THE INTERNATIONAL MONETARY FUND

1. I have had the opportunity of reading Mr. Melville's last
report on the inaugural meeting of the governors of the
International Bank at Savannah in March [2], and also a report by
Mr. Brigden on the issues raised for Australia in considering
whether she should join the International Monetary Fund. [3] I
have not had the opportunity of reading Mr. Melville's earlier
review of the Articles of Agreement, to which he refers in his
report. It is the purpose of this note to deal with the broad
general considerations that face Australia in deciding her course
of action. She cannot at present alter the terms on which the new
monetary system is to be established, though, as a member, she
could affect the way in which it will be managed. The system is
now well on its way and has to be accepted or rejected. The
immediate issue is therefore not one of arguing the intrinsic
merits or defects of the new system, but of assessing the broad
consequences of joining or not.

The Case Against Joining:

2. The case against joining may be summed up as follows. Adherence
to the Fund would interfere with Australia's freedom of action,
particularly with respect to depreciating her currency and
imposing quantitative restrictions on imports, if the
circumstances involved a choice between depreciation and
restriction on the one hand and the abandonment of a pre-
determined domestic policy on the other. There are many other
related problems, but it is not exaggerating the importance of the
issue, as it has been stated above, to say that this is the
overwhelming consideration. This matter is of the first importance
because Australia is likely to be well in the vanguard of
employment and investment policies that could be hampered in
certain circumstances by a rigid exchange policy, and she is also
the first country to feel the impact of a general recession of
business on her exchange stability.

The Experience of 1930:

3. The experience of 1930 was the classic case of this, and it is
ever-present in the minds of all of us who have to consider the
course Australia should pursue in the future. On both economic and
political grounds, the experience of 1930 is apt to overcloud our
minds. There was a combination of three factors in 1930 that is
unlikely to occur again. First, Australia was a heavy borrower and
was deriving both overseas funds and national income directly from
loans to the value of 30m. per annum. This was suddenly stopped,
but that situation is unlikely to arise again. Australia has been
paying off overseas debt over the past 12 years, and, though
private capital will come in during the years of expansion after
the war, it will not be a determining influence on the prosperity
of the country to the extent to which the public borrowing in the
twenties was. Moreover, if Australia can continue to pay off
overseas debt through the sinking fund provisions, there is an
offset here to be used if and when a situation suddenly arises in
which the inflow of private capital ceases. Secondly, the
international investment picture in the twenties cannot be
accepted as the pattern for the future. The United States was
politically out of the world by her decision on the Treaty of
Versailles and other international actions, though in the world
uneasily for a few years as an investor. In these circumstances,
it was inevitable that she should withdraw sooner or later, taking
no consequences for her action which she would not regard as a
defection. This is not likely to be the position in the future,
however desperate a view we take of American policy. This must
always remain a matter of judgment until recorded events tell
their own story, but I can only state my opinion that the United
States has become the dominant world power for good or for ill and
that she will not again abandon her responsibilities as an
international investor as she did in 1930. Thirdly, and related to
the second point just made, the fall in world prices in 1930 was
on a grand scale because the world had lost its mainspring to
action through international investment, and the United Kingdom
was in no position to discharge either its economic or political
responsibilities in the absence of a lead from the United States.

These three forces acted savagely in 1930, and all in unison. It
would be a mistake to build a policy on any assumption that they
could ever combine to cause such wreckage again.

The Spread of Expansionism:

4. This is the negative approach to the problem. On the positive
side, there are the following major matters to note. First,
Australia will not be alone in placing emphasis on domestic
employment and investment policies. The United Kingdom is heavily
committed in this direction, both in ideas and in contemplated
practice. This is one of the major changes that have come over the
economic scene since the bad days of the depression and the inter-
war period. The new position of the Treasury, the nationalisation
of the Bank of England, the economic policies being worked out by
the economic experts that now have an accepted position at
Whitehall, and the political temperament of the people all lead in
one direction.

For her own good, the United Kingdom must become, and is now in
fact, the leading exponent of an expansionist economic policy. She
will not be without allies because all the democratic countries
must pursue the same policy if they are to survive with their
present political structures, and there will be many prepared to
follow the leader of the opposition if they feel the hand of the
dominant economic power falling too heavily upon them. It is a
mistake to assume that any country, least of all Australia, will
approach the monetary fund without allies, if her case rests upon
an enlightened interpretation of the doctrine of expansion in a
world that is threatened with deflation. To resist deflation is no
longer to act in defiance of the accepted financial faith. In a
growing number of countries it will be regarded as a virtue.

Better Prospects for Stability in Primary Products:

5. Secondly, the demand for the basic raw material and foodstuffs
will, in all probability, be inherently stronger than before the
war, and there will be better techniques available for dealing
with surpluses that may affect the markets adversely. If the
claims for international cooperation to raise standards of living
mean anything at all, they mean that the products which Australia
has to sell will be among those that will benefit most; and this
will be true of all primary producing countries. An expansionist
world economy, which, in part, it is true turns on what the United
States does, will alter the price structure for the main basic
commodities that enter into world commerce. Moreover, the general
price management of this war has not left Australia in so
vulnerable a position as she was in the inter-war period. Her
export prices have not risen so much as they did in World War I,
and her internal debt structure is also much more capable of
absorbing a shock. Moreover, the proposals for international
agreements on commodities, new in operation in the classical case
of wool, will give greater stability to the world prices for basic
commodities. They will be helped by the plans of the Food and
Agricultural Organisation.

The United States as Lender:

6. Thirdly, it is by no means certain that dollars will be scarce.

It is quite certain that they will not be as scarce as they were
in the thirties. This will depend upon the extent to which the
United States maintains its position as a lender on international
account, on the competitive power of her exports in the world
markets, and on the level of her imports. in all these ingredients
of the problem, the position is now much better than it was in the
thirties, and, in some respects, it can be argued that the outlook
is positively good. First, on lending, the United States has
certainly made a good start. That might have been said of the
country after the last war, but, on this occasion, the commitments
on political as well as economic policy are far greater. In fact,
there is no comparison between the position taken up by USA now
and in 1920. It is not necessary to make a catalogue of the
Congressional Acts that have linked the fate of the United States
with the outside world. They are well known, though not always
assessed at their true significance. But what seems to be
overlooked is the machinery that is being worked out for
administrative purposes in carrying out the new economic policy
that these Acts involve. In this connection, the new' National
Advisory Council' should be mentioned. This Council advises the
President on international monetary and financial problems, and
consists of the Secretary of the Treasury, the Under-Secretary of
State for Economic Affairs, the Secretary of Commerce, the
Chairman of the Federal Reserve Board and the Chairman of the
Export-Import Bank. As 'The Economist' stated on May 25th, the
National Advisory Council is 'a committee created by Congress at
Cabinet level, equipped with staff committees as needed, its task
is to co-ordinate the country's financial and monetary policy and
operations in foreign affairs, and to gear the whole into the new
world organisations, the International Fund and the Bank'. Its
lucid report on the Foreign Loan Policy of the United States,
published in the Federal Reserve Bulletin for March, 1946, is an
impressive document, and indicates that the authorities guiding
these financial transactions have a sense of responsibility far
greater than their predecessors of 1919. It may well be that they,
in common with many others, will live to be rebuked by Congress,
which never allows any of its own creations to gain too much
authority. But it would be a mistake to assume that, on that
occasion, the rebuke would involve so desperate a change in policy
as overtook the country when it withdrew completely from external
investment in 1930. That act was merely an adjustment of the
economic policy to a political course already set ten years
before. On this occasion, the anxiety of the National Advisory
Council, as advisor to the President, is to see that economic
policy keeps up with the new political commitments of the country.

On this count, therefore, we must expect dollars to be less scarce
than before the war.

The Balance of Exports and imports:

7. What of the other two elements of the dollar supply problem,
the level of exports and imports? There is a fear that, in the
world situation, American exports will flood the world markets.

This may be a legacy from the days of lend-lease when, in fact,
the United States did flood the world markets on the grand scale,
but at what level of prices? Costs in the United States are far
higher than before the war, and, on the whole, relatively higher
than costs in the United Kingdom or the other possible competitors
of the United States such as Canada, the Northern European
countries and Australia. Most of these countries are a lap behind
in getting their internal demands satisfied because the war effort
was a greater burden on their resources, and they have a greater
lee-way to make up. But we shall shortly witness the classical
theory of international trade working out in the most interesting
way, when the United States finds that, in the world of
competition, economic power is not enough; cost, quality and
efficiency come into the picture. The inflationary tendencies in
the United States are all to the good, because they offer an
additional guarantee that the demand for dollars may not after all
exceed supply. On the import side, the tendency will be for higher
spending power to increase the volume of imports, and any movement
for lower tariffs and reduced restrictions on world trade will
work in the same direction. It is true that recession in business
will interrupt these movements, but, here again, it would be
erroneous to imagine that, on the first reverse, the deep-seated
tendencies which are outlined here would be thrown into reverse
gear. All the efforts of the New Deal before the war could not
upset the operation of the forces that were building up in the
twenties to create the biggest scarcity of the leading
international currency in modern times. I see no reason why a
slump in the United States should upset the fundamental tendency
at present in operation to create a surplus of dollars. Safeguards
in the Monetary Fund:

8. This is the general background in which the problem has to be
resolved. It may be argued that the thesis presented here is too
favourable, bearing in mind the uncertainty of political and
economic policy in the United States. There is substance in this
objection, and it must always be a matter of judgment as to
whether the Americans will pursue a sufficiently expansionist
policy to enable the world to avoid the economic disasters of the
inter-war period. On a conservative view of the position, the
outlook is much better than it was before the war, and, if the
United States succumbs to a depression, which it is powerless to
circumvent as it was in the thirties, there will be many countries
anxious to press upon it a liberal interpretation of the machinery
of the Monetary Fund. Pressure will come from within as well as
from without the United States. There are certain automatic
safeguards in this machinery. Two of these are important, namely
the right of any country to depreciate its currency by 10%, and
the right to discriminate against scarce currencies. No
international monetary system has hitherto conceded these rights
to dependent countries against the dominant partners in the
system. Those who speak as though the Monetary Fund was a return
to the gold standard, naked and unashamed, overlook these
provisions.

Safeguarding Domestic Policy:

9. There is a third, which is not automatic, namely the right of a
country to present a case for depreciation of its currency, if
that course is felt to be necessary to safeguard its domestic
policy. The Fund must then give adequate consideration to the
case. There is the risk that rigid opposition to currency
depreciation may make this provision a dead letter, and that, in
any case, the decision may be delayed, and the relief come too
late.

A general condition of this sort in any agreement necessitates the
development of working machinery, which would be put into
operation in circumstances in which a country would be embarrassed
if it had to maintain exchange stability, apart from its automatic
rights to a 10% depreciation, and the use of restrictive measures
against scarce currencies. There is no reason why those countries
that feel the need for protection against delays and inflexible
attitudes on the part of the dominant powers should not insist on
such machinery being developed in good time for any adverse
situation that may arise. There is little likelihood that it will
arise in the immediate future, and it may well be argued that
Australia would be in a stronger position to protect herself by
joining the Fund now and obtaining a seat on the governing body,
where she could press her point of view, rather than take the risk
of being the only important country outside Russia that remains
outside the Fund.

False Analogies:

10. Mr. Melville refers to the steam-roller tactics of the United
States in insisting on Washington being the headquarters of the
Fund, and the high salaries fixed by the Savannah Conference for
the Directors as possible examples of the disregard by the United
States of the rights of others. But is the analogy correct? The
minor countries will not get excited over the choice between
Washington and New York as headquarters, and they are less likely
to be opposed to high salaries. The late Lord Keynes [4] is
reported to have referred to the 'pathetic procession of stooges',
including China, from where this memorandum is being written, who
were prepared to do the bidding of the United States on these
matters. It will be a different case when countries are confronted
with steam-roller tactics that affect their rights to manage their
own affairs, and, in a world that has learnt so much unorthodoxy
in finance in the last fifteen years, the task of marshalling the
forces of reaction won't be so easy. Mr. Melville also refers to
the condition in the United States - United Kingdom Loan Agreement
under which the United Kingdom is required to abandon exchange
restrictions in one year instead of the five years originally
stipulated for the members of the International Monetary Fund. But
surely this is irrelevant to the issue. The one year period was
part of an overall plan for adjusting the external position of the
United Kingdom based upon a substantial loan from the United
States. No such considerations can be applied to ordinary members
of the Fund.

Conditional Adherence Favoured:

11. Admittedly, adherence to the Fund will limit the freedom of
action of the individual members, but that is true of all
international agreements. Australia has taken a leading part in
the discussions that have led up to the establishment of the
several institutions under which it is hoped to regulate the
relations among the nations in the future. It would be anomalous
for her to abstain from entering into the most important economic
instrument of international control at a time when she is playing
so important a part in the international political arena. The
risks she takes are far less than those which the United Kingdom
has taken under the American Loan Agreement, which, in many
respects, is the corner stone of the new international economic
structure. if, as Mr. Melville suggests in the concluding
paragraph of his main report (43), adherence were accompanied by
the reservation that it was tentative, and conditional upon the
provisions of the proposed International Trade Organisation, there
would appear to be little risk at all. In this event, Australia
would be in the Fund on an experimental basis, and would avoid the
misunderstandings that are bound to arise through her conspicuous
absence at present.

D. B. COPLAND