Washington Discussions on Financial Questions and Commercial Policy

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Washington Discussions on Financial Questions and Commercial Policy

Since September 1945 the British Government had been negotiating a financial arrangement with the US.  The Cabinet discussed international financial policy on a number of occasions beginning on 6 November 1945.  They discussed the American loan agreement and whether the agreement reached at Bretton Woods should be ratified.  Bretton Woods set up a system of rules, institutions and procedures to regulate the international monetary system; the planners at Bretton Woods established the International Bank for Reconstruction and Development which became one of the five institutions of the World Bank Group and the International Monetary Fund (IMF).  The chief features of the Bretton Woods system were firstly, an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value, plus or minus 1%, in terms of gold and  secondly, the ability of the IMF to bridge temporary imbalances of payments.

The following extracts give a flavour of what was said in Cabinet:

H.D.  

Bretton Woods.  Nothing in this which affects state trading etc. 
  Narrower than supposed.
  Wd require us to do 3 things
   a) secure stable exchange rate
   b)     ..     relaxn of     ..     restns qua current paymts.
   c)     ..     convertibility of currency.
  Of these, a) is to our advantage.  Competitive devaluation of
  foreign currencies was greatest handicap to our export trade in
  inter-war years.  Subject to condition:  that we can avoid being   dragged down by deflationary depression of other currencies.
  For this, escape clauses are provided.
  We shd. have to declare our rate of exchange v. dollars & gold.   We can change by 10% either way uni-laterally.  Beyond 10%
  also, if Gov. Body of Fund are satisf. change needed to correct    fundamental disequilibrium.
  Further, any member can w'draw at any time w'out leave or
  notice.
  Many safeguards, therefore.
  Obligations, especially under b) and c), won't operate until after    transitional period wh. mustn't be too short.  If 5 years, this wd.    do.
  Interpretative declaration.  Wd. be safe without it.  But cautious to
  safeguard  a) our emplt. policy  b) transition:  period is at our
  option.  Read out text from "a)" to (b).

A.B.  

Criticisms - a) we are abandoning Sterling area system.
  Safeguards really destroy B.W. Agreemt.  And, havg. meanwhile   destroyed Sterling area, we shall be left with neither.

E.Sh.  

Sorry to see these separated into w'tight compartments.  Can't discuss   B.W. w'out refce to commercial policy.
  We begin fr. the point that we must borrow from U.S.  But we haven't  been told yet why, we need to borrow.

H.D.  

In my memo. of August.  £1.00 m. over 3 years:  to buy the imports we
  must have.
  B. Woods.   Talk with J.A. & Keynes:  K. admitted it wd. be better to
  get Trade agreemt. before B. Woods.
  Tho' borrower in diffies, so often is the lender.  What wd. happen in
  U.S.  if we had to tighten our belt.  Ball not entirely at U.S.
  feet, since the debtors are essential to U.S. prosperity.  We can
  therefore strike hard bargain.
  Clear intention of U.S. = break up Sterling group.  Let us first be sure
  of consequences of that.  We shall then be entirely in U.S. hands,
  who can throw resources where they wish. Don't play into their
  hands by makg. it condn of borrowing from them (wh. is to
  their advantage) tht. we shd. accept B. Woods and destroy
  Imperial Preference.
  How close is B. Woods to Trade Agreement.  What is devaluation
  for - related to emplt. policy & to trade agreement.  Just as
  much dictation as it was in 1931.  B. Woods postulates non-
  discrimination.  We must leave our hands free.
  Aren't we too quick to accept this international co-opn idea w'out
  seeing first what it means.  Do you think U.S. will throw their
  markets open to us?

E.Sh.  

Then there won't be any agreemt.  They can be self-sufficient.  And   for this nebulous offer, we are going to break Sterling Area and   discard our power of discrimination.

R.S.C.  

This is clear issue - are we to maintain Isolationist Policy or to follow  declared policy of Labour Party?  Are we going in for attempt   at it.  This = all part of a scheme.  If one leg breaks, we shall
  come out of all these schemes.  Our policy = to have a shot at
  this, provided we are safeguarded v. failure.

A.V.A.  

Was ready to agree to that when it was assumed tht. U.S. wd. approach  this with reasonable moral attitude.  Much opinion tht. U.S. are   using financial posn to enable them to break our Imperial
  position.

A.V.A.  

They are more dependent on us than they suggest.
  After 1931 we got on our own feet in 2 years by Imperial trade
  system.  Think we may have to do the same again unless we can   get better terms.
  Don't yet know what these terms involve.  Will they tie a mill stone    round our necks for a generation.  a) What happens to pre-war   U.S. debt?  What is debit value of remanet of L-Lend?  Sinking   fund & interest will or may be intolerable burden.

H.D.  

I'm considering that.
  On b) all will be wiped out:  ½ billion dollars out of this loan will be   attributed to that.  Final evaluation, includg. those in pipeline,
  are being estimated in Washington.

E.Sh.  

And then you pay 2% on them.

R.S.C.  

Yes because they are either goods after V.J. Day or goods we intend
  to divert to civil uses.

H.D.  

L-Lend will be wholly & finally liquidated for this ½ billion dollars.

A.B.  

Think we're giving far too much for what we are getting.
  U.S. purpose = liquidate Sterling Area.
  St. Area canalises trade.  Our creditors are anxious to trade with us
  in order to get our goods.  (H.D.  Unrequited exports)

P.M.  

Trouble = large sterling balances:  they want goods for which we get
  nothg. in return.

H.D.  

Sterling bloc is somethg. wh. will go on v. strongly if you don't make   this agreemt. with U.S.  On contrary, they are v. conscious of
  the diffy. above, & they will break away.  S. Africa will soon
  want to go out of it.

E.B.  

Started in 1941 - U.S. not in war:  no L-Lend.  A.G. was then in Chair.  After L-Lend started, K. to help invented Bancor.  I got them to    agree to reservation in Interpr. Decln.  Then White invented
  Unitas.  For all these years same arguments all over & over
  again.
  I hate idea of getting under U.S. control.  But situation I'm faced
  with is - can you carry thro' B. people for next 3 years on
  lower rations.  I believe our bluff is called.  We can't ask them   to face another 3 years of even tighter living - with
  industrial unrest.  We are in Shylock's hands.  What is lowest    price we can get?  Wd. risk a higher price w'out strings.  But
  we can't get rid of the strings.  And I believe our negotiators
  have got the best terms possible.  No alternative now but to
  accept this unless you are ready to demand these further
  sacrifices from the B. people.  That this is the real issue now.

P.M.  

Issues to be faced.  a) Are you ready to tell B. people to suffer 3 more
  years of even worse privations?

A.G.  

Problems clearly put in p.p. of August by Keynes & R.S.C.
  We have done v. well to get so far.
  We can't dictate to U.S.  Tho' their long-term diffies will be greater
  than ours, they are on velvet to-day.
  Unless immediate relief by U.S., years of privation for U.K.
  Take firm decision to-day.

C.E.  

Our diffy = no p.p. seen since we saw mema in August.
  Any creditor can break a debtor.  Only a wise creditor can let him
  live & make him pay.  U.S. is not a wise creditor.
  We may in the end have to ask our people to stand up to it.  But we
  ought to be able to say tht. it was the creditors & not we who
  broke up the Confce.  We shd. go to the confce & try to make it
  clear to the U.S. people that they have their duties as creditors.
  Avoid anythg. wh. makes us subservient to U.S.  And if it breaks
  make it clear that U.S. broke it.  As we did for Russia at C.F.M.

J.J.L.  

Ques. wtr. B. people wd. stand more privation.  Even more important
  wd. be loss of all their hopes of international co-opn.  U.S. wd.
pull out of responsibilities for occupn etc.  Moral loss wd. be greater than any economic loss.

E.Sh.  

Para. 7 of H.D.'s memo.  But I have reservns on Annex C.  E.g. Russia
  has to be brought in:  look at para. on State-trading.  No
  Socialist Govt. cd. accept that.

P.M.  

The words aren't happy, but are directed to use of State trading to
  get round tariffs.

E.Sh.  

Look also at words on Subsidies.  All right if they aren't concealed.
  Concealed State subsidies for shipping in U.S.  a) Ask
  therefore tht. our hands be not tied.  b)  Ask tht. we look at
  B. Woods after Trade Agreemt.
  Wd. be ready to give up b) if you agree to a).

R.S.C.  

The deal wd. then be off.  Two months' work wd. be wasted.  All
  these proposals are our own.  State trading - as in telegrams.

H.D.  

When it comes to workg. it out at Confce, we can propose detailed
  amendmts.  We got it agreed tht. State tradg. formula doesn't
exclude long-term contracts with regular buyers.  Convinced tht. this can be safeguarded by long-term arrangemts.

A.B.  

Can't agree this is good agreement. Think it is a bad one.  And
  people will so regard it.  Accept F.O. word that alternative
  is to bite on the iron:  but don't know how much.  Believe
  we have under-estimated our own strength & over-estimated
  U.S. strength.

E.Sh.  

I wd. rather face that than accept this position.  For U.S. won't be able   to co-operate.

H.D.  

What it wd. involve.
  To maintain existg. p'mme of consumption & production.  100 needed  fr. U.S. in 1946 alone.
  With no imports from U.S. - bread & potato alone wd. be maintained.  redn in fats:  no cheese increase:  no dried eggs or tinned meat:
  15% redn in meat imported:  redn in maize, effect on livestock:   50%  ..     ..  sugar:  40% in ply wood:  cotton:  80% redn in
  tobacco.
  No export of steel products.
  W'in Ty. I have long refused to believe we are so dependent.  And
  these facts produced because of my reluctance.
  Easy to make a Dunkirk speech.  Diff. matter to face those facts.  We
  really can't face it.

E.Sh.  

What will U.S. do with these goods.

H.D.  

They won't give us them on L.-Lend.

E.Sh.  

U.S. will be forced to come to terms with us.
  Believe we cd. force U.S. into it.  U.S. want to know how they will
  dispose of their products.
  Let us have the loan, but don't let us tie our hands.

Taken from C.M. 50(45) - Meeting held on 6 November 1945.

The Cabinet continued their discussions on the Washington talks on 5 December following further talks in Washington and counter proposals by the US.

The following extracts give a flavour of what was said in Cabinet:

H.D.  

U.K. draft at last Cab.  U.S. counter-draft:  in many respects the same
  but some diffies.
  Many mtgs. in W'ton:  & here of 3 Ministers.
  Substantial point now outstandg:  transit. period is connn with B.W.A.
  and scheme generally.  U.S. counter proposal unsatisf.  Strong
  telegram sent askg. for 3 amendmts - a)  t. period origin. 5 yrs
  under B.W.A.:  U.S. were seekg. to reduce to little more than
  one   b)  U.S. seekg. deprive us only of benefit of scarce currency
  clause   c)  not clear how far we retained right to resign fr. Fund.
  As a result:  b) we have won outright.  c) our freedom to resign
  not challenged - & to re-value sterling:  but not to re-impose
  exchange control on current transaction by resigning.  First =
  the more important.  a) we haven't bn. met:  & U.S. ready to
  break on this.
  This therefore is the issue.  T. period originally cont. = 5 yrs.  Now
  agreed:  15 mos. fr. effective date (for both Agreemt. & Fund).
  Ques. = betwn. 15 mos. & 5 yrs.  We suggd Dec. '48 & they
  reject it.  Shd. we make final effort for e.g. 21/2 yrs?  But:  pt.
  was to give us freedom when we were short of f. exchange.
  They say, you won't now be short because of loan.  Awkward
  for Parlt. presentn tht. this period is to be cut down.  But shd. we
  break on this?

H.D.  

In U.K. draft considered before:  commd to free dollar earngs. w'in
  1st 15 mos.  Sterling area desire this.  For Sterling area therefore
  this pt. already given away.
  Countries for wh. restns wd. remain = some not founder members
  of Fund, mainly Switz., Spain & P., Argentine.
  Qua other founder members, already commd to freeing on current
  earnings in 15 mos.
  Not therefore as much in this quantitatively.
  Alternatives.
  Fr. loan:  terms much more harsh.  Repaymt. in 30 yrs. vice 55 &
  beginning at once.  23/8 vice 2%.
  If we get this, need for care over dollar exp. wd. remain.  Slow
  drawg. - qua overdraft.  And build up exports w'in 2-3 yrs.
  Durg. tht. time protected by this credit fr. impact of econ. condns
  outside. Cd. build up standards/livg.  6 year fr. Dec. 45 before
  paymt. begins.  Shd. get right by then - increasg. release fr.
  shortages & austerity.  Assumg. reasonable freedom for expts.
  shd. be able to carry the charge by then.
  If we don't get this - a) reversal on standards = food, clothing,
  tobacco.  Recalled earlier informn on this.  Less of all foods save
  bread & potatoes.  This = immediate consequences before
  switching to other sources.  b) Power to export limited by gt.
  U.S. drive on competitive basis.  c) Political consequences on
  this Govt.:  wd. be said to be our fault.  d) Canadians wd. say
  we had broken on an unimportant point.  W'in sterling area
  disintegration wd. begin rapidly.  They don't like our control
  of dollar pool.  S. Afr. wd. quickly brk. away:  U.S. wd. offer
  India gt. inducemts. to brk. away.  Egypt wd. go.  We shd. be
  left with Austr. & N.Z.  e) Genl. effect on Anglo. U.S.
  co-opn - & internatl. political posn.
  Conclude:  not justifiable to break on this.  Make a final attempt to get
  some alleviation - e.g. extend to Dec. '47.

R.S.C.  

Diffy. more psychol. than real.  In fact not giving much because
  t. period much cut down already.
  Won't therefore make much diff. in dealg. with sterling.
  Real diffy. is Parly. one - askg. for ratificn of B.W.A. at same time
  as bilateral agreemt.  Cuttg. down period fr. 5 yrs. to 15 months.
  Quite logical, however, for U.S. to say large loan with no
  repaymt. for 5 years makes it unnecessary for you to invoke
  Art. 14 of B.W.A.
  Alternative so disastrous I believe we shd. face Parly. diffy.

E.B.  

I am against brkg. on this.  Concerned to get our industry going - for
  reconstn of Europe.  Tried for '48 because believed by then we
  shdn't be so dependent.  Even by '47 chance we wd. be well on
  the road.  Try for '47.

P.L.  

If U.S. had opposed c) it wd. have bn. v. serious.  Glad Art. 15 isn't
  challenged.
  a) is much less serious.  Not of practical importance.  And much in
  U.S. argument.
  Think we shd. accept - must prime the pump.
  Doubt if its worth trying to get '47.  Wdn't help the Parly. argument.
  Might introd. fresh complicn.  I wd. accept w'out a last attempt
  to haggle.

H.M.  

Agree with C/E. & B/T.

A.          

. .      . .      . .        Shd. get no support fr. Canada or S. Afr. if
  we broke on this.

A.V.A.  

On prev. pts. of doubt negotiators have done v. well.
  We may be optimistic re recovery.  Heavy fiscal charge in '50/51.
  Wd. like a further effort to extend - to '47. because Parly. diffy.
  Worth another shot.

A.G.  

Consequences of a brk. - for other countries as well as us - so severe
  I wdn't brk.
  Agree with P.L. re last shot.

E.Sh.  

Don't attach importce to redn of t. period because agreemt. as a whole   so bad.  Only pt. on this = it's bilateral, in a multi-lateral
  Agreemt.
  Presented with alternatives.  My answer to that:  haven't adequ.
  explored posn in long run if this accommn rejected.  H.D.'s
  figures etc., have related to immediate consequences only.
  Believe tht. if we had stood up to U.S. we'd have done better.
  This = overdraft only & on one bank.  Asked to accept on
  understandg. we buy heavily fr. U.S.  Don't believe our
  industry. recovery depends on imports fr. U.S.  Do believe
  their industr. recovery depends on makg. loans on condn of
  purchase of their exports.
  U.S. Shylock.  We cd. have impeached them before the world.
  That wdn't have embittered Anglo-U.S. relns.  What would
  do so is if 2/3 years hence we have to say we can't meet our
  obligns.

A.B.  

U.S. insisting on this redn in t. period in order to force us into takg. up
  credit.
  This is U.S. come-back on our puttg. it on basis of overdraft.
  Forces us to use the dollars instead of Art. 15 method of escaping
  tempy diffy.
  This is how argument will be put in Parlt.
  Too much concerned with our diffies = not enough with theirs.
  Psychol. aspect.  R.S.C. thinks he has got all he wants - but U.S.
  think the same.
  Risk of mutual self-deception.  Will foul Anglo-U.S. relations.
  They & we will think of spirit, not letter.
  Can't brk. on this sort of point, if we once accept Agreement in
  substance.
  Negotiators v. skilful - but our approach was wrong.  Wd. have bn.
  better to say at outset we wdn't accept Agreemt. wh. wd. militate
  v. reconstn of world-trade.

E.W.   

In general agreemt. with E.Sh.

J.       

So am I but can't break on this point.  

Taken from C.M. 59 (45) - Meeting held on 5 December 1945.