249 Walker to Burton

Memorandum 979, PARIS, 23 December 1949

UNITED NATIONS REPORT ON NATIONAL AND INTERNATIONAL MEASURES TO ACHIEVE FULL EMPLOYMENT The Economic and Social Council, in its resolution of 11th August, 1949[1], requested the Secretary General to arrange for a small group of experts, to prepare, in the light of the current world economic situation, a report on national and international measures required to achieve full employment. This decision arose out of the Council's discussion of the replies of governments to a United Nations questionnaire on the measures they contemplated taking in the event of a decline in employment, and of the recent growth of unemployment in the United States and some European countries.

2. The Secretary General appointed the following experts to prepare this report:

Professor J.M. Clark (Columbia University) (U.S.) Mr. Nicholas Kaldor (Fellow of King's College, Cambridge) (U.K.) Monsieur Pierre Uri (Economic Adviser, French Planning Commission) (France) Dr. E. Ronald Walker (Australia) Professor Arthur Smithies (Harvard University) as associate to Professor Clark, whose health would not permit him to engage in protracted debate.

3. The group worked in New York and at Harvard University, from 20th October to 16th December 1949, under the chairmanship of Dr. Walker. It produced a unanimous report, which will be forwarded to governments as soon as copies can be made, incorporating last minute revisions. The recommendations contained in the report are far-reaching; and represent a substantial advance beyond the position hitherto adopted by most American economists on the question of the responsibility of the United States towards the rest of the world.

4. It should be noted that the report is to be issued on the responsibility of the experts, and does not commit the United Nations or any government. The experts were required to make the usual United Nations declaration to the effect that whilst engaged on this report they would not accept or seek any instructions from any government.

5. The present memorandum summarises the report and comments on the recommendations. The Government will presumably desire to brief the Australian representatives at the forthcoming session of the Economic and Employment Commission beginning about 19th January, and at the Economic and Social Council in February. Although the report is being referred to the Economic and Employment Commission for comment, the report also stands as an item on the Agenda of the Council, irrespective of whether the Commission desires to submit any comment on it to the Council.

6. The report, which will run to about 100 printed pages, is divided into three parts. The first, on the full employment obligation, is mainly of an introductory nature, and sets the problem. Part II contains an authoritative restatement of the causes of a deficiency of demand, and of the fluctuations that occur, with an analysis of the process by which fluctuations in the leading countries, such as the United States, are propagated to other countries. The remainder of Part II argues the case for the specific recommendations contained in Part III.

7. Underlying the recommendations is the recognition that the United States is the main potential source of economic instability in the modern world and that since America's foreign trade is of far less importance to her than it is to the rest of the world, minor fluctuations which do not give ground for concern in the United States from a domestic viewpoint, may cause grave economic disturbances in other countries. Consequently, as the American members of the group fully realise, the United States has a greater obligation, from the international viewpoint, than from a purely national viewpoint, to maintain full employment at home, and to co-operate in international measures to reduce the impact, on other countries, of such fluctuations as do occur in the United States economy.

8. The Recommendations are grouped under Domestic Measures and International Measures. The domestic measures are summarised in the report that follows:

In order to give better effect to the fulfillment of the full employment obligation assumed by Members of the United Nations, we recommend that each government should take early action on the following lines:-

(i) It should adopt and announce a full employment target which will define the meaning of full employment in the country concerned in operational terms, and which would constitute the standard to the attainment of which the national employment stabilisation measures will be directed;

(ii) It should announce a comprehensive programme for directing its fiscal and monetary policies, its investment and production planning, and its wage and price policies (including anti-monopoly policies) to the continuous achievement of its full employment objective;

(iii) It should adopt and announce an appropriate system of compensatory measures designed to expand effective demand which would be prepared in advance for automatic application in case its general program for maintaining full employment, indicated above, fails to prevent unemployment from exceeding the full employment target by a pre-determined amount for three successive months;

(iv) It should announce the nature of the policies which it will adopt in order to maintain the stability of the price level and to combat inflationary tendencies in a manner consistent with the maintenance of its full employment target;

(v) It should adapt its legislative procedures, its administrative organisation and its statistical services, to the implementation of the programme indicated above.

[matter omitted][2]

14. The recommendations for external measures are supplementary to the foregoing; they are designed to prevent the international propagation of fluctuations in effective demand, to create a workable system of international trade, and to accelerate the orderly economic development of under-developed countries. These factors, in the opinion of the committee, constitute the essential international framework for successful national policies of full employment.

15. A Programme to Establish a New Equilibrium of World Trade (Recommendation i) The Committee believes that the present chronic imbalance of international trade is of profound significance in the problem of maintaining full employment in many areas of the world, and its removal is an essential condition for a stable and expanding world economy and for the restoration of freer and less discriminatory trading conditions. It therefore recommends that the Economic and Social Council convene a meeting of the governments of interested countries in order to develop a joint programme designed to establish, at a reasonably early date, a new structural equilibrium in world trading relationships; and to consult together on the adjustments in domestic and external policies that are required to this end. This programme should aim at removing the existing lack of balance and at establishing structural equilibrium in world trade within the space of three or four years.

16. Before the war Western Europe had an excess of imports from the United States, and an excess of exports to the overseas under-developed countries. Since the latter, as a group, had an excess of exports to the United States it was possible to settle accounts by triangular clearing of the balances due either way. The present position is that Western Europe, on the one hand, still has a much greater deficiency in her trade with America than before the war, and the overseas under-developed countries are themselves deficiency areas, absorbing dollars instead of providing them. This is the immediate cause of the dollar crisis. The situation can only be remedied by the establishment of a new equilibrium, requiring important domestic adjustments in many countries. The structure of the new equilibrium, and the domestic adjustments necessary to achieve it, will be very different according to whether the United States is to be a large international lender, and whether she balances her accounts at a high or low level of trade. For instance, the United States may lend $5 billion per annum, and balance with imports at $10 billion and exports at $15. Or she may lend nothing, and balance at $10 of imports and exports; or even at a lower figure. Another uncertain factor is the future dollar position of under-developed countries. (The economic consultant of the Economic Commission for Latin America told us that in future Latin America would use all its dollars to finance American imports of goods needed for development, and that it was illusory for Europe to hope to earn dollars in Latin America. If he is right, this is a most important datum in relation to future trade adjustments).

17. The first step in preparing a programme to achieve a new equilibrium would therefore be for countries to set targets for the main constituent items in their balances of payments (including lending and borrowing) by which they hope to reach trading equilibrium within an agreed period. An analysis of these targets would reveal inconsistencies and point the way to necessary adjustments by the countries themselves.

[matter omitted][3]

20. Stable International Investment for Economic Development (Recommendation ii) The Committee considers it essential that international investment be stabilized. This can only be achieved if governments undertake to supplement private international investment and offset fluctuations in the latter. The Committee suggests that lending governments should set targets and in the event of private international investment falling short of the target in any year, the government should deposit the difference with the International Bank for Reconstruction and Development, which would lend in turn to countries engaged in development programmes. This scheme involves modifying the articles of agreement of the Bank, and the Committee submits carefully worked out concrete proposals on the changes that would be required in both structure and policy.

21. A Plan for Stabilising the Flow of International Trade (Recommendation iii) The Committee proposes a detailed plan, to be operated through the International Monetary Fund, to finance fluctuations in balances of payments caused by economic recession in the leading industrial countries. As at present constituted, the International Monetary Fund does not possess sufficient resources for the task, and its mode of operation is too limited. The Committee would leave the present operations of the Fund unaltered, but would supplement them with a different system. These proposals were worked out after protracted consultation with the technicians of the Fund and deserve very serious consideration.

22. In brief, each country would undertake that in the event of it undergoing a recession and decline in imports, and consequently syphoning off some of the monetary reserves of other countries, it would make available sufficient of its own currency to enable the Fund to replenish those reserves; under a system which, as soon as the first country reaches a stage in its own recovery where it begins to lose monetary reserves again, its reserves would be replenished out of currencies made available to the Fund by the countries whose reserves had been previously replenished.

[matter omitted][4]

25. Suggested Method of Handling the Report It is not possible to forecast the action that other members of ECOSOC are likely to favour, but perhaps the Australian Government should consider whether it can support action along the following lines:

(a) The recommendations on domestic measures could be made the subject of a recommendation by the Council to all governments, backed if possible by statements from some important government, that they are prepared to give serious consideration to these proposals.

(b) The Secretariat might be requested to take account of these recommendations when formulating future questionnaires in order to ensure that action taken along these lines will show up in the replies of governments.

(c) The first of the international recommendations could be adopted by the Council forthwith, for implementation in the course of 1950.

(d) The second and third recommendations could only be implemented by a special meeting of the Members of the Bank and Fund and other prospective participants. As a first step to see whether such a new 'Bretton Woods'[5] would be worth arranging, the Council might request governments to consider these proposals and to inform the Council whether they support the holding of a meeting for their detailed examination. Such a meeting could be held under the joint auspices of the United Nations and the Bank and the Fund.

(e) Alternatively, a single meeting could be called to deal with all three of the international recommendations; to carry out (i); and to prepare, on behalf of recommendations numbers (ii) and (iii), a detailed agreement for submission to all interested governments.

[1] That is the joint resolution summarised in Document 237.

[2] Paragraphs 9-13 elaborate in greater details the recommendations noted above in paragraphs (i)-(v).

[3] The omitted material examines a suggestion that the Economic and Social Council might establish an expert advisory commission to assist governments.

[4] The omitted material explains how the Fund would operate the plan.

[5] A reference to the Bretton Woods Conference of 1944 which led to the establishment of the Fund and the International Bank for Reconstruction and Development. See Volume 7.

[AA : A1838, 701/8/1, II]