22 Notes by Coombs
NOTES ON PRIME MINISTER'S VISIT TO LONDON AS REPORTED BY MR.
The general method of work The Prime Minister saw United Kingdom Cabinet Ministers alone, although there were some half a dozen round-table talks at which officials were present, but in the main officials dealt directly with their corresponding officers of the United Kingdom Government. Consultation between the Prime Minister and officials was confined to discussions at meals, and so on.
Sterling area and Sterling Balances Australian balances.
The Chancellor reaffirmed the United Kingdom assurance that Australia would be able to use any balances above the frozen limit of 125m. sterling. The question of how far the United Kingdom would be able to supply goods against these balances was not pressed.
Capital movements to Australia.
The United Kingdom impression is similar to that of our own that no great movement to Australia has taken place. Certainly no control of such movements is contemplated.
Bi-lateral payments agreements.
The Prime Minister raised with the United Kingdom the question of whether the strict balancing of bilateral payments agreements with countries outside the sterling area might not tend to create difficulties for members of the sterling area. The United Kingdom agreed that this was a danger, but felt it was inevitable for the time being and that they aimed to increase elasticity by reducing the debits in the United Kingdom in these agreements. To do this they must increase exports without correspondingly increasing imports.
It should be noted that Australia is still proceeding on an entirely multilateral basis in her trade and that if the United Kingdom gets her own trade completely covered by bilateral agreements, we may obtain the residue of goods only. The situation has not developed to extremes as yet, but the main danger is the practice of bilateral agreements becoming established. On the other hand, the increasing administrative complexity of these agreements may force a reaction.
The United Kingdom claim that they are not accepting obligations to supply fixed quantities of goods but only to use 'their best endeavours' to supply these commodities. Our view is that this represents a moral obligation and that in practice pressure will be exerted to achieve the quantities and that, furthermore, if they were not achieved, an adjustment would need to be made in subsequent agreements. The United Kingdom claim that the Committee supervising these agreements keeps Dominion and Commonwealth requirements under review when accepting any obligations. However, they agreed that they might not be fully up to date in changing requirements and said they would welcome an Australian commodity expert in London to keep Australian needs constantly before them.
Supplies to Australia are being assisted by the fact that United Kingdom traders are anxious to retain the Australian market for their products which is highly valued. This is operating in a contrary direction in connection with tin plate where the known intention of B.H.P. to establish a mill here to produce tin plate is tending to encourage United Kingdom producers to direct their supplies elsewhere to markets which they believe to be more permanent.
There are not very many classes of goods which are allocated under official supervision at present, and capital equipment-perhaps the most important-is not as yet included. However, the United Kingdom has accepted obligations to encourage the flow of equipment to U.S.S.R. and to India as a result of agreements with those countries and this may lead to more complete supervision.
On particular commodities in which Australia is interested, it seems likely that as a result of the Prime Minister's visit, increased supplies of particular commodities Will be obtained. For example, tin plate exports to Australia will probably be increased.
Australian currency payments for Australian exports.
It had been suggested that, in view of the possibilities of exchange variations, contracts for Australian exports should be expressed in Australian currency. The Chancellor was adamant against such a change on the grounds that if he accepted a proposal of this sort for Australia, he would be under pressure to do the same for all other countries from whom the United Kingdom made bulk purchases. Furthermore, it would be a recognition of the weakness of sterling which was undesirable and which neither the United Kingdom nor Australia would wish to express. We did not press the issue, but made it clear that if there were a change in the exchange rate, then we would seek an immediate review of export prices.
The Dollar Problem Short term.
Plans for 1949 are based upon the maintenance of existing reserves for the sterling area. The picture for 1949 is, roughly, as follows:-
United Kingdom dollar expenditure- 525m. sterling-against which exports, shipping, etc. will provide, 235m., leaving a deficit of 290M.
The Colonies are expected to provide a net surplus of 30m. and the Dominions a net deficit of 45M., leaving a net deficiency for the outer sterling area of 15m. Other payments to Belgium, Egypt and other countries are likely to add a net additional gold drain of 13m. This gives a total deficiency for 1949 of 318m. against which it is hoped to obtain E.R.P. grants and loans totalling 1270m. dollars, To the extent that E.R.P. assistance falls short of 1270m. dollars the intention is that the import programme will be cut. The programme on which these figures are based would just enable the United Kingdom Government to carry on without relaxation of austerity and without building up stocks of goods in the production pipe line. Any reduction would mean unemployment and further reduction in living standards. The programme contains no food from the United States, although it does include food from Canada, wheat, bacon, and other livestock products which Canada included as a condition of the wheat contract by which the United Kingdom is provided with wheat at less than world prices. It involves further cuts in previous import programmes.
The provision made for Australia and the Dominions figure referred to above was 75m. dollars on a net drain basis, allowing for our gold output including both United States and Canada. (Our current estimates have been round about 60m. The Chancellor suggested that we might be given an allocation for a target to work to, but the Prime Minister refused to accept this, preferring to continue on present gentlemen's agreement basis. This was acceptable to the Chancellor who made no adverse comments on Australia's efforts to economise on dollars.
Mr. Wheeler's impression is that the Prime Minister's attitude is that it is not necessary at the present time to consider further economics immediately but progressive tightening may be necessary associated with positive action on the long-term problem.
It should be noted that the figures submitted by the United Kingdom to E.R.P. authorities are on the assumption that the net sterling area deficit will be met. However, the United Kingdom authorities do not expect that E.R.P. officials will agree to this, and it seems likely, therefore, that the suggested E.R.P.
allocation of 1270m. dollars will be correspondingly reduced. If this is done, and there is no offset by Australian participation in off-shore purchases, then there will be further reduction in the United Kingdom import programme. The attitude of the E.R.P.
officials is apparently reasonably favourable towards meeting the sterling area deficit, but they are gloomy about including the figures this year. They state the terms of the Act  and its legislative history preclude such action, but hope the Act may be amended next year.
The United Kingdom is, therefore, anxious that we should get off- shore purchases and they are agreed that we should proceed with discussions with E.R.P. countries and in Washington to obtain these. Officials consider that it might be desirable to defer such discussions until the current negotiations with E.R.P. authorities in Paris are complete. This is unlikely to be more than three weeks.
Consideration was given as to whether it might be good policy to defer Australian exports, e.g. wheat [for] the United Kingdom, thus increasing the direct United Kingdom deficiency in the hope that this would be covered by increased E.R.P. aid and that the wheat thus released could be sold by Australia for dollars. United Kingdom opposed this strongly. They state that the import programme is determined by the amount of E.R.P. aid and that therefore they get no benefits. It does seem possible, however, that there could be a wangle if the United States and other countries were prepared to connive. On the whole, however, it scarcely seems worthwhile.
There seems considerable confusion in the United Kingdom analysis of the long-term dollar problem. Generally speaking, they are proceeding on the assumption that they must aim at a greater degree of self-supporting trading in the non-dollar part of the world. They have attempted to estimate the volume of their exports in 1952 when they feel they will be able to sell 145% of 1938 volume. These estimates are based on judgments as to the absorptive capacity of their main markets on the assumption of high levels of employment and are not based on United Kingdom productive capacity. This would permit only 75% to 80% of 1938 imports. The terms of trade are at 1947 levels and if United Kingdom agricultural output can be increased to 150% of 1938 levels.
If these estimates are achieved, they anticipate a dollar deficit of 100m. per annum in 1952 compared with 300M. in the current year. This reduction would follow from increased export to dollar areas, gradually increasing availability of goods from non-dollar sources. Such a reduction in United States purchases win involve some further reduction in the standard of living but would be brought about mainly by the development of alternative sources of supply, particularly for foodstuffs.
While this is the general basis on which the United Kingdom is working, they seem to be very worried as to their capacity to finance their purchases even if they can be diverted to non-dollar sources. They express this as a fear that currencies, e.g. even Australian currency at present soft may become hard. This shows in an unwillingness to enter into long-term commitments either on quantity or price basis.
Everybody is agreed that conscious planning will be necessary to bring about the trade developments which should be necessary if we are to be independent of dollar aid at the end of the E.R.P.
period. The Prime Minister insisted on the importance of concrete proposals with this end in view and on the need for collaboration between United Kingdom and Australia.
The following arrangements have been suggested for future work and collaboration in these matters-Firstly, the United Kingdom have nominated Plowden, the chief planner, as a general co-ordinator of United Kingdom work on this matter. It is agreed that they will push ahead with forecasts of the general shape of future trade patterns and United Kingdom plans in connection therewith. As these progress, they will forward them to Australia for our examination and for comment and discussion on common action. In the meantime we will keep them informed of corresponding action here and at an appropriate time discussion between officers concerned should take place. (Mr. Wheeler indicated that the Prime Minister has Post-War in mind as the coordinating authority in Australia since this win link up very closely in our work with the long-term dollar problem here).
Contract prices for Australian foodstuffs The United Kingdom rejected the cost of production approach to the determination of prices of these contracts. The Chancellor indicated that they believed cost of production approach to be uncertain and dangerous and that they would prefer to pay more now than to have an indefinite commitment in the future. The Prime Minister indicated that, while this might be reasonable generally, it was not to be expected that Australia would undertake development, e.g. in the Northern Territory or New Guinea, for the purpose of meeting United Kingdom long-term requirements without some firm understanding about future markets for the products themselves.
Gold The Prime Minister undertook to continue the sale of our current production of gold to the Bank of England. This, presumably, is subject to review at our discretion.
Borrowing The Prime Minister made it clear that Australia would not borrow from the International Monetary Fund at least for the time being and that any form of dollar borrowing would be opposed. He emphasised the political antagonism to external borrowing in the Australian Labor Party.
Sterling exchange rate The Chancellor emphasised that devaluation offered no trade advantages to the United Kingdom in the short run and that, therefore, there was no intention to devalue sterling at the present time. The only thing which might affect this attitude would be any action by the International Monetary Fund to devalue a number of European currencies.
[AA: A9790, 533, i]
1 US Foreign Assistance Act of 1948.