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

Conference files, lot 59 D 95, CF 100

No. 341
Memorandum of a Luncheon Meeting at the Department of the Treasury, January 8, 1952¹

confidential
TCT CONV–7—Part I²

January 8, 1952

Present:

• U.S.

  • Secretary Snyder
  • Mr. W. Averell Harriman
  • Mr. E. H. Foley
  • Mr. Richard M. Bissell
  • Mr. William McChesney Martin, Jr.
  • Mr. Willard Thorp
  • Mr. John S. Graham
  • Mr. Thomas J. Lynch
  • Ambassador Walter S. Gifford
  • Mr. Leroy D. Stinebower
  • Mr. Frank A. Southard, Jr.
  • Mr. George H. Willis
  • Mr. C. Dillon Glendinning
  • Mr. Judd Polk

• U.K.

  • Lord Cherwell
  • Sir Leslie Rowan
  • Mr. Denis Rickett
  • Mr. Allan Christelow
  • Mr. Robert Hall
  • Mr. G. D. A. McDougall

Secretary Snyder welcomed the group, and said that while he did not wish at a luncheon to go intensively into the financial and economic problems of the British, he did think it would be appropriate to invite the British representatives to give us some indication of the problems of the United Kingdom and the broader British Commonwealth. We were all concerned with the importance of economic stability of the free world. We hoped that the British would be able to give us on a frank basis any information and ideas as to how they saw the problem and what they were proposing to do to deal with it.

Lord Cherwell spoke at some length. He said that this Government had only been in office nine weeks. Frankly, they had been shocked by what they had found on coming into office, and if we had had the opportunity to see some of the papers they had, we would feel the same way. What seems to have happened is that the previous government was completely misled by the spurious prosperity of the year 1950. Looking back on it, that prosperity reflected mainly the very marked increase in Sterling Area earnings from exports of raw materials at the higher prices prevailing after the outbreak of hostilities in Korea. The artificiality of the prosperity became clear in 1951. The sterling countries wanted to spend their earnings, the UK had to spend more to restock, and on top of it all there was the rearmament effort. The rearmament effort was originally scheduled in terms of 3.5 billion pounds, with a general expectation (undocumented) that through burden sharing, or otherwise, some 550 million pounds would come from outside assistance. Subsequently, the program was revised upwards to 4.7 billion pounds.

The results of these pressures in 1951 produced the serious drain on reserves. The Government had to take action immediately. They cut imports by 350 million pounds, mostly in food. The size of this cut can be appreciated when it is remembered that 350 million pounds represents 20 percent of total food imports, and half of Britain’s food is imported. In spite of this measure, the drain on reserves is expected to continue, and unless assistance can be worked out will bring reserves down to a dangerously low level in the first half of 1952. In order to solve the immediate problem, it will be necessary to increase exports, which basically means increasing the production of steel-using industries. This, in turn, would mean a cutback in arms—a cutback that we all want to avoid.

It now seems that capital flight (weakening confidence in sterling) played only a very minor part in the current drain—something less than 100 million pounds, but if the drop in reserves is not arrested, the UK will shortly face a crisis in confidence. He felt that it was clear that the British reserves needed to be higher to enable them to carry on safely the large volume of trade so necessary for Britain. They had seen that fluctuations in trade could become so great as to deplete their reserves and aggravate their problems by threats of loss of confidence in the currency. They would like to try to restrict somewhat these violent fluctuations by attempting to stabilize more effectively prices of raw materials, and hoped that there could be consultations on this subject.

The next six months look bad. He hoped that some help could be found in getting at this problem through offshore procurement and through arrangements of materials. Secretary Snyder indicated that the matter of materials would be discussed with Mr. Wilson, and that offshore procurement was a question to be discussed with the Defense Department.

Sir Leslie Rowan added that the Western Allies had two agreed related objectives in this period: First, to maintain a sound economy, and second, to develop an adequate defense program. For the UK, the former objective means the maintenance of dollar reserves and a balance in external accounts, and the year 1951 had demonstrated clearly that they had been unsuccessful on both scores. Reserves had fallen by 40 percent; a comparable percentage drop in US reserves would be $9 billion. External accounts were out of balance in 1951 by about $1.5 billion. The UK had, of course, taken immediate steps to reduce the rate of external expenditures, and—perhaps even more fundamentally—had raised the bank rate and funded some of the short-term debt. Obviously, other immediate steps were needed, such as more progress in coal production, as emphasized in the TCC report, and an increase in exports. In the case of exports, he emphasized Lord Cherwell’s point that since half the British exports are in metal-using industries, a marked increase in exports obviously implied a reduction in defense.

The UK is hoping that the current Commonwealth talks will be helpful, but the problem of the reserves drain remains.

Mr. Harriman said that he was very impressed by the fact that the UK had gone ahead with its defense program without waiting for any sort of a return commitment. Surely that was one of the most honorable steps a government could take. Looking back on it, however, there was obviously little concerting of British defense production with ours, and this resulted in mistakes and waste. It is not too late to concert our planning, and this should be done now, although it will be more difficult. He was not suggesting the establishment of a combined production board, but there should be an intimate exchange of information to facilitate such aspects of programming as to count on US end-items which are not easily supplied, and to develop appropriate off-shore procurement. On the latter, he noted that there were many things that the UK could produce more cheaply than the US; he understood that Jets could be produced for something like half the cost. So there is a question of saving money and of conserving materials, although the concerting of expenditures is impeded by many questions of national pride. He recalled that the Prime Minister had stated that while the UK recognized the necessity of interdependence in security matters, they wanted independence in economic matters. This objective, he felt, is sound and also fits into our political scene. Mr. Harriman added that he felt very strongly on the question of coal. The UK as a member of the North Atlantic Community has an obligation to produce more. The use of dollar-procured coal, which would run from $600 million to $1 billion for the European countries as a group, is “simply not in the woods.” On the question of stockpiling, we might review later the feasibility of our having a stockpile in the UK; we learned in the last war the importance of having supplies there in order to save shipping. In general, the US administration wants to work closely with the UK to solve problems, get all the factors on the table, and to reach a solution of immediate problems. At the same time, we must not delay an understanding on the long-run objectives, such as policies of convertibility and non-discrimination. We recognize that these policies cannot be implemented for the time being, but it would be useful to have an understanding as to the ultimate goals. Otherwise, exceptions to the policy get frozen on an international level. People want to be reassured. Finally, Mr. Harriman stated that the “maintenance of the military program is a must.”

Lord Churchill [Cherwell] said that they recognized the extreme importance of coal, and that they were pressing determinedly for an improvement in production. The problem is very complex. Men who don’t come from mining families are reluctant to go into the mines, and a democratic society does not force them to do so. A generation of younger men has been lost due to the war, and older men don’t want to enter the mines. A considerable program of incentives had already been developed—the Government gave pensions, housing preferences, and exemptions from military service. The importation of Italian workers was also difficult. Harmonious living arrangements with British workers had not developed. The UK was also pressing coal-saving measures. As for the longer-range objectives, we are all agreed, but from the British point of view implementation of these objectives at the moment seems so remote that they don’t like to talk about them. How can you talk about convertibility when your anxiety is for the immediate run on the bank?

Secretary Snyder mentioned that he had talked to the Chancellor of the Exchequer at Rome,³ and emphasized that Congress was very interested in having expressions of intent. Certain commitments had expired as of the end of 1951 under the Anglo-American Financial Agreement,⁴ although they still exist in other international agreements. ITO had not come into being. Congress is naturally going to ask what is the British intention. Such an expression would certainly be helpful in Congressional hearings on aid programs. The Secretary expressed the hope that before the British leave we could develop something concrete on this matter.

Secretary Snyder said he felt it would be helpful to continue discussions of US–UK problems within existing channels, and he asked Mr. Willis to discuss with Sir Leslie Rowan and Messrs. Bissell and Thorp the question of how to proceed and what to discuss.⁵

1. Drafted by Judd Polk of the Treasury on Jan. 21; a notation on the source text indicates that it was not reviewed by the principals.
2. For Part II, see Document 348.
3. No record of Snyder’s meeting with Butler at the time of the North Atlantic Council meeting in Rome at the end of November 1951 has been found in Department of State files.
4. For documentation on the Anglo-American Financial Agreement, signed at Washington, Dec. 6, 1945, see Foreign Relations, 1945, vol. vi, pp. 1 ff.
5. For a further discussion of the economic position of the United Kingdom, see Document 348.