CAB129-53 — Page 115

(c) some reduction in imports.

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Ip will be understood that the value of the above stepsplepe 798 °F 53 the manner and time of their announcement.

I am advised that the measures already taken in the field of monetary policy are working well and that any upward movement in the Bank Rate would make the wrong impression on confidence.

13.

I must make quite clear to my colleagues also that this Plan would involve risks and dangers which we should not underestimate. It is certainly true, however, that events since last February have reduced the risks which we should have to run.

14.

On the internal side, there are two main elements of risk, both of them fundamental to the nature of the Plan:-

(i) The danger that the rate will fall so far that it will lead to a rapid

increase in the prices of imports, particularly food. This might have serious political and social repercussions, especially in this period of wage claims.

(ii) The danger that the effect of sterling becoming convertible would be

to cause other countries to discriminate against our exports

a process which would lead us to retaliate by cutting out our imports from them - and thus to a general downward spiral of world trade in which we should lose exports and would consequently suffer unemployment.

The impact of these difficulties might well not arise immediately.

15.

On the first of these risks, I would not be prepared to make a prediction of the extent to which the rate would move in the near future. This is likely to be governed as much by capital factors as by current. It is nevertheless true to say that, although there is a very large prospective deficit in relation to our reserves, the deficit is not large in relation to the total volume of transactions. Furthermore, even if sterling were to depreciate by as much as 10% against all other currencies, the impact on the cost of living index would not be more than an increase of 1%.

16.

C

The danger of loss of "less essential" exports arising from discrimination against us is a real one, but the extent of it should not be overestimated. The risk really relates to that part of our trade about one- third of the whole which goes neither to the sterling area nor to the dollar area and within this amount to that part of these exports which consists of "less essentials". Our trade policy might have to be adapted to meet this danger.

17.

In this connection, I should refer to the effect of the Plan upon our world oil trade. As the world price of oil tends to be the dollar price, any depreciation of sterling against the dollar would increase our sterling earnings per ton of oil sold. Against this advantage, however, must be placed the likelihood that concessionary Governments such as Iraq and Kuwait would put forward demands for a revision of the terms of their concessions in order to protect themselves against the fluctuations in the value of sterling; we should almost certainly have to concede these demands in some degree.

18.

The other dangers which appeared most serious when the Cabinet considered the Plan in February were the impact on the Commonwealth and the impact on Europe.