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This idea which may be susceptible of manpabarot has such advantagestaat in spite of difficulties which we feel bound to
b¶662 set out, the efforts involved are well worth making.
3.
4.
It is obvious:-
(a) that the United States would expect a very considerable
corresponding sacrifice from the existing holders of sterling balances. But the sacrifice could not extend over the whole area of the balances since the external assets of the countries concerned are, to some extent, backing for their currency: it would therefore be necessary to exclude from any settlement by way of cancellation a reasonable amount to be used as a currency reserve and to provide in some way that these amounts could not be used to recreate the problem we are now trying to solve.
(b) Whether or not their balances are arbitrarily reduced,
it must be assumed that the external assets of the holders would continue to fall, i. e. they are likely to continue to run a deficit as long as they can afford to do so. There must, however, come a time at which they would in any case have to stop running a deficit: a whole new set of problems would arise if the effect of the scheme were substantially to advance that time or to reduce the currency backing below danger point.
(c) The swollen volume of United Kingdom trade with the
countries concerned and the employment dependent upon it would certainly fall. This is a necessary con- dition of increasing exports to more desirable market: but a sudden stop would cause great dislocation and consequent unemployment. Provided that a settlement is based on tapering off, as were the recent agree- ments with India and Pakistan, the adjustment for United Kingdom industry should and must be manageable.
Taking first the United States attitude, this will no doubt reflect the philosophy which led to Section 10 of the Financial Agreement of December, 1945. This had its origin partly in the feeling that, had Lend/Lease principles been extended over the whole of the sterling area, the great bulk of the sterling balances would never have arisen, and partly in the quite genuine feeling that a substantial alleviation was essential to United Kingdom recovery. Equally the Americans feared that, as indeed has happened, the easy spending power in sterling flowin from the existence of these huge balances would lead to great advantages for British exports to the countries concerned, at a time when dollar shortages would be restricting the field for American exports and so enabling us to establish ourselves more to their detriment. We can only guess what they would now think; but it is reasonable to suppose that they would expect any dollars placed by them at the disposal of holders of sterling balances to result in a diminution of the sterling balances by at least twice the equivalent of the dollars to secure an equivalent sacrifice (i. e. cancellation of £2 in exchange for £1 worth of dollars). Since they could not deal with the whole of the balances in this way, there would be a volume of sterling balances still remaining in the treatment of which they would demand a considerable say. It is almost certain that they would expect the holders and the United Kingdom to agree upon schedules of releases of the remainin sterling balances and might seek to add the proviso that amounts so released (possibly together with current sterling earnings) should be available in whole or in part for spending in any currency Brge 461 ofin621y, the amount of dolPage 460ofilable for the scheme would undoubtedly be strictly limited by Congress.
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