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

No. 444

841.10/9–651

Memorandum of Conversation, by the Assistant Secretary of State for Economic Affairs (Thorp)¹

secret

Washington, September 6, 1951.

Subject: Report on Meeting in Mr. Wilson’s Office at 12:00

Participants:	Mr. Hugh Gaitskell, Chancellor of the Exchequer; Sir Edwin Plowden; Mr. Denis Rickett; Sir Sydney Caine; Mr. Armstrong (Mr. Gaitskell’s private secretary); The Viscount Knollys; Sir Leslie Rowan
	Charles E. Wilson, Director, Office of Defense Mobilization; William Y. Elliot, ODM; Eric Johnston, Administrator, Economic Stabilization Agency; Manly Fleischmann, Administrator, National Production Authority (entered at the middle of the meeting); Willard L. Thorp, State Department

Mr. Gaitskell tabled and summarized a memorandum concerning the British economic prospects.² (He is apparently giving a copy to each person upon whom he calls, indicating that it must be carefully kept secret.) In general, the memorandum paints a grim picture of the prospects, forecasting a dollar drain on the sterling area for fiscal 1951–1952 of $1,200,000,000 and with the reserves at the end of 1952 possibly being about $2 billion. He discussed the various elements which brought this about and, since there is no assurance that they are temporary, his great concern for the future. While he realized that the suspension of Marshall Aid was necessary during the period of rising reserves, he suggested that it was unfortunate that it was not recognized that the period of 1950 was temporarily benefitted by low imports and high export prices and that in fact the dollar gap problem had not been solved. The U.K. is already taking steps to improve the situation. They are definitely planning to curtail dollar imports and possibly to cut rations. They have already cut the ration on cheese and may cut it on sugar. They are imposing additional restrictions on the use of paper and pulp. They also propose to take further steps to force exports particularly by limiting the output that may be sold in the domestic market. Near the end of the year there is to be a Commonwealth meeting and he expects that it will be necessary for the members of the Commonwealth also to consider making adjustments in their imports. In general, their great concern is that of building military strength and maintaining solvency at the same time. The new situation has all come about so rapidly that they do not feel that they have thought the problem through, but that they did wish to have us understand the situation.

It is obvious that one of the most important requirements is that they produce at a maximum and this leads to the problem of steel. Possibly a few months ago he might have been talking of other raw materials, but he feels that we have made a real success of the materials business and that this is no longer a critical matter although there are points which he wishes to raise later. As to steel, they are resuming the full war controls. Their problem, in the first place, is in their own production where they are concerned about scrap and ore. They have maintained their 16 million tons of production this year by drawing down raw material stocks and at the moment it is hard to see how they can even maintain the present level of production. They must therefore press strongly for help in whatever form it can be given, in scrap, in ore, or in steel itself. He mentioned the figure of 800,000 tons for next year. This is the key to much of their export trade and their military production.

Mr. Wilson asked as to the kind of steel required, and Mr. Plowden said that steel in any form would be helpful since they could keep the situation in balance through adjustments at their end. Mr. Wilson explained how difficult the situation was here, but said that we would look at it; possibly by the last half of 1952 the situation might be somewhat eased and we could do something. Mr. Elliot asked about the prospects of British exporting structural steel, and Mr. Gaitskell said that was about the worst prospect.

Mr. Wilson then asked about the price differential between exports and imports. Mr. Gaitskell indicated that he thought there was a real element of permanence in this. Eric Johnston said that he thought the old relationships would return. Mr. Wilson said that he was rather optimistic with regard to prices. Gaitskell said that they were trying to reduce the pressure on the engineering industry by building up the export of consumer goods, notably textiles. He noted in passing that they had now completely lost the Canadian automobile market. He personally felt that there would be a strong export demand for consumer goods and that this would help correct the situation. Mr. Shawcross was by no means as optimistic.

Mr. Gaitskell then turned to the question of raw materials, saying that here stability of prices were what was needed, and Mr. Wilson said that he couldn’t agree more. Mr. Gaitskell pointed out his conflicting interest that the sterling area should earn dollars, but that the U.K. should not pay high prices. He said that they were very much concerned for fear that wool prices might go up again and asked what we contemplated in view of the result of the IMC Committee consideration. His great fear was erratic military buying. Mr. Fleischmann said he felt quite certain that there will not be a military scramble. Eric Johnston said he thought the situation would not skyrocket, although there were some shortages. If there was any evidence that prices were starting to soar, and he would regard $2.50 as a high price, he would recommend rapid expansion in the field of synthetics. He reported that Boston wool men did not think the price would go over $2.00. Lord Knollys said that we need an understanding that the military buying would be a stabilizing rather than a disturbing factor. Mr. Wilson explained that there were pressures on the military for them to buy to support various situations. Mr. Fleischmann said that this was true but more in cotton than in wool, but he agreed to look into the situation. Mr. Wilson asked if $1.70 to $1.80 would be a fair price to Australia. Mr. Gaitskell said that he couldn’t answer, and Mr. Rowan pointed out that you never can say that a single price is fair except when related to other prices. Mr. Wilson said that his impression was that $1.70 was a high price. The meeting then adjourned for lunch.

(During lunch Messrs. Gaitskell and Wilson discussed the coal problem, and Mr. Gaitskell outlined a number of things that were being done to improve the situation, including the bringing in of Italians. In that connection he said that one of the problems was that the British were more concerned about the political views of prospective immigrants than the continental countries and that this was a delaying factor. He pointed out that it might be possible for the British output to be increased by some 5 million tons per year, but that the earlier estimates that British consumption would increase 2 or 3 million tons per year were proving to be too low. At the other end of the table Messrs. Elliot, Rowan and Plowden discussed possible sources of iron ore and steel. Mr. Elliot suggested such steps as that American coal might be used in Sweden to obtain the iron ore now going to Poland, or in Germany, to expand steel production to send steel to the U.K.)

When the group reassembled, there was a brief discussion of iron ore, and it was agreed that a study group should be organized to consider the iron and steel problem. Mr. Thorp undertook to set up the U.S. side to meet early next week with the British.

Mr. Elliot then brought up the question of non-ferrous metals and the fact that we needed British help in holding the price line. Lord Knollys said that they were looking to us for our attitude on copper allocation. Mr. Fleischmann said that he thought we would be able to do our part here. Lord Knollys said, as to lead and zinc, that they were awaiting the conclusion of the U.S.-Canadian discussions. At the end of the month they would have to renegotiate a number of their contracts, and that they did hope to press for a roll-back. Mr. Johnston asked if this included Mexico, and Lord Knollys said that the Mexican arrangement would have to be renegotiated. Mr. Johnston said that if Canada, the U.K. and the U.S. would hold the price line on lead and zinc, he felt sure that this would control the world prices. Mr. Elliot pointed out that there was a problem of Soviet buying, and that perhaps more thought should be given to long term contracts to tie up the supply, and asked if the British letter³ indicated that they were not willing to try to hold the price line. Lord Knollys said that it merely meant that the British could not be absolutely committed to stay out of the market but had to be assured of minimum supply. Mr. Gaitskell said that there was no disagreement here, but that all they felt they needed was to know how great the calculated risk was; that they were of course greatly concerned with holding the price line.

Mr. Elliot then said that as to international allocation of nickel and cobalt, he was by no means convinced that this was the best method in these instances, that the metals were more important than the price, and we might do better, for instance, without allocation than if we have to share on some basis which cannot fully recognize the significance of the jet problems. Mr. Fleischmann said that the immediate problem was copper, but we haven’t gotten as far along on nickel or cobalt.

Mr. Gaitskell then turned to tin, said that he didn’t want to go into past history, that the Bolivian contract had caused a great deal of trouble, that some arrangement was needed, and suggested the importance of an American mission going to Malaya. Mr. Thorp outlined the situation as it had developed in recent days, and Lord Knollys said that he wished to suggest that our delegation to the Tin Study Group stop in London on its way back from Rome. Mr. Gaitskell said that he hoped we could move rapidly on this problem. Frankly, his particular interest in this problem was related to the dollar situation, and he suggested that if there is any way of speeding up the process of meeting together, we ought to do it. Mr. Wilson said we would certainly bear this in mind, and that he would get everyone concerned together. Mr. Gaitskell said that the tin situation is certainly an unnecessary one, and that we have all managed to make it exceedingly difficult for ourselves. It was understood that Lord Knollys would follow up on this matter.

Eric Johnston then returned to the non-ferrous metals price situation and said that we and the Canadians wanted the U.K. to sit in with us. Lord Knollys assured him that they would, and Mr. Gaitskell said that they wanted to. Mr. Johnston said that such a purchasing agreement would be a bold venture, one which he was sure state departments and foreign offices in general would not like, but it was the only positive approach he could see. Lord Knollys said that he thought this matter was well in hand.

Mr. Gaitskell said that he also had other problems on his mind, for example, East-West trade. However, the Foreign Secretary would probably take this up later.⁴ He was only mentioning the fact that the problem existed.

In general he wished to say that the British position is grim, and they do not feel they know the answer. He wants us to be familiar with the problems, and hopes we can put our heads together looking towards their solution.

Willard L. Thorp

1. According to the source text the meeting took place in the Office of the Director of Defense Mobilization at noon, and Fleischmann entered in the middle of the meeting.

2. No copy of this memorandum has been found in Department of State files. According to the records of the Department of State, Gaitskell and his advisers arrived in Washington on September 5 for a prolonged stay to include talks with U.S. officials, meetings of the World Bank and International Monetary Fund, a trip to Ottawa from September 14–17 to participate in the Seventh Session of the North Atlantic Council, and return to Washington before departing for London on September 22. In preliminary discussions between the Department of State and representatives from the British Embassy the following agenda had been agreed:

   1. General economic outlook and its implications for the United Kingdom.

   2. International price policy on raw materials.

   3. End-items for the United Kingdom.

   4. Next step in burden-sharing.

   In preparation for the talks the Department of State drafted a series of position papers designated FC-D covering the topics most likely to be discussed with the British. A set of the position papers is in CFM files, lot M–88, box 158. Documentation relating to the preparation for the talks is in files 841.00 and 741.13.

3. The letter has not been identified further.
4. For a record of the talk on East-West trade between Secretary Acheson and Foreign Secretary Morrison, see U.S.-U.K. MIN–2, September 11, vol. iii, Part 1, p. 1238.