NO PROBLEM OF first importance in international relations it less understood in the United States than the economic divergence between the United States and Great Britain. The sudden and unilateral cancellation of Lend-Lease by President Truman has led to a hasty attempt by foreign correspondents and commentators to explain the British situation. But most of these efforts are incomplete and have not sunk far into the American consciousness. Few in this country understand the rather intricate calculus of imports and exports, foreign exchange, international debts and repayments, and currency stability. Discussion has been carried on largely in terms of sentiment having to do with obligations or generosity or protection of domestic interests. These emotions have their important place in the affair, but no proper basis for them can be laid without a real understanding of the economic issues involved.

The major premise of the argument has by this time been made fairly clear. Before the war, Britain had to import about 60 percent of her food (by value), She also had to import cotton, lumber, petroleum, iron and other critical raw materials. Her exports of goods were sufficient to pay for only about half the required imports. The rest were paid for by the earnings of shipping, banking, insurance and other services, and the income from British investments abroad. In order to concentrate her efforts on the war, Britain had to cut her exports to the vanishing point and dispose of a large share of her foreign investments. She also accumulated a huge debt to the countries constituting her chief sources of supply, with the exception of the United States and Canada. In the case of the United States, Lend-Lease was a substitute forthis debt. It was part of the Lend-Lease understanding that Britain should concentrate on war production, rather than retaining and enlarging her exports in order to pay for what she needed.

In order to resume economic life on a peacetime basis, Britain must find a new way of paying for the essential imports. Lend-Lease is gone. She cannot prudently increase her already large foreign indebtedness, and in any case does not wish to do so. The debts she has must be funded and if possible scaled down. The income from her foreign investments has been drastically cut. Her shipping losses have been great, and a world shipping surplus is in prospect so that a reduction in income from ocean cargo-carrying is antic ipated. The consequence is that Britain will have to increase her exports of goods at least 50 percent above the prewar level in order to sustain her old standard of living, and she will have to increase them more than this if the level of living is to rise.

Naturally, Britain cannot even restore her prewar volume of exports, to say nothing of increasing them before industrial reconversion is completed, and while her manpower is still largely scattered over Europe and Asia. To cut off Lend-Lease at this juncture was to create for her a problem of desperate urgency. She must have means of obtaining necessary supplies during the transitional period. Offers of loans from the United States to bridge the gap will hardly be accepted, because the necessity of future repayment of interest and principal would only aggravate the ultimate problem, which is already grave enough.

In addition, there seems to be a desire on the part of the American government to extract from the British conditions to which an important section of British opinion is reluctant to assent at this stage. Fortunately, these conditions will not embody the demand of reactionaries that we attempt to force Britain to abandon her plans for domestic social reform, full employment and the nationalization of basic industry. They do, however, look in the direction of renunciation of the system of imperial-preference tariffs, exchange control, the pooling and rationing of exchange within the sterling area and other so-called "discriminatory" practices in the regulation of foreign trade.

These are matters concerning which American understanding is almost nonexistent. Most of us have accepted on faith the old doctrine, ably promulgated by Secretary Hull, that all barriers to trade imposed by governments are injurious to world prosperity and should be removed. We are at a loss to see why the British, with their need for greatly expanded trade, should object. We do not understand what gave rise to these practices, or why they may be needed by a nation in Britain's precarious position.

The imperial-preference tariffs constitute an arrangement roughly similar to the tariff of the United States, The nations in the British system all impose import duties, but allow imports from one another at lower rates than imports from outside the Empire. This is an approximation to our system of protection, with free trade among the several states. Our exporters regard imperial preference as a handicap to their ability to sell in British countries. Exporters in the United Kingdom regard it as a means of assuring them a competitive advantage in Empire countries. If everyone could be sure that production and trade throughout the world would expand, doubtless all concerned would benefit by abolishing both American and British tariffs, But as long as there is uncertainty on this point and Britain has a desperate need to sell abroad, she is reluctant to give up the wall about the relative freedom of trade within her protected area.

The sterling area is composed of Empire countries, and of others as well, all of whose currencies are linked with the British pound sterling. The exchange values of these currencies do not seriously fluctuate in relation to one another. Britain can buy or sell freely in any of them without concern about foreign-exchange problems, just as New York can buy or sell freely in Illinois or California. When, however, Britain or any other country in the sterling area wants to buy from the United States or other countries dominated by the dollar, it first has to consider whether it is going to have enough dollars to pay the bill. The number of dollars available depends upon purchases by Americans in the countries of the sterling area, or loans and investments in that area from the United States.

Both before the war and during it, there was a chronic shortage of dollars in foreign-exchange markets, because foreigners wanted to buy more here than we wanted to buy abroad, and the difference was not made up by loans and investments. Therefore, purchases from the United States by members of the sterling area had to be restricted according to the dollars available. This result is now accomplished by the British scheme of exchange control, which forbids out-going payments without governmental permission, pools the dollar exchange available to the sterling area and allots it to the most necessary uses. American exporters object to this plan because it limits their sales in sterling countries. They seem to be ignorant of the fact that their total sales in this area are automatically limited by the number of dollars which the United States makes available, and that the British scheme is merely one which decides how these dollars shall be apportioned. It is difficult to see how the plan can be abandoned until Britain is able to balance her international payments in a free market. Even in the long run, if the United States is going to try to export more than she imports, or suffers a severe depression so that American purchases abroad are sharply reduced, Britain can do without exchange control only at her peril.

Other so-called "restrictive" practices, such as international barter agreements, constitute attempts to assure a necessary amount of international trade between the parties in question, in spite of depression or shortages of international exchange. Most of them arose during the Great Depression of the thirties, when t h e disastrous drop of American foreign purchases and investments placed almost every other country on the breadline.


Britain can afford to relinquish such safeguards during the transitional period only if the United States can assure her of enough dollars so that she can buy what she must have, no matter how much more than this the abolition of controls may lead the sterling countries to import from us. The assurance, moreover, must be of such a nature that it will not oblige her in the future to pay back more than her resources of foreign exchange will permit. How such a transaction might be arranged is a puzzle, though not necessarily an insoluble one. It might in part take the form of agreements to purchase from Britain or other countries of the sterling area several billion dollars’ worth of goods or other property needed by the United States, or it might in part take the form of a loan without interest for a period of years and with a proviso that ultimate interest and amortization would be decided at a later dater in view of circumstances then existing.

As for the longer future, the British would take a large risk by committing themselves to worldwide multilateral trade without discrimination or control of any sort. They admit that if any prosperity could steadily be maintained and if trade should expand, all concerned would gain more from such a regime than from one in which controls and special arrangements existed. But if, on the contrary, the United States should suffer a depression a depression, dragging the rest of the world down with it, Britain would be forced to protect herself as best she could. Such protections would necessarily involve measures which our government wishes her to promise to abandon. Many Englishmen believe that the only safe course is to build up a full-employment area consisting of the sterling bloc and the nations of Western Europe, an are which would strive to insulate itself from misfortunes of the American economy.

In making the critical decision whether to join the United States in worldwide removal od trade and currency controls, Britain is chiefly influenced, not by the pressure we put upon her, but by her estimate of our will to cooperate on broad lines and of our economic future. While the British did not expect Lend-Lease to continue in peace, the unexpected arrival of V-J Day and the cancellation of Lend-Lease without prior consultation or agreement on any of these difficult problems has, according to reliable reports, aroused strong but largely unexpressed opinion in Britain adverse to any future dependence on American policy. The United States, with its vast resources and great wealth, may be able to take its chances with the vagaries of an uncontrolled free market which may lead to depression and unemployment. Britain, with her narrow margin, cannot, Rather than assume obligations which she cannot fulfill, and rather than cast herself adrift on the seas of an uncharted freedom of trade without any guarantee against misfortune, Britain will live through the crisis without our aid, uncomfortable though it may be, Her powers of recuperation may be unexpectedly great. What we shall have to so in order to enlist her cooperation is not to engage in sharp trading but to survey the problem as a while and implement the joint interest in an expanding economy and steady full employment.