CAB129-52 — Page 76

The Need for a Surplus

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4. Our cash position is lamentably weak. In six months the gold reserves have fallen from £1,050 million to £590 million. They are now so small in relation to our short-term debts and in relation to the amount of international business which we transact that a further substantial fall would certainly lead quickly to open crisis.

5. We must therefore conduct our affairs so that we do not risk losing reserves. This must continue until we have built the reserves up, and have strengthened our external capital position generally.

6. It follows that we have to attain a large surplus in our current balance of payments-i.e., a large surplus of exports (visible and invisible) over imports and overseas Government expenditure. We no longer have the cushion of reserves to meet the inevitable ups and downs in our trading position and that of our sterling area partners; our own trading position must be strong enough to enable us to do without it.

7. This task is made much more difficult by the external capital commitments described in paragraph 6 of C (52) 166. We need a large surplus to meet these alone-contractual repayment of debt and necessary overseas investment are about £200 million a year, and on top of this we have contingent liabilities to repay debt (if our creditors call for it) which can amount to very much bigger figures. These commitments are just as real as imports--if we do not pay for them by exports, we lose gold. Some indication of the possible scale of all these is shown by the experience of the first quarter of this year. Our deficit on current account was not very large, but the capital commitments took nearly £200 million in the three months, so we lost £227 million of gold.

8. A large surplus on current account, year in and year out, is therefore indispensable. I cannot say how large a surplus we should need to avoid the risk of periodic open sterling crisis. For the purpose of this paper, I have assumed £300 million a year--but as £200 million of this is already bespoken for contractual debt repayment and overseas investment (almost all in the Commonwealth), which are virtually certain to arise and are in effect a regular addition to our import bill, there is only a tiny margin for contingent commitments and reserve-building. Even if we could regularly attain a surplus of £300 million, we should still be running sizeable risks.

9. For the United Kingdom to pay its way therefore requires a United King- dom surplus on current account of at least £300 million a year-and in certain circumstances even this would not be enough.

The Sterling Commonwealth

10. The behaviour of other sterling area countries is vitally important. They are our chief creditors (we owe the Colonies over £1,000 million). The adequacy or otherwise of a United Kingdom surplus depends upon whether they are pros- perous or not. If they are failing to pay their way, the strain is thrown on us. In the last nine months, they have failed to pay their way by over £500 million. They have therefore had to draw on their reserves (i.e., the sterling balances), so that in effect we have had to repay debt. For India, Pakistan and Ceylon, the extent to which they are entitled to do this is contractually limited, but for the rest there is an indefinite contingent liability upon us—which has cost us £500 million of gold and exports since last June.

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11. If they pay their way, these contingent liabilities do not arise. At the Commonwealth Finance Ministers' Meeting in January, I sought to persuade them of the need that they should pay their way. They have responded, and their situation should improve considerably in the next few months. But they are not so strong that we can expect them over a period of years to stand on their own feet; they depend upon a very narrow range of export products, many of which are very vulnerable to synthetic substitution and the vagaries of world demand, and most of them are trying to carry out development programmes which are in excess of their unaided capabilities. They have sterling reserves available, and they will have to use them some time. When this happens, the burden is thrown on us-either on the gold reserves, or on our export resources. I shall continue to press them to pay their way, but we cannot rely upon their ability or in some cases their willingness-to do so. Least of all can we rely upon them to support Page to ease our problem.

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