Dear Mike [Pearson],

Yesterday evening I entertained the Chancellor of the Exchequer to dinner as the result of a suggestion which he had made through Sir Percivale Liesching that it would be useful to have a general discussion about the problems of AngloCanadian finance. The Chancellor had also suggested indirectly those whom he would like invited - Sir Edward Bridges and Sir Wilfrid Eady of the Treasury, Sir John Henry Woods, Permanent Secretary at the Board of Trade, Mr. T.L. Rowan, Chairman of the Overseas Negotiations Committee, and Sir Percival(; Liesching. Unfortunately neither Bridges nor Eady could accept and I invited Mr. R.W.B. Clarke of the Treasury instead, so that the company consisted of Cripps, Woods, Liesching, Rowan, Clarke, Syers of the Commonwealth Relations Office and LePan.³

2. As soon as Cripps joined the company, he plunged into an urgent exposition of his concern. What worried him most was that there seemed to be no available device lying ready to be pressed into use at the end of this three-month period. He said that he recognized that the Canadian Government had shown great goodwill during the negotiations last December and had stretched themselves to the uttermost to find a solution. The Government here, he thought we would admit, had also placed themselves under real strain in order to come to an agreement. But what was to happen at the end of March? The United Kingdom could not continue to make United States dollars available to us at the same rate as they were doing at present.

Even since the agreement had been concluded the seriousness of the deficit with Canada had been increasing. "Some of our friends," he said, "seem to find it impossible to be continent." By this I assume he meant that some of the other sterling area countries were not managing to limit their dollar deficits to the amounts which had been forecast when Liesching was in Ottawa. On the other hand, he realized that the Canadian Government very probably would also feel - and with reason - that they could not continue the present arrangement. By the end of March the Canadian Government, he imagined, might be unable to extend further credit; and the United Kingdom Government would be unable to continue their rate of payments of United States dollars. With the best will in the world, under those circumstances, it would be impossible to reach a new financial agreement. It would be quite useless to send out anyone to Ottawa or even to suggest that negotiations should take place. He and his advisers had been casting about desperately for some device which could provide a way around the impasse. They had not been able to light on any new ideas and he himself now felt sure that there were none, that there were no keys to unlock this intractable problem, at least so long as it was considered in isolation. The only creative approach, he thought, lay in changing the terms of the problem. It had been considered hitherto chiefly as a difficulty between Canada and the United Kingdom. He thought that now it would have to be transposed and considered as a problem affecting Canada, the United Kingdom and the United States. It was clear that the problem would temporarily disappear, or at least be made much less acute, once the Marshall Plan was in full operation. The brighter prospect in the future, however, would not of itself suffice to ease the position for the five or six months after the end of March, unless positive action were taken and concrete means were devised of bringing in the expectation of future favours to redress the present difficulties.

3. This exposition (in which I said that I generally concurred) led to an account of the prospects of the Marshall Plan as they now appear to the Government here. Material for this appreciation was provided by a number of individuals, notably by "Otto" [R.W.B.] Clarke, as well as by the Chancellor. But I think I may be able to give you a clearer idea of how the Marshall Plan now appears to the United Kingdom Government if I omit any reference to the contributors to the discussion and instead arrange the conclusions which emerged and which had general approval in a more summary form.

(a) It is not expected that effective aid will be forthcoming under the Marshall Plan until September at the earliest. The Foreign Office believe that the appropriations for the European Reconstruction Programme may be voted by June; but even this is held to be an optimistic forecast. After funds have been appropriated, however, considerable time must elapse before bilateral agreements can be made with the sixteen countries, an administrator appointed and his organization set up, and before the receiving Governments are actually in a position to procure needed supplies from the Western Hemisphere.

(b) Aid will be extended in the form of loans and gifts either of dollars or commodities to make possible an agreed import programme. If the receiving country decides that it does not wish to accept some of the commodities offered, then aid will be reduced by that amount. For example, if the United Kingdom does not wish to accept as large a quantity of tobacco as the United States Government offers, they will not be able to obtain the equivalent value in other commodities, of which in their view they have greater need. Sir Stafford said that the experience of the French under the Interim Aid appropriation had been instructive on this point. As a result of the increase in British coal production, the National Coal Board had been able to offer the French substantial quantities and the French had wished to accept these in place of American coal, expecting that they could obtain United States wheat in lieu. They had not been able to secure sanction, however, from the State Department for this switch. Sir Stafford thought that the accounting system in the United States Treasury and the influence of pressure groups would operate to prevent any such alterations in the European Reconstruction Programme as well as in the provision of Interim Aid.

(c) Congress will almost certainly make some cut in the sum of $6,800,000,000 for which the State Department is asking to meet the requirements of Western Europe for the fifteen months from the end of March. Since there are no pressure groups inside the United States to push the claims of off-shore purchasing, this end of the programme is likely to be the first to be scamped as the result of any cut in the appropriation. In fact, the United Kingdom may well find itself doubly squeezed. They would suffer from any reduction in the sums available for off-shore purchase and also from pressure on them to accept substantial quantities of commodities like tobacco, oranges and dried fruits, which have not a high priority in their own import programme.

(d) The Interim Aid for France will be completely exhausted, according to M. Mayer, on the 10th of February. In addition, Italy will be in almost as perilous a situation by that time. Consequently, some thought is now being given in the State Department to the possibility that there may have to be a fresh instalment of Interim Aid in order to provide a firm basis for the European Reconstruction Programme when it comes along.

4. Sir Stafford said that he thought the State Department were preoccupied with the pressing needs of France and Italy, and he added that in his opinion that present concentration of interest was right and proper. Obviously he had been deeply disturbed by what he had heard from M. Mayer, who was in London last Friday and whom he is seeing again in Paris today. M. Mayer had said that, according to close estimates made by the French Ministry of Finance, France's resources for financing essential imports would be entirely exhausted by the 10th of February. I imagine that the reason why interim aid has been eaten up so much more quickly than was expected is to be found in the loss of production caused by the Communist-inspired strikes of last November. The Chancellor felt that the present French Government was extremely insecure and he did not know what would follow if they fell from office. All the prognostics were very gloomy. If the Marshall Plan were to become a reality, the State Department could not afford to let either France or Italy collapse and their preoccupation with these two countries was therefore justified -or at least up to a point. They tended perhaps to take the United Kingdom's stability for granted. He did not complain of that. The United Kingdom was, as it were, the anchor of the Marshall Plan in Europe and, although in the long run its require-. ments must be met if the Plan were to be a success, its immediate needs were not so absolutely imperative as those of some other countries. The problem of the United Kingdom's deficit with Canada, however, was a sharp exception from that general rule. A solution for that must somehow be found, and found quickly. And here the assistance of the United States would be necessary.

5. The Chancellor and his advisers doubted whether even yet the seriousness of the problem of financing the United Kingdom's imports from Canada was fully realized in Washington. In the past they had too often made the mistake of not informing the Administration in good time of the difficulties they were facing. For example, when Mr. Clayton' was told last summer of the gravity of the exchange crisis which was then blowing up and which resulted only a few weeks later in the suspension of convertibility, he expostulated with them, saying that he wished he had known of the situation much earlier. Sir Stafford thought that the Canadian and United Kingdom Governments should take concerted action as quickly as possible to let the Administration know the acuteness of the difficulty. As he put it, it was necessary not only to tell the Americans, "but to tell all the right Americans." The problem should be broadened without delay and put on a triangular basis, and the Americans should be given as much time as possible to think of possible remedies and expedients. In an impasse of this sort it was necessary to look for a deus ex machina. In this case the only outside beneficent force which could intervene was the United States.

6. There was no very precise view of what form American action could take. It was frankly recognized that the existing lending capacities of the Administration were exhausted. Sir Stafford said that last year he had urged on Mr. Douglas the⁴ importance of replenishing the credit resources of the Export-Import Bank. He had even explored with the Ambassador the possibility that some of the United Kingdom's investments in the United States might be applied to this end. I am not sure that I fully grasped the scheme which he lightly touched on; but, unless I am mistaken, it was a plan for transferring the United Kingdom holdings which have been pledged against the R.F.C. loan to the Export-Import Bank and using them as collateral for additional credit. In any case, none of these schemes had proved acceptable and the Administration was now left without immediately available credit facilities and therefore found itself with limited room for manoeuvre.

7. What Sir Stafford was hoping for as the consequence of an approach by the Canadian and United Kingdom Governments was an informal commitment on the part of the Administration regarding the use to be made of Marshall aid for financing the United Kingdom's purchases in Canada, which would allow the United Kingdom to take some large risks before the Marshall Plan came into effect, perhaps in September. Such an informal commitment would involve an agreement with the Administration as to how much of the Marshall aid earmarked for the United Kingdom could be used in Canada. It would also involve permission to use moneys appropriated by Congress in June for the Marshall Plan to finance the deficit with Canada from the end of March. This would mean in a sense ante-dating the financial aid; but Sir Stafford did not think this was an insuperable difficulty, since, according to the State Department's plan, the first instalment of Marshall aid had been intended to cover the recipients' deficits from the 1st of April, 1948, until the 30th of June, 1949. Perhaps the crucial point would be to obtain the Administration's consent to use some of the Marshall dollars to replenish the United Kingdom's reserves by the amount they might have to be run down to cover the deficit with Canada for five or six months from the 1st of April. The Chancellor did not know whether there was any chance of the Administration agreeing to an informal commitment of this sort, and of course the United Kingdom Government would have to wait until a reply had been received from Washington before it could decide whether there was a sufficiently firm basis for taking this final risk with its last reserves. However, he felt considerable confidence that, if the Americans were made fully aware of the gravity and urgency of the problem, they could be relied on to respond with practical help. Although for the most part the United Kingdom's needs could be left until more pressing problems had been attended to, this particular difficulty of the deficit with Canada brooked no delay if the United Kingdom were to be kept in a position where it could continue to be an asset to the Marshall Plan and to the United States. 8. Sir Stafford hoped that the Canadian Government would agree that such a concerted approach to the United States would be desirable. The method of the approach would obviously have to be worked out with great care beforehand. And for that reason he strongly urged that you yourself should come to London for discussions. He thought that it was of the greatest importance that someone in Ottawa who was fully acquainted with the most recent Canadian scene and who was aware of the political as well as the economic considerations which this question inevitably raised should give them the benefit of his advice and in turn be able to sample at first hand the present European atmosphere. The Marshall Plan essentially was a plan for reconstructing Europe, and the Foreign Secretary only that afternoon had committed the United Kingdom more firmly than ever before to a European partnership. It was for that reason particularly that he suggested that in the initial stages of such an initiative, while it was being prepared for consideration by ministers here and in Ottawa you should be present in London, even if only for a few days.

9. Throughout this letter I have confined myself to recounting as fully as possible Sir Stafford's exposition of the situation and his proposals as they gradually took shape in the course of a round-table discussion. I have done so because in broad outline at least they strike me as sensible. As you know, I have been very worried from this end over what is to happen when the present financial arrangements come to an end in a little more than two months' time, and I have been baffled to suggest any way around the difficulty. This suggestion by the Chancellor has the advantage that it starts with a plain recognition of the facts of Anglo-Canadian economic relations and looks for relief from them in the only quarter from which aid can possibly come in time. No one can be sure, of course, that such a concerted approach to the United States would be successful. But I am convinced that it should be tried. It is for that reason that I have reported what the Chancellor had in mind as fully and sympathetically as possible and that I hope that the Prime Minister and Mr. St. Laurent may look favourably on the suggestion that you yourself should try to come to London to explore it further .⁵

Yours sincerely,
N.A. ROBERTSON

³ D.V. LePan, premier secrétaire, haut-commissariat au Royaume-Uni. D.V. LePan, First Secretary. High Commission in United Kingdom.

⁴W.I. Clayton, ancien sous-secrétaire d'État aux Affaires économiques des États-Unis et l'un des principaux architectes de la politique économique internationale de l'après-guerre.
W.L. Clayton, former Under-Secretary of State for Economic Affairs of United States and a major architect of post-war international economic policy.

⁵Le 27 janvier, Pearson envoya une copie de cette lettre à Saint-Laurent qui écrivit dans une note de couverture : On January 27, Pearson forwarded a copy of this letter to St. Laurent who minuted on the covering memorandum: I am not convinced the Chancellor is approaching this problem from the angle from which I view it. They have reserves which they must husband for things which are indispensable. But I look upon food from us as such. Some they could perhaps do without but they are getting it for less than the saving on their wheat which they must have, and which if they do not carry out their contracts with us. will have to be paid for out of the same reserves. The matter of safeguarding their reserves is a matter for them to discuss with Washington and I do not like the idea of having us join with them as supplicants for the replenishing of their reserves. L.S. St. L[aurent]