20 Bunting to Wheeler
Letter [CANBERRA], 29 June 1948
No doubt one of your main London topics will be the preservation of the present sterling area arrangement whereby we are able to have our dollar deficits financed.
It may be that the British, with an eye to the absolute level of their reserves, will be fearful of continuing the arrangement as freely as we would like. They may hope to have some sort of understanding about a ceiling on our dollar convertibility. The Chancellor informed High Commissioners at the end of April that one of the major lines of policy in the Marshall Aid era was to maintain the reserves at 'the present level of about 550 million', which is necessary to commence the post-Marshall era 'in a sound position with a strong backing for sterling.' The United Kingdom originally expected some fall in the reserves during the first Marshall year, and felt that the drain might continue in the subsequent years. This of course is still possible, but there are now stronger grounds for believing that the Marshall aid will roughly offset the U.K. and Colonies net deficit in dollars. (The reserves at 31St March were about 550 million; at 30th June they will be about 450 million. As there will be 100 million unused 'drawing rights' against the E.C.A., the 550 million is still held at 30th June in a book-keeping sense).
However, Marshall Aid is not intended to offset the dollar deficits of the self governing sterling area countries, and the Americans may expect these deficits to be reflected in falls in the reserves. The U.K. will obviously want the resulting drain kept to a minimum, and for this reason may desire to set unofficial limits to the drawing rights of sterling area countries which still have flexibility.
You will answer of course that because of our dependence on a certain volume of dollar imports, and our vulnerability on the export side, we want to avoid a ceiling, preferring to continue our present flexible arrangement on the assurance that we will conserve dollars as much as we can. But there is a point which often occurs to me and which I have not seen in any statement or document by the British. It is the fact that we cannot tell at this stage what the purchasing power of 550 million in gold and dollars will be in 1952. If dollar prices were to fall by 25% between now and 1952 about 400 million then would be the equivalent of 550 million now. Possibly dollar prices will be higher in 1952, but I think they are more likely to be lower. Some of the factors now sustaining the U.S. economy might have ceased to be effective by 1952-e.g. building lag overtaken, other accumulated demands met, inventory buying and spending of large proportion of current income ceased. But whether U.S. prices fall or rise, the additional drawings (if any) which Australia would make under a flexible arrangement compared with a ceiling arrangement are likely to be submerged in the movement in the real height of the reserves caused by even a moderate change in the dollar price level. The same would apply to New Zealand as in neither their case nor ours, is the deficit likely to get out of hand. But to avoid our being exposed to a policy of keeping our imports within a fixed distance of our export values, I think it would be worthwhile to use an argument along the above lines if the British introduce the ceiling idea because of their desire to have 550 million in kitty in 1952.