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Z-1860

BOARD.-OF. GOVERNORS
OF THE
FEDERAL RESERVE SYSTEii

For release, upon delivery

May 22, 1946

STATEMENT OF MAfiiilNER S. ECCLES, CHAIRMAN OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, BEFORE THE BANKING AND CURRENCY COMMITTEE OF THE
HOUSE OF REPRESENTATIVES, MAY 22, 1946, ON THE FINANCIAL AGREEMENT
BETWEEN THE UNITED STATES AND GREAT BRITAIN.
Mr. Chairman, I appreciate this opportunity to express my views
on the proposed British loan. This is one of the most important issues
of our time, and one of the most difficult. During the weeks and months
of continuous negotiations which we conducted with the British representatives last Fall, I formulated three questions in i y mind which I eventually
q
found could be answered, at least to my own satisfaction:
1. Why do the British need help from abrdad?
2. What would it cost us to help them out?
3» What would we get in return?
First: Whv do the British peed help from abroad?
They need it because they have just finished an all-out war
against our common enemies. They need a blood transfusion to help them
regain their international economic health. The-proposed credit is not
ana, therefore, should not be judged as a commercial*loan. It is more
like a draft on a blood bank.
We in this country'Know something- about the cost of war. We
too have thrown our resources into the breach without thought of anything
but victory. And we too face a tremendous job of reconversion and of
recovery from the strain which the war effort placed on our economic and
financial system. This job we plan to do vdth our own resources. Why
can't the British do the same?
To answer this question we must look at the peculiar character
of the British economy. .We, in America, who are accustomed to a Natioa
with vast continental resources, find it difficult to realize how different
is'the position of a country where lifeblood is in foreign trade. The
k6y to the whole British problem is that here is a country which cannot
live? largely from its own resources, a countly which must import or die.
The British are handling their domestic reconversion well enough but let's
lopk at the problem they are up against in getting back to a pay-as-you-go
basis internationally.




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Britain's export trade, the main source of her international
earning1power, was reduced to one-third of normal during the war. Why?
Because in her wartime partnership with us, it was agreed that she should
concentrate her efforts on war production while we provided her essential
imports under Lend Lease, Lend Lease abruptly ended on V-J Day. Britain's
real struggle to rebuild her export trade did not begin until that day.
She. has already made great progress under severe handicaps. She must
free labor and materials badly needed for reconstruction at home in.order
to manufacture goods for export. She must-renew contact with foreign
markets and adjust her output to the world's needs. All of this takes
time, effort, and organization. Meanwhile the essential imports of food
and raw materials must keep flowing in if the British people are to survive.
This temporary loss of exporting power would have;been serious
enough by itself but in addition, again a£ a result of the war, Britain
has suffered other losses of overseas income. Before the war'Britain was
one of the greatest creditor countries in the world, receiving each year
close to one billion dollars of net income from her foreign investments.
To finance her war effort, she had to liquidate a large part of her foreign investments and to incur, in the form of frozen sterling balances,
foreign obligations amounting to approximately 12 billion dollars. As
a result, her net income from foreigi investments has been reduced to about
400 million dollars. Not only has she lost this income to pay for current
imports; in addition she no longer has as large a volume of liquid assets
as would otherwise have been available to tide her over this postwar situation.
In ohort, the British need help from abroad in meeting the bill
for essential current imports during the period when they are getting
back on their feet in international trade.
Second: What would j t cost us to help them out?
^,
The bill which is before you calls for a line of credit in favor
of the British Government up to an amount of $3,750,000,000. .'This figure
was not just picked out of the air. It represents the very careful judgment of ' the American negotiators as to the minimum amount which the British
need from us. It assumes that the British will continue to maintain an
austere living standard while they work their way out of their postwar
predicament. It takes into consideration the extent tb which they can use
existing resources and borrow from countries other than the United States.
It represents the hard-core deficit in Britain's overseas balance of payrments during the postwar transition period.
Now what does a loan of $3,.750,000,000 cost the United-States?,
The interest rate which our Government; has to pay on borrowed l l n y is
tqe
not the important matter that some 'have tried to make it seem. The. real
question is the strain on our financial and economic resources. That
involves a real cost. I scarcely need remind you that1• we, too, have inherited troubles from the war. As a result of the way .in which we financed
the war, our national debt amounts to nearly 275 billion dollars and our




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people possess a mass of.excessive purchasing power. .The-great shortage
of goods relative to this, purchasing..power ha^-created dangerous inflationary pressures in our economy.'..'The expenditure in our. markets of
dollars provided Under {this lo.an would admittedly add to, thesé pressures
at this time. However, the "added pre¿sures..wo^l4 not be as.-heavy as they
might seem a t first sight. The risks which remain are, in my judgment,
*
a small price to pay for what we expect to get in.return.
Expenditure of the' dollars under the proposed loan would- not
hit our markets all at once. In fact it would be spread out over a number
of years. The line of,credit would be available until the end of 195^
and would be drawn upon'''by'the''British only as needed. Furthermore,
many of the dollars drawn, under the credit would be .spent initially in
other countries and" might take some time finding their way back here.
Even the dollars spent in this country during the next year or so would
be used'in part for purchasing goods in ample supply. And unless we bog
down in the management of our own affairs at home,., our vast capacity to
produce goods will progressively overcome the shortages during the life of
this extension of credit.
It was neither practical nor desirable ;to attempt to specify as
a condition of the loan how, or when, orxfor what the dollars should be
spent in our markets, We already have over-all control of exports, through
export licsnaes, whereby we can control the timing and nature of all foreign demands, whether they arise under this loan or otherwise. This control should be retained during the period of inflationary pressures in our
economy whether this loan is made or not, However, we shall have to share
with the world some of our scarce resources. This fact has been.recognized
in our food program. We shall need to recognize it as it affects other
necessities if we are to help bring about economic, and political stability
in the world.
;

Up to this point my assessment of the real cost of the loan has
assumed that it would be duly serviced and repaid. But what of the risk
of default? What if this loan proves to be1a deadweight.on the American
taxpayer,and not a self-liquidating investment in British reepvery?
Of course this risk exists but in my judgment it should not
deter us from action, It can easily be exaggerated ana I, for one,.would
enter upon this loan with every reasonable expectation that it would be
repaid. A country that has shown the vigor, the courage, and the strength
of character that Britain has shown during this war period is a country
in which we- can have confidence. Through all the rigors of wartime life
in England,* the British people have shown ¡ capacity for government and
a
for management of their economic affairs which is rare' in this world. The
payments on this loan; which "Will1 probably amount to np more than 2 per
cent of Britain's annual expenditures abroad, .will' certainly not prove
unmanageable if we succeed in' building, any sort of .a satisfactory, postwar
"
.world. Of course we cannot foresee#the conditions which will prevail over
•the rest of this century and neither this loan agreement nor any of the




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other economic arrangements into which we now enter can survive a state
of world-wide economic collapse such as we suffered during the Great
Depression, Further, we in this country must recognize that in the long
run international trade must bè à two-way street, and that only through^
an adequate, intake of foreign goods ànd .services can we sustain a thriving
export business and enable the1 debts due. us to be paid.
but let me impress this thought upon your that our very purpose
in making the ..loan is to create the conditions in thé world under which
it can be repaid.
Third: What" would v e get in return?
/
The contract for this proposed loan provides.for repayment of
the principal and for a moderate rate of interest., but at this juncture
in our affairs at home we are certainly not looking for loans just for
the sake of a financial'return. On the contrary no foreign loan should
be made at this time which"does not reasonably promise, lasting benefits
and compensations to the United States far outweighing the financial considerations involved. My endorsement of this proposed loan to Britain is
based on the firm belief that it is an essential step in world recovery
and reconstruction.
We live today in a sick world. We have yet to attain the objectives of the Atlantic Charter, freedom from want .and freedom from fear.
We do not yet know whether the victory of American, arms in the war will
be crowned by victory of American ideals in the peace. But. we do know
that if the w/ir-shattered world is not restored to a tolerable degree of
economic health, our ideals of peace and democracy cannot survive.
This situation is à challenge to America. We ha.ve already gone
far to meet this challenge but the measure which is now before you is in
a sense the keystone of the whole program. As you know, this Government
has taken the lead- in drawing up treaties of economic pcace as the basis
for-a stable world order* V e have laid down "rules of the game" for a
i
peaceful and productive system- of world trade and finance, first in the
Bretton Woods Agreements and then in the proposals for an International
Trade Organization. The basic justification for the British loan is that
it would enable Britain to join; with us in turning these blueprints into
a living reality. Without the loan, the British would have to go their own
way--without us—indeed in opposition to us.
As you know, Britain is the largest market in world trade so that
her commercial and exchange practices have a very great influence on the
rest of the world. Traditionally she has tended to follow liberal trade
principles. If v e refuse this loan, however, she could hope to maintain
/
her essential Imports only by making a desperate bid for domination in
world markets. She;wo\iid be, forced to intensify the restrictive and belligerent currency -and -trading practices born during the years of war and
depression. In order "to exploit to the full.,hervadvantage as the world's
leading importer, she would have to turn increasingly•to state trading and




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barter. A large part of the rest of the world would be forced into the
same pattern and free enterprise in foreign trade would be strangled.
Along this road lies further totalitarian development.
The alternative is clear, If we grant the British sufficient
credit to cover that hard-core deficit in their overseas payments during
the transition years, thqy will be able to work their way out of their
postwar predicament in a peaceful and orderly way. They will be able to
open their markets to the world on a basis of non-discrimination and receive access to foreign markets on.the same basis. They will be able to
make pounds sterling earned by foreign suppliers of the British market
freely convertible into other currencies so that trade would no longer
have to be arbitrarily channeled along bilateral lines. Dollars provided
by the loan would flow to the British Empire, to Latin Amei-ica, to Western
Europe—to all of the countries receiving net payments from Britain. The
loan to Britain would become in this way a source of assistance to a great
many other countries which desire dollars to make purchases here. In
short, the road would be opened to a genuine world trading system, which
is essential to the maintenance of productive employment and economic
stability in a democratic world.
The costs and risks of this project must therefore be weighed
against the objectives which we seek. Without effective British participation, which is possible only if we lend our aid, the Bretton Woods
institutions and the International Trade Organization cannot fulfill the
hopes which we have placed in them. Without the fulfillment of these
hopes for a stable and productive economic order in the world, there is
little prospect of success for the United Nations Organization in its
search for political stability and security. Without economic or political
stability, we can expect only a continued drift of world affairs toward
the catastrophe of a third World War.