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ARTICLE VII
The Lend Lease legislation passed by Congress authorised aid on 'terms and conditions' specified as 'payment or repayment in kind or property or any other direct or indirect benefit which the President deems satisfactory' (Skidelsky p.126). Responsibility for determining the terms and conditions was given to the State Department under the Secretary of State, the militant free trader Cordell Hull and his Assistant Secretary Dean Acheson. The result was a draft of seven articles which Keynes saw on 28th July. Article VII read:
'The terms and conditions upon which the United Kingdom receives defensive aid from the United States of America and the benefits to be received by the United States in return therefor, shall be such as not to burden commerce between the two countries but to promote mutually advantageous economic relations between them and the betterment of world-wide economic relations; they shall provide against discrimination in either the United States of America or the United Kingdom against the importation of any produce originating in the other country; and they shall provide for the formulation of measures for the achievement of these ends.'
Innocent as that may seem, it prompted an angry response from Keynes:
'It was impossible, he raged, for the British to make such a commitment in good faith. It fastened upon the future an ironclad formula from the nineteenth century. It contemplated the impossible and hopeless task of returning to a gold standard where international trade was controlled by mechanical monetary devices. It banned exchange controls, which were the only way to maintain economies in balance. It allowed all kinds of cunningly devised tariffs which were in fact discriminatory, while prohibiting sound monetary controls. After the war, Britain would have a large surplus of imports over exports and the Article VII formula provided no remedy for this.'
Later, in a letter to Acheson apologising for the violence of his reaction, Keynes developed his argument:
'His reaction, he said, "was the result of my feeling so passionately that our hands must be free to make something new and better of the post-war world; not that I want to discriminate in the old bad sense of that word - on the contrary, quite the opposite. But the word [discrimination] calls up ... all the old lumber, most-favoured-nation clause and the rest which ... made such a hash of the old world. We know also that won’t work. It is the clutch of the dead ... hand. If it was accepted it would be the cover behind which all the unconstructive and truly reactionary people of both our countries would shelter. ... Meanwhile forgive my vehemence which has deep causes in my hopes for the future.' (Skidelsky, pp.129-131)
Keynes's old ally from the 1920s effort at full employment, Hubert Henderson, now based in the Treasury, and the Bank of England were similarly hostile to Article VII:
'Both Hubert Henderson and the Bank of England disliked the idea of making promises for the future, however vague. The view which they represented was that countries, or groups of countries, should aim to balance their post war trade by the wartime mixture of exchange controls and state trading agreements. This would enable them to maintain stable exchange rates with each other. Article VII, with its ban on discriminatory trading arrangements - those which favoured the exports of one country over another - struck at the heart of this philosophy ...
'The Bank of England minuted: "it can surely be foreseen that we and others will refuse to limit our internal monetary policy by reference to any external standard; that we can never again tolerate conditions in which mass movements of capital are free to overwhelm the international exchanges; that we shall maintain exchange and import controls for an indefinite period; that we shall aim at maintaining the concept and structure of a sterling area; and that we shall retain the liberty to use bilateral negotiations as an instrument for promoting international trade."' (pp.209-10)
But in this case Keynes argued against the idea that the sterling area could be expected to behave as a coherent bloc:
'The Bank attached great importance to import controls to "balance trade". But it did not make it clear whether import controls were to be applied between members of the sterling area or only between the sterling area and the rest of the world. If the latter, they were an extreme form of discrimination; if the former, the sterling area concept became very thin. The Bank’s scheme presupposed a pooling of the sterling area’s gold and dollar reserves. Under whose control was that reserve to be? Keynes denied that there was enough "solidarity" within the sterling area for Britain to be entrusted with the pooling. It could only be done by an impartial international body.' (p.211)
In the event Roosevelt assured Churchill that Article VII wasn't intended as an attack on Imperial Preference and the impact of it was watered down and combined with other, more interesting aims in the 'Mutual Aid (Lend Lease) Agreement' finally signed in February 1942:
'To that end [the betterment of worldwide economic relations] the [benefits to be provided to the United States of America by the Government of the United Kingdom in return for aid] shall include provision for agreed action ... directed to the expansion ... of production, employment and the exchange and consumption of goods [and] to the elimination of all forms of discriminatory treatment in international commerce and to the reduction of tariffs and other trade barriers ... ' (p.226, fn)
The shift in emphasis away from 'discrimination in either the United States of America or the United Kingdom' to 'discriminatory treatment in international commerce and to the reduction of tariffs and other trade barriers' reflects the shift from the State Department (Hull and Acheson) to the Treasury (Morgenthau and White) and their more ambitious plans for a reorganisation of world trade. Keynes remained the key figure on the British side.