with the non-sterling world, coupled with the deficit of the other sterling area countries (R.S.A.) with the non-sterling world, which they finance by buying dollars and other currencies from us. The following shows how the loss of reserves arose up to the end of the first quarter of the year: —
TABLE 2.-Transactions with Non-Sterling World
2nd half, 1951 (Quarterly rate)
£ million
1st Qtr.,
1952
United Kingdom-
Imports
616
545
Exports and re-exports
361
383
Invisibles (net)
45
9
Current balance
-300
-171
R.S.A. balance (i.e., sales of foreign
currency to R.S.A.)
96
32
Total current deficit
-396
-203
Capital transactions*
:
122 (i.e., net borrowing) 274
24
(i.e., net repayment)
227
Loss of gold reserves
*E.P.U. credits, change in liabilities to non-sterling countries, &c.
6. Thus, the combined current defict of the sterling area with the non-sterling area fell from an annual rate of nearly £1,600 million in the second half of 1951 to an annual rate of £800 million in the first quarter of this year. It has probably fallen further in the second quarter, though not by very much. The check in the loss of gold reserves since the Budget is attributable almost entirely to two special factors: --
(a) Our debtors have been paying their bills, and this has probably been worth about £50 million in the current quarter. This once-for-all gain pre- dominantly resulted from the 4 per cent. Bank Rate and the restrictions on overseas credit.
(b) We have been receiving substantial amounts of Defence Aid; we have already had £40 million since March and hope to receive £69 million in all by the end of June.
7. Thus, whilst the sterling area position has greatly improved, and the respite for the reserves has given an invaluable breathing-space, the underlying deficit is still very large, particularly in relation to the size of the gold reserves.
8. It is too early to make an accurate comparison of what is happening in the first six months of this year with what was expected earlier. The estimate for the year 1952 prepared by Ministers last October, before cuts, would have implied a current deficit with the non-sterling world of £378 million in the first half-year. Our present estimate of the out-turn for the first half-year is £395 million, excluding Defence Aid. In spite of all the action taken since, both by Her Majesty's Govern- ment and by the other sterling area countries, the total deficit is greater than was previously envisaged on the basis of then existing policy.
9. On the United Kingdom side, imports have been higher than expected; the November import cuts of £300 million a year were applied fully-the January and March cuts were not expected to affect the first half-year much-but the original estimate of the level of imports without cuts was certainly too low; consequently, although non-sterling imports in the first half of this year may be as much as £400 million a year less than in the second half of 1951, they have fallen less rapidly than was hoped. This incidentally means that stocks of food and raw materials are now in a healthier condition than was previously expected. The value of exports has been much the same as expected (but the total in the past half-year has been swollen by the sale of material stocks to United States); the invisibles have been worse, and the rest of the sterling area has fared worse (largely because of the falls in commodity prices).
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Page 171 The Dollar Gap in the Second Half of 1952