London Embassy Files: Lot 59 F59: File 850 Marshall Plan: Telegram
The Ambassador in the United Kingdom (Douglas) to the Secretary of State
2589. 1) I agree with principle that US cannot acquiesce to Brit Govt proposal to reduce its own dollar expenditures below the total [Page 451] of ECA allocation plus current dollar earnings during the first year of ERP. (Re Deptel 2116, June 7)1 Legislative history of ECA including my testimony before Congressional committees was consistent with stated principle. I believe, however, that the above method of stating the principle is to be preferred over the statement in para 2 of your cable, in spite of the fact that the two are in essence identical, because statement above emphasizes determination to prevent undercutting Brit recovery whereas statement in reference cable carries implications that US objects in principle to operation of basic elements of sterling area, and proposes to police individual dollar payments and receipts.
2) If Brit proposal to reduce imports could be implemented to the extent suggested this would result in receipt of more dollars than required to cover projected balance of payments deficit of UK and DOT as a group. ECA would have greatest difficulty in explaining this unless it could be maintained that extremely exceptional circumstances warranted deviation from principles established during Congressional hearing. It follows that only possible source of dollars for sterling area requirements is the reserve, which will have to be drawn down despite declared Brit policy of maintaining reserves intact. I believe this necessity will constitute strongest possible incentive for Brit to exercise strict economy and it will support them in inducing Dominions to do likewise. Brit might even welcome this necessity as strengthening their hand in negotiations with Dominions.
3) I believe that underlying principle which should guide approach to this and other problems is that US assistance, while it should be adequate, should not be so large as to enable any Govt to postpone the necessity of facing up to the fundamental economic problems of the UK itself. These problems include the necessity to reorganize the economy to reduce costs: a) through tax reforms to encourage capital formation and b) through measures to divert resources to productive uses. These readjustments necessary to the economic stability of the UK after 1952 and, in consequence, to world confidence in sterling and the strength of the sterling area. I recognize that the determination of what is an adequate amount of assistance, and what would be an excessive amount, involves an exceedingly fine judgment. In any event we should avoid giving impression that we are attempting to embarrass existing Govt and bring about its fall.
4) Preceding para should not be interpreted to mean that direct or indirect assistance to sterling area countries to meet reasonable [Page 452] needs on current account in succeeding years of program is thought unwise. Desirability of such assistance will have to be decided on basis of developing economic situation and in light of political and strategic considerations specifically omitted in memo referred to in para one your cable. But such assistance, if deemed advisable, should not be so generous as to permit relaxation of economic recovery efforts on the part of the Brit. I agree with statement under (b) on page 4 Treas memo May 142 that provision of US funds for sterling area demands must depend upon the essentiality of their requirements.
5) In view of the delicacy of UK/Dominion political relationships and sensitivity of Brit to US attitudes toward sterling area the presentation to Brit proposed para 4 reftel should be made tactfully and any documents given Brit or for publication should be drafted with great care to avoid unnecessary offense to Brit pride. At best our attitude represents bitter pill for Brit to swallow. Suggest approach based on first para Sub-Section 2 of Section III of Treas memo May 14. We are particularly conscious of the need for some flexibility in laying down principles and criteria.
- In telegram 2116 to London, June 7, 1948, not printed, the Department of State reported that ECA, State, and Treasury had discussed the approach that was to be made to the dollar requirements of the independent sterling area countries during the first year of the European Recovery Program. Tentatively they had agreed in principle that the “US cannot acquiesce to UK Govt diverting current dollar earnings to meet dollar requirements of independent sterling area countries during first year of ERP.” (840.50 Recovery/6–748)↩
- Not found in Department of State files.↩