Foreign Relations of the United States: Diplomatic Papers, The Conference of Berlin (The Potsdam Conference), 1945, Volume I

740.00118 (Potsdam)/5–2446

No. 539
Briefing Book Paper

top secret

[Undated.]

The Need for Discussions With the British on Post V–J Day Financial Arrangements

summary

1. It is important to come very soon to definite understandings with the British on post-war financial questions. There is serious danger that otherwise Britain may not ultimately go along with our program to restore world-wide multilateralism in finance and trade.

2. It is suggested that the Prime Minister be asked to designate representatives to meet with U. S. representatives this summer to discuss lend-lease settlement policy, post-lend-lease credits, and post-V–J Day monetary and exchange policies. These discussions would be related to the conversations already under way regarding foreign trade policies, with a view to comprehensive post-war arrangements carrying out the objectives of Article VII of the British Master Lend-Lease Agreement.¹

3. For the reasons which will appear below, it is probable that the British will be reluctant to discuss financial questions, particularly post-lend-lease credits. At the same time such credits will, in our opinion, be essential if we are to obtain satisfactory arrangements with them on trade and commercial policy. In order to get the financial discussions started we are convinced that it will be necessary for the President to bring his personal influence to bear on the Prime Minister with a view to persuading him of their urgency and importance.

4. The beginning of discussions might well coincide with the planned high-level mission to the August UNRRA meeting in London.

[The Need for Discussions With the British on Post V–J Day Financial Arrangements]

i.

There is serious danger that the financial devices of exchange control, “exchange pooling”, and bilateral financial dealings which the British have built up of necessity during the war may become permanently imbedded in British economic practice. These financial practices lend themselves naturally to bilateral or regional trade dealings and State Trading, and can easily be used to discriminate permanently against economically strong countries such as the U. S. They therefore represent a most serious threat to our post-war foreign economic program.

While British officials generally profess intention to abandon these financial practices after a “post-war transition period” of five years or so, as is provided in the Bretton Woods Agreements,² the issue is far from decided. There has been much criticism of Bretton Woods from both Left and Right on the grounds that it might prevent bilateral and regional arrangements. Lord Keynes, speaking for the British Treasury, has felt forced to state in Parliament that Bretton Woods is not necessarily incompatible with bilateral trade arrangements. Although the late coalition government supported Bretton Woods and spoke of their “promise” to the U. S. to rebuild a multilateral world economy, Mr. Bevin of the Labor Party has recently expressed his doubt that Bretton Woods sufficiently protects Britain against external fluctuations of trade that might threaten prosperity and full employment at home, and Mr. Churchill’s current platform cautiously states that while everything will be done to promote international trade, Britain will not give up its right “to safeguard our balance of payments by whatever means are necessary”.

Even if British intentions to revert to multilateralism at the end of the transition period are unquestioned, however, there remains the danger that during that period strong vested interests might grow up to defend successfully these war-conceived and transition-nurtured financial and trade practices, as strong interests quickly grew up behind the British tariff and Empire preferences in the thirties. Fully as serious is the danger that even temporary formation of a “sterling area trade bloc” in peacetime might weaken support for leadership by this country in trade barrier reduction and multilateral trade expansion. There is already a rising tide of complaint that the Sterling Area dollar pool and associated exchange controls are being used to foster bilateralism and discrimination against U. S. interests.

ii.

It is appropriate that we should make exploratory lend-lease settlement discussions, now timely in any case, a part of interrelated financial and trade discussions aimed at scotching these dangers and accelerating Britain’s return towards multilateralism. The Department of State has always held that Article VII of the U. K. Master Lend-Lease Agreement, (a copy of which is attached for ready reference³) constitutes a basic “charter” for action by the two Governments to reduce trade barriers and expand trade. Discussions relative to implementing Article VII have taken place from time to time beginning in 1943. A representative of this Government is now in London carrying on discussions at the expert level on proposed multilateral trade arrangements to implement this Article.

The British were very reluctant to commit themselves to Article VII in the first place, and they have shown themselves equally reluctant to proceed with discussions looking towards its implementation. It was only by the last minute intercession of President Roosevelt with Mr. Churchill that the Article was originally agreed to by a plainly divided British Cabinet.⁴ Subsequent discussions were twice held up by basic policy disagreements at the Cabinet level, but are continuing.

It has become increasingly clear that the foremost valid obstacle to the conclusion of satisfactory agreements on trade is the financial difficulty in which Britain finds herself as a result of the war. It is probable that the British will take the position that even Bretton Woods and the strengthened Trade Agreements Act⁵ will be insufficient to permit them appreciably to relax wartime financial controls at an early date, in view of Britain’s post-war transition financial predicament.

It must be admitted that the post-war transition will be very difficult for the British. To add to their present heavy short-term international indebtedness, the British contemplate a trade deficit of $4 to $5 billion during the three years or so following hostilities. During this period the British feel they cannot afford to let those selling goods to Britain convert the resulting sterling into dollars at will, much less offer conversion to the holders of the huge mass of accumulated sterling. Yet until at least currently earned sterling is convertible into dollars for trade purposes the basis for multilateral trade is lacking and bilateral and regional dealings must perforce continue.

The obvious solution, which we should press upon the British, is for the U. S. to supply Britain with the necessary dollar credits to permit the “unfreezing” of sterling proceeds from current trade. It might be possible to go even further, in some cases, and supply dollars to permit the free conversion of a part of existing sterling balances. Such arrangements would permit contemporaneous liberalization of trade and exchange policies throughout the sterling area.

British inability to maintain multilateral financial and trading arrangements without financial aid from the U. S. is transitional only. While Britain has lost heavily from the war, her financial plight consists more in very heavy short-term indebtedness than in a badly balanced over-all debtor-creditor position. It is estimated that Britain will end the Japanese war with net short-term sterling liabilities of perhaps $14–$15 billion, and gold and dollar obligations, aside from lend-lease, in the neighborhood of $1 billion. To this might be added $3–4 billion of trade deficit during the transition years, making a total of, say, something less than $20 billion. The British avowedly expect to scale down their sterling indebtedness substantially, on the grounds that much of it represents war debt and not a commercial obligation. A reduction of as much as 40%–50% in the aggregate amount payable in sterling is not impossible.

Against this short-term indebtedness, Britain will probably possess at the war’s end about $1.5 to $2 billion in gold and dollar balances. Her net long-term assets will probably amount to roughly $10 billion, a cut of about one-third below pre-war levels but still a very substantial figure compared with her probable total indebtedness. Whatever may be the final balance of overseas assets and liabilities, it is generally agreed that Britain will still have a substantial net income on foreign investment account, probably more than half of the approximate $800 million per year she enjoyed before the war.

In short, Britain should be well able, given prosperous and reasonably stable world economic conditions, and assuming the reduction of foreign trade barriers against British exports, to carry on multilateral payments in a multilateral trading world, if her industries, especially her export industries, are reasonably efficient.

The nub of the problem is the British reluctance to incur large dollar obligations, based in large part on fears of future inability to earn the dollar exchange required to service the debt. This fear is based in turn on scepticism of our intentions and ability to maintain liberal trade policies, high steady employment and large import demand in this country. Along with these understandable qualms undoubtedly goes the realization that Britain can much more easily repay obligations expressed in her own currency, and in the process expand and solidify her export markets.

iii.

It will not be easy to devise arrangements satisfactory to Britain and yet economically and politically sound from our standpoint, but we believe it can be done. Apart from the assurance of U. S. participation in Bretton Woods and in a general program of trade barrier reduction, we have much to offer Britain: settlement of lend-lease obligations; the possibility that by holding out at least partial conversion of sterling into dollars, Britain may be able to secure a more substantial reduction of her sterling obligations; badly needed supplies to aid in her domestic reconstruction; and the opportunity to reestablish Britain’s financial position and prestige. We on our side would be asking simply that Britain enter a worldwide financial and trading system which, from the long run standpoint, will be beneficial to her as well as to us. Any suggestion that the British “cannot afford” to embrace our ultimate objectives must be rejected as false. The crucial problem is to arrest the British tendency toward exclusiveness and restrictionism before it grows strong. A reasonably generous lend-lease settlement, the requisite credits on appropriate terms—and above all U. S. friendship and cooperation—should be sufficient to induce the Britain [British] to accept our program. But action should be prompt.

1. Signed at Washington, February 23, 1942 (Executive Agreement Series No. 241; 56 Stat. (2) 1433).
2. Text in Proceedings and Documents of the United Nations Monetary and Financial Conference, vol. i, p. 927.
3. Not printed herein.
4. See Sherwood, Roosevelt and Hopkins , pp. 506–507; The Memoirs of Cordell Hull vol. ii, p. 1153.
5. Approved July 5, 1945; 59 Stat. 410.