I expect to sail on March 13 to attend the meeting of the Joint Committee
of the League of Nations for the Study of Clearing Agreements. As you
know, I am acting on this Committee as a substitute for Mr. Norman H.
Davis.
I shall be pleased to receive any instructions or suggestions that you
may desire to give me.
[Enclosure]
Mr. Oscar B.
Ryder, United States Tariff Commissioner, to the
Director of the Economic Relations Section, League of
Nations (Stoppani)
[Washington,] March 5, 1935.
My Dear Sir: I have received, through the
Department of State, your letter of February 212 addressed
to me in care of Mr. Prentiss Gilbert and your radiogram of February
282 notifying me that a meeting of the Joint Committee
for the Study of Clearing Agreements, on which I am to act as
substitute for Mr. Norman H. Davis, has been called March 25, 1935.
I have also received the documentation prepared by the Secretariat
of the League on the subject of clearing agreements.3
[Page 530]
At the March 25 meeting, I shall express my views regarding clearing
agreements, both as they affect world trade in general and as they
affect the United States in particular. At present, I can only
indicate in a general way my point of view.
Although the United States is not a party to any clearing or
compensation agreements, and has not applied any form of unilateral
exchange clearing or of compensation, it has an interest in these
arrangements. In the absence of direct American experience with
them, I shall not at this time offer any comment on the technique of
their administration but shall confine myself to considerations of a
larger order relating to the fundamental implications of these
arrangements, implications which tend to be lost sight of if the
emphasis is upon the minute details of procedure and
administration.
A study of the genesis and operation of clearing agreements makes it
clear that they invariably arise out of a situation of which rigid
exchange controls and blocked balances are prominent features.
Although intended to afford relief from some of the conditions
prevailing in such situations, they do not lead to the
reestablishment of freer trade relations and of a more liberal
system of international exchange. Moreover, they differ from those
methods of commercial policy, such as tariffs, which operate through
their influence on competitive prices, and which vary in their
effectiveness according to the nature of the changes, if any, in the
other factors determining prices. Clearing agreements in their
operation cause the distribution of a country’s foreign purchases to
be influenced by considerations other than those of price and thus
give rise to discrimination between countries.
When two countries conclude a clearing arrangement, a preferential
status results in favor of the transactions coming within its scope
to the detriment of the excluded aggregate of transactions, actual
or potential, which depend for their liquidation upon the remaining
supply of exchange. The special treatment of the transactions coming
within the scope of the arrangement results in a greater reduction
in the supply of exchange than in the volume of the transactions for
which exchange is needed. The conclusion of a clearing agreement may
generally be taken as implying that the supply of exchange was
already inadequate, on the one side or the other, to meet the volume
of claims upon it at the established rate. The effect, then, of a
clearing agreement is to concentrate upon the excluded transactions
the full burden of this inadequacy. Thus, the preference established
by the arrangement is aggravated by the diminution of the means of
liquidating the excluded transactions. Third countries, therefore,
find themselves faced by discrimination in the payment of their
claims and by an actual loss of markets.
[Page 531]
Clearing agreements, in any form, are essentially restrictive in that
they tend to promote bilateral trade balancing at the lower rather
than the higher level, and thus to cause the elimination of the
surplus—the “favorable” or “unfavorable” balances—normally paid
through the system of open international exchange. To be sure, a
clearing agreement, if applied to a frozen exchange situation, may
for a limited period cause some increase in the trade of one or both
of the countries parties to it. In the long run, however, any gain
thus obtained is practically certain not to constitute an increase
in total trade, but, rather, to grow out of an artificial diversion
of trade and to be offset by an equal, if not a greater, loss
elsewhere. In any event, the gain secured is less than could be
obtained under freer conditions of trade. This is true because
bilateral clearing is narrowly restrictive as compared with the
normal clearing off against each other of commercial and financial
transactions from diverse sources.
As a result of the discrimination against them arising from clearing
agreements, countries not party to such agreements are quickly
brought under pressure to protect their trade or to retaliate. With
each extension of the clearing and compensation system abroad and
the resulting accretion to the discrimination against a country
which does not enter into the system, the pressure upon the latter
to react in kind is intensified and it becomes more difficult to
resist the impulse to impose similar restrictive arrangements in
those situations in which an apparent advantage would seem likely to
accrue from such action. We, in the United States, despite our
success up to the present in avoiding resort to these arrangements,
have, nevertheless, had plentiful experience with the pressure that
develops to follow suit when other governments conclude clearing and
compensation agreements between themselves.
In conclusion, it should be said that I am not unaware of the
situations and pressures out of which many of the clearing and
compensation arrangements have developed. But recognition of the
circumstances leading to their establishment should not be permitted
to obscure the fact that all these arrangements are essentially
makeshifts in an unsatisfactory situation. The point of view which I
shall emphasize is that the primary object of our Committee should
not be so much to perfect the technical details of these
arrangements and to improve their operation as to examine them with
respect to their essential causes and results and in order to
ascertain the most appropriate means of return to freer conditions
of international trade.
I look forward with pleasure to seeing you at the meeting of the
Committee on March 25.
I have [etc.]
