Foreign Relations of the United States, 1952–1954, Western Europe and Canada, Volume VI, Part 1

841.131/10–1652: Telegram

No. 368
The Ambassador in the United Kingdom (Gifford) to the Department of State ¹

secret

London , October 16, 1952—9 p.m.

2252. Dept pls pass Treasury, MSA, DMS.

1. Lee and Dean yesterday invited Gordon and Brown to hear oral summary results of Commonwealth officials meeting.²…

. . . . . . .

3. Substance their summary as follows.

4. Conference discussions were conducted throughout on a high level of technical competence, reflected a realistic understanding of the problems faced by the Commonwealth and were marked by an unusual willingness of officials to have the internal behavior of their respective countries thoroughly and frankly discussed. Domestic political considerations were kept to a minimum.

5. Short-term balance of payments. The officials made an exhaustive analysis of the short-term balance of payments, more thorough than had been made by a group of Commonwealth officials before. Analysis covered only period through June 1953. The conclusion reached was that the Commonwealth wld be in over-all balance with rest of the world, after including US aid in the amt indicated in our preliminary estimate to the Congress for 1952/1953, and receipts that might be expected from off-shore procurement in the major items, such as Swifts and Centurions, which are now considered reasonably firm.

6. It was recognized that this balance is being achieved primarily as a result of import cuts rather than by expanded exports. Attitude is that critical emergency has passed, but that long hard road must still be pursued to get out of woods. No estimates were made for periods beyond mid-1953 in view of general uncertainties and especially fact that primary producing countries had no basis for estimating probable prices of their commodities after that time.

7. Commodity policy. Nothing new was developed in this field. There was a general reaffirmation of the desirability of avoiding wide fluctuations in primary commodity prices. It was recognized that conditions in different commodities varied widely and that the problem of stabilization wld have to be handled on commodity-by-commodity basis. It was decided to have another look at a dozen or more obvious commodities to see whether it was desirable to seek any kind of international action with respect to any of them. The problem of whether it was possible to find a way of taking emergency action before serious surplus situation developed without going through all the procedures prescribed by Chapter 6 was considered without conclusion. Attitudes of the different countries varied widely with Pakistan favoring some form of international price parity arrangements and Australia being sceptical of any commodity agreements, especially after wheat agreement experience.

8. Commonwealth development. Much attention was given to the most effective way of developing Commonwealth resources. Underdeveloped members, especially Pakistan, were very strongly in support of rapid industrialization. At same time it was recognized that use limited capital available must be more definitely and effectively planned and that self-discipline by member countries required in using available capital. It was agreed that studies shld be made of methods of developing production of such basic dollar-saving or earning Commonwealth commodities as wheat, copper, chrome, etc. At same time, danger was stressed of developing production which wld be uneconomic in multilateral world.

9. Methods of financing this development were discussed. The UK officials pointed out that it was a condition precedent to their being able to provide the needed capital that the UK shld run a surplus in current account. But, nevertheless, UK indicated that it was prepared to consider providing somewhat more capital for sound development schemes than it had been doing. This very tentative suggestion, in form of indication of intent and not quantified, was avidly seized upon by other countries.

10. There was considerable discussion of means of attracting dollar capital and it was frankly recognized that in order to do so, substantial investments of local capital in the member countries wld be necessary. Obstacles to dollar investment, such as difficulties in repatriation of investment and remittance of earnings, restrictions on purchasing dollar capital equipment, requirements of employment of local personnel, etc., were reviewed to see what cld be done to modify them.

11. Stress was laid upon the role of the International Bank, which makes excellent and penetrating analyses of the soundness of the projects which it finances and which cannot be accused of acting as a colonial power in making these criticisms or of selecting its investments. IBRD loans are also untied.

12. Progress toward convertibility. There was agreement on convertibility as a goal and discussion of the necessary conditions and ways and means of meeting it. In fact, this was the point from which the discussion started. There was agreement that a basic prerequisite of progress toward convertibility was sound and strict internal financial measures. Discussion on this point was encouragingly frank and the unanimity of agreement on the need for internal self-discipline was considered heartening.

13. Beyond this point wide divergencies of opinion emerged. The Canadians, on the one hand, favored early convertibility with fluctuating exchange rates. While they recognized that some limits on convertibility, as well as certain QRs, wld have to be maintained, they advocated willingness to take substantial risk. South America was strong for convertibility provided it involved a raising of the price of gold. At the other extreme, India, Pakistan, and Ceylon, were greatly troubled at the prospect of convertibility. Their doubts had two aspects. The first was the political problem of how they cld present such a program to their people. They were concerned at arrangements involving fluctuations in value their reserves without any control their part. They pointed out that their governmental machinery was not sufficiently developed to make possible the internal fiscal or monetary disciplines which all agreed were a prerequisite to the success of convertibility. Their tax systems and social conditions simply did not permit the indirect controls which were available to countries like the UK. They also feared that any such move might be considered as one imposed by the developed or NATO powers and urged that, if it were to be adopted, it be presented by some international body of wide membership, such as IMF or GATT, in which they are equal and independent participants. On the practical side, they were concerned that even a limited convertibility and the abandonment of quantitative restrictions wld leave them at the mercy of forces entirely beyond their control. There was division on this point among the UK officials themselves, with the weight of opinion, on the whole, inclined toward making the effort on a somewhat managed basis.

14. It was contemplated that if some measure of convertibility were attempted adjustments might have to be made not only in the direction of a flexible sterling-dollar rate, but also possibly in the rates between the different members of the Commonwealth.

15. No precise definition was made of the conditions considered prerequisite to any effort at convertibility, but it was felt that reserves were still dangerously low as a basis for any such effort.³

16. There were no suggestions from any source of more formal sterling area institutions than now exist.

17. The gen assumption as to the role of the US in any such picture was that it wld have to behave as might be expected of a good creditor in terms of its commercial and investment policies. No specific proposals involving support from the US were formulated, although the possibility of some form of US support of sterling, if an effort at convertibility shld be made, was suggested.

18. The consensus of opinion was definitely against any effort to build up soft markets for Commonwealth exports or to build the Commonwealth or the sterling area as a closed trading bloc. No suggestion was made that the Commonwealth countries withdraw from GATT although the possibilities of some amendments to the GATT were considered. While unwilling to discuss the attitudes of different countries toward Commonwealth preferences, our informants stated that so far as commercial policy was considered the group wanted to go “your way” rather than the Beaverbrook way.

19. In all the discussions it was assumed that the UK wld have to continue to carry approx its current burden of re-armament.

20. At the close, Lee and Dean again stressed the fact that the ideas reported were purely those of officials which wld have to be considered by Mins and might be wholly rejected by them.

21. We gained the impression that the officials had (1) concluded that the road that the Commonwealth must follow was the road of becoming competitive and of seeking convertibility and (2) that there was a new recognition among the officials at least of the central importance to the success of this effort of internal self-discipline both in current fin policies and in capital investment.

22. This impression was confirmed by the mtg today with Norman, Robertson, Rasminski, and Deutsch. Although unusally reticent, they clearly confirmed that the officials were all agreed that the Commonwealth countries must be steered toward a multilateral world and that there was no pressure for a closed sterling bloc. They detected no signs of desire for this among UK officials and stated that if it had been proposed by them it wld not have been a starter with the others.

23. We gained the impression that the Canadians were well-satisfied with the results of the mtg and that the officials had given rather more specific attention to procedures for future action than might be inferred from what Lee and Dean had told us.

24. They felt that the statements of the FinMins last year about approach to convertibility were now considered far more timely and immed and were being taken much more seriously than wld have been the case a few months ago.

25. They stressed the great difficulties for India in a move toward convertibility and abandonment of quotas. The Indians did not see how they cld carry on the kind of development of their country which they thought was necessary without the use of QRs. With the limited savings in their country, its inadequate admin and tax structure, and its enormous needs for capital, the investment had to be highly selective and internal fin measures were too blunt instruments. The Commonwealth officials agreed that it was better that any move toward convertibility shld be made with India and the other Asiatic members in rather than outside, even though the Asians might have to move at a slower pace.

26. They stated that the UK and Canada were the only countries which had really done much homework before the mtg and, therefore, the possibility of divergence between the views of officials and Mins of the other Commonwealth countries was much greater. They also stressed, however, the especially difficult polit problems for UK Conservative Govt, particularly regarding Commonwealth preferences, GATT (Embtel [despatch] 1796 Oct 16⁴), and domestic popularity of welfare state.

27. They stated that in all of the discussions the UK had made it quite clear that sterling was their currency and that in any move toward convertibility they wld have to make the ultimate decision. This was accepted by all concerned.

28. We discussed at length the problems of timing involved in securing a proper coordination of the US and Commonwealth policies. The Canadians expressed the strong hope that the US wld formulate its own commercial, investment and econ assistance policies on the assumption that the Commonwealth countries wld follow a sensible policy. They felt that any kind of bargaining between ourselves and the Commonwealth as to policy wld be unfortunate and said that they had tried to keep their colleagues from getting into any kind of a bargaining attitude.

29. They realized that no Amer policy cld become overt before the Commonwealth mtg but hoped that the probable line of US policy might be foreshadowed by the time of the President’s inaugural address.

30. They do not expect that the Prime Mins Conf will produce dramatic public results, but foresee its results as a basis for further steps behind the scene, including discussions with US. They did not anticipate that the UK wld know anything very definite about the reactions of other Commonwealth Mins to the officials recommendations much before the actual opening of the conf in Nov.

31. Have reason to expect Canadians will be more communicative after US election.

Gifford

1. Transmitted in two sections; repeated to Paris.
2. Commonwealth officials began meeting in London on Sept. 22 to prepare for the Prime Ministers meeting scheduled for November 1952.
3. In telegram 2253 from London, Oct. 16, Gifford reported further that the Embassy had gained the impression that some form of convertibility “was now considered as action [active?] possibility, perhaps in 1953, rather than merely as distant goal.” (841.131/10–1652)
4. Despatch 1796 from London reported on the discussion of GATT and imperial preferences at the Conservative Party Conference. (394.31/10–1652)