344 McFarlane to Chifley

Cablegram 2664, LONDON, 7 August 1948, 3.40 p.m.

SECRET

Your 2915.[1]

1. Vital factors in recent developments which affect prospects of off-shore purchases or sale of surplus commodities to E.C.A. direct are:-

(a) E.C.A. has refused off-shore purchases of jute from India for France therefore unlikely they would agree to off-shore purchases from Australia at present or direct purchases by themselves.

(b) E.C.A. undertook to examine possible methods of meeting rest of sterling area deficit (as explained in cable 319[2] from Commonwealth Relations Office) by (a) Offsetting it against colonies surplus and (b) Interlocking dollar finance possibilities are still under examination but there was no assurance and no reply has yet been received.

(c) Above all E.C.A. believes that rest of sterling area particularly Australia was not making any adequate contribution to European recovery (in particular although Bissell was impressed with Chancellor's explanation Harriman[3] later expressed view this issue would be raised).

(d) A recent statement by high official in Washington indicates hardening view against Australia in some quarters.

(e) If Australia now press E.C.A. to purchase surplus commodities for dollars or approach European participants immediate response of E.C.A. would almost certainly be to ask what contribution was Australia prepared to make to European recovery.

2. There are two further important factors upon which decisions have still to be reached viz:-

(a) Allocation of Marshall Aid for first year. Working Party of four 'wise men' in Paris is still engaged and it is unlikely O.E.E.C.[4] will reach definite recommendations for a few days consequently no country likely to consider any firm suggestion for off-shore purchase until its total aid is fixed.

(b) Payments Clearing Scheme. This is exceedingly difficult and complex problem and final decisions and agreement in detail have still to be worked out. So far nobody even in Paris has been able to give one clear statement of detailed decisions likely to be reached but it looks as though Belgium, for instance, will have to make grant equivalent to grant aid received from E.C.A.[5]

3. For all these reasons, after discussion with British Treasury Officials I am of the opinion present is inappropriate time for Australia to make approaches to E.C.A or European participants as suggested in paragraph 9 of your cable and I strongly advise awaiting clarification of questions still at issue. British Treasury Officials thoroughly agree.

4. I discussed with Treasury Officials the question of whether Australian gesture to European countries other than United Kingdom as suggested your paragraph 15 would make reasonable contribution to the problem.

5. This issue is linked with the question of the European clearing arrangement the answer to which depends upon agreement on details of respective surpluses or deficits with each other which has still be reached. It is expected that United Kingdom will in aggregate be in surplus but United Kingdom is not committed to make a contribution in the form of grant equal to its estimated net surplus with them. For instance if the net surplus is say �75,000,000 sterling United Kingdom might make grants to other countries of say �40,000,000 and those countries still in deficit on their estimated figures would have to reduce their imports accordingly to meet the uncovered deficits. Now if Australia desires to assist the European recovery the best method to my way of thinking would be to make a contribution through the United Kingdom towards her obligation on behalf of the sterling area as a whole. In this way a contribution of say �5,000,000 as mentioned in paragraph 15 of your cable would be useful and Treasury Officials agree.

6. On the other hand a straight out credit of �5,000,000 for say five years after United Kingdom had indicated to Europe the amount of her grant would not assist United Kingdom except perhaps to relieve some pressure for an increased grant. Therefore although this would involve a grant by Australia instead of a credit to my way of thinking it would be better to adopt this method of assisting European recovery through United Kingdom rather than by way of direct credit to another European country the repayment of which may be doubtful. I rather favour this method and even 5,000,000 might be respectable if United Kingdom's liability for grant in respect of sterling area as a whole limited to say about �30,000,000.

7. If however you preferred direct credits to European countries, France would, in the view of the Treasury Officials, be more in need of aid than Italy who is not very short of sterling. The real problem is France rather than Italy but United Kingdom will know which countries should receive most aid after figures are agreed but we can forget Belgium who is the most selfish country.

8. All this is however subject to the result of the payments clearing arrangement which in turn, so far as United Kingdom is concerned, will be affected by E.C.A. decision on the rest of sterling area deficit. For instance, if E.C.A. decide that because of legal difficulties etc. they cannot take care of the rest of the sterling area deficit then United Kingdom's contribution to European clearing arrangement must be appreciably reduced. Again the payments clearing scheme may provide for credits in lieu of grants to deficit countries.

9. Therefore, so far as Australia making a contribution to European recovery by way of credit or grant is concerned, it is essential to await decisions on outstanding problems referred to above and then seek United Kingdom's advice as to best course before formally putting forward definite proposal. Treasury Officials concur in this advice.

10. This cablegram highlights points mentioned to Wheeler by telephone yesterday and in some respects notably size of credits to European, modifies them in light of further conversation with Rowan[6] and Rowe-Dutton.[7]

11. I have advised Wilson by telephone in broad outline of my views and am sending him copy of this telegram. I understand he has sent you further cablegram re unofficial United States proposal for loan from Export-Import Bank in conjunction with like amount of off-shore purchases and that a reply is still awaited from Canberra which may affect decision in paragraph 16 of your cable. I presume you will await E.C.A. decision on possibilities referred to in paragraph 1 above before reconsidering this alternative proposal.

[1] Document 343 was repeated to McFarlane in London as cablegram 2915.

[2] Document 341.

[3] W. Averell Harriman, US Special Representative in Europe.

[4] Organisation for European Economic Co-operation (established by CEEC).

[5] For a brief explanation of the scheme, see Document 346.

[6] T.L. Rowan, Second Secretary, UK Treasury.

[7] E. Rowe-Dutton, Under-Secretary, UK Treasury.

[AA : A1838, 703/5/5]