I attach a note I have prepared on the dollar situation and action
which might be taken here particularly from a long-term point of
view.

I am giving copies of this to Watt [1] and Wheeler of the Treasury
and would be glad of an opportunity to discuss the suggestions
made with you at an appropriate time.

Attachment

DRAFT MEMORANDUM FOR THE PRIME MINISTER

Policy in relation to the Dollar Problem

The recent memorandum from the United Kingdom [2] on the 1948
dollar position makes it clear-
(1) that in the absence of Marshall Aid the United Kingdom would
be in a desperate position;

(2) that the rate of improvement which it seems reasonable to
anticipate will still leave the United Kingdom in a critical
position when the end of the Marshall Aid period is reached;

(3) that the United States does not intend that Marshall Aid
should be used for meeting dollar deficiencies of the sterling
area;

(4) that this deficiency, while small in relation to the total,
represents a substantial proportion of the total sterling area
reserves held by the United Kingdom, and it is clear that the
United Kingdom will be unable to continue to finance it on its
present scale for a number of years.

It seems inevitable, therefore, that we will continue to be
subject to pressure by the United Kingdom further to reduce our
dollar expenditure and probably to borrow from the Monetary Fund.

Both from the point of view of our responsibility as a member of
the sterling area and in order to maintain effective independence
in the conduct of our own economic affairs, it is essential that
we should plan to place ourselves in a position where we do not
make any net drawings on the sterling area dollar pool. This win
require-
(a) long-term policy which will so alter the character of our
trade that we are capable of meeting our own dollar requirements;

(b) a short-term policy which makes a maximum contribution to our
essential requirements during that period and facilitates the
development of the longterm programme.

Limitations of present action
So far it has not been practicable to do much more than impose the
most severe restrictions on dollar expenditure. This produces the
quickest results and, furthermore, by its severity justifies any
remaining calls on the dollar pool which we are obliged to make,
but it seems certain that it is of a severity which it will be
difficult to sustain, and in some cases by preventing the
importation of capital equipment may, in fact, slow up the
replacement of goods previously imported from dollar areas.

Similarly on the export side, such stimulation of exports to
dollar areas as has been possible has of necessity been confined
to marginal increases in such exports by diversion of slightly
larger quantities from the domestic market. The aggregate of our
exports of manufactured goods in particular to dollar areas is
small, and it is obvious that this approach can make little
contribution to the problem.

Long-term Policy
It seems desirable, therefore, that an approach should be made to
a long-term solution of the problem by the formulation of plans
which it is recognised will take a number of years to put into
effect.

These plans would be prepared in relation to the main items in our
balance of payments in dollar countries and would need to be
formulated in as concrete terms as possible. At this stage it is
practicable only to give an indication of the type of measures
which should be investigated in more detail and to suggest
procedure for such investigation and for the development of
concrete projects out of them.

Imports
The main commodities entering into our dollar import programme are
set out in Table 1 attached. The possible lines of action in
relation to imports include
1. Restrictions.

2. Replacement by Australian production.

3. Diversion to other sources of supply in soft currency
countries.

It seems that restriction has probably gone as far as is wise, and
adequate machinery is in existence for the review of import
programmes. No further attention is, therefore, given to
restriction in these notes.

Import replacement by Australian production is not likely to be
easy. Australian aggregate production is already at a maximum and
we are facing widespread shortages of manpower, materials and
equipment. Furthermore, we are likely to experience problems in
relation to the techniques and costs in a rapid stimulation of
such replacements. However, a development of Australian production
to replace imports is a normal characteristic of Australian
development and much could probably be done by concentrating
development in the next few years deliberately into channels
likely to make a maximum contribution to replacement of dollar
imports.

The classes of commodities which appear to offer the best prospect
of replacement by Australian production are-
Tobacco leaf
Chemicals
Motor chassis and tractors
Tinplate
Newsprint
Paper and pulp
Cloth and yarn
Tobacco is an agricultural product and the limits within which
Australian production can be increased may be determined by
climatic and other technical considerations.

The remainder of the commodities mentioned are manufactured
products, and in some cases plans are in existence for expansion
of Australian production. In these cases Government action to
expedite this expansion by assisting the firms concerned to obtain
the necessary manpower, materials and equipment, appears to be the
most hopeful line of action. The means whereby this can be done
presents some administrative problems.

Diversion to other sources of supply is in some cases impossible,
and in others difficult, but diversion to United Kingdom sources
seems possible in relation to Chemicals
Machinery
Tractors
Motor chassis
Over a longer period it might also be possible to obtain some of
our requirements of these products from European countries whose
currencies are less difficult. For instance, France, Italy,
Germany, Czechoslovakia and Sweden. For those diversions to take
place, however, changes in certain forms of production, e.g. motor
bodies, may well be necessary and, furthermore, established
commercial connections might have to be varied. This can only be
done slowly and with the collaboration of the commercial
enterprises concerned.

Of the remaining commodities it seems to be possible that
diversion could take place in relation to-
Tobacco
Timber
Newsprint
Paper and pulp
Diversion of the tobacco demand to South Africa and Rhodesia
apparently does not effect any dollar saving since the net
settlement with these countries is in gold, but some possibility
may exist in Greece, Turkey and other Middle East countries. So
far as timber, newsprint, paper and pulp are concerned, there
appear to be some possibilities of diversion to New Zealand and
Russia.

The procedure for such diversions may be inter-government
negotiations followed by direct trade contacts or perhaps by the
negotiation of formal bilateral treaties of the kind concluded by
the United Kingdom.

Exports
Here we have two possible fields of action. Firstly, in relation
to foodstuffs and raw materials, of which Australia is already a
substantial producer, it may be possible to divert some of our
present production into dollar markets. On the other hand, in some
of these products such as beef and dairy produce, increased
production is certainly practicable over a long period. The
question will arise as to whether we should continue to export all
our surpluses of foodstuffs to the United Kingdom or whether we
should seek to establish ourselves in the United States' markets.

From a long-term point of view there seems to be a good case for
diverting sufficient to establish effective commercial connections
in the United States markets themselves. However, since sales to
the United Kingdom of increased production of these commodities
probably reduces their purchases in South America and reduces
purchases in the Western Hemisphere, they probably represent net
savings of dollars to the sterling area as a whole even if these
do not accrue directly to Australia.

Action in this field has already been commenced with the
investigations arising out of the United Kingdom request for
increased food production.

In the field of manufacturing there are not the same opportunities
for producing large numbers of dollars. Individual classes of
production cannot hope to do more than contribute on a small
scale. Nevertheless, such contributions are well worth while and
are comparable in scale to the savings which can be made from
imports restrictions and replacements. They are preferable to
these forms of action since they tend to increase the aggregate
level of production and contribute to Australian industrial
development.

It seems, however, that a new approach to the export trade will be
necessary if significant results are to be achieved. In the past
exports of manufactured goods have been an incidental to
production for the local market. This has meant both discontinuity
of supplies and frequently inappropriateness to the market to be
served. It will be necessary for production to be undertaken
specifically for export and on a scale which will enable costs to
be competitive not merely in the present period of excessive
demand but on a long-term basis.

It is clearly difficult with the present general shortage of
labour and the irregular supply of basic raw materials such as
coal, steel, etc. to anticipate very early results in this field,
but it seems reasonable to expect steady improvement in the
supplies of these basic requirements and, in the meantime, plans
can proceed for the development of the export side of certain
industries. The most promising appear to be-
Wool textiles both woollen and worsted, but especially the latter
Iron, steel and steel products
Selected machinery and machinery parts
Felt hats
Men's and children's hose
Felt products
Selected chemicals
Processed foodstuffs.

In some cases action necessary will be fairly obvious, although
perhaps difficult to give effect to. For instance, it seems likely
that production of woollen textiles for export could be
considerably increased if increased manpower were available. This
is in some cases associated with the shortage of accommodation and
could perhaps be overcome by development of the policy already
partly in effect of providing hostels for housing migrants closely
in association with this industry. In other cases long-term plans
for the extension of capacity and for the adaptation of existing
capacity to export requirements may be necessary. In these cases
plans would need to be worked out in some detail in collaboration
with the firms concerned, and action may be called for from a
number of Departments. This raises the administrative problem of
the means of collaboration with outside firms and the co-
ordination of governmental action between Departments concerned.

Another possible line of action is the stimulation of exports by
relatively small enterprises. It is known that there are
possibilities for the sale of the products of such enterprises in
dollar areas, but such firms are frequently unable to establish
the necessary commercial connections, and there appears to be a
relatively limited number of reputable export houses who can place
firm orders with manufacturers operating on a small scale. It was
to meet this particular need that a proposal was put forward some
time ago for the establishment of a joint government and private
enterprise export corporation. Consideration might be given to the
revival of this project.

Greater possibilities may well exist in the field of mineral
development, where the problems of equipment, manpower, etc. are
in many cases similar to those of manufacturing enterprises.

Services
There are only two items of great significance in this group of
payments, i.e. films and tourist expenditure. The action which has
been taken so far in relation to films is essentially negative and
short-term in character, although it appears to have led to some
interest by American film enterprises in the possible production
of films in Australia. The development of plans of this sort both
by producing films in Australia for local showing and the possible
earning of dollars in the United States from the showing of the
films produced here represents a line of action worthy of detailed
examination.

Similarly, United States' citizens are the world's heaviest
spenders abroad. The possibilities of bringing American tourists
to Australia at present are clearly limited by transport
difficulties and shortage of hotel and other accommodation in
Australia. These, however, can be temporary factors and a
conscious plan of development of accommodation directed to the
requirements of tourists could almost certainly lead to a very
marked expansion of expenditure of this sort in Australia.

Capital transactions
Normally there is a small flow of dollar capital into Australia,
and to the extent that this can be expanded it will make an
immediate contribution to our dollar problem and, if directed into
appropriate forms of production here, may reduce our long-term
dependence on dollar supplies.

Government policy has been opposed to government borrowing
overseas but, generally, private capital has been welcomed. It may
be possible to stimulate the flow of American private capital into
Australia. For instance, consideration has been given from time to
time to the establishment in London of an office designed to
promote the transfer of British enterprises to Australia by
interesting British industrialists in the possibilities of
development here. There seems good reason to believe that the
establishment of such an office in the United States could have
significant effects.

While government borrowing abroad is contrary to government
policy, there seems less objection to borrowing where it is
related directly to the import of capital equipment for the
development of Australian industry, particularly where the
industry concerned would be producing commodities for which we
would otherwise have to pay dollars. It may be sound economy to
borrow in order to finance such development. Consideration might
be given to borrowing from the International Bank for
Reconstruction and Development for financing imports of this
character.

To ensure that the relevant funds were used only for this purpose,
a special account might be established to which specific imports
of this kind could be charged. It has been estimated that in the
present import programme there is roughly 6,000,000 for capital
equipment and that 10,000,000 might more truly represent the
essential needs of industry especially in view of present import
replacement projects. It would be legitimate to borrow for these
purposes and this would have the double effect of reducing our
immediate claims on the sterling dollar pool and of reducing our
long-term dependence on dollar supplies. A borrowing transaction
of this sort is fundamentally different from a proposal that we
should use up our drawing rights from the Monetary Fund, rights
which are established to deal with temporary difficulties in our
balance of payments rather than the correction of a long-term
disequilibrium.

Organisational problems
In effect the suggestions made above amount to a general
influencing of Australian development in order to promote the
production of goods capable of reducing our dependence on dollar
supplies. It is a policy which will take some years to produce
substantial effects and will require to be implemented through a
number of Departments by steady and continuous action.

Furthermore, it may require the preparation of detailed plans in
collaboration with individual and private enterprises which will
call for a variety of forms of government action. The working out
of such policies and giving effect to them presents unusual
organisation problems for Government Departments.

It seems to me that it is necessary for a continuous watch to be
maintained on the development of this policy both at the
Ministerial level and the departmental level. I suggest,
therefore, that there should be established-
(1) a Policy Committee at the Ministerial level consisting of the
Prime Minister and Treasurer, the Minister for Post-War
Reconstruction and the Ministers for Commerce and Customs;

(2) a Policy Committee at the departmental level consisting of the
departmental heads of the Departments of Post-War Reconstruction,
Treasury, Commerce and Customs.

It would be the responsibility of the Departmental Committee to
prepare proposals in general terms for the consideration of the
Ministerial Committee, and, having obtained general approval for
them, to arrange for their working out at an inter-departmental
level in greater detail. In some cases the working out of these
plans would fall within the responsibilities of individual
Departments. In other cases, for instance in the preparation of
plans for the development of particular manufacturing enterprises,
for action from a number of Departments, e.g. the Division of
Industrial Development, Treasury, Department of Commerce,
Commonwealth Bank, Department of Immigration, Department of Works
& Housing and Department of Labour & National Service. For this
phase of the work it would probably be appropriate to set up small
working parties from the officers of the Departments concerned who
would be able to give a substantial proportion of their time to
this work.

Work in its relation to manufacturing industry would be detailed
and complex and require continuous attention for some considerable
time. Direct negotiations with senior business executives would be
involved as well as collaboration with State Governments and
Commonwealth Departments. In this field, therefore, it may be
worth considering establishing a small full time working party at
a high level which would be responsible to the Heads of
Departments Committee. Men such as S. F. Cochran, Chairman of the
Queensland Electricity Commission, J. Breden of the Commonwealth
Bank and Capital Issues Board staff, and J. L. Knott of the
Division of Industrial Development might be appropriate for this
purpose.

For work in agriculture, mining and services, and in connection
with diversion of import trade to soft currency areas, other forms
of working parties might be more suitable. This question should
receive early attention.

Short-term possibilities
Since some time must elapse before any long-term policy can
produce significant results, and since we are under pressure from
the United Kingdom to exercise our borrowing rights from the
Monetary Fund, pressure which it seems likely will be renewed,
consideration might be given to other forms of short-term action
capable of helping the immediate position.

The action suggested above for the stimulation of private
investment and the possible borrowing from the International Bank
of Reconstruction and Development to finance specific imports of
capital goods would of course make an early contribution to the
short-term problem.

Other possibilities which might be examined are-

(1) Sales of Australian products to Europe against Marshall Aid
Dollars
European countries receiving Marshall Aid are substantial
purchasers of Australian wool, and if the wheat harvest in the
coming year provides a surplus over our commitments to the United
Kingdom and other normal Australian markets closer at hand, they
would be substantial purchasers also of Australian wheat.

Particularly in view of American insistence that Marshall Aid to
the United Kingdom should not be used to finance deficiencies of
the rest of the sterling area, there seems to be a good case for
representations to them that Marshall Aid money should be capable
of being used for the purchase of essential foodstuffs and raw
materials from Australia. It should be noted that it has been
agreed that Marshall Aid money can be expended in South American
countries.

(2) Realisation of stocks
Australia and the United Kingdom are joint owners of substantial
stocks of wool which are of possible interest to the United
States. The transfer of ownership of the part or whole of this
stock could make an immediate contribution to sterling area dollar
resources. This might be done either by a direct sale of the
products to the United States' Government or, alternatively, by
United States' participation in the Joint Organisation. [3] If the
latter alternative were adopted, the United States could make an
immediate payment to the other two partners to cover her share of
the stocks. United States' participation might have other
advantages in that it would give greater stability to the future
of the wool market and remove the justification for United States'
objections to the operations of the Joint Organisation. It might
also become the forerunner of a general international wool
agreement, studies for which are in progress.

Conclusions and Recommendations
The suggestions included in the above-mentioned notes are made in
many cases by way of illustration rather than from the certainty
that they can be put into effect and will produce the results
suggested. However, it seems certain that sufficient possibilities
exist for a substantial change to be brought about in our net
dollar requirements over a number of years.

It is recommended, therefore-
(1) that the Policy Committees at the Ministerial and Permanent
Head level be established immediately;

(2) that the Departmental Committee should be asked to examine the
suggestions in this Paper and any others which arise out of its
work and to submit proposals as its work proceeds to the
Ministerial Committee for action;

(3) that the Departmental Committee in particular advise upon the
desirability of a full time working Party at a high level to
develop plans for manufacturing industries. [4]