You will recollect that we informed you by telegram of the 29th January of the disquieting weakening of the United Kingdom dollar position and sought your continued co-operation in making economics in direct dollar expenditure, to which you responded immediately. I am very sorry to have to say that the position has deteriorated much more rapidly than we then expected and the situation which now confronts us is very serious. Very full statistical material was recently communicated to you by our High Commissioner in Canberra which fully reveals the developments in our situation. In writing what follows, I shall assume that you have seen this material and I will refer to it without reproducing the figures in any detail.
2. We believed that the amount of the loan from the United States Government would have been sufficient to enable us to reach the recovery stage without further aid, had our expectations in other directions been realised. Unfortunately, they were not. The main upsetting factors have been the big rise in prices of food and other imports, the disappointment in the recovery of Europe, and, to a lesser extent, the severe winter which curtailed production.
Moreover, further unexpected factors are now causing an additional drain of United States dollars. These arise from the world shortage of dollars, which reflects the enormously favourable balance of payments of the United States. Thus Canada is running a deficit with the United States of $600 million. Sweden is in dollar difficulties; so is the greater part of Latin America and, of course, most of the world. In consequence, great areas are attempting to meet their dollar difficulties by restricting imports-including those from the sterling area-with the result that the sterling they receive for their exports, instead of being freely spent in the sterling area, tends to be spent in dollars, to supply their urgent needs for American goods. All these factors combine to influence the United Kingdom balance of payments. Last year it was about 400 million, practically all with the hard currency areas. For the year to June, 1948, we estimate it as 600 million with the hard currency areas, against which there should be a surplus of 150 million with the rest of the world, or 450 million net.
3. In this acute situation our most urgent need of the moment is to make the supply of dollars last as long as possible. We have just announced still further import cuts from dollar sources, and as we are committed to non-discrimination by the Financial Agreement with the United States, we are brought directly up against difficulties with other countries. We are also seeking to expand exports, and this too involves further deprivations for our people.
4. In addition to this immediate dollar problem, we are facing difficulties in the negotiations with various countries on accumulated sterling balances. In some cases, like Egypt, it has only been possible to make short period agreements; India will no doubt have to follow the same course. We have to combine our major objective-to secure a sort of standstill on the major part of the sterling balances-with the necessity of keeping their economies afloat, particularly in the politically vital area of the Middle East.
5. Your own balances, which I believe stand at something like 125 million sterling, could, like those of other countries, be a serious embarrassment to us in the near future. However, for our part, we do not propose to seek any formal arrangement with you, as we feel that we can look forward to your continued co- operation, which will take into account our external difficulties.
6. In approaching the problem in this manner, we have in mind the sympathy and practical assistance which your Government and your people have already given. Their goodwill has been illustrated by the 25 (Australian) million gift, the continuation of rationing, the drives to obtain meat, and the welcome food parcels from individuals, and many other ways. For all this I cannot adequately express our thanks.
7. It is therefore with great regret that our difficulties compel me to ask for your continued, and if possible increasing, help in this present vital year, subject of course to the preservation of your own essential needs. In these circumstances, I am taking the liberty of putting to you our broad hopes of the way in which Australia may be able to co-operate, and of suggesting to you particular directions in which that co-operation in the immediate future would be gratefully welcomed by my Government. These are as follows:-
(a) Import Policy: I would like to say how greatly it would help us in our present difficulties if you could find it practicable to keep your imports within the limits of current income. I realise, of course, that short term import planning is impossible for your economy, and that your net position will depend on several factors-the volume and price of your exports as well as the level of imports. I also realise that you must have sufficient flexibility to give you control over your balance of payments for your own trade policy. My hope is, however, that you would, if necessary by measures to check consumer demand, keep any temporary drawing down of your existing balances to the minimum practicable, and that you would thereafter restore those balances as rapidly as possible. We would appreciate it if we could periodically "change vital information which may bear on this aspect of trade. We would not, of course, seek any day to day consultation. I should also like to emphasize that next twelve months are vital to the United Kingdom. We are anxious to obtain maximum returns for our exports, to keep imports at minimum level and to make our dollars last as long as possible in the hope that we can carry on without extreme restriction before some new favourable development occurs. In particular, therefore, we had hoped that you might be able to undertake to keep your imports for the current twelve months within your current income, but McFarlane has stressed the difficulties of an undertaking of such rigidity and we appreciate his representations. I would, however, ask for your special co- operation in this vital twelve months period. I should like to refer immediately to the United States dollar position, which has deteriorated so rapidly as to face us with a crisis which would have reactions not only in United Kingdom but in world trade generally. Recent withdrawals from the United States loan have been at the rate of nearly 100 million a month, and if this rate continues, the credit will be used up before the end of 1947. We have therefore found it necessary to cut down our imports from the United States in order to conserve dollars. As we are committed to a policy of non-discrimination, we have not been able to avoid interference with our imports from other countries, including Australia. We regret the embarrassment which our restrictions have caused you and again assure you that we have endeavoured to keep our interference to a minimum. For your own part, your supply of dollars, or other currencies, now flows automatically from your current earnings of sterling. But in the exercise of your discretion in determining your import policy, you will, no doubt, bear in mind the consequences not only to us but to yourselves if the central reserves of all the countries which have such a close financial link with us were depleted at a rate which put the position out of control.
(b) Current gold production: I understand that you have a small reserve of gold which you are building up from current production.
In the circumstances that confront us in the near future, the importance of strengthening our own gold reserve is very great.
Apart from the undoubted psychological effect, it represents both an extension of the time required for remedial measures to take effect, and gives us greater freedom in negotiation with the United States upon matters of vital concern to you as well as to ourselves. I hesitate to ask you to change your present practice, but if you would see your way to sell your current production to the Bank of England against sterling, I should greatly appreciate it. As you will understand, it would go far to ensure that there would be no need to draw down your existing sterling balances. Our gold and dollar resources are in fact the final source of help for all countries linked to us by close ties. If we can manage to keep them looking strong, they will be strong.
(c) General: There are some aspects of a more general nature on which it seems desirable to have a mutual understanding:-
As to the unforeseen: I hope you will agree that if our own external position worsens or there is unexceptedly heavy drawing down of Australian sterling balances our two Governments should consult as to appropriate measures to be taken; on the other hand if there is a serious decline in Australian export income (due to major falls in prices, bad harvests, etc.) there should be similar consultation.
As to future development of Australia: I appreciate you would desire to be free from time to time to discuss with United Kingdom whether any part of your accumulated balances could be used for financing a larger volume of imports for the development of Australia, particularly in the event of an improvement in our position or a drastic rise in import prices into Australia.
Charges to accumulated balances: Repayment or repatriation of sterling debt, including repayments from Sinking Funds, and outstanding war accounts would be recognised as proper charges to accumulated balances and not to current income. Amounts used temporarily for underwriting purposes would also be an appropriate charge to accumulated balances.
Accretions to sterling balances: Any future accretions to sterling balances arising from favourable balance of payments would be regarded as current income for the future and be freely available for any current transactions in any subsequent year.
8. I understand that McFarlane has been in close touch with the Treasury, and he will be able to take back to you perhaps a more realistic appreciation of our problems than I have been able to convey in this message.
9. I regret that circumstances beyond our control compel me to make this appeal to you and I feel I can look forward with confidence to your co-operation as far as the preservation of your own essential needs will allow.
Postscript This message was prepared with the help of McFarlane before last week's debate in Parliament. In some respects, therefore, it is rather behind the most recent developments, which are touched upon in McFarlane's telegram to you of which he has been good enough to give us a copy.
I understand that you would still find the message useful as a background for your own handling of the position and I am therefore sending it to you.