CAB129-52 — Page 77

Page 77. of 200

The Immediate Crisis

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12. The rapid worsening of the situation in the second half of last year was due to the combined effect of the appearance of large deficits in the United Kingdom and in the other sterling area countries. In the second half-year the combined deficit was £777 million:

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Current Deficits.

Non-sterling Sterling

Total

area

area

2nd half 1951—

(£ million)

United Kingdom

-599

Rest of Sterling Area

- 178

+171

- 171

-428

- 349

Total

-777

-777

13. In the first quarter of this year, the deficit has been greatly reduced:-

1st quarter 1952—

United Kingdom

Rest of Sterling Area

Total

-

-171

32

+136 -- 136

35

- 168

- 203

-203

14. Thus, the combined deficit with the non-sterling area fell from an annual rate of over £1,500 million to about £800 million. In the current quarter, there will probably be a further slight improvement, to an annual rate of deficit of about £700 million. It can be said therefore, that the sterling area as a whole has reduced the size of its deficit with the rest of the world by about one-half.

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15. But a deficit of £700 million a year is formidable-when the gold reserves stand below £600 million. We have been fortunate in recent weeks in that the loss of reserves has been checked. Since the end of March, indeed, we have lost only £17 million from the reserves; if there is no worsening in " confidence," the reserves at end-June may be as much as £580 million ($1,625 million). This would be a much better result than I expected at the beginning of April (C. (52) 111)—a loss of only £27 million in the quarter, compared with a loss of £227 million in the first quarter.

16. But we must not deceive ourselves. This result (if we get it) is due to two thinks both transient. First, the 4 per cent. Bank Rate and the restrictions on overseas credit have given us a once-for-all gain--our debtors have been forced to pay their bills, and this may be worth £50 million in the quarter. Second, United States defence aid has been flowing in much faster than expected; we have already had £27 million since March, and we now hope to get £75 million by July. These two factors alone make about £125 million in the quarter—an annual rate of £500 million a year against the deficit of £700 million a year. The respite for the reserves is very welcome, and gives us a breathing space. But that is all the comfort there is in it.

17. We must concentrate on the hard fact that the sterling area's deficit with the rest of the world is about £700 million a year, that the gold reserves are less than £600 million, and that the means of finance which are at present being used to meet the deficit are only transient.

The Prospects for 1952–53

18. The relevant actual figures for the second half of 1951 and our estimates for the first half of 1952 are set out in an appendix in the appropriate amount of detail. Alongside these are set out some illustrative figures for 1952-53. These are based on present prices, and present policy no easing of import cuts, and no new measures to stimulate exports.

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