PERHAPS it is a curiosity of international relations that collaboration as widespread as that between Britain and the United States should normally be conducted in the atmosphere of unsparing mutual criticism. In December last the two Governments, after three months of negotiations between experts, jointly announced a broad economic and financial agreement -- a peacetime accord comparable in breadth, though not in nature, to the wartime lend-lease agreements, and regarded by the executive branches of both Governments as a model for international coöperation. The text of the agreement evoked more than a little hostility. In London various voices pronounced it "cruelly hard," said that it "left us with our agricultural program," or concluded that "we have been forced into a disastrous bargain." In many of the American Congressional comments the agreement was handled in much the same harsh spirit: it was called "not a loan but an outright gift" and "a game of chance," and the criticism was voiced that it would "promote too damned much Socialism at home and too damned much imperialism abroad." A mutual declaration of economic warfare could scarcely have elicited warmer outbursts of distaste on both sides. The British Parliament nevertheless felt forced begrudgingly to confirm the agreement. The United States Congress has yet to act, and what its action will be is at the present time uncertain.

The purpose of this paper is not to show on which side of the Atlantic there has arisen the juster oratory. Rather, an effort is here made to assess from an economic point of view the likely effectiveness of the proposed arrangements for solving the United Kingdom's current economic dilemma, and for contributing to the "multilateral" economy which is the avowed aim of the international economic policy of the United States.

Presumably the first concern of the United States in the negotiations was to expedite Britain's transition to a "normal" self-liquidating trade basis, in contrast to the informal financial arrangements of wartime. The British came to the negotiations with a similar general aim of achieving a multilateral international setup, but also with the need of meeting beforehand an urgent problem in their balance of payments. To understand the terms at last agreed upon, consideration must be given to various facets of the British problem, the solution of which represented for the negotiators a condition precedent to effective progress toward the broader aim of the two Governments.

In its simplest form, the British problem is that of finding a way to finance an import balance (that is a balance-of-payments deficit on current account) during the immediate period ahead, when British foreign receipts will be inadequate to sustain imports at a rate necessary for a fast reconversion without lowering the standard of living of the British people to an intolerable degree.

This problem is new to Britain only in its intensity. Her insular economy has always depended on vital imports paid for by British overseas income. Her balance of payments, running in the pattern of a large import balance on merchandise account adjusted by an export balance in invisible transactions, has gotten seriously out of kilter on at least three occasions in the last 15 years alone. On each occasion, the trouble came from the same general cause -- the failure of receipts, particularly from service items, to sustain the volume of imports essential for so specialized an economy.

The first occasion was in 1931, when there was a deficit on current account (excluding gold movements) of about $500 million. For the purpose of handling the resulting exchange pressure, the United Kingdom imposed controls which tended to isolate the British Empire from the rest of the trading world. These controls, undertaken in connection with a general devaluation, and meant to stimulate exports and employment, covered a broad field -- the Empire system of tariffs and quotas, bilateral clearing and trade agreements, development of the sterling bloc, control of foreign investments, and various forms of assistance to home producers competing with imports. Although these measures were thought by many economists to have contributed to the raising and stabilizing of employment levels, they were only partially effective in eliminating the exchange pressure. During the three years before 1939, proceeds from merchandise exports covered only slightly more than half the cost of merchandise imports, and the debit balance on all current transactions averaged over $170 million a year, excluding gold movements.

The second of the recent occasions on which the deficit problem became critical arose with the advent of war. Then the necessity for full monopolization of dollar resources, and the need for aid from the United States, again made it necessary for the United Kingdom to alter drastically its system of international trade and financial controls. The sterling area became one unit for exchange control purposes, and exceedingly stringent controls were placed on the movement of funds outside the area. All of the nations remaining in the sterling area (most non-British countries left following the outbreak of war) pooled and monopolized their resources of gold and dollars ("the dollar pool") so as to permit maximum war purchases. As a further step, the United Kingdom required its citizens to surrender their foreign exchange assets. These were spent early in the war: the net gold and dollar reserves of the United Kingdom, estimated at $4.2 billion in August 1938, were drawn down to $12 million by April, 1941.[i]

In addition, over $820 million of investments in the United States were sold or repatriated during the war. It was obvious in the early spring of 1941 that the British deficit on current account vis-à-vis the United States would make other currency arrangements necessary for the further effective conduct of the war. The arrangements took the form of lend-lease agreements, which in themselves amounted to a gigantic bilateral clearing agreement based on an unspecified trade ratio. This was by no means the full extent of Britain's financial and trade adjustments necessitated by the war. Export trade declined drastically, the volume in 1944 being officially reckoned at 30 percent of 1938. Of more immediate importance was the overseas spending during the war of huge sums in maintaining British forces, mostly through the creation of sterling bank accounts. From the outbreak of war to June 30, 1945, this overseas debt of the United Kingdom, commonly referred to as "blocked sterling," increased by $11.6 billion to $13.5 billion. Britain's total repatriation and sale of overseas investments, including those in the United States, totaled $4.5 billion. The net merchant shipping position, always important in bridging the gap between Britain's excess of merchandise imports over exports, declined due to war losses to 75 percent of the prewar capacity.

So with the end of lend-lease immediately after the war, the United Kingdom, standing in a greatly impaired economic position, faced for the third time since 1930 the problem of a critical deficit in the balance of payments. The extent of this impairment is to be measured not only by the disadvantageous change in the United Kingdom's external position as shown above, but by parallel changes internally. Industrial disinvestment (accumulated depreciation not even including bomb-damage) is estimated by the British as $3.5 billion. In addition, some of the facilities which might otherwise be reserved for export production will have to be committed to making long-overdue replacements in consumer items, such as houses, clothes, etc. Finally, the United Kingdom faces a drastic reconversion problem -- the difficulties of which we also know only too well.

In this grim outlook, several brighter spots may be noted: 1, the increasing centralization of the British economy may well facilitate reconversion, and the attainment of high production levels and increased exports; 2, the war eliminated three of England's chief competitors abroad -- Germany, Italy and Japan; 3, during the war, great technological advances were made in British industries, which greatly increased production per manhour, despite wartime difficulties.


Obviously, in these circumstances, the United Kingdom's main interest in financial negotiations with the United States would be to secure such assistance as would permit the necessary balance-of-payments adjustment other than through a drastic paring of imports. The United States was also interested in "regularizing" Britain's position, among other reasons because of her importance as an American customer and because of her potential importance in the creation of a multilateral trading system of the sort hoped for by the American negotiators.

The actual agreements, reflecting both Britain's need for immediate financial aid to adjust her international position and the American desire that any such adjustment be made only within the framework of a multilateral system, are notable for the fact that they deal with the whole range of problems related to that adjustment. Thus, in addition to provisions for a long-term credit line to Britain, the agreements provide for the settlement of lend-lease and surplus war property, and deal with mutual trade policy commitments, including a substantial relaxation of the familiar British controls.

Before we proceed to comment on the financial agreements, our main concern in the present paper, brief notice should be taken of the lend-lease settlement, which constitutes a major though relatively little publicized accomplishment of the negotiations. Subject to what will certainly be minor adjustments, the United Kingdom agrees to pay the United States $650 million in full settlement of lend-lease, surplus war property and other financial claims arising out of the conduct of the war. This debt is to be discharged on the same terms as the loan discussed below.

Aid from the United States to the United Kingdom under lend-lease was some $20 billion in excess of reciprocal aid received. This huge debt is now, for all practical purposes, wiped out. The $650 million payment is entirely for goods and services which were not consumed during the war, and which are available for British use or consumption after the war. Although the agreement was made without prejudice to any settlement for lend-lease and reciprocal aid with other nations, it will, no doubt, set a precedent for recognizing (in the words, later retracted, of President Roosevelt) that "victory and a secure peace are the only coin in which we can be repaid" for lend-lease. The great significance of the settlement can be appreciated by recalling the long-drawn-out and largely unsuccessful attempts by the United States to collect from its Allies on World War I debts. The settlement, therefore, removes a threatened renewal of a problem which in the 1920's was one of the major causes of economic and political friction.


Under the terms of the financial agreement, the United States negotiators agree to extend a $3.75 billion line of credit to the United Kingdom. This credit can be drawn upon until December 31, 1951, and is to be used "to facilitate purchases by the United Kingdom of goods and services from the United States, to assist the United Kingdom to meet transitional postwar deficits in its current balance of payments, to help the United Kingdom to maintain adequate reserves of gold and dollars, and to assist the United Kingdom to assume the obligations of multilateral trade." The loan is to be repaid in 50 annual installments beginning in December 1951, with interest at the rate of 2 percent per year. Taking account of the interest-free years up to 1951, the rate is actually 1.6 percent. Even at this unprecedentedly low rate, the interest charges will more than cover the cost to the U. S. Treasury unless an unforeseen number of interest-waivers are granted. The maximum annual payment of interest and principal would be $140 million.

The British negotiators, and the British public, had frankly hoped for aid in the form of an outright grant -- retroactive lend-lease, as it were, covering the period between the outbreak of war and March 1941. Failing to find a favorable reaction to this idea in the United States, the British felt that the least we could do would be to provide an interest-free loan. Lord Keynes, the chief British negotiator, has stated: ". . . I shall never so long as I live cease to regret that this is not an interest-free loan. The charging of interest is out of tune with the underlying realities." In urging approval in the House of Lords, however, he noted the very potent reality that the United States negotiators deemed it absolutely necessary to charge interest if Congress and the American public were to accept the agreement. The interest charges are, in fact, considerably below those charged by the Export-Import Bank for loans which it is currently making to several of our other Allies, as Lord Keynes also noted.

A further softening of the interest requirement was arranged in the novel automatic waiver provisions. Interest may be waived in any year in which Britain's average income from home-produced exports plus net income from invisible transactions during the five previous years is, after adjusting for price level changes, less than £866 million. In order to prevent the British from drastically reducing or possibly eliminating any net income from invisible transactions, it is further provided that in the handling of releases of blocked sterling, a maximum of £43.75 million is to be included in annual current transactions, and any additional amount is to be considered as capital transactions. Broadly, the effect of this technical arrangement is that Britain could request a waiver of interest whenever her average annual receipts from goods sold abroad plus net service income fall below the prewar volume. It is impossible to forecast whether resort to the waiver of interest will be needed frequently, since so much depends on the level of world -- and especially American -- economic activity and on political considerations which cannot be assessed.

The agreement is also unique in that it attaches no strings to Britain's use of the dollars except that they will not be used "to discharge obligations of the United Kingdom to third countries outstanding on the effective date of this agreement." The sterling balances represent the most important obligation of this type. Since nowhere in the agreement does there appear to be any literal intention to earmark dollars from one specific source for transactions of a specific type, the net effect of this provision is to guarantee simply that the United Kingdom will in any year import at least as much as it borrows from the United States. It is inconceivable that the British position could be adjusted on the basis of a volume of imports no larger than the $600 million which could on the average be borrowed annually during the life of the credit. Accordingly, this provision is actually without significance, except as a comforting reaffirmation of the fact that Britain intends to go on importing.

The United Kingdom also agrees not to arrange before 1952 any long-term loans "on terms more favorable to the lender than the terms of this line of credit." The ramifications of this restriction are not clear. Certainly difficult questions could arise as to comparability of terms, inasmuch as the terms of the present agreement go far beyond routine amortization and interest provisions. In any case, the application of this provision is specifically made subject to consultation between the two Governments. It may be that the restriction was intended to discourage further British borrowings, on the narrow assumption that the fewer debts Britain has to service, the more likely she will be to service this one. Whatever the purpose may have been, the proviso will give Britain a weapon against possible pressure to fund the blocked sterling balances on unfavorable terms or undertake other long-term obligations of an unfavorable sort in connection with them. It will also protect the Administration from later charges that the American negotiators were out-bargained.

In return for this credit line, the British agree within a year to relax (with minor exceptions) wartime exchange controls so that both countries in the sterling area and other countries will have their current receipts at their free disposal for current transactions anywhere in the world. The fulfillment of this provision will terminate the dollar pool and the further blocking of sterling. As noted above, the difficulties of paying for imports from the United States during the war were removed by lend-lease and dollar-pool arrangements, and the difficulties of paying for imports from the sterling area were removed by the "blocked sterling" arrangements. Taken together, these procedures had automatically resolved the problem of Britain's unbalanced external budget. The termination of these controls will, therefore, impose on Britain the necessity of finding hard currencies to pay for the imports, either from the sterling area or from outside the sterling area. In short, with the help of the present credit line and possible other loans, Britain's external budget will have to be balanced within the framework of a multilateral economy.

As an immediate consequence of this concession, the United Kingdom will lose one important current source of dollars, namely, the dollar pool. This loss is an effective reduction of the $3.75 billion credit line. Moreover, to the extent that these provisions initiate a period in which the Empire countries will hold balances in currency other than sterling, they introduce a short-term capital flight, which in turn will aggravate the problem this loan is intended to solve -- the United Kingdom's exchange shortage. Faced with such a possibility, the United Kingdom may be forced to cover its short-term debts thereafter with larger exchange reserves. This would immobilize another portion of the credit. In such an eventuality, the United Kingdom might after 1951 become increasingly dependent on the International Monetary Fund for relief from some of the burdens connected with the defense of sterling. These consequences, however, probably should be viewed only as hastened, not caused, by the British agreement to relax the Empire controls. As Lord Keynes pointed out in an answer to bitter criticism of this particular sacrifice of control over the sterling area: "I wonder how much we are giving away there. . . . It will be very satisfactory if we can maintain the voluntary wartime system into 1947. But what hope is there of the countries concerned continuing such an arrangement much longer than that? Indeed, the danger is that these countries which have a dollar or gold surplus, such as India, and South Africa, would prefer to make their own arrangements, leaving us with a dollar pool which is a deficit pool, responsible for the dollar expenditure not only of ourselves but of the other members of the area having a dollar deficit."

In regard to the existing sterling balances now blocked and not covered by the foregoing provisions, Britain states her intention "to make agreements . . . for an early settlement," on the basis of a partial write-off, with the balance to be liquidated by installments. As has been noted, the wartime sterling accumulations are comparable to the lend-lease accounts and their settlement is subject to political considerations to which the United States is not a party. That a real political difficulty exists is shown by the comment of a New Delhi newspaper that any attempt to write off any part of India's sterling balances would be considered "sheer robbery." However, if the blocked sterling accounts are treated in terms comparable to the settlement of lend-lease, the write-off would be drastic.

Finally, the United Kingdom and the United States mutually undertake not to impose discriminatory quantitative import restrictions. This provision recognizes that if the United Kingdom is to forego its current controls with only the limited help afforded by the present credit line, imports will in all probability have to be rigidly supervised to guarantee that exchange resources will be used in ways most helpful to the reconstruction of the British economy. The time for loosening belts is not at hand. Britain here agrees not to impose import quotas in such a way as to discriminate against United States exports.

Whatever relation "non-discrimination" may have ultimately to a relaxation of "Empire Preference" or to a change in United States tariffs will have to await the fuller formulation of trade policy in the proposed International Trade Organization or in other agreements. In a joint statement accompanying the financial agreements, the United Kingdom and the United States acknowledge their mutual agreement on the general lines of desirable commercial policy, and express their intention to begin at an early date preliminary negotiations between themselves and other countries.


Since the agreements obviously affect far-reaching economic and political problems, they have naturally evoked many questions in both countries. Sometimes these questions have arisen from malice or hostility; more often from sober doubt, occasionally from sheer misunderstanding. It would require many pages to deal with them all. The discussion here will be confined to the two questions which on careful consideration seem to have the greatest basic merit. The first question hits at the adequacy of the loan. Will the financial arrangements in fact result in Britain's adjustment to a multilateral world? The second question goes into the urgency of the loan from the standpoint of American international policy. Is there an alternative solution?

Regarding the technical adequacy of the loan, we must recognize that once the idea of an interest-free loan had been discarded, the negotiators must have been concerned to get the size of the loan properly adjusted between two conflicting economic considerations. Too large a loan would produce too heavy a service burden, beginning in 1951, on the British economy; on the other hand, it must be large enough to permit the rapid rate of reconversion essential if the British economy was to stand on its own feet within the allowed five years. The figure actually agreed upon, $3.75 billion, permits an average annual credit of $600 million to the British, or approximately 15 percent of their prewar exchange resources. It is estimated that even in 1946 Britain's own current exchange resources will still be $1.5 billion below the prewar level. Obviously, an annual credit of $600 million would not completely offset the $1.5 billion loss of exchange from these normal sources. At the same time, the maintenance of large British forces overseas and the accumulated capital needs of the economy represent additional exchange requirements. Even though the credit line appears modest when seen in connection with the loss of other exchange resources and the growth in exchange needs, the resulting burden of interest and principal repayments starting in 1951 amounts to some $140 million annually. In addition, the adjustment of the sterling balances and the terms of additional credits may be expected to impose a service burden of similar proportions, resulting in an aggregate burden of some $300 million a year. Consequently, there were cogent reasons for not increasing the credit line above the present figure. The inescapable conclusion is that the adjustment of the British international account on the basis of the present credit can be made only if imports are strictly limited; and that effort will require, as the New Statesman and Nation remarked, "every aid which deliberate arrangement and planning can supply."

It is hard to predict how much difficulty will be experienced in attempting an adjustment with only the agreed credit for margin. Factors at present unknown, such as possible additional credits from Empire countries (negotiations with Canada are now in progress) and the rapidity of reconversion and reconstruction, will come into play. Most important of all, employment levels and the volume of production outside Britain will influence the volume of her receipts. Favorable conditions for world trade would unquestionably react beneficially on her trade; unfavorable conditions might make adjustment impossible. It is this latter possibility which especially disturbs the British.

In partially forsaking domestic manipulation as a basis for stabilizing trade, and accepting instead the vagaries of unstabilized external production, the British remember sourly the effects on their economy of unemployment in the United States. As an official British publication states: "It is a striking fact that between 1929 and 1930, when the income of the United States fell by 50 percent, British exports to the whole world fell by precisely the same figure. . . . It is certain that under a multilateral trading system, British exports in the postwar world would tend to follow once again the trend in economic activity of the United States." And the Economist commented: "Everything turns on America's foreign trade policy, which depends in its turn on the stability of the American domestic economy. And anyone who believes that America is growing in stability deserves a diploma for optimism."

If the amount of aid and the conditions under which it is offered leave a disturbing possibility that the United Kingdom will not be able to complete the necessary transition within the allowed years, it may be wondered why the British Parliament accepted the agreement. The answer is probably that the British had no real choice. To quote Lord Keynes' observations to the House of Lords: "Do the critics really grasp the nature of the alternative? The alternative is to build up a separate economic bloc which excludes Canada and consists of countries to which we already owe more than we can pay, on the basis of their agreeing to lend us money they have not got and buy only from us and one another goods we are unable to supply."

From the standpoint of our foreign policy, the major significance of the agreements appears only when viewed in the context of related international measures. Seen in connection with the International Monetary Fund, the International Bank for Reconstruction, and the proposed International Trade Organization, this financial accord may become a crucial part of the general design for an unfettered international commerce. Without these other institutions, it is doubtful if these agreements, except for the credit line, have any significance other than as the record of an interesting bilateral conversation.

In the light of the general international design, it is notable that although the agreements involve commitments which tend to bring the British economy into a larger international economic unit, there are no parallel commitments -- particularly from the United States -- to provide for sustained production and employment in this larger unit. In fact, it is a remarkable feature not only of the present financial agreement, but also of the related international agreements for monetary institutions (Bretton Woods) and proposals for trade organizations (the State Department's "Proposals for Expansion of World Trade and Employment"), that the avowed purpose of attaining high levels of international trade, production and employment is nowhere accompanied by positive provisions for controls commonly regarded in national economies to be necessary for the accomplishment of such a purpose.

While the financial agreement can scarcely be regarded as guaranteeing a full solution of the critical British problem, and much less the creation of a full-fledged multilateral trading sphere, it is important to recognize its significance as a vital step toward both of these objectives. The approach to both might preferably have been multilateral. That alternative is no longer open. If we reject the financial agreement, the British will probably be constrained for political reasons to withdraw their effective participation in the Bretton Woods agreements. With both Britain and Russia outside of the international economic arrangements which we have sought to make, the arrangements themselves would for a long time represent no more than a United States trading sphere of even narrower scope than that which existed before the war.

[i] Largely as a result of spending by the United States forces in the United Kingdom, the British net gold and dollar reserves at the end of the war had increased to $1.8 billion, according to minimum official figures.

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