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Britain's International Position

ANATION of fifty miłlion people, inhabiting an island of 90,000 sąuare miles and accustomed to live at a standard which is among the world's highest, cannot hope to feed themselves nor keep themselves in work from the produce of their homeland. A large part of our foodstuffs and many essential raw materials have to be im-ported, and those imports, in the first instance at least, are paid for in sterling, the currency of the country into which the goods and services are imported and where they are sold. But the overseas exporters' costs are incurred in their own currency and it is in that coin that credits due from foreign sources are expended. An internationaltrans-action is thus not complete until the domestic currency realised by the sale of the imported goods has been exchanged into the (foreign) cur­rency of the country in which the goods were produced. The foreign currencies finally reąuired to pay for imports into the United King-dom are contributed by the proceeds from the sale overseas of British goods and services; from the reception at home of tourists and other visitors from abroad; by interest on capital already invested abroad and by foreign loans; by the realisation of overseas assets held by residents in the United Kingdom; and by direct aid and other credits such as the sterlirtg balances, extended through overseas suppliers who do not or who cannot press for immediate payment. These foreign currencies, offered in exchange for the pounds, shil-lings and pence needed to pay the producers of British exports and creditors resident in the United Kingdom of overseas debtors, set up the demand for sterling on the market for foreign exchange. The supply of sterling, per contra, is furnished by those merchants who have sold foreign goods in the United Kingdom and are now offering that sterling for exchange into the foreign currencies needed to pay the overseas producers of the goods and services they have imported; by British residents who want to travel abroad and by anybody else, normally resident in the United Kingdom who, having his funds in sterling, lends overseas, or has interest and sinking fund to pay to foreign creditors on loans already incurred. British imports of goods, for the past century at least, have regularly exceeded exports of British produce and manufactures. Re-ceipts from sale of goods abroad have thus been less than the foreign payments which have had to be made for purchase of goods and the British balance of trade, defined as the difference between receipts and payments for goods exported and imported, has been consist-ently adverse or unfavourable. Payment for this excess of imports of merchandise has to be made up somehow and the wherewithal is found from funds furnished by receipts from overseas customers for services rendered by British ships, British banks and other under-takings and by the interest due upon British capital invested abroad. The sum of net receipts for these "invisible" items, as they are called, was more than enough, at least until the first world war, to pay for the excess of commodity imports (the visible items). The balance United Kingdom Balance of Payments table 4 Current Account 1870 to 1938—£000,000 (annual merages) Imports Exports Balance Services (net) Interest (net) Balance of Payments Outflow Year of Merchandise a of Trade on Current Account of Gold 1870-80 394-7 303-75 - 90-95 75-3 47-95 32-3 1881-90 416*8 318-4 - 98-4 79-75 6905 50-4 1891-99 480-3 331-5 - 148-8 87-2 92-6 310 1900-09 620-25 4490 - 171-2 11515 121-45 65-4 1910 (6) (c) (c) - 15906 1250 1870 1530 1913 (6) (c) (c) - 158-06 1290 2100 1810 1924-29 1256 870-5 - 385-5 209-2 245 68-7 (13) 1930-37 847-7 511-5 - 336-2 130-6 183-1 - 22-5 (- 68-1) 1938 . 835 533 - 302 73 159 - 70 210 (a) Includes coin and bullion. (6) Board of Trade Journal, 1923 (Vol. CX, p. 386). (c) The Statistical Abstract for the United Kingdom, 1901-16, shows imports and exports for 1910-13 as under. Imports Exports of Merchandise Balance of £000,000 Trade 1910. . . 749-68 598-87 - 150-81 1913 . . . 842-76 696-96 - 145-80 These figures include coin and bullion and re-exports. No explanation is otfered of the discrepancy. Sources: A. E. Kahn, Great Britain in the World Economy, Tables 13, 14, 15; and (for 1938) Cmd. 7928, United Kingdom Balance of Payments 1946-9, and Cmd. 8354, Reseryes and Liabilities, 1931-45. on current account for all items, visible and invisible, the balance of payments as a whole, remained favourable. The finał surplus, the net sum of the credits earned and held overseas, went to build up the fund of British capital abroad. Considerable inroads were made during the first world war; but the accumulation remaining even so amounted to an overseas fortunę estimated in 1938 at £3,500 million, measured, by the nominał value of the securities ąuoted on the markets. Population has grown and the standard of living has risen par-ticularly among wage-earners. The volume of imports reąuired to provide for the greater numbers at a higher standard has as steadily increased. Commodity imports till the thirties exceeded com-modity exports by a rising margin. Net receipts from services suffered from the depression. The export trades were neglected in favour of an expanding and later protected home market. The return upon British capital invested overseas, reckoned in money (but certainly not in terms of the imports which that money would buy) fell, according to the estimates, from an annual average of £250 million in the nineteen-twenties to £180 million, and at some time during the thirties the total of foreign payments began regu-larly to exceed the sum of foreign earnings from all sources (Table 4). The incipient deficits were well covered by the accumulation of British capital abroad. The immediate consequences of the worsen-ing of the balance of payments were concealed both by the influx and efflux of short-term capital (hot money) which was such a feature of those years, and by the remarkable turn in Britain's favour which took place in the terms of trade—in the price, that is, of imports measured in terms of exports. World prices of foodstuffs and raw materials fell in relation to the prices of industrial goods; and while the export trades suffered from the impoverishment of their markets, the domestic consumer gained from the cheapening of imports. Great Britain entered the second world war among the world's largest creditors. £1,120 million of British capital held overseas was sold or repatriated during the war. The short-term debts owed abroad by H.M. Government and residents in the United Kingdom rose from an estimated £500 million in August 1939, to £3,355 mil­lion on June 30th, 1945. The British emerged from the war with £2,300 millions of their foreign investments still intact; but they were now one of the world's largest debtors and the change for the worse in international accounts of the United Kingdom was then esti­mated1 at not less than £4,000,000,000. 1 Cmd. 6707, Appendix VI. The principal currencies before the war could be freely exchanged, that is "converted" into one another, and debts owed in one were sąuared by credits in others. The estimates, such aś they were, of the British balance of payments were not then divided by regions as they are now, and one cannot say by how much purchases by British importers and others in the United States and Canada exceeded, during the nineteen-thirties, the sum of British dollar credits. But the particular dependence of the United Kingdom on the dollar area was nevertheless apparent and it had certainly been recognised in the official schemes which were being considered immediately before the war both to conserve dollars and to add to earnings by encour-aging exports. The dollar problem was shelved for the period of the war by the passage of the Lend Lease Act by the Congress of the United States in March 1941. British exports of goods and sendces, helped out at first by the liąuidation of British capital held overseas, were then replaced as a source of the foreign credits needed to pay for the vast import of munitions and other stores for military and civil consumption by Lend Lease, mutual aid, and other forms of financial assistance rendered by one ally to another. Commercial exports by 1944 had fallen to half the pre-war value and to 30 per cent of the pre-war volume. An estimate prepared in 1945 put at "nearer 75 per cent than 50 per cent the increase in the volume of exports above the levels current before the war which would be required to restore a 'reliable eąuilibrium', without measures of restriction or other defensive mechanisms of a type with which it was hoped to dispense".1 Manifestly, this could not be done in the first years of peace. Manifestly, however, the British would need for their support supplies of foodstuffs and raw materials which, though limited by an austerity carried from war into the first years of peace, could not substantially reduce imports without jeopardy to employ-ment and standards of nutrition. Rationing and restriction of im­ports by licence had in fact reduced personal consumption of foodstuffs and other imported merchandise by about one-fifth, but incomes were higher after the war than before. More people were in work than in the days of depression and the demand for raw materials was greater. At the same time the prices of imports measured against the prices of British exports were rising. The terms of trade were turning against Great Britain, as indeed against all industrial countries and the value, though not the volume, of imports showed a marked increase. The period of wartime sharing was brought to an end within a few 1 Cmd. 6707, para. 12 and Table 2. United Kingdom Balance of Payments table 5 Current Account 1946 to 1952—£000,000'^ Year Merchandise Services Interest and Dividends Balance of Invisible items Govern- ment Payments Govern- ment Receipts + Balance on Govern- ment Account Defence Aid + Balance of Payments Import Export + Balance of Visible items Import (a) Export(6) + Payments (c) Receipts (d) + 1946 1,082 917 - 165 183 295 84 162 + 190 487 164 - 323 Nil - 298 1947 1,560 1,145 - 415 246 309 128 186 + 121 278 129 - 149 Nil - 443 1948 1,794 1,602 - 192 244 458 137 192 + 269 172 96 - 76 Nil + 1 1949 1,978 1,841 - 137 266 500 127 200 + 307 174 35 - 139 Nil + 31 1950 2,383 2,250 - 133 265 675 112 271 + 569 165 29 - 136 Nil + 300 1951 3,481 2,748 - 733 384 754 194 307 + 483 192 38 - 154 4 - 400 1952 2,950 2,825 - 125 380 735 278 291 + 418 217 45 - 172 121 + 242 1953 2,879 2,668 - 211 333 764 231 274 + 474 214 60 - 154 102 + 211 Shipping and travel. Shipping, travel and other net "receipts". Interest, profits, dividends; and migrants' funds, Iegacies, private gifts (net). id) Interest, profits and dividends. Source: United Kingdom Balance of Payments, 1946-54 (Cmd. 9291), Table 1. days of the surrender of Japan by the suspension of deliveries under Lend Lease in August 1945. The British almost overnight were thrown on their own, much straitened resources. The international accounts of the United Kingdom closed with a deficit for the next six years and the deficit in the dollar area was the largest and most persistent part of the whole. Eligible foreign securities held by the British had been sold before the Lend Lease Act could be passed. The amount of the reserves in 1945 was no less than it had been on the outbreak of war; but the (dollar) price of gold had not been raised and its value, measured by the cost of imports from America, had fallen by at least one-third.1 American aid did not fail though Lend Lease had been suspended. The dollars which could not yet be earned in trade were found first as the Anglo-American Loan United Kingdom Balance of Payments table 6 Regional Balances on Current Account—£000,000'j Year Balance of Payments Dollar Area Other Western Hemi-sphere O.E.E.C. Other Non-Sterling Countries Rest of Sterling Area Non-Territorial Organisa- tions 1946 . - 298 - 301 - 24 + 80 - 17 - 28 - 8 1947 . - 443 - 570 - 65 + 6 + 11 + 127 - 12 1948 . + 1 - 252 - 38 + 88 - 42 + 254 - 9 1949 . + 31 - 296 + 62 - 16 - 8 + 293 - 4 1950 . + 300 - 88 + 26 + 115 - 35 + 287 - 5 1951 . - 400 - 435 + 5 - 198 - 105 + 342 - 9 1952 . + 242 - 174 + 91 - 28 - 8 + 367 - 6 1953 . + 211 - 12 - 22 + 106 - 19 + 171 - 13 (i) Dollar Area: U.S.A. and dependencies; other "American Account" countries of Central and South America, Liberia and the Philippines; and Canada. American oil companies. (ii) Other Western Hemisphere: Argentina, Brazil, Chile, Paraguay, Peru and Uruguay. (iii) O.E.E.C. Countries: non-sterling area members of the Organisation for European Economic Co-operation—Austria, Belgium, Denmark, France, Greece, Italy, Luxembourg, the Nether-lands, Norway, Portugal, Sweden, Switzerland, Trieste, Turkey and Western Germany, together with their dependent overseas territories (including the Faroe Islands, but not Indonesia). (iv) Other Non-Sterling Countries covers most of the Middle and Far East, Eastern Europę, includ- ing the U.S.S.R. and Eastern Germany; and Spain. (v) Rest of Sterling Area consists of (a) the colonial territories of the United Kingdom (excluding Nortnern Rnodesia and Nyasaland); (b) other Commonwealth countries (including Rho-desias and Nyasaland, but excluding Canada); the British Protected States in the Persian Gulf (Bahrein, Kuwait, Qatar, and the Trucial States); Burma, Iceland, Iraq, the trish Republic, Jordan and Libya. (vi) Non-Territorial Organisations include the United Nations and its specialised agencies and the Bank for International Settlements (except when acting as Agent for the European Payments Union). 1 Cmd. 8354, Table II. table 6 (d) Regional Sources of Imports—fOOOjOOO'^ Year Total Dollar Area Other Western Hemisphere O.E.E.C. Countries Other Non-Sterling Countries Rest of Sterling Area 1946 . 1,082 390 96 146 66 384 1947 . 1,560 567 154 239 106 494 1948 . 1,794 406 170 339 218 661 1949 . 1,978 442 105 456 211 764 1950 . 2,383 439 160 573 262 949 1951 . 3,481 742 182 924 379 1,254 1952 . 2,950 606 88 738 271 1,247 1953 . 2,879 519 152 678 213 1,317 For Definition of Areas—see notes, Table 6. table 6 (b) Regional Destination of Exports—£000,000's Year Total Dollar Area Other Western Hemi­sphere O.E.E.C. Countries Other Non-Sterling Countries Rest of Sterling Area Non-Territorial Organisa- tions 1946 . 917 100 38 262 93 384 40 1947 . 1,145 130 60 260 135 539 21 1948 . 1,602 196 89 393 169 751 4 1949 . 1,841 195 108 421 195 921 1 1950 . 2,250 324 114 596 205 1,011 Nil 1951 . 2,748 394 114 702 262 1,276 Nil 1952 . 2,825 410 103 730 257 1,325 Nil 1953 . 2,668 441 54 759 205 1,209 1 For Definition of Areas—see notes, Table 6. in 1946 and the Canadian bilhon-dollar loan and when the first was prematurely exhausted, the deficits continued to be made up by grants under the European Recovery Programme (Marshall Aid).