I have the honour to report that the increasing continentalization of the United Kingdom's policy is causing concern in those parts of the Commonwealth which do not fit easily into a continental grouping, notably Australia and New Zealand.

2. It is perhaps unnecessary to point out that there are two separable causes of this new orientation of the United Kingdom's outlook. Towards the end of December of last year the Foreign Office presented to the Cabinet a long conspectus of Soviet policy throughout the world, in which Communist pressure at all of the critical points was analyzed and its danger estimated. This review led to the conclusion that, unless firm action were taken, the situation would deteriorate further and important positions would be lost one by one and almost by default. As a result of the submission of this paper, the Cabinet authorized Mr. Bevin to make his speech of the 22nd of January in the House of Commons in favour of Western Union. The bases of that speech were diplomatic and strategic rather than econornic. But for many months previously the United Kingdorn had been forced by economic necessity to move in the same direction; and indeed it may be doubted whether Mr. Bevin's initiative would have taken the form it did of calling initially for a closer association of the democratic states on the Atlantic seaboard of Europe if a continental pattern had not already been laid down by the European Recovery Programme.

3. Although the main lines of the United Kingdom's foreign policy have been dictated by the knowledge that the values of Western civilization are under grave attack, many of its features cannot be explained except by reference to the dollar problem. This continuing preoccupation has led to a more ready acceptance of the United States lead in most diplomatic spheres than would have been likely otherwise and to a progressively greater awareness that manpower must be drawn from the Services in order to increase production for export. There have been very few aspects of the United Kingdom foreign policy which have not been affected by one or other of these constant influences - the shortage of United States dollars, the necessity of working closely with the United States, and the need to economize in the use of manpower. The dollar problem has had its effect on great things and small. It led to the precipitate withdrawal from Greece and Turkey and so to the formulation of the Truman Doctrine. It was responsible for the dusty answer which the Newfoundland Delegation received when they came to London last spring. It accounts for the increasingly marginal role which the United Kingdom is playing in the Japanese settlement. Without the sharp spur of the dollar drain, the United Kingdom would not have agreed to form the Bi-Zone in Germany and to give up sole control of the Ruhr, for which both Mr. Churchill and Mr. Bevin fought so stubbornly. All around the globe the United Kingdom's foreign policy has been influenced by the exigencies of the dollar problem.

4. Although these withdrawals altered substantially the comparative responsibility of the United Kingdom and the United States, for the most part they did not produce any marked or permanent changes in political geography. The United States moved in as the guarantor of many areas from which the United Kingdom had moved out; but the size and shape of the areas which could be considered in a more or less unitary way remained constant. With Mr. Marshall's offer of a European Recovery Programme, it was different. These developments seem likely to produce a lasting change in the world's political configuration. They have imposed a continental pattern and also show promise of giving back to Western Europe the inner cohesion it has lacked for so long.

5. The critical period in the development of this new pattern, to my mind, came in the four weeks between the speech by Mr. Dean Acheson³⁷ at Cleveland, Mississippi, on the 8th of May last year and Mr. Marshall's speech at Harvard on the 5th of June. In a masterly survey Mr. Acheson had explained to the American people the nature and causes of the world's economic difficulties. But he had not prescribed a specific remedy. Indeed, his diagnostic examination could have served as the basis for any one of a number of different remedies. For example, the worldwide shortage of United States dollars which Mr. Acheson discussed might conceivably have received some global treatment; and I have recently learned that in those critical few weeks the United Kingdom Treasury urged on the Administration in Washington an approach of that kind. But the die was cast differently, and when Mr. Marshall spoke at Harvard he suggested a continental solution which would concentrate first on the problems of Western Europe.

6. The reasons for that decision, I imagine, are to be found in Mr. Marshall's appreciation of the strategic situation and in Mr. Acheson's analysis of the domestic political scene in Washington. Only a few months before, Mr. Acheson had experienced the difficulty of selling to Congress the programme of aid to Greece and Turkey. He had discovered that it could be done only by giving the programme a strong anti-Soviet twist. A programme of aid to Western Europe would have the advantage that it could be commended to Congressmen, at least privately if not in public, as a promising counter-attack at a critical point on Soviet pressure and Communist infiltration. This argument could be re-inforced by strategic considerations. The United States had twice fought in order to deny the Western seaboard of Europe to an unfriendly power. But as a result of the Second World War the countries of Western Europe were left impotent and open to attack. The balance of power had been destroyed, and between the Elbe and the Atlantic there was little more than a vacuum.

"Now Europe's balanced, neither side prevails For nothing's left in either of the scales."

That couplet was much more applicable to Europe after the last war than when Pope wrote it. No doubt economic aid to Western Europe commended itself to Mr. Marshall as a way of pouring in cement to strengthen the chief overseas bastion of United States security.

7. Whatever the reasons for the decision, as soon as it had been taken it began to enforce a continental grouping. On the one side, the sixteen countries of Western Europe, united as prospective recipients of United States aid and pledged to economic cooperation among themselves. On the other side, the United States, as the chief fount of benefits, along with other American countries, in which it became increasingly clear that a considerable amount of the necessary purchasing would be done. Against that pattern the reasons for the anxiety of the antipodean Dominions become clear. The new grouping cuts across the old maritime organization of the Commonwealth and threatens to leave the already isolated members in the South Pacific entirely out in the cold.

8. just as this new pattern has been evolved in the process of attempting to solve economic problems, so the difficulties it is creating for Australia and New Zealand are first showing themselves in economic forms. Two illustrations have recently come to our attention.

9. The first has arisen in the course of discussions concerning the project for a European Customs Union. It will be remembered that this was strongly advocated by Mr. Clayton last summer as an essential part of the economic cooperation enjoined on the sixteen Marshall countries by the terms of the offer of further United States assistance. At the meetings of the European Customs Union Study Group which Mr. [D.V.] LePan of this Office has attended the observers for Australia and New Zealand and in private conversation have both taken the line that, of course, the United Kingdom would not enter a European Customs Union. Extinction or even partial extinction of preferences which Australia and New Zealand enjoy in the United Kingdom market would lead automatically to retaliatory action; and no conceivable benefits which the United Kingdom might gain from participation in a European Customs Union could compensate it for the loss of its preferences in these two Commonwealth countries. This threatening and truculent attitude may not express the considered policy of the Australian and New Zealand Governments; but behind it lies the genuine fear that industries which have been developed in order to supply the United Kingdom market, such as the dairy industry in New Zealand, may suffer when all the implications of the United Kingdom's new continental orientation have been worked out. At a meeting of Commonwealth representatives at Havana on the 4th of February Mr. Walter Nash, the New Zealand Minister of Finance, put the same view more temperately but hardly less forcibly. He is reported in the minutes as having said:

"The erection of a customs union on the basis that substantial elimination of preferences would be required involved entry into the political arena. Without that requirement it would still be difficult to create enthusiasm in New Zealand for the idea of Western European Custorns Union; with it, it would be impossible to obtain cooperation. The idea of political union with Western Europe which had been put forward in the recent speech by the Foreign Secretary would be popular in New Zealand. But if there were any suggestion that such a political union was a first step towards a customs union, a necessary condition of which was the elimination of preferences, that popularity would immediately vanish."

10. My second illustration comes from the meetings of the Sterling Area Statistical Committee, At the meeting on the 11th March Mr. R.W.B. Clarke, of the Treasury, attended at the invitation of the Chairman in order to speak about the European Recovery Programme. In the course of his remarks, as you might expect, he took occasion to stress the two chief anxieties of the United Kingdom's financial policy now that ERP has become a reality:

(a) Even when ERP comes to an end the United Kingdom will not be able to finance its current programme of imports from the Western Hemisphere.

(b) Although the net deficit of the United Kingdom Colonies and Eire with the Western Hemisphere will be substantially covered by ERP financing, the net dollar deficit of the rest of the sterling area will still be a drain on the central reserves, so that over the period of ERP the reserves will continue to decline, since there will be no conceivable way in which they can be replenished.

Mr. Clarke ended by drawing the moral that the other countries in the sterling area, as well as the United Kingdom, must do everything they can in the way of dollar-earning and dollar-saving.

11. When he had finished, Mr. G.W. Clinkard, the Secretary of the New Zealand Department of Trade (in our terms Deputy Minister of Trade and Commerce) who has been here for some months as head of a New Zealand supply mission, asked a number of questions which tended to suggest that, if New Zealand were to divert some of its exports from the United Kingdom to dollar markets during the period of ERP, the drain on the central reserves could be checked without any harm being inflicted on the United Kingdom. New Zealand might sell butter in the United States, for example, while the United Kingdom would make up its supplies from the United States under ERP. Mr. Clarke quickly demolished this suggestion by pointing out that it rested on the assumption that the ERP Administrator would foot the United Kingdom's deficit with the Western Hemisphere whatever happened. This was, of course, not the case. ERP funds were limited, and the net result of such a diversion would almost certainly be a reduction in the United Kingdom's total supplies. It may be doubted, however, whether Mr. Clinkard's question was really so naive as it sounded. The inward purpose of it was, I think, to stress the way New Zealand and Australia were being squeezed by the form which ERP had taken and to serve notice on the Treasury here that if New Zealand were pressed too hard to restrict dollar imports, it might adopt an entirely new line and attempt to balance its dollar accounts by re-directing its exports. Essentially he was making a negotiating point. But the sense of grievance which Australia and New Zealand feel at being excluded from ERP breathed through everything he said. New Zealand would get no relief from ERP either directly or through off-shore purchases; and throughout the duration of the Programme it would have to meet its dollar deficit from central reserves to which it had contributed in the past, which would be diminishing and which could not be allowed to drop below a minimum level. Under these circumstances New Zealand might have to reconsider its position radically.

12. During this discussion the Australian representative, Mr. J.F. Nitmmo, of the Department of the Treasury in Canberra, who has come to London specially for the meetings of the Committee, said nothing. But the incident was not closed with the end of the meeting. In the course of his reply to Mr. Clinkard's questions, Mr. Clarke (who has the great merit of being frank) said that, although the suggestion which Mr. Clinkard had made could not be put into effect without injury to the United Kingdom, he personally would not rule out the possibility that other sterling area countries over the long run might have to redirect their exports. Although Mr. Nimmo made no comment at the time, he was alarmed by this remark, since he inferred that Mr. Clarke meant that the day might come when the United Kingdom would decide that it could no longer let other sterling area countries have any convertible sterling at all, If that happened, of course, they would be forced to balance their dollar accounts directly. After consulting with his Government by telegram, Mr. Nimmo on instructions saw Mr. A.T.K. Grant. who is the Chairman of the Sterling Area Statistical Committee, in order to place his fears squarely before the Treasury here.

13. Mr. Nimmo has told us that he was reasonably satisfied by what he learnt in his interview. Mr. Grant explained that, although there were individuals in the Treasury, including Mr. Clarke, who thought that in the long run at least it might be necessary to deny to the other sterling area countries any convertible sterling from their accumulated balances and so virtually break up the sterling area, this was by no means the ruling view. The Chancellor, Sir Edward Bridges ³⁸ and Sir Wilfrid Eady, all believed that arguments both of equity and of expediency led to the conclusion that efforts should be made to keep the sterling area functioning, even if this involved continued, although it was to be hoped diminishing, drawings on their accumulated balances by other sterling area countries. I might add that this account of the difference of opinion in the Treasury about the use to be made of the sterling balances tallies with my own impression. Moreover, the division coincides, I think, with the split in the Treasury over the importance of restoring the international position of sterling. The majority who feel that at all costs the sterling area must be maintained also set a very high value on restoring sterling's position. The minority who believe that it would pay to be tougher with other sterling area countries are also not so convinced that the revival of sterling as an international medium of exchange is essential for this country's recovery.

14. Shortly before Easter the Australian High Commissioner here, Mr. Beasley, called on Sir Stafford Cripps and received from him assurances similar to those which Mr. Grant had given to Mr. Nimmo. Notwithstanding these assurances, however, the Australian authorities are still worried by the possibility that the United³⁸ Kingdom may cease to grant them any convertible sterling from their accumulated balances. They now know that at least one influential official in the Treasury believes that such a move may be on the cards. They also know that there is considerable pressure for it in Washington. You will be acquainted with the article by Mr. Michael Hoffman, which appeared in The New York Times for the 18th of March under a Paris dateline, in which it was reported that, "Britain may be forced by pressure from her Western European neighbours and the United States to abandon her efforts to maintain her position as banker for the British Commonwealth and other sterling area countries." The article went on to state that "American and Continental experts" had arrived at the conclusion that "There is a basic inconsistency between Britain's participation in ERP and Britain's position as banker for the sterling area," and that, "Among steps the British may be asked, urged and eventually forced to take are definitive blocking of existing sterling balances to reduce the ability of India, Egypt and other nonEuropean countries to buy British goods that might otherwise go to Europe; cessation of conversion of sterling into dollars for sterling area countries; and extension of sterling loans to France and other Continental countries." This article, which elucidates many of the issues very clearly, (I have attached a copy for convenience of reference) † is no doubt too categorical to be taken as an expression of the prevailing view in Washington. In particular, it leaves out of account a conviction which I gather is almost as strong in many circles in Washington as it is here that destruction of the United Kingdom's long-established commercial and financial relationships throughout the world would be calamitous for everybody. But Mr. Hoffman, who served in the United States Treasury during the war, still enjoys exceptional access to many important officials in the United States Government service; and I have no doubt that this article represents the view of at least a considerable body of opinion in Washington.

15. Since the Australians are apprehensive that they may have to face a situation in which they will no longer be able to convert into dollars any of their sterling balances in London (which constitutes the most important part of their reserves), they are guarding closely the few other reserves over which they have independent control and which would provide their last line of defence in such an event. The reserves which the Australians can dispose independently are of two kinds - their quota in the International Monetary Fund and their gold reserve in Australia. The exact amount of the second item is kept secret; but Mr. Nimmo has told us that it is "a little over £20 million." Both of these reserves have recently been under pressure from London. When Sir Stafford Cripps saw Mr. Beasley before Easter he urged that over the next four years Australia should draw its full quota from the IMF in order to diminish the drain on the central reserves of the sterling area. A few days previously Mr. Grant had suggested to Mr. Nimmo that the gold reserve in Australia should be transferred to London and sold to the United Kingdom for sterling. Neither of these transactions is likely to take place, Mr. Nimmo has given us to understand. So long as the Australians are worried that the form of the European Recovery Programme, which provides a means of covering the deficit with the Western Hemisphere of part of the sterling area but not of the rest, may lead to the dissolution or impairment of the central reserve system, they will insist on trying to keep intact the marginal reserves over which they have independent control.

16. You will not have failed to notice that for this examination of the current anxieties of Australia and New Zealand I have provided as a preamble a perhaps over-long essay on the new political geography. My justification is that, when I consider these countries' problems against the emerging continental pattern, I am more than ever impressed by our own good fortune. I am not thinking only of the relief which Marshall aid seems likely to bring almost at once to our balance of payments with the United States. I am thinking as well of the way in which the new pattern imposed by the European Recovery Programme provides a context in which many of the difficulties which have beset our external policy for so long can be resolved. Ever since we have been in a position to shape our own policy abrcad, we have had to wrestle with the antinomies created by our position as a North American country and as a member of the Commonwealth, by our special relationship with the United Kingdom and at the same time, although in less degree, with other countries in Western Europe as well. A situation in which our special relationship with the United Kingdom can be identified with our special relationships with other countries in Western Europe and in which the United States will be providing a firm basis, both economically and probably militarily, for this link across the North Atlantic, seems to me such a providential solution for so many of our problems that I feel we should go to great lengths and even incur considerable risks in order to consolidate our good fortune and ensure our proper place in this new partnership. This is the reason why in the past few weeks I have argued, perhaps intemperately, that in this changed situation, which is both hopeful for the world and congenial to our own national aspirations, it would be a mistake for us to allow our policy to be shaped too much either by financial caution or by a regard for our diplomatic status which might hamper the encouraging developments which are now on foot.

I have, etc.
N.A. ROBERTSON

³⁷Ancien sous-secrétaire d'État des États-Unis.
Former Under-Secretary of State of United States.

³⁸Sir Edward Bridges, secrétaire permanent, ministère des Finances du Royaume-Uni
. Sir Edward Bridges, Permanent Secretary. Treasury of United Kingdom.