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DRAFT 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

pay- ments 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 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;

(b) 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 our- selves 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 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;

(f) that on the basis of present United Kingdom policies they cannot, there- fore, 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 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 Page 371economy can be restored.

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4. These auments tabe refuted, in general and in detail. Page 37ss §62

essary 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 converti- bility 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's 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 Administration 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, thatgit 37 yeof 6ely that the attitude of the United Bates3 Minist662 in the forthcoming discussions will be to sit back and not make any suggestions

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themselves, unless and until they are satisfied that this country is determined to

66 do everything 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, particu- larly 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. The right line, in our view, is therefore to consider whether we cannot, by actions decided on before the Conference, create the conditions which would enable United Kingdom Ministers to discuss immediate and long-term problems with the United States and Canada as matters of common concern between partners.

9. Such action as we ourselves decide upon should not, of course, be regarded as concessions to the United States and Canada. They should not be spoken of as such, and they are not matters for negotiation or bargaining. They should be steps which we take of our own accord, in our own interest and in the common interest.

Proposals for Action by the United Kingdom

10. 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 (C.P. (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 (b) 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

this subject will shortly be submitted by the Investment Programmes Committee.

11. On the basis of existing policy, a public announcement at this stage would cover the ground of (i) (a) and (b) in the succeeding paragraph. As regards (ii) (the Investment Programme) a decision on what can be said should await consideration by Ministers of the report of the Investment Programmes Com- mittee. Nothing can yet be said about (i) (c).

12. We doubt whether a statement on these lines would have sufficient impact either on conditions here or on the talks in Washington, and we think that no public announcement about Government expenditure would be worth while unless it was made in the context of a fixed determination of the part of His Majesty's Government to halt the automatic growth of Government expenditure.

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*13. For our part, we doubt whether action on these lines would be sufficient,