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Printed for the Cabinet. September 1949

The circulation of this paper has been strictly limited. It is issued

Sir Norman Brook

for the personal use of

TOP SECRET

C.P. (49) 191

20th September, 1949

CABINET

Copy No.

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THE WASHINGTON DISCUSSIONS, 7TH-12TH SEPTEMBER, 1949

MEMORANDUM BY THE CHANCELLOR OF THE EXCHEQUER

1. Before landing from the Mauretania the Foreign Secretary made a long statement to the Press setting out the problem and the objectives concerning our visit, and this had the effect of rendering the Press most helpful during the rest of our visit. On arrival in Washington we held a meeting of the seven* Ministers, together with the British and the Canadian Ambassadors, and constituted ourselves a Steering Committee. No officials were present and no notes were taken of any of the meetings. This arrangement enabled us to have not only very confidential, but very frank discussions. We called in to our discussions any additional persons who were required on particular topics. Mr. Douglas and Mr. Harriman were, in fact, present most of the time, except when we were discussing exchange rate problems, and Mr. Willard Thorpe and Mr. Martin a good part of the time.

2. At the first meeting (7th September) I made a prepared statement as to the foreign exchange rates of sterling, a copy of which is attached as Appendix A. This was very well received by both the United States and Canadian representa- tives and undoubtedly had the effect of creating a good atmosphere. We then proceeded to discuss an agenda and decided to set up a number of working groups to deal chiefly with shorter-term problems, leaving the more difficult and important matters to be discussed by Ministers. The matters dealt with by the working parties were

(1) Commodities and stockpiling.

(2) Economic Co-operation Administration (E.C.A.) eligibility.

(3) Overseas investment.

(4) Customs procedures.

These working groups all reported on the Saturday morning (10th September) and the substance of their reports was included in the Joint Communiqué. Copies of these reports will be circulated to the Departments primarily concerned.

3. On the Wednesday afternoon (7th September) a plenary session was held ut which a large number of officials were present from all the countries, making about 50 in all, at which introductory statements of welcome were made by the United States Ministers and responded to by myself and the Foreign Secretary and the Canadians. The first real discussions started on Thursday morning (8th September) and lasted throughout the afternoon and Friday afternoon (9th September), and were resumed on Saturday morning (10th September), and the Joint Communiqué was finalised on Monday (12th September). The ten main subject matters discussed are set out in paragraph 7 of the Communiqué, which * Mr. Acheson, Mr. Snyder, Mr. Hoffman, Mr. Lester Pearson, Mr. Abbott, Mr. Bevin and myself.

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is attached as Appendix B. Of this, as already stated items 1 were dealt with by working parties. I can, I think, best deal with the Ministerial discussions by reference to various paragraphs in the Communiqué.

4. The first two paragraphs demonstrate the agreement that was arrived at as to the common objectives, and also that any solution of the problems must entail action by all three countries. There was no question of that solution being the responsibility of ourselves alone.

5. Paragraph 3 shows the agreement upon the problem and upon the necessity for continuing efforts by all three countries if there was to be a solution.

6. Paragraph 4, which was put in at the request of the United States Secretary of State, and was not greatly welcomed by the Canadian Finance Minister, is an acknowledgment that the action we have taken in cutting down dollar imports is essential and is recognised as such by the three Governments The reason for this insertion was that the United States Secretary of State wished it to be made quite clear that we were going to adhere in the full to the economies which we had already put forward to the House of Commons.

7. Paragraph 6, which deals with the longer-term solution, has an important final sentence to the first section, and was written in the light of the knowledge that we were going to change the dollar exchange rate of sterling. It was inserted at our request and in order to make clear that no steps must be taken to counteract our efforts to enter and remain in the United States' and Canadian markets. The second section of the paragraph deals with the positive steps to be taken by the United States and Canada to assist our import of commodities into those markets and provides the argument that the Canadians and Americans will use in their own countries for freer markets.

8. The summary of the reports of the working groups is in paragraphs 8-10. So far as foreign investment is concerned, it will be seen from paragraph 8 that the President's Committee for Financing Foreign Trade (which is under the chairmanship of Mr. Winthrop Aldrich) is to explore the possible lines of co-operation for external private finance from the United States. I had

talk

on this matter with Mr. Aldrich after he had been asked to act, and he will shortly be in this country with a view to discussing exactly how the investigations of his Committee should proceed. We stressed the necessity for United States private enterprise to act in an enterprising manner and not to require absolute guarantees of every kind before making investments abroad. The group on commodity arrangements and stockpiling were successful in arranging for the United States to modify the Executive Order relating to the consumption of synthetic rubber, thereby opening a wider market to natural rubber. The United States represen- tatives said that they were prepared to review their stockpiling programme and hoped to be able to expand it in tin and other materials besides rubber, but for the moment this is held up as Congress has not yet passed the appropriation for stock- piling and the Defence Ministry have not yet decided upon their programme of purchases. I mentioned this to Mr. Louis Johnston when I saw him and expressed the hope that the Defence Ministry would not hold matters up unduly. He was very friendly and co-operative. The United States Ministers expressed themselves as being ready to proceed with the preparation of a tin commodity agreement, though they did not wish this expressly mentioned in the Communiqué.

9. In paragraph 10 the eligibility of articles for E.C.A. aid is dealt with, and in this a very considerable improvement has been brought about. The actual extra list that was drawn up amounts to nearly 300 million dollars including particularly 175 million dollars for Canadian wheat. In order to assist the Department of Agriculture in giving their approval to E.C.A. purchasing Canadian wheat with off-shore dollars we agreed-

(a) to purchase up to 10 million dollars' worth of agricultural surpluses of

various kinds, and

(b) to purchase 30 million dollars' worth of United States wheat at the world price some time during the course of the next twelve months.

It was on this understanding that Mr. Hoffman took the chance, against the advice of his legal advisers and against the advice of the legal advisers to the Department of Agriculture, of promising to include in the E.C.A. list the purchase of Canagan heft662the extent of 175 million dollPage He5a66eured for his policy the support of the three leaders of the Farm Lobbies, to whom I subsequently wrote letters of gratitude for their help.

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10. Paragap7610deaf with the question of Customs Praged57es. Offe are being satisfactorily dealt with by the United States Government and though legislation will be required in some cases, good progress is being made in the administrative sphere. They have promised to proceed with this as rapidly as possible and to promote the legislation as soon as it is practicable. The state- ment in this paragraph as to tariff rates is, of course, immensely important. Though the United States Ministers recognise that it would be desirable to have a unilateral lowering of United States tariffs, they stated that this was impossible and that if they were to make any such proposals to Congress it would undoubtedly result in the raising and not the lowering of tariffs. The best that they could do was to seek to get the Reciprocal Trade Agreements Act passed and to operate under that. They did not despair that, if the campaign which they proposed to carry out publicising the necessity for the United States adopting a true creditor attitude succeeded, they might be able, possibly some time next year, to act unilaterally.

11. Paragraph 12 deals with the question of the liberalisation of inter- European trade, which really, of course, turns upon the non-discrimination clauses of the Anglo-American and Anglo-Canadian Financial Agreements. The view set out in the last sentence but one of the paragraph is intended to prepare the way for pressure upon Senate and Congress Leaders to agree, without legisla- tion, to the practical abandonment of Section 9 so far as European trade is concerned. Nothing further was stated in the Communiqué as it was thought that, after we had changed our exchange rates, it would be much easier to convince the Senate and Congress Leaders that the abandonment of Section 9 would have no effect on United States economy and could therefore quite easily be done. The last sentence of the paragraph was intended to assist the Americans and Canadians in their arguments to their own people, emphasising that if the circumstances changed so as to make discrimination unnecessary, there could be a review in which they could urge the abandonment of any discriminatory practices by us.

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12. Paragraph 13 deals with sterling balances. We had a full discussion of this and I made a statement as to the reasons for the action we had taken in releasing sterling balances. I think I convinced both the Americans and Canadians that this matter could not be dealt with apart from the question of capital investment and capital development in such countries as India and Pakistan. This is made clear in sub-paragraph (c) and it was agreed that this rather complicated subject matter should be discussed fully, the countries concerned being called in as necessary to join in those discussions. These discussions are, I hope, proceeding now in Washington.

13. Paragraph 14 deals with petroleum and shipping. So far as shipping is concerned all the American Ministers who were present were fully in agreement that the present practices as regards the shipping subsidies by the United States, which are now said to amount to $350 million annually, were quite indefensible and most undesirable. On the other hand, they made it clear that the shipping Lobby was so powerful that it would be quite idle to make any direct attack upon it. They are, however, hopeful that if their general line of propaganda as regards America behaving as a creditor country is successful, they may be able to make some improvement upon this shipping position. For the present, however, nothing can be done.

14. So far as petroleum is concerned, we had a discussion on this at which I outlined the problems with which we were confronted and the Americans pointed to the complaints of the American companies that we were keeping them out of certain markets. We agreed to appoint a working party to go into the whole of the petroleum matter to try and clarify the issue on both sides, which should then be presented to the Ministerial group for some directive as to possible lines of solution. The matter could then be pursued by a joint official working party sitting in Washington. It may be that such a working party would be able to report to the Minister, including the Foreign Secretary, before he returns.

15. Paragraph 15 deals with the Continuing Organisation. This is made as innocuous as possible as there is a great fear in the United States of unlimited proliferation of organisations of this type. The idea is that there should be a committee, consisting of the three United States Ministers, the8fwa Canadian

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Ministers7 purf Ambassador and any Minister who happens to be in the United States or goes there specifically for the meetings, which can meet when matters are ready for Ministerial decision, but as a normal matter the board will meet at the official level with alternates who will be persons of first-class standing. We propose to send such a person to Washington in order to devote his whole time to this matter under the control of the Ambassador. The latter part of the paragraph was intended to remove any fears that the other European countries might have that we had been coming to arrangements which would be antagonistic to their interests.

16. Paragraph 16 was inserted in order to show that we anticipated that if the same spirit of co-operation could be continued in the future, we should be able to find the way out of the sterling-dollar difficulties.

17. The major gain of these meetings is not, I think, to be found in the precise and detailed matters agreed upon, though these are in themselves matters of great value and importance, but rather in the acknowledgement by the United States and Canada-

(a) that the steps we have already taken were necessary, e.g., the cuts in

dollar imports;

that the dollar-sterling problem was their problem as well as ours;

(c) that they must henceforward behave as creditor nations if the problem

is to be solved, that is

(i) they must invest abroad;

(ii) they must reduce tariffs and remove other impediments to

imports;

(iii) they must get rid of all devices to protect and subsidise their own

trade or services in competition;

(d) that they must do their utmost to help us and all non-dollar countries to

earn dollars for the sake of their own exporters.

It is this new friendly and co-operative atmosphere that augurs well for the future.

18. The reaction of our Canadian and American colleagues to our announce- ment of the change in the dollar rate of sterling was excellent, and as will be seen from Appendix A we made it clear that we wanted a promise from them not to counteract the hoped-for advantages of our action by the raising of tariffs or the reduction of the value of the dollar.

19. Though they could not of course bind themselves not to take any such action they made it clear that it would certainly be no part of their policy or intention so to do, and the words inserted in the Communiqué (particularly in paragraph 6) make this clear and were put in for that purpose. Similarly, the reception of our action by the Monetary Fund and by the United States Govern- ment preclude the United States Administration substantially from taking any retaliatory action.

20. We were satisfied that we had got as much as was possible by way of promise not to act so as to cut down or cancel out the effectiveness of our change in the rate.

21. I attach as Appendix C a telegram just received from our Ambassador in Washington giving his view on the talks, and as Appendix D a telegram from Sir H. Wilson Smith.

Treasury Chambers, London, S. W. 1,

20th September, 1949

R. S. C.