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

611.41/1–1552

No. 348
Memorandum of a Meeting at the Department of the Treasury, January 9, 1952, 3 p.m.¹

secret
TCT CONV–7—Part II²

January 9, 1952, 3 p.m.

Present:

• U.S.

• Department of State

  • Mr. Thorp
  • Mr. Stinebower

• Treasury

  • Mr. Brenz
  • Mr. Polk
  • Mr. Willis

• MSA

  • Mr. Bissell
  • Mr. Woodbridge

• U.K.

  • Sir Leslie Rowan
  • Mr. Burns
  • Mr. Hall
  • Mr. McDougall
  • Mr. Rickett

The Economic Position and Problems of the U.K.

Mr. Willis:—We want to look at the implications of the present economic situation confronting the UK, particularly the long term implications. This is the third postwar crisis. We are interested to know what action the UK Government is likely to take, both on the domestic UK front and on the wider sterling area front.

Mr. Thorp:—I like to view the present situation in historical perspective. I remember the visit of Keynes at the time of the negotiations for the loan.³ At that time, we thought we made a thorough go-around about possible future developments. Keynes laid out a program for dealing with sterling balances. We then thought we were giving proper attention to the long term future. It turned out, of course, that we were not. Again we embarked on a thorough examination of the long term outlook in 1949⁴ but for various reasons we did not carry through with that examination, partly because the situation seemed to improve so rapidly. Looking back, we now believe the situation then improved so rapidly partly as result of devaluation, of the cut-back of imports, and also as a result of what we now know were fortuitous events. The United Kingdom has a tough problem. We are certainly interested in what you are planning to do about it. It creates a challenge of deciding what further steps are necessary to create a more stable situation.

I believe that the UK is a large tail on a dog, and that the dog sometimes goes tearing off without much control and that the tail is forced to follow and is necessarily involved in what the dog does. I wonder if it is all well integrated. I have the impression that much of the difficulties of the sterling area come from parts other than the UK. I should also like to add that I was disturbed by Hall’s view that there is little capital flow movement reflected in the recent decline in gold and dollar reserves but that on the contrary most of the decline can be explained in terms of current trade. I assume that the colonies have continued to contribute to the reserve and that therefore the decline with respect to other areas is even greater than the figures indicated. As Lord Cherwell said the other day, the situation needs to have some stability injected into it. I would be interested to know your view on the long range problem.

Mr. Bissell:—This is the third UK postwar crisis. I think that there is some evidence of structural difficulties that would not be cured by adequate dollar reserves. As an opinion, I have the feeling that even if the UK position is serious, still it is in good hands and under control. My concern gravitates more to the RSA. These questions are in my mind and they must have arisen in yours.

1. To what extent have the other members of the RSA little sense of responsibility in respect to preserving gold and dollar reserves?

2. What is the bearing of the relatively uncontrolled capital movements between the UK and RSA?

3. What are the administrative problems in the RSA countries that limit the effectiveness of controls?

To what extent do these factors that I have just mentioned contribute to the present situation? It is surprising to me that the RSA should be in deficit to EPU. Presumably Europe is anxious to get hold of all the RSA materials available. It is therefore surprising and disturbing to me why RSA sales should be down. These matters require a searching look, particularly by you. I am sure that you will agree. The world won’t hold together if something isn’t done to remedy this situation. I would like to see agreement on diagnosis. That part of the sterling area least known and understood by us is the RSA.

Mr. Willis:—I have always felt that the independent sterling area is unpredictable and, of course, conditions and courses of change are not well known to us. The relationship between the United Kingdom and the sterling area is important, but we should not forget the importance of examining levels of consumption in the United Kingdom itself. Furthermore, we are interested not merely in the sterling area but in the Commonwealth as a whole.

Sir Leslie Rowan:—This is the third postwar crisis and therefore presents an occasion for us to look at the fundamental factors. The world has developed in a different way than the people who met at Bretton Woods expected.⁵ We also think that we should look at the fundamental problems, but not just those of the UK and RSA in a vacuum. We believe that we must examine their problems in a wider and bigger setting. We should welcome new machinery to examine the situation, but we would want to look at the whole problem not just a part of it. It is clear that the world balance is liable to more violent fluctuations than we once thought. In the case of the United Kingdom we have undertaken a large rearmament program. It may look small in comparison with yours, but that is not true in real terms, as the TCC report has recognized. We undertook this program when we were convalescing, not when we had recovered. In spite of your help, which we greatly appreciate, and in spite of the severe restriction which we have maintained at home, we have never had the opportunity to build up our reserves to an adequate level. The Prime Minister has made it clear that we are determined to set our own house in order. We have already taken certain steps and more will be announced at the end of January. I cannot say now what they will be, but they will be along the lines of the past, i.e., they will put us in a better position to pay our own way. I would like to say at this point that the burden-sharing exercise that has been going on for many months has not yet resulted in any aid designed to assist our economic situation. We have, of course, received military end-items for which we are grateful, but these add to our security but do not strengthen our economy. Outside of machine tools we have in the past year received no assistance that would help strengthen our economic position. The immediate economic problem is, of course, for both the UK and the RSA, the gold and dollar reserve problem. In the last half year there has been a certain factor of leads and lags and flight of capital, the extent of which cannot be estimated.

Capital movement including these leads and lags in the last quarter have not been significant. The deficit in that period can practically all be explained on the basis of current trade. We are therefore bound to be disturbed when we consider the outlook for the next 6 months. There has been a sharp deterioration in the relations of the RSA to the rest of the world. However, the crucial point is the trade position of the total sterling area with the rest of the world. If the total sterling area is not in balance with the rest of the world, the deficit must be met by a gift from the outside, or by a run on reserves. Trading within the sterling area is a different problem which in some ways affects the other but it is the relation of the sterling area with the rest of the world that is, of course, most important. We must attempt to achieve a balance between the sterling area and the rest of the world and within that a balance with the dollar area. We must work for that, and until that is achieved there can be no stability. We will discuss soon with the Commonwealth powers how to do this. The RSA position has deteriorated. There are various reasons such as lower demands and much lower prices for their products. There is also the impact of liberalization. I would like to say, however, that we have not found that there has been any degree of irresponsibility by the RSA members; on the contrary, they have played up well. In raising the question of capital movements within the sterling area I think you must keep in mind the basis on which the sterling area was built. These seem to me to be the principal points:

1. The UK was a great manufacturing country and could export.

2. The UK was a banking center where capital could be obtained.

3. The UK was a market where goods could be sold.

4. All along as the UK was in surplus it could provide convertibility.

These factors should be looked at again to see whether the basic conditions for the sterling area still obtain. However, I repeat, the main point is to achieve balance between the sterling area as a whole and the rest of the world. This must be done by examination of the problem in each part of the sterling area. We are trying to do various things. We have already made substantial cuts. The situation has so deteriorated since then that it now looks as though we should have to make in addition cuts at least as large. We welcome the suggestion of discussing the long term outlook. We want to talk to you about it. We would like to know what you have in mind in respect to continuing such talks here and in London.

Mr. Hall:—I should like to say that so far as the UK position is concerned I tend to be rather optimistic. I believe that what we are doing since 1946, though perhaps we had a too doctrinaire approach in money matters which is being corrected by the present Government, was right and was getting us up perhaps over the hill. We were all too optimistic in 1951. Our real weakness is, of course, coal. It is hard to talk about planning on a big scale if one hasn’t succeeded in planning in respect to a small part of the total. I want, however, to assure you that we are deeply conscious of the importance of coal production. Looking at the wider scene, sterling balances are still a serious problem. I am not sure that we have thought out the implications of our position as banker. We have a current tendency to borrow short and lend long which I believe accentuates our weakness. Are we capable of fulfilling the conditions which will permit us to continue as banker for the sterling area? The UK must live within its means and I believe it can do so. The other members of the sterling area must also do so. In respect to the long term outlook, let us for a moment consider the past. The 1945 and 1946 talks were dominated on both sides by the thought that instabilities in economic relations would be caused by instability in employment. A lot of thought was given the question of how to avoid large scale unemployment. That has proved not to be a factor at all. For some time our treasury has believed and I have now come to agree that the swings in the modern world would be much higher than in the past and that therefore we should need much higher reserves than in the past. I do not think that we should assume that Korea and the rearmament program are unique. One begins to suspect that recurring crises will be part of the situation and that therefore we will need larger margins of reserves to meet them. The sterling area as a whole must live within its means. To do this it must first examine the relations between the various parts. It must then determine what are the possible degrees of swing. After that, it can determine the size of reserves needed to take care of these swings. I assume you want to live in the same kind of world that we want, and therefore consider these as common problems. We should certainly like to exchange ideas with you.

Mr. Bissell:—I agree with Rowan’s analysis of the central problem, i.e., the question of balance between the sterling area as a whole and the rest of the world. Two lines of speculation occur to me. One of these relates to the internal situation of the sterling area and the relations between the UK and the RSA. It would seem to me that one circumstance has bedeviled this ever since the war. There is a strong stress to invest in all parts of the sterling area, even though from time to time the stress might be slightly higher in one part than in another. There has been a problem of savings. Therefore, it is not a problem of the fiscal policy of the government, that, because of obsolescence permitted in the 30’s, because of the war, and for other reasons, there is an enormous demand for capital in the UK. Because they are essentially underdeveloped areas, there is also a considerable demand in the RSA. This seems to me to be a long term state of affairs. I think there will be a greater pressure for investment capital in the sterling area than in North America, i.e., the United States and Canada.

The second area of speculation relates to the course, nature, and probable magnitude of the swings. They are, of course, influenced by raw materials prices. I realize that minor changes in the U.S. situation have a great exchange effect on demand for and prices of raw materials. However, the UK payments with the rest of the sterling area changed just as violently as did the trade changes with the rest of the world. I am not clear why this has happened. In the United States there has been for 9 months an inventory recession. I think it is clear why this has taken place and that the role of the U.S. in this situation is also clear. What is less clear to me is what is happening on the other side. Is this sort of thing going to continue? There has been no depression in North America since 1930 and in the last year nothing approaching the recession of 1949. Yet there have been great swings in 1950 and 1951. Why? Is it a result of a set of accidents or is it something big that will continue?

Mr. Hall:—I think there has been a curious combination of unfortunate circumstances. We de-stocked in 1950 and then had to rebuild our stocks in 1951 and also to create stockpiles at the most expensive time.

Sir Leslie Rowan:—It is quite true that we did de-stock in 1950 and in the early part of 1951, but I don’t think we should overemphasize this factor. Another thing to remember is that in 1950 by agreement the RSA kept its dollar purchases down to 75% of its 1948 purchases. In 1951 liberalization changed all this. It is worth recalling that in 1950 the UK was in surplus on its dollar account. There are four big factors that must be remembered in comparing 1951 with 1950.

1. Exports by volume were up 3%.

2. Imports by volume were up 14%.

3. The terms of trade were a half billion worse.

4. Invisibles were way down as a result of developments in Iran and elsewhere with which you are familiar.

Mr. Thorp:—It seems to me that the corrective factors undertaken by governments are often late in working and therefore tend to exaggerate swings.

Mr. Willis:—It seems to me that we are tending to establish the idea that there is only a remote connection between internal and external factors.

Sir Leslie Rowan:—We do not intend to do that, since there is of course a very close connection.

Mr. Hall:—I assume that what we are trying to do is to determine whether this crisis has been caused by a random coincidence of unfortunate factors or by certain fundamental factors.

Mr. McDougall:—There are two important things that we should keep in mind regarding the recent reserve drop.

1. The speculative element has been very small.

2. In the second half of 1951 we drew heavily on EPU credits.

It is by no means certain that these two factors would exist in the future. It is quite possible that a small deficit in trade might be accentuated by a much larger speculative drawing on funds. The lag in carrying out policy to which Mr. Thorp referred is bound to be true. But it is not only government administrative measures that lag; the effect of private business transactions is much the same. While we want to determine the size of the reserve needed to meet fluctuations, what we also want to do is try to find measures that will even out the fluctuations.

Mr. Willis:—The discussion has brought out a number of useful lines of emphasis and inquiry. Sir Leslie has emphasized the need of straightening out the internal positions in the sterling area. Mr. Hall has drawn attention to the tendency for fluctuations to be felt in the international accounts now rather than in domestic employment and incomes as in earlier days. Mr. Bissell has drawn attention to the “investment inflation” in the sterling area. Mr. Thorp has pointed out that the amplitude of swings was in the past due to administrative import controls being relaxed or strengthened on the basis of forecasts which frequently were incorrect. In effect, we have been drawing attention to the rather rough and discontinuous connection between internal and external factors which existed under the present situation as a factor in causing these swings but we were recognizing that the internal position needed to be given more emphasis than it had previously received.

Mr. Thorp:—It is difficult to see how conventional methods can deal with the present situation. I think it possible that you can get agreement with the RSA in connection with the problem of building up reserves. I am not sure, however, that the RSA would be willing to join in a policy of savings designed to reduce the sterling balances. Perhaps support of the sterling area is too much of a burden on the UK.

Mr. Willis:—Let us turn our attention from a preliminary look at the situation and examine the line of procedure that we might adopt if we feel that further examination of the situation is desirable. We should, of course, have to consult our principals before reaching any decision as to procedure but we might suggest that we do what we started to do in 1949, i.e., keep the examination of the situation as a sort of a continual agenda item and resume discussion whenever the British felt they had something useful to go on. Clearly we ought to make use of established channels (perhaps supplemented from time to time by UK visitors coming to Washington for other purposes). There should be no publicity. As for possible discussions in London, I have not given that much thought beyond feeling that London is pretty busy with operating problems and our idea was that discussions in Washington should not in any sense be a substitute for the regular channels on operating problems.

Mr. Bissell:—I agree with this.

Mr. Hall:—Is this what you have in mind?—There will be an informal group of interested U.S. departments who will be working on the problem. We shall, of course, have a similar group. Arrangements will be made to provide interchanges between the groups but on an informal basis.

Mr. Willis:—In general that is what I have in mind. I have thought of it being on an ad hoc basis rather than on a formal one. I realize, of course, that there is a danger of being sidetracked and that we should make special effort to avoid this.

Sir Leslie Rowan:—We have all recognized that there is a problem of world character. You are going to think about it; we are going to think about it. What we want is to be sure that our thoughts are married at a fairly early stage. We should try to keep a continuity of thought without, however, providing any elaborate measures for this purpose. The people who regularly work together will keep in touch with each other on this matter. Without any formalization, it would nevertheless be helpful if this were done. In the past there have been periodic meetings of ministers. I hope that this will continue. Such meetings could be forward-looking and would have to spend less time concentrating on the current situation, if the kind of thing that we are discussing can be arranged. I expect that Hall and I will frequently be visiting the U.S.

Mr. Hall:—It would be useful to have meetings when we are here but I would hope that we wouldn’t just pick up where we left off at the previous meetings.

Mr. Bissell:—After all, we all work in bureaucracies and some of our thinking has to get written down. I suggest that we consider exchanging papers that should not be official communications but should be papers discussing matters on an informal basis. The discussions held when you make your periodic visits would be more useful if ideas had in this way been exchanged in advance.

Sir Leslie Rowan:—I am entirely in agreement that an exchange of papers would be most useful.

Mr. Willis:—I should like to think this one over. It is very difficult for government officials to disassociate themselves from their official roles.

Mr. Bissell:—It is quite clear that we cannot exchange all papers but in some areas the problems are minimal. We already exchange papers dealing not only with facts but with forecasts. I think we could do this with diagnosis. In policy areas there would obviously be limitations, but in analyzing what has happened and in making diagnoses an exchange would be possible and fruitful.

Mr. Thorp:—I agree with Mr. Bissell. The principal matter is that of understanding the status of the papers. The next step should be to codify the ideas we have expressed. We have to push on and get a diagnosis of the situation. This could be done better if it is done jointly. I do not think it can be done alone. It would be useful to exchange questions. Perhaps you can give us answers that would help us with certain things, and likewise we might be able to help you. I don’t believe we have done as much of this as we should have.

Mr. Willis:—Well, I assume we shall all check these suggestions with our superiors.

1. Drafted by George Woodbridge of the Mutual Security Agency on Jan. 15. Another record of this meeting, drafted by Judd Polk of the Department of the Treasury, which is the same in substance, is in CFM files, lot M 88, box 160, “Miscellaneous”.
2. For Part I, see Document 341.
3. For documentation on the conversations with the British, including Lord Keynes, from September to December 1945 which led to the signing of the U.S.–U.K. Financial Agreement at Washington on Dec. 6, 1945, see Foreign Relations, 1945, vol. vi, pp. 122 ff.
4. For documentation on the U.S.–U.K. financial talks held at Washington in September 1949, see ibid., 1949, vol. iv, pp. 781 ff.
5. For documentation on the United Nations Monetary and Financial Conference, held at Bretton Woods, New Hampshire, July 1–22, 1944, see Foreign Relations, 1944, vol. ii, pp. 106 ff.