Memorandum for Government by the Department of External Affairs
'Possible devaluation of the Sterling and Depression in Britain and the U.S.'
(Top Secret)

• The possible devaluation of the sterling. While, of course, no definite information is available as to the intentions of the British Government in this respect, it is known that the matter has been under active consideration for some time past. This question is freely discussed, both in American and British economic publications. In American official circles it is regarded as very likely.

  The extent of the devaluation discussed, ranges from 20% to 33⅓%. The official current rate of the dollar is $4.025 to the sterling. It is suggested freely that the £ will be devalued to the value of $3, or $3.20 or $3.50 to the £. The current value of the £ in the free markets in the U.S. and in Tangiers varies from $3.19 to $3.24. If devaluation takes place, it is likely that sterling will be devalued to in or about the current free market value.

• For some time past forecasts have been made that a depression is about to set in, both in the U.S. and in Britain. All the indications are that, as far as the U.S. is concerned, the depression has already set in, and is causing grave anxiety to the American administration. The contraction of British exports, coupled with the depression in the U.S., point to the development of a serious economic position in Britain.

Insofar as our capital resources are concerned, our sterling assets would lose their purchasing power by 20% to 33⅓%; the same would apply to money in circulation in Ireland and to investments, if the Irish £ is maintained by us at parity with sterling and consequently devalued.

In terms of pre-war values, the £ sterling is now worth 11s.5d. By reason of the disastrous financial policy of under-investment and under-capitalisation of our own resources, coupled with dependence on the 'sterling assets', invested in Britain, Ireland has already suffered vast losses by reason of the depreciation of the sterling. Our 'sterling assets' invested in Britain at the moment are estimated to be in the neighbourhood of £450,000,000.

The depression crisis in Britain would have severe repercussions for us, owing to a number of factors:-

1. Fall in emigrants' remittances;
2. The stemming of emigration to Britain, which, while very desirable in itself, would cause unemployment here, unless large-scale employment was available here;
3. Fall in quantity and value of our exports to Britain;
4. No compensating reduction in the cost of raw materials imported from Britain, which are all controlled by the British Government and even a likely increase in their costs;
5. Likelihood of dumping of British manufactured goods to compete with our own industries.

The Minister for External Affairs wishes to refer the members of the Government to the post-war White Paper published by the British Government in 1944 on 'Employment Policy'¹ and in particular to Chapters 4, 5 and 6 of this White Paper. While all the conditions referred to in this White Paper are not applicable to Ireland, it does, however, deal with many of the considerations applicable in our case in the event of a depression.

Any reasonable impartial objective view of the situation leaves no doubt that, putting it in the mildest form possible, there is a definite element of speculation in investing Irish monies in Britain at a time when the British economy and sterling are confronted with such dangers and uncertainties.

Taking the value of the sterling as being equal to 100 in 1914 the extent of the depreciation of the sterling is shown by the following table:-

1914   value of sterling   100

1939 ''' 63

1945 ''' 42

1948 ''' 36.

If, instead of investing our capital in British securities, we had, during this period of time, invested our capital resources in the creation of State Forests, not only would we have avoided a loss of 64% through depreci-ation in our sterling assets, but would now have acquired invaluable assets, providing raw material for a chain of industries, providing employment and saving us large imports of timber and goods manufactured from timber.

Inadequate, uneconomical and spasmodic, as have been the forestry operations carried out by the State, they show a very considerable profit and increase in capital wealth that increases year by year. Indirectly, of course, too, had these monies been invested in providing employment for our people instead of in British securities, the national income would have been increased and the Exchequer would have been saved the sums that had to be paid out in doles and in relief schemes.

Among the national development projects which could be capitalised out of 'sterling assets' or out of funds which would otherwise be invested in Britain are the following:-

• Afforestation. While it has been decided to step up the plantation rate to 25,000 acres a year, a much higher rate of plantation should be envisaged as a sound investment. The increased programme decided upon falls very short of our timber requirements and is hardly sufficient for the development of industries dependent on timber.
• Arterial drainage and land reclamation. On the basis of the programme envisaged, it will take nearly a century before the programme is completed. By heavier capital expenditure a much greater rate of practical progress could be achieved, thus considerably increasing the area of land under production.
• The erection and equipment of factories and industrial plant, which would then be leased to industrialists or to local co-operatives; some such system is in operation in Britain.
• Mineral Development. The programme envisaged could be greatly speeded up, if sufficient capital were made available.
• Electricity Production. Even when the present programme of hydro-electrical development and of turf burning generating stations have been completed, the supply of electric power will still fall very short of the demand. This shortage of power will hinder industrial develop-ment. The speeding up of the existing programme and the preparation of a further programme to meet the full anticipated requirements should be considered.
• Harbour Development. Whatever additional harbour facilities are required, both from a commercial and tourist point of view, should be embarked upon now.

As regards the erection and equipment of factories and industrial plant, the Minister for External Affairs suggests that the industrial development authorities should be asked to apply their minds to this question as soon as possible.

In the event of devaluation or depression, it is obviously more beneficial to have our money invested in land, industry and bricks and mortar here than in British securities. Likewise, if an economic situation develops, which is likely to result in unemployment, it is essential to have in being large-scale productive schemes capable of absorbing unemployment. The only alternative would be doles or relief schemes which are neither productive nor socially sound and which would place an added burden on the Exchequer in difficult circumstances.

It should also be borne in mind that, while there is no acute unemployment problem at the moment, this is only due to the fact that emigration absorbs the unemployment problem that would otherwise exist. Quite apart from the obvious desirability of stemming this continued emigration, the depression will, while achieving this result, cause unemployment.

The events that have occurred since the Majority Report of the Banking Commission, published in 1938, seem to indicate that the considerations relied on, if valid then, are not valid now.