STERLING BALANCES

In accordance with your request I discussed this question with Mr
Nash on Friday last. [1] Mr McFarlane has probably reported the
substance of the discussion to you, but it may be of interest to
you to have my summary of the conclusions we reached which were
briefly:-

(1) Neither Australia nor New Zealand has a sufficiently large
accumulation of sterling balances to be confident of convincing
Parliament that they were in a position without risk of subsequent
difficulty to write off any significant proportion of their
present balances;

(2) At the same time it is clear that the United Kingdom had borne
a disproportionately heavy part of the burden associated with the
conduct of the war and that both Australia and New Zealand could
reasonably make a contribution to the solution of the United
Kingdom international difficulties on this score;

(3) The benefit to be derived by the United Kingdom from such a
contribution would be predominantly psychological in that it would
be an expression of confidence in the future of sterling and
possibly an example to other countries such as India with
substantially larger holdings of sterling balances;

(4) It would not, however, remove the necessity for the United
Kingdom to limit the rate at which we and other holders of
sterling could be permitted to draw on those accumulations for the
purchase of imports. The fact that the assistance given was in the
form of a contribution to the cost of the war rather than in the
form of a writing down of sterling balances need not preclude an
understanding between the governments concerned that, if in the
future our sterling balances declined to embarrassingly low
levels, we could expect assistance from the United Kingdom
Government;

(5) Relatively the New Zealand sterling balance position is
somewhat stronger than that of Australia, although, with a
proportionately higher import and debt commitment, the discrepancy
was perhaps less than the figures themselves would indicate. In
the circumstances a contribution by Australia and New Zealand of
25 million and 15 million respectively would appear to be
reasonable.

General Comment
Sterling balances are not strong enough for me to recommend that
we could afford to offer the United Kingdom this assistance
without difficulty to ourselves in any circumstance. Some risk is
involved. Whether this risk should be accepted is essentially a
political decision. If it is desired to offer the assistance, I
recommend that it should be in the form of a contribution towards
the United Kingdom costs of the war, and I believe that a
contribution of 25 million would involve risks of a relatively
modest character. [2]