Minister

1. The Department of Finance are playing with the idea that, in order to preserve our rights as a member of the sterling area, and as a help towards maintaining the cohesion of the sterling area itself, we should do our ERP financing through the medium of the sterling area dollar pool. What they have in mind is that, once our ERP imports had been agreed with the Administrator, we would proceed to purchase them in the ordinary way, drawing dollars from the sterling area pool for the purpose, and subsequently repaying to the sterling area dollar pool the dollars reimbursed to us by the Administrator on the basis of our vouched claims. The Department of Finance would propose to put this idea to the British informally and, if they approved of it, to seek the Administrator's agreement to the adoption of this procedure.
2. We see great objection to this Department of Finance idea. It seems to us to ignore completely political realities in Washington and to invite certain risks which it should be our primary object to avoid.
3. Everybody knows that the sterling area is viewed with unreasoning dislike and suspicion by an important body of opinion in the United States, including an influential group in the American Congress. It is not a question whether this point of view is just or well-founded. In my personal opinion, it is neither. The point is that this feeling of hostility towards the sterling area exists, and has made itself felt at every important turning in the economic relations between Britain and the United States since the war. It was responsible for the abrupt ending of Lend-Lease. It dictated the unreasonably stringent terms of the Anglo-American Loan Agreement. It forced the inclusion of the clauses about non-discrimination and the reduction of sterling balances in that Agreement. It led to the attack on the system of Commonwealth Preferences both in connection with the Loan Agreement and in connection with the proposed International Trade Organisation. Now that ERP is about to come into practical operation, this American attitude is making itself strongly felt again. Backed by support from France and other continental countries, it is raising the question whether ERP aid extended to Britain will not be used to build up the sterling area and the Commonwealth trading system rather than to help on the recovery of Europe, the purpose for which it was voted by Congress. Influential and well-informed commentators in America and Europe are drawing attention to the existence and importance of this feeling in America. To take merely one example: the special correspondent of the New York Times in London, the usually well-informed Herbert L. Matthews, stated in his despatch to his paper of the 9th April that 'Britain has been warned again by the United States that Marshall Plan aid must not be used to underwrite the sterling area ￿ It has been made clear that there is a strong feeling in some circles in Washington that Britain must exercise tighter controls over the drain of dollars from the sterling area ￿ There are signs of new United States pressure to induce Britain to do something more drastic about her enormous war-time sterling debts which are leading to a certain amount of unrequited exports from Britain. These warnings have not yet been formalized. They are more like storm signals of what to expect.'
4. As I say, it is not a question of whether this American opinion is justified or not. The point is that it is a political FACT with which the Department of Finance suggestion, if adopted, would bring us into headlong collision. In our view, no good results could follow from our adopting the proposal. It might well involve us in a tiresome and difficult argument with the Administrator at the very outset of the programme. The very making of the suggestion might well prompt him to be more inquisitive about our relations with the sterling area than we would want him to be. If the Administrator is as sensitive to Congressional opinion as Herbert L. Matthews and other newspapers have predicted he will be, we might well find ourselves, as a result of making the suggestion, subjected to more stringent controls and accounting requirements than other participating countries, so that the Administrator would be in a position to refute any charges of leakage of ERP dollars into the sterling area pool through this country. A further serious risk involved in inviting any detailed discussion with the Administrator about our sterling area relationship is that of reviving the question of a reduction of our sterling balances. This might very well take the form of an admission a demand - which in any case I fear we may have to face before we have finished with ERP - that the local currency funds accruing to us by virtue of ERP shipments from the United States should go in reduction of Britain's sterling indebtedness to us.
5. Our rights as a member of the sterling area during the ERP period are already safeguarded by an exchange of semi-official correspondence. It may well be that the assurances we have received should be on a more formal basis. That is a point which should be considered. Moreover, it will be in our interest throughout the period of ERP to do what we can, diplomatically and otherwise, to strengthen the sterling area position. It should be possible, for example, to make some arrangement under which we could use our receipts of American sterling without cutting across the efforts that are being made to maintain and increase the willingness of people in America to hold sterling balances. The more independent of the sterling area we appear for the time being, however, the stronger the position we will be in to urge questions such as the non-inclusion of British colonial earnings in the earnings debited to Britain under ERP and to emphasise the importance, both from the point of view of European recovery and world economic stability generally, of the creation of the conditions necessary for the restoration of the convertibility of the pound sterling. It is by action on those lines that we can best serve our own interests and help the sterling area. We would not only achieve neither of these objects - we would actually run the risk of doing ourselves and the sterling area serious harm, if we were to start off by focussing on ourselves the feeling of uneasiness about the relationship between ERP and the sterling area reserves which at present exists in America.