You will have noted when the Conference discussed the economic
problem that the Prime Minister laid stress on the fact that we
had come to no final conclusions and, indeed, that we are by no
means all agreed here in this country, even as regards the
principles underlying the Monetary and Commercial Union schemes
which economists have been discussing, not to speak of the
details. Naturally it would not have been appropriate for me to
air my own particular point of view at the meeting, but it might
interest you, for your purely private information, to look at the
enclosed memorandum in which I have embodied my objections on
broad principle. I might add that Mr. Fraser has also seen the
document, but naturally I should be glad if you would regard it as
private and confidential.

What I feel is that the United States' outlook, or perhaps more
truly the outlook of Mr. Cordell Hull, Mr. Sumner Welles [1] and
their group, is substantially the outlook of the English
Manchester school of a hundred years ago-an outlook which views
all economic problems from the point of view of the trader and
investor, with labour regarded as an instrument of production and
not as an end in itself. Whether that point of view is
theoretically right or wrong, it has become impossible in any
country in which the mass of the working population have an
effective say in the government. It has in fact also become
impossible in other countries which, for reasons of national
strength or development, are determined to push their industries
by giving them effective protection. Whether that is done on
Socialist lines, as in Russia, or on individualist lines by
tariffs or quantitative restrictions, the fact remains that it
will not fit in with schemes based on free trade principles. The
issue is, as you very truly said at the Conference [2], primarily
a political issue, and the discussions of theoretical economists,
whether out of date or not, are at any rate irrelevant.

L. S. AMERY

Enclosure (extract)

1 May 1944

PRIVATE

COMMERCIAL POLICY

[matter omitted]

11. Yet it is in the absence of any such guarantee [3], and in
spite of the experience of the inter-war years, that it is now
suggested that we should renew the attempt to set up the Humpty-
Dumpty of Nineteenth Century economics on his wall again. For the
schemes which have been worked out, in respect both of commercial
and of monetary policy, by our departmental officials in
conjunction with certain American officials, are schemes entirely
dominated by the Nineteenth Century conceptions of the minimum
interference with trade, 'non-discrimination', i.e. the Most
Favoured Nation Clause, and the maintenance of exchange parity.

The authors of these schemes, influenced by the experience of the
past, have introduced into them certain easements and
modifications. But the main objective remains unchanged. It is, I
submit, incompatible with any national policy of stable employment
based on national standards of living or with a planned expansion
of our resources as individual nations or as a Commonwealth. It
is, I would add, equally incompatible with similar policies which
other nations will insist on pursuing and with an expansion of
world resources based, not on promiscuous individual competition,
but on national cooperation.

12. The Commercial Union scheme aims at including a substantial
majority of the nations of the world in a multilateral convention
by which they are to be obliged to reduce their tariffs to some
undefined low level and to abjure all other methods of selective
control of their import trade. In order to provide some inducement
for joining the scheme the nations that stand outside are to be
excluded from the benefits, such as they are, of the Most Favoured
Nations Clause. On the other hand, those that come in are to be
precluded from such mutually favourable bilateral arrangements,
largely based on quantitative control, such as our treaties with
the Scandinavian countries by which we secured our coal exports in
return for guaranteed quantities or percentages of our imports of
bacon and butter. Those who are members of the British
Commonwealth and Empire are, moreover, to forgo the advantage they
enjoy at present in not being under the obligations of the Most
Favoured Nation Clause in respect of their trade with each other
and are to be obliged to abandon, or at any rate reduce to an
ineffective minimum, their present mutual preferential
arrangements and to abstain from any new arrangements of the same
character. It is not clear what is to happen to an Empire country
which prefers to stay outside in order to be free to develop its
own industries. But the result might well be that we might be
obliged to give the Argentine better terms than Australia, if
Australia stayed out, or Japan better terms than India. In any
case the question for each of us is whether there is any reduction
in the tariffs of American or of other foreign countries, a
reduction extended, of course, to all the members of the Union,
sufficiently far-reaching to compensate us (a) for the loss to our
industries or agriculture in our home markets consequent on the
corresponding reduction in our tariffs and (b) for the abandonment
of our bargaining power whether within the Empire on the basis of
tariff preference or of preferential long-term contracts, or with
foreign countries on the basis of specific agreement. Aesop's
fable of the dog who dropped his bone in the water in order to
grab at its more attractive looking reflection is very much to the
point.

13. The Monetary Fund scheme aims at securing exchange parity, but
provides certain easements in order to give rather more elasticity
than the old gold standard. The objection to it is not that gold
is an element in the scheme: gold is likely for a long time to be
an important element in currency and exchange. it is to making
parity, and incidentally gold convertibility, a primary object of
policy, as against the control of the internal price level, and to
the total inadequacy of the easements provided. Some of these,
such as the two ten per cent. step reductions and the amount to be
subscribed to the Fund, are obviously inadequate to meet the great
fluctuations which may yet occur in money values in America or
elsewhere. Australia, which handled the last monetary crisis more
successfully than any other country (except New Zealand, Sweden
and Portugal, which followed similar policies) dropped her
exchange below gold by 40 Per cent. in two steps, first by 20 per
cent. below sterling when sterling was tied to gold and then
another 20 per cent. with sterling when it went off gold. In our
case we in 1931 threw 100,000,000 into the sea in our last
unavailing effort to keep up our exchange parity. The measures
that may be required in future years, not for competitive
depreciation of the exchange, but to preserve the infinitely more
important stability of our own internal price level may well have
to be even more drastic than those to which we resorted in 1931.

As for the suggested right of special measures of exclusion to be
taken against countries whose currencies are declared to be in
scarce supply, i.e. more particularly the United States, who can
believe that they are either workable from the economic point of
view or politically feasible?
14. In any case the essence and object of the scheme, like that of
the commercial scheme, is the restoration of the Nineteenth
Century economic system. The two are essentially linked together
and neither of them is compatible with economic policies aimed at
security of employment and the raising of national standards of
life, above all in the years of confusion and fluctuation which
will long continue after this war. A time may come when things may
settle down sufficiently to enable various currency systems to
maintain a reasonable degree of parity with each other and when
nations or nation groups will have built up their economies to the
point when they can afford to forgo many measures of control and
approximate increasingly to something nearer world free trade. But
that time is remote and meanwhile toying with schemes that are not
likely to be workable or acceptable in any future for which we can
make practical provision only stands in the way of any effective
policy of recovery.

15. The nature of such a policy was summed up in a sentence in a
recent speech by the American Republican leader, Mr. Dewey. [4]
'We shall be truly effective in helping with the rehabilitation of
the world only if we first restore at home a healthy, vigorous and
growing economy.' For us of the British Commonwealth that means,
first of all, the building up, each in our own countries, of as
balanced an economic life as our conditions allow, and the
freedom, for that purpose, to exercise an effective and unfettered
selective control over our imports. Secondly freedom to use the
bargaining power of our markets, both through the development of
inter-Empire Preference and also through specific trade agreements
with those foreign countries that will give us value for value.

Thirdly freedom to retain full control over our internal price
level, making the fullest use at the same time of the wide measure
of exchange parity afforded by the sterling system.

16. The detailed methods by which these main principles are to be
applied in practice may well differ in different parts of the
Empire and from the point of view of different political parties.

They can be applied equally well under a system of state purchase
and sale or licensed import or export monopolies or under free
individual trading subject to tariffs, levy-subsidies,
quantitative restrictions and differential customs duties. These
are matters which can be settled as we go along and can vary, as
between one Empire country and another, or in the course of years
in each country, without detriment to our general purpose. The
full working out of these principles may take more than one
generation and may be left to the political trends of the day in
each of our countries and to the general development of the world
economic environment. What is needed now is to set a new course
inspired by modern democratic conceptions of social health and
national strength, and not to let ourselves be diverted by futile
and dangerous attempts to restore the outworn economy of the past.

L. S. A.