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

841.10/1–1552: Telegram

No. 362
The Chargé in the United Kingdom (Penfield) to the Department of State²

secret
priority

London, January 15, 1952—7 p.m.

3097. Pass MSA and Treasury. Re Commonwealth Finance Min conference. Ref: Depcirctel 58, Jan 5 and Embtel 3069, rptd Paris 1424 Jan 11.³ Fol is report Emb–MSA conversation with reps Brit Treasury, FonOff present.

1. First week official conf resulted in agreed report completed Jan 12 for submission to all Fin Mins (Brit think Ministerial conf likely to be concluded end this week, but Fin Mins probably not depart London immed conclusion conf.

2. Brit emphasized sterling area officials reviewed mutual benefits derived from SA and stated all members shared desire to take all necessary steps continue receive these benefits (clearly accepted by officials that convertibility necessary for effective maintenance sterling area. Brit specifically stated no discussion of subj of building up and maintaining reserves of individual countries.

3. Our mtg with Brit in form of Brit Treasury official outlining contents of agreed report of officials. Report divided into three main headings: Immediate balance of payments problem, long-run problem, communiqué on conclusion of conf.⁴

A. Immediate balance of payments problem.

(1) Taking into account effects of measures already taken by SA countries (e.g., UK import cuts and credit controls, Australian Fadden budget, NZ credit controls), agreed report estimates deficit between sterling area and rest of world at pounds 530 million for calendar 1952. Brit emphasized, however, that effect of internal deflationary measures already undertaken cannot be evaluated yet, and rough provision made for effects in estimate may be too small. Sterling area countries recognize problem not as dollar crisis such as in 1949, but as sterling area balance of payments problem vis-à-vis whole of rest of world, although dollar problem remains hard core. Present crisis different from 1949 where even switch from dollar to non-dollar sources wld not solve problem. Agreed report takes position that even allowing for external and internal measures already taken, situation so severe as to be insufficient to ward off disaster if more short-term remedial measures not taken, namely both external (i.e. import cuts) and internal (deflationary measures). Report estimates that if these immed measures not taken (i.e., beyond those already announced) and balance of payments develops at estimated level of pounds 530 SA overall deficit for 1952, by end June 1952 dollar reserves of sterling area wld be little more than pounds 550 million (excluding reserves held by individual SA countries). Description of immed corrective steps.

a. Emergency import cuts about which Brit unable to provide details, either UK or RSA; will be separate programs of cuts for imports from dollar area and imports from rest of non-sterling world; b. internal deflationary measures, whose principal effect viewed as long-term corrective, but expected to yield some benefits in short-run. Psychological reaction to effective immed steps believed important. Objectives of these immed measures to achieve in last half of 1952:

(a) At least overall balance of sterling area with rest of world; (b) within that, balance with dollar area, including Brit estimate of Amer aid not specified. Brit regard it imperative to have no drain in reserves last half of 1952, assuming considerable decline first half.

(2) Re estimates discussed in preceding para, of pounds 530 million sterling area overall deficit, UK portion of pounds 215 million and RSA pounds 315 million; sterling area deficit with dollar area pounds 267 million, and with rest of world pounds 263 million which also involves large dollar losses, e.g., EPU. No account taken of confidence factor in estimate loss of reserves first half 1952. Estimates assume resumption tin purchases by US and assume no further general adverse price developments. In answer to query Brit stated that if anything the RSA figures provided by RSA countries show worse deficit than earlier UK estimates for RSA as reported in Toeca 1186, rptd Torep 1041, Dec 12.⁵

B. Long-term problem.

Brit stated there was surprising degree of unanimity among Commonwealth officials re long-term problem and remedial measures required. Agrmt that must press forward with measures toward achieving goal of sterling becoming and remaining convertible, that belief shared by Commonwealth countries that sterling area not likely to last long if they do not go towards and achieve convertibility. Agrmt that main long-term action required is internal deflation. Recognition that the sterling area countries have failed to adjust themselves to econ conditions of postwar world, that countries have adopted policies requiring greater demand on resources than cld be afforded. Brit reported that in conf there was frank and free ventilation of ideas of each country re its own internal measures. Brit stated such open detailed discussion of internal measures contemplated by each country unusual departure for Commonwealth econ conf. When queried re timing of convertibility, Brit stated that shortest possible time was desired but no dates were mentioned at conf. The fol were presented as the necessary conditions for achieving convertibility:

(a) Sound internal situation each country; (b) adequate reserves; (c) finding means to encourage Amer investment. Re sound internal situation Brit stated that they desire a balance in overall payments each country, taking into account long-term investment requirements and rights to draw on sterling balances. Brit indicated that UK hoped internal situation RSA countries wld not require regular yearly drawings, but rather intermittent use as required. Re investment, Brit reported agrmt at conf that in next few years UK did not have resources for much long-term investment in RSA countries. Conf agreed that only country able to provide sufficient long term overseas investment in sterling area is US, and conf agreed to examine carefully measures to encourage Amer investment. Brit mentioned necessity to investigate present deterrents to Amer investment in sterling area such as exchange control, taxation, nationality of ownership. Brit reported officials very impressed with large new dollar capital investment in Canada in recent years offsetting large current account deficit.

C. Brit indicated that conf attached great importance to necessity of communiqué issued upon conclusion of conf instilling confidence in sterling, that necessary remedial measures being under taken both short-term and long-term. Conf agreed that desirable set up machinery for frequent Commonwealth consultation on econ problem.

Request that contents this msg for use only within US Govt.⁶

Penfield

2. Repeated to Paris, Canberra, Colombo, Delhi, Karachi, Ottawa, and Pretoria.
3. Neither printed; the former asked for information on the Commonwealth Finance Ministers Conference, while the latter transmitted an initial report on the conference based on conversations with a Canadian official. (841.10/1–552 and 1–1152)
4. For the text of the communiqué issued at the end of the conference, Jan. 21, see Documents (R.I.I.A.) for 1952, pp. 59–62.
5. Not printed. (ECA telegram files, lot W–130, “London Toeca”)
6. In telegram 3193 from London, Jan. 23, Holmes reported further on the conference, stating that the British were satisfied with its results, that it had been a frank discussion of each country’s financial problems, that more agreement had been reached on long-run problems than at previous conferences, and that working parties had been established to deal with the problems of (1) convertibility and (2) development and foreign investment. (841.10/1–2352)