ANGLO-AMERICAN economic relations are passing through a period of uncertainty; and where there is uncertainty, there is inevitably some danger. The new British Government entered office in 1951 in a phase of acute crisis; rather drastic first-aid measures had to be taken to restore solvency. When the measures began to show signs of having been effective, and after an intensive study of more basic factors in the international situation, the Government focused its thoughts on how a decisive move might be made towards that ideal of a "one-world" system, with convertible currencies and no discriminations, which has been the declared objective and abiding aim of the United States and the United Kingdom alike. A movement away from the paths of control and of interference with the natural flow of trade was quite in line with the philosophy of the new Government.

These matters were discussed at the great Commonwealth meeting in the autumn of 1952 in a spirit of hope and purposefulness. While the communiqué was necessarily expressed in somewhat general language, there is little doubt that the discussions covered a number of specific problems. These were, however, treated with realism and with no desire to embark on experiments that might involve excessive risk. It was accordingly felt necessary to predicate that the bolder measures envisaged would be dependent on what are commonly called "helpful" policies on the part of the United States. "Helpfulness" here did not mean "aid."

Unfortunately, hopes were soon dashed by a development that need not be regarded as surprising. The new Administration in the United States required a fairly extensive period for study before committing itself to new developments. The simplicities of election speeches were confronted by the woefully complex, obdurate and tiresome facts of the present economic situation. No blame at all can be attached to the Administration for requiring time to consolidate its thoughts, but the result has been a sort of waiting period. Furthermore, during this period fears have arisen that political conditions in the United States are such as to preclude large departures of policy in a "helpful" direction. That is, of course, a matter on which judgments formed abroad are nearly worthless; but the mere delay, quite inevitable though it may be, is highly favorable for the advocates of an altogether different point of view in Britain, namely of what is sometimes called the "two-world" system (both being, of course, within the free world). That idea is to weld together the British Commonwealth and Empire, and the countries of Europe, into a system supported by strengthened preferences, and currencies that are mutually convertible but inconvertible to outsiders. Economic relations with the United States would be limited to a minimum.

This point of view has rather noisy supporters, but it must be emphasized, first that its British adherents consist of no more than a minority in either of the great political parties; the majority in each adheres faithfully to the one-world idea; secondly, that this school of thought has hardly got beyond verbal phrases which, when analyzed, prove no more coherent than they were when Lord Keynes castigated them in his speech recommending the U.S. Loan Agreement to the House of Lords in 1945. Furthermore, they contain much wishful thinking in regard to the degree of coöperation likely to be forthcoming for such a scheme, both from other members of the sterling area and from the other countries of Europe. Thus there is no need to fear that a policy of this kind will take the place of the one the British authorities are pursuing--sincerely, if, in American eyes, somewhat slowly.

However, one trouble at the moment is that there is a lack of clarity about the relation between the ultimate aim of a "one-world" system and the immediate necessities. Clearer definitions are needed. These require not only constant attention to the ultimate aim, but also frankness in recognizing the nature of the difficulties. Many obstacles have been overcome since 1945. It is important to be clear about the nature of the obstacles that remain, and of course it would be very advantageous if the authorities responsible for policy on both sides of the Atlantic should take the same view of them. After all, the facts are what they are, and it should not be impossible for highly intelligent administrators to achieve a unity of vision and assessment.

It cannot be denied that most Americans feel rather strong discontent with British behavior in recent years. Between the Atlantic meeting and the end of the war, a common point of view about international economic policy seemed to emerge, and it was hoped that the two countries would work together, not only in implementing a liberal policy but also in influencing other countries in the same direction. Meanwhile, the United States was conscious of making large concessions to the British--wiping out the Lend-Lease obligation and granting a large loan on easy terms. These acts were not regarded by most people as a sort of bribe for securing British adhesion, but rather as a token of the fact that the British had expressed sympathy for the broad American line of policy, and had reached agreement on many matters of detail, such as those involved in the Bretton Woods plans. Meanwhile, it was recognized that Britain could not come the whole way towards liberalization while coping with the "transitional" difficulties of postwar readjustment.

In the eight years that have passed, Britain has had the advantage of much American money. Yet little progress seems to have been made towards removing discriminations against American exports. Outside the sterling area, sterling remains inconvertible, and this also may militate against American sales. There has been no joint leadership toward a clean sweep of restrictions and inconvertibilities. The United States has been generous and patient. Britain cannot still plead that she has been hurried, and Americans feel that she has failed to carry out her undertakings. The British feeling that the United States still has to do something more "helpful" in its external economic policies is intensely irritating to Americans.

The British, on the other hand, concentrate on the fact that, much to their own disappointment, a fundamental equilibrium has not yet been achieved. Britain just cannot abolish discriminations, as this would mean stark bankruptcy. While the British are willing to admit that mistakes have been made, and while their successive governments have had sharp critics at home, they plead that the situation since the war has been perplexed and confusing. They feel that they have made very great efforts indeed. They may point to their austerity, for which they have received some admiration but also a good deal of sarcastic comment of a not very friendly kind. British production has soared. Exports have soared. And yet British citizens have so far reaped practically no advantage from all this; they tighten their belts; and then they are scolded for not having implemented a liberalizing policy which to them seems manifestly impossible. The very fact that so much time has passed with no fundamental equilibrium reached despite all their hard work and austerity seems to point to the conclusion that there is something in the world-wide state of affairs that precludes the attainment of such an equilibrium, however hard they may work for it.

It cannot reasonably be argued that shortcomings in the nationalized sectors of the British economy are responsible for the external trade deficit; and the increase of social services, also criticized in America, cannot possibly have had any effect on the external situation. They have been fully paid for by the British citizens themselves. Since 1947, the British budget has had a surplus, and in this respect Britain can claim that her record is much better than that of the United States. Indeed, if less had been spent on health and education in Britain, and more on automobiles or other luxuries, the balance of trade would probably have been worse. While British people in the lower income brackets have probably had some moderate improvement in their standard of living, when all is averaged out it appears that the general level of consumption in the country has barely risen compared with the prewar period. Outside the poverty-stricken regions of the world's surface, this is probably a unique record. And so, since the international balance continues to be in disequilibrium, the British are inclined to argue that the next move is up to the Americans. They ask them to adopt more "helpful" policies. It is a paradoxical situation. The two countries have, or claim to have, the same ideals; neither side wishes to be unreasonable in its demands. And yet there is friction.

This must arise from a failure at some point to appreciate the facts. But the trouble is that there are so many facts, and each party may choose those that suit his point of view. If my facts are presented with a view to justifying the British point of view, I hope it may at least be considered that they are relevant and that they are facts that both parties should bear in mind if they are to succeed in contriving harmonious policies conducive to their common aim.


I concentrate upon the external aspect. It is not necessary to bring into the picture the familiar facts about war damage in Britain and the need for internal rehabilitation. The external task has been twofold. Foremost and greatest has been Britain's need to reëstablish her over-all external balance, which had been gravely damaged during the war period. The additional task was related to the specific "dollar shortage." Besides greatly enlarging her exports, Britain has had to reorient them somewhat, owing to a shift in the pattern of world trade. She has had to make a huge increase of exports, but she has also been concerned to see that a larger proportion of those exports earned dollars.

The mere enlargement of exports was bound to be the prior task. If Britain did not enlarge them enough to pay her way, then the country would be insolvent. If she did not enlarge her dollar exports sufficiently, she would have to maintain discriminations against dollar imports, and this would be contrary to the long-run commitments which she had undertaken, and to her own long-run policy. But it is clear that the question of over-all solvency had priority; a country lapsing from bankruptcy to bankruptcy would accomplish nothing by coöperating in establishing a brave new world of multilateral trade.

To see where we are and what the United States may reasonably expect of Britain in the next round, it may not be unfair to look first at the situation as it was in 1951 and 1952. The two great factors that have militated against Britain in her over-all balance are, first, the loss of value of her "invisible" receipts on foreign account, of which the investment-income item is much the largest component; and, secondly, the worsening in her terms of trade. The loss of net investment income was due partly to Britain's forced sale of foreign assets in order to fight the war against Hitler, especially when fighting it alone, and partly to the reduction in the value of fixed-interest receipts owing to worldwide currency inflation. The loss of net invisible income may be fairly and squarely attributed to the war. It could be argued that the terms of trade might have moved against Britain even had there been no war, though it may also be said that, had Britain not been engaged in the terrific economic strain of the war, she would have been able to adapt herself gradually to the worsening situation. However that may be, what we are interested in here is the size and nature of the burden which she has had to take on.

In 1938 Britain exported sufficient to buy imports worth £533,000,000; on top of this she had an invisible net income by which she could buy £248,000,000 worth of imports. Thus her net invisibles enabled her to buy 47 percent more imports than she could otherwise pay for. In 1951 her net invisibles were £346,000,000. These paid for as many imports as £79,000,000 worth of invisibles would have paid for in 1938. Thus the amount of extra goods that she could buy with her invisibles in 1951 represented only 15 percent of what she could buy with her exports in 1938. If we may take exports and invisibles together, we can say that exports as they were in 1938, plus invisibles as they were in 1938, would buy 147 units of imports (exports 100 and invisibles 47). If, in 1938, she had had only the net invisibles she had in 1951, she could have bought in 1938 only 115 units of imports. Therefore if, in 1951, she was to offset her loss on invisibles, she had to raise her 1938 exports by 32 percent to fill the gap. That is one heading of loss.

Moreover, owing to the worsened terms of trade, a given quantity of exports in 1951 would not buy as many imports as in 1938. The terms of trade had moved against Britain by 42 percent. Thus if she was to pay for as many imports out of earnings in 1951 as she paid for in 1938, she would have to increase her exports by 74 percent--of which 32 percent allowed for the loss of buying power of her net invisibles, and 42 percent allowed for her worsened terms of trade. If she exported 74 percent more in 1951 than she exported in 1938, she would be able to pay for as many imports, and no more, as she paid for in 1938. Let us consider this burden, leaving out of account for the moment the fact that in 1951 Britain might want more imports because she had a larger population and because her manufacturing population was producing nearly 50 percent more and needed correspondingly increased amounts of imported raw materials; and let us also leave out of account any possible increase in her standard of living. To get that same amount of imported goods that she paid for in 1938, she had to increase the amount of her exports by 74 percent. This is a large amount. It meant that Britain had to export extra goods worth about $3,423,000,000 merely to be where she was in 1938.

The figures for 1952 are slightly more favorable owing to an improvement in the terms of trade. On account of invisibles she would have to export 36 percent more, and on account of the worsened terms of trade she would have to export 31 percent more, making a total of 67 percent on both accounts. This was worth about $3,091,000,000.

We may hope for some improvement on this in coming years, but we cannot bank on it owing to the slackening in world markets for British exports and keener competition. It looks as if Britain would have to continue to export some $3,000,000,000 worth of extra goods merely to be where she was in 1938. In the end she will have an imperative need to import somewhat more than in 1938, but let us waive this for the moment. It must be remembered that Britain is holding her imports down to (or below) the level of 1938 only by stringent import restriction--one of the very points at issue between herself and Americans, who claim that, in accordance with jointly-declared aims, she ought to give a lead in liberalizing her commercial policy.

But let us concentrate upon the burden. This need to continue, year by year, to export some $3,000,000,000 more of goods merely to be where she was in 1938 may be conceived to be a sort of perpetual tribute levied upon Britain by the war--perpetual, anyhow, for the period relevant to immediate policy decisions. This is a large sum of money. Americans might claim that they had increased exports by considerably more than this sum a year; but then they are exporting from a larger economy. It would represent only some 1 percent of the American national income; it is about 8 percent of the British national income--all going out for no return whatever, in the sense that Britain must do it merely to keep from sliding backward. And, of course, these extra exports use much more than 8 percent of her manufacturing output.

Americans rightly feel that they have been patient in waiting for an adjustment in British external policy, and generous in giving her aid during the awkward transition. Of the generosity of the aid there can be no doubt; and Britain remains appreciative of it--and aware that it was not without cost to the harassed American taxpayer. But, of course, it does not follow that because aid is very generous it can solve the problem of the beneficiary country. In order to get a balanced view, it is desirable to compare the aid with this extra tribute that Britain now has to pay (remembering that this burden has nothing to do with the specifically "dollar" problem, which requires a reorientation of her exports).

The great U.S. loan to Britain consisted of $3,750,000,000. The terms were generous, but it is now being repaid at a low rate of interest. In one way and another Britain has repaid the dollar area governments $764,000,000 since the war; of this the major part was to the United States. So we may think of the great loan as being somewhat over $3,000,000,000 net, which must be repaid. Receipts under Marshall Aid and under Defense Aid to the end of 1952 amounted to $3,043,000,000. That sum need not be repaid. All this is certainly great generosity; but, in effect, what it means is that the United States has lent Britain enough to pay her "tribute" for a little more than one year, and given her enough to pay it for another year. To put it thus is not to register a note of complaint. The comparison is brought with a view to diagnosis. It is to be hoped that Britain will progressively reduce her import restrictions; but it must be borne in mind that the amount given was small in relation to the burden that Britain has to be sure of being able to shoulder before she can reduce her import restrictions.

Broadly we may say that this heavy task was achieved two years ago. In 1950 the volume of British exports stood at 176, taking the volume for 1938 as 100; manufactured exports had been roughly doubled. But exports had to be expanded further to make possible the purchase of a greater volume of imports in line with growing needs, and thereby to enable restrictions to be removed. Yet another heave was necessary. In 1951 exports were further increased. But since then, the situation has not been favorable for this further objective. World markets have been declining and British exports have somewhat declined in volume; this problem gives rise to anxiety.


The second problem is the balance with the United States. Not only has an increase in the total quantity of British exports been required, but there has had to be some change in their direction, so that a higher proportion of dollars would be earned. Britain must accomplish this at a time when the dollar shortage is world-wide, owing to changes in the direction of demand and supply of various commodities. These changes, however, have not had much direct effect on the bilateral balance of trade between the United Kingdom and the United States, which has improved somewhat since before the war, no doubt partly owing to discriminatory restrictions.

Other factors have hit Britain. There has been a substantial decline in her bilateral balance with the United States on invisible account, owing to loss of investments and to a shift in shipping. But the main cause of British embarrassment is the altered position of gold. Before the war Britain was easily able to finance her bilateral deficit with the United States on trade account--a perfectly natural one--by the remission to the United States of newly-mined gold, which it could purchase out of its surpluses in the sterling area. Indeed, the value of newly-mined gold substantially exceeded what was required for this purpose, and a much larger amount was dispatched to the United States to cover capital movements; but we need not be concerned with these here. At the present time, although the trading deficit is smaller, the newly-mined gold is insufficient. This is the crux of the British problem; it is also the crux of the European problem. The countries of continental Europe had a persistent and natural trading deficit with the United States, and the whole of this could comfortably be financed by newly-mined gold, in a way that--again apart from capital movements--did not mean the allocation of an exorbitantly large share of the gold to the United States.

If this old relation is not to be restored, Europe will have to find a new method of securing a balance with the United States. Since the war the situation has been adjusted partly by aid, and partly by restrictions on imports from the United States. But great efforts have been made to increase exports to America. In the British case, the quantity of finished manufactures exported to the United States stood, in 1951, 83 percent above the level of 1935-39.[i] Exports of materials had not risen so much, but this was partly due to a change of accountancy by which the United Kingdom ceased to be credited with some materials that passed through it by way of entrepot trade. The total dollar value of its exports to the United States stood at 318, compared with 100 in 1935-9. This was a handsome increase, and the figure would have been higher but for the statistical confusion about entrepot trade. In 1952, the figure appears to have been 341, and in the first quarter of 1953, 357 (annual rate).[ii] This effort is not to be belittled. Nonetheless, Britain's exports still paid for less than half of her greatly restricted imports from the United States. No one seriously thinks that the bilateral trade between these two countries could or ought to be made to balance. What is needed is for Britain to secure a dollar balance multilaterally, that is by earning dollars in third-party markets.

The changed position may, no doubt, with some oversimplification, be stated as follows. In the old days Britain had no difficulty in maintaining surpluses with the sterling area, wherewith she earned gold to make good her deficit with the United States. By those surpluses, she can now earn some dollars, but not nearly enough to balance what would be her deficit if discriminatory import restrictions were removed. Her main task now, therefore, is, while striving to sell as much as possible in the United States, to achieve surpluses, not where she can earn gold, but where she can earn dollars. And that means achieving surpluses in the Western Hemisphere, for the rest of the world has not many U.S. dollars available. Thus Britain has not only had to devote a much larger proportion of her productive capacity to additional exports (for which she gets no additional return), but if the discriminatory system is to be modified she must also enter into hot competition with the United States in this area, thus earning extra U.S. dollars to balance her direct deficit with the United States.

To put the point strongly, Britain has to push a fairly large quantity of United States exports out of markets where United States goodwill is strong. This is formulating the matter in a way that seems almost to give it an anti-American twist. But it is vitally important that Americans should understand the position. If they wish Britain to abandon her discriminatory system --a reasonable wish--it will be necessary for Britain to capture some of the U.S. dollars available in the countries of the Western Hemisphere by squeezing out American exports. If she cannot do this, it is fairly certain that she will have to maintain her discriminatory system. This is a mere matter of arithmetic. Americans are too apt to think of Britain's dollar imbalance in merely general terms and not to figure out what a rectification would mean concretely. It must mean the capture by Britain (and other European countries) of Western Hemisphere markets for which the United States now caters; there are no two ways about it.

There are grave difficulties confronting such a development. European exports to Latin America are hampered by fears in that region of a third world war and a desire not to be dependent on supplies of manufactures that might again be cut off. During the postwar period, when Europe was heavily engaged in restoring its productive system and expanding its over-all volume of exports, Americans came in strength into the markets of the Western Hemisphere and established connections. If Europe had been in a position to compete very effectively there in the years immediately after the war, her position might be much easier now. But that was not possible at the time.

If Britain and Europe are to achieve balance in this way they will have to quote competitive prices and underbid American traders. But their prices must not be too low for, if they were, that would turn the terms of trade against them and gain no dollars. We need not despair of this development eventually taking place. But the task is by no means an easy one. It calls for another big effort, and at the present time markets are not favorable. What I would put forward is that Britain and the countries of continental Europe have made a remarkable achievement in the over-all expansion of their exports, which may be judged a creditable performance and a justification of the aid so generously accorded.


What might constitute the so-called "helpful" policy on the part of the United States in these circumstances? By far and away the most helpful thing that could be done would be a restoration of the position of gold. This is a delicate topic, and it is not for foreigners to prescribe to the United States what its gold policy should be. If it chose to proceed exactly as at present, no one could complain. But the most helpful thing that the United States could do would be to raise the dollar price of gold by a substantial amount. Subject to the strong proviso that there must be no claim to interfere in what is essentially America's own business, some remarks may be made about this.

First, it may be noted that the present position is utterly unlike that which confronted President Roosevelt in 1933, and that no American who has strongly condemned Roosevelt's policy need think he is being inconsistent in favoring a change in the price of gold now. Some Americans hold that it would set up an internal inflationary pressure. The outside observer is bound to feel skeptical about this, since the Federal Reserve System has plenty of ammunition for preventing the increased value of gold from enlarging the total money supply in the United States. It is indeed possible that an inflow of gold at an increased value might raise difficult problems relating to the Federal Reserve support for the U.S. bond market. The agreement on this topic reached two years ago between the Federal Reserve System and the United States Treasury was certainly a matter of great satisfaction outside, as well as inside, the United States. It would be regrettable if that harmony were disturbed; but that set of problems, interesting and important as it is, is bound to seem rather minor compared with the momentous question of the equilibrium of world trade and the choice between a "one-world" and a "two-world" system.

Some Americans argue that to raise the price of gold would merely be to give "aid" (which we all now seek to work away from) in a new form. Outsiders cannot see it quite that way. This would not be giving something for nothing. Gold is produced only by toil and sweat. Both from the point of view of the countries that mine gold, and of the European countries which would have to produce goods for export in order to buy it, requital for this labor at a fair price can by no means be regarded as "aid." Americans might argue that, even if the gold cannot be provided without hard productive labor, its purchase at a higher price would indeed constitute "aid" if they do not happen to require more gold at a higher price. It has often been said--much too often, I think--that there is already plenty of gold in Fort Knox.

It is certainly most imprudent for an outsider to challenge this view, yet even on this ultra-delicate subject a few words may be said for the sake of frankness. In the two great war efforts which the United States has undertaken in this century, the course of events developed in such a way that the United States did not require great external reserves, as Britain did. But another war might be different. In the Second World War, Britain, a smaller country, and able to operate only on a much smaller scale than would the United States in another world war, overspent externally far more than $22,000,000,000, and dollars were then worth more. Anyone who sits down to do a little figuring can see at once that the approximately $22,000,000,000 of gold in Fort Knox is a miserably inadequate external reserve, and quite out of line with the defense preparations that the United States is making in all other fields. It could be argued that the United States would find itself able to purchase goods from neutrals and to finance overseas operations on credit, since its credit is excellent. Britain did that in the last war. Blocked dollar accounts could be set up in various parts of the world. But it must be said that this would not be a point of strength; it is often embarrassing to depend on being given credit to finance operations or purchases that may be of vital importance in the war effort. If by a stroke of the pen the United States told the world that its present stock of gold was worth not $22,000,000,000, but $44,000,000,000, the whole world would accept that now; but after a war had broken out, it would be too late.

It is not necessary for me to dilate upon various helpful lines of policy in the field of tariff and customs procedures, since these are already very well known. But I should repeat that it would be useful for the American authorities always to bear in mind that the way in which the true equilibrium of world trade can be established and discrimination dispensed with is for Europe to sell more goods, at the expense of American exports, in Western Hemisphere countries. And there is a further point in connection with this. Some Latin American countries have recently been overspending, and are unable to pay all their debts either to American or European exporters. In consequence, European exporters have become discouraged and relaxed their efforts to sell in those regions. If the United States authorities make advances enabling American commercial creditors to be paid off, these American traders will naturally go at their task of selling in those countries with renewed zest. Thus American exporters will be encouraged, and European exporters further discouraged in these markets. Such action by the American authorities may be regarded therefore as decidedly unhelpful. To take another point, where the Americans have a generous conception of aiding underdeveloped countries by productive investment, whether directly or through international agencies, it would be helpful if they encouraged the employment of a fair share of European technicians, since orders on capital account tend to go to the countries from which the technical experts have come, rather than to the countries where the required equipment is available on the most economical terms.

There is one final point to be made beyond all this. It is "helpful" for Americans to show sympathetic understanding of the European problem. The figures I have given may suggest that the efforts made by Britain have not been unworthy, and that the period that has been required for them not unduly long. If discriminations have to be maintained, for the reasons already stated, this should not be attributed to backsliding. If at a time when Britain feels she has done a good job of work and is determined to go ahead to reach the "one-world" ideal, Americans attribute her failure to remove discriminations here and now to mere slackness and backsliding, the resulting exasperation gives fine ammunition to the minority in Britain which seeks a "two-world" system.

The situation is particularly delicate at the moment, because the tailing off of American aid may require even stronger discriminations against American goods. Also, if the United Kingdom is to make sterling convertible in the fairly near future, that may also require an intensification of discrimination. It must be remembered that an increase of discrimination undertaken in order to buttress a convertibility experiment would represent the thinking of those whose final aim is the "one-world" system. The "two-world" party is not interested in convertibility. It can be argued that it will be difficult for Britain to earn dollars in triangular trade--and that is an absolutely essential prerequisite for eventually getting rid of discrimination--so long as sterling is a soft currency, for debtors will seldom surrender hard currency to pay a soft-currency debt. Thus it may be desirable to introduce convertibility prior to the establishment of final equilibrium, even at the expense of temporarily increasing discrimination against U.S. imports. It is important that Americans should understand the true meaning of such a move and not raise obstacles in its way.

The "two-world" party is most unlikely to gain power in Britain. The greater the sympathy and patience shown by the American authorities at all stages on the difficult journey to the restoration of a fully "one-world" system, the sooner it will come.

[i] "Pattern of the U.S. Import Trade Since 1923." Federal Reserve Bank of New York, p. 136.

[ii] These last figures are deduced from the data supplied in the Monthly Digest of Statistics. Her Majesty's Stationery Office, June 1953.

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  • ROY HARROD, University Lecturer in Economics at Oxford since 1946; Joint Editor of the Economic Journal; author of "The Life of John Maynard Keynes" and other works
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