10. At the end of June, the gold reserves will probably be slightly below £600 million. We must assume that we shall by then have exhausted the effects of the first of the factors which have recently favoured us--the collection of overdue bills. Indeed, the "confidence " factors are at least as likely to work against us as for us.
11. The plan announced by the Chancellor in the Budget was (a) that the United Kingdom should be in current balance with the non-sterling world (including Defence Aid) in respect of the second half of 1952 and (b) that the other sterling area countries should be in surplus (a target of £100 million had been agreed at the Commonwealth Finance Ministers' Conference). It had been hoped that this plan would permit a beginning to be made with the rebuilding of gold reservės, if con- ditions were favourable, and would leave some margin for unfavourable contingencies.
12. Our present estimates suggest that we are far from carrying out this plan. The following table sets out the prospective sterling area situation in the second half of 1952:
TABLE 3.—Sterling Area Balance of Payments: 2nd Half 1952
£ million
Non-sterling world
United Kingdom-
Rest of sterling area
Total
Imports
921
578
1,499
Exports and re-exports
730
625
1,355
Overseas Government expenditure Invisibles (net)
53
68
121
+3
+208
+ 211
Current balance
--241
+187
54
Defence Aid
115
115
Current balance (including Defence
Aid)
Debt redemption, &c.
R.S.A. balance
Total non-sterling deficit
...
-126
+187
+61
31
20
--177
:
13. These estimates are based upon present policies (including the November, January and March import cuts) and generally assume present commodity prices. They do not include any element for sale of armaments abroad, except where this is normal" export business, and they, of course, take no account of any decisions which Ministers may take on economic policy, arising from the series of papers now under consideration.
66
14. The United Kingdom total imports and exports (together with invisibles) are not far from balance. But this does not help much. The large surplus with the other sterling area countries is absorbed by capital commitments, e.g., repay- ment of sterling balances, long-term investment, &c. What is primarily relevant to the gold reserve is the sterling area's total deficit with the non-sterling world.
15. The underlying deficit with the non-sterling world is expected to improve in the second half-year. There is no new deterioration implicit in these estimates. In the first quarter of the year the current deficit of the sterling area (Table 2) was at an annual rate of over £800 million; in the second half of this year, excluding Defence Aid, the annual rate of deficit should be little over £500 million a year. This is a big improvement. The trouble is that the rate of improvement, both here and in other sterling area countries, is not nearly fast enough to save the gold reserves from exhaustion:·
TABLE 4.-Progress Compared with Target
Deficits with non-sterling
world
United Kingdom current
Defence Aid
R.S.A.
Total*
2nd half 1951
--599
1st half
1952
-291
.-192
· 69 -104
-791
-326
£ million 2nd half, 1952 Estimate target -2417 zero
115
20 +100.
-146
+100
* These exclude United Kingdom debt redemption and long-term investment in non-sterling countries (61 in the second half 1951, 5 in first half 1952, 31 in second half 1952). These are equally charges
The reserves and are therefore included in Table 3.
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Page 172 We are likely, on present policies, to be about £250 million short of the target. Both the United Kingdom and the R.S.A. are responsible for this. We cannot rely on the R.S.A. being able to do better than is shown here even if they take new action quickly; they were slow off the mark, but nevertheless the estimates show a speedier reduction in their non-sterling imports than in ours.
The Loss of Reserves
17. The non-sterling deficit, current and capital, is put at around £175 million for the second half-year. This deficit, if allowed to take place, will almost certainly be reflected in an equivalent loss of gold reserves. Indeed, the loss of gold reserves may well be greater than this (as it was in the first quarter of the year), partly on account of "confidence" considerations and partly because surpluses with certain countries will be reflected, not in a gain of gold, but in reduction of their sterling balances or a refusal to make remittances to British creditors. We no longer have any credit on which to draw in the European Payments Union, from which we have drawn £61 million this year, and we must reckon on having to pay cash throughout the world.
18. It must be emphasised, moreover, that whilst these are the best estimates which we can make, there is a very great range of uncertainty. The sterling area's transactions with the rest of the world are not far short of £10,000 million a year; even if we could forecast the outcome of these transactions within 21 per cent. on either side a remarkable achievement-the margin of uncertainty would be £125 million on either side of an estimate for a half-year. This is a very moderate margin, for there are many unpredictable elements, such as the Indian monsoon, or the actions of the United States Congress, which can affect the deficit by scores of millions of pounds. The estimated loss of reserves could more properly be stated to lie between £50 million and £300 million. With reserves of less than £600 million, this emphasises the narrowness of the margins on which we are working.
19. It is almost certain that a fall in reserves of around £175 million would lead to a major loss of confidence and a sterling crisis. It may be reasonably hoped that the gold reserve announcement at the end of June will be received without loss of confidence; but if it is found as the summer proceeds that the loss of gold has begun again, and in particular if the next announcement at end- September reveals a significant loss and not a gain of gold, the prospect will be grim.
20. Drastic action by the United Kingdom is therefore indispensable. The possibilities of action outside the field of United Kingdom imports are beyond the scope of this report; such action would obviously have to become effective very quickly in order to affect the situation before the end of 1952. It must at the same time be pointed out, however, that United Kingdom imports constitute only about 20 per cent. of the total transactions between the sterling area and the rest of the world; we cannot expect to solve the balance of payments problem solely by repeated cuts in United Kingdom imports.
21. In the supplementary note attached to this report, we have examined the scope for reductions in non-sterling imports in the second half-year. We have considered how far they are covered by contracts and commitments which cannot readily be avoided. We found that commitments have already been made for about 65 per cent. About 121 per cent. of our non-sterling imports are uncontrolled (and, of course, substantial private commitments exist in these). In the remaining 221 per cent. (about £210 million) no commitments have yet been made. We have considered the individual items in these categories in order to establish the impli- cations of stopping purchases in terms of food consumption, industrial activity, commercial relations, and so on.
22. There is still scope for import reductions in the second half-year which would not involve such drastic repercussions (internal and external) as to self- defeating for the balance of payments, but it is clear that serious limitations emerge at a fairly early stage. Where the crucial point lies is a matter of individual judgment, but it can certainly be said that it would be impossible to cover the whole £175 million "gap" by import cuts without most damaging repercussions.
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