Report [LONDON], 23 June 1947

AIRMAIL SECRET

STERLING BALANCES
The only remark the Chancellor made when I called on him [1] was
to remind me of the difficulties of the United Kingdom in my talks
with the Treasury. I later called on the head of the Treasury
(Bridges [2]). My talks were to be with Rowe-Dutton. [3]

2. Preliminary talks with Rowe-Dutton.

At the outset he accepted my suggestion that there would be no
formal agreement. The question of an exchange of letters was left
for the time being. Formal agreements are contemplated with India,
Egypt and foreign countries.

3. After the expected preliminaries the main points of the U.K.

approach
were:

(a) Australia should not run down its accumulated balances for
current purposes. The hope was expressed that we would want to
increase them.

(b) There should be a tight hold on imports generally to ensure
that we would keep within our current earnings.

(c) There should be further talks in twelve months.

(d) If difficulties occur in the meantime, Australia could consult
U.K.

4. Accumulated balances.

For the purpose of discussion I put these down at 30 million
sterling at 30th June, 1947, excluding gold reserve.

5. In my reply I said the prospects for r2 months were good and
with difficulties of supply it may well be that our current
balances would be adequate. However, we were a vulnerable economy
(export prices, seasons, etc.) and had a backlog of import needs
and were looking forward to some developments, consequently we
would be unable to meet his request. We desired some access to
accumulated balances. The extent of the access could not be
predicted, but we wanted a flexible arrangement. Nevertheless, he
came back at the 130 million several times later with reasons
which I appreciated, but I explained why I could not agree. He
pressed that U.K. could not release accumulated balances except
for a dole. He added that they could not agree to release any
balances to meet a difficulty unless Australia was prepared to do
something herself to combat the position. It was understood, of
course, that accumulation would be available to meet debt
repayments.

6. Arrangements with India and Egypt.

I asked on two occasions whether he could advise the stage reached
with India and Egypt re the running down of their balances. He
explained that they both had current deficits and could not carry
on without some relief, but beyond this and a suggestion that they
would be hard terms I got nothing specific.

7. He added on my enquiry that it was impracticable to work on
some percentage basis in the sterling balance settlements. Each
country had to be dealt with as a separate issue. For instance 5
per cent. for one country might be reasonable, but it would mean
over 60 million for India. I did not think a flat rate percentage
basis reasonable; in any case India had run down 100 million last
year.

8. I mentioned that I would be in a difficult position if I
agree[d] on an official level to little or no access to our
balance, and then, later, found that a more generous arrangement
in this regard had been made with other countries.

9. I also enquired about Iraq. (The Chancellor gave them a
dinner.) I was informed that development was necessary in Iraq. I
appreciated this, but added that we also contemplated developments
because, next to the Middle East, Australia was on a long view
probably the most vulnerable spot in the world. They are also
dealing with Uruguay. (I will seek further information later as to
the progress with these countries.)
10. I naturally emphasised that our balances arose in a different
manner to the Indian and Egyptian and mentioned all the points in
the Advisory Council's minute [4]-(e.g. the U.S.A. spending,
curtailment of imports, no profiteering in export prices, etc.)
11. Import Policy
This has been the subject of a lot of discussion. There have been
some inconsistencies in the U.K. approach which need clarification
in the light of obligations in the proposed I.T.O. Charter and the
significance of 15th July, 1947, when our current sterling becomes
convertible.

12. The approach from Rowe-Dutton was on these lines
(a) 15th July had no significance and called for no relaxation of
import licensing with U.S.A.

(b) Imports from U.S.A.-The dollar position was more acute than
ever. The loan was expected to run out about the middle of 1948.

Australia should confine imports to essential durable goods and
restrict consumable goods to a bare minimum. (He didn't mention
tobacco, so I suppose it is 'durable' in Australia as in U.K.)
(c) Imports from other countries, including U.K.-We should keep a
close scrutiny and immediately there was any tendency for them to
overrun current earnings we should restrict either piecemeal or
more comprehensively as the need arose. The reason was to avoid
running down accumulated balances which would absorb current
production in U.K. that was so necessary to exchange for imports.

13. I dealt with these proposals at some length. The points
included the following:

(a) 15th July, 1947-His interpretation was in contrast to our own
views. As current sterling would be convertible, we might easily
incur criticism and possibly some retaliation if we did not avail
ourselves of the right, even though we had no legal binding
obligation like U.K. We had already received complaints [of]
discrimination in favour of Canada, (axes and floor coverings).

Moreover, we would be off-side with the proposals in the Trade
Charter. I suggested that they should talk to the Americans. This
point has still to be clarified to my satisfaction.

(b) Volume of imports from U.S.A.-In 1946 we had a favourable
balance with U.S.A. Our policy had been to restrict to essential
needs-e.g. motor vehicles for our starved transport,
Constellations (U.K. were using them), some textiles to meet our
ration coupons-but we had cut down recently and incurred
criticism. For 1947 to date we were just about square on our
payments balance with U.S.A., but we might have to draw later.

Much depended on wool sales to U.S.A. We would be prepared to
stall for time but did not want to incur risks.

(c) Imports from countries other than U.K. and hard [5]
currencies:

I outlined Coombs' proposal that Australia should, during the
course of the Geneva negotiations, announce its intention to relax
(not abolish) import licensing. [6] With Coombs' consent I gave
them details of his proposal and the reasons. At a later talk they
brought in two officers in touch with Geneva (Clark and a Bank of
England man just back from Geneva). If the proposal is to be
approved the question of timing will be important so as to avoid
any appearance of its being a tariff bargaining weapon. It must be
associated with the Charter and it should await a proposed easing
of Article 28(i)(e) [7] which might make discrimination a little
more respectable. The question of 'devastated countries' was also
mentioned, and it was suggested that the 'war-shattered' clause
justified. substantial discrimination in favour of U.K. I am not
satisfied on this point.

I have conveyed my tentative views on Coombs' proposal by cable
[8] and am keeping in touch with Coombs.

The U.K. Treasury's desire for a close scrutiny over imports did
not add up with the proposed relaxation, which would necessarily
involve some non-essentials.

(d) Imports from the U.K.-We had abolished licensing (except for a
few non-essentials) with the encouragement of the United Kingdom
itself. We would not want to re-impose licensing to correct an
adverse trend. It would be jumping too quickly from one foot to
the other.

(e) General-Finally, I said that import licensing was a dreadful
business, both from the governmental and business point of view
and we would not want to re-impose it either piecemeal or over a
wide field unless we faced a serious reverse. Moreover, licensing
could not correct an adverse trend except after a period of some
months. On the contrary, it was desirable that we should relax
licensing (e.g. Coombs' proposal). Further, we might be obliged to
ease up on U.S.A. while our balance of payments outlook was
favourable. In short, the proposals outlined above by Rowe-Dutton
were actually in conflict with other representations that had been
made by U.K. itself, and also with our desires and what we felt
would be our obligations. This whole position of import policy is
complex and wants very close study before any commitments could be
accepted.

14. Right to draw on Monetary Fund-Rowe-Dutton asked whether, if
we faced a deficit, we would be prepared to draw on the Monetary
Fund rather than on accumulated balances. Drawing of sterling from
the Monetary Fund would help U.K.'s external position, whereas
running down balances would embarrass U.K.

15. The reply was that if the option rested with us, we would
naturally prefer to draw on balances, and would look at the
Monetary Fund as a last ditch reserve.

16. Gold reserve: Rowe-Dutton also raised this question and asked
very definitely that we should include current gold production in
our exports and sell it to the Bank of England.

17. This gave me an opportunity to refer to our experience of 1930
when our approach for help from the Bank of England met with a
very cold reception. Consequently, the reserve was the 'Sacred
Cow' and it would be difficult to touch it in the light of past
experience and the need to guard against a future contingency. The
reserve was not large. We had not accumulated gold like South
Africa during the war. It was not until 1943 that we had
commenced, with the concurrence of the Bank of England, to build
up a reserve, which was now equal to about, 24 million sterling-a
small chest as it were. He enquired about current production-now
about 6 million sterling per year-which he said would be a very
valuable help to U.K. in her position of need. He pressed that
this should form part of the sterling gold pool.

18. He said we wanted two last ditch reserves-gold and the
Monetary Fund and wanted to draw down balances and keep these two
reserves intact. U.K. would be taking all the risks, but not
Australia. I thought that this was quite a good point in his
favour and promised him I would give it consideration, but added
that gold would be jealously regarded because of past experience.

19. I think there is a good deal of reason in the request that we
should make current gold available to help U.K.'s position,
provided in other respects the final proposals are acceptable to
us. I suggest that the Bank should consider this.

20. Reserve and working balances-It is not contemplated by U.K.

that our balance should be actually frozen, but that it should
remain as at present with the Commonwealth Bank on the
understanding that we would finish up the year with at least the
same balance so far as current transactions were concerned. Then
we should come here and talk again. If it was still k13O million
they might suggest we should carry on for another 12 months on the
same basis. Rowe-Dutton had a little discussion with his off-
siders at this stage as to what would happen if our balance
increased by, say, 5 or 10 million. I thought they could reach
the right answer to this one without any help from me, and they
eventually did so.

21. The accumulated balances would be available for debt
redemption (we have a lot of definite maturities as well as
options in the next five years). Also they would be prepared to
discuss assistance from the balances in emergency if our export
position suffered a serious reverse.

22. Having explained the practical difficulties involved by their
suggestions for prompt import control (they are still examining
this) I emphasised that we wanted a flexible arrangement and put
forward the proposal for a reserve and working balance which we
would only use if necessary. On enquiry I mentioned 40 million
sterling. When they recovered, they asked whether I wanted a
formal agreement on this basis with a freezing of the remainder. I
said no, just an understanding, and we would be reasonable. Rowe-
Dutton suggested that a working balance would be unnecessary,
because our funds would permit fluctuations. All he had asked was
that we finish up the year on the same figure as we started. To
this I said the term 'reserve and working balance' had a better
ring, would cover a period longer than one year, and we would be
reasonable. I am not hopeful of a satisfactory response to this
suggestion. I was afraid to use the Governor's 5O million. The
shock would have been too great altogether.

23. Rowe-Dutton kept making the point that we should finish the
year the same as we started-i.e. live within current earnings-and
if there is an adverse trend, then control imports promptly so as
to avoid drawing down balances and absorbing production which
could be sold elsewhere. If we got into difficulties, then we
could come and discuss them; in any case the whole position would
be reviewed again next year.

24. General comments: I have written as above so as to give you
the atmosphere. You will appreciate that I am aiming at something
much more flexible than the Treasury want to concede. I propose to
continue my talks with the object of trying to secure something on
the lines attached.

25. I should be glad if the points in this outline could be
examined and comments cabled back to me for guidance.

Attachment

AUSTRALIAN PROPOSALS FOR CONSIDERATION

1. Period-2 years.

12 months is too short. It also means our approaching U.K. for
further talks. In any case the next 12 months should be easy for
us and we would have to go over same ground again. Therefore 2
years suggested.

2. Consultation-U.K. to consult with us rather than we should
consult with them.

Their idea is that we promise to live within current income and if
we get into difficulties we should come and discuss our difficulty
under an escape arrangement.

My idea is that we should have flexibility within our own hands
but that we would be reasonable. This means a right to a 'Reserve
and Working Balance'. This flexibility would enable us to meet a
temporary difficulty without reimposing import licensing. We could
take some risk before imposing any necessary corrective action or
approaching the Fund for dollar assistance to meet a temporary
set-back in our Balance of Payments. It may well be that we can
get through two years within our current earnings, but the future
is very unpredictable-much depends on the Marshall plan-and it is
important to start off on the right foot now rather than to seek
variations in our favour later.

Moreover, we don't want to be so tied up that we have to go to the
U.K. Treasury when we want some greater freedom.

The method I have outlined above would make it necessary for U.K.

Treasury to approach us if they wanted some tightening-up or
thought we were unreasonable. This particularly applies to our
import policy if we meet difficulties on this point. Both Wheeler
and Woodrow [9] stressed to me the difficulties we would face if
we had to consult from time to time.

3. Import Policy-A flexible arrangement but we will be reasonable.

For the reasons given above we want a more flexible arrangement
than they propose, and provided we can secure acceptance of the
idea of a 'Reserve and Working Balance' it should be sufficient.

We would then have freedom to regulate our own import policy. I
propose to avoid commitment, except in relation to a temporary
stalling, on the future import licensing of American goods in case
we desire to make relaxations either because of obligations or in
our own interests.

4. Reserve and Working Balance-4O million (or less)
The idea is a 'Reserve and Working Balance' with full rights to us
to draw on it without consultation but we will be reasonable.

A working balance for one year is useless. Therefore I suggest the
whole arrangement should cover two years. I am afraid it will be
difficult to get acceptance of 25m. stg. for two years and I
would be prepared to make 20m. stg. or 25m. stg. to secure
agreement to this principle. The year 1947-48 should be good.

5. Current Gold-The U.K. request to be favourably considered.

The Treasury request is that current gold production (about 5
1/2/6m. stg. a year) should be sold to the Bank of England and
they will press it hard because of the great need for dollars. As
we have the right of convertibility of our current sterling into
dollars (which U.K. have borrowed) it is not unreasonable for them
to expect current gold to be exported in the same way as wool and
wheat. If we want to hold our current gold and drawing rights on
the Monetary Fund as two last-ditch reserves and draw down our
accumulated balances to the embarrassment of U.K., they would have
some justification for regarding us as very difficult.

I think therefore the request should receive favourable
consideration as regards the two year period. If we agreed, it
would be a very useful factor in getting flexibility in other
directions.

6. Escape Provision-Some understanding in an emergency.

If I could secure an understanding on the lines set out above I
would still seek an escape clause to meet an emergency but in this
case it would be up to us to approach the U.K.

7. Agreements with other countries-Prior information.

I'm afraid it is going to be difficult to [secure] [1O] any
precise information in the next few days on the proposals being
discussed with India, I have asked two or three times about India
and Egypt but the only line I could get was that they were running
current trade deficits (which suggests some access to accumulated
balances) but in other respects the arrangements will be tough.

[In] the case of Iraq, I was informed that development was
necessary. I feel that if we can secure an understanding
satisfactory to us, we should not insist on knowing the full
details of these other countries. I would appreciate comments on
this point.

8. Interest and Sinking Fund-These cost about 18/20 million a
year. I raised the point whether interest and sinking fund could
be treated as debt transactions and come out of accumulated
balances if necessary. I added that other countries had used their
balances to wipe out sterling debt. The reply was that these were
proper charges to current earnings. I do not feel I can
successfully press the point re interest, but may follow up
sinking fund if I think it worth while.

9. Definition of current earnings and payments-to be considered
later: In the talks we have referred generally to imports and
exports and I haven't taken up yet the question of definition. I
regard both as covering 'invisible' as well as pure trade items-in
other words the items in our balance of payments (except such
items on both sides as can be properly allocated to accumulated
balances) would all come under the heading of current earnings or
current payments, which are more descriptive than 'imports' and
'exports'. We could, of course, ask that private capital transfers
should be excluded, but that would not suit us at present, as the
trend is still our way. It may well continue in that direction,
although a remark from one quarter indicated that it is probably
on the decline for the time being. The U.K. Treasury could, with
some justification, ask that capital transfers from U.K. be
excluded from current earnings, but if they do, I will counter it.

I would be glad of any comments by the Bank on the above.

10. Form of understanding: I will not raise this until we have
actually secured an agreement. The alternatives are:

(a) an exchange of official letters on a Government level.

(b) exchange of understanding between Treasury officials and
initialled by them.

It depends upon the nature of the understanding and whether it
would be desired by both parties to publish it. An exchange of
letters on a Government level would no doubt provoke a request in
Parliament for publicity. I suggest a decision be made over for
the time being.

11. General: I suggest that brief comments might be telegraphed to
me to guide me in further talks. It will be sufficient to refer to
item numbers.