[The Interdepartmental Committee on External Relations was formed
to coordinate executive action on matters of external economic
policy affecting more than one department. It met for the first
time on 5 June 1942 and included representatives of the
Departments of Commerce, External Affairs, Labour and National
Service, Trade and Customs and-the Treasury, together with
Professors D. B. Copland and L. F. Giblin. P. M. C. Hasluck of the
Department of External Affairs was appointed Executive Secretary,
with L. F. Crisp of the Department of Labour and National Service
as Associate Secretary.]

AUSTRALIA'S POSITION IN RELATION TO ARTICLE VII OF THE ANGLO-
AMERICAN MUTUAL AID AGREEMENT [1]

A. Post-war position without international collaboration
1. Some estimate of post-war prospects without international
collaboration must be made as a preliminary to making any judgment
on the possible benefits to be obtained from international action
in accordance with Article VII of the Mutual Aid Agreement. The
successful conclusion of the war would leave us with special
problems, both internal and external.

2. There will be an overwhelming public demand after the war for-
(a) immediate measures to find employment for members of the
Forces and workers in defence industries who will be disemployed
when the war ends;

(b) thereafter positive measures whenever necessary to maintain
employment at a high level.

3. The measures taken under (a) will tend inevitably to be
directed to employment as an end in itself. Even employment on
chipping footpaths might be a benefit to the community compared
with no employment at all. It is obvious however that, the more
productive the employment is, the more goods and services will be
available to the community and the higher the standard of living
we can maintain. The aim must be therefore with the utmost urgency
to shift employment from relatively unproductive fields to those
that will give the highest returns per unit of labour.

4. There will be difficulties, practical and political, in making
these transfers of labour, which need not here be discussed. We
shall certainly go on for a considerable time with our resources
not used to best advantage. We shall be maintaining income and
spending power for part of the community above the value of its
production. If this was offset by taxation or loan from the rest
of the community, we could carry on indefinitely, though with a
standard of living below the best possible. We must expect however
that much of the cost of maintaining employment will be met by
monetary expansion. We shall then be trying to maintain a high
level of consumption over the whole community, and consequently a
high demand for imports. We must then consider whether export
income and reserves of London funds will enable us to meet this
high demand.

5. The same question of ability to pay for imports will arise
whenever, in any future heavy loss of export income, employment is
maintained by monetary expansion. In the immediate post-war
period, we shall have a further pressure on imports on account of
the great mass of spending power, largely in very liquid form,
which will be set free when wartime controls are removed.

6. We must therefore now consider the prospects of export income
and of London reserves. It is obvious that to maintain employment
at anything like the present level would raise consumption greatly
above the pre-war period. This implies a corresponding demand for
imports. There will be some replacement of old imports by new home
production, but this will not greatly affect the position because
finished goods have become a comparatively small part of our
import requirements. In the pre-war years we were barely able to
pay for the imports we required and London funds tended to be low.

We need then a prospect of export income and of London funds
appreciably higher than in the pre-war years, if we are to
maintain employment in the manner indicated above and at the same
time meet our external commitments. This will be true, after
allowance is made for reasonable import replacement.

7. So far as can be foreseen at present, Australia's post-war
exchange position, without international collaboration, is likely
to be somewhat unsatisfactory-
(a) London funds will be relatively low.

(b) Export markets may be moderately good for a while, but
surpluses accumulated during the war will probably not be
immediately marketable. Moreover, Australia is already committed
to making gifts to countries devastated by war.

(c) The long-term prospects for export markets are not very good,
and markets may be expected to sag after a certain time (differing
for various commodities, and depending upon overseas
developments).

(d) Hence there will be a tendency for London funds to remain
weak.

8. It is then highly probable that the maintenance of employment
in Australia in the immediate post-war period will involve acute
difficulties in meeting external obligations. Current export
income will tend to be insufficient and we shall not have the
large reserves necessary to hold the position while adjustments,
which would then be unavoidable, are made.

9. These difficulties, moreover, are almost certain to recur after
any serious fall in export prices, because-
(a) import prices will not fall as quickly as export prices;

(b) it is unlikely that ample overseas reserves will have been
built up;

(c) the normal inward movement of capital under these
circumstances would probably be small and possibly negative;

assistance in the form of loans from United Kingdom could not be
confidently expected, as Britain herself would probably be
experiencing exchange difficulties.

10. If the principal countries of the world, and particularly
United States of America, adopted consistently and effectively the
same policy to maintain employment, the danger of a serious slump
in the export market might be much reduced. Without some assurance
of this kind, international difficulties over our trade balance
must be expected.

11. It will be socially undesirable and politically impossible to
meet these difficulties by abandoning the policy of maintaining
employment at all costs. In the absence of corresponding policy
overseas, possible defences of our international solvency will be-
(a) exchange depreciation;

(b) reduction of overseas obligations;

(c) exchange control or import restrictions.

Rationing might be considered a fourth alternative. But no form of
rationing would be both politically practicable and effective,
which was not in effect import restriction. So it may be grouped
with (c).

12. Depreciation is for various reasons unsuitable as a temporary
measure, and should be avoided until there is clear evidence that
a permanent revaluation of the currency is required. Then the
revaluation should be made as boldly and objectively as possible.

13. Reduction of overseas obligations would be a desperate remedy.

As in the case of exchange depreciation, it should be regarded as
a long-term measure and not as a convenient escape from temporary
difficulties. Adjustment could be safely made only by agreement
with our overseas creditors, and would probably require the same
kind of prolonged negotiations as were needed to convert
Australian loans in London after 1931.

14. It follows that for the short-term difficulty we must examine
the possibilities of exchange control and import restrictions.

15. Supervision of capital movements should in any case be
maintained after the war. This will involve a supervision of all
transactions involving overseas exchange; thus the machinery of
the present import and exchange controls will have to be continued
after the war. The degree of control exercised may of course be
generally nominal.

16. If, then, our employment policy led to pressure on London
funds, the import and exchange controls could be used
restrictively. Imports might also be checked by higher customs
duties. By such measures, imports might be kept down to our
ability to pay for them, though it would not be easy. We might,
however, be able to continue the policy of maintaining employment
with the help of monetary expansion.

17. The restriction of imports necessary under these conditions
would, however, involve a very wasteful use of resources. Some
waste is almost certain to occur with any large Government action
to promote employment (paras 3 and 4 above), but with serious
restriction of imports the waste would probably be serious. The
imports given up are likely to be replaced by very uneconomic
industries, which, on account of the capital involved, will
persist and be a lasting drag on the country when active measures
are no longer needed to maintain employment.

18. The conclusion is, therefore, that in the absence of effective
international collaboration Australia may succeed in maintaining a
high level of employment, but at a lower level of average real
income-probably a good deal lower-than it would have had, if by
international collaboration we had been able to reach the same
employment position with a more profitable use of resources.

19. Moreover, while a country in temporary difficulties may
reasonably deny itself certain imports because it cannot pay for
them, if it seeks to replace those imports by uneconomic home
production it is bound to cause resentment in the exporting
countries. Retaliation is likely to follow with further adverse
effect on our exports, which will have to be met by further
restrictions on our part. So we are back into the old spiral of
declining international trade, with real income stationary or
falling.

B. The possibilities of collaboration
20. It is against the background of paragraphs (1) to (19) that
the proposals of Article VII must be considered. Article VII
proposes international collaboration-
(a) to increase production and employment, consumption and world
trade;

(b) to reduce trade barriers and get rid of trade discriminations.

The root of the matter must be the increase in production and
employment, from which will flow improved consumption and the
extension of international trade, which will further raise
consumption standards. The removal of trade barriers should
accompany and fortify these movements rather than precede them. It
is important then that positive measures to increase productivity
should figure largely in any plan to promote world prosperity.

21. Many countries, including Australia, could not risk trade
disarmament without a good prospect of a substantial improvement

in world trade, such as would make conditions favourable to the
maintenance of employment at a high level. To have such conditions
would be a substantial improvement on our prospects without
international collaboration (paras 1 to 19). We should then be
prepared to risk something to gain that end. We cannot ask for
certainties.

22. We want to be able to maintain employment without being forced
to restrict imports, and we want an assurance that we shall have
sufficient overseas reserves to tide us over any temporary decline
in export markets. An absolute guarantee cannot be expected,
because that would enable us to raise our standards continuously
at the expense of the rest of the world. Some help in maintaining
reserves may be provided by the machinery referred to in paragraph
30 below. For the rest, we must look to an expansion of world
trade which will enable us to build up overseas reserves, and to
international collaboration to maintain employment and reduce
depressions to manageable dimensions. If we can see, by either or
both of these ways, a good probability of security for our balance
of payments, then we should be prepared to pay the price necessary
to ensure this international collaboration.

23. It seems clear that there can be no substantial gain without
positive action, which must include both internal action in all
countries to maintain employment and external help provided by the
'strong' countries for the 'weak'. It is by no means easy to
predict which countries will be strong or weak; moreover, a middle
group may be distinguished, which can be expected on the whole to
do their own reconstruction and will require, in general,
protection against fluctuations rather than continuing help.

Australia will probably be in this group.

24. It is fairly certain, however, that the U.S.A. must be the
very predominant contributor, at least in the early years after
the war; and the main recipients of aid will be, first, those
countries which have suffered most severely from the economic
effects of invasion and occupation, and then countries which with
external help might greatly improve on their pre-war productivity,
such as China, India and the countries of the Danube basin.

25. Help from the strong might be given by-
(a) Government gifts;

(b) private gifts-e.g. for the education and training of
technicians and administrators;

(c) Government loans;

(d) private investment, possibly under Government control or
direction.

26. Much will depend on the amount of international investment or
gifts which will be made, especially by the U.S.A. in the first
period. Contributions on a large scale are probably in the mind of
the present administration, but whether U.S.A. will fully support
this policy remains to be seen. There is the possibility that the
present administration may not be able to get full support from
the country when it comes to the practical application of
principles. There is the possibility also of a different President
and a different administration. Unless America is a full-blooded
participant, the results are unlikely to be of great importance.

27. The U.S.A. will probably be willing to go some way in external
gifts or loans, if only to find a market for her surplus post-war
production. This latter circumstance need not detract from the
value of American participation in increasing world trade and
productivity, although it may prove an embarrassment to particular
countries. If, however, U.S.A. tries to keep up an excess of
exports over imports, the scheme must break down unless she lends
her exports or gives them away (as in effect suggested by Feis
[2]). The question is, therefore, whether the U.S.A. will prefer
to raise her real income by an import surplus and submit to the
embarrassments of adjusting her excess export production to home
consumption, or take the opposite course of avoiding the
embarrassments and forgoing the income.

As with Australia, it will be a question of the relative value set
on real income in comparison with 'easy' methods of maintaining
employment.

28. The vital question is whether the participating countries and
U.S.A. in particular are prepared to go far enough in real
collaboration to satisfy the general requirements set out in
paragraph 22. Such special aspects of collaboration as the loss of
preferences in the British market or American dumping of goods
competitive with Australia must be merged in the total picture of
gains and losses. If the net result is favourable, we should be
prepared to put up with the embarrassment of internal adjustments
of production. That does not mean that we need give up a long-term
policy of industrial development but only that we should carry it-
out with the sanity and moderation which are in our own real
interests, though they may not accord with the romantic ideals of
the Autarkists.

29. The answer to the question of the previous paragraph cannot be
given until definite proposals for international collaboration are
made and discussed. Australia, with a number of other countries,
will stand in some danger of being given the permanent role of
hewer of wood and drawer of water to the highly industrialised
countries. Any such tendency would wreck the whole scheme and it
is important that the interests of these countries should be fully
represented at an early stage in the negotiations. In some
respects Australia's interests will be with United Kingdom as
against U.S.A.; in other respects with other countries against
both United Kingdom and U.S.A.

30. If and when the preliminary negotiations show that the
participating countries are prepared to go far enough to make the
whole plan worthwhile for Australia (in terms of paragraph 22),

then the operating machinery will become of great interest. It
will be of importance that this machinery should-
(a) give effective representation to countries in the economic
position of Australia, which are not great powers;

(b) be subject as little as possible to pressure from producer
interests.

31. We may sum up by saying that without international
collaboration the post-war prospects for the world are gloomy, and
Australia's economic position is such that she will be one of the
countries which will suffer most from a condition of chronic world
depression. On the other hand, international collaboration offers
a fair prospect of escaping these difficulties and embarrassments
and taking part in a systematic upward movement of world

prosperity which will benefit no country more than Australia.

There is undoubtedly a large measure of international goodwill
towards these ends, which is Steadily accumulating and
strengthening. It should be the policy of Australia to do
everything possible to bring these aims and aspirations to a
successful issue.

C. Some special questions
32. Turning to particular issues raised, it seems that an
international clearing bank might serve a useful purpose in
cushioning particular countries against the adverse effects of a
temporarily adverse balance of payments. The difficulty of
securing an objective judgment on overdrafts would be very great
indeed. The Bank would have to survey the affairs of participating
countries as the Grants Commission surveys those of the Australian
States, and make recommendations regarding overdrafts and their
renewal based on its conclusions.

33. No close policing of a country's use of the overdraft would be
possible. Australia, for example, might be given a standing right
to overdraft of a definite amount based on a very general survey,
say 30m. If she abused this privilege and did not make a
reasonable effort to pay her way, then the privilege could be
withdrawn, after Australia had had an opportunity to make her
defence. The penalty of withdrawal would probably ensure that
there was no serious abuse.

34. Success in stabilising the prices of primary products would be
a great achievement and would be an outstanding contribution to
international stability. It would, however, require both national
and international control of production and of buffer stocks. The
difficulties are known only too well. There is no easy solution.

What can safely be said is that the experience of international
collaboration in other matters, and an increased authority for
international decisions, should make it much more possible to
reach agreement also in the field of primary production.

35. The nutrition aspect of an improvement in world conditions may
have considerable value in getting support for international
collaboration, particularly in America. In many countries
nutrition standards cannot be permanently raised except by
increased productivity, so that nutrition is one aspect of
increased productivity. Nutrition, however, has more colour than
productivity or real income and 'the nutrition approach' is more
likely to rally popular opinion to Article VII.

36. An international Planning Board has been proposed to give
advice to Governments from an international point of view. In the
planning of production, trade and finance, such a Board might make
a useful contribution. It would have no authority except the moral
authority it gradually built up for itself by the wisdom and
impartiality of its advice. If its members were of high prestige
and it was conducted with tact and discretion, such a Board might
in time become an important factor in promoting a better world
order.