Gold and Dollar Reserves

Part of Balance of Payments – in the House of Commons at 12:00 am on 6th July 1949.

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Photo of Sir Stafford Cripps Sir Stafford Cripps , Bristol East 12:00 am, 6th July 1949

The usual quarterly statement on the balance of payments and its effect on our reserves of gold and dollars is now due and the figures are being published today. For reasons of which the House will be aware—and to which I have referred more than once in recent weeks—it is desirable for me to make al short explanation of the facts set out.

During recent months there has been a decline of business activity in many parts of the world. Instead of a sellers' market, we now have a buyers' market. As we all know, the most difficult problem with which the sterling area has been faced is in its balance of trade and payments with the dollar area. This has been well demonstrated by the critical effect of the dollar shortage upon our sterling economy over the last few years. The decline in demand from the dollar area for sterling area goods naturally brings with it important consequences.

As has already been pointed out on more than one occasion, this change in the financial and commercial climate has meant that the shortage of dollars in the sterling area has become even more marked. As the House is aware from the April and May figures of overseas trade, there has been a considerable falling off in our sales to the U.S.A., and this has reduced our dollar earnings. This decline has been even more marked in the case of other parts of the sterling area, particularly those selling primary commodities to the U.S.A., where both quantities and prices have moved sharply downwards.

It is good to know that our sales to Canada were well maintained in the month of May and that in that month they were very nearly an all-time record. We hope that these exports will be increased still further especially as a result of action taken by industry and by the Government following the visit of my right hon. Friend the President of the Board of Trade to Canada. We are also hopeful that our exports to the U.S.A. will resume their upward tendency. It cannot be emphasised too often that this is by far the most urgent and important task of all those concerned with exports. Success in that task does, of course, also depend on the willingness of the United States and Canada to accept our exports, and to continue to purchase the raw materials which the sterling area can supply.

As a result of the decline in demand that I have mentioned, our dollar gap has widened again and a new and unfavourable position has developed. While awaiting the figures for the second quarter of 1949, to make its usual quarterly announcement, the Government, in the course of its normal review of the situation, have already taken certain preliminary steps to deal with this situation.

The figures of our dollar deficit, before taking account of E.R.P. assistance, of the Canadian credit, or of drawings on the International Monetary Fund, were in the four quarters of 1948—£147 million, £107 million, £76 million and £93 million. In the first quarter of 1949, the corresponding figure was £82 million. The Economic Survey gave an estimate of £195 million for the first half of 1949, which would have allowed for a dollar deficit of £113 million for the second quarter, as expenditure was expected to increase temporarily in line with our E.R.P. Programme. In the event, however, the dollar deficit for the three months to 30th June has risen to £157 million.

There were no drawings during the quarter from the International Monetary Fund, but, after taking account of £85 million for E.R.P. reimbursement and £7 million from the Canadian Credit, the reserves of the sterling area fell from £471 million as at 31st March last to £406 million at 30th June. There is also a sum of about £20 million owing to us under E.R.P. for goods for which we have already paid. In addition, part of the E.R.P. allocation made to us in respect of the first 15 months of E.R.P. is designed to cover supplies which will not come forward, or be paid for, until a later date.

Though this fall in our reserves is a serious development, yet any comparison with the events of July and August, 1947, would be entirely misleading. In 1947, though our own recovery was under way, we were still in the middle of the process of re-conversion and re-deployment, which had itself been checked by the fuel crisis in February of that year. In Western Europe as a whole, the economic recovery had made little headway and the political situation was marked by weakness and uncertainty.

Today, as a result of the conclusion of the Brussels Pact, the establishment of the O.E.E.C. and the signature of the Atlantic Pact, our own position and that of the other countries concerned have been immeasurably strengthened. We have behind us in the U.K. two years of expenditure on capital goods on an unprecedented scale, and of uninterrupted economic progress. We have taken a variety of measures to deal with the inflationary situation with which in 1947 we were threatened.

Our production is at a record level in the whole of our history, and our exports are as high as they have ever been and half as high again as in mid-1947. We have practically reached a state of overall balance in our overseas trade. All this has been made possible by the great efforts of our own people and by the generous help of the United States and Canada, especially through the European Recovery Programme, which is so large a factor in the progress that is being made, and will, I hope, enable us to expand European trade in the way that I explained to the House on Monday.

Productive power is the foundation of a country's economic strength, and ours has grown to such an extent in the past two years as to give us confidence that we can deal effectively with the present unfavourable turn in our affairs. But a drain upon our reserves at the present rate calls for immediate corrective action, as well as for longer term and more fundamental measures. His Majesty's Government therefore acted at once in pursuance of what must remain the major objective of our financial policy, the safeguarding of the reserves of the sterling area. Before the middle of June, we had, much to our regret, been compelled by events to give instructions to all our purchasing Departments that they were to postpone new dollar purchases to the maximum extent practicable. That stand-still arrangement will be continued for at least three months and till after the discussions to which I am about to refer. Existing contracts and commitments will remain in force, but specific authority will be required for any new dollar purchases and will only be given where a clear case of urgent national interest is established. Dollar expenditure, other than on imports, will only be permitted where essential, and then at a reduced rate.

Unless the sterling area succeeds in restoring the volume of its sales to the dollar area, these restrictions upon dollar expenditure will have to be continued. As soon as the distribution of E.R.P. aid for the coming year has taken place and the new intra-European payments scheme has come into operation, we shall get out a new import programme in the light of the circumstances which then exist. We hope to have such a programme completed in September next. Before the discussions to which I will refer in a moment, we do not intend to make any immediate adjustments in the amount of dollar goods released for consumption; but, as soon as they are over, we shall have to reconsider the situation in the light of any decisions reached, and it may then become necessary to reduce consumption of certain selected foodstuffs which are primarily drawn from the dollar area and of certain raw materials.

I must make it clear that, just as it took some time for the position which I have outlined to declare itself, so this standstill will have little immediate effect in reducing the drain on our reserves. Unless contracts already entered into were to be broken, and the flow of imports for which firm arrangements have already been made was to be stopped, there could be no large degree of relief from the present measures until towards the end of the third quarter.

But a standstill on dollar expenditure, though absolutely essential, is no solution for our difficulties. The effect upon our trade relations with the dollar area of the change from an expanding to a contracting volume of world trade demonstrates the need for positive long-term policies. In the meanwhile, His Majesty's Government will press on with every practicable method of increasing our export trade, above all, the sale of goods and services for dollars. And for this it is fundamental that industry itself must quickly achieve a reduction in costs and prices by improved productivity, and give preference wherever possible to exports to dollar markets.

Any inability to hold our own in world markets must deprive us of essential supplies and our standards of life will suffer. This creates the imperative necessity for new directives to be given to all those in industry who are concerned with costing and securing contracts, that they must increase dollar exports. We must get our export prices down to a point which enables us to improve our position in these markets, and the rather easy methods resulting from the unlimited demand of the last 10 years must go.

The Government and the nation are pledged to a policy of maintaining full employment and protecting our present standard of living. To that end our efforts will be directed, but no democratic Government can do this alone. If a nation is to achieve these generally accepted aims, there must be complete co-operation. While we have no desire to see wages cut, we must and can cut down costs, and this we can do if we increase our efficiency of production. There should therefore be, throughout the Government services and every other public service, and throughout all industry, a resolute aim to achieve the utmost efficiency. In addition, we must avoid waste in materials and in every other way, so as to get the best possible results from what we import.

Above all, it is quite certain that our existing policy on personal incomes, costs and prices will have to be vigorously pursued. I must warn the House and the country that any attempt at this stage to force up personal incomes can only have the most adverse effect upon our situation, since it will raise prices, and thereby make it even more difficult for us to earn dollars or other hard currencies with our exports. This, in its turn, must lead to a diminution of our general standard of living. If our money is to buy us less in goods, an increase in money earnings is of no value. It is of crucial importance that in meeting the present situation we should not aggravate it either by demands for increases of personal incomes or by delays and stoppages in our industry which increase costs and reduce our dollar earnings.

This continuation and intensification of the policies we have been pursuing, though vitally important, will not in itself be enough to remedy our situation. The problem of the relationship between the sterling and the dollar worlds is not one to which the United Kingdom alone can find a remedy. It is a problem in which our friends and partners in the United States and the Commonwealth are especially involved. Just as we have in this post-war period concerted together short-term economic solutions to our difficulties, and together laid the basis for our long-term political association, so now we must seek together a long-term remedy for the stubborn problems of the balance of trade between the Western Hemisphere and the rest of the world, of which the sterling area forms so important a part.

As soon, therefore, as the facts of this greater stringency of dollars and its effects upon the whole of the sterling area, became evident we invited Commonwealth Finance Ministers to attend a meeting in London. This meeting will begin on 13th July, and its purpose is to discuss the situation as it now exists, and to devise mutual co-operative measures to deal with it. We are taking the opportunity of the visit of Mr. Snyder, the Secretary of the United States Treasury, who will be visiting London this week, to initiate discussions with the United States Government on the whole matter; Mr. Abbott, the Canadian Minister of Finance, will take part in these talks, as well as in those of the Commonwealth Finance Ministers.

Arrangements have thus been made for prompt discussion of the whole position at a high level. The House will realise that until these talks—which will undoubtedly take some weeks—have been concluded, it will not be possible for the Government to formulate and lay before them the full policy which we intend to pursue, in association, we hope, with our American friends and with the other members of the Commonwealth. In the meantime, we shall in the course of these consultations, and in concert with others, take whatever further steps may be necessary to deal with the immediate situation of the sterling area. I would warn the House and the country that a thorough-going solution of this sterling-dollar problem will take some time, and just as in dealing with every other great national problem following the upheaval caused by two world wars, we shall need, while exercising patience, to be prepared to take resolute action.

The United Kingdom carries a great burden of responsibility in this matter, not only as the central country of the sterling area, but also because it is so large a contributor to world trade. We have indeed fully recognised this responsibility in the assistance which we have provided since the war to stimulate world trade and to help forward world recovery. As the House is aware, we have devoted over £900 million to this cause.

We are convinced that the present circumstances offer a real opportunity for a long-term solution of the difficulties between the dollar area and the rest of the world. Our recovery and that of Europe has, with American and Canadian Governmental help—which cannot be expected to continue indefinitely—gone far enough to enable us now to look for a way out of these difficulties. If in the future we are to have the convertibility of currencies and the multilateral form of trade which we have sought ever since the end of the war, and are now seeking, we and others must begin to build the permanent policies that will make these desirable objectives possible of attainment.

It is therefore in a spirit of constructive determination that we approach the solution of our present difficulties, and if we must pass through a further period of restraint and restriction in order to bring about a more permanent solution of our problems, I am confident that, in so doing, we can rely upon the help and support of all our people thus safeguarding that basic policy of full employment to which we, in common with all other countries of the world, are so deeply pledged, and at the same time preserving the principle of "fair shares" to which our nation is committed.