After the Cabinet meeting yesterday afternoon, I asked Sir Alexander Clutterbuck to come and see me and told him that the Government had been giving some preliminary consideration to the United Kingdom counterproposal on wheat which he had stated to me orally earlier in the day.

I told him that, irrespective of our attitude towards amounts and prices, we could not consider the change from optional arrangements for 1950-51 and 1951-52 to a firm price for those years. I added that our first reaction was that the United Kingdom counterproposal, largely because of the inclusion of this new element, was even less attractive to us than the proposal which had been made in London and which Mr. Gardiner had rejected.

Sir Alexander, who was accompanied by Sir Andrew Jones, seemed surprised and somewhat puzzled by our attitude as he said that he had learned from Department of Agriculture sources here that this change would commend itself to the Canadian Government. I admitted to Sir Alexander that Mr. Gardiner had not been present at the Cabinet meeting, but said that I would be very surprised indeed if our Minister of Agriculture's reaction was different from that which I had just expressed. The Deputy Minister of Trade and Commerce, who was also present, said that be felt sure that Mr. Howe would also share the opinion that I had expressed.

I then asked Sir Alexander to put the United Kingdom counterproposal in writing as I wished to make sure that we had the exact information concerning it. He is doing this⁵⁸

The High Commissioner then explained that the quantities suggested (120 million bushels for 1950-51 and 100 million bushels for 1951-52) were, in the opinion of the Untied Kingdom authorities, entirely reasonable as was the price suggested, and that they could not consider as accurate the figures which Ihad given to him (and which had been given to me by the Minister of Agriculture) for average shipments from Canada to the United Kingdom covering the prewar years. I said that these figures had been sent hurriedly without an opportunity for checking them, but that in any case our argument did not rest mainly on them.

There is no doubt that we are reaching a very difficult stage in our wheat negotiations with the United Kingdom and that our difficulties are increased by the vulnerability of our position vis-a-vis the United States. The United Kingdom know, of course, that our capacity to bargain with them in this matter is lessened by the fact that any arrangement we make with them must be, in principle if not in detail, acceptable to the Americans; otherwise, the Americans can make the arrangement null and void by refusing to allow E.C.A. funds to be used in Canada for purchases under it. The United Kingdom can be expected to use this situation to strengthen their own position. Therefore, it may suit their purpose to sit back and make no further wheat offer at this time, on the assumption that the logic of events will force us substantially to meet their terms. The only effective wheat card we have to defeat this game, if it is played, would be the threat to rescind the wheat contract immediately and sell wheat in the open market for what we can get. I am assured by Mr. Gardiner (with whom I spoke this morning) that, if no satisfactory price arrangement is reached by the middle of January for 1950-51, we are not breaking faith in any way if we end the wheat agreement under these conditions. However, there are strong arguments against taking this course. It would, of course, mean that we would get more for our wheat immediately, but we would throw away long term market security and stability as well as forfeit any "have regard to" rights, and thereby make it almost impossible to refute the argument which would certainly be used by our opponents that our whole wheat policy has been wrong all along and has ended in disaster.

My view is, therefore, that, if the United Kingdom will not accept our recent offer and we do not wish to end the wheat contract, we must make another offer to the British as soon as possible. If so, there are three courses open to us, as I see it:

1. to persuade the British to accept a proposal for $2. for 1949-50 and the optional proposals for the subsequent two years to cover, say, 120 million bushels of wheat at $1.55 or $1.50;

2. to establish a $2. price for 1949-50 and leave the "have regard to" obligations to be determined later; or

3. some combination of 1. and 2. with the British giving up $100,000,000 or so of the loan, which could then be used for any purpose we desire.

I feel that it is of the very greatest importance that while we are talking to London on this subject we also talk to Washington. We will have to discuss our wheat negotiations with the Americans in any event and we should not permit the United Kingdom to anticipate us in this regard. The attached disturbing telegram from London [No. 33]t indicates that discussions between the United Kingdom and the United States on our wheat negotiations have, in fact, already taken place. We certainly cannot, to say the least, expect the United Kingdom to put the case for a successful outcome of these negotiations as strongly as we could ourselves.

Furthermore, these wheat discussions are merely one aspect of the whole question of economic relationships not merely between the United Kingdom and Canada, but also between the United States and Canada. Those relationships with our neighbour would be seriously endangered if the United States took any action to make impossible a satisfactory wheat arrangement with the United Kingdom. To prevent this, I think the time has come to have serious discussions on the highest political level in Washington on Canadian-United States economic and political questions. It seems to me that our best chance of a favourable United States reaction to any plans which we may have for safeguarding our own position, is to explain our difficulties and our objectives, frankly and in language they will understand, to the top people in Washington. If the United States wish us to cooperate with them both economically and politically, they will have to show some realization of these difficulties, and some interest in these objectives. On the face of it, we seem to be in a very favourable statistical position and, for this reason, United States officials not especially concerned with the political aspect of questions, will insist that we should make greater "sacrifices" for European recovery. In my view, we must get completely away from this approach. This, however, will require highlevel political rather than official talks. If we wish those talks to be as successful as they should be, we should link up wheat and E.C.A. questions with questions concerning cooperation in other fields, such as defence, Atlantic security, the United Nations, the St. Lawrence Waterway, etc. I mentioned this subject yesterday in Cabinet and I think it is one that should be given most serious and immediate consideration.

L.B. PEARSON

⁵⁸ Note de has de la page du document wiginel. Footnote in original document:
Sir Alexander's note is attached herewith.

[PIÉCE JOINTE /ENCLOSURE]

Note du haut-commissaire pour le Royaume-Uni

Memorandum from High Commissioner of United Kingdom

SECRET

Ottawa, January 6, 1949

WHEAT PRICE 1949-50

United Kingdom Ministers have carefully considered the proposals put forward by the Canadian Government in the message communicated by the Canadian High Commissioner in London to the Chancellor of the Exchequer on the 24th December.

2. As regards quantity, United Kingdom Ministers feel that the request that this should be increased to 140 million bushels in the two options raises extreme difficulty, for the following reasons:-

(I) Total United Kingdom requirements of wheat and flour may be taken to be of the order of 220 million bushels of wheat. Of this quantity it is hoped to obtain 60 million bushels from Australia, and 20 million from other non-dollar sources of supply. If we were committed to obtain the whole of the remaining balance of 140 million bushels from Canada, not only would our supply programme be deprived of any margin of flexibility but we should be placed in a very difficult position in relation to any International Wheat Agreement. Indeed, the effect would be that we should be virtually contracting out of the Agreement for a period of three years.

This would be likely to meet strong objection from the United States, and the prospects of securing a satisfactory International Agreement might be fatally prejudiced.

(2) It is vitally important to us (and also, it is suggested, to Canada) that our wheat supplies from Canada should continue to be secured by off-shore purchases under E.R.P. An International Agreement would guarantee the Americans a market for an agreed quantity of wheat but it would not guarantee a price above the floor price. If the United Kingdom import programme were to be wholly committed in advance as in (1) above, and given also a continuance of heavy crops in the United States, it might well be that the Americans would be compelled to accept very low prices for any wheat that was not covered by E.C.A. finance. In such circumstances the strain on the off-shore purchase system would clearly be insupportable.

(3) The conclusion is unavoidable that if we are to be assured of a continuance of E.C.A. finance for off-shore purchases of wheat from Canada, the quantities to which we are committed in advance must, in order to be proof against criticism from the United States standpoint, bear reasonably close relation to the pre-war volume of supply. During the years 1921-38 inclusive the average United Kingdom retained imports of wheat and flour from Canada were substantially less than 100 million bushels in terms of wheat equivalent. Hence the insertion of the figure of 100 million bushels in the United Kingdom proposals, as the maximum figure likely to be acceptable from the standpoint of E.C.A. finance. The adoption of this figure would not of course mean that the United Kingdom would not in practice take more than 100 million bushels in any circumstances; it would, however, mean that the United Kingdom would not be committed in advance to take more than 100 million bushels, and that the question of filling the balance of its import requirements would be left to be determined in the light of supply and financial conditions at the time.

3. As regards price, on this head too the proposals of the Canadian Government raise serious difficulty. The price of $1.40 suggested by the United Kingdom Government in the two options is above the floor proposed in the draft International Wheat Agreement. To increase this price to $1.55 would raise it still further above the floor and would indeed introduce a new conception into the options.

The options were devised, in an effort to meet the Canadian Government, with the object of putting Canadian farmers in a specially favourable position compared with other producers by giving them a guaranteed floor price in the years in question higher than the floor proposed in the draft International Agreement. At the same time Canadian hands are not tied in any way. There is nothing to prevent Canada from seeking to sell at higher than the floor price, and indeed there is no commitment on Canada's part to sell to the United Kingdom at all. Thus the options are heavily weighted in Canada's favour, the United Kingdom obligating herself to buy at a specially favourable floor price if Canada requires her to do so, but being left in a position of complete uncertainty as to her forward supply position.0 To advance the proposed floor price to $1.55 would weight the options still more heavily in Canada's favour while leaving the United Kingdom in the same position of uncertainty. Moreover, a floor price of $1.55 would be wholly out of line not only with the contemplated floor prices in the International Wheat Agreement, but also with any realistic estimate of world supply prospects in eighteen months' time.

4. In these circumstances United Kingdom Ministers feel that, if difficulties are seen in the proposals communicated to Mr. Gardiner in London, a solution might best be found in an alternative line of approach. For the reasons stated they fear that there would be serious risk of difficulty with the United States over the provision of E.C.A. finance if the quantities envisaged were to be in excess of 100 million bushels. In order, however, to meet the Canadian Government they would be prepared, if what follows is acceptable, to agree to a figure of 120 million bushels for 1950-51 while leaving the figure of 100 million for 1951-52, and they would do their utmost to justify these figures to the E.C.A. If an increase in price to $1.55 is desired, it is clear to United Kingdom Ministers that this could only be justified and defended to E.C.A. and to other signatories of the proposed International Wheat Agreement if the proposal was not an entirely onesided one, related only to a floor price, but carried with it an obligation on the part of Canada to sell as well as an obligation on the part of the United Kingdom to buy. Even so, while they would be prepared on this basis and in order to achieve a settlement, to envisage a price of $1.55 for 1950-51, they do not feel that they could reasonably go further than $1.45 for 1951-52 when the supply position may be expected to be very substantially easier.

5. Accordingly they would urge on the Canadian Government the merits of a settlement on the following lines, the proposition to be considered as a whole:

(1) Payment of $2.0 for 140 million bushels in 1949-50, the last year of the existing Agreement.

(2) A firm commitment on the part of the United Kingdom to buy, and on the part of Canada to sell, 120 million bushels in 1950-51 at a price of $1.55.

(3) A firm commitment on the part of the United Kingdom to buy, and on the part of Canada to sell, 100 million bushels in 1951-52 at a price of $1.45.

(4) Recognition that on the above basis the obligations of the "have regard" clause in the existing Agreement will be fully satisfied.

[ALEXANDER CLUTTERBUCK]