841.000/9–451: Telegram
The Ambassador in the United Kingdom (Gifford) to the Acting Secretary of State 1
1208. Dept pass Treas and ECA. Holmes had long and separate conversations with Gaitskell and Plowden who depart by air tonight for Wash. Gaitskell is pessimistic and worried about the deteriorating situation with respect to terms of trade, balance of payments and gold and dollar position. He said that Trew’s estimates were that there wld be a drain on gold and dol reserves during this year of something like $1 billion. He admitted that this was probably a prudent estimate but that minimum net loss to be expected was 800,000. He gave the fol reasons for these adverse trends:
- (1)
- High prices of imported raw materials which were running from 60 to 70 per cent higher than estimated at the time the 4.7 billion pound rearmament program was inaugurated. He admitted that there had been some improvement in these prices lately and that they might settle down to an average increase of 60 per cent for the bal of the year. He admitted also that some of these shortages were a result of curtailed purchases following devaluation and permitting Brit stocks to run low.
- (2)
- Increased demands of rest of sterling area for dollars.
- (3)
- Increased purchase by rest of sterling area on continent resulting in piling up UK’s deficit position with EPU.
- (4)
- Loss of income from Persian oil, replacement cost being estimated $360 million.
Gaitskell and Plowden both said that the most immed and most critical shortage that they were faced with is that of steel. UK has [Page 960] made application through ECA for priorities to purchase 800,000 tons finished and semi-finished steel from US production. Plowden considers this to be the most important matter for discussion at Wash. He contends that this steel, in addition to UK production, is necessary not only for rearmament program but to keep engineering trades active and sustain export market with important marginal effect on terms of trade and overall balance of payments. The Brit say that their shortage of steel is brought about, first by their own low coal production; second, by inability to obtain ore from European sources, principally Sweden; and third, great reduction in scrap deliveries from Germany. One of the things that Gaitskell will request is a reduction in US purchases Swedish and North African iron ore.
Another item which worries Brit Treas in prospect is the ending of the collection of occupation costs from Germany. If these were assumed at once they wld represent an additional burden of 180 million pounds annually for which no provision has yet been made.
Gaitskell will contend in the light of the situation described above that it is utterly impossible for the UK to increase its rearmament program as suggested by our proposal to meeting production requirements of the MTDP. He will likely say that the UK will not be able to complete the present 4.7 billion program without assistance from the US. This he realizes represents a very difficult problem with important political handicaps, both in the US and UK. He will probably criticize our proposal tabled in Council of Deputies re increased armament production by saying that it postpones work on burden sharing exercises. It will be recalled that when the UK announced its present rearmament program Brit said they wld not ask for US assistance but made a reservation with regard to anything to which they might be entitled as a result of burden sharing. We believe Gaitskell will press for a completion of the burden sharing exercises in the hope that out of it may come through this multilateral consideration of the problem financial assistance to the UK which wld not have the polit disadvantages either in the US or UK of direct aid. We do not believe that he expects to obtain any commitment on this score but for the present trip will explain the UK position and anticipated deterioration in the hope that it will be better understood by us and as preparatory to a request for assistance at some later date. He will specifically press hard for a reduction in US iron ore purchases in Europe and for the allocation of steel.
Although Gaitskell will have the possibility of a fall election in the back of his mind and domestic political considerations will inevitably color his thinking, he will probably point out that a Cons Govt wld be faced with the same problem. This contention is substantially [Page 961] true although there wld be a difference in emphasis under a Tory Govt.
- Secretary Acheson was in San Francisco for the signing of the Japanese Peace Treaty.↩