At my suggestion Cripps was invited to address High Commissioners
today on E.R.P. and its effects. Cripps commenced by saying
Britain was pleased that Harriman [1] appointed as E.R.P.

Representative in Europe. Britain now anticipating E.R.P. Aid at
rate of 325m. per annum. Net dollar drain during first quarter
1947 was at rate of 590m. per annum. The United Kingdom estimate
of the net dollar drain between July 1948 and June 1949, in the
absence of Marshall Aid, is 548m. Some action is obviously needed
if our reserves are to be maintained at about 500m. which is
their present level and the minimum desirable to run the Sterling
Area.

2. The United Kingdom desires a greater volume of trade 'passing
through sterling' and this has been the objective of our 32
bilateral agreements. However we must adjust our imports in order
to maintain the Sterling Area reserves which, based on present
prospects, might decline by 200m. this year.

3. The United States was not prepared to consider meeting dollar
demands of the rest of the Sterling Area, which she expects the
United Kingdom to carry. Our policy during the next four years
must be to develop plans to eliminate the dollar deficit and to
foster export expansion on a sound basis. To do this we propose to
proceed in two ways:-

(a) To try to increase the validity of resources in the Sterling
Area by supplying one another's needs in increased measure and by
exporting more to the Dollar Area.

(b) To try to increase the volume of trade within Western Europe,
i.e. to increase the volume of production and reduce the European
drain on dollars.

4. An essential factor is the maintenance of sterling as an
international currency and an extension of the area in which
sterling is used. Cripps does not think United States hostility to
the sterling Area and Imperial Preference is likely to be the
policy of the present administration. There is, however, the
embarrassment of an annual vote.

5. Cripps believes total United States exports for 1948 will not
exceed 90% of the 1947 volume. In 1948 E.R.P. countries may
approach their 1947 volume of imports from the United States, but
there will be reduced United States exports to other countries. He
also anticipates a change in the make-up of American exports-more
steel and less food.

6. The United Kingdom is under pressure to supply a larger volume
of goods to E.R.P. countries. These will come not only from the
United Kingdom but also from some other Commonwealth countries.

The United Kingdom is hoping by one device or another to improve
the chances of France buying raw materials from the Sterling Area.

The balance in inter-European trade will in fact be a balance
between goods of the Sterling Area and those of the E.R.P.

countries. There is every prospect of a larger demand for Sterling
Area goods from Western Europe and of increased supplies from
Western Europe to the Sterling Area.

7. The United Kingdom is worried by the refusal of many countries
to import non-essentials. The United Kingdom's hope is that non-
essentials should pass both ways.

8. When I inquired about the necessity for further dollar
restrictions Cripps replied that although Commonwealth countries
had done a good job the need for dollar economy was as great as
ever. The United Kingdom must reduce existing dollar expenditure
and there would be no marked increase in living standards in this
country unless increased supplies were received from non-dollar
areas.

9. I inquired whether the provisions of the E.R.P. agreement
between the United Kingdom and the United States might provide for
increased supplies of iron and steel products and capital
equipment to other E.R.P. countries and if so might this mean
reduced supplies to Australia. Cripps replied that production in
this country had reached capacity at 15m. tons per annum. He
pointed out that countries such as Australia received large
amounts of capital equipment from Germany, Belgium and France in
the pre-war period. The main sources of increased steel output are
now in Western Europe, in particular the Ruhr. He hoped that the
United Kingdom and Western European countries together would be
able to supply the capital goods needed by Australia. (This was a
definite hint that we should seek to place orders for capital
equipment on the Continent.) [2]

10. The Pakistan representative referred to exchange difficulties
in increasing trade with Western Europe. Cripps admitted this
difficulty but said that Britain was working to overcome it,
although the solution would not come quickly. I followed this up
by asking Cripps what were the prospects for a Western European
Clearing Union, and what would be the link between other Sterling
Area currencies and any new clearing unit. Cripps replied that a
Western Union Clearing Agreement ought to result in a greater
volume of trade with the Sterling Area, but again admitted that it
would not be easy to arrange.

11. I sought the latest information on the setting up of a
European Customs Union and mentioned that Australia was worried
about the possible effects of such an agreement on Imperial
Preference. Cripps said that Australia need not worry about
Imperial Preference for the next four years because prohibitions
and control factors will be much more important in determining the
volume of trade. I suggested that this might be very well during
the next four years, but what would happen if there were a
reduction in the demand for raw materials and food stuffs. Cripps
stated that his aim was to avoid a heavy slump in raw material
prices.

12. In reply to a query the Canadian High Commissioner stated that
Canada's net drain of dollars to the United States has stopped.

However Canada does not propose to consider unfreezing the
remainder of the British credit until the end of the summer when
the quantity of her crops and the effect of off-shore purchases
will be known.

13. Cripps stressed the difficulty of France's present situation.

She may not be in a position to purchase sterling goods after the
end of next month. The United Kingdom will suggest to the European
Co-operation Administration that France be permitted to use
Marshall dollars for off-shore purchases of Australian wool.

14. I mentioned that Australia was worried by the acute situation
which might arise if there were a further serious drain in
Sterling Area gold and dollar reserves. We want to be prepared
and, if necessary, move towards it in relatively easy stages.

Cripps replied that it was because of such a possibility that we
want to keep Commonwealth Governments fully informed. At present
the United Kingdom has only a vague idea of what is likely to
happen. Our reserves are the Sterling Area reserves. Western
European Union would mean a change in the economy of all Western
European nations. The United Kingdom would have to make
adjustments also. The outcome should be to make Western Europe
more dependent on the Sterling Area.

15. The above is a fair resume of Cripps's comments. It is obvious
that as E.R.P. begins to flow plans will be evolved to meet
changing circumstances and we will do our best to keep you fully
advised.