We have recently had under consideration the United Kingdom import programme for 1947 and think that you should have the following appreciation of the general position as we see it here.

2. The broad position is that the United Kingdom enters 1947 stronger than we expected in the sense that our 1946 deficit on current account will probably be nearer [5]00 million pounds than the 750 million pounds forecast at the beginning of 1946. This results largely from the success of the export drive and from the willingness of the country to put up with shortages of consumer goods for the sake of exports. For reasons explained below, this relatively satisfactory export position in noway means a strengthening of our overseas financial position, this on the contrary, is considerably less strong than we expected and hoped. We have about 1,500 million pounds of resources representing the aggregate of our net gold and dollar reserves and of the unused parts of the United States and Canadian credits, but we must hold a minimum of 500 million pounds as a reserve, so we cannot put our disposable resources above 1,000 million pounds.

3. The United States and Canadian credits gave us a breathing space. We assumed that the general world supply position would be eased so that we should be freer in our choice of sources of supply, and that the recovery of our import markets and sources of supply, particularly in Europe, would go further. These assumptions have been falsified. We are compelled to buy a large part of our supplies from the American continent either for dollars or for their equivalent and at rising prices. We are selling the greater part of our exports against currencies which will not be convertible into dollars for some time. We are running high deficits with the dollar area and considerable surpluses with European and sterling area countries which cannot be transferred against these deficits.

4. [missing from original] credits faster than we had expected. Unless we take vigorous steps to remedy this, drawings on the present scale might well exhaust the Canadian credit by the end of 1947 and the United States loan at latest by the spring of 1949. If Canadian and United States prices rise still further, exhaustion of the credits will be correspondingly earlier. Our major objective of assuring the convertibility of sterling (which we have undertaken to put into effect in July 1947) may involve some initial drain on our resources before it brings the long-term advantages to which we attach such importance.

5. In order to husband our resources, both to provide for such an initial drain and to build up reserves which will allow us to begin the repayment of the Canadian and United States credits, we shall be compelled progressively to take drastic steps which may be thus summarized:

(a) Exercise of great care in imports from the dollar area and any avoidable extravagance;

(b) Development of exports to the dollar area. This has obvious quantitative limitations;

(c) Constructive efforts, so far as our general policy of nondiscrimination permits, for gradually increasing the proportion of supplies obtained from the sterling area and Europe;

(d) Continued development of food production in the United Kingdom;

(e) Examination of dollar expenditure on oil.

6. The steps we. can take will be to some extent conditioned by the nondiscrimination obligations which we undertook under the United States and Canadian agreements²⁶ to make effective as from the beginning of this year. For instance, with reference to (a) above these obligations now prevent the United Kingdom from limiting imports of a competitive article from the United States and Canada while freely permitting imports of that article from other sources and the United Kingdom can thus only limit dollar imports of a:particular article if imports of that article from elsewhere are similarly limited.

7. So much for our burden, we are not living in luxury. Despite the high volume of employment and the corresponding high demand, imports in 1946 were less than 70% of the volume of 1938. We may in 1947 expand our imports to 80% of the volume of 1938 but, in order to pay for this, we shall have to raise our exports to 150% of the 1938 volume. In addition, we have had to assume a staggering liability for the rehabilitation of Germany which is estimated at a total of at least 500 million dollars in the course of the next three years. Every effort will, of course, be made to limit both the total expenditure in this direction and to minimize its impact on our dollar resources. But it remains a key expenditure in the essential task of restoring the Western European economy as a whole.

8. There is no doubt that the essential remedy for these difficulties lies in increased production and in a continued willingness on the part of our population to continue to accept deprivation of many of the alleviations to which they are so fully entitled after seven years of hardship. In particular we here must go slow in the consumption of home produced goods so as to keep up the export drive and of products imported from the Western Hemisphere so as to make our dollars last until we are once more in balance vis-r-vis the dollar area.

9. We must, therefore, attach considerable importance to the objective of increasing our exports to the Western Hemisphere. As far as possible this should not he at the expense of exports elsewhere. We do not propose to set up machinery for the direction of exports and we shall aim at achieving our objective by an absolute increase in overall production and by allocating a larger part of our total production to export (despite the great inconvenience to the domestic consumer) accompanied by every inducement to manufacturers to produce for and export to hard currency areas.

10. It is also of the highest importance to us that the economic recovery of soft currency countries in Europe should be accelerated as quickly as possible. We can then hope to obtain a higher proportion of our import requirements from them and hence reduce the dollar burden. Moreover, the quicker production in these countries is rehabilitated and their export trade developed, the sooner will it be possible for them to make their currencies convertible and hence for our export trade with them to earn proceeds which themselves are convertible into dollars or gold.

11. Our position is such that we cannot shrink from masterful administration in putting the necessary remedial measures into effect, however difficult they may be. Their main impact will fall on our own public; hut we would ask you to view them in so far as they may affect your interests in the light of what has been said above. We shall continue to keep you informed and it is because we think it important that you should know the situation which confronts us that we have thought it right to send this appreciation. We should greatly welcome any comments Dominion Governments may feel able to make.

²⁶L'accord financier entre le Royaume-Uni et les États-Unis et l'accord financier entre le Canada et le Royaume-Uni. Voir le volume 12. les documents 796-811.
United Kingdom-United States Financial Agreement and Financial Agreement between Canada and the United Kingdom. See Volume 12, Documents 796-811.