15 Beasley to Chifley

Cablegram 71 LONDON, 27 April 1948

At my suggestion Cripps was invited to address High Commissioners today on E.R.P. and its effects. Cripps commenced by saying Britain was pleased that Harriman [1] appointed as E.R.P.

Representative in Europe. Britain now anticipating E.R.P. Aid at rate of 325m. per annum. Net dollar drain during first quarter 1947 was at rate of 590m. per annum. The United Kingdom estimate of the net dollar drain between July 1948 and June 1949, in the absence of Marshall Aid, is 548m. Some action is obviously needed if our reserves are to be maintained at about 500m. which is their present level and the minimum desirable to run the Sterling Area.

2. The United Kingdom desires a greater volume of trade 'passing through sterling' and this has been the objective of our 32 bilateral agreements. However we must adjust our imports in order to maintain the Sterling Area reserves which, based on present prospects, might decline by 200m. this year.

3. The United States was not prepared to consider meeting dollar demands of the rest of the Sterling Area, which she expects the United Kingdom to carry. Our policy during the next four years must be to develop plans to eliminate the dollar deficit and to foster export expansion on a sound basis. To do this we propose to proceed in two ways:-

(a) To try to increase the validity of resources in the Sterling Area by supplying one another's needs in increased measure and by exporting more to the Dollar Area.

(b) To try to increase the volume of trade within Western Europe, i.e. to increase the volume of production and reduce the European drain on dollars.

4. An essential factor is the maintenance of sterling as an international currency and an extension of the area in which sterling is used. Cripps does not think United States hostility to the sterling Area and Imperial Preference is likely to be the policy of the present administration. There is, however, the embarrassment of an annual vote.

5. Cripps believes total United States exports for 1948 will not exceed 90% of the 1947 volume. In 1948 E.R.P. countries may approach their 1947 volume of imports from the United States, but there will be reduced United States exports to other countries. He also anticipates a change in the make-up of American exports-more steel and less food.

6. The United Kingdom is under pressure to supply a larger volume of goods to E.R.P. countries. These will come not only from the United Kingdom but also from some other Commonwealth countries.

The United Kingdom is hoping by one device or another to improve the chances of France buying raw materials from the Sterling Area.

The balance in inter-European trade will in fact be a balance between goods of the Sterling Area and those of the E.R.P.

countries. There is every prospect of a larger demand for Sterling Area goods from Western Europe and of increased supplies from Western Europe to the Sterling Area.

7. The United Kingdom is worried by the refusal of many countries to import non-essentials. The United Kingdom's hope is that non- essentials should pass both ways.

8. When I inquired about the necessity for further dollar restrictions Cripps replied that although Commonwealth countries had done a good job the need for dollar economy was as great as ever. The United Kingdom must reduce existing dollar expenditure and there would be no marked increase in living standards in this country unless increased supplies were received from non-dollar areas.

9. I inquired whether the provisions of the E.R.P. agreement between the United Kingdom and the United States might provide for increased supplies of iron and steel products and capital equipment to other E.R.P. countries and if so might this mean reduced supplies to Australia. Cripps replied that production in this country had reached capacity at 15m. tons per annum. He pointed out that countries such as Australia received large amounts of capital equipment from Germany, Belgium and France in the pre-war period. The main sources of increased steel output are now in Western Europe, in particular the Ruhr. He hoped that the United Kingdom and Western European countries together would be able to supply the capital goods needed by Australia. (This was a definite hint that we should seek to place orders for capital equipment on the Continent.) [2]

10. The Pakistan representative referred to exchange difficulties in increasing trade with Western Europe. Cripps admitted this difficulty but said that Britain was working to overcome it, although the solution would not come quickly. I followed this up by asking Cripps what were the prospects for a Western European Clearing Union, and what would be the link between other Sterling Area currencies and any new clearing unit. Cripps replied that a Western Union Clearing Agreement ought to result in a greater volume of trade with the Sterling Area, but again admitted that it would not be easy to arrange.

11. I sought the latest information on the setting up of a European Customs Union and mentioned that Australia was worried about the possible effects of such an agreement on Imperial Preference. Cripps said that Australia need not worry about Imperial Preference for the next four years because prohibitions and control factors will be much more important in determining the volume of trade. I suggested that this might be very well during the next four years, but what would happen if there were a reduction in the demand for raw materials and food stuffs. Cripps stated that his aim was to avoid a heavy slump in raw material prices.

12. In reply to a query the Canadian High Commissioner stated that Canada's net drain of dollars to the United States has stopped.

However Canada does not propose to consider unfreezing the remainder of the British credit until the end of the summer when the quantity of her crops and the effect of off-shore purchases will be known.

13. Cripps stressed the difficulty of France's present situation.

She may not be in a position to purchase sterling goods after the end of next month. The United Kingdom will suggest to the European Co-operation Administration that France be permitted to use Marshall dollars for off-shore purchases of Australian wool.

14. I mentioned that Australia was worried by the acute situation which might arise if there were a further serious drain in Sterling Area gold and dollar reserves. We want to be prepared and, if necessary, move towards it in relatively easy stages.

Cripps replied that it was because of such a possibility that we want to keep Commonwealth Governments fully informed. At present the United Kingdom has only a vague idea of what is likely to happen. Our reserves are the Sterling Area reserves. Western European Union would mean a change in the economy of all Western European nations. The United Kingdom would have to make adjustments also. The outcome should be to make Western Europe more dependent on the Sterling Area.

15. The above is a fair resume of Cripps's comments. It is obvious that as E.R.P. begins to flow plans will be evolved to meet changing circumstances and we will do our best to keep you fully advised.

1 W. Averell Harriman, US Special Representative in Europe.

2 The sentence in brackets has been struck out on the file copy.

[AA: A2910, 453/7/1, VI]