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The Economic Situation - Washington Talks.
THIS DOCUMENT IS THE PROPERTY OF HIS BRITANNIC MAJESTY'S GOVERNMENT
Printed for the Cabinet. August 1949 -r 2
The circulation of this paper has been strictly limited, it is issued
for the personal use of ..^^,.S^.9^yyr^^.f^y^9^f
TOP SECRET Copy No. 22
,C.P. (49) 185
29th August, 1949
CABINET
T H E ECONOMIC SITUATION—WASHINGTON TALKS
NOTE BY THE CHANCELLOR OF THE EXCHEQUER
I circulate, for t h e information of my colleagues, t h e brief for the forthcoming
Ministerial talks in Washington. This is a revised version, amended in the light
of the C a b i n e t ' s discussion on 29th August, of the d r a f t prepared by officials of
the Departments concerned and circulated with C P . (49) 175 of 23rd August.
R. S. C.
Treasury Chambers, S.W.1,
29th August, 1949.
37507A
T H I S D O C U M E N T I S T H E P R O P E R T Y O F H I S B R I T A N N I C M A J E S T Y ' S G O Y E R N M E NT
The circulation of this paper has been strictly limited, it is issued
for the personal use of
TOP SECRET Co%1f No.
BRIEF FOR MINISTERIAL TALKS IN WASHINGTON
Objective of the Talks
1. The general objective of the three Governments in the Washington talks
should be—
(a) to secure that all three Governments will work together on a basis of close
co-operation in order to establish equilibrium in the balance of payments
between the dollar and the sterling and non-dollar areas on a
permanent basis, at a high level of trade and without the recurrence
of crises.
The specific objective of the United Kingdom Government should be—
(&) to secure (a) with the highest standard of living for ourselves and without
threatening the maintenance of full employment here.
The immediate objective of the United Kingdom Government should be—
(c) to secure that the United States and Canadian Governments take certain ::
specific steps which, together with the steps taken by the United
Kingdom Government, will ensure that the immediate dollar crisis will
be overcome.
Attitude of the United States and Canada to the Talks
2. We start by setting out the views of United States and Canadian
Ministers as we believe, on the best advice we can get, United Kingdom Ministers
will find them when they get to Washington. These are set out in the following
paragraphs.
3. Briefly summarised, the views of United States and Canadian Ministers
will, we believe, be as follows :—
(a) That the United Kingdom since the war has been faced with recurrent
crises, and in particular now appears to be needing more rather than
less dollar assistance;
(&) that, despite the recovery which the United Kingdom undoubtedly has
made, we have made little progress during the whole post-war period
towards the state of international economic relations which we have,
equally with them, repeatedly asserted as desirable and pledged ourselves
to try to reach;
(c) that, despite our repeated assurances, our actions, particularly through
bilateral agreements, are building a structure of world trade which
is further and further from that which we say we want, and thus
that we are deceiving either them or ourselves;
(d) that we are trying to insulate ourselves in a high-cost world, and that
some of the causes of this situation lie in our internal economy; and
that our failure to deal effectively with our internal inflationary
forces and high costs has driven us increasingly to bilateral practices
with all the evil effects that that has—in their eyes;
(e) that in particular we have taken no effective action to deal with the
problem of the sterling balances, despite the quite clear undertaking
which we gave on this matter in the Anglo-United States Financial
Agreement^ 1945 (Cmd. 6708), and that we are, in effect, using
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Marshall Aid to repay the sterling balances, and also using sterling
balances in order to promote British trade at the expense of the trade
of the United States;
(/) that on the basis of present United Kingdom policies they cannot, therefore,
have confidence in the basic United Kingdom capacity to recover
from its present troubles and to continue subsequently in a healthy
economic situation;
(g) that no purpose will be served by making any proposals designed to
fi^ji iJ, contribute towards our joint long-term objectives, or by having any
serious discussion of major issues unless their doubts can be removed
and their confidence in the United Kingdom as a healthy and stable
economy can be restored.
4. These arguments can be refuted, in general and in detail. The necessary
material will be available to Ministers on these points, and to save time we do
not set forth all the arguments here. We should admit, of course, that there
is a clear obligation upon us to attain viability and freedom from dollar aid
at the earliest possible moment; that.our campaign for greater productivity and
efficiency must be relentlessly pushed forward; that inflationary pressures still
exist in the United Kingdom and have to be countered; and that we have so far
failed in the effort to steer an adequate proportion of our exports to North
America. We should, however, repudiate the fallacious idea that the sterling
dollar problem is entirely a matter of United Kingdom effort or United Kingdom
policies. This is patently false, since something like half the deterioration in
sterling area dollar earnings this year relates to goods originating from outside
the United Kingdom.
Ministers will also no doubt wish to deal with any confused idea put forward
by the other side on such matters as that British Government social expenditure
is a major element in United Kingdom direct costs of production. Ministers
will wish to point out, if necessary, that money raised in private taxation and
paid out in certain services such as food subsidies and family allowances tends
not to raise costs and export prices, but to lower them.
5. The United States and Canadian outlook on these matters cannot,
however, be properly understood without reference to the discussions which took
place during the latter stages of the war and immediately after the war to
establish a general code of economic behaviour. This code and the general rules
of international financial and economic conduct were worked out in Anglo-
American talks during the war. They were discussed in International Conferences
between 1944 and 1946, and culminated in agreement on the International Trade
Organisation (I.T.O.) Charter, which is at present before Governments for their
ratification. During these discussions it was recognised that we should be faced
with transitional difficulties. There is no doubt that the United States and
Canada consider that, since our figures of production and exports show that we
have recovered from the damage caused by the war, we ought to be making greater
progress towards the agreed objectives. On this we shall probably have to make
it clear that convertibility and greater multilateral trade must be the results
of equilibrium in the balance of payments, and not steps towards it. If attempts
are made to introduce them first, equilibrium will be itself retarded, and the
attempted convertibility and multilateralism will collapse, as 1947 plainly showed.
We must defend the successful bilateral agreements made since 1947 as vital to
the rebuilding of our economy after the misguided attempt at premature convertibility
in 1947, and as having certainly increased rather than diminished the total
world trade. It should be made clear that these agreements are flexible and
various, and do not by any means always or usually imply an exact two-way
balancing of visible trade. Our recent proposals for freeing intra-European trade,
for example, show that we are ready to move away from bilateralism in certain
conditions. The main condition is that we can see our way to meet any new
obligations in goods (which we can supply), and that we are not called upon to
meet them in gold or dollars (which we cannot spare). If we are forced into the
latter course, this can only delay progress towards equilibrium, which is the
foundation of any progress towards convertibility and multilateralism. Finally,
we should perhaps again point out that we maintain in the sterling area the
largest multilateral system, with widespread convertibility, in the world.
6. There is evidence in the press of North America of campaigns casting
doubts on the ability of this country to extricate itself from the present difficult
situation. We only mention this because the attitude of the general public in
the United States might well have an effect upon the present Administration^
willingness to give a lead to public opinion, and its ability to put its policies into
effect, more especially because of its lack of control of Congress. With public
opinion on its side, the United States Achninistration might be ready to try to
force through the policies which it thought right, even against Congressional
opinion. Without the backing of public opinion, the Administration will hardly
venture to take a lead.
7. We would also remind Ministers of the considered advice of His Majesty's
Ambassador in Washington, and that of the United Kingdom High Commissioner
in Ottawa, that it is very likely that the attitude of the United States Ministers
in the forthcoming discussions will be to sit back and not make any suggestions
themselves, unless and until they are satisfied that this country is determined to
do: every thing in its own power to extricate itself from the present difficult
situation. We believe this consideration is also of great importance in regard
to the degree of support we can look for from Canada. Canada's undoubted wish
is to remain a full and active partner in the Commonwealth. Provided that the
Canadian Government are satisfied as to our determination to do all we can to
help ourselves, we shall find strong support from them in Washington, particularfy
in stressing the duties of creditor countries. This became quite clear in the
discussions which Mr. Norman Robertson had with the United States officials
about drawing up the agenda.
United Kingdom Attitude at the Outset of the Talks
8. Putting all these considerations together, we make the following
suggestions :—
If the United States and Canadian Governments advance the arguments
summarised in paragraph 3, these arguments will have to be rebutted. But
discussion on these points is not likely to lead to any constructive basis for
the talks, the time available for which is already short enough. As soon as
possible, therefore, our representatives must turn to the discussion of immediate
and long-term problems with the United States and Canada as matters of common
concern between partners.
Action by the United Kingdom
9. The Cabinet have agreed that the following steps should be taken :—
(i) A review of Government expenditure has been put in hand, with a view
to securing such economies as can be obtained without prejudice to
major Government policy. The Prime Minister has issued to all
Ministers in charge of Departments a directive (CP. (49) 170) calling
upon Ministers—
(a) to curtail services not essential to major Government policy;
(b) to effect more economical administration of policies which must be
retained;
(c) if the economies under (a) and (&) do not amount to five per cent.,
to submit a statement showing what further action would have
to be taken to achieve a reduction of this amount. The proposals
under (c) will be considered by the Economic Policy Committee
in the latter half of September.
(ii) The Economic Policy Committee are to consider what measures could
be taken to counter any inflationary pressures which may develop.
Ministers have, in particular, asked for a study of the reductions
which might be made in the Investment Programme; and a paper
on this subject will shortly be submitted by the Investment
Programmes Committee.
10. These steps should not, of course, be regarded as concessions to the
United States and Canada. They are not matters for negotiation or bargaining,
but are internal matters of concern to ourselves alone. Our representatives should
avoid being drawn into any discussion of these or any other matters of internal
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policy. If they are pressed about them they can confirm that a review of Government
expenditure has been put in hand with a view to securing such economies as
can be obtained without prejudice to major Government policy, but they should
not enter into any details of possible reductions. They can also give a general
assurance that His Majesty's Government will of course continue to take any steps
which they consider necessary to counteract any inflationary pressures that may
develop. '
Short-Term Measures by the United States and Canada to help the United
Kingdom to tide over while Long-Term Issues are Settled
11. It will be necessary to seek the assistance of the United States and
Canada in taking measures in the external field which are not wholly within the
power of His Majesty's Government. For example, it would clearly be of the
greatest value.if the United States and Canada took the steps within their power
to reduce the prices of essential dollar products sold to the non-dollar world, e.g.,
by modifying restrictive measures. We should hope to have created a basis
of mutual confidence and to be able to argue our case, not on narrow detailed issues,
but in the broadest political context.
12. At this stage the United States and Canada may themselves have some
measures to suggest, e.g., we understand that the United States are looking into
the possibility of further action by way of tariff reductions. The Canadians
could act reasonably quickly in this direction under their existing powers, but
although the United States will no doubt secure very shortly the renewal of the
Reciprocal Trade Agreements Act, this machinery is very cumbersome, and it is
doubtful whether actual reductions of the United States tariff could be effective
in much less than eighteen months. The possibility of United States action in
this field is discussed in paragraph 24 below; and for the reasons there given
cannot be regarded as a substitute for the much more important objective of
unilateral action by the United States themselves in reducing their tariffs.
13. We on our side would press the various short-term points which have
been raised with Mr. Snyder and Mr. Abbott and are set out in C P . (49) 165 (a list
is attached as Appendix A). It should be recognised that these measures fall, in
the case of the United States, into two classes; those which require new legislation
and those which can be put into effect by administrative action. This is an
important distinction, as some of the most important matters, such as action on
non-discrimination (Section 9 of the United States-United Kingdom Financial
Agreement, 1945 : Cmd. 6708), require new legislative action. We cannot rely,
in the conditions prevailing, on new legislative action becoming effective until the
middle of 1950. The problem of ensuring that E.R.P. dollars can be used for
Canadian wheat would also involve legislative action if wheat should be declared
surplus. This again is a matter of great importance. It will be mentioned to
Mr. Hoffman and has been put to the Canadian Prime Minister, whose reaction
has been helpful (see CP. (49) 172, CM. (49) 52nd Conclusions, Minute 2, and
Ottawa telegram No. 943 of 16th August). The remaining matters specified in
CP . (49) 165 do not require any legislation. These el1*6j £IS far as the United
States are concerned :—
More favourable administration of E.R.P.
Resumption of stockpiling.
Loans from Export-Import Bank.
Drawings from International Monetary Fund.
Reciprocal tariff reductions.
But even in these cases it must be remembered that the latitude which the
Administration will allow itself will be tempered by Congressional views and
public opinion.
14. The same consideration, i.e., the need for new legislation, applies only
in a minor degree to the'short-term measures which Canada can take and which
are listed in CP . (49) 165; and in all cases they could take action more quickly
than the Americans.
There are, however, two other matters which have both short- and long-term
implications, which are not dealt with in CP . (49) 165. These are non-discrimination
and oil.
Non-Discrimination
15. In the short-term this raises two problems :—
(a) The effect of Section 9 on the plan we have sponsored in O.E.E.C. for
relaxing import restrictions.
(6) The discrimination we must commit in order to obtain the imports we
really need ourselves.
No new decisions of policy are required on either of these points, but Ministers
will be required to take decisions on the former point during September. These
matters are dealt with in a fuller note at Appendix B.
16. The issue of non-discrimination enters into the long-term in the
following way. Section 9 of the Financial Agreement itself ceases to be effective
at the end or 1951. We obtained an informal assurance earlier this year from
the Americans that if and when the Havana Charter came into force and an
International Trade Organisation was thereby established, of which both the
United States and the United Kingdom were members, they would regard
Section 9 as automatically superseded by the modified non-discrimination rules
of the Charter. Unless there is some radical change in United States opinion
there is now no chance of the United States ratifying the Charter before next
Spring. If the Washington talks fail, the resulting situation will be such that
the Charter is unlikely to survive, and there will be no International Trade
Organisation and no rules about non-discrimination after 1951. It is true that
we are parties to the Geneva General Agreement on Tariffs and Trade (G.A.T.T:)
which embodies modified non-discrimination rules identical with those of the
Charter, and that if the G.A.T.T. survives these would hold the field for us
when Section 9 expires. But if there is to be no Charter it is doubtful whether
the G.A.T.T. will survive. The G.A.T.T. or Charter rules on this subject could,
however; be very onerous; they are necessarily somewhat vague and everything
depends on how they are interpreted. We made it clear in signing the Final Act
at Havana that we should not be able to accept the Charter unless the rules
were administered very broadly. Since then we have had experience at the Annecy
meeting of an attempt by the United States representatives to apply the rules
in a strict and narrow way. A further test will come when we put to the United
States the arrangements we have just made with South Africa to ensure us a
minimum amount of gold. If, as is probable, their reaction to the arrangements—
which may be regarded as a test case—is very hostile, this would show the
difficulties the United Kingdom would have in accepting the Charter without
the assurance that the United States would support us in securing temporary
complete suspension of the non-discrimination rules. It cannot be determined
in advance whether some such indication of our thinking should be given in the
course of the talks. It would probably be best not to attempt a detailed discussion
of this complex subject, but, since in any event the question of United States
acceptance of the Charter is by no means immediate, to suggest that the matter
might be studied through such means of continuous consultation as may emerge
from the talks. The balance of advantage is clearly against forcing this issue
during the forthcoming talks.
Oil
17. The non-discrimination provisions of the Loan Agreement strictly apply
only to oil produced in the United States (but this strict interpretation might
be questioned by the United States Government and we have never formally
raised the matter with them). We have, however, in fact treated all imports of
oil by United States companies into the United Kingdom as if they came within
the scope of Section 9. Any discrimination against American oil anywhere in
the sterling area would undoubtedly be held by the Americans to involve important
questions of principle. So long as this position continues, we cannot cut imports
of dollar oil into the United Kingdom without at the same time cutting consumption
of "sterling" oil proportionately so that, to save 1 ton of dollar oil,
consumption in the United Kingdom has to be reduced by 3£ tons or in the rest
of the sterling area by 2 tons. Moreover, the British oil companies will have,
even in 1949-50, oil which is surplus to their present commitments. While nondiscnmination
is in force we cannot consume this oil in the sterling area without
buying additional dollar oil which we cannot afford; far less can we use the British
companies' surplus to displace dollar oil and so reduce our dollar deficit. Moreover,
if American and British-controlled oil companies are allowed to maintain
their relative market positions in the sterling area as a whole, the dollar cost of
the American-controlled companies' share of trade within the sterling area may
on present estimates rise over the period up to 1953 to a point which would
neutralise a large part of the expected reductions in the dollar cost of Britishcontrolled
companies' operations over the same period. The oil which we supply
for sterling to Western Europe at considerable dollar cost to ourselves is so vital
for European recovery that we can take very great credit for it. We can, therefore,
make good use of this point in argument. The talks on oil in Washington
should not be pressed too far; we should present the problem as we see it and try
to get agreement to our negotiating a solution with the American oil companies
which, while securing for us the dollar savings that we must have, will damage
them as little as possible. But it will be highly desirable, as a preliminary to such
discussions, that the United States Government should agree in principle that
non-discrimination should not apply strictly to American oil imports into the
sterling area. We must therefore press for the agreement of the United States
Government to this.
Value of short-term measures
18. The object of these short-term measures, coupled with the action which
we are ourselves taking, is to help us to stabilise and then ,reinforce our reserves
quickly, and maintain them above the indispensable minimum, until longer-term
measures can take effect. It is difficult to estimate the value of the various
measures in terms of dollars, since the range of possibilities is large in each case;
but an attempt at such an estimate will be made before Ministers go to Washington.
The major factor will be a restoration of confidence, the effect of which
it is impossible to quantify.
Long-Term Policies
19. These short-term measures, even if implemented in full and in the most
generous fashion, provide no permanent solution. The essential purpose of the
conference will be to set the stage for the consideration of long-term policies
on the basis of mutual confidence and of agreed long-term objectives.
20. It will not be impossible during the few days of the Ministerial conference
to reach final conclusions on these long-term matters. The most we can hope
for is for the problems to be set out, for the establishment of the greatest identity
of views possible between the three Governments, and for agreement on the
necessity for more frequent talks at Ministerial level backed up by a continuance
of meetings at official level.
21. The ultimate objective of all three countries is the attainment of
equilibrium in world trade at a high stable level. It is essential, however, that
we should not accept obligations which may be beyond our powers to implement,
and in particular that we should not be committed to any specific time-table in
such matters as convertibility or multilateralism. We must indeed emphasise that
experience since the war has made it quite certain that the attainment of sucb
conditions will only be possible if all countries concerned strive towards them,
and that it is quite beyond our powers to make much contribution in the absence
of effective action by countries such as the United States and Canada. In a word,
the object of United Kingdom Ministers should be to place the long-term policies
very definitely in the context of the responsibilities of creditor and debtor nations
which were given such great emphasis during the recent discussions with the
Commonwealth Finance Ministers (Annex to CP. (49) 160, Section I). If we can
succeed in this, then the discussions can proceed on the right basis—namely, that
of the mutual responsibilities, according to their strength and ability to contribute,
of debtor and creditor nations. It can then be shown, on a basis not of controversy
but of economic fact, that a satisfactory solution of the United States surplus in
world trade cannot, be provided by efforts of the debtors alone; and that unless
both sides make great efforts, involving radical re-examination of existing policies
and patterns of production, then the level of trade with the dollar area must
decrease rapidly, thus postponing indefinitely any hope of convertibility or
multilateral trade.
22. There are six main long-term issues which we should seek to discuss in
more detail during the Ministerial talks. These are ;
(a) Full employment.
(&) Restrictive measures taken by the United States to support domestic producers
and to prevent earning of dollars by other countries.
(c) Foreign investment by the United States and Canada.
(d) Sterling balances.
(e) Commodity Agreement for Tin (and points on other commodities). :
(/) Dollar price of Gold.
Full Employment Policy
2 3 . The first point is that of the maintenance in the United States of a high
level of employment, income and demand. The United States are deeply committed
to a full employment policy, and the President, in his message to Congress,
shows full American realisation of their commitments and responsibilities. It
would be easy to get embroiled in discussions on the proper interpretation of full
employment, on whether the Americans are prepared to tolerate a larger measure
of unemployment than is desirable, or on whether our own policy leads to undue
rigidity. There is room for dispute on the extent and nature of the present
recession in America and there has been at least a temporary improvement. It
would, therefore, be unwise to make too much of this, though we could certainly
take the Presidents message as our text. It would seem best to treat this as a
matter on which there is no basic difference of view between the Americans and
ourselves and one in which they will themselves be prepared to take the necessary
steps. We should argue strongly that one of the most helpful steps which the
United States could take in the long-term and when certain present shortages
have been overcome would be to consume at home more of her own production,
and thus decrease the pressure of her exports and surpluses on world markets.
Full employment is the major factor in ensuring high internal consumption, and
is essential to a stable and healthy position both internally and externally. Thus,
unless the United States is prepared to consume or to lend abroad as much as she
produces she will inevitably exert a deflationary pressure on the countries with
which she trades. We cannot hope for immediate practical advantages out of this
discussion, but it should form one of the bases of long-term action.
United States Restrictive Measures
24. The next set of points are in the field of restrictive measures by the
Americans in the interest of their own domestic producers which block ways in
which we could earn dollars. Both the level of their tariff and the methods by
which it is administered place considerable obstacles in the way of imports. The
United States Government support their own agricultural prices at levels which
could easily become much higher than those in the outside world and which
practically prohibit imports if there is any danger of foreign competition. It
will, of course, be realised that any action which the United States Administration
could take in respect of tariffs under existing powers would be subject to
reciprocity on our part. They might be persuaded that some easement for us
would be provided in this way without very hard bargaining and with a result
which did not in effect mean a tooth for a tooth. It is, however, probable that
they would regard this as another good opportunity to whittle away substantially
(and for as long as the G.A.T.T. or the Charter is in force) the preferences we
enjoy in other Commonwealth markets. What we really need is a measure of
unilateral tariff concessions on their part. Since this would involve legislation
it is necessarily a long-term rather than a short-term matter and, as is pointed
out in paragraph 12 above, action by the United States even under the Reciprocal
Trade Agreements Act would not become effective in much less than eighteen
months from now.
25. There is also a major point as regards shipping. The United States
Government argue very strongly in favour of the competitive basis of trade, yet
in the field of shipping they adopt a highly discriminatory policy in order to
protect their own shipping, which is far from competitive. We think that this
is a point which should be strongly pressed on the Americans. They may argue
in reply that it is essential for them to maintain a large merchant fleet on strategic
grounds. We do not think that we should ourselves raise this aspect of the matter,
because of effects which it might have in other fields—mainly military. But if
the Americans raise the point, we should argue that the coming into force of the
Atlantic Pact reduces greatly the strength of this argument—at any rate so far
as cargo vessels are concerned.
Foreign Investment
26. The next question is that of United States, and Canadian foreign investment.
It is vitally important that both should encourage international investment
by their nationals and through national and international institutions. For the
investment to be really effective it is essential that it should be made under
circumstances which do not impose limitations on the area within which funds
can be spent. This has not presented great difficulty in the past, when investment
has been mainly private investment, but it is probable that investment in the
future will tend more and more to take the form of Government lending and in
these circumstances to be " tied " to a much greater extent than in the past.
This is a matter which will have to be pressed very strongly and it is one to which
the countries of the Commonwealth attach great importance. The resumption of
such lending on a considerable scale is essential both to bring the United. States
into balance and to develop under-developed areas. At the moment United States
private lending is on a very small scale for a number of reasons, including political
uncertainties. The only Government agencies are the Export-Import Bank and
the Economic Co-operation Administration, whose funds are limited. We must
show ourselves fully willing to take any steps in our power to make investment
overseas by American private lenders more attractive. When we have showed our
willingness to do this, we can then press the United States and Canada—
(a) to reconsider such legal and technical obstacles to private lending as may
exist, e.g., through the regulations of the Securities Exchange Cornmission
in the United States and any similar requirements which may
exist in Canada;
(6) to adopt a steady policy of encouragement to the banking communities
to explore all likely possibilities of foreign investment;
(c) to couple this with a policy of further education of Congress so that
putt ic agencies may be kept amply supplied with funds for lending
(which is clearly recognised by the Governments concerned as essential)
without hampering the benencial employment of these funds through
undue restrictions and precautions. We can emphasise that a restrictive
policy, however much it may appear justified to Congress, will
defeat its own end, and that the surest way of losing money is to make
an adequate investment on impossible terms.
All this is a matter for mutual and continuous study by the parties concerned,
but it would be wrong to think that the creditor countries may not raise important
issues affecting internal policies.
Sterling Balances
27. This matter will certainly be raised with us by the Americans and we
shall have to explain our policy in recent years, especially in the light of specific
undertakings given by us in the Anglo-American Financial Agreement of 1945.
Our explanations should be so made as to enlist the effective co-operation of the
United States Government in achieving a solution of this problem. In fact, we
must be ready to take a positive line of inviting the Americans to assist us in this
matter and be ready to put forward proposals. This is a strategic and political
question as well as a financial and economic one, both for the United Kingdom
and the holders of sterling themselves. In particular, holders of sterling are in
the main countries in whose political stability the Americans are concerned and
who occupy positions of great strategic importance. We are examining further
and will report on the positive proposals which we consider we can best make to
the Americans.
Commodity Questions
28. Ministers have already decided that a Commodity Agreement is necessary
in the case of tin. It will be necessary to persuade the Americans to withdraw
their opposition to the proposal for a Tin Agreement and also to co-operate
in short-term measures to deal with the present precarious situation in the interval
before a Commodity Agreement can come into effect. As regards -rubbery wool,
cotton, sugar, cocoa and sisal, it is considered that Commodity Agreements would
not increase the Sterling Area's dollar earnings and would also be open to other
objections at the present time. In the case of rubber, the chief source of the
present difficulties is the regulations governing the use of synthetic rubber, and
it is proposed that we should press the Americans to modify these regulations in
order to allow the maximum competition between natural and synthetic rubber.
It is recommended that we should not seek any change in the Rubber Act itself,
which will in any case have to be reviewed by Congress before June 1950, when
the Act expires. These conclusions and the arguments which lead to them are
set out in Appendix C.
The dollar price of gold
29. Since 1939 the costs of gold production, like all other costs, have
increased but the dollar price of gold has remained unchanged. There has therefore
been a steady fall in gold production and an increase in the price of gold
would reverse that tendency. It would also have more general advantages : it
would immediately increase the dollar value of the monetary gold reserves of all
countries and thus increase their purchasing power in the United States and
Canada; an immediate dollar profit would accrue to the United States Government
on its own large gold reserves and that profit would make it easier for it
to assist other countries; and there would probably be a public expectation of
higher commodity prices which would give general encouragement to business
and international trade. Such advantages make it desirable to press the United
States Government to increase the gold price. At the same time present indications
are that the United States Government are unlikely to be sympathetic
towards the proposal--possibly because they fear that its effects in the United
States, direct and indirect, might be too inflationary. Any change would require
the consent of Congress. As "stated, we should expect great benefits from such
a step and United Kingdom Ministers should seek to raise this matter in
Washington if the progress of the talks affords any opportunity to do so.
I t should be addecf that it is almost certain that Dr. Havenga will press
the proposal on the United States Government in South Africa's interest.
Need for Continuing Consultation
30. During the war there was very close and continuous consultation and
co-operation with the Americans and Canadians at all levels in the fields which
were of mutual concern. Since then this has ceased to be the case and it is only
now that we are beginning to build up again this close working together in the
military and political fields. But we have not made any real progress in the
economic field. We therefore recommend that we should seek agreement with
the Americans and Canadians that there is a need for more frequent meetings
of Ministers and for continuous discussions of economic problems by an informal
group of officials of the three countries concerned.
31. If this can be generally agreed, we consider that the constitution of the
informal group of officials should be governed by the following considerations.
(a) The officials should be of high rank and this work should have first call
on their time.
(6) Their role should be advisory, with power to consider fully and frankly
all subjects bearing on the economies of the three countries.
(c) They should deal not only with current matters but also with trends and
developments in the future.
(d) Their work and their reports to their Governments must, therefore, be
treated in the strictest confidence.
(e) We should not add representatives of other countries as the success of
this group will depend upon its being small. (From our point of view,
this means that we must find other methods of keeping the other
members of the Commonwealth informed and of ensuring that this
method of work does not cause difficulties with the Organisation for
European Economic Co-operation (O.E.E.C.).)
37507 n
Position of O.E.E.G. . - ... ; * .. - / . . .
32. The Marshall Plan, and the need for its success; are very deep rooted in
United States policy, and it would be contrary to our interest and'to the interest
of European recovery if we were-to give the impression in any'way that we did not
regard the Marshall Plan as of major importance. It would be equally wrong, as
this paper shows, to give the impression that we regard it as providing a solution
for the difficulties which now face us. It is clear that many of the questions which
will arise during the Washington discussions are of concern to the members of
O.E.E.C. and that they will expect to play their part in their solution. Indeed,
O.E.E.C. will soon be examining long-term problems and the report which is due
in October will deal with many of the issues which we shall be discussing in
Washington. We must play our full part in this O.E.E.C. operation. It should
be emphasised that, under the Convention of O.E.E.C., l;his body is not limited
to any fixed period, and that the United Kingdom Government has
subscribed to a recent resolution of the Council of the Organisation
that O.E.E.C. should continue beyond the end of Marshall Aid. There
is no doubt that there is suspicion in O.E.E.C. about the September
talks. This suspicion will naturally be increased if the tripartite consultation
is continued as we suggest above. It is for this reason that the
machinery must be kept as informal as possible. But provided that we do not in
any way diminish the role we play in O.E.E.C. or in any way give an indication
that we regard it as of lesser importance, we should take the line that this tripartite
consultation is designed to enable us to play a more effective role in
O.E.E.C. But it is essential that we should ensure that we have the full support
of the United States Administration in this.
33. We therefore recommend that, in seeking the continuation of the tripartite
discussions, we should make it clear that this will in no way diminish
the role we play in O.E.E.C. and that we shall expect United States support in
the line that it will help rather than hinder our contribution to European
recovery. 1
Position of the Commonwealth
34. For the reasons which are set out above we do not think that it would
be right to have Commonwealth participation, apart from Canada, in the continuing
tripartite discussions. But the extent to which we shall succeed in this
objective, while retaining the full confidence of the Commonwealth, depends on
keeping the other members of the Commonwealth fully informed both of our
policy and of our discussions in September and in the future, as they unfold.
The Commonwealth Finance Ministers noted with satisfaction that the September
talks were to take place and we must not do anything to diminish this satisfaction.
We have already been asked at the official level at. the Commonwealth Liaison
Committee what is the line we are proposing to take in September. We therefore
seek ministerial authority to inform the Commonwealth Governments of the
broad lines which we propose to take, to keep them informed of the discussions
while these are in progress, and to use existing channels of information, including
the Commonwealth Liaison Committee, to the fullest possible extent for this
purpose.
- SUMMARY OF RECOMMENDATIONS
I.—Objective of Talks (paragraph 1)
Our general objective should be—
(a) To secure that all three Governments will work together on a basis of
close co-operation in order to establish equilibrium in the balance of payments
between the dollar and the sterling and non-dollar areas on a permanent basis, at
a high level of trade and without the recurrence of crises.
The specific objective of the United Kingdom Government should be—
(b) To secure (a) with the highest standard of living for ourselves and
without threatening the maintenance of full employment here.
the immediate objective of the United Kingdom Government should be—
(c) To secure that the United States and Canadian Governments take certain
)ecific steps which, together with the steps taken by the United Kingdom
Government, will ensure that the immediate dollar crisis will be overcome.
I . - A c t i o n by the United Kingdom (paragraphs 9 and 10)
Detailed discussion on matters of internal policy, such as the size of Oovernlent
expenditure should be avoided. If asked, our representatives should
eaffirm our intention to take any steps necessary to combat any inflationary
jressure that may develop.
II.—Short-Term Measures by the United States and Canada (paragraphs 11-17)
We should press the United States and Canada on all the short-term measures
n CP . (49) 165 (a list is at Appendix A and an appreciation of their effect is
jeing drawn up—see paragraph 18) and in addition on—
Non-discrimination (paragraphs 15 and 16)!
Oil (paragraph 17).
IV.—Long-Term Policies (paragraphs 19-31)
(a) We should recognise that it will not be possible to reach conclusions on
long-term issues in the time available. Our objective should be to open them up,
get the maximum identity of view possible, and then lead on to the proposal for
continuous discussion at official level with more frequent Ministerial meetings
on the lines of recommendation (V) below (paragraphs 19 and 20).
(b) We should seek to place the long-term policies in the background of the
responsibilities of creditor and debtor countries (paragraph 21).
(c) The six main issues are :—
Full Employment (paragraph 23).
Restrictive measures taken by the United States (paragraphs 24 and 25)
to support domestic producers and block our means of earning
dollars, especially
tariffs,
agricultural support prices,
snipping.
United States and Canadian Foreign Investment (paragraph 26). '-
Sterling Balances (paragraph 27).
Commodity Questions (paragraph 28).
Dollar Price of Gold (paragraph 29).
Y.—Machinery for Continuing Consultation (paragraphs 30 and 31)
We should seek agreement on the need for more frequent tripartite meetings
of Ministers, with the corollary of the need for continuous discussion of these
matters by an informal group of officials of the three countries, to be established
on the basis proposed in paragraph 31.
Y I . - P o s i t i o n of O.E.E.C. (paragraphs 32 and 33)
We should not seek to minimise the importance of the Marshall Plan or
O.E.E.C., though we must make it clear that the Plan of itself cannot solve the
problems which face us, We should stress that we will continue to play our full
part in O.E.E.C. and seek to secure United States support for the view that these
tripartite talks will enable us to play a more effective role in O.E.E.C. We should,
on these grounds, resist any proposal for enlarging the tripartite talks by inclusion
of O.E.E.C. countries.
37507 D
Y I I . — P o s i t i o n of the Commonwealth (paragraph 34)
Further Commonwealth participation in the new proposed special machinery
would equally impair its effectiveness. It is essential, therefore, to keep the other
members of the Commonwealth fully informed of policy and of the discussions in
September and in future as they unfold. We should use existing channels of
communication, including the Commonwealth Liaison Committee, to the maximum
extent for this purpose. In particular, we ask for specific authority to give the
other Commonwealth Governments, and the Commonwealth Liaison Committee,
on which Canada is represented, the general outline of the policy which we propose
to follow in the Washington talks when it has been approved by Ministers.
APPENDIX A
SHORT-TERM MEASURES BY THE UNITED STATES AND CANADA
(paragraphs 11-14)
United States
(a) Administration of E.R.P. in a flexible manner which will ease the strain
on United Kingdom reserves: in particular E.R.P. financing of
Canadian wheat.
(b) Resumption and intensification of stockpiling purchases.
(c) Revision of United States policy on drawings from the International
Monetary Fund.
(d) More liberal use of the resources of the International Bank.
(e) More liberal administration of United States tariff.
(/) Reduction of proportion of synthetic to natural rubber to statutory
minimum.
(g) Loans from Export-Import Bank.
Canada
' (a) Active encouragement by Canada of United Kingdom and sterling area
imports, particularly as regards United Kingdom capital goods.
(&) Freer use of the Canadian credit.
(c) Canadian stockpiling of certain strategic raw materials.
(a) Co-operation in avoiding any liability on the United Kingdom to repay
Newfoundland^ interest-free loan.
(e) Easement of the arrangements for repayment of the 1942 interest-free
loan.
(/) Co-operation in evolving a scheme designed to relieve the United Kingdom
of the heavy drain of emigrant remittances to Canada.
APPENDIX B
NON-DISCRIMINATION '
In the short-term, this raises two problems.
First, Section 9 of the United Kingdom-United States Financial Agreement
is blocking the carrying out of the plan we have sponsored in O.E.E.C. for relaxing
import restrictions by means of Open General Licences, for the import of specified
commodities from specified countries. We have taken the line with the Americans,
as well as with the European countries, that we must be able to relax our restrictions
in favour not only of O.E.E.C. countries but of the rest of the sterling
area Commonwealth as well. This we cannot do under our existing understanding
with the United States, which allows us to discriminate to obtain imports we
genuinely need provided that the discrimination is concealed as far as possible,
since it is here a question of open discrimination in respect of a wide range of
goods, many of which we have no real need to import freely. We have had no
response so far from the Americans to our approaches on this point, and we have
told the sterling area Commonwealth countries that we are considering how far
we could meet the need to go ahead with the plan in the immediate future if the
United States remained adamant. This means in effect modifying our list of
relaxations so as to avoid in practice seriously damaging the interests of sterling
area Commonwealth countries, but still making good bur proposals to do our part
in a substantial relaxation scheme, with all the benefits we see in its train by
way of greater efficiency and scope for competition. We should, however, only
with the greatest reluctance accept a situation whereby this contribution on our
part to the effective working of the European trade exchanges was made at the
cost of our relations with the rest of the sterling area Commonwealth; and in
the first place, no sort of inkling should be given to the Americans that we have
even considered the possibility of not extending the relaxation to our partners
in the sterling Commonwealth.
No immediate new decision on policy is required on this point, but we have
to table our list of relaxations in Paris by 1st October. If, as this date approaches,
the United States authorities have still not come forward with some means of
removing the Section 9 obstacle, we shall have to make up our minds whether to
adopt one or other of the extreme" courses of (a) dropping the scheme entirely
(which would have the most serious repercussions on O.E.E.C. and E.R.P. aid),
or (6) going ahead with the scheme on a basis of general discrimination against
the sterling Commonwealth (possibly omitting a number of classes of goods so
as to reduce the practical damage to Commonwealth trade to very small proportions)
or whether to adopt some middle course.
Secondly, there is the discrimination we must commit in order to obtain
imports we really need ourselves. As indicated above, the United States have
accepted that this must be allowed on condition that we keep up a facade of
compliance with Section 9. So far, owing to high United States prices and
relative lack of interest on the part of United States producers in the United
Kingdom market, we have managed to keep up this facade without serious trouble;
and we can still hope to be able to do so so long as the. present interim standstill
on dollar imports lasts. Once, however, we carry out our re-programming,
we shall in all probability be compelled to make specific cuts on dollar imports
which will knock down this facade completely, or at least make obvious that it
is an entire sham.
This second difficulty would be eased, though not necessarily removed, by
devaluation, and this only provided that most other countries follow the lead
of the sterling Commonwealth. It is clear, however, that in the earlier stages
at Washington we must continue in any case to maintain that we are looking
for a favourable reply both on our own account and to enable us to go ahead
with relaxations of import restrictions by way of helping European trade.
The Canadians are formally in the same position on this problem as are the
United States, but we can be fairly confident that if the United States give way,
and to the extent that they give way, the Canadians will follow suit.
APPENDIX C
COMMODITY AGREEMENTS AS A MEANS OF INCREASING THE DOLLAR EARNINGS OF
THE STERLING AREA
(Summary of the Findings of the Working Party on Raw Material Prices)
Summary of Conclusions
1. This report discusses the individual primary commodities for which, on
the face of it, commodity agreements might be useful as a means of increasing the
sterling area dollar earnings, i.e., tin, rubber, wool, cotton, sugar, cocoa and
sisal. In the case of tin, Ministers decided on 22nd July (E.P.C. (49) 29th Meeting,
Minute 3), that a commodity agreement was necessary. It is proposed below
that the Americans should be urged to abandon their opposition to a tin agreement
and also to take certain other remedial action of a more immediate character. As
regards the other commodities, the general conclusion reached is that agreements
would not have the effect of increasing dollar earnings and, in most cases, would
have positive disadvantages from the point of view of the United Kingdom. Even
37507 D 2
if a rubber agreement could be negotiated, a proposal for one would probably wreck
our chances of securing better arrangements about the consumption of
synthetics (on which specific proposals for discussion with the Americans are
proposed). In the case of cotton and sugar, the dollar area itself is a large
producer; commodity agreements would not increase our sales to that area and
would have other disadvantages. The price of wool will probably have to fall
to ensure continued large sales to the dollar area, and there is no reason to suppose
that a commodity agreement would assist this process. In the case of cocoa and
sisal, it seems probable that prices and quantities can be maintained at their
present relatively high levels without any international arrangement.
The International Background
2. Possible commodity agreements need to be examined against the background
of international discussion of commodity problems and, in particular,
against the general rules governing commodity agreements which are embodied
in the Havana. Charter for an International Trade Organisation. These rules
prescribe, among other things, that there shall be adequate international study
of each commodity before an agreement is considered, that an agreement shall
be negotiated at a conference at which all countries may be represented, that
there shall be equal representation of producers and consumers on any body
administering a commodity agreement, that agreements regulating prices or
limiting production shall be concluded only when a burdensome surplus of the
commodity or widespread unemployment exists or is expected, and that such an
agreement should provide scope for a shift from high- to low-cost producers. The
United Kingdom has an interest in the trade of primary commodities both as a
consumer (of food-stuffs and raw materials for manufacture) and as a producer
by virtue of a common interest with the rest of the sterling area in earning dollars
for primary commodities and because of our direct responsibility for the economic
welfare of the Colonies, and it is therefore in our interest to observe these general
rules which are designed to hold the balance fairly between producers and
consumers.
Tin
3. Estimates of production, consumption and stocks made at the meeting
-of the International Tin Study Group in June, 1949, show that there is likely
to be a growing surplus of world production over commercial consumption in' the
next five years, and that the position is rapidly developing in which a commodity
control agreement is required. The United States, however, does not yet
admit that a burdensome surplus is in sight. The Study Group has set in
hand the preparation of a statement of the case for a commodity conference
together with a draft agreement and will consider them towards the end of this
year. However we cannot count On such an agreement being effective in under
two years from now, even if the negotiations are successful.
4. In 1948 our dollar earnings from tin were about £15 million (29,000 tons),
and about £13 million (23,000 tons) in the first half of 1949.
5. The Americans recently stopped buying, and the arrangement by which
the Ministry of Supply takes all Malayan production resulted in their accumulating
tin at the rate of 1,200 tons a week. The United States has
now resumed buying, but it is clear that the commitment by the Ministry of Supplyto
purchase the whole Malayan output cannot continue much longer.
6. The United Kingdom has in effect been supporting the world price of
tin for some time by buying up all Malayan production. In this process the
Ministry of Supply has accumulated about 15,000 tons (say about £8 million at
present prices) more tin than is considered commercially desirable. The Malayan
Government have suggested that in order to support prices at or about their
present level the United Kingdom should continue to buy all surplus Malayan
tin, for stockpiling purposes. This cannot be recommended, for financial reasons
and because the effect would be that the Dutch and Belgians would undercut
United Kingdom resale prices and secure most of the dollar markets for themselves.
The deliberate creation of a United Kingdom strategic stockpile cannot
be entirely ruled out, but there are financial objections to and no strategic
justification for the stockpiling of any. further significant quantities. Preliminary
consideration has been given to two possible courses of action to deal
with Chinese unemployment which would follow a falling off in demand, and are
now being further discussed. These are (a) a Malayan Government scheme either
to divert the discharged labour to public works or to provide unemployment
benefits; (6) a form of subsidy to marginal tin producers, possibly by some
alteration in the system of taxation, to keep them in production.
7. The following points should be put to the Americans :—
(a) It should be stressed that Malaya is in the front line of the cold war
and that its stability is essential for all of us, including the United
States. A stable and adequate price for tin is of the first
importance to Malaya. A drastic fall in the price would mainly
affect the Chinese producers whose costs are higher because they work
ground which cannot be worked by dredgers, and might throw out of
employment as many as 10,000 Chinese who might well find their
way into the Communist forces. Moreover, it would involve a loss
of revenue, since 16 per cent, of the revenues of the Federation are
derived from ad valorem duties on tin and there is no other way of
getting this revenue.
(6) Sales of tin are of great importance to the sterling area. The Americans
themselves cannot escape some responsibility for the present precarious
position, since until recently they have been pressing for increase in
production and maintaining that their stockpile would take care of
any surplus over the next four years. Now they have announced that
their stockpiling requirement for four years is 104,000 tons (which is
considerably less than the anticipated surplus).
(c) The Americans should be urged—
(i) To lift all their internal controls on the end use of tin immediately
(they are believed to intend this and may have done so by
September).
(ii) To conclude the bilateral agreements for stockpiling without delay
(if they have not already been concluded). Negotiations are
at present suspended owing to difficulties in Congress about
appropriations.
(iii) To consider urgently the possibility of increasing stockpiling purchases
of tin metal ' under these bilateral agreements
substantially above the figure of 104,000 tons at present
contemplated.
(iv) To enter into discussion with ourselves, the Dutch and the
Belgians, without further delay, about the date on which inter.
national tin allocation is to cease, the leng'th of warning to be
given and the methods by which tin will be dealt with thereafter.
(v) To change their attitude towards the need for a Commodity
Agreement, and support any reasonable proposals which- may
emerge.
(d) The Americans are suggesting that, when allocation ceases, supplies of
tin should still be denied to the Russians. The line should be taken
very strongly that, if the Americans are not prepared to absorb the
surplus, all producers must be free to sell where they like.
(e) We have been and are at the present time taking action to support prices
through Ministry of Supply purchases (see beginning of paragraph 6
above). (When decisions have been taken on the proposals mentioned
at the end of paragraph 6 above the Americans should be told what we
have in mind.)
Rubber
8. Rubber is one of the most important dollar earners. Unlike almost every
other commodity, natural rubber is now very nearly back to a pre-war price level
(having fallen in the last year from 22-80 cents a pound to 16-50 cents as cornpared
with pre-war 15 - 50 cents), in spite of increased costs of production. This
has a serious effect in Malaya which is even more dependent on rubber than tin.
The Commonwealth produces 57 per cent, of world supplies (mostly in Malaya),
the United States takes 45 per cent, of world supplies. Last year rubber earned
$200 million; this year earnings are running at about two-thirds of that. The
reasons for this fall are—
(a) A drop in the price of rubber (30 per cent, of the loss).
(b) A fall in United States imports (15 per cent, of the loss).
(c) Relative decline in United States imports from the sterling area in comparison
with Indonesia and Siam (accounting for 55 per cent, of the
loss).
As regards the last cause action must be taken elsewhere than in Washington,
since the Americans buy in a free market, but the. United States Government
could take action in regard to the synthetic rubber industry which would help to
counteract the first two causes.
.9. The origin of the synthetic industry was strategic, and it is still regarded
as having strategic importance. The United States Rubber Act requires the
President to ensure a minimum annual consumption of 225,000 tons. But last
year the United States consumed 442,000 tons of synthetic in addition to 627,000
tons of natural rubber. The Act expires next June. It is not recommended that
His Majesty's Government should seek to influence future aetion as regards the
Act itself, but it is proposed that they should attempt to persuade the Administration
to alter the regulations under the Act. The present regulations (known as
Order R. 1) make the use of specified proportions of synthetic rubber mandatory
in the manufacture of tyres and tubes, but not for any other purpose. Even in
this limited section of the industry the regulation is unnecessarily drastic, since
mandatory consumption on tyres and tubes in 1948 was more than 50,000 tons
in excess of the 225,000 tons required by the Act. In addition, there was a
voluntary usage of 166,000 tons for other purposes. Logically, therefore, it
would seem that the Americans could reduce the amount required to be used in
tyres and tubes to the difference between the 225,000 tons specified in the Act and
the actual voluntary usage. This would widen very considerably the field for
natural rubber and thus strengthen the price. Only a moderate increase in price
can be hoped for, since synthetic is selling for 18 - 5 cents a pound and it is doubtf
ul whether natural rubber will obtain a higher price, though we might hope that
it will obtain as much. The Americans should be urged to go as far in this
direction as they can. Reference might be made to the view recently expressed
by Mr. Shafer (a Republican who is considered the outstanding Congressional
authority on rubber) in the House of Representatives that either Order R. 1 should
immediately be suspended entirely, or that the amount required for mandatory
consumption should be substantially reduced. Our object should be to persuade
the Administration to permit the maximum competition between natural and
synthetic rubber that their legislation permits. Effective action on this might
make a material difference to our dollar earnings Over the next few months.
10. It would also be of assistance if the Americans could maintain their
purchases of natural rubber for their stockpile at a steady and high rate during
this period, particularly if some assurance could be given that stocks would not
be reduced without consultation with the producers of natural rubber.
11. A commodity agreement for rubber is not recommended. The chief
arguments against it are—
(a) The profound American dislike of rubber regulation. It must be
remembered that in the case of rubber (unlike most primary commodities)
the manufacturers have the power to counter any measures
they dislike because of the existence of an efficient and competitive
synthetic industry; this opposition would take the form of pressure
in Congress to prevent the Administration from entering an agreement
and to renew the Rubber Act next year in an even more restrictive
form. .
(b) The impossibility of enforcing, except in Malaya and Ceylon, a scheme
restricting production.
(c) The practical difficulties, in the case of rubber, of enforcing a price control
scheme without Government buying.
12. The primary object must be an increase in the area of competition
between natural and synthetic rubber. An attempt to secure a commodity agreement
(even if otherwise desirable) would almost certainly fail and would" destroy
such chance as we have of succeeding in this primary objective.
Wool . .
13. The price of wool is still three or four times the pre-war level, and
when, by the summer of 1950, the war-time stocks held by United Kingdom/
Dominion Wool Disposals Ltd. are virtually exhausted, the tendency will be for
prices to rise. On the other hand competition from synthetic textiles is encouraged
by the disparity in price, and it is likely that sales of large quantities of wool to
the United States during the next few years can only be maintained by a fall in
price. :
14. There is no reason to suppose that a commodity agreement would hasten
a fall in price. Moreover the conditions of surplus which, in accordance with
the provisions of the Havana Charter, justify a price fixing agreement are not
present. Finally, it is unlikely that the Commonwealth producers would favour
an agreement which would include the United States; indeed they are thought to
be contemplating some form of arrangement exclusively between certain producers.
Cotton ,
15. Of the quantities of cotton which enter into international trade, the
United States exports 40 per cent., Egypt 17 per cent., '"' other Africa " 11 per
cent., Brazil 11 per cent., Pakistan 7 per cent. Shortage of dollars has led to
concentration of buying from non-dollar sources, which (except in the Colonies)
has forced up the price of non-dollar American type cotton, as compared with
United States cotton, and created differentials ranging up to 15 per cent. This
is in spite of United States price support measures at about three times the
pre-war level.
16. Any cotton agreement which might be negotiated at the present time
would almost certainly have two results which would be unfavourable to the
United Kingdom, since non-dollar and non-sterling producers, such as Egypt,
would exploit their present strong position to fix prices at a high level, while the
United States would try to ensure for dollar cotton the largest possible
share of markets. As a result of pressure by Egypt for a commodity
agreement, the International Cotton Advisory Committee is now engaged in studying
methods of increasing consumption and methods of balancing production
and consumption, but we hope that this study will be prolonged and not lead to
definite proposals in the near future.
Sugar
17. It is important that Commonwealth production be increased, both from
the point of view of those Colonies economically dependent on sugar and also for
currency reasons, since Canada buys a large part of her requirements from the
Commonwealth, and this at present necessitates an import of sugar from hard
currency sources into the United Kingdom. His Majesty's Government have
already undertaken to find a market for total exportable Commonwealth
production until the end of 1952 and have just announced their intention to
undertake discussions this autumn about longer-term arrangements with
Commonwealth producers.
18. For currency reasons, however, there is already an impending surplus
of dollar sugar. The Cubans, in particular, who during the war increased their
production to twice its pre-war size, are anxious about the future and have been
pressing for a commodity agreement. Our primary objective is to preserve sufficient,
freedom for Commonwealth countries to expand their production and for the
United Kingdom and Canada to absorb it, and we should, therefore, neither
take the initiative in raising the question of an agreement, nor, if it is raised,
even admit that conditions yet exist for considering an agreement.
Cocoa
19. West African cocoa is sold through two producers' marketing boards,
which, until 1948, paid prices below the world prices and accumulated reserves
to cushion prices and for development work. In spite of American suspicions,
these boards are not Government monopolies, although informal consultations (to
which no public reference should be made) take place between the boards, the
Colonial Office and the Treasury, to ensure that they do in fact adjust quantities
and prices in a way which ensures maximum dollar earnings and reasonable
stability of prices. As regards the level of prices, the excess of demand over
supply, which is expected to continue, should maintain a high price. For these
reasons a commodity agreement seems unnecessary and, indeed, against our
interest.
Sisal
20. Sisal is essentially in a similar position to cocoa, in that demand tends
to exceed supply, prices are high (five times pre-war) and the growers are well
organised. The chief danger to the price and volume of sales in the case of sisal
is increased competition from other materials, but although this maybecome more
serious later it is not a significant factor at the moment. The negotiation of
an agreement on sisal now would tend to decrease our dollar earnings in the short
term without necessarily increasing them in the long term.
Additional Notes
21. It is possible that a proposal for a tin agreement might lead to United
States proposals for agreements on cotton or sugar. We should have to point
out that the difficulties in the case of cotton and sugar are primarily currency
difficulties limiting consumption. In any case, however, we should take our stand
on the principle embodied in Chapter VI of the Havana Charter, that the only
possible way to consider commodity agreements is singly, on the merits of each
commodity.
22. It is recommended that the subject of barter agreements should be
avoided if possible. Barter agreements on raw materials would tend towards a
net loss of dollars in the long run since they would tend to provide for acquisition
by the United States of strategic materials such as rubber and tin, without dollar
payment; in return for purchases by us of cotton and maize for dollars. While
these purchases would accelerate the rate at which the stockpile was accumulated,
they would not ultimately increase its size. On the other hand we should be
expected to take raw materials such as cotton and maize in excess of our minimum
, requirements.
23. A proposal was recently put forward by the United Kingdom Delegation
to the Interim Commission of the I.T.O. in Annecy for the provisional application
of the commodity chapter of the Havana Charter in advance of the Charter
as a whole. The proposal was rejected, principally because the United States
feared the effect on Congress. It has been suggested in the press and elsewhere
that this proposal was due to a desire on the part of the United Kingdom for
certain particular commodity agreements. This was not so, and, if the point is
raised, we should emphasise that our object was to have machinery ready in case
the need arose (and to secure that commodity agreements were dealt with by the
I.T.O. or its forerunner, and not the Food and Agriculture Organisation
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