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3rd JULY, 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 .
Since we d i s c u s s e d e x t e r n a l s t e r l i n g p o l i c y l a s t F e b r u a r y , m y
colleagues should know that we a t the T r e a s u r y have not been i n a c t i v e .
The
G o l d a n d D o l l a r R e s e r v e s s t a n d a t a l m o s t t h e s a m e l e v e l a s a t t h e t i m e of t h e
B u d g e t . U n f o r t u n a t e l y for a v a r i e t y of r e a s o n s t h e f u t u r e o u t l o o k i s u n s e t t l e d .
It i s m y d u t y t o i n f o r m m y c o l l e a g u e s t h a t I h a v e r e c e n t l y r e c e i v e d a v e r y
. s e r i o u s w a r n i n g 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 i n w h i c h h e s a y s
t h a t if w e a l l o w o u r a r r a n g e m e n t s i n t h e f i e l d of e x t e r n a l f i n a n c i a l p o l i c y t o
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 , this "would involve a g r a v e
r i s k t o t h e c u r r e n c y a n d , 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
the s t e r l i n g a r e a " . . After deep c o n s i d e r a t i o n and consultation, I a g r e e with
this view.
2.
W e s h o u l d r e m e m b e r t h a t d u r i n g t h e s e c o n d q u a r t e r of t h i s
y e a r we r e c e i v e d no l e s s than
200 m i l l i o n s United S t a t e s a i d . This is at a
r a t e of $ 8 0 0 m i l l i o n s p e r a n n u m , w h i c h i s m u c h h i g h e r t h a n w e e x p e c t e d o r
than we can p o s s i b l y r e c e i v e in the future. Despite t h i s , h o w e v e r , we lost s o m e
gold f r o m o u r r e s e r v e s . The b e s t f o r e c a s t I c a n m a k e is that we s h a l l l o s e ,
i n t h e a b s e n c e of a n y c h a n g e s of p o l i c y , a f u r t h e r £ 1 7 5 m i l l i o n s f r o m o u r
r e s e r v e s d u r i n g t h e s e c o n d h a l f of t h e y e a r . T h i s i s e q u i v a l e n t t o 4 % of t h e
t o t a l t r a n s a c t i o n s b e t w e e n t h e S t e r l i n g A r e a a n d t h e r e s t of t h e w o r l d i n t h e
p e r i o d . It w i l l t h u s b e s e e n t h a t t h i s f i g u r e m a y w e l l b e s u b j e c t t o a m a r g i n of
e r r o r of s a y £ 1 2 5 m i l l i o n s u p w a r d o r d o w n w a r d . I s p e a k of c o u r s e f o r t h e
whole sterling a r e a .
3,
We c a n n o t p o s s i b l y a l l o w o u r s e l v e s t o s u f f e r s u c h a l o s s w h e n
o u r r e s e r v e s a r e o n l y £ 6 0 0 m i l l i o n s . T h e h a r d f a c t of t h e m a t t e r i s t h a t o u r
g o l d r e s e r v e s h a v e f a l l e n s o l o w , b o t h i n 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 in r e l a t i o n to 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 c o n t i n u e o u r
p r e s e n t e x t e r n a l financial s y s t e m only a t g r e a t r i s k , both to o u r s e l v e s and to
t h e s t e r l i n g a r e a . 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 w h o l e s y s t e m i n j e o p a r d y . We a r e l i k e a b o a t i n m i d - A t l a n t i c
h e a v i l y l o a d e d a n d a l m o s t a w a s h . If w e h a v e f a v o u r a b l e w i n d s a n d w e a t h e r
w e s h a l l m a k e t h e c r o s s i n g , if n o t , t h e w a v e s of a n y a p p r e c i a b l e s t o r m w i l l
s w e e p over the g u n w a l e .
4.
I h a v e s a i d f o r s o m e t i m e t h a t w e s h a l l h a v e t o 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 s t e r l i n g a r e a u p o n o u r i n a d e q u a t e r e s e r v e s . I a m n o t p r o n e t o d i s r e g a r d
the v e r y weighty and a l m o s t unanimous advice which I have received from the
w o r l d of B a n k i n g a n d F i n a n c e t h a t a c h a n g e i n o u r p r e s e n t s y s t e m i s n e c e s s a r y .
H o w e v e r a r e c e n t i n f o r m a l d i s c u s s i o n w i t h s o m e of m y c o l l e a g u e s i n d i c a t e s
nO
t h a t t h e y a r e n o t r e a d y t o c h a n g e t h e m e c h a n i s m of o u r e x t e r n a l f i n a n c i a l
s y s t e m a t t h e p r e s e n t t i m e . It i s a n u n d e r s t a t e m e n t t o s a y t h a t w e a r e t h u s
^going t o t a k e a v e r y g r a v e r i s k .
5.
G i v e n t h a t t h e e x i s t i n g s y s t e m m u s t go on s u b s t a n t i a l l y
u n c h a n g e d , what a d v i c e can I then give ? I a m e x p e c t e d to c a r r y the s t e r l i n g
a r e a i n t o t h j w i n t e r , a f t e r r e c e i v i n g e s t i m a t e s of t h e a p p r e c i a b l e e x t e n t
to which the R e s e r v e s m a y d r o p , I do not believe that m y c o l l e a g u e s want
a f u r t h e r d e v a l u a t i o n on the 1949 m o d e l , which I would not p e r s o n a l l y be
w i l l i n g to b e r e s p o n s i b l e f o r . N o r a m I w i l l i n g to drift into a p o s i t i o n in
w h i c h w e a r e f o r c e d b y c i r c u m s t a n c e s t o m a k e a c h a n g e of p o l i c y , e v e n t h o u g h
it m i g h t a p p e a r politically e a s i e r to explain then than now.
6.
A s far a s I can judge under the c i r c u m s t a n c e s d e s c r i b e d , the
o n l y c o u r s e o p e n t o u s w h i c h g i v e s u s a n y c h a n c e of g e t t i n g t h r o u g h i s to
a d o p t t h e f o l l o w i n g b a s e s of p o l i c y .
A . T h e f i r s t i s t h a t t h e s t a t e m e n t w h i c h I m a d e i n t h e H o u s e o n J u n e 1Z a f t e r c o n s u l t i n g m y c o l l e a g u e s , n a m e l y t h a t t h e b a l a n c e of p a y m e n t s h a s f i r s t p r i o r i t y in a l l o u r c o n s i d e r a t i o n s , i s a c c e p t e d a n d c a r r i e d through all our actions.
This is v i t a l . I hope that the Cabinet will give a definite d i r e c t i o n on w h i c h a l l D e p a r t m e n t s will a c t in c o n j u n c t i o n w i t h t h e T r e a s u r y . It m e a n s s p e c i f i c a l l y t h a t e a r l y decisions m u s t now be taken and announced for:­
(i) d e f i n i t e a n d e f f e c t i v e r e d u c t i o n s i n t h e D e f e n c e
Programme;
(ii) 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 a n d l e s s on s o c i a l i n v e s t m e n t , i n c l u d i n g
housing;
( i i i ) a r e d u c t i o n i n i m p o r t s s u f f i c i e n t t o m e e t t h e e s t i m a t e d d e f i c i t i n
t h e s e c o n d h a l f of t h i s y e a r .
B,
T h e s e c o n d b a s i s f r o m which we should w o r k is t h a t we c a n n o t continue i n d e f i n i t e l y w i t h a s y s t e m of i n a d e q u a t e r e s e r v e s s u p p o r t i n g a n inconvertible currency. M y c o l l e a g u e s w i l l r e c a l l t h a t a f t e r t h e m e e t i n g of 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 in J a n u a r y a s t a t e m e n t w a s i s s u e d in w h i c h we s a i d : ­
" . . . . While s t e p s a r e t h u s being t a k e n to o v e r c o m e the i m m e d i a t e
p r o b l e m s of t h e s t e r l i n g a r e a a n d t o a c c e l e r a t e i t s d e v e l o p m e n t ,
we a g r e e that its r e c o v e r y will not be complete until the conditions
have b e e n c r e a t e d in w h i c h s t e r l i n g can b e c o m e and r e m a i n c o n v e r t i b l e " .
We h a v e j u s t i s s u e d i n v i t a t i o n s t o C o m m o n w e a l t h P r i m e M i n i s t e r s t o
a t t e n d a g e n e r a l e c o n o m i c c o n f e r e n c e i n N o v e m b e r , a n d if t h i s i s t o b e
a success two things a r e n e c e s s a r y : ­
( a ) t h a t t h e U n i t e d K i n g d o m G o v e r n m e n t h a s a d e f i n i t e l i n e of p o l i c y t o
put forward; and
(b)
that the c o n f e r e n c e is fully p r e p a r e d at the official l e v e l beforehand.
If t h e s e c o n d i t i o n s a r e t o b e f u l f i l l e d , w e s h a l l r e q u i r e v e r y e a r l y
d e c i s i o n s on the l i n e s on which o u r p o l i c y is to be p r e p a r e d . I t r u s t t h a t m y
c o l l e a g u e s will give m e a u t h o r i t y t o develop a constructive line on convertibility
w h i c h will i n t e r p r e t o u r own p h i l o s o p h y a s a G o v e r n m e n t and give c o h e s i o n t o
t h e a s p i r a t i o n s of t h e C o m m o n w e a l t h . S o m e of t h e p r e l i m i n a r y w o r k m a y
w e l l r e q u i r e v i s i t s t o C o m m o n w e a l t h c o u n t r i e s . In a n y c a s e t h e u t m o s t
s e c r e c y will have to be o b s e r v e d . I have a l r e a d y m a d e s o m e way with
c e r t a i n C o m m o n w e a l t h c o u n t r i e s . We m u s t a l s o w o r k to a c h i e v e the u t m o s t
u n i t y i n t h e f i n a n c i a l p o l i c y of E u r o p e a n c o u n t r i e s . H e r e a g a i n I h a v e
e s t a b l i s h e d t h e f i r s t l i n k s . It m a y w e l l b e t h a t c e r t a i n E u r o p e a n c o u n t r i e s
will not now w a i t l o n g e r for u s , before a l t e r i n g t h e i r own c u r r e n c y p o l i c y .
7.
A s to t i m i n g : our a n n o u n c e m e n t s on the p h y s i c a l m e a s u r e s
n e c e s s a r y t o b r i d g e t h e g a p in o u r B a l a n c e of P a y m e n t s , a n d t o g i v e
c o n f i d e n c e , m u s t b e a n n o u n c e d in t i m e f o r a d e b a t e t o t a k e p l a c e b e f o r e
P a r l i a m e n t r i s e s for the s u m m e r r e c e s s . I m u s t m a k e it c l e a r t h a t I
r e f e r h e r e to m e a s u r e s other than adaptation in c u r r e n c y policy. I a m
quite c e r t a i n that we cannot allow the House to r i s e without an announcement
having b e e n m a d e . What a r e now r e q u i r e d a r e c l e a r d i r e c t i o n s so that a
w h o l l y a d e q u a t e p r o g r a m m e of a c t i o n c a n b e a n n o u n c e d i n t h e r i g h t w a y a n d
at the right time.
R.A.B.
T r e a s u r y Chambers, S.W.1.
3 r d J u l y , 1952.