34 Evatt to Chifley

Letter CANBERRA, 29 June 1949

SECRET

Following the conversation I had with yourself, Mr. Dedman, and Mr. Wheeler regarding the present critical financial position of Britain, I would like to submit to you certain relevant considerations.

Britain's problem is, no doubt, created primarily by the loss of her overseas income, together with the results of devastation in Britain itself during the war. However, it did seem early this year that the United Kingdom Government was bringing about the necessary adjustments to meet the changed position.

The circumstances which are perhaps basically less important than these losses, but which nevertheless seem to have provoked the present emergency, are (a) the fall in business activity and employment in the United States, leading to a fall in prices of dollar-earning goods, (b) the absence of beneficial East-West trade in Europe which would gradually avoid the necessity of United States loans, and (c) the development of competition from Germany and Japan due (i) to measures taken by the United States and the United Kingdom to build up their economies, and (ii) to endeavours to integrate these economies in the Western rather than the Eastern European orbits.

I cannot judge the importance of these factors in the absence of reliable information, but it appears that they are important now and will become increasingly important as time goes on.

(a) Fall in Employment in the U.S.A.

You will remember that, from 1943 onwards, we struggled persistently and with apparent success to convince the United States as to the importance of their maintaining full employment, not merely high levels of employment. For instance, at San Francisco in 1945, we had included in the Charter of the United Nations a specific obligation to maintain full employment.

More recently, in respect to the I.T.O. Charter, we endeavoured to balance any obligations we undertook with benefits we might derive from undertakings by the United States to maintain employment.

Insofar, therefore, as reduced levels of activity in the United States are responsible for Britain's financial plight, we have, under the United Nations Charter and under the I.T.O. Charter, a clear right to press, on the basis of an international obligation, for United States co-operation in forms which might prove beneficial to the sterling area.

Your own officers would be able to suggest the type of actions the United States could take to assist the position, for instance, reduction of duties on certain dollar-earning goods, and even, perhaps, if the matter were handled on a high enough level, a reintroduction of some type of unconditional lend-lease system to overcome the present post-war emergency.

In the immediate future, the United States of America could perhaps assist most by co-operating in discriminatory plans which would assist in the conservation of dollar income and the maintenance of existing exchange rates. This is quite contrary to present U.S.A. policy; but the raising of the matter at a high political level, and, if necessary, on an international platform, is perhaps the only means of resisting U.S.A. policy in this respect.

(b) Restraints on East-West Trade I understand that certain United Kingdom Government Departments are in favour of increased East-West trade, and, in fact, the view has been expressed that the only hope of European recovery is a greatly increased measure of this trade. I suppose that the resistance in the United Kingdom comes primarily from the Foreign Office.

Here again, without the necessary facts, it is impossible to assess the importance of East-West trade to Britain's recovery, It would seem to me, for example, that over-stringent restrictions on the present sale of so-called strategic materials, such as rubber, are probably preventing Britain and other Western European countries from obtaining many agricultural products which might otherwise be available from Eastern Europe.

From a political point of view, the whole policy of restricting trade in these so-called strategic materials seems to me very anomalous in the present circumstances. As a result of the pressure of world public opinion, some of the political obstacles to East-West agreement have been overcome, and a wise policy at the moment would endeavour to extend the area of agreement which might exist between the Eastern and Western groups. But any such extension is immediately prejudiced by the policy of over- restriction of trade in crucial materials, at any rate those which are not in short supply and can be beneficially used for trading purposes. In other words, British foreign policy, to a large degree no doubt forced on the United Kingdom Government by the U.S.A., is actually bringing about increased financial burdens upon the United Kingdom.

In this respect it may well prove that U.S.-U.K. foreign policy is self-destroying. Restraints on East-West trade for strategic purposes are likely to bring about [even the failure] [1] of Marshall Aid, which has the same strategic objective. The countries of Western Europe cannot be built up and stabilized by Marshall Aid unless East-West trade is gradually re-established as Marshall Aid is tapered off. United States policy prevents the re- establishment of East-West trade. Yet the United States is terminating, or at least reducing, aid, particularly to the United Kingdom, thus suddenly leaving not only the United Kingdom but all other Western countries in a hopeless financial position.

(c) The Development of German and Japanese Competition I must point out too that German and Japanese competition is beginning to be serious for Britain. This is being brought about in two ways: there is actual competition as a result of these two countries being built up by U.S.A. aid; and there is the indirect competition which results from the fact that the United States of America has endeavoured to incorporate Germany and Japan in the Western economic 'bloc', with the result that they both compete with Britain for the U.S. market, and compete with Britain for U.S. goods, thus forcing up the price of these dollar goods.

(i) Both Germany and Japan have been deliberately built up as part of the 'cold war'. Dollars have been diverted on a large scale to both countries, and the competitive production of both countries has increased Britain's problems. I was able, while in Berlin [2], to obtain enough information to make me believe that Britain was pursuing the 'cold war' tactics in Europe at the cost of already developing German competition which she could not bear. I attach some recent statistical information I obtained. The United States Government should be made to realise that the post-war rehabilitation of Britain is of far greater value to her than the building up of Western Germany.

Substantially the same is true in the case of Japan. Japan must be allowed to reestablish itself, and the choice may be between building Japan up within the Western economy and in competition with the United Kingdom, ourselves and others, or allowing Japan to find her raw materials and markets in China, which would be of mutual benefit to Japan and China without adversely affecting Western economies. But U.K.-U.S.A. policy with respect to Japan and China may prevent this development.

(ii) The effects on Britain of Germany and Japan being diverted from natural markets in Eastern Europe and in China could not be easily measured. It is clear, however, that the effect has been to force up prices of U.S.A. goods and to force down prices of British and Western European exports to America. An examination might be made of the extent to which trade has been diverted from Eastern Europe and the Asian continent. The diversion is political in intent, but the political judgment seems to have been taken without any assessment of cost.

Australian Approach If it were not for these considerations which I have mentioned, that is, the United States obligations to maintain full employment, and the financial implications of U.S.-U.K. foreign policy, there would be a strong case for co-operation amongst all the countries in the sterling area to build up within that area a kind of self-sufficiency group. It would seem to me, however, that the United States responsibilities for full employment should first of all have been brought home to the United States Government and the people of the United States on the basis of existing international agreements, and that the United States and the United Kingdom Government should have been persuaded in foreign policies to bear in mind financial and economic consequences which, in turn, tend to affect or even reverse the general trend of foreign policies.

There may be some danger in the fact that any conference that might be convened to deal with this seemingly financial problem will be largely a conference of Treasury officers. [3] They will naturally endeavour to find solutions, taking for granted existing political policies and circumstances. But it will be seen that these financial and political matters are inter-related; for example, probably the most effective means of resisting United States pressure for non-discrimination and for devaluation would be to face the United States Government with the political problem in relation to Europe which will be created if Western Europe and the British Commonwealth is forced to develop a non-dollar area and is forced, therefore, to seek a far greater degree of economic co-operation with the countries of Eastern Europe.

I would suggest that you may press for consideration of the current financial problem of Britain in this broader background, so that some of the financial and economic implications of U.K.- U.S.A. foreign policy can be examined and the costs of existing foreign policies carefully weighed. It may then be decided that Australia should join with the United Kingdom in making immediate approaches on the highest level to the United States Government and, if necessary, through international agencies on the question of United States economic obligations to the rest of the world, and the question of East-West relationships would necessarily be involved.

As I see it, the procedures might be, after consideration of the existing problem, a (a)decision that United States pressure on the question of non-discrimination and the question of devaluation should be resisted, (b) consideration of the steps which might have to be taken within the sterling area in order to maintain for the present the sterling position, and, finally, (c) consideration of the way in which America can be approached, both at a governmental level and publicly, on these broader issues.

In the light of what I have said, it would probably be of advantage to you if one of my officers, for instance Mr. Tange, accompanied you to the proposed Financial Conference of Commonwealth Members in London. [4]

I am attaching several documents which give factual information in support of the points made above.

1 Words in square brackets have been altered on the file copy from the original wording which read 'the tapering off'.

2 Evatt visited Berlin in June 1949.

3 The British Government had proposed that Commonwealth finance ministers meet for discussion in July 1949 4 Dedman attended instead of Chifley.

[AA: A4311, 29/4]