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283 Memorandum by Coombs

[CANBERRA], 27 September 1943


1. While in Washington and London I took part in talks with United
States and United Kingdom Treasury officials on international
monetary plans. The following comments set out the main issues
involved and the outcome of the talks.

2. Two plans for establishing new international monetary machinery
have been advanced. They are the Clearing Union plan which
originated with Lord Keynes and has been published by the United
Kingdom Treasury and the Stabilisation Fund which is the work of
Mr. H. D. White of the United States Treasury.

Objectives of the Plans
3. The two schemes have basically the same objectives.

They are:-

(a) to provide countries during the post-war period with
additional international exchange reserves;

(b) to prevent countries introducing, without the consent of an
international body, measures such as exchange control or currency
depreciation which are detrimental to the economic condition of
other countries;

(c) to put pressure on countries to modify their domestic policies
where there is a persistent lack of balance between their
international receipts and expenditure.

4. As a result of the war many countries will have depleted
exchange reserves. Income from exports will be uncertain and the
capacity to pay for the level of imports required by internal
reconstruction and maintenance of employment will be in doubt.

There are circumstances which, in the absence of concerted
international planning, may force some of the major trading
countries to protect themselves with restrictive exchange and
trade policies, and engage in the kind of economic warfare which
leaves little prospect of a stable and prosperous world economic

5. Financial policy alone will not avoid these developments. But
if the overriding threat of exchange difficulties can be even
partially removed, world economic conditions are more likely to be
stable and prosperous.

6. Improvements in Australian standards of living still depend to
an important extent on our being able to pay for imports: that is
to say, on our ability to find growing primary and secondary
export markets. Our reserves in London at the end of the war will
not be strong. Britain's ability to trade on terms favourable to
us is in doubt. Therefore a Clearing Union or Stabilisation Fund
which offers to expand international buying power of our oversea
markets, and at the same time offers us temporary borrowing
facilities, deserves the most careful examination.

Difference between the Plans
The Stabilisation Fund proposes that the additional international
reserves made available will be obtained from contributions of
gold and the local currencies of member countries. The Clearing
Union, on the other hand, proposes that these reserves would be
provided by the creation of a new international currency, which
would be transferred from one account to another in the books of
the Union in settlement of payments due by members to each other.

7. In addition to technical differences, there are significant
differences in the power to be transferred to the international
authority, and in the borrowing rights proposed for Members.

Generally speaking, the Clearing Union would permit more extensive
use, by countries experiencing exchange difficulties, of measures
such as exchange and import control and currency depreciation. The
Clearing Union also would appear to be more expansive in its
effect on world economic activity than the Stabilisation Fund.

Weaknesses of the Plans
8. Both plans offer potential advantages to Australia. But since
membership involves the surrender by us of some of our rights, for
example to depreciate our exchange rate by independent decision,
we should have to consider membership cautiously for these
important reasons:-

(a) Neither plan takes adequately into account the influence which
the level of employment and economic activity in major economic
countries has upon world trade and the economic position of
dependent economies such as Australia. A depression in the United
States or the United Kingdom will cause falling markets and
exchange difficulties in Australia and other dependent economies,
irrespective of any assistance provided by either the
Stabilisation Fund or the Clearing Union.

(b) Both plans have effective means for exerting pressure on
countries which are unable to meet their international expenditure
from their current receipts, but neither imposes a serious
pressure on those countries whose balances persistently tend to be
in credit. It is obvious that if, for example, the United States
persistently sells abroad more than she buys and as a result
accumulates gold or foreign exchange, other countries will be
forced into the position of being unable to meet their current
international expenditure. If Australia were one of these
countries she might be subjected to pressure to reduce her
standards of living or to follow a deflationary policy because of
a refusal by the United States or other major economic country to
expand their international purchases to the level of current

(c) Whether the Fund or the Union were adopted, the international
organisation set up would be dominated by representatives of
economically powerful countries, who would be likely to take a
conservative and creditor view of international financial problems
and be inclined to force any necessary adjustments on to dependent
economies rather than modify their own internal policy.

United States Views
9. In the discussions with the officials of the United States
Treasury we emphasised both the respects in which the
Stabilisation Fund was more restrictive than the Clearing Union
and also the basic deficiencies of both plans. In reply they
emphasised there was considerable opposition in Congress to any
measures tending to increase United States responsibility in
international economic affairs, particularly if the action could
be interpreted as financial assistance to other countries. They
emphasised that there was no chance of persuading Congress to
accept a plan based upon a Clearing Union. They regarded the
following four points as essential to any plan if it were to have
a chance of being accepted by the United States Congress:

(a) the scheme must be contributory in character;

(b) the share of the countries in the control of the organisation
must be related to the size of their contributions;

(c) the exchange rates between major currencies must be fixed
before the Fund is established and variations in these rates made
possible only with a substantial agreement from countries other
than that desiring to alter its own exchange rate;

(d) there should be a definite limit to the financial obligations
of the United States to the organisation.

10. Furthermore, they stated that, while they were sympathetic
with our views that a high level of employment in the United
States was essential to post-war stability, they believed that any
attempt to write into the scheme obligations to maintain
employment, or to avoid accumulating international balances, would
render it politically suspect to Congress and therefore
unacceptable. They pointed out also that any provision for
increasing pressure on countries with persistent credit balances
could be in the form only of requiring additional contributions or
loans by the country concerned to the Fund. This would conflict
with their fourth requirement that there should be a definite
limit to United States financial obligations to the Fund. While
they agreed that the control of the Fund would tend to be in the
hands of representatives of the major countries, they believed
that the Fund would in fact operate in a way which would tend to
stimulate rather than depress economic activity.

United Kingdom Views
11. The United Kingdom officials with whom I discussed these plans
appear to have accepted the view that agreement can only be
reached by accepting the Stabilisation Fund plan, at least as a
basis. I understood from Keynes that he would be prepared to seek
a compromise of this kind. In his view the real difficulty would
not be to obtain agreement between him and White, but to get a
satisfactory scheme accepted in the face of opposition in the
United States from banking interests and Congress.

12. The British would desire to see the Stabilisation Fund amended
in the following respects:-

(a) That, while countries should contribute to the Fund in gold
and their own currencies, they should be credited with balances in
Unitas which would be transferred from one country to another in
bringing about a balance in their international payments. This
insistence on the establishment of an international currency is, I
believe, based upon the hope that at some future date it will be
possible for the Stabilisation Fund itself to become a credit-
creating agency and so operate more expansively.

(b) That greater freedom should be given to countries to vary
their own exchange rates at least within narrow limits. A possible
variation of 5% is acceptable to the United States but the United
Kingdom officials, I understand, consider 10% a minimum. Neither
figure would be of much value to Australia, where small variations
in the exchange rate have little effect on our international
balance of payments, but where a major adjustment to the exchange
rate is perhaps the most effective method of meeting a long-term
change in the relative prices of our exports and imports.

(c) That there should be provision for more effective pressure on
countries with persistent credit balances. It is difficult to work
out methods by which this pressure may be exerted which do not
involve increasing contributions or loans by the United States to
the Fund.

(d) That there should be written into the plan a direction to the
Executive of the Fund that in periods of declining economic
activity their operations should be conducted in a way likely to
check the spread of depression and to restore world employment and

13. It is probable that any common plan agreed upon by United
Kingdom and United States officials and subsequently presented for
discussion by other nations will contain the basic features of the
present Stabilisation Fund proposal. While the amendments sought
by the British would improve the Stabilisation Fund, it would
still from the Australian point of view be open to the following

(a) the additional foreign exchange reserves which it will make
available to Australia are unlikely to be adequate for her
possible needs;

(b) it may require Australia to accept, as a condition of using
overdraft facilities, advice and pressure concerning her domestic
economic policy from an international body on which her
representation is negligible;

(c) it calls for a serious sacrifice of economic freedom to vary
her own exchange rate, and to impose exchange controls;

(d) it offers no assurance that the major economic countries of
the world will maintain a high level of employment and incomes and
avoid the accumulation of persistent credit balances. Only
confidence in these conditions would justify Australia continuing
to accept these limitations to her freedom of action.

14. On the other hand, in a world of generally high employment the
existence of a Stabilisation Fund liberally operated would do much
to ease the burden of year to year fluctuations in our balance of
payments and promote more stable economic conditions within
Australia, and in the world generally. Furthermore, if agreement
is reached concerning the establishment of the Fund between a
large number of countries, it might be politically unwise for
Australia to refuse to participate.

15. I feel that firstly, we should continue to stress the
fundamental importance of full employment policies by major
countries, and seek, as part of general economic collaboration,
international machinery for the recording of employment and for
regular consultation between nations on domestic policy affecting

16. Secondly, since the Fund cannot give Australia certain
protection against exchange difficulties we should leave the way
open for withdrawal. For instance, it may be necessary to resume
our freedom of action if the Fund fails to permit us to protect
the balance of payments and thereby maintain our employment
policies, when it is clear that our exchange difficulties are
caused by the failure of major economic powers to maintain
economic activity. We would be wise to have our position clearly
understood on entry so that if withdrawal became necessary, we
could justify the action and avoid stigma of default on

17. We should continue to press for modifications which will meet
in other ways the basic criticisms outlined in paragraph 13 above.

We can hope for some concessions to our point of view, which in
important respects will be supported by the United Kingdom.

Therefore I believe we should continue to play an active part in
future discussions.


[AA:A989, 43/735/56/3]
Last Updated: 11 September 2013
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