Memorandum by James J. McElligott
'Note by Secretary, Department of Finance'

The general impression left by the meetings at the Treasury on Friday and Saturday, the 29th and 30th July,¹ is that the British are extremely concerned about the whole dollar situation and are getting more concerned about the situation in regard to a number of other currencies. In the latter connection they mentioned specially Belgium, Switzerland, Japan, the Trizone in Germany - Italy, Portugal and Sweden have to be kept under observation. They also made a particular reference to Argentina, which they asked us to treat as 'hard' as regards both imports and exports and to consult with them in advance of any large transactions.

2. The British appraisal of the situation seems to be borne out by the facts. Exports to the dollar area have materially declined, the trade gap has widened, although imports by the U.K. were less than the target, the deficit of the U.K. and the Sterling Area as a whole has far exceeded expectations and the gold and U.S. dollar reserves at £406 million on 30th June are nearly £100 million below what was previously considered the minimum reserve figure.
3. The Treasury team at the meeting was a strong one, and while the C.R.O. Board of Trade and Ministry of Food were represented they took no part in the discussion, except when we took the initiative in mentioning a few trade matters, e.g., sulphate of ammonia supplies from U.K., exports of books from Ireland to U.K., etc.
4. Sir Herbert Brittain,² who presided at both meetings, after outlining the general seriousness of the situation, indicated the measures which had been, or were being, taken to cope with it. These measures were intended to surmount immediate difficulties and could hardly be described as long-term remedies of the situation. It had been decided by the U.K. not to import in 1949/50 more than 75% of its imports from the dollar area in 1948, which amounted to about £400 million: the new figure of imports would therefore be about £300 million. This was a serious decision, he said, especially taken in conjunction with the Standstill Order that had been imposed at the beginning of July, when all Government purchasing Departments were instructed to postpone fresh dollar purchases to the maximum extent possible and to avoid entering into new commitments. Sugar, tobacco, cotton and other raw materials are being cut, with consequences that would be the reverse of pleasant.
5. Questioned as to the advisability of action with such unfavourable repercussions, Sir Herbert urged that there was no alternative open to them, in view of the gravity of the reserve position. He went on from this, in the course of the two-day discussions, to make suggestions about the Irish position, which may be summarised as follows:
   • Ireland should keep its dollar outlay inflexibly within the limits of American Aid plus earnings.
   • Ireland should reduce the duration of its interim draws on the Sterling Area Pool.
   • Ireland should tighten import policy as regards countries whose currencies are, or threaten to be, hard (see list above).
   • Ireland might have to face a fairly drastic reduction in the figure of $64 million American Aid provisionally earmarked for 1949/50, involving in turn an immediate and radical revision of import programmes.
   • In any case Marshall Aid would last only for two years longer, and that on a diminishing basis. Concern was expressed at our apparent inability to find substitutes for dollar imports, or even perceptibly to reduce our dollar outlay. The sooner this problem was taken seriously in hand the better it would be in our own interests as well as in the interests of the Sterling Area as a whole.
6. The general conclusion to be drawn from these warnings is a cheerless one. It can now be said with certainty that there is no prospect whatever of sterling convertibility being restored in 1952.
7. It is not, in the Treasury view, a convincing argument to say, as we said more than once during the course of the discussions, that Ireland had lived up both in letter and spirit to the undertaking given by the Taoiseach and his Government in regard to foreign exchange matters as a result of the London negotiations in June, 1948.³ It was then agreed that 'pending clarification of the amount of assistance to be received from the U.S.A. under the European Recovery Programme, the Government of Éire would continue to effect the maximum economy in expenditure of hard currencies and would not exceed the level of expenditure during the first half of 1948. The Government of Éire will use its utmost endeavours to obtain the maximum amount of aid available under the European Recovery Programme, with the object of ensuring as far as practicable that their recourse to the Sterling Area Pool for hard currencies will not involve any ultimate drain on the Pool'.
8. The British line now is that the situation has changed out of all semblance to mid-1948. On the 31st March that year gold and U.S. dollar reserves were £546 million; on 30th June last they were £406 million, and had since continued rapidly to decline.
9. The British further pointed out that other Sterling Area Countries are taking steps similar to their own to deal with the crisis. The Commonwealth Finance Ministers' meeting in London in mid-July had agreed to recommend to their Governments immediate steps to check the drain on Sterling Area reserves. Pressed as to what this recommendation meant in reality, the Treasury representatives were not so specific, but they seemed satisfied that Government action would be taken in the different countries comparable in its results to that already decided upon by the U.K.
10. We pointed out more than once that during the critical second quarter of 1949 Ireland had been a net contributor to the Sterling Area reserves, but this surplus, as the British know, was to a large extent fortuitous, and in any case succeeded a long series of deficits for each of the preceding five quarters, the period covered by Marshall Aid.
11. Our suggestion that the crisis might be only temporary was not acceptable, nor was our suggestion that Military Aid appropriation of $1,500 million by the American Government, would, if approved, turn back the tide of economic recession in U.S.A. Increased stockpiling of strategic materials drawn from the Sterling Area might help matters somewhat, but even here there were conflicting interests at work, e.g. synthetic rubber manufacturers in U.S.A.
12. No alleviation of the position is expected by further credits to the U.K. from Canada, at any rate on any worthwhile scale. It is possible, however, that the position of India may be improved by a credit from the International Monetary Fund, to whom she had applied for a loan of $100 million. Negotiations had at first promised well, but now things did not look so bright, the I.M.F. taking the view that it could only make advances to tide over temporary recessions in a nation's economy. The indications were, in the I.M.F.'s view, that the recession in the Indian economy was anything but temporary.
13. No information was forthcoming as to the course of the discussions with the Canadian and American Finance Ministers which had taken place in London, and a query about devaluation elicited an emphatic no. On the latter, the official policy remained as enunciated from time to time by Sir Stafford Cripps.