Foreign Relations of the United States, 1948, Western Europe, Volume III

841.00/1–3048: Telegram

The Chargé in the United Kingdom (Gallman) to the Secretary of State

secret

London, January 30, 1948—6 p. m.

370. This is a further message in our series of evaluations of trends in British foreign relations and of developments in the domestic field. Period under review dates from November 15, 1947, the date of our last previous message in series. (Embtel 6060, November 15, 1947¹)

During period under review, it became evident that early and adequate ERP aid is outstanding British need for 1948. Breakdown of CFM² was followed by strong condemnation of Soviet Union by government, accompanied by similar action on trade union levels, placing Bevin³ in stronger position than ever. His support now even includes almost all MP’s of non-Communist left. Period under review further marked by strong comeback of government from low of autumn 1947 with Attlee⁴ in enhanced position; Britain’s drawing closer to Western Europe as evidenced by Bevin’s advocacy of western union;⁵ wide acceptance of a viable Germany as essential to UK, and Western Europe; further deterioration in Anglo-Soviet relations; and great exertion by British officials to strengthen British position in Middle East for what is regarded as inevitable explosion being set off in Palestine in spring.⁶

I. General Economic Situation

Encouraging trend coal, steel output induced moderate year-end optimism and perhaps justified Morrison’s⁷ statement Britain has turned the corner but Cripps analysis steel position established steel as No. 1 shortage 1948. Reduction capital investment program now appears primarily an attempt to limit steel use.

With supplies 1 million tons short of requirements for full productivity and capital development the system of steel allocations will be major device to control nature and direction productive effort as evidenced by recent exemption steel for building from latest price rise and by maintenance steel allocations at 1947 level or better to encourage output of electric power equipment, agricultural implements, tractors and mining machinery, while allocations for machine tools have been cut in attempt to force exports.

Year-end reports indicate surprisingly modest general improvement business profits 1947 over 1946. Best gains registered in shipping, shipbuilding and motors due heavier volume, but steel only 7 percent better and banks no gain despite larger volume business, while railways failed to earn 3 percent interest. Heavy losses recorded in aviation companies and coal operating at loss despite price increases. 1947 gross national product improved only about 10 percent over 1946 mostly accounted for by price increases. In general rising costs appear to have limited business profits despite greater volume of output. General picture is of an industrial economy just about holding its own during 1947, probably due to setback of fuel crisis in early months, and nothing like the US boom apparent in UK.

It is too soon to say how effective measures to deal with dollar crisis will be but it is clear export targets not being realized and continued lag probable. Imports November were down to target level at rate of pounds 1,600 annually but high December figures suggest difficulty in keeping import values down partly due rising prices essential imports.

Recent census 1,000 manufacturers experiencing export difficulties revealed 58 percent encountering trade restrictions of which half Europe and nearly quarter Empire countries. Other trade obstacles are price competition 23 percent and high tariffs 19 percent.

Effects of European trade restrictions apparent in recent export statistics. Consequence has been heavy pressure on government to open trade channels through bilateral negotiations and UK has concluded 7 agreements with 9 now under discussion.

Bilateralism seems only immediate approach to developing UK trade but not regarded as desirable in long run and is putting great strain on UK negotiators which will increase as more exportable essentials are tied up but will be eased if exportable coal exceeds estimates. British find that in bilateral deals each country exerts pressure to export maximum less essential goods and to import maximum essential items. This may tend to reduce total trade between the two although UK in most of its recent agreements believes it has provided for expansion rather than limitation, particularly in agreements with Sweden and USSR.

Possibilities for further limitation imports dubious because no further important savings on food can be made especially with potato ration threatened by shortage, and evidence accumulating that general ration level inadequate for full effectiveness heavy workers. Raw material supplies are currently at practicable minimum to maintain current rate of production, and if imports essential materials are reduced UK will be entering a spiral of reduced productivity and shrinking capacity to pay for imports. Gold and dollar reserves being steadily drained at rate which will reduce them below minimum safe level by mid-1948. UK basic dilemma lies between cutting raw materials with indicated serious consequences or permitting reserves to fall dangerously low. These projections make it clear that early and adequate ERP aid is the outstanding British necessity of 1948 and is essential to solving British dilemma since assurance such aid might justify UK in maintaining raw material imports and gambling with reserves if certain dollar drain soon to be checked.

II. Internal Finance

Weight of potential inflation appears less than year ago but suppressed inflation still major economic problem. Pace of inflation partly checked 1947 by drawings US and Canadian loans. Through such drawings good[s] made available to UK economy without corresponding money payments to public ordinarily involved in domestic production (chiefly wages). UK Treasury sold borrowed dollars to importers for sterling and used latter to meet extraordinary expenditure thereby reducing necessity creation internal debt. Government actually able retire roughly pounds 210 million floating debt 1947.

Deflationary effect foreign credits will not be nearly as great in 1948 unless ERP aid is forthcoming. Latter would probably have some deflationary effect on economy as UK loan drawings (depending on policy adopted for local proceeds). In absence ERP increased restriction imports seems inevitable together with every possible expansion of exports. Such development would severely increase inflationary pressure since quantity of goods available locally would be reduced in face same or possibly greater money payments.

Sign of improvement inflationary situation in monetary supply did not rise compared with 1946. This coupled with abandonment government’s cheap money policy represents far healthier situation than 1946 when government creating bank deposits in attempt establish low rate on long-term borrowing. Other favorable factors included cuts in capital expenditure. Small savings are improving and life insurance and building society figures are running at record levels. Government budgetary surplus on ordinary account running at higher rate than estimated November budget.

Most pressing problem facing Britain coming months is how to prevent further cost inflation. With regard to wages, TUC has declined accept national wages policy leaving to individual unions onus of not pressing for wage increases unless output is increased. If all or substantial proportion of increased output is exported and wages raised, this will surely add to inflationary pressure at home. It is possible national wages policy might be adopted by TUC if government offered capital levy on which widespread discussion continues.

III. International Financial Position

(Data in million pounds sterling)

British now expect hard currency drain to be 225 in first half 1948 and less than 100 in each last two quarters, or total about 425. This would be only half drain 1947. It would also represent substantially reduction rate weekly drain experienced last 5 weeks 1947 at about 10. Substantial and consistent progress has been made in reducing rate weekly drain since August run on sterling. Target figures on drain believed possible of achievement but only by further reduction imports and expanded exports in trade with hard currency areas both by UK and rest of sterling area.

Should be noted, however, that Cripps predicated UK would balance current payments 1948 compared with deficit 650 in 1947. This seems somewhat over-optimistic. Despite overall balance, hard currency deficit 300 anticipated UK account. This measures UK program for unrequited exports in 1948 and extent obligation supply traditional markets principally in sterling area and inability shift exports to hard currency markets. Remainder anticipated drain on reserves, 125, measures extent UK anticipation demands rest sterling area for assistance meeting hard currency deficits with rest world.

Estimate that if drain reserves anticipated by UK should be realized 1948, and it will take considerable effort restrict reserve losses that rate, reserves would stand approximately 300 at year-end. This would include some portion undrawn Canadian credit which might not be available in fact.

Clearly no such reduction in reserves can be permitted. UK absence ERP will have to take most drastic measures to reduce drain. This would have to include greatly increased pressure on sterling area countries to balance their hard currency accounts and reduce their demands on common pool reserves. Present UK plans are apparently to proceed along lines indicated in belief ERP will afford relief from severe measures otherwise required.

British opposition franc devaluation program very determined. Chief basis was expectation rate between official sterling and free dollar rates would be substantially below 4.03 creating doubt on soundness 4.03 rate and suggesting that sterling overvalued.

British also fearful pressure on pound would develop through transactions centered French banks. Nature such transactions quite nebulous present thinking. Present feeling financial community here that initial fears this phase problem exaggerated. France on strictly bilateral basis in payments arrangements with UK. Payments receipts sterling involving countries other than French monetary area and sterling area require prior approval Bank England. Such control effective in past and no reason suppose it will not continue so. Technical difficulties will no doubt increase but Cripps left team experts Paris study problems and prepare defenses.

British concerned difficulties French program will create for them but determined work out on basis friendly cooperation best possible arrangements under circumstances.

VI. Foreign Policy

1. Breakdown of CFM conference December marked watershed in British foreign policy, new lines of which were laid down by Bevin and Attlee in foreign policy debate January 22–23. The condemnation Soviet Union by government and proposal western union have been accompanied by similar actions on political and trade union levels as well. British Labour Party has taken initiative in calling conference of Socialist parties of M Plan countries; Trades Union Congress quietly preparing break in World Federation Trade Unions and formation rival international trade union center; and Labour Party and trade unions have opened offensive against British Communist Party and on communism generally.

2. Labour Government’s policy caution, restrained criticism Soviet Union and communism, of playing down details Soviet policy and practices, which have characterized British policy since end of war in hope reversal Soviet policy, is now ended. British public and particularly British labor movement from now on will be told in moderate but straightforward language full significance developing events in order dissipate any lingering illusions about Soviet intentions and to prepare them for any eventualities.

3. The way in which virtually whole British labor movement has, step by step, abandoned its sentimental attitude toward Soviet Union and ranged itself behind Bevin, demonstrates again (a) political maturity of British labor movement, (b) essential non-doctrinaire and non-Marxian character British labor movement, which has always distinguished it from the more Marxian-minded continental labor movements, and (c) the unshakable attachment British labor to democratic, humanist and liberal conceptions.

4. This remarkable change is in its way almost as significant as the change in US from isolationism to internationalism. For British labor movement has had strong attachment to Soviet Union, every since Bevin stopped British intervention in early 1920’s by direct action and Soviet Union made large contributions to British general strike 1926.

5. Debate in Parliament January 22–23 should disabuse any doubts which might still remain in world opinion about degree of support which Bevin commands in Britain. Most of the MP’s on non-Communist left are now solidly behind Bevin, and for first time in 18 months they made no demand to cut armed forces, or withdraw troops from Greece. Some non-Communist left MP still reluctant face some of the implications new foreign policy line: for example, they find it extremely distasteful support policy in Greece in view of character Greek Government; they will find it difficult to swallow De Gaulle if he should come to power: they are afraid that it will mean making up with France, etc. But Soviet intransigeance is driving one leftist after another into private and even public admissions that Soviets have slammed door on repeated overtures of friendship, and that Labour Government has no alternative except defend itself and its principles.

6. Recent handling of American policy has been equally important in this consolidation of British opinion, particularly left-wing opinion behind Bevin. References by Ambassador Douglas last autumn, when appearing in Washington before Congressional committee,⁸ to state of British mining industry under private ownership and hopeful signs for the future, the release of $400 million despite suspension of sterling convertibility, the reference in Harriman report to importance of trade between eastern and western Europe,⁹ the Department’s recognition that socialism stands for same human and democratic principles for which US stands, and administration’s recommendations to Congress on ERP, particularly the one to avoid laying down conditions, have not only not gone unnoticed here, but have largely dissipated suspicion held by large number this country that American “capitalism” was hostile to Labour Government. Coming at a time when Soviet Union was attacking Labour Government, these American actions have made it clear where the danger to labor Britain really lies. Change in attitude of large sections of labor movement during past three months from one of suspicion of US to one of open friendliness is perhaps the most important recent development in British public opinion.

7. It should be borne in mind that there is still much latent fear of US in a number of circles. Labor’s suspicion of American “capitalism” still lingers. Conservatives fear American competition and American threat to imperial preferences. All groups fear that US policy may be erratic in particular instances. For example, all groups wonder what the apparently American-Soviet instigated policy for Palestine will ultimately lead to in the Near East in terms of oil and political chaos exacerbated by Soviet pressure. All shades of political opinion are concerned lest US policy will drag them into other adventures. Similarly all groups wonder how a clash can be avoided between American interests and western union, should western union countries take concrete steps in their empires to reduce their long-term dependence on US for such goods as tobacco, cotton, films, etc.

8. In short, while US–UK relationship is virtually unbreakable and while we have every reason to be satisfied with development Anglo-American solidarity in last few months, we must not take too much for granted. Delays in ERP to the point of exhausting British dollar reserves, or major reductions in amount of aid or attachment of conditions offensive to British pride may endanger this solidarity in critical period ahead. It is because British gratitude to US today is not unlike what it was in the days when lend-lease bill was being debated in 1940 that Bevin could take a calculated risk in standing up to Soviet Union. But it was a risk based on assumption that US aid would be forthcoming in acceptable form. If that expectation should be disappointed, no one can say what the outcome would be. So great are the stakes that British may have no alternative except seek rapprochement with Soviet Union, no matter what government might be in power.

V. Domestic Political Situation

1. Government has staged strong comeback since August/October when it appeared to be tottering and there was much public speculation to effect Attlee would resign, government would not last more than few months, there would be early general election or possibly a coalition government. This speculation has now completely died out. Reasons for this change were cabled in Embassy’s 6622, December 24.¹⁰

2. Attlee came through political crisis with enhanced reputation. His weakness as public figure often obscures his strong points. He is skillful, clear-thinking politician. He is stubborn, courageous and not easily rattled. He appeased Aneurin Bevan¹¹ and labor left-wing who demanded immediate nationalization of steel industry with bill to amend power of Lords to delay legislation. He transferred Shinwell,¹² who was major political liability, and shook up his Cabinet. He had a windfall when Dalton¹³ leaked on budget and had to be removed. (Dalton, it appears now, might be brought back in government in few months time—possibly as Minister of Defense in place of Alexander.) He backed Cripps’ crisis measures in face of strong resistance from individual ministers whose programs had to be curtailed: i.e., education, housing, town and country development. He backed Bevin to hold [hilt?] on foreign policy and had satisfaction last week of seeing virtually the whole of Labour Party united behind Bevin. As result of these maneuvres, luck and this reassertion his leadership, Attlee again heads a fairly well united Parliamentary Labour Party and Cabinet.

3. It is now generally felt that government has fair chance of running until end of its term (July 1950), but this is predicated on assumption (a) that ERP will materialize in acceptable form and provide economic underpinnings of European economic recovery, and (b) that government’s measures to deal with British trade balance crisis will soon produce significant results.

4. Political consequences any failure ERP to materialize in acceptable form are unpredictable. While it might bring government down, it would more likely force coalition. Possibility that Labour Government might survive even that shock must be reckoned with. For then it is likely that whole of Western Europe would be driven leftward, forced to install tightly controlled economy designed to provide little more than food and shelter, and forced to seek rapprochement with Soviet Union. Britain could hardly escape being swept along in such a political current, and a Labour Government in those circumstances might well be regarded as a better instrument for accomplishing such a policy and such a volte-face than either a Conservative or coalition government.

VI. Western Europe General

In our view, Bevin’s speech January 22 advocating western union serves as excellent statement of British policy toward countries Western Europe.

Specifically he urged “not a formal political union with France” but “ever closer unity between two nations;” negotiation by France and Great Britain with Benelux countries of treaties similar to Dunkirk treaty; partial lifting of British travel ban; and “closest possible collaboration with Commonwealth and overseas territories not only British but French, Dutch, Belgian and Portuguese.” He also referred to possibility of including “the new Italy in this great conception.” (Switzerland was not specifically mentioned by Bevin, Attlee or McNeil.¹⁴) Nevertheless Bevin spoke rather of goal to be reached than means of obtaining it, and looseness of concept is clear from his statement “if we are to have an organism in the west, it must be a spiritual union.” Attlee also defended absence concrete plan and was careful to endorse neither Churchill’s United Europe Committee, nor Cross-man’s¹⁵ Socialist Western Europe. Omission of concrete proposals was source of disappointment and of practically all criticism to date except that from Communists and fellow travellers.

Use of treaty of Dunkirk as prototype in initial steps is regarded by Foreign Office as practical approach in that any treaty of alliance and mutual assistance will serve and although it deals principally with German problems it contains one article providing for economic cooperation.

Immediate and extensive support (Churchill said at least 75 percent of people and equal majority of Commons, other estimates run higher) is indicative not only of increasing unity and coherence within Labor Party on foreign policy but also of widespread realization in all but Communist circles that weakness and vulnerability of Western Europe demand something more than isolated attempts of each country to solve its own problems. ERP and formation Cominform stimulated thought along these lines. Britain itself has now admitted it needs M aid and as a corollary is with some reluctance abandoning its attitude that it is able to go it alone and also its position as aloof spectator it would have preferred to be. Its interest in the fate of free governments and economic stability in Western Europe, especially in France, will inevitably deepen as we draw closer together. No better evidence need be sought than British concern over French devaluation measures.

[Here follow sections on Germany, Scandinavia, Soviet Union, Poland-Czechoslovakia, Trieste, Hungary and the Balkans, Greece, Middle East, Iran, India and Pakistan, the Far East, Antarctica, and the British Colonies.]

Gallman

1. Not printed.
2. For documentation on meetings of the Council of Foreign Ministers, see Foreign Relations, 1947, vol. ii, pp. 1 ff.
3. Ernest Bevin, British Secretary of State for Foreign Affairs.
4. Clement R. Attlee, British Prime Minister.
5. For documentation on Western Union, see pp. 1 ff.
6. For documentation on the Palestine situation, see volume v.
7. Herbert Stanley Morrison, Lord President of the Council and Leader of the House of Commons.
8. Ambassador Lewis W. Douglas testified on the Interim Aid Program during hearings before the House Foreign Affairs Committee, November 10–15, 1947.
9. For a summary of the report of the President’s Committee on Foreign Aid, released to the press by the White House on November 8, 1947, see Department of State Bulletin, November 16, 1947, pp. 936 ff. For related documentation, see Foreign Relations, 1947, vol. iii, pp. 197 ff.
10. Not printed; it gave as reasons the return of general confidence in the Labour Government; the failure of the December meeting of the Council of Foreign Ministers, which caused many left-wing Labour members to fall in line behind the Government; and a fuller realization of the United Kingdom’s economic dependence on the United States. (841.00/12–2447)
11. British Minister of Health.
12. On October 7, 1947, Emanuel Shinwell, previously Minister of Fuel and Power, became Secretary of State for War.
13. Hugh Dalton resigned as Chancellor of the Exchequer on November 13, 1947, after details of the interim budget were released to the press prematurely.
14. Hector McNeil, British Minister of State.
15. Richard Howard Stafford Crossman, Labour M. P. and assistant editor of the New Statesman and Nation.