Following for Pearson from Wrong, Begins: Towers, Rasminsky and I saw Acheson, Clayton and Nickerson on Thursday night, and had a long informal discussion of the world dollar situation in general, and Canada's situation in particular. Acheson was not present during the early part of the evening and missed Towers' original exposition, outlined in paragraph 2.

2. The following is a summary of Towers' opening statement:

(a) The Canadian exchange position is causing us great anxiety. The loss on current and capital account, resulting from transactions with countries other than the sterling area, will result in an intolerable drain on our reserves.

(b) The current account deficit with hard currency countries is entirely with the United States; with other hard currency countries we have a sizable surplus.

(c) There is a difficult problem in weighing the dangers of depletion of reserves against the dangers of precipitate action involving legislation to restrict imports during the next two months. To get a breathing space, we had made proposals to the British regarding their use of the Canadian credit during the next 12 months. These proposals had come as a blow to the United Kingdom, who were already feeling very hard-pressed. They would not necessarily involve increased drawings by the United Kingdom, on the American credit as cash payments to Canada might be made out of United Kingdom gold reserves.

(d) Even on the basis of these proposals our cash position at the end of 1947 would not be satisfactory, particularly when regard was had to the rate of deficit we would be running. Measures of one sort or another would have to be taken, either by ourselves or other people, which would have the effect of bringing Canada's dollar accounts closer to balance, during the breathing space provided by the proposals we have made to the British.

(e) Of the measures which Canada could take on her own the most important is, of course, the restriction of imports. Our examination had shown that restriction on a non-discriminatory basis, even if the selection of commodities were made with an eye on the United States, would not save an amount of United States funds significant in relation to the magnitude of our deficit. Even with drastic restrictions on consumers' goods and certain producers' materials imposed on a discriminatory basis we would have a hard time saving as much as $300 million dollars per year, on the basis of 1947 imports, when the restrictions became fully effective. The position is therefore that import restrictions would have to be discriminatory to effect any substantial saving on United States dollars, and, moreover, common sense would revolt against our imposing import restrictions against countries to whom we have extended, or were extending credit. Discrimination would mean discrimination against the United States alone as with other hard currency countries we had a favourable balance.

(f) Restriction of pleasure travel in the United States is another possible way of saving United States dollars, but the close relationships between Canadians and Americans make this a particularly undesirable form of restriction as our wartime experience had shown.

(g) Were constructive solutions to the problem possible in the terms of straight Canadian-American arrangements? For example, could the United States make certain purchases in Canada for relief and rehabilitation? Were stockpiling purchases possible, perhaps for deferred delivery? Could certain American defence purchases, including supplies for her own forces abroad, be made in Canada? Could part of the Greek and Turkish programme be directed to us?

We did not know whether any of these ideas were practical or whether they would yield significant results but it would seem worthwhile to have the appropriate people from both sides look into these possibilities carefully.

(h) We were examining certain types of non-restrictive action which might lie within our own power; for example, the possibility of increasing exports to dollar countries at the expense of the domestic market and the possibility of arranging for more dollar exports by Canadian branches of United States subsidiaries.

(i) Measures of the type suggested in the two preceding paragraphs might enable us to get by for a certain period of time, but they were no long-run solution. Our overall position is sound, our balance of payments favourable, our production high, our prices and costs not unreasonable. Our record of financial assistance to other countries, during the war, was not discreditable, and our post-war credits were not far short of $2 thousand million dollars. Perhaps they had been larger than our real capacity, in view of the slowness of European recovery and the rapidity of American reconversion. We were, however, anxious, in our own self-interest, to make every contribution that we could to the reconstruction of Europe. We had also played a part in the Fund, the Bank, and the ITO. Now, however, the world dollar shortage had caught up with us.

(j) There is no satisfactory solution for Canada so long as the United Kingdom and western Europe are in difficult straits.

(k) The British are also greatly concerned about their dollar position and had intended to tell Clayton in London, what they have told us of their situation. They are most anxious to see him as soon as possible. Their current estimate is that, subject to the adoption by the Cabinet of a programme involving continued austerity and the foregoing of planned improvements in their standard of living they will, on June 30th, 1948, have total dollar resources of $34 hundred million, of which $8 hundred million will be the unused portions of the United Stales and Canadian credits. The current rate of drawings against the credit suggests that their position may be even worse than this. We do not know the details of their plans for exchange saving which are still at the stage of Cabinet discussion, but it is clear that they are looking for all possible ways and means of cutting down all dollar expenditures and their outlook is very bleak indeed. (At this stage a reference was made, by Clayton, to Dalton's statement at Margate, regarding a further credit from the United States. Towers said that his general impression was that the United Kingdom attitude towards a further credit was entirely negative, partly on the grounds that they would have trouble enough repaying what they had already borrowed and because they felt that the real difficulty lay in continental Europe, and if this situation were fixed up the British would be able to work their way out of their troubles without further borrowing).

(l) The European situation was well known to the Americans and Acheson, in his Mississippi speech, had shown an appreciation of the urgency of the problem.

(m) In conclusion, if no action is taken in 1947, developments will get underway which may produce incalculable political results. It means the writing-off of the whole United States international economic programme as one country after another gets into difficulties.

The adoption of restrictive trade policies of a discriminatory character will not be due to bad-will on the part of the countries concerned. Canada is the best illustration of this. If Canada, against her will, is a backslider, what prospects are there that other countries, not excepting the United Kingdom, will hew to the line of nondiscrimination. Once we set foot on this path there will he great difficulty in turning hack. The internal economic effects on the United States of sharp, curtailment in exports in 1948 might well be a cause for concern.

3. Clayton was clearly impressed with the seriousness of the dollar problem and showed no disposition, as we had feared he might do, to adopt too optimistic a tone. He acknowledged that the whole foreign economic policy of the United States was in jeopardy and did not deny that time was running out rapidly and that a dollar shortage might force countries into a course of action which would abort the ITO. He did not quarrel with Towers' statement that import restrictions imposed in consequence of a world dollar shortage would be discriminatory against the United States, nor did he argue that, in the present situation, import restrictions should be only non-discriminatory in character.

4. Clayton and Acheson made it clear that their main pre-occupation is with what is politically possible and not with what is economically necessary. Any further administrative initiative to make additional dollars available to Europe during the present session of Congress, which ends July 30th, must, in their view, be ruled out. A special session of Congress in October is possible, but according to Acheson, the administration has definitely come to the conclusion that the piece-meal approach of fixing up one country after another will not receive political support and must be abandoned. The facts of the situation have already thoroughly discredited this policy. As Acheson said, he and Clayton now have to eat practically every word that they had uttered before Congressional Committees during the past three years: They had argued in favour of UNRRA, that it would do the job of relief and rehabilitation, and now with UNRRA wound up the job that remains to be done in Europe is essentially a relief job; they had testified that the loan to the United Kingdom would get them back on their feet, and it was clearly insufficient to do so; they had oversold the Bank and the Fund to Congress, and similarly with all the other foreign appropriations they had requested.

5. If Congress is to be asked for more money, it must, in their view, be on a basis radically different from the past. American public opinion will have to be convinced that the process of financing Europe will come to an end and that Europe is doing all it can to help itself. The European problem will have to be tackled as such and an integrated plan of economic cooperation worked out for Europe as a whole. As one aspect of such a plan, large scale financial assistance might well be forthcoming from the United States. It might take the form of provision on a non-repayment basis of the natural surpluses of the United States; c.g., cotton, coal, tobacco, wheat, and shipping services. But the initiative for such an integrated plan on economic cooperation would have to come from the Europeans themselves and the plan would have to involve more than the extraction of dollars from the United States.

Acheson and, to sonic extent, Clayton expressed serious disappointment that the British had not taken a more vigorous lead in trying to bring western European countries together. The Americans were disappointed to find that it always seemed to he left to them to take the initiative. It was not made entirely clear what European countries were referred to but we believe that they have in mind mainly the United Kingdom, France, Belgium, Holland, and Italy. They recognize that the countries of eastern Europe could not, in present circumstances, he brought into arrangements involving some degree of integration, but they feel that the benefits and assistance which the European countries might agree to give each other should he open to all European countries willing to come in on the plan.

6. In spite of repeated efforts, we failed to elicit any clear indication of the precise form which they thought the economic integration of Europe should take. Clayton, apparently, has in mind a Customs Union, and referred to the absurd waste of resources involved in the recent construction of a steel plant in Norway and a fish processing plant in Belgium. Acheson, however, thinks that tariffs are not a major factor and spoke vaguely about the lack of intelligent allocations of European production, and with some asperity about British policy in Germany as factors impeding production and delaying European recovery. On the whole, it seems likely that they have no clear idea of what they mean when they refer to the economic integration of Europe. There is probably a general feeling that a larger economic unit is more likely to be self-supporting than a number of small ones. It is also possible that they have mainly in mind that a dramatic gesture of self-help on the part of Europe would facilitate a new approach to Congress for funds.

7. We hope to explore some of these matters further with them next week and to find out whether their ideas are more concrete than they appeared last night, and whether they have any real evidence that an initiative along the lines indicated could come from Europe in time to avert a dollar crisis.

8. I shall not attempt, in this message, to summarize all the views we expressed on the various points raised by the Americans. We laid repeated stress on the extreme urgency of the situation and the necessity for early action on the part of the United States if their international economic programme is to be salvaged. Towers said that he did not believe that the hard-pressed European countries could take an initiative along the lines apparently desired by the Americans unless there was a definite lead from the United States with an indication of willingness to help. We stressed that the disappointment felt at the slowness of European recovery was due mainly to the fact that the real damage of the war had been under-estimated; and that the basic problem was the juxtaposition of a war-impoverished Europe and an enormously wealthy and productive United States. We reminded them of the extent to which Europe had, in effect, recovered by its own efforts, and of the considerable assistance the United Kingdom had given various continental countries through credits and in other ways.

9. The Americans recognize the seriousness and urgency of the Canadian exchange problem and are clearly anxious to be helpful. The suggestion referred to in paragraph 2 (g) above, that a small informal group should explore ways and means, was immediately taken up and I expect to hear from them in this connection early next week. They stressed the need for utmost secrecy regarding the existence of such an informal committee, and we, of course, stressed the need for secrecy regarding our exchange position and prospects.

10. There was no reference to the possibility of exchange depreciation and the only reference to the possibility of Canada borrowing in the United States was in an aside from Nickerson to Rasminsky.

11. We raised with Acheson the desirability of a talk with the Secretary of State, and he and Hickerson both stated emphatically that this would serve no purpose whatever.

12. It seems to us that the correct interpretation of the conversation as a whole is that the American administration realizes that the piecemeal approach hitherto adopted has produced inadequate results, that they arc well aware that a world dollar crisis is looming, with serious economic and political consequences, and that they are grouping for a fresh approach to the problem. The approach will have to be sufficiently different from the past, or at least look sufficiently different, to persuade Congress that it is not just another item in an unending series of requests for money. As indicated however, the administration's ideas as to what the new approach should be are vague and unformed.

13. Towers suggests that this message be repeated to Robertson and that he inform Eady, generally, of its contents. Clayton hopes to visit London en route to Geneva in about a week. Ends.