Foreign Relations of the United States: Diplomatic Papers, 1945, The British Commonwealth, The Far East, Volume VI

611.4131/5–146

Memorandum of Conversation

London, August 3, 1945.

Participants:	U.K.–Lord Keynes
	Sir Wilfrid Eady
	Mr. Robert Brand
	U.S.–Mr. Clayton
	Mr. Hawkins
	Mr. Collado

Mr. Clayton began by stating that he was speaking informally in accordance with the President’s letter of July 29 to the Prime Minister,⁴⁷ that in general he could only present his personal views, but that the matters which he would discuss were questions which had been generally discussed with the President in connection with Bretton Woods and trade agreements legislation. Lord Keynes stated that in view of the new government, the views of the British officials must also necessarily be tentative as they have not had a chance to discuss these matters with the new Chancellor of the Exchequer⁴⁸ and the new Ministers.

Lord Keynes stated that it would be difficult to obtain the attention of the new Ministers until August 15, on which day the King’s message to the Parliament would be presented. He stated that the Parliament would recess and the Ministers disperse for holidays on September 1. In view of the desire for early discussions in Washington, he would like the United States to set a definite date, certainly not later than September 15. This would enable the British officials to press the Ministers for policy decisions before they go on their holidays. It would be important to get the discussions well under way in September as many of the officials would have to return in October for the presentation of the Bretton Woods proposals to the Parliament. Mr. Clayton stated that he was certain that he could cable the date within a few days after his return to Washington and report to the Secretary and President.

There followed some discussion of the method of indicating to the public the reasons for the British delegation to Washington, and Sir Wilfrid Eady suggested that it be indicated that the delegation was discussing the clean-up of lend-lease and other related matters, including post V–J⁴⁹ economic matters. Mr. Clayton stated he thought this would be all right, but he wished to study it further.

Lord Keynes stated that there were three general topics which should be discussed during Mr. Clayton’s stay:

(a) The facts of the British international position;

(b) UNRRA;

(c) Commercial policy.

Facts of the Situation

Lord Keynes pointed out that there were two basic problems: the handling of the accumulated blocked sterling balances and the continuing problem of deficits in the post V–J day period. These are interrelated although the latter is more important in the short run. On the other hand, it is not possible to put new obligations ahead of the existing sterling balances. Thus the balances are an obstacle to new borrowing. Moreover, it is not possible to cut off the members of the sterling dollar pool without the U.K. helping them to meet their deficits. Lord Keynes added parenthetically that he was very pleased with the letter to Congressman Celler regarding the dollar pool.⁵⁰

Post V–J Day Balance of Payments

(All figures in millions of pounds sterling)

Lord Keynes presented the following figures on the estimated balance of payments during the calendar year 1945. These figures omit munitions received on lend-lease and Canadian mutual aid, and therefore include principally types of items which in general character would continue into the postwar period. Other items of an essentially war character which are included in Lord Keynes’ estimate include:

Cash outgo, including supply department expenditures in India and Australia, loans to governments, foreign office expenditures, net British troop pay and local services:
India	400
Middle East	100
Australia	150
Other	100
Total		750

Cash income:
U.S. net troop pay	50
Refunds from Australia, South Africa and other Dominions	about 100
Total		150
Net outgo:	about 600
Net deficit:
on trade, shipping, investment, etc. account	900
Total adverse balance		1500

Sources of Finance

Lend-Lease	600–750 or more
Canadian Mutual Aid	100–150
Sterling area (by reducing assets or accumulating new blocked balances)	700–750
	1400–1650

Lord Keynes stated that exports were now very low. Last year they were down to 33% of prewar. They are now 36% but a considerable portion of the increase is in items which are technically non-munitions but are in practice related to military. By the end of the year the level of exports may be up to 40%. Prewar exports were about £ 1250 at present prices. In 1943 they were £ 240, in 1944 £ 283, and in 1945 they are expected to hit £ 356. Since prices have advanced 10% during the past year, the increase in terms of volume is less.

Postwar imports, while of a somewhat different composition than present imports, will be somewhat greater. Food imports will increase. Moreover, world prices are tending upward. Lord Keynes felt that the combined purchases “bluff” was beginning to lose effect and that prices generally would increase by 20%.

Lord Keynes went on to state that the rate of reconversion and demobilization is very disappointing, that by December 31, 1945 not more than 100,000 men will have returned to export trades. Sir Wilfrid explained that conscription for domestic industry is now relaxed and as a consequence of this, and a high level of income and savings, many married women and old men and other pensioners will quit workings—perhaps 1 million persons are in this category. On the optimistic side, it is expected that 1 million men will be released by the Army and 750,000 persons will flow out of the munitions industries, but because of holidays and other factors there is not expected to be an increase of more than 350,000 persons in the non-munitions labor forces. Of these, about 250,000 will go into building trades and other domestic industry, leaving not more than 100,000 for the export trades.

Keynes thinks that there may be no net increase in manpower in the export trades. Keynes and Eady pointed out that it is very difficult to take the right decision with respect to the Japanese war effort. If the British release more manpower, public opinion in the United States will say that they are not doing enough for the Japanese war. Keynes pointed out that the present military assumptions are that a full Japanese war pipeline must be maintained to December 31, 1946. This seems absurd and Keynes believes that perhaps we should reconsider and begin to taper off.

Keynes continued his discussion of the balance of payments by indicating that after V–J day, that part of the deficit which is related to military efforts will run off, but slowly at first. He estimated that by the end of the first year, it would be off 500 gross or 400 net. If there is a substantial increase in exports, say 600 total exports, which is very optimistic, and small increases in shipping and other invisibles, the net deficit will be 650 optimistic, 750 probable and 850 possible. Keynes is optimistic; Brand is pessimistic.

In arriving at these deficit estimates, Keynes is including some 300 million of additional overseas expenses into the sterling blocked balances to be added to the war settlement with the sterling area. Zero day for blocked balances would be several months after V–J.

In the second post V–J year, it is difficult to make estimates but the deficit might be 500, in the third year 200, and on an optimistic calculation perhaps zero thereafter. Thus Keynes would arrive at an estimated deficit of about 1500 over the three years. To this figure would have to be added any net releases to the sterling area.

With respect to net acquisitions from or net releases to the sterling area, Keynes insisted that there are two requirements of the British position: to make current sterling balances fully convertible and to keep consumption in the U.K. short so that goods will be available for export. If confidence can be produced in the convertibility of sterling, it may well be that the increases in ordinary sterling reserves [of?] third countries will offset outlays to help meet the deficits of certain sterling area countries. For example, Canada may be expected to help. Sweden might accumulate some sterling balances. The Northwestern European areas can be expected to meet certain arrears of payments. The French agreement, although weak, may yield something net, possibly as much as 40 if full payment of arrears is made and between 25 and 30 on current account. U.K. balances with Belgium and the Netherlands may be at first adverse but in time there will be some gold payment to the U.K. Since South Africa has large gold reserves, it might be induced to increase its sterling balances.

Lord Keynes then turned to the gold and dollar position. He stated that the gold liability to Portugal may be settled during the coming week with a result that the net gold liability would be considerably reduced. Lord Keynes then rehearsed the development of the gold and dollar position.

(All figures in billions of dollars)

December 31, 1938	4.2
September 1939	2.5
April 1941	10–12	million
	(before RFC loan51)
December 31, 1941	.4
December 31, 1942	.7
December 31, 1943	1.3
(This was over the $1 billion figure of the U.S. Treasury and occasioned great discussion.)
April 30, 1945	1.8
June 30, 1945	1.846
December 31, 1945	estimated 2.0

During the Phase Two conversations, Lord Keynes felt that Secretary Morgenthau would not be averse to a total of $2 billion or $1¾ billion. At the conclusion of the negotiations, especially as a result of the “Chapter III” items, Keynes expected the figure for the end of 1945 to be about 1.5. Since then the U.S. net troop pay in the U.K. is much better than had been anticipated and in addition, South Africa is expected to turn over some gold for sterling.

Of the $2 billion, the British could use $1 billion to meet post V–J deficits. This would last four months.

Lord Keynes again stated that all of the working officials felt that current sterling must be convertible. The alternative of tying up the sterling area tightly would lead to serious consequences so Keynes personally would want an interim program for getting rid of exchange restrictions, say not over five years as provided in the Bretton Woods program, but immediately. Unfortunately, the new officials might be superficially attracted to bilateralistic schemes, but it would be an educational process in which the permanent officials would have to point out the necessity for free exchanges and multilateral commercial policy.

Mr. Clayton pointed out that in his opinion it was essential that the blocked sterling balances be scaled down. Lord Keynes indicated that the officials had proposals with respect to the sterling balances but that they were not ready to discuss them until they had a chance to clear with the new ministers. Mr. Clayton and Lord Keynes discussed briefly the South African gold position and Lord Keynes described the difficult political position which made it impossible to get much more than the British are already getting from the South Africans. He stated that South African gold production is approximately 100 million pounds per annum, of which about 50 million goes into imports and other current balance of payments needs, 25 million is currently being transferred to the U.K. in return for sterling balances, and the remaining 25 million is added to South African gold stocks.

At several points in the discussion Lord Keynes indicated that with good management it should be possible to trim down the total deficit. Mr. Clayton remarked that public opinion in the U.S. seemed to be settling on the possibility of the extension of $3 billion in credits to the U.K.

The conversations were resumed in the afternoon with Messrs. Glasser,⁵² Earley and Stinebower added to the group. Lord Keynes began by stating that he had had some “extra thoughts” on the morning’s discussions. In the first place, he wished to make it clear that the present V–J day arrangements could not be only between the U.K. and U.S. but must embrace all countries. The sterling area settlements must proceed simultaneously with any U.S. arrangements. The whole question must be looked upon not as a simple question of transitional financing but a series of arrangements which would be a contribution towards a basic U.K. situation that would make possible a brief transition.

Mr. Clayton thanked Lord Keynes for his complete presentation and stated that happily there was a shift in U.S. opinion with respect to world affairs both in political and economic matters. He referred to recent opinion and Congressional action with respect to the San Francisco Charter,⁵³ Bretton Woods, Export-Import Bank, and trade agreement legislation. He felt that if a satisfactory overall commercial policy agreement could be made, it might be possible very promptly to get special credit legislation which might authorize the figure he had mentioned in the morning—$3 billion—on liberal terms. Some conditions would have to be imposed. The dollar pool is anathema to U.S. exporters. Rightly or wrongly they attributed all of their lost orders to the manipulations of the pool. Then, of course, it would be necessary to get agreements on tariffs, cartels, quotas, discriminations, etc., and these matters would be discussed Saturday⁵⁴ with the Board of Trade.

U.S. public opinion fully supports the views of government officials with respect to liberal trade and financial policies. The President and the Secretary of State believe that it should be possible to work out something satisfactorily with the U.K. along the lines of liberal commercial policy. Mr. Clayton was unable to express firm views or make definite commitments partly because of the very recent appointment of a new Secretary of State who had not been able during the pressure of the Potsdam Conference⁵⁵ to devote any attention to these matters. Mr. Clayton had discussed the problems in some detail with President Truman in connection with legislation on trade agreements, and he felt certain of the President’s general views. He had talked to Secretary Morgenthau and to Judge Vinson and felt sure that what he was saying reflected Treasury’s policy. Mr. Glasser nodded assent.

Mr. Clayton felt that it would be necessary to adjust the sterling blocked balances—to scale them down and to refund the remainder. It would not be possible to put in any fresh money without settling these old obligations. Lord Keynes agreed.

The United States has been bothered by recent British bilateral exchange agreements. It recognizes that in the present situation without broader arrangements with us, such bilateral exchange agreements are perhaps inevitable. If broader arrangements could be made, the present defensive measures might not be necessary. It is recognized that they are intended to expand trade, but we are afraid of the bilateralistic tendencies inherent in them.

To sum up, Mr. Clayton indicated that the U.S. wants to make possible a broad liberal multilateral trade and financial policy. Lord Keynes stated that the three British officials personally agreed in full. They could not know definitely the views of their new Ministers. There is, as he had indicated earlier, a superficial attractiveness to the bilateral course.

Lord Keynes went on to make two points. At this stage of the discussions, he would prefer “a more meaningless phrase” than “credits”. Moreover, he wished to emphasize the high priority of existing balances of the crown colonies and certain other members of the sterling area. He indicated that while from some points of view the sterling area may not be regarded as having contributed to war finance, the sterling area did give unlimited credit, would permit the full imposition of U.K. exchange control, etc. In answer to Mr. Clayton’s question was there any alternative for the sterling area, Keynes said perhaps not much, but that there was a real difference in the attitude of Iraq vs. Iran. Keynes went on to say that while scalings down were essential, some balances would have to be released. In considering credits all obligations now outstanding would have to be taken into account.

Keynes’ second point related to the figure of $3 billion. The important thing is to restore confidence in the convertibility of sterling and some sterling must necessarily be released to the sterling area. If Britain is “but a shilling better than bust, we shall be bust”.

Mr. Clayton stated that in his view if the war finance was cleared up, it ought to be possible to settle the postwar deficits for say $3 billion. Keynes felt that the U.K. would be called upon to make very sweeping commitments on exchange and trade policy and it would need to have an adequate reserve. He did not feel, however, that it was useful to talk about the figures further at the present time and stated that he would present a detailed analysis later.

Mr. Clayton pointed out that $3 billion is the figure in the minds of the U.S. public although Winthrop Aldrich⁵⁶ had mentioned $5 billion. Lord Keynes hoped that the figures would not crystallize, and Mr. Clayton agreed that that would not be desirable. Lord Keynes and Mr. Clayton agreed that public opinion in both the United States and the U.K. must agree on the desirability of the measures taken.

Lord Keynes then turned to the “problem of settling war obligations” and stated that we were witnessing the twilight of lend-lease. Both lend-lease and reciprocal aid are running down both in volume and in public estimation. Lord Keynes felt that there might be a very short period of straight lend-lease after V–J day followed by a cleanup. He did not want a 3(c) agreement.⁵⁷ He felt that it was important to know what would be the date for the cessation of new procurement—V–J or shortly later—and what would be the date for discontinuance of deliveries. Then it would be necessary to arrange a settlement with respect to lend-lease stocks on hand, ships, and disposal of lend-lease stocks and surpluses.

In his opinion the clean way to do it would be to arrive at a global figure for all items not purely war lend-lease, to adopt a cash figure of all such overhanging items, also to do the same with respect to reciprocal aid exclusive of such items, of course, as the transport home of U.S. troops in U.K. vessels. The war lend-lease would of course be part of the broad settlement; the overhanging items might be gathered into a single net cash figure for settlement.

There ensued a rather full discussion of the scope of paragraph 3(c) in which it became clear that the British officials did not understand the problem and at the end of which it was agreed that there should be a further exploration of possible arrangements under Section 3(c).

At this point Messrs. Gilpatric,⁵⁸ Marris,⁵⁹ Hasler⁶⁰ and Dunnett⁶¹ entered and there ensued a discussion of UNRRA matters. No attempt is made in this memorandum to discuss the UNRRA problems except as they relate to the British financial position.

Lord Keynes stated that from the Treasury point of view the important UNRRA issues were the total requirements and the size of the U.K. share. The British were naturally concerned about the size of their expenditures—particularly externally—because even expenditures in the crown colonies are a drain on the British exchange position. The British had studied the possibility of UNRRA actually making deliveries—due to shipping and supply availabilities—and were convinced that if the Soviet request⁶² could be put aside, and with the first $200 million only for China at this time, an increase of 50% in the quotas would handle the situation. After considerable discussion it was agreed that a working party would look into the figures.

Lord Keynes pointed out that in the U.K. the distinction is not drawn between authorization and appropriation and that the Chancellor would find it very difficult to “authorize” 1% on the chance that it might eventually be needed. Lord Keynes felt that if UNRRA thought it had 1%, ways would be found to expend it.

It was agreed that this whole matter would be discussed further.

47. For text of letter from President Truman to Prime Minister Attlee, see Conference of Berlin (Potsdam), vol. ii, p. 1184.
48. Hugh Dalton.
49. Reference is to the future date of victory over Japan.
50. Texts of the letter from Representative Emanuel Celler, of New York, to Secretary of State James F. Byrnes, July 3, and the reply from Acting Secretary of State Grew, July 25, are printed in Congressional Record, vol. 91, pt. 12, Appendix, September 11, 1945, p. 3830.
51. For text of agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and Reconstruction Finance Corporation, dated July 21, 1941, see British Cmd. 0295.
52. Harold Glasser, Assistant Director, Division of Monetary Research, Department of the Treasury.
53. Reference is to the Charter of the United Nations, June 26, 1945. For text, see Charter of the United Nations and Statute of the International Court of Justice, 59 Stat. (pt. 2) 1031. The Senate had advised ratification of the Charter on July 28.
54. August 4; for summary of these discussions, see telegrams 7903, August 6, and 8132, August 11, from London, pp. 87 and 90, respectively.
55. July 17–August 2, 1945. James F. Byrnes was appointed Secretary of Stale on July 3, 1945, succeeding Edward R. Stettinius, Jr.
56. Chairman of the Board of the Chase National Bank of the City of New York.
57. An agreement under section 3(c) of the Lend-Lease Act of March 11, 1941, 55 Stat. 31, as amended, April 16, 1945, 59 Stat. 52.
58. Donald S. Gilpatric, Chief, War Areas Economic Division, also Adviser and Executive Secretary, United States delegation, Third Session of the UNRRA Council, London, August 7–24, 1945.
59. Adam D. Marris, Assistant Under Secretary of State, British Foreign Office, also member of the United Kingdom delegation, Third Session of the UNRRA Council.
60. William J. Hasler of the British Foreign Office, member of the United Kingdom delegation, Third Session of the UNRRA Council.
61. G. S. Dunnett of the British Treasury, member of the United Kingdom delegation, Third Session of the UNRRA Council.
62. See vol. ii, pp. 958 ff., passim.