1. Stabilisation Fund-The Commonwealth Government has not yet
considered the international currency proposals. Pending this
consideration the following departmental views on the
Stabilisation Fund are forwarded for your guidance and
transmission to the appropriate United Kingdom and United States
officials.

2. Unless member countries maintain a high level of employment and
avoid persistent credit balances, the operations of the Fund will
not with certainty protect Australia and other dependent economies
from exchange difficulties. Accordingly, we still feel that the
importance of this issue should be publicly recognised by the
inclusion in Section 7 of an appropriate undertaking. [2]

3. In any event we consider it essential for Australia to retain
sufficient freedom of action in the control of its exchange rate
and foreign exchange transactions to protect itself immediately it
becomes clear that a critical position is impending.

4. For this reason we feel that the clauses referring to the
withdrawal from the Fund must provide that where a Member
withdraws on the grounds that its exchange difficulties are due to
the serious failure of major countries to maintain employment and
to avoid persistent credit balances, it will be free, upon giving
notice of withdrawal, to reimpose complete exchange control
(including quantitative control of imports) and to alter its
exchange rate with other countries. In all other respects the
Member's obligations to the Fund should continue during the period
of notice.

5. With regard to the question of exchange control, we are still
not clear what is intended. Clause 7 (2) of the draft refers to
the removal of 'all restrictions (other than those involved in
capital transfers) over foreign exchange transactions'. We think
that this clause should be amended to make it clear that we may
retain the machinery of import and export licensing and the
scrutiny of all overseas payments for the purpose of controlling
capital transfers and that the quantitative control of imports is
not regarded as a 'restriction over foreign exchange
transactions'.

6. On general grounds we have already urged (see our telegram 1068
[3]) the establishment of international machinery for recording
the level of employment in major countries and for promoting
regular international consultation on domestic economic policies
affecting employment. Regular consultation and the circulation of
adequate data on the employment and exchange position of countries
would help to prevent the abuse of the limited freedom of action
(see paragraph 4) which we feel it essential to retain.

7. We also feel that provision should be made for a withdrawing
country to be able to redeem any excess holdings of its currency
from the Fund over a long period, e.g. 10 years.

8. With regard to quotas the Fund should provide accommodation
adequate to meet normal fluctuations in the balance of payments.

In our view a quota of 80m. sterling would be necessary to give
Australia reasonable security on the assumption that world
employment and income are being fairly well maintained.

9. In 1929 our reserves of 95m. sterling were found much below
requirements even before the general world depression. Between
1934 and 1939 Australia twice found herself in a critical position
in respect to overseas funds in spite of deflationary pressure at
home. In 1937 overseas reserves were about 70m. sterling and yet
in 1939 they were depleted to danger point and only rises in
prices due to the war saved the situation. The future is full of
uncertainties for Australian exports and the value of money is
generally lower than pre-war. Moreover, if our level of employment
is to be maintained at even average pre-war figures, reserves of a
higher order will be required in the future.

10. We understand that the United Kingdom officials propose to
suggest modifications along the following lines:-

(a) Unitas to become the true international currency in which
payment can be made to bring about a balance in international
accounts.

(b) Provision to be made for more adequate pressure on countries
with persistent credit balances.

(c) The inclusion in the plan of a direction to the Board of the
Fund to use its powers at a time of declining world activity for
the maintenance of world employment and income and the prevention
of the spread of deflation.

(d) Variations in exchange rates to be made easier.

11. These proposals would effect considerable improvements in the
plan and they have our strong support.

12. We shall be glad if you will keep us fully advised of the
progress of the discussions on these matters.

13. If satisfactory modifications to the present plan cannot be
achieved consideration might be given to a more limited plan for
collaboration between the major countries. Dependent economies
such as Australia would participate through their link with one of
the major currencies.