DOLLAR STATISTICS AND POLICY

Following our recent telephone conversations on the various sets
of dollar statistics, our telegram to Nimmo and Bury's report of
the discussions he and Brand [2] had with Haslam [3], I feel that
it is worth-while attempting to put on paper some statement of
what our general attitude to these statistics should be. I hope
that this rough attempt will stimulate you to a reply.

2. Firstly, there is the question of our general policy towards
the Sterling Area dollar pool. To my mind recent events have
reinforced our previous view that every effort should be made to
ensure that as far as Australia is concerned the sterling area
dollar mechanism is kept on a flexible 'gentleman's agreement'
basis. [4] The resulting discretion preserves for us an element of
elasticity and multilateralism which shields us to some extent
from the strong trend in the United Kingdom finance and trade
relationships towards bilateralism. Should United Kingdom impose a
quota on us for dollars, nil or otherwise, and flexibility in our
arrangements with the United Kingdom in this connection be lost,
we would be forced increasingly into bilateralism with America and
other countries, and, more important, with the United Kingdom
itself.

3. The diversion of our products from the United Kingdom to the
United States market with its repercussions would immediately come
up for consideration. We might well become progressively involved
in bilateral bargaining on commodities, based on scarcity and
essentiality, and be led into a series of arrangements as to which
goods we should buy or sell to particular countries. An elaborate
and restrictive apparatus of trade controls, operating on narrow
currency grounds and paying little attention to relative costs,
might become unavoidable. This seems particularly likely when we
remember that other countries including the United Kingdom will be
debating what goods can be exported to Australia for quite apart
from scarcity some goods are equivalent to dollars.

Note-Goods may be equivalent to dollars in two senses, first that
the export of them against sterling, etc., involves the sacrifice
of a dollar sale, secondly, that even if (a) is not true the buyer
may be saved a dollar purchase.

4. Our general attitude therefore should be to conduct both our
high and low level negotiations and interchanges with the United
Kingdom in a manner which will give us the best chance of
preserving the long-standing flexible arrangements whereby we draw
on the United Kingdom for dollars in order to cover our realised
deficit on dollar account, subject only to the condition that we
take note of the changing fortunes of the dollar pool and practise
a degree of economy in dollar expenditure broadly comparable to
that exercised in the United Kingdom.

5. We must, of course, take account of the price which we have to
pay to retain this flexibility and, as you know, the Treasurer has
recently decided that a surrender of our ultimate reserves (i.e.,
our independence and freedom of action in a crisis) cannot be
tolerated in a world as uncertain and as bleak in outlook as the
present one. I think we are all fully agreed on this general point
but, as you know, there is some difference of opinion as to
whether Australia must retain ultimate reserves as large as our
present gold holdings and our full drawing rights from the Fund. I
personally think that something less than this would be an
adequate reserve. But the Treasurer has decided otherwise.

6. This, however, does not deny the need for continued efforts to
retain our present flexible 'gentleman's agreement' basis with the
dollar pool. If anything it may mean that our efforts should be
intensified.

7. The flexibility basis has unfortunately been severely shaken
recently. The convertibility crisis, the imposition of quotas on
India, Eire, Pakistan, etc., by the United Kingdom, coupled with
the departure from the arrangement of certain countries, e.g.,
South Africa, and the continued rate of drain, have undermined it
considerably. While our actions cannot markedly influence this
trend as far as other members of the pool are concerned, our
conduct and attitude towards negotiations with the United Kingdom
do affect the question whether and how long Australia and New
Zealand continue to operate on the flexible 'gentleman's
agreement' basis.

[matter omitted]

26. Your other fear was that Nimmo's scouting activities for the
purpose of his background letters might weaken us more than they
strengthen us. Your point was that by putting a representative in
London to attend meetings of the Sterling Area Statistical
Committee and to nose around in a discreet fashion, we were giving
the United Kingdom people an additional opportunity 'to hammer
us'. But if this were so, surely it would be dangerous to have any
representative of any kind in any overseas centre. After thinking
the matter over since our discussion I am convinced that provided
Nimmo and Bury do not 'stick their necks out' and intrude on
policy matters without instructions there is no danger. In fact, I
think the information we gain is of very real advantage. I have
always thought that the Treasury should be well represented in
both London and Washington. I would add that both the Treasurer
and the Acting Secretary are very keen on getting as much
background from London as possible. In both cases their final
words to Bury were on those lines.