with more emphasis recently on dol area in view disappearance dol surplus sterling area. Latest trade figures show percentage Brit exports to western hemisphere 18.52 in June compared 17.77 average first half.

5. Lack of maneuverability in Brit economy is politically embarrasing to govt. Beset by uncertainties heightened by unpredictability of external influences to which Brit economy still highly susceptible, govt faces dilemma of taking positive action such as imposing stronger curbs on consumption (action hardly likely to enhance its popularity) or further restricting imports, or following policy of inaction, possibly risky and likely produce intensified opposition criticism. Increasingly insistent trade union demands for more wages and price controls indicate need for political fence building inside labor party. Brit officials in Wash for talks⁴ will be acutely aware of the economic problems which their govt faces, and of their political implications and of the heavy burden imposed on Brit econ resources by present commitments including rearmament. See Embtel 1040, Aug 25.⁵

Holmes

1. Telegram 967 asked for the Embassy’s views on the British economic situation including the balance-of-payments situation, sterling balances, the possibility of a serious external financial crisis, inflation and the extent to which the forthcoming British elections were affecting the government’s policy with respect to taxation, the level of consumption, and other economic programs. (841.00/8–1051)
2. Neither printed.
3. Not printed.
4. For documentation on the meetings of the Foreign Ministers of France, the United Kingdom, and the United States, at Washington, September 10–14, see vol. iii, Part 1, pp. 1163 ff.
5. For text, see ibid., p. 1180.