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THE PRIME MINISTER said that it was not clear to him what form such proposals should take. The advantages to be gained from a modification of exchange rates were debatable. As regards public expenditure, he would welcome any reasonable economies which could be made; but it should not be forgotten that a substantial part of our expenditure was incurred on defence, and the Americans had never shown any signs of willingness to see us reduce our defence commitments - indeed, their pressure upon us in this matter had been in the opposite direction. As regards production costs he could not accept the view that our export prices generally were non-competitive. For capital goods and engineering products we were still able to find markets in the Western Hemisphere: it was only in consumer goods that our prices seemed to be out of line with those of our American competitors.

In further discussion the following points were made :-

(a) The greatest single contribution towards the solution of the short-term problem would be the resumption of Economic Co-operation Administration (E.C.A.) financing of our purchases of Canadian wheat. This had been suspended because E.C.A. had feared that wheat might be declared surplus in the United States, with a fall in domestic wheat prices below the Canadian contract price of $2. In fact, however, this had not happened; and there was some hope that the United States Government might agree that E.C.A. dollars might again be made available for our purchases of Canadian wheat, at any rate up to the ceiling of 81.80, prescribed by the International Wheat Agreement. The Canadian Government had not given up hope of this - indeed they felt very strongly on the matter and it was most important that they should be persuaded to join with us in pressing the Americans to give a favourable decision on this point.

(b) The United States Government, while urging other countries to apply the principles of free trade, insisted on maintaining their policy of price support for American agriculture. Should it not be argued that what was fair for wheat was fair also for the primary products of the sterling Commonwealth e.g. tin, rubber, cocoa and wool ? Much of our difficulties could be met if the prices of these commodities could be maintained at reasonable levels.

(c) Public opinion in Canada and the United States tended to assume that our current difficulties were due to a drop in exports of United Kingdom manufactured goods to dollar markets, and further to assume that this was due to the high cost of those exports. In fact, our difficulties were more largely due to a drop in the volume and value of exports to dollar markets of primary products from the rest of the sterling area.. It would be useful if it could be brought out in the course of the Washington discussions (i) what proportion of our loss in dollar earnings was attributable to decreased earnings on primary products from the rest of the sterling area; (ii) what proportion of the dollar earnings of the sterling Commonwealth was represented by exports of United Kingdom manufactured goods, and (iii) within the total of United Kingdom exports, what was the proportion (e.g. of consumer goods) whose prices were not fully competitive with those of the United States.

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