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22 Notes by Coombs



The general method of work
The Prime Minister saw United Kingdom Cabinet Ministers alone,
although there were some half a dozen round-table talks at which
officials were present, but in the main officials dealt directly
with their corresponding officers of the United Kingdom
Government. Consultation between the Prime Minister and officials
was confined to discussions at meals, and so on.

[matter omitted]

Sterling area and Sterling Balances
Australian balances.

The Chancellor reaffirmed the United Kingdom assurance that
Australia would be able to use any balances above the frozen limit
of 125m. sterling. The question of how far the United Kingdom
would be able to supply goods against these balances was not

Capital movements to Australia.

The United Kingdom impression is similar to that of our own that
no great movement to Australia has taken place. Certainly no
control of such movements is contemplated.

Bi-lateral payments agreements.

The Prime Minister raised with the United Kingdom the question of
whether the strict balancing of bilateral payments agreements with
countries outside the sterling area might not tend to create
difficulties for members of the sterling area. The United Kingdom
agreed that this was a danger, but felt it was inevitable for the
time being and that they aimed to increase elasticity by reducing
the debits in the United Kingdom in these agreements. To do this
they must increase exports without correspondingly increasing

It should be noted that Australia is still proceeding on an
entirely multilateral basis in her trade and that if the United
Kingdom gets her own trade completely covered by bilateral
agreements, we may obtain the residue of goods only. The situation
has not developed to extremes as yet, but the main danger is the
practice of bilateral agreements becoming established. On the
other hand, the increasing administrative complexity of these
agreements may force a reaction.

The United Kingdom claim that they are not accepting obligations
to supply fixed quantities of goods but only to use 'their best
endeavours' to supply these commodities. Our view is that this
represents a moral obligation and that in practice pressure will
be exerted to achieve the quantities and that, furthermore, if
they were not achieved, an adjustment would need to be made in
subsequent agreements. The United Kingdom claim that the Committee
supervising these agreements keeps Dominion and Commonwealth
requirements under review when accepting any obligations. However,
they agreed that they might not be fully up to date in changing
requirements and said they would welcome an Australian commodity
expert in London to keep Australian needs constantly before them.

Supplies to Australia are being assisted by the fact that United
Kingdom traders are anxious to retain the Australian market for
their products which is highly valued. This is operating in a
contrary direction in connection with tin plate where the known
intention of B.H.P. to establish a mill here to produce tin plate
is tending to encourage United Kingdom producers to direct their
supplies elsewhere to markets which they believe to be more

There are not very many classes of goods which are allocated under
official supervision at present, and capital equipment-perhaps the
most important-is not as yet included. However, the United Kingdom
has accepted obligations to encourage the flow of equipment to
U.S.S.R. and to India as a result of agreements with those
countries and this may lead to more complete supervision.

On particular commodities in which Australia is interested, it
seems likely that as a result of the Prime Minister's visit,
increased supplies of particular commodities Will be obtained. For
example, tin plate exports to Australia will probably be

Australian currency payments for Australian exports.

It had been suggested that, in view of the possibilities of
exchange variations, contracts for Australian exports should be
expressed in Australian currency. The Chancellor was adamant
against such a change on the grounds that if he accepted a
proposal of this sort for Australia, he would be under pressure to
do the same for all other countries from whom the United Kingdom
made bulk purchases. Furthermore, it would be a recognition of the
weakness of sterling which was undesirable and which neither the
United Kingdom nor Australia would wish to express. We did not
press the issue, but made it clear that if there were a change in
the exchange rate, then we would seek an immediate review of
export prices.

[matter omitted]

The Dollar Problem
Short term.

Plans for 1949 are based upon the maintenance of existing reserves
for the sterling area. The picture for 1949 is, roughly, as

United Kingdom dollar expenditure- 525m. sterling-against which
exports, shipping, etc. will provide, 235m., leaving a deficit of

The Colonies are expected to provide a net surplus of 30m. and
the Dominions a net deficit of 45M., leaving a net deficiency for
the outer sterling area of 15m. Other payments to Belgium, Egypt
and other countries are likely to add a net additional gold drain
of 13m. This gives a total deficiency for 1949 of 318m. against
which it is hoped to obtain E.R.P. grants and loans totalling
1270m. dollars,
To the extent that E.R.P. assistance falls short of 1270m. dollars
the intention is that the import programme will be cut. The
programme on which these figures are based would just enable the
United Kingdom Government to carry on without relaxation of
austerity and without building up stocks of goods in the
production pipe line. Any reduction would mean unemployment and
further reduction in living standards. The programme contains no
food from the United States, although it does include food from
Canada, wheat, bacon, and other livestock products which Canada
included as a condition of the wheat contract by which the United
Kingdom is provided with wheat at less than world prices. It
involves further cuts in previous import programmes.

The provision made for Australia and the Dominions figure referred
to above was 75m. dollars on a net drain basis, allowing for our
gold output including both United States and Canada. (Our current
estimates have been round about 60m. The Chancellor suggested that
we might be given an allocation for a target to work to, but the
Prime Minister refused to accept this, preferring to continue on
present gentlemen's agreement basis. This was acceptable to the
Chancellor who made no adverse comments on Australia's efforts to
economise on dollars.

Mr. Wheeler's impression is that the Prime Minister's attitude is
that it is not necessary at the present time to consider further
economics immediately but progressive tightening may be necessary
associated with positive action on the long-term problem.

It should be noted that the figures submitted by the United
Kingdom to E.R.P. authorities are on the assumption that the net
sterling area deficit will be met. However, the United Kingdom
authorities do not expect that E.R.P. officials will agree to
this, and it seems likely, therefore, that the suggested E.R.P.

allocation of 1270m. dollars will be correspondingly reduced. If
this is done, and there is no offset by Australian participation
in off-shore purchases, then there will be further reduction in
the United Kingdom import programme. The attitude of the E.R.P.

officials is apparently reasonably favourable towards meeting the
sterling area deficit, but they are gloomy about including the
figures this year. They state the terms of the Act [1] and its
legislative history preclude such action, but hope the Act may be
amended next year.

The United Kingdom is, therefore, anxious that we should get off-
shore purchases and they are agreed that we should proceed with
discussions with E.R.P. countries and in Washington to obtain
these. Officials consider that it might be desirable to defer such
discussions until the current negotiations with E.R.P. authorities
in Paris are complete. This is unlikely to be more than three

Consideration was given as to whether it might be good policy to
defer Australian exports, e.g. wheat [for] the United Kingdom,
thus increasing the direct United Kingdom deficiency in the hope
that this would be covered by increased E.R.P. aid and that the
wheat thus released could be sold by Australia for dollars. United
Kingdom opposed this strongly. They state that the import
programme is determined by the amount of E.R.P. aid and that
therefore they get no benefits. It does seem possible, however,
that there could be a wangle if the United States and other
countries were prepared to connive. On the whole, however, it
scarcely seems worthwhile.

Long term.

There seems considerable confusion in the United Kingdom analysis
of the long-term dollar problem. Generally speaking, they are
proceeding on the assumption that they must aim at a greater
degree of self-supporting trading in the non-dollar part of the
world. They have attempted to estimate the volume of their exports
in 1952 when they feel they will be able to sell 145% of 1938
volume. These estimates are based on judgments as to the
absorptive capacity of their main markets on the assumption of
high levels of employment and are not based on United Kingdom
productive capacity. This would permit only 75% to 80% of 1938
imports. The terms of trade are at 1947 levels and if United
Kingdom agricultural output can be increased to 150% of 1938

If these estimates are achieved, they anticipate a dollar deficit
of 100m. per annum in 1952 compared with 300M. in the current
year. This reduction would follow from increased export to dollar
areas, gradually increasing availability of goods from non-dollar
sources. Such a reduction in United States purchases win involve
some further reduction in the standard of living but would be
brought about mainly by the development of alternative sources of
supply, particularly for foodstuffs.

While this is the general basis on which the United Kingdom is
working, they seem to be very worried as to their capacity to
finance their purchases even if they can be diverted to non-dollar
sources. They express this as a fear that currencies, e.g. even
Australian currency at present soft may become hard. This shows in
an unwillingness to enter into long-term commitments either on
quantity or price basis.

Everybody is agreed that conscious planning will be necessary to
bring about the trade developments which should be necessary if we
are to be independent of dollar aid at the end of the E.R.P.

period. The Prime Minister insisted on the importance of concrete
proposals with this end in view and on the need for collaboration
between United Kingdom and Australia.

The following arrangements have been suggested for future work and
collaboration in these matters-Firstly, the United Kingdom have
nominated Plowden, the chief planner, as a general co-ordinator of
United Kingdom work on this matter. It is agreed that they will
push ahead with forecasts of the general shape of future trade
patterns and United Kingdom plans in connection therewith. As
these progress, they will forward them to Australia for our
examination and for comment and discussion on common action. In
the meantime we will keep them informed of corresponding action
here and at an appropriate time discussion between officers
concerned should take place. (Mr. Wheeler indicated that the Prime
Minister has Post-War in mind as the coordinating authority in
Australia since this win link up very closely in our work with the
long-term dollar problem here).

Contract prices for Australian foodstuffs
The United Kingdom rejected the cost of production approach to the
determination of prices of these contracts. The Chancellor
indicated that they believed cost of production approach to be
uncertain and dangerous and that they would prefer to pay more now
than to have an indefinite commitment in the future. The Prime
Minister indicated that, while this might be reasonable generally,
it was not to be expected that Australia would undertake
development, e.g. in the Northern Territory or New Guinea, for the
purpose of meeting United Kingdom long-term requirements without
some firm understanding about future markets for the products

The Prime Minister undertook to continue the sale of our current
production of gold to the Bank of England. This, presumably, is
subject to review at our discretion.

The Prime Minister made it clear that Australia would not borrow
from the International Monetary Fund at least for the time being
and that any form of dollar borrowing would be opposed. He
emphasised the political antagonism to external borrowing in the
Australian Labor Party.

Sterling exchange rate
The Chancellor emphasised that devaluation offered no trade
advantages to the United Kingdom in the short run and that,
therefore, there was no intention to devalue sterling at the
present time. The only thing which might affect this attitude
would be any action by the International Monetary Fund to devalue
a number of European currencies.

[AA: A9790, 533, i]

1 US Foreign Assistance Act of 1948.

[CANBERRA], 28 July 1948
Last Updated: 11 September 2013
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