Composite memorandum handed by Prime Minister Churchill to the President’s special assistant
Cairo, December 7 (?), 1943
[I]
The question of the British gold and dollar balances
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Some time back, in different circumstances from the present, the President approved a line of policy which would permit the British gold and dollar reserves to reach some figure between $600 million and $1,000 million. There was no agreement by the British to limit their reserves to this figure.
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For some little time past the British reserves have exceeded $1,000 million, and may be increasing at a rate of some $600 million a year. This includes gold and represents their total resources against growing liabilities in all parts of the world, which amount to six or seven times these reserves.
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This increase in the British reserves does not reflect an improvement in their financial position. Their quick liabilities, largely caused by heavy cash outgoings in the Middle East, are increasing at four or five times the rate at which the reserves against them have increased. Their net overseas position, in fact, is deteriorating at a rate of about $3-billion a year.
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The increase in their gold holdings is due to certain receipts from South Africa and Russia. The increase in their dollar balances is due to their receiving the dollar equivalent of the local currency provided to meet the pay of American troops within the sterling area. Indeed, if it were not for the pay of the American troops the British dollar balances would be going down.
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Apart from certain raw materials, the British are already giving reciprocal aid to the fullest extent of American Government requirements. They have now offered raw materials purchased by the U.S. Government in Great Britain and the Colonies on reciprocal aid terms. This would retard the growth of their balances by about $100 million a year, and by $200 million if India and Australia join in.
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The British argue that some growth of their reserves is indispensable to the delicate system they are operating by which they finance the war on credit throughout a large part of the world, and that the retention of some part of the above receipts, as a support to this credit system and an offset to a much larger increase of liabilities, is not open to legitimate criticism. They point out that the Russians are believed to hold gold reserves nearly double the total reserves of the British and have no significant liabilities against them. But, in the case of Russia, it is not at present proposed to require them to surrender any part of their reserves as a condition of further Lend-Lease assistance.
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The British feel that they ought not to be asked to agree to a ceiling to their balances, since their reserve position must be their own concern. Nevertheless, if the British argument is accepted as valid, the position could be regularised by a new Directive, which would set up a revised formula for the guidance of American Departments. If the figure given by the new formula was being approached, then the whole question could be re-opened.
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The new formula might provide that an increase in British reserves is not unreasonable if the increase does not exceed, say, 30 per cent, of the increase of British liabilities.
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Figures furnished to Congress hitherto have not disclosed the full burden of British overseas liabilities, or their rate of growth. It might be necessary to justify the new arrangement to provide that the information given to Congress in future should be fuller, and should show in some fashion, which would not be dangerous to British credit, the growth of liabilities as well as the growth of reserves.
26 October 1943
[II]
Prime Minister
There is a matter affecting our financial relations with the United States of America which I think I must bring prominently to your notice at this particular juncture. We have reason to believe that the President is about to give a decision which is of absolutely vital importance to our financial capacity to get through the transitional period and, indeed, to our diplomatic independence during that time.
We are all concerned by the mounting accumulations of sterling balances in the hands of other countries. These represent a post-war liability upon us to convert the sterling into gold or other foreign exchange which the holders of the balances may need.
It looks indeed as though we may come to the end of the war with external liabilities of not less than £2,500,000,000 (ten billion dollars).
On the other side, after being almost cleaned out by the middle of 1941, we have been gradually building up a modest reserve. Our free balances of gold and dollars have now reached £300,000,000, and there is a reasonable hope of their reaching £500,000,000 (two billion dollars) by the end of the war, or about one-fifth of our assumed liabilities at the same date. These balances represent our only quick assets against the liabilities and constitute in fact the central reserve of the whole Commonwealth, since they include dollars turned over to us under the sterling area arrangements by the Dominions and other countries in the sterling area.
These balances will be absolutely essential to see us through the difficult transition period after Lend-Lease has ceased, and before the measures we shall have to take to restore the balance of our external trade have had time to bear fruit.
Early in the year we heard, almost accidentally, that the President had authorized a directive to the effect that the British reserves were not to be allowed to rise beyond a billion dollars (£250,000,000). It is not clear that this directive was ever issued in such explicit terms, and we were certainly not consulted about it. But the U. S. Treasury maintain that this alleged directive puts the Departments under orders to cut off Lend-Lease as soon as our total reserves exceed the limit of a billion dollars.
In course of time, this figure has been passed. Our reserves are now more than $1,200 million. From now on they are likely to increase, owing to our receiving the dollar equivalent of the pay of the American troops in the sterling area. According to present estimates of the numbers of American troops who will be drawing their pay in those areas, our reserves may increase by as much as $600 million in the next year.
This does not mean, however, that we are getting richer. Our liabilities are increasing five or six times as rapidly as our reserves, and we are constantly getting deeper into the pit of net indebtedness. Indeed, I doubt if we can maintain our external financial fabric on its present basis, unless some moderate proportion of our increased liabilities is covered by reserves against them.
All this has been explained in great detail to the American Administration. The late Chancellor of the Exchequer wrote a long letter to Mr. Morgenthau, rather more than two months ago, which the latter acknowledged and promised to answer. No reply has been received. When our Delegation was recently in Washington in connection with the currency and commercial talks, Lord Keynes and his colleagues submitted a memorandum to the State Department, the Lend-Lease Administration and the American Treasury on our balances and on our liabilities, asking the American Government to recognise that, in view of our growing external liabilities which arose directly from the war, the position of our balances should not be regarded as open to criticism. This view received strong support in some of the American Departments, though not in all. Mr. Stettinius and the State Department are wholly convinced that, in the circumstances, there should be no reduction of Lend-Lease, and that this small mitigation of our growing indebtedness should be allowed to accrue to us. The Lend-Lease Administration (at any rate before they were merged in the new body) were of the same opinion. The U.S. Treasury, on the other hand, has been taking up a sticky line, for reasons which have never been explained to us. They have shown a disinclination to discuss the matter with any of our representatives or to give any reasons.
Some elements in the Administration maintain that Congress was given to understand that Lend-Lease was only to apply to the extent to which the recipient countries were utterly unable to pay for imports, whether of food or military equipment. In other words, however great our liabilities, we are not entitled to Lend-Lease as long as we have a dollar in the till. This view might have been sustainable in some quarters before Pearl Harbour. But it is, of course, utterly contrary to the principle of the pooling of resources between Allies, and also to the principle that the most convenient supplier shall provide the materials, irrespective of financial liability.
Moreover, it is a doctrine apparently to be applied to us only, for no such suggestion has been made to Russia. Nor, of course, do we apply it in giving reciprocal aid to the Americans or to any other country.
To resolve the difference of opinion between his own advisers, the President set up, several months ago, an interdepartmental, ministerial Committee, to report to him. Owing to the difference of opinion on this Committee, no report emerged, and sundry meetings of the Committee were adjourned when the time came to call them. This position has gradually become intolerable from our point of view. As the U.S. Treasury takes the line that the existing Presidential directive must be followed until it is superseded, the Lend-Lease Administration is reluctantly and half-heartedly falling in with this by proposing to cut off various items of Lend-Lease, though on nothing like a large enough scale to keep our balances down to the prescribed figure. We have been urging, therefore, on the American Departments concerned that the matter should be brought to a head. During Lord Keynes’s recent visit, the State Department and the Lend-Lease Administration both agreed that this was the right course. Colonel Llewellin and Sir Ronald Campbell urged Mr. Harry Hopkins to bring it to a head. As a result, the President has instructed Mr. Morgenthau to expedite the Committee’s report.
It may be that this report is already in the President’s hands. In any case, it is absolutely vital to us that he should make the right decision when it reaches him.
There are several reasons for hoping that he will:
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The force of our case, to anyone who takes the trouble to understand it, is overwhelming.
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Russia’s gold and dollar reserves are nearly twice ours, and they have no liabilities against them. The Americans are not proposing to tackle the Russians with a similar proposal. We, however, are thought to be easier game.
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A change of policy sufficient to keep our balances down to one billion dollars would have to be a very drastic one. The Americans will either have to ask us to meet the pay of their troops throughout the world (at a rate approximately double ours); or they will have to cut off Lend-Lease from some major item, such as food. At the very same time that the President has been emphasising the importance of our mutual aid, and when we have only just offered them raw materials, it would be a bit stiff to take either of these measures.
A favourable decision could take various forms. In no circumstances, of course, should we agree, on our side, to allow the amount of this country’s reserves to be settled by the Congress of the United States. But that is no reason why the President should not give instructions to his own Departments to the effect that they need not begin to worry about our reserves until they exceed a certain figure.
The most satisfactory revised directive would be one that fixes no limits, but asks that we should keep in consultation with the Administration about liabilities and balances. Failing that, if there is to be a ceiling, it should be raised to something not less than $2,000 million.
Apart from our post-war liabilities, which, as I have said, are likely to approach five times that amount, our adverse balance of trade in the first two or three years after the war will by itself exceed it. It is about the same amount as the Russian reserves, and they, as I have said, have no corresponding liabilities.
I attach a brief version of our case in a form which may have reached the President. This was prepared by Lord Keynes for Mr. Dean Acheson and Mr. Harry Hopkins, so that they could have something brief in their hands for use at an appropriate opportunity.
I again emphasise that an adverse decision would have the gravest consequences to our financial independence; whilst a favourable decision would remove a constant source of anxiety and friction.
JA
11 November 1943
[III]
Prime Minister
Great George Street, SW1
Secret
Gold and Dollar Balances
Thanks to gold from South Africa and pay to American troops in the U.K. and the Empire, our gold and dollar balances have increased to $1200 million and may rise to $2000 million by the end of the war. Much of the increase is not really ours at all but represents profits of Empire countries who choose to use us as their banker. Actually our reserves are far outweighed by our liabilities, especially in India and the Middle East, which are rising about five times as fast as our reserves and may amount to $10,000 million by the end of the war. Thus our net overseas position is deteriorating rapidly and our reserve when the war ends is likely to be only one fifth of our liabilities.
Certain Americans, ignoring these liabilities, claim that supplies on Lend/Lease should now be reduced and that we should be made to pay with our gold and dollars for goods supplied. Why they should pick on us for such treatment is not clear; it is never suggested that Russia and France with their enormous gold balances should pay for goods supplied to them.
The Lend/Lease administration who, with the State Department, are favourable to us, are reluctantly proposing to cut supplies since the United States Treasury maintain that the President issued a directive limiting British reserves to $1000 million.
The President has appointed a Committee to examine the matter, whose report may be already in his hands. It is vital to us that he should make the right decision. If our Lease/Lend supplies are cut off and our balances reduced to $1000 million, it will be almost impossible for us to tide over the difficult post-war period while we are building up our export trade.
CHERWELL
12 November 1943
