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be sufficient, 179 and we would like to recommend that His Majesty's Government should declare, as a positive decision of policy, that:

(i) As a short-term measure Government expenditure is to be decreased forthwith (vide the Prime Minister's recent circular); the more precise and definite this can be, the better....

(ii) As a long-term policy the growth in Government expenditure is to be stopped and its level further decreased (defence expenditure must be an exception to this).

We recognise, however, that there would be difficulty in getting the new decision which would be required to this effect, in the time available.

14. As regards monetary policy, no announcement is needed, nor is any substantial action called for, but the situation would need to be carefully watched.

Short-Term Measures by the United States and Canada to help the United

Kingdom to tide over while Long-Term Issues are Settled

15. Ministers should be able, at the opening of the talks, to show that we have decided to apply the internal remedies which are within our own power. They would then be able to seek the assistance of the United States and Canada in supporting these remedies and in taking others in the external field which are not wholly within our own power. 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 thus 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.

16. 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 28 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.

17. 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 C.P. (49) 172, C.M. (49) 52nd Conclusions, Minute 2, and Ottawa telegram No. 943 of 16th August). The remaining matters specified in C.P. (49) 165 do not require any legislation. These are, as 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.

It is not endokse by the+MikiNQZ who submit the draft brief for the Cabinets consideration24.

* This paragraph represents the views of the officials by whom this draftbrief has been

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But in the But even in these cases it must be remembered that the latitude, which the Adminisation will allow itself will be tempered by Congressional views and public opinion.

18. 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 Č.P. (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 were not dealt with in C.P. (49) 165. These are non-

discrimination and oil.

Non-Discrimination

19. 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.

(b) 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.

20. 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 of 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

21. 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 ever 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 38tion or discrimination against Amerif 3anywhere 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 consump- tion 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 21 tons. Moreover, the British oil companies will have, even in 1949-50, oil which is surplus to their present commitments. While non- discrimination 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. More- over, 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 British- controlled 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, there- fore, 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

22. 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 Wash- ington. The major factor will be a restoration of confidence, the effect of which it is impossible to quantify.

Long-Term Policies

23. 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.

24. It will not be impossible during the few days of the Ministerial confer- ence 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.

25. 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 such 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 the cone of the responsibilities of creditegand detor nations which were given such great emphasis during the recent discussions with the

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Commonge3th Bfrance Ministers. (Annex to C.PP(ag) BHU, Sécbfon 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.

26. 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.

(b) Restrictive measures taken by the United States to support domestic pro-

ducers and to prevent earning of dollars by other countries.

(c) Foreign investment by the United States and Canada.

(d) Sterling balances.

Commodity Agreement for Tin (and points on other commodities). Dollar price of Gold.

Full Employment Policy

27. 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 com- mitted 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 President's 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

28. 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 measure of

92 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 16 above, action by the United States even under the Reciprocal Trade Agreeme8fs 3Aet would not become effective in much less than Aghteen

months from now.

29. 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

30. The next question is that of United States and Canadian foreign invest- ment. 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-

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(a) to reconsider such legal and technical obstacles to private lending as may exist, e.g., through the regulations of the Securities Exchange Com- mission in the United States and any similar requirements which may exist in Canada;

(b) 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 public agencies may be kept amply supplied with funds for lending (which is clearly recognised by the Governments concerned as essential) without hampering the beneficial employment of these funds through undue restrictions and precautions. We can emphasise that a restric- tive 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

31. This matter will certainly by 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

a

and the holders of sternal and economic one, both for the United Kingdom

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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

32. Ministers have already decided that a Commodity Agreement is neces- sary in the case of tin. It will be necessary to persuade the Americans to with- draw 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 rubber, 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

33. Since 1939 the costs of gold production, like all other costs, have increased but the dollar price of gold has remained unchanged. There has there- fore 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 Govern- ment 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 indica- tions 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.

It should be added 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

34. 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 American 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.

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35. If this can be generally agreed, we consider that the constitution of the informal group of officials should be governed by the following considerations.

(2) The officials should be of high rank and this work should have first call

on their time.

(b) Their rôle should be advisory, with power to consider fully and frankly

all subjects bearing on the economies of the three countries. They should deal not only with current matters but also th trends and

developments in the future.

Page

(d) Their work and their reports to their Governments must, therefore, be

treated in the strictest confidence.

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(e) We should not add representatives of other countries as the success of thiagrons will depend upon its being small. (Fromane protoof6jew, 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.).)

Position of O.E.E.C.

36. 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., this 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 consul- tation 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 rôle 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 tri- partite consultation is designed to enable us to play a more effective rôle 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.

37. We therefore recommend that, in seeking the continuation of the tri- partite discussions, we should make it clear that this will in no way diminish the rôle 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.

Position of the Commonwealth

38. 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 con- tinuing 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 lofgrade and 66ithout the recurrence of crises. Page 380 of 662

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of the United Kingdom Governments 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.

II. Proposals for Action by the United Kingdom (paragraphs 10-14)

.

(a) Before Ministers leave for Washington a decision should be taken on the form and timing of any announcement about reductions in Government expenditure. Any announcement should be so timed as to avoid any suggestion of United States or Canadian pressure. An announcement on the basis of existing policies, which must necessarily exclude any reference to a five per cent. cut, would be not worth while unless it were made in the context of a fixed determina- tion on the part of His Majesty's Government to halt the automatic growth of Government expenditure.

(b) The officials responsible for the preparation of this draft brief doubt the adequacy of an announcement on the lines of (a) above and recommend that His Majesty's Government should declare, as a positive decision of policy that-- (i) as a short-term measure Government expenditure is to be decreased forth- with (vide the Prime Minister's recent circular); the more precise and definite this can be, the better;

(ii) as a long-term policy the growth in Government expenditure is to be stopped and its level further decreased (though defence expenditure must be an exception. to this.

The officials recognise, however, that there will be difficulty in getting, in the time available, the new decision which would be required for this purpose.

(c) Á decision on what can be said about the Investment Programme should await consideration by Ministers of the report of the Investment Programmes Committee.

III.—Short-Term Measures by the United States and Canada (paragraphs 15–21)

We should press the United States and Canada on all the short-term measures in C.P. (49) 165 (a list is at Appendix A and an appreciation of their effect is being drawn up see paragraph 22) and in addition on-

Non-discrimination (paragraphs 19 and 20). Oil (paragraph 21).

IV. Long-Term Policies (paragraphs 23-25)

(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 23 and 24).

(b) We should seek to place the long-term policies in the background of the responsibilities of creditor and debtor countries (paragraph 30):

(c) The six main issues are :-

Full Employment (paragraph 27).

Restrictive measures taken by the United States (paragraphs 28-29) to support domestic producers and block our means of earning dollars, especially

tariffs,

agricultural support prices, shipping.

United States and Canadian Foreign Investment (paragraph 30). Sterling Balances (paragraph 31).

Page 38mmodity Questions (paragraph 32).

Dollar Price of Gold (paragraph 33).