The War Illustrated, No. 223, Vol. 9, January 4th 1946

What the Loan Means lot i v i t a i n J theN House o f Commons on August 24,1945, Mr. Attlee announced the termina­tion by the Americans o f the Lend- Lease arrangements which had been in operation since March 11,1941, and stated that Lord Halifax, British Ambassador to the United States, and Lord Keynes, adviser to the Treasury, were proceeding to Washing­ tonto discuss the resulting situation with representatives o f the U.S. Administration. Talks opened on September II, but it was not until December 6 that the Prime Minister was able to announce that a financial agree­ment putting almost £1,100,000,000 at the disposal of Great Britain had been signed. Details o f the final proposals arrived at have now been presented to the House o f Commons and to the British public. They have aroused little enthusiasm and some opposition, but they were accepted by the House o f Commons on December 13, and by the House of Lords five days later. If, as seems likely, the U.S. Congress ratifies the agreement, the foundation o f the economic life of the post-war world will have been laid. Why has the “Financial Agreement between the Governments of the United States and the United Kingdom ”been accepted with such reluctance in Great Britain ?Annual Repayment Over 50 Years A loan equivalent to about £1,100.000,000 is offered by the U.S.A. to Great Britain. O f this sum about £162,000,000 is to be used to pay for the goods dispatched to Great Britain under the terms o f the Lend-Lease arrange­ments but not actually received, when those arrangements were terminated. The re­mainder is available in dollars to be drawn upon at anytime between ratification o f the agreement and the end o f 1951. The loan and the interest are to be repaid in annual sums of about £35,000,000 (except in certain circumstances), over a period o f fifty years, beginning in 1951. In previous articles—see pages 366 and 483— I tried to show why a loan o f U.S. dollars is necessary. Briefly, we require dollars to pay for goods and services which we have to buy in America, and to be able to offer dollars to some of the nations to whom we owe pounds sterling, but who want to make payments to the U.S.A. (This is what is meant by “making the Sterling Balances convertible ”into dollars.) In the long run, these dollars must be obtained by exporting British goods and services to the U.S.A. T Tn fort u nat f.l y,our ability to do this at ^the present time is limited by factors directly connected with the war. For exam­ple, we had to sell a large proportion o f the securities on which we used to receive interest payments in dollars in order to pay for American aircraft before the days o f Lend- Lease. About half our pre-war tonnage o f merchant ships, which used to earn an income in foreign currency, has been sunk during the war. Above all, labour and machinery were directed' from making goods for export to making munitions or filling the ranks of the armed forces. The revival of the flow o f dollars and other foreign currencies with which to buy imports will depend on the revival o f the export trade, and that in turn will depend on the rate of “Reconversion.” By “Reconversion ”we mean not only bringing theW aafs back to the cotton mills and turning tank factories back into motor works, but also making good great arrears of maintenance work in those factories which did continue to make civilian goods during the war. The task is form id­ able, for our export trade, which fell during the war to about one third o fits 1938 value, must be raised about three-quarters above that level if our essential post-war imports are to be paid for. J t f f J O Mi V B f C K A T Z S C M M T O most people the complexities and uncer­tainties of the Anglo-Am erican Loan Agreement constitute a major headache. The purpose of the immense sum involved, the terms of the loan and conditions attached, how it is likely to affect our trading relations with the Dominions, the influence it will have on the lives of us all for years to come :these and other points are made clear in this exposition specially written for “The War Illustrated.” Even though the process of reconversion is going ahead faster than many people suppose (probably faster than the reverse process did in 1939-41), and even though the home market continues to be starved o f the goods which have been enjoyed by our American Allies throughout the war, some years must elapse before this export target is achieved. The alternative to obtaining the necessary American goods in return for British exports would be to obtain American goods on credit. It was originally hoped that the United States would see their way to making a grant-in-aid—a sort o f peace-time Lease- L end—in recognition o f the terrific burden borne by this country during the war. This proposition being unacceptable, the only remaining possibility is a loan on orthodox term s:and this, broadly speaking, is what the British negotiators have received. From one point of view, the securing o f a loan is a source of satisfaction. For it will mitigate to some extent the great hardships that would otherwise have had to be endured during the next few years, and will enable us to meet some o f the requests o four Sterling creditors for payments in American dollars. But, unfortunately, certain conditions are attached to the granting o f the loan which can only cause very grave misgivings to many people in Great Britain. If a Major Slump Occurs in U.S.A. What are these conditions ?In the first place, obviously the acceptance o f the Loan imposes a burden of annual payments amounting to about £35,000,000 over a period o f fifty years. This is not a large sum in itself, but clearly does nothing to lighten the existing heavy burden on our Balance of Payments. This sum must, of course, be paid out o f the proceeds o f additional British exports to America (except insofar as it is paid in gold bought from other countries). Thus the ability o f Great Britain to repay the Loan depends on the willingness o f A m eri­ cans to buy British goods. Experience o f the conditions prevailing in the inter-war period has shown that, this willingness is likely to vary considerably from time to time. In particular, if a major slump should occur in the U.S.A., the American National Income will fall, and with it the ability of American citizens to buy British goods. Under these ‘OUT OF TUNE WiTH REALITIES’ “[SHALL never as long as I live cease to regret that *this is not an interest-free loan," said Lord Keynes, speaking in the House of Lords on December 13,1945. “The charging of interest is out of tune with the underlying realities. It is based on a false analogy. “Other conditions of the loan indicate clearly that our case has been recognizcd as being a special one. The Americans, one would have thought, might have emphasised the special character still further by for­going interest. “The amount of money at stake cannot be Important to the United States, and what a difference it would have made .to our feelings and our response. But there it is." he added resignedly. PAGE 547 conditions the American government will almost certainly attempt to encourage Am eri­ can exports, though it maybe difficult for it to persuade the U.S.A. to admit imports of British goods. Now. it is true that the Loan agreement provides for the “waiving ”if the annual repayments o f the British Balance o f Payments can be shown to be in such a state as not to permit the necessary transfer 'of dollars to be made. But it may still prove difficult to invoke this waiver clause. A more serious cause o f misgiving in Great Britain is the manner in which the oiler o f the Loan is tied to the acceptance by Great Britain o f what is called “free multilateral trade.” Essentially this means that we forgo the right to make specific trading agreements with other nations, in particular with the Dominions. We agree to make any future sterling balances freely convertible into dollars. By this undertaking a powerful in­ducement to other countries to buy from us because we buy from them is removed. At the same tim ewe have undertaken that any portion o f the vast existing sterling balances that are released for spending shall be made available in either sterling or dollars, as their owners choose. Regarded as an Economic Dunkirk Moreover, the Agreement limits the power o f Great Britain to grant Imperial Preference. For we have agreed to curtail imports from Empire countries in the same proportion as we may at any future time curtail imports from the U.S.A. The effect which this pro­ vision may have on the economic structure o f the British Commonwealth cannot yet be predicted. But it is clear that we must be prepared to abandon the picture we had formed of the members o f the Commonwealth establishing, if necessary, a large group o f nations main­taining full employment at home and insu­lated from the possible international economic fluctuations generated by variations in the American willingness to buy imports. Provided such fluctuations do not occur, all maybe well but we cannot feel justified in assuming that the American people have learned the great lesson o f the inter-war period—th at employment must be stabilized at a high level by systematic planning on the lines which were lajd down in the British Coalition Government White Paper on Employment Policy. The Loan Agreement, in fact, has two serious' implications. In the first place, we are forced to lay aside some o f the most powerful weapons by which we could hope to achieve the enormous task o f rebuilding our export trad e—m ainly controls over our overseas trade. In the second place, we are draw nonce more into a world o f inter­national economic relationships in which all depends on the willingness o f creditor nations (to all intents and purposes the U.S.A.) to accept imports. Both these are implied by the “convertibility ”undertakings and by the abandonment o f Imperial Preference. All ,we repeat, maybe well, but it is im-possible to feel any confidence that it will be so. The Loan could not be rejected, but we should regard it as an economic Dunkirk, providing a breathing space which may enable us to set about the gigantic tasks o f national recovery from a situation into which we were thrown by the completeness o four war effort, and hope that the U.S.A. will recognize the duty o f creditor nations to accept payment in goods o f the debts owed to them .This means a complete revision of American tariff-policy and a refusal to rely on the disastrous expedients o f the nineteen- thirties by which nations sought to export their unemployment.
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