Foreign Relations of the United States, 1958–1960, Foreign Economic Policy, Volume IV

32. Memorandum of Conversation⁰

February 24, 1958.¹

SUBJECT

• World Financial Problems

PARTICIPANTS²

• UK
  • Sir Leslie Rowan, Permanent Undersecretary of the Treasury
  • Sir Robert Hall, Economic Advisor to UK Treasury
  • Sir Harold Caccia, UK Ambassador
  • Mr. G. F. Thorold, UK Embassy
  • Mr. D. B. Pitblado, UK Embassy
• US
  • Secretary Anderson, Treasury
  • Mr. C. D. Dillon, State
  • Dr. Gabriel Hauge
  • Dr. Saulnier
  • Mr. Baird, Undersecretary of the Treasury
  • Mr. A. W. Marget, Federal Reserve Board
  • Mr. W. T. M. Beale, State
  • Others from Treasury, State and Federal Reserve Board

Secretary Anderson opened the three hour meeting with a general presentation of United States views of world economic problems, with special attention to the British concern over “world illiquidity.” The Secretary emphasized the need for expanding economies, for increasing world business activity. He said that real productive growth was much more important than the level of reserves, or the position of sterling. After the expansion of the previous years where such growth had been as high as ten per cent on an annual basis, a “levelling-off” was to be expected. He said that in 1957 the United Kingdom had followed wise monetary policies, that British action on bank rate (5% to 7% on 9/19/57) was a sign of strength, a step in the right direction. The Secretary said that press speculation over the pound’s future was regrettable as it injured Britain’s position as a world banker and endangered solvency. Within the limits possible in a parliamentary democracy press articles harmful to financial stability should be curtailed.

The Secretary said that irresponsible press handling of these financial matters pointed up what to his mind was the crucial issue, a psychological issue; this was the element of “confidence” which he called “the most important single ingredient in the present economic situation,” the “great intangible factor.”

The Secretary called the IMF “an unusual device” to be sparingly used, else its effectiveness would be defeated. He pointed out that the British had obtained $1.6 billion in 1957 from the IMF, EXIM Bank, and deferral of U.S.-Canadian loan payments. Britain’s problem now was how to increase its ability to earn. He acknowledged some real improvement in 1957 in the U.K. situation, but added that internal policies must be constantly directed toward improvement in the internal U.K. economy. The world problem, which all countries faced, was how to sustain adequate growth without inflation. The U.S. had faced this problem for some years. In an uncertain world there could be no real hope for certainty in what we did, no real expectation that economic problems would lose their complexity.

Sir Leslie Rowan passed quickly over Secretary Anderson’s themes, agreeing that confidence was an important element in any economic situation, that the problem was maintenance of stability without disquieting inflation at the same time sustaining a desired rate of growth.

Sir Leslie emphasized the role of reserves and liquidity. A shortage of reserves would be a threat to future growth. Liberalization of trade on the part of creditor countries was essential. Reserves must be adequate to support normal functions of the economy. British reserves were too low, entirely inadequate when one considered the borrowed sums repayable within the next three years. There is, according to Sir Leslie, a three fold “illiquidity”: a) gold; b) dollars; c) sterling. Wider use of the German DM was necessary. Sterling could no longer meet the needs of other countries for short- and long-term borrowings. The Sterling Area was “absolutely vital” and Sir Leslie said he wanted to go on record by stating that there was “no intention whatever of winding up the Sterling Area.”

Sir Leslie questioned the Secretary’s figure of 10 per cent in annual growth. He felt the allowance for inflationary content would considerably lower the figure. Even assuming a lesser percentage there were insufficient reserves to support such growth. Gold was insufficient, a dollar gap had begun again to appear, sterling balances would decrease, perhaps as much as £300 million per year in the near future. In the past eighteen months, reserves of the rest of the Sterling Area had gone down by £500 million.

Sir Leslie referred to the previous day’s meeting where the U.S. side had estimated a net outflow of gold and dollars from the U.S. of between one half and three quarters of a billion dollars. Sir Leslie said this was just about the amount net which the U.K. expected West Germany to take in and he wondered how much good it would do simply to shift reserves from the largest holder to the next largest holder. Secretary Anderson said we did not contemplate so large a net increase in Germany’s gold and dollar reserves.

Sir Leslie agreed there was no rigid trade-reserve formulas, but added that when reserves were decreasing one had to question whether trade could appreciably expand, especially when reserves were too low to meet any abnormal fluctuations. Sir Robert Hall said it was all very well to talk of earning reserves, but if there was a decreasing trend and trade imbalances one asked where the reserves were which should be earned. The U.K., he said, had some genuine intellectual and analytical doubts about world liquidity.

Secretary Anderson reiterated the U.S. view that there were factors other than reserves and that he felt there was undue pessimism on the U.S. balance of payments, that we would continue to make heavy dollar purchases abroad.

Mr. Dillon added a review of U.S. trade policy, of attitudes toward such plans as that of Italian Foreign Minister Pella (which we obviously don’t like too much), and toward Soviet economic aid. On the latter point Mr. Dillon agreed it could not be prevented, and that the U.S. became concerned only when it went beyond safe limits.

In turning to the German reserve picture Sir Leslie said the Germans did not consider that their reserves were too large. To Dr. Marget, FRB, who had said reserves were flowing out from Germany, Sir Leslie sharply retorted that nothing else could be expected after last year’s speculation in favor of the DM and that it was certain to be a temporary phenomenon (Note: latest January figures confirm the British analysis).

Dr. Marget said he felt there was no general shortage of reserves, that he “candidly did not see any overall liquidity problem,” though there were of course problems for individual countries, caused primarily by their own unwise internal policies. He cited India as one of these “misbehaving” nations. Sir Leslie differed with Dr. Marget, pointing out that the United States, Canada, Germany and Venezuela had added $3.4 billion to their reserves over the past 18 months while the rest of the world had lost $1.6 billion, despite drawings from the IMF. He called this genuine “maldistribution” of reserves. Marget reiterated his view with the statement that “nothing adverse in the past was attributable to inadequacy of reserves.” Sir Robert Hall said that obviously countries would have to be separated out for analysis. He added that the future was important. Admittedly the IMF had provided a “masse de manoeuvre” in December, 1956, but what would provide the “masse” if the IMF could not provide it. Southard of the IMF said that while the IMF was not “broke” there was a tendency for all underdeveloped countries to spend for development all funds they could put their hands on. Thailand and Venezuela were glaring exceptions to this rule. There was little chance that spending and consumption patterns in these other countries could change so that heavy demands from the underdeveloped countries must be expected. Sir Robert Hall added that this was a special problem for sterling; that the rest of the Sterling Area, for example, was almost constantly in current and capital account deficit with the non-sterling world, thus adding to strains on sterling.

The meeting concluded with an exchange of brief summaries of positions, with the British expressing the hope that future meetings of such a nature might be expected. There was no encouragement from the U.S. side.

Comments: It is difficult to believe that the British could have found any great measure of satisfaction in the meetings of February 18–19. The meeting on the 19th seemed almost entirely negative with the U.S. side finding little basis in the concern of the British over “world illiquidity”. Perhaps this was an ill-chosen designation and a stronger British case might have been made had the British dealt specifically with the problems confronting sterling.

There seemed to be no enthusiasm on the U.S. side for future meetings and initiative to hold further meetings is obviously left with the British, who will doubtlessly want another meeting but who must now wait for developments justifying another gathering since in my opinion we interpreted away the basis of last week’s meeting which might have called forth future meetings.

The general feeling on the U.S. side was that the British position was weak. If so, it was probably partly deliberate as the British probably did not want a rigid U.S. negative response to definite British proposals, and wanted some flexibility. But something more than these meetings produced must have been expected. It is difficult to find tangible results when one side says it believes the other is too pessimistic and the latter can only respond that it hopes the optimism of the former proves to be justified. There was agreement only upon one point: a greater German financial contribution is called for and is justified. On all other points there were widely divergent interpretations: a) illiquidity and reserves; b) greater powers and resources for IMF; c) trends toward further distortion of trade and “maldistribution” of reserves.

There is no denying the seriousness of the British economic problems and an imaginative approach to their solutions is called for. A startling reversal of present economic trends in the U.S. will justify to some extent the U.S. position in these recent meetings. It will not correct the long-run difficulties of the United Kingdom. Any prolongation of the U.S. “recession” would undoubtedly justify U.S.-U.K. meetings to deal with international repercussions.

The possibility that the gold and dollar flow from the United States will about equal the gold and dollar flow to Germany is likely to be realized. My own idea is that based on the Germany trend to surplus in EPU which began in January thus reversing its deficit trend of prior months, West Germany may gain $600-700 million surplus in trade outside the U.S. with the deficit in trade with the United States reducing this amount to a net of around $500 million. Here the British, it seems to me, have pointed out a possible shift in reserves benefiting only the Germans.

The British did not bring up two points: a) raising the price of gold; b) changes in exchange rates. There was no suggestion of devaluation of the pound.

0. Source: Department of State, Central Files, 800.10/2–2458. Confidential. Drafted by Warrick E. Elrod, Jr., of the Office of British Commonwealth and Northern European Affairs.
1. Presumably the meeting took place at the Treasury Department.
2. Participants not identified here include British Economic Minister at Washington Guy Frederick Thorold, Special Assistant to the President Gabriel Hauge, Chairman of the Council of Economic Advisers Raymond J. Saulnier, Director of the Federal Reserve Board Division of International Finance Arthur W. Marget, and Deputy Assistant Secretary of State for Economic Affairs W.T.M. Beale.