The Ambassador in the United Kingdom (Douglas) to the Acting Secretary of State 1
2326. For Webb eyes only from Douglas. Please give this message no other circulation except as authorized by Under Secretary Webb after he has seen it.
- This is to alert you to the possibility that the UK may be confronted this summer with a major financial crisis not unlike that which developed in 1947.2 The economic consequences would almost certainly precipitate a political crisis as well.
- Information given us in utmost secrecy by Cripps3 shows sharp and accelerating rise in dollar gold drain April–June quarter to pounds 150 million compared with pounds 82 million first quarter. After allowance for ECA, IMF, and Canadian contributions total reserves expected to fall to pounds 400 million end of June compared pounds 471 million end of March and pounds 552 million at beginning of ERP.
- Increased rate of dollar gold drain is attributed here to several factors: (a) some abnormal purchasing, partly by India and Australia; (b) withholding of payments by US importers, slower repatriation of dollar receipts by UK and Empire exporters and some postponement of purchasing commitments by US and other countries, [Page 785] all of these traceable to widespread talk about possible sterling devaluation; (c) general tendency in US to reduce inventories all products, resulting in sharp decline in volume US buying from UK, dominions and colonies, which has affected such important dollar earners as rubber, cocoa and jute; (d) general diminution US purchasing abroad as result lower level US economic activity.
- While some of these adverse factors may not continue to operate so strongly in immediate future, there seems to be little prospect for sufficient degree of improvement, except in unlikely event of strong reversal of recent trends in US economy. In addition, psychological impact of announcement of June 30 reserve figures, which will be necessary about mid-July, will create strong adverse factor not presently operative. Realization that reserves have fallen a sixth in three months and that expenditure is proceeding at more than twice anticipated ECA allocation, will create shock which might even intensify drain. This is the basis for our judgment as to the timing of possible crisis.
- The deterioration in the reserve position by itself is extremely serious but taken in conjunction with UK growing difficulties in exporting even to non-dollar countries we may see a convergence of factors this summer which may throw the country into an economic as well as a financial crisis. Even if our estimate of the imminence of a crisis in July or August is over-pessimistic, we nevertheless feel that the general position is deteriorating at such a rate as to make a crisis probable in a matter of months.
- The leaders of this government vividly recall the 1931 crisis which brought down the second Labor Government and sent labor into the political wilderness, and we doubt that they would let themselves drift into disaster. We therefore think the government will try to cope with the situation before it has deteriorated beyond repair. The position will be watched closely in the next few weeks, with mid-July in mind as the critical time when the country’s difficulties must be made public. The trends then apparent will, of course, influence judgment as to the course of action to be adopted. It seems to us the government must come out, as it did in 1947, with a program to arrest the rot. Some of the obvious avenues which might be explored in framing a program would include: (a) drastic cuts in UK dollar imports such as would reduce food consumption and require slashing the investment program; (b) shedding more military and political commitments abroad; (c) increasing the pressure on the sterling area to reduce its dollar drain; (d) tightening the bonds between sterling and certain other currencies, perhaps even trying to rivet them to sterling.
- Since many other countries would be affected by a British collapse it seems to us that the logic of the situation would compel [Page 786] Britain and other countries to move toward the development of at least a quasi autarchic sterling area, embracing as many countries as could be brought or forced into it. Also, with the probable shrinkage of trade with the dollar area, would not these countries eventually have to consider a reorientation of their trade toward Eastern Europe and Russia?
- I am informed from wholly authentic sources that HMG has developed a program which, if necessary to adopt, “will insulate the UK from strong American pressure to devalue sterling and which the US will not like.” Devaluation of sterling, unless the pressure of events takes command of the situation, will in our opinion be resisted to the end, principally because of fear of a repetition of the 1931 debacle and because Cripps is convinced that devaluation by itself will not make any material contribution to a solution.
- How the government would put a drastic program over politically is not clear, (a) It might try to use its majority to force a program through, without modifying the orginal intention of staging an election next year. (b) Alternatively, the government might prefer to face a crisis by framing a policy, dissolving Parliament and going to the country immediately. In this case we would expect dissolution in July or August and an election in September or October. In either case it is not unlikely that the Labor Party may be defeated and that it would harbor, as it did after 1931, a conviction that US influence had brought about its downfall. Moreover, many other groups are likely in any event to blame the US for Britain’s economic difficulties, attributing them to a combination of US political pressures and US economic depression. If a serious crisis develops, therefore, we must anticipate a difficult period in Anglo-American relations.
- If the full seriousness of the financial position were known to the leaders when the Labor Party conference was in session in Blackpool last week, they concealed it successfully. The general seriousness of Britain’s economic position was stressed, but there was no indication of an impending crisis. This does not mean, however, that the government will allow the situation to drift. The impression gained by our observer at Blackpool was of a party leadership with a strong will to power, and a rank and file with great confidence in the leadership. This is what makes us believe the government might elect to meet a crisis head on.
Sent Department 2326, repeated Paris 432 (for Secretary and Harriman4 eyes only).
- Secretary Acheson was in Paris attending the sixth session of the Council of Foreign Ministers; documentation relating to this session is in volume iii, chapter vi ↩
- For documentation relating to the British financial crisis of 1947, see Foreign Relations, 1947, vol. iii, pp. 1 ff.↩
- Sir Stafford Cripps, Chancellor of the Exchequer.↩
- W. Averell Harriman, United States Special Representative in Europe.↩