339 G.P.N. Watt to McFarlane
Cablegram 492, CANBERRA, 19 May 1948
IMMEDIATE SECRET PERSONAL
AUSTRALIA AND E.R.P.
1. After examining material available here, including your letters of April 13 and 24 and telegrams 468 and 538 from Embassy, Treasurer has authorised despatch of this telegram in order to obtain considered opinion from you after consultation with Wilson on what action, if any, Australia should take to protect its interests.
2. Australia is vitally concerned in amount of E.R.P. aid to United Kingdom because of inevitable effect on availability of dollars to Australia from sterling area pool. If American proposal to limit aid to United Kingdom dollar deficit after deducting dollar surplus of Colonies [is enforced Australia will be left in an invidious position. Any] drawings from the pool by Australia would then mean an equivalent reduction in the central reserve. In these circumstances dollar scarcity for Australia (and New Zealand) might well become more acute than for most or all other countries.
3. United Kingdom authorities are contesting American proposal and urging that minimum sterling area deficit must be covered in order to enable central reserves to be kept at an adequate level to maintain confidence and to enable effective operation after cessation of E.R.P.
4. It might be worth pointing out to America (either direct or through United Kingdom) that American proposal would tend to make European recovery more difficult because our capacity to continue supplying foodstuffs and raw materials to Europe depends upon our ability to finance essential dollar imports. You will have noticed from document of 30th April entitled 'Estimated Australian Gold and Dollar Commitments' that even assuming maintenance of current dollar income and restriction of imports to 1946-47 values we will still have a significant dollar deficiency. These estimates of our deficit are possibly optimistic but even so they imply volume of dollar imports well below that of pre-war (see quantity index) and current opinion here is that further reductions could not be made without considerable repercussions on production and employment with consequent effects on exports to Europe.
5. Reference might also be made to aid already given by Australia, mainly to Europe, for example - (a) U.N.R.R.A. and Post-U.N.R.R.A. Relief contributions.
(b) Gift to United Kingdom.
(c) 'Freezing' of accumulated sterling balances.
(d) 'Unrequited exports' to Europe which explain in part recent growth in our sterling balances. Whilst small absolutely, these contributions are not inconsiderable in relation to Australian resources.
6. If minimum sterling area dollar deficit were met by E.R.P. financing of Western Hemisphere exports to the United Kingdom, Australia would be able to retain the customary flexible arrangements for financing our dollar trade through London with the minimum of interference by outside authorities. A disadvantage would be that the availability of dollars in Australia would in effect be determined as a result of negotiations in which we had no part but the Treasurer's preliminary attitude is that we should leave it to United Kingdom to arrange the dollars.
7. Participation by Australia in offshore purchases to cover Australian dollar deficit either in whole or in part as tentatively suggested by United Kingdom authorities might mean a further step towards breakdown of existing sterling area arrangements. Proposals in telegram No.538 for furnishing of detailed information are reminiscent of procedure of justification required under Lend Lease and suggest probable development of American control and intervention. Further we foresee difficulty in establishing Australia's case in Washington in the present atmosphere with consequent debate and uncertainty. Although there is no geographical limitation in the E.R.P. Act our impression is that offshore purchases are intended for Western Hemisphere only.
8. Further possible difficulties are - (a) Financing of Australian exports of basic foodstuffs to United Kingdom by offshore purchases would cut across our existing bulk contracts with United Kingdom and might re-open the whole question of prices and terms.
(b) There might be difficulties in reconciling offshore purchases of wool for United Kingdom or for E.R.P. recipients with established auction system of sale.
(c) Offshore purchases might lead to American pressure on Australia to make a direct contribution in the form of credits or grants in aid to the United Kingdom and possibly other E.R.P. recipients.
9. Objections in paras 7 and 8 would not apply in same degree, if at all, were off shore purchases in Australia arranged at request of E.R.P. recipients other than U.K.
10. On the other hand Melville and Richardson at present think there are practical advantages in arguing for Australian participation in offshore purchases instead of in favour of the United States covering the full amount of the net sterling area dollar deficit by financing Western Hemisphere exports to U.K.
Their reasons are - (a) The Americans dislike the sterling area so strongly that our interests are likely to suffer if the latter method is adopted;
(b) Offshore purchases would place Australia in the same position as Canada, Argentine, Brazil, etc.
(c) Offshore purchases are part of the United States plan; and (d) it is unlikely that offshore purchases will prejudice sterling area arrangements as much as a direct argument by U.K. in favour of covering the sterling area deficit.
We would also add that with the amount of E.R.P. aid to United Kingdom for first year now more or less crystallised, the only practicable method of obtaining any contribution to the dollar deficit of the rest of the sterling area in this period may be for Australia and or United Kingdom to seek offshore purchases in Australia and other sterling Dominions for export to recipients of E.R.P. other than United Kingdom.