1st June, 1927
PERSONAL & CONFIDENTIAL
My dear Prime Minister,
It was with very much pleasure that I received your letters of April 20th and April 21st.  In the former you briefly commented upon certain points raised in my own letter to yourself, in the latter you discussed tariff problems and made a most interesting suggestion for a piece of research on the effect of Australian Tariff changes upon British trade.
AUSTRALIAN TARIFF POLICY
It is a curious, and I hope a happy chance that your letter asking me to let you have any views I could put forward on this subject should have crossed two recent letters of mine in which I have discussed this matter. I hope they may prove of some value to you.
I am, however, resurveying the whole question and realising from your letter that the time factor may be important, I shall try to forward to you by the next mail a fairly comprehensive memorandum setting out my views.
In looking through my papers on this subject, I find that from 1924 I have given you a number of memoranda, some purely of ephemeral interest but one or two others which might be useful.
The more important ones are as follows: One entitled 'Protection and Efficiency' dated 14.10.24, two that I handed you just before you left London in December 1926 and my letter sent by last mail on the Julius  address. If your young man is still studying this subject for you, perhaps you might care to refer these papers to him. 
THE AUSTRALIAN TARIFF AND EMPIRE PROPAGANDA
The point I should like to stress in this letter is the serious effect that Australian tariff tinkering is having on the Imperial idea in Great Britain. I am enclosing a copy of a letter from Page Croft  which is very pertinent. In questions in the House of Commons and in the press, there appears a stream of comments drawing attention to the way in which extreme Australian protection is handicapping certain British industries. I do all I can to put the other side and I enclose a letter to the Liverpool journal of Commerce and another to the Shipping World, as examples of my counter propaganda. It is, however, extremely difficult to answer the man who asks why Australia needs a 100% ad valorem duty against the British manufacturer of, say, hosiery or the cheaper forms of woollens.
I do not believe that the really efficient Australian manufacturer of such goods needs any such degree of protection.
Last week, at the invitation of Mr. Pethick-Lawrence  (Labour M.P.), I met five Hosiery Manufacturers from Leicester and Nottingham and while I was able to put up a pretty good case on the basis that in spite of everything Australia probably remained in 1927 the chief market for the exported products of the knitted goods industries, yet the questions fired at me were difficult in the extreme.
I feel sure that Australia can, without any material sacrifice, alter things to her own real advantage and also to a great improvement of understanding here. However this subject shall be fully treated next week, I enclose an interesting and judicial leading article from the 'Times Trade Supplement' which I hope you will find time to read.
AUSTRALIAN TARIFF CHANGES AND BRITISH TRADE
I shall, as soon as possible, start an economic research into the subject suggested in your letter. I shall try to find out how one can show that, although the Australian tariffs of 1908, 1914 &
1921 increased duties against Great Britain and detrimentally affected certain British trades, yet British general trade constantly expanded. I shall try to get out graphs etc. I may find that the available information here will not enable me to make a proper job but if so, I can send you the outline and perhaps you can have the gaps filled in in Melbourne.
THE WINE DUTIES
Sir Horace Hamilton, Chairman of the Board of Customs, asked me to call last Thursday. He said that British merchants held about 1,000,000 gallons of Tarragona wines upon which the duty had been increased from 2/6d. per gallon to 8/- per gallon. They were protesting that, at the new duty, the losses they would incur would be ruinous. Hamilton was considering whether he should advise the Chancellor  that the Finance Bill should be amended to allow a rebate of from 2/- to 3/- per gallon on Tarragonas actually in bond at the present time but wanted to consult me as to whether this would have a detrimental effect upon the sale of Australian wines.
I promised to make some enquiries and Hamilton promised to let me know if the Chancellor was seriously considering such action, in order that I might let you know of the probability of such action.
So far I have not been able to get any definite line upon the possible effect on Australian sales nor have I heard further from Hamilton.
BRITISH ECONOMIC POLICY
I had a very interesting and encouraging talk with Hamilton about his possible line of country when he succeeds Chapman  at the Board of Trade. He agreed with me that today no concerted plans are being made to meet the situation that will arise if the Treasury, Bankers and Economists happen to be wrong and if prosperity does not return to British industry. We discussed the possibility of general Economic staff work at the Board of Trade and I came away decidedly encouraged.
While on this subject I regret I omitted to enclose the 'Times' cutting giving details of the changes in the Civil Service. I enclose it herewith.
AUSTRALIAN LIQUID FUEL SUPPLIES
Last week I received from Gepp  a cable pointing out that Australia pays 12,000,000 annually for imported liquid fuel and that it is almost entirely from foreign sources and asking me to discuss with Sir Frank Heath , Mr. Tizard  F.R.S. and Dr.
Lander , the Director of the Fuel Research Board, the question of what immediate practical steps Australia could take in order to derive a larger proportion of her oil fuel from her own resources.
On looking into the matter I found that the 12,000,000 statement was somewhat incorrect, presumably Gepp having taken the retail price of liquid fuel to Australian users instead of the c.i.f.
price at which the fuel is actually imported. Even so, however, the drain on Australian resources amounts to 7,000,000.
I had a two hour Conference in Sir Frank Heath's office, and I think that you would be interested to have a copy of the report which I have had prepared on this interview. To summarise the matter briefly the recommendations made were that the most immediate practical step would be for Australia to import the whole of her supplies in the form of crude oil. This would reduce the cost of importations from some 7,000,000 to 3,000,000 and would involve the establishment of cracking plants in Australia.
These cracking plants would be essential if, at a later stage, the hydrogenation of Australian brown coal served to procure for Australia the bulk of her liquid fuel supplies.
Tizard in particular emphasized the strong probability of the Diesel engine being adapted to land transport problems. He told us that promising experiments were being carried out on Diesel engines for aeroplane construction. In the event of the Diesel type becoming a real factor in motor transport, crude oil could directly take the place of motor spirit and therefore an Australian policy of importing crude oil would be a very sound one.
Apart from this major method, they recommended the expenditure of a considerable amount of money on discovering the best type of motor engine to use to produce a gas obtained from charcoal for motor vehicles in country districts far removed from sources of liquid fuel. I would rather definitely draw your attention to the points that I urged in this connection and which are set out on page 4 of the accompanying memorandum. I would also draw your attention to the section dealing with the hydrogenation of coal on pages 6 and 7.
I enclose copy of a further article which I sent to the 'Times Trade Supplement' which carries on the story set out in a pamphlet on 'Where we sell our goods' to the quarter ending March 31st 1927. The graphs illustrating it are interesting and worth your attention.
Yours sincerely, F. L. MCDOUGALL P.S. COLONIAL OFFICE CONFERENCE
I am enclosing a report from today's 'Times' of the official summary of the proceedings of the Colonial Office Conference.  I would particularly draw your attention to the paragraphs devoted to transport problems which bear definitely on the section of my letter dealing with Australian Liquid Fuel supplies and also with the attached memorandum. I have today been discussing at length with Walter Elliot  the bearing of the Colonial Office Conference upon the general work of the Empire Marketing Board and hope to be able to send you an intelligent account of how we view it by next mail.
F. L. MCD.