Balance of Payments

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Balance of Payments

Balance of Payments.

H.D. 

Hoped 300m $ for August.  V. serious situation has, however, developed. At 1/8. out of 3.750 we had drawn 2.750. – 1.000 balance.  Was told no drawgs. needed 1 - 10/8.  150 drawn on 11/8.  Expected another 15- about 20th.
But on Friday E.E.B. reported a run on sterling.  Connect with Debates & Press comments:  = effect on foreigners.  They began to scramble for dollars. 175m. drawn in last 5 working days. C.P. 227 of 5/8 gave details of drain on dollars. Proposal:  stop the drain by rationing etc.,  As in para. 7 of memo.
Spoken to E.B. who wants keep U.S. Ambassador in touch.  Askg. him to return from Paris by Monday a.m. Results of this action – as in memo:  para. 8 & 9.

E.B. 

Argentine.  If tracked pari passu with U.S., wdn't they be all right.
Inclined to send for their Amb. on equal footing with U.S. Play on their pride.

J.S. 

Also Canadian High Commr.  C.E. to see him.

E.B. 

French best able to steady Europe.  Message thro' Duff Cooper at same time.
Eady's phraseology needs care.  Not repudiating:  not brkg. agreement:  force majeurs compelled us to take this temporary action:  maintenance of sterling as strong currency is main hope of steady world economy – necessary both in Europe & F/East.  These therefore are precautionary measures & temporary in character.
This action might go far to avoid worst consequences of para. 9 & 10.

H.M. 

First ques:  must these measures be taken & now?  Yes.
Second: is this adequate?  Para. 5 – clamp down on sterling areas but slower with sterling area.  Not sure it's right to go so slow with sterling area countries.

E.B. 

What is convertible sterling balance (total) over next 6 months?

H.M. 

Believe only 20% belong to non-sterling area countries.  And of this many tied up.  e.g. Argentine owes us 150m for B. rlways. Brazil restricted: Portugal has agreed to tie up most of theirs. Rest is v. small. Hence not practicable to go easy with sterling area countries.

R.S.C. 

These figures are irrelevant because they aren't current sterling holdings.

H.M. 

Main point remains. Further we are exporting sterling a month. Want assurances therefore tht. sterling area countries will be prevented from draining in excess of what we agree to.
Third:  Past attitude.  This shd. have bn. done 2 months ago. But H.D. told us convertibility was O.K.  Shall now be told we shd. have done this before Parlt. rose – will even be said we deliberately waited till Parlt. rose.  What is best answer?

P.M. 

We were assured by B/England this wdn't happen.

H.D. 

To end/June convertibility under Loan Agreement wasn't a problem.

H.M. 

We can say tht. in debate we indicated we were approaching U.S. on convertibility. We must expect criticism from U.S. – raising this so suddenly & taking this action on eve of W.E.'s Mission. Effects.  All countries will conclude reconstn has broken down & will leave to be lateral arrangemts.  Strong countries will be shaken.  Weak ones will suffer more.  May be emergency Session of Congress.  Soviet Union will exploit situation.  Shock in Paris Conference. U.K. imports.  May pay some countries to divert supplies to hard-currency countries, or consume them themselves, rather than go on supplying us for non. convertible currency. Publicity shd. stress Britain's long-term solvency & strength. Switch to essentials for exports vice china dogs. Wrong to decide on further import cuts. But Dpts. with Ty. shd. report wh. items will become unobtainable & what can be done.  Commodity directors shd. return from leave:  & some who have left Service shd. be re-called. Publicity.  Statement.  Cd. H.D. and I consult? Have p'poned economics Press Confce to Wed.  Wd. like to hold it, with H.D. attending also. Agreed.

Follow-up.  Small body of officials incldg. Nicholson.? Agreed.
Mechanism for B/Payments.  Stats. not good enough.  Machinery is inadequate.  Shd. we not have B/Payments Staff – Ty, B/T., B/England & Econ Section.  Cd. Harold Wilson have chairmanship?

E.Sh. 

What will effect be on U.S.A.?

R.S.C. 

Cancelln of contracts & turn over to non-dollar goods.  Will decrease volume of U.S. exports.  Not large enough to cause depression in U.S.A.

R.S.C. 

Agree with H.D. on measures & E.B. on method.
After this temporary stop, Ministers will have to go (soon) to Washington.
Tell them now we shall do so.

P.M. 

Effect on I. & O. & Paris.

R.S.C. 

No hope of I. & O. becoming effective before 1951/52.  Won't therefore wreck it. May make them think it's even further off. U.S. now more disposed to reduce tariffs w'out quid pro quo on non discrimination.

E.B. 

Paris.  This acceleration has upset me.  Germany:  dollar Loan:  & rise in U.S. prices:  Convertibility & non- discrimination (working up well in U.S. Press):  Paris conference due to report above 1/9:  1. & O.   Paris:  I. & O.:  Germany wd. have helped us to close the gap.  Had bn. working towards this.  Had intended to be ready to go to U.S. (with other Ministers) instead of U.N. – to take up financial issues.  Aimed at 16/9.  In view of acceleration, must think again.  But don't decide to send Ministers out before I can assess chance of success. Have bn. advised we shan't get by Congress save on big comprehensive scheme wh., tho' dealing with U.K. as main trading nation, covers our neighbours too. Must have something in our hands at Washington.  No hope in C.P. 232 quo coal.  What about agriculture?  Must have more concrete design of what we are going to do about our own industries. Snyder-Munro discns.  Must have more cards in our hands.

H.M. 

This is unilateral action.  U.S. can resent that. They can say:  no more dollars. Ques.  What is best means of enlisting U.S. support? And that is urgent.  Can't wait for weeks.

E.B. 

Don't believe they'll stop our drawings. Depends how it's put to them.
Presented as precautionary step. If you decide to send Ministers to consult, dollars will be gone first.

A.V.A.  

Doubt if timing is right.  25m. a day in last 5 days:  13 days before only 18 1/2  M.  Don't know what claims next week. How long will Eady talk before we  can act? If we have to take unilateral action, shdn't we act to-night?
For it we lose another 300m. in next 2/3 days, we shan't have power to do  the  other things.

H.D. 

W.E. must tell U.S. first.

E.E.B. 

W.E. and Cobbold most anxious not to present U.S. with fait accompli.
Wd. defeat negotiation. Want to deploy situation:  say what Ministers want to do:  consult with them:  perhaps give them 24 hrs. to think it over. They already think we haven't consulted them soon enough.

A.B. 

Looking at problem wrong way.  Asking for life-line not principles. Right to treat U.S. diplomatically.  But delay weakens our posn & strengthens theirs.  In 2/3 days we shall be weaker & they can drive harder bargain.  Said before tht. debate in H/C wd. weaken sterling: & it has done so. This will go on.

Approach to U.S.  Rest of world in soup, in deeper, and U.S. will be later.  U.S. economy can't be independent of world trade.  The first blow at world trade = absence of dollar.  We aren't dependents of U.S. but co-partners with them in aiding trade reconstn.  Because no dollars, run on sterling as  substitute. We must say all we can do is defend remaining sterling area of trade. I therefore favour informg. U.S. at once tht. if we allow run on sterling to continue we shall cripple world trade.  Must therefore ration sterling areas as well. This action shd. be accompanied by statement (Cab.) explaining that if we allow it to go on world trade will be w'out any currency to deal in.  i.e. not for our own protection, but to m'tain world trade. Ty. not giving us day-to-day clear a/c of our position. Shdn't have bn. poss. for H.D. to say in H/C. tht. drawings are no more than current needs.

H.D. 

But it's since the debate that this happened.

A.B. 

Ty. advised us tht. it wd. worsen situation to block sterling.  That was wrong advice. B/England shd. give us more up-to-date informan b)Don't be afraid of bi-lateral agreements where we can.  Don't however talk about it because we are still aiming at multi-lateral ideal.

C.E. 

Arithmetic: 175m. in last 5 days.  Support A.V.A.  To-morrow & Tuesday we must assume it's more.  Want v. quick action. At least, immediately after W.E. sees the U.S. repves.

H.D. 

Don't risk losing 700m. balance because U.S. cut it off. Stats.  V. diff. to get up-to-date figures – not easy to see how particular bills will go.  Ready to seek further improvements willing to allow H. Wilson to try to improve statistical machinery. Don't dissent from A.B.'s view. Shall have to do good deal of bi-lateral trading.

E.B. 

Don't risk U.S. cutting off remaining 700m. Credit.  Better to risk drain of another 50m. on Mon. or Tuesday. I shd. get Douglas back fr. Paris.  Tell  Eady I'm telling Douglas. Then Eady shd. start in W'ton as soon as possible.
– 10 a.m. W'ton time.  Wd. expect an answer Mon. night.  Cd. then act on Tuesday.

E.E.B. 

9.pm. on whatever day is best for announcement.

A.B. 

We must be defenders of world trade not suppliants to U.S.A.

H.M. 

If we "consult" U.S. & they ask for a week = then upsets them worse if we go ahead & do it. I wd. sooner we decided now to act on Monday.

P.M. 

Endorsed A.B.'s view regarding Eady's approach.

J. 

U.S. Govt. will find it diff. to consult w'out Congress.  Wdn't it be better to act first.

E.B. 

No.  Don't ask U.S. consent.  Tell Eady to say we have decided to take this temporary action:  during this interval we will discuss with you.

E.Sh. 

Eady shd. discuss before we act.  For v. dangerous to antagonise U.S.

E.E.B. 

Worried at thought of acting on Monday: for-
a) Eady was anxious not to have to report a decision.
b) V. early – must discuss with Canada.
c) Cobbold won't join Eady till to-morrow:  may have comments. Cdn't Eady take this line:-
x/ Govt. have no option but to make temp. measure of control:  has it in mind to act Tuesday:  thought it right to discuss with U.S. first.

R.S.C. 

So long as we don't appear to be inviting U.S. consent, every courtesy to U.S. is wise. Agreed as at x/.

G.T. 

Effect on our people?  Effect on human life here?  Can we get this over?
In such a way as to put heart into him, rather than reverse.

E.B. 

If Argentine & U.S. aren't handled right, our meat ration goes. We may have to get Argentine to rally against the dollar. Must see a no. of Ambassadors & get them on our side – on Mon.

H.D. 

On Tuesday.

E.B. 

Will consult on timing.

J.S. 

Argentine more important supplier of food than U.S. Propose no further  buying from U.S. in 1947. Dollars, but not U.S. supplies, are issue.
Our getting imports fr. Argentine depends mainly on our getting the right kind of exports to them.  Want machinery (? H. Wilson) for this incldg. direction of exports.

R.S.C. 

While home priorities for steel remain, there isn't enough to cover exports needed. Selectively cd. be greater if more steel.

J.S. 

Question that.  It's the other way round. Must tie up our export p'mme with our import needs.  When sterling becomes inconvertible, there must & can be more direction of exports.

H.M. 

B/Payments working Party isn't strong enough.

P.M. 

Formula for W. E.

A.B. 

Want to preface it by argument:   shortage of dollars likely to be succeeded by shortage of sterling – and then world trade breaks down.

E.B. 

Don't talk of Ministers flying out – H.M.G. ready to enter further discns with U.S. Govt. at the higher level in whatever way is found mutually convenient.
Action.  Order to be made Tuesday.  Announce 9.15 Tuesday p.m. written statement:  H.D. & H.M. to draft & submit to Cabinet.

C.E.

Effect on Doms.
Three groups.

a) Canada.  Towers is going to meet Eady at Washington: & after that our High Commr. will deliver message to Canadian Govt.

               Agreed  { H.D. and C.E. also speak to Can. High Comm in London.

b) Australia, N. Zealand & Eire.
P.M. to P.M. telegrams required, announcing action & reasons for it, to first two. Eire in same posn but not h'to so helpful. High Comm. Dublin to give statement to de Valera immed. after public announcement.

c) S. Africa.  Gold.  Loan offer & it's condns must be re-examined in light of this situation.  Dangers i) we may lose this loan. (ii) S. Africa may leave sterling area.
Inform Smuts at once & promise further message re loan.

d) India.  Effect on their food.  Must tell them.

R.S.C. 

They have a ration of dollars.  Enough to get on with for some time.

Taken from C.M. 71(47)(1) - Meeting held on 17 August 1947.