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Ill ' T H I S D O C U M E N T IS T H E P R O P E R T Y O F H E R B R I T A N N I C M A J E S T Y ' S G O V E R N M E N T
T h e circulation of this paper has been strictly limited.
It is issued for the personal use of
'
1
T O P SECRET
7
Copy No....r.:f.
C . ( 5 2 ) 217
2 8 T H J U N E , 1952 CABINET EXTERNAL FINANCIAL POLICY
M e m o r a n d u m b y t h e C h a n c e l l o r of t h e E x c h e q u e r
On T u e s d a y n e x t w e a r e t o c o n s i d e r c e r t a i n v e r y i m p o r t a n t m a t t e r s
c o n c e r n i n g our e x t e r n a l financial policy. I have p r e p a r e d the attached p a p e r s
before the w e e k - e n d , though I myself, and no doubt all c l o s e l y c o n c e r n e d ,
w i l l w i s h t o s p e n d t h e n e x t t w o d a y s i n f u r t h e r t h o u g h t . It w i l l b e n o t e d t h a t
m y m e m o r a n d u m i n c l u d e s t h e m e s s a g e f r o m t h e G o v e r n o r of t h e B a n k of
E n g l a n d w h i c h gives u r g e n c y to the q u e s t i o n .
R.A.B.
T r e a s u r y C h a m b e r s , S.W. 1.,
28TH J U N E , 1952.
EXTERNAL STERLING PLAN
1.
A t t h e e n d of l a s t F e b r u a r y , I p r o p o s e d t o m y c o l l e a g u e s a m a j o r
c h a n g e in e x t e r n a l f i n a n c i a l p o l i c y w h i c h b e c a m e k n o w n a s t h e E x t e r n a l
Sterling P l a n . After a thorough discussion, the Cabinet decided not to p r o c e e d
with the Plan at that t i m e .
2.
I h a v e s i n c e r e c e i v e d t h e f o l l o w i n g m e s s a g e f r o m t h e G o v e r n o r of t h e B a n k of E n g l a n d : ­
x
" I n v a r i o u s t a l k s s i n c e t h a t t i m e a n d i n m y m e m o r a n d u m of
6th May, I h a v e e x p r e s s e d the v i e w t h a t , while m e a s u r e s t a k e n
i n y o u r B u d g e t a n d t h e r i s e in t h e B a n k R a t e h a d h a d c o n s i d e r a b l e
effect on the e x c h a n g e s , the i m p r o v e m e n t could not w i s e l y be
r e g a r d e d a s setting a n end to our t r o u b l e s ; t h a t the c r u s t w a s thin
and t h a t we could not continue long on the p r e s e n t b a s i s without
r i s k i n g t h e r e - e m e r g e n c e of p r e s s u r e a g a i n s t s t e r l i n g .
"As I s a i d to you this m o r n i n g , the signs a r e now a l l pointing
t o a g r a d u a l r e a p p e a r a n c e of t h i s p r e s s u r e ( n o t , h a p p i l y , a t p r e s e n t
o n t h e s o r t of s c a l e e x p e r i e n c e d i n t h e m o n t h s b e f o r e y o u r B u d g e t
s t a t e m e n t ) . It i s i m p o s s i b l e t o g i v e e x a c t r e a s o n s o r t o p r e d i c t
e x a c t d e v e l o p m e n t s . But w o r l d financial opinion is beginning once
a g a i n to b e l i e v e t h a t it is r i s k y to a c q u i r e or hold s t e r l i n g a t p r e s e n t
r a t e s and in p r e s e n t conditions, and that a s h o r t position in s t e r l i n g
i s u n l i k e l y to l e a d to l o s s but m a y w e l l l e a d to p r o f i t .
x
Extract from letter dated
21st J u n e , 1 9 5 2 .
' -1- *
"In t h e s e c i r c u m s t a n c e s I feel it m y duty to l a y b e f o r e you
the B a n k ' s view that a decision to allow our a r r a n g e m e n t s in
these fields to r e m a i n s u b s t a n t i a l l y unchanged over the S u m m e r
m o n t h s would involve a g r a v e r i s k to the c u r r e n c y and t h e r e f o r e
t o t h e e c o n o m y of t h e U n i t e d K i n g d o m a n d t h e S t e r l i n g A r e a . "
3.
In t h e f o u r m o n t h s s i n c e t h e b e g i n n i n g of M a r c h w e h a v e h a d a
w e l c o m e r e s p i t e in the l o s s e s f r o m t h e gold r e s e r v e s , and t h e l o s s for the
p r e s e n t q u a r t e r will be m u c h s m a l l e r than I a d v i s e d m y colleagues to expect
t w o m o n t h s a g o i n C . (52) 111. T h i s h a s r e s u l t e d p a r t l y f r o m t h e c o n f i d e n c e
c r e a t e d b y the Budget, p a r t i c u l a r l y b y the c r e d i t m e a s u r e s , which have led
t o a b n o r m a l r e c e i p t s ( c h i e f l y t h e p a y m e n t of o v e r d u e b i l l s ) , a n d p a r t l y f r o m t h e
v e r y r a p i d i n f l o w of D e f e n c e A i d f r o m t h e U n i t e d S t a t e s .
4.
I have never concealed m y view, however, either from m y colleagues
o r f r o m t h e H o u s e of C o m m o n s , t h a t t h e r e s p i t e h a s b e e n o n l y a t e m p o r a r y
o n e . T h e l a t e s t f o r e c a s t s of o u r s i t u a t i o n i n t h e s e c o n d h a l f of t h i s y e a r
w h i c h I p r e s e n t e d i n C . ( 5 2 ) 195 s h o w t h a t t h e v a l u e of t h e m e a s u r e s t a k e n i n t h e
Budget cannot last indefinitely, and that the other Sterling A r e a c o u n t r i e s will
not be able to a c h i e v e the t a r g e t s s e t a t the C o m m o n w e a l t h F i n a n c e M i n i s t e r s '
M e e t i n g . A t s o m e t i m e in the next few m o n t h s there m a y t h e r e f o r e w e l l be a
r e s u r g e n c e of t h e c r i s i s of c o n f i d e n c e i n s t e r l i n g w i t h w h i c h w e h a v e b e e n
b a t t l i n g e v e r s i n c e w e c a m e into office. I do not m y s e l f c l a i m t h a t o u r
p o w e r s of p r e d i c t i o n i n t h i s f i e l d c a n b e a b s o l u t e l y a c c u r a t e , b u t I m u s t
r e c o r d t h e r e s u l t of t h e o f f i c i a l c a l c u l a t i o n s a n d of t h e i m p r e s s i o n s I h a v e b e e n
a b l e t o g e t of t h e s t a t e of o p i n i o n o u t s i d e .
5.
S t e r n m e a s u r e s on d e f e n c e , i m p o r t s , e t c . a r e n e c e s s a r y in a n y c a s e .
Yet the h a r d fact r e m a i n s t h a t the gold r e s e r v e s h a v e fallen s o l o w , both in
r e l a t i o n t o t h e t u r n o v e r of t r a n s a c t i o n s a n d i n r e l a t i o n t o o u r s i g h t l i a b i l i t i e s ,
t h a t we c a n continue o u r p r e s e n t e x t e r n a l f i n a n c i a l s y s t e m o n l y a t g r e a t r i s k
t o o u r s e l v e s a n d to t h e S t e r l i n g A r e a . O u r c a p i t a l p o s i t i o n i s t o o w e a k .
On o u r p r e s e n t b a s i s , w e c a n n e v e r k n o w f r o m o n e w e e k t o a n o t h e r
w h e t h e r s o m e n e w a d v e r s e t u r n of e v e n t s w i l l n o t p l a c e t h e r e s e r v e s a n d s o t h e
whole s y s t e m in j e o p a r d y .
6.
F u r t h e r m o r e , t h i s i s n o t a p a s s i n g p h a s e . It w i l l o b v i o u s l y b e a
long t i m e b e f o r e we c a n build up the gold r e s e r v e s b y e a r n i n g a s u b s t a n t i a l
gold and d o l l a r s u r p l u s . T h e a m o u n t s which we could b o r r o w through the
c h a n n e l s w h i c h a r e a t p r e s e n t o p e n t o u s a r e s m a l l i n r e l a t i o n t o t h e s i z e of
the r e s e r v e s which we n e e d to feel r e a s o n a b l y p r o t e c t e d , and in a n y c a s e it
is w r o n g to b o r r o w and pledge s e c u r i t i e s without a positive p o l i c y for r i g h t i n g
the difficulties which give r i s e to the n e e d for b o r r o w i n g .
7.
C a n w e find a w a y of r u n n i n g o u r a f f a i r s w i t h o u t t a k i n g t h e w h o l e
s t r a i n of t h e b a l a n c e of p a y m e n t s of t h e w h o l e s t e r l i n g a r e a u p o n o u r w h o l l y
inadequate r e s e r v e s ?
8.
I h a v e s e t o u t i n t h e A p p e n d i x t h e e s s e n t i a l f e a t u r e s of a P l a n o n
t h e s a m e l i n e s a s t h a t s u b m i t t e d b e f o r e . It i s a c o m b i n a t i o n of a f l o a t i n g r a t e
of e x c h a n g e , c o n v e r t i b i l i t y of s t e r l i n g i n t h e m a r k e t for p e o p l e o u t s i d e t h e
s t e r l i n g a r e a , and holding action on the s t e r l i n g b a l a n c e s . The m a i n
difference between this and the f o r m e r plan is that the p r e s e n t one contains
n o p r o v i s i o n f o r t h e f o r m a l f u n d i n g of t h e s t e r l i n g b a l a n c e s of s t e r l i n g a r e a
c o u n t r i e s , s i n c e t h i s d o e s n o t n o w s e e m t o b e n e c e s s a r y ( s e e p a r a g r a p h 19
below).
Illf
9.
The P l a n in the Appendix p r e s u p p o s e s that we should a i m a t
k e e p i n g t h e r a t e of e x c h a n g e a s s t a b l e a s p o s s i b l e b y c o n s t r u c t i v e u s e of
the r e s e r v e s . The G o v e r n m e n t would have p o w e r to decide f r o m t i m e to
t i m e w h e t h e r o r not to u s e the r e s e r v e s to s u p p o r t the r a t e ; but our r e s e r v e s
a r e not l a r g e enough to enable us to s u p p o r t a r a t e which is c l e a r l y u n r e a l .
If i t w e r e a g r e e d t h a t t h e p l a n s h o u l d go f o r w a r d , I w o u l d p u r s u e e n q u i r i e s
a b o u t s e c u r i n g a l i n e of c r e d i t f r o m t h e I n t e r n a t i o n a l M o n e t a r y F u n d ( I . M . F . )
t o b e a n n o u n c e d , if p o s s i b l e , c o n c u r r e n t l y w i t h t h e P l a n .
10,
I n o w c o m e t o t h e t i m i n g of a n y p l a n s u c h a s t h e a t t a c h e d . I t
h a s e m e r g e d f r o m d i s c u s s i o n with m y a d v i s e r s , and in p a r t i c u l a r with the
G o v e r n o r of t h e B a n k of E n g l a n d , t h a t t h e t i m e f o r a c h a n g e i s n o w r a t h e r
t h a n l a t e r . T h e p o s i t i o n c a n n o t be b e t t e r in t h r e e m o n t h s t i m e t h a n it i s n o w .
It m a y w e l l b e w o r s e . F u r t h e r m o r e , t h e a n n u a l m e e t i n g of t h e I , M , F , i n
S e p t e m b e r i s b o u n d t o g i v e c a u s e t o a g r e a t d e a l of s p e c u l a t i v e t a l k w h i c h
c o u l d b e d a m a g i n g t o u s . W e s t i l l h a v e a c h a n c e of m a k i n g a c h a n g e i n
circumstances which: ­
1
(a) w i l l s h o w t h a t w e a r e t a k i n g a p o s i t i v e s t e p a n d n o t a c t i n g f r o m weakness; (b) w i l l g i v e a c h a n g e t h e b e s t c h a n c e of s u c c e s s b y a n n o u n c i n g s t r o n g
i n t e r n a l action at the s a m e t i m e ;
(c) w i l l p r o v i d e s u f f i c i e n t t i m e f o r c o n s u l t a t i o n w i t h t h e C o m m o n w e a l t h
and o t h e r s .
I a m b o u n d t o w a r n m y c o l l e a g u e s t h a t s o m e a c t i o n i s n e c e s s a r y a n d t h a t if
w e d e l a y a c t i o n , we r u n a g r a v e r i s k t h a t we s h a l l h a v e t o m a k e a c h a n g e in
the w o r s t p o s s i b l e c i r c u m s t a n c e s , i. e . when we a r e f o r c e d into it by a c r i s i s
w i t h n o a d e q u a t e t i m e t o c o n s u l t . W e h a v e t o w e i g h t h e v a l u e of p o s i t i v e a c t i o n ,
w i t h a l l i t s r i s k s , a g a i n s t t h e g r e a t o b j e c t i o n s of a p p e a r i n g t o b e f o r c e d i n t o
action.
11.
I m u s t m a k e it quite c l e a r t h a t I do not r e g a r d t h i s plan a s a m e a n s
of r i g h t i n g o u r c u r r e n t b a l a n c e of p a y m e n t s . If a d o p t e d , i t s h o u l d i n d u e c o u r s e
h a v e f a v o u r a b l e e f f e c t s u p o n t h e w h o l e s t e r l i n g a r e a ' s c u r r e n t b a l a n c e of
p a y m e n t s w i t h t h e r e s t of t h e w o r l d , f o r if t h e p o u n d f a l l s t h i s w i l l t e n d t o
d i s c o u r a g e f o r e i g n e x c h a n g e e x p e n d i t u r e of a l l k i n d s , n o t o n l y i n t h e U n i t e d
K i n g d o m b u t a l s o i n t h e r e s t of t h e S t e r l i n g A r e a . T h i s w o u l d a l s o b e a
s t i m u l u s to our competitive p o w e r and to e x p o r t s . T h u s , the o p e r a t i o n would
a c t u p o n t h e w h o l e of t h e s t e r l i n g a r e a ' s b a l a n c e of p a y m e n t s a n d n o t m e r e l y
o n t h e U n i t e d K i n g d o m ' s i m p o r t s . T h e m a i n p u r p o s e of t h e P l a n w o u l d b e t o
change o u r e x t e r n a l financial s y s t e m in a w a y which would e n a b l e us to
continue without these c r i s e s - i t deals with the capital position, so to speak,
and not with the c u r r e n t position.
12.
B u t o b v i o u s l y t h e P l a n if i t i s a d o p t e d c o u l d n o t b e a l l o w e d t o
f a i l . It i s a b s o l u t e l y n e c e s s a r y t o r e d u c e t h e o v e r l o a d o n t h e e c o n o m y a n d
t o h e l p t o p u t r i g h t t h e c u r r e n t b a l a n c e of p a y m e n t s , w h e t h e r w e a d o p t t h e P l a n
o r not. But I could not r e c o m m e n d the P l a n u n l e s s it w e r e a c c o m p a n i e d b y : ­
(a)
definite and effective r e d u c t i o n s in the Defence P r o g r a m m e ;
(b) a n a d a p t a t i o n of t h e i n v e s t m e n t p r o g r a m m e , p u t t i n g m o r e e m p h a s i s
on p r o d u c t i v e i n d u s t r y and l e s s on s o c i a l i n v e s t m e n t , including
housing;
(c)
s o m e r e d u c t i o n in i m p o r t s .
It w i l l b e u n d e r s t o o d t h a t t h e v a l u e of t h e a b o v e s t e p s d e p e n d s u p o n t h e m a n n e r a n d t i m e of t h e i r a n n o u n c e m e n t . I a m a d v i s e d t h a t t h e m e a s u r e s a l r e a d y t a k e n i n t h e f i e l d of m o n e t a r y
p o l i c y a r e w o r k i n g w e l l and that a n y u p w a r d m o v e m e n t in the B a n k R a t e would
m a k e t h e w r o n g i m p r e s s i o n on c o n f i d e n c e .
13.
I m u s t m a k e quite c l e a r to m y c o l l e a g u e s a l s o t h a t t h i s P l a n
w o u l d involve r i s k s a n d d a n g e r s w h i c h w e s h o u l d n o t u n d e r e s t i m a t e . It i s
certainly t r u e , however, that events since last F e b r u a r y have reduced the
r i s k s which we should have to r u n .
14.
O n t h e i n t e r n a l s i d e , t h e r e a r e t w o m a i n e l e m e n t s of r i s k , b o t h
of t h e m f u n d a m e n t a l t o t h e n a t u r e of t h e P l a n : ­
(i) T h e d a n g e r t h a t t h e r a t e w i l l f a l l s o f a r t h a t i t w i l l l e a d t o a r a p i d
i n c r e a s e i n t h e p r i c e s of i m p o r t s , p a r t i c u l a r l y f o o d . T h i s m i g h t
have s e r i o u s political and s o c i a l r e p e r c u s s i o n s , e s p e c i a l l y in this
p e r i o d of w a g e c l a i m s .
(ii) T h e d a n g e r t h a t t h e e f f e c t of s t e r l i n g b e c o m i n g c o n v e r t i b l e w o u l d b e
to c a u s e other countries to d i s c r i m i n a t e a g a i n s t our e x p o r t s ­
a p r o c e s s which would l e a d u s to r e t a l i a t e by cutting out o u r
i m p o r t s f r o m t h e m - a n d t h u s t o a g e n e r a l d o w n w a r d s p i r a l of
w o r l d t r a d e in which we should lose e x p o r t s and would
consequently suffer u n e m p l o y m e n t .
T h e i m p a c t of t h e s e d i f f i c u l t i e s m i g h t w e l l n o t a r i s e
immediately.
15.
O n t h e f i r s t of t h e s e r i s k s , I w o u l d n o t b e p r e p a r e d t o m a k e a
p r e d i c t i o n of t h e e x t e n t t o w h i c h t h e r a t e w o u l d m o v e i n t h e n e a r f u t u r e .
T h i s i s l i k e l y t o b e g o v e r n e d a s m u c h b y c a p i t a l f a c t o r s a s b y c u r r e n t . It i s
n e v e r t h e l e s s t r u e to s a y that, although t h e r e is a v e r y l a r g e p r o s p e c t i v e deficit
in r e l a t i o n to our r e s e r v e s , the deficit is not l a r g e in r e l a t i o n to the total
v o l u m e of t r a n s a c t i o n s . F u r t h e r m o r e , e v e n if s t e r l i n g w e r e t o d e p r e c i a t e
b y a s m u c h a s 10% a g a i n s t a l l o t h e r c u r r e n c i e s , t h e i m p a c t o n t h e c o s t of
l i v i n g i n d e x w o u l d n o t b e m o r e t h a n a n i n c r e a s e of 1 ^ % .
16.
T h e d a n g e r of l o s s of " l e s s e s s e n t i a l " e x p o r t s a r i s i n g f r o m
d i s c r i m i n a t i o n a g a i n s t u s i s a r e a l o n e , b u t t h e e x t e n t of i t s h o u l d n o t b e
o v e r e s t i m a t e d . T h e r i s k r e a l l y r e l a t e s t o t h a t p a r t of o u r t r a d e - a b o u t o n e ­
t h i r d of t h e w h o l e - w h i c h g o e s n e i t h e r t o t h e s t e r l i n g a r e a n o r t o t h e d o l l a r
a r e a - a n d w i t h i n t h i s a m o u n t t o t h a t p a r t of t h e s e e x p o r t s w h i c h c o n s i s t s of
" l e s s e s s e n t i a l s " . Our t r a d e policy m i g h t have to be adapted to m e e t this
danger.
17.
I n t h i s c o n n e c t i o n , I s h o u l d r e f e r t o t h e e f f e c t of t h e P l a n u p o n o u r
w o r l d o i l t r a d e . A s t h e w o r l d p r i c e of o i l t e n d s t o b e t h e d o l l a r p r i c e , a n y
d e p r e c i a t i o n of s t e r l i n g a g a i n s t t h e d o l l a r w o u l d i n c r e a s e o u r s t e r l i n g e a r n i n g s
p e r t o n of o i l s o l d . A g a i n s t t h i s a d v a n t a g e , h o w e v e r , m u s t b e p l a c e d t h e
likelihood that c o n c e s s i o n a r y Governments such a s Iraq and Kuwait would put
f o r w a r d d e m a n d s f o r a r e v i s i o n of t h e t e r m s of t h e i r c o n c e s s i o n s i n o r d e r t o
p r o t e c t t h e m s e l v e s a g a i n s t t h e f l u c t u a t i o n s i n t h e v a l u e of s t e r l i n g ; w e s h o u l d
a l m o s t certainly have to concede t h e s e d e m a n d s in s o m e d e g r e e .
18.
T h e other d a n g e r s which a p p e a r e d m o s t s e r i o u s when the Cabinet
c o n s i d e r e d t h e P l a n in F e b r u a r y w e r e the i m p a c t on t h e C o m m o n w e a l t h a n d
the impact on E u r o p e .
19.
L e t m e c o n s i d e r t h e C o m m o n w e a l t h f i r s t . T h e v e r s i o n of t h e P l a n
in the Appendix w i l l c r e a t e m u c h l e s s difficulty t h a n the p r e v i o u s one would
h a v e d o n e . T h e d i f f e r e n t t r e a t m e n t of s t e r l i n g b a l a n c e s w o u l d b e v e r y
h e l p f u l to C o m m o n w e a l t h c o u n t r i e s . A l l t h a t t h e y would b e r e q u i r e d t o do
a b o u t t h e i r s t e r l i n g b a l a n c e s would b e to c o - o p e r a t e with u s in p r o d u c i n g a n
a g r e e d a s s e s s m e n t of t h e e x t e n t t o w h i c h t h e b a l a n c e s r e p r e s e n t a " s i g h t
l i a b i l i t y " u p o n t h e United K i n g d o m e c o n o m y . It s h o u l d n o t be difficult t o
a g r e e w i t h t h e m a s t a t e m e n t s h o w i n g t h a t t h e i m m e d i a t e b u r d e n of t h e
b a l a n c e s i s a c o m p a r a t i v e l y s m a l l f r a c t i o n of w h a t t h e o u t s i d e w o r l d h a s c o m e
to b e l i e v e . The s t e r l i n g r e l e a s e a g r e e m e n t s w i t h India, P a k i s t a n a n d Ceylon
w i l l r e m a i n u n c h a n g e d u n d e r t h e n e w p r o p o s a l . We s h o u l d b e a b l e t o g i v e t h e
G o v e r n m e n t s of t h e s t e r l i n g C o m m o n w e a l t h r a t h e r l o n g e r t o c o n s i d e r t h e
p r o p o s a l s t h a n w a s p o s s i b l e b e f o r e , in t h e hope t h a t it would b e p o s s i b l e to
a n n o u n c e t h e s c h e m e a s h a v i n g t h e i r full s u p p o r t .
20.
We m u s t n o w c o n s i d e r o u r E u r o p e a n p a r t n e r s . O u r i m m e d i a t e w i t h ­
d r a w a l f r o m t h e E u r o p e a n P a y m e n t s U n i o n h a s a l w a y s b e e n o n e of t h e m o s t
d i f f i c u l t i m p l i c a t i o n s of a n y m o v e t o p r o v i d e c o n v e r t i b i l i t y . I n t h e l a s t f o u r
m o n t h s , h o w e v e r , a g r e a t d e a l cf t h o u g h t h a s b e e n g i v e n t o t h i s p r o b l e m i n
E u r o p e , a n d t h e i d e a s b o t h of a n e a r l y s t e p t o w a r d s c o n v e r t i b i l i t y a n d a
floating r a t e have been ventilated m u c h m o r e fully than t h e y had b e e n
p r e v i o u s l y . I think it is v e r y likely t h a t F r a n c e and B e l g i u m a t a n y r a t e ,
a n d p e r h a p s o t h e r s , would follow a n y lead given by u s . T h e r e m a y be indeed
a p o s s i b i l i t y of c o n c e r t e d a c t i o n o v e r q u i t e a w i d e f i e l d i n E u r o p e , a n d if t h e
p l a n w e r e a d o p t e d by u s , it would be p o s s i b l e to have p r i o r c o n s u l t a t i o n s with
the F r e n c h , Belgians and Scandinavians in t i m e to p e r m i t t h e m to c o n c e r t with
u s . P r i o r consultation with the G e r m a n s would a l s o be d e s i r a b l e after the
U n i t e d S t a t e s G o v e r n m e n t h a d b e e n i n f o r m e d . I t w o u l d , of c o u r s e , b e v e r y m u c h
in o u r i n t e r e s t t h a t a l l t h e s e c o u n t r i e s should a c t a t the s a m e t i m e , and it
w o u l d g r e a t l y r e d u c e t h e d a n g e r of l o s s of t r a d e t h r o u g h d i s c r i m i n a t i o n
against us.
21.
D e s p i t e a l l i t s d a n g e r s , o n e g r e a t a d v a n t a g e of t h e P l a n i s t h a t i t
h a s s t r o n g c o n s t r u c t i v e p o s s i b i l i t i e s a n d o f f e r s h o p e of f r u i t f u l c o l l a b o r a t i o n
w i t h o u r p a r t n e r s in t h e C o m m o n w e a l t h a n d i n W e s t e r n E u r o p e on l i n e s which
c a n l e a d , with A m e r i c a n c o - o p e r a t i o n , to m a k i n g s t e r l i n g a n effective c u r r e n c y .
22.
In c o n c l u s i o n I would s a y t h i s . I b e l i e v e t h a t we n e e d a c o n c e r t e d
p l a n of a c t i o n t o i m p r o v e o u r B a l a n c e of P a y m e n t s a n d t h a t s u c h a c t i o n m u s t
b e l a u n c h e d i n t h e r i g h t p s y c h o l o g i c a l a t m o s p h e r e . If a n y a l t e r n a t i v e a c t i o n
which would achieve t h e s e ends can be s u g g e s t e d , I should be v e r y glad to
c o n s i d e r i t . So f a r I a m n o t a w a r e of a n y a l t e r n a t i v e w h i c h i s s a t i s f a c t o r y .
R.A.B,
T r e a s u r y C h a m b e r s , S . W . 1. ,
28TH J U N E , 1952.
APPENDIX R-T
Main Features of the External Sterling Plan
(This is in a form suitable for inclusion in a telegram to the Commonwealth). 1.
The Plan consists of six p a r t s : ­
(a) A s from
, sterling currently earned by countries outside, the sterling area (which will be designated as "external sterling") will become convertible, (b) The nominal official parity of sterling will remain at $2.89
but no attempt will be made to maintain the existing margin of $ 2 . 7 8 to $2.82.
We shall use the gold and dollar reserves, held by our Exchange Equalisation Account, to inter­
vene constructively in the exchange market so as to secure the maximum stability in the rate at a level consistent with the real international value of sterling.
For your own infor­
mation we shall seek initially to keep the rate within limits /to
be defined/ so long as this does not dangersousLy weaken the reserves, but you should know that this intention will not be maie public or revealed to anyone (repeat anyone) except for the narrowest possible circle of the U . K . and Commonwealth financial authorities. (c) The London gold market will be reopened and gold will be traded in a free market against external sterling, dollars, and ether currencies at prices fluctuating according to supply and demand, and not in any way tied to the U . S . official price for gold. (d) The sterling balances of non-residents (repeat non-residents)
in the sterling area will "be frozen sufficiently to prevent any appreciable offerings of such balances of the London market in exchange for dollars or other wanted currencies.
The following steps will be taken: (i)
(ii)
(iii)
(iv)
(v)
Up to £1,000 could be transferred to External Sterling Account;
this would dispose of de mlnimis cases. The balances Would be avilable for meeting pre-zero commitments, on a restricted basis. Foreign commercial and central "banks could transfer agreed sums to External Sterling Account as working balances. The remainder of the balances could be invested in quoted securities with a life exceeding ten years, such securities (or any balances not so invested) being blocked. All existing balances on American and Canadian Accounts (for which we are already liable to provide dollars) will be transferred to External Sterling Accounts.' (e) The present structure of the sterling area would be m a i n ­
tained.
Countries in the area would retain full exchange /eontrol C O N T R O L AND S T E R L I N G AREA R E S I D E N T S WOULD S T I L L N E E D A U T H O R I T Y
F R O M T H E I R G O V E R N M E N T S TO A C Q U I R E F O R E I G N C U R R E N C I E S I N T H E
MARKET FOR P U R C H A S E S O U T S I D E THE A R E A .
PAYMENTS BETWEEN
S T E R L I N G AREA C O U N T R I E S WOULD N O T , C F C O U R S E ,
I N V O L V E THE
^GUSE OF EXTERNAL STERLING.
I T I S E S S E N T I A L F O R THE S U C C E S S
s f p o f THE S C H E M E THAT A L L C U R R E N C I E S W I T H I N THE AREA S H O U L D
M A I N T A I N A S T A B L E EXCHANGE RATE W I T H S T E R L I N G ,
THOUGH NOT
N E C E S S A R I L Y AT T H E E X I S T I N G P A R I T Y .
(F)
I N O R D E R T O C O N V I N C E T H E WCRLFL T H A T T H E E X C H A N G E V A L U E
O F S T E R L I N G W I L L N O T "lee S U B J E C T TO C O N S T A N T
DEPRECIATION
U N D E R T H E W E I G H T O F AN E X C E S S O F S T E R L I N G , I T I S AN E S S E N T I A L
P A R T O F T H E S C H E M E T O SHOW T H A T O N L Y A S M A L L P R O P O R T I O N O F
THE S T E R L I N G B A L A N C E S R E P R E S E N T S E F F E C T I V E - E I G H T
LIABILITIES
O F THE U . K .
F R O M S U B - P A R A G R A P H ( D ) ABOVE I T W I L L B E -SEEN
HOW D R A S T I C A L L Y WE P R O P O S E T O T R E A T T H E B A L A N C E S O F N O N S T E R L I N G AREA C O U N T R I E S .
^ F O R M O F S T A T E M E N T WE R E Q U I R E F R O M T H E S T E R L I N G
GOVERNMENTS.
T H I S I S S T I L L UNDER C O N S I D E R A T I O N
P A R A G R A P H IFF O F C O V E R I N G M E M O R A N D U M ^ AREA SEE