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29 Coombs to Chifley

Letter [LONDON], 5 October 1948

Although discussions here have not yet gone very far, it may be
useful if I set out for you my preliminary impressions. I have
taken it that my prime function was to find out as much as
possible about the U.K.'s long-term plans and to analyse their
implications for Australia.

Independence of Marshall Aid by 1952/1953
The purpose of the plan to be presented to the O.E.E.C. is to
demonstrate how the United Kingdom proposes to become independent
of further American aid by 1952/1953. Broadly, the United Kingdom
plans to use Marshall Aid to enable a greater proportion of her
resources to be used for capital equipment to increase
productivity and to establish new forms of productivity. The
increased production thus planned for will to a large extent be
direct replacement of goods at present being imported from the
western hemisphere and less than I had anticipated expansion of
export production while exports are expected to be 50% higher than
1938 compared with a present level of 43% above 1938. Consequently
much improvement in the U.K. standard of living as is contemplated
comes primarily from domestic production and includes relatively
little improvement, for instance, in imported food supplies.

Continuance of food rationing on something very much like the
present levels is assumed to be necessary. This is the source of
some of the strongest internal criticism of the plan.

If the plan is achieved the United Kingdom will be independent of
dollar aid only in the sense of not requiring further abnormal
loans and grants. It is accepted that after 1952/1953 severe
restrictions on dollar purchases will be continued apparently
indefinitely. In other words, the plan does not hope to establish
by 1952/ 1953 a multilateral trading world of which the United
States is a part. The sterling area will continue to have a
deficiency of dollars in normal trading conditions and those
concerned here see no prospect of offsetting this deficiency with
surpluses with other countries. As you know, this is a phase of
the problem to which, in my opinion, insufficient attention is
being directed. It is one on which little progress can be made
except with the co-operation of the United States and runs into
acute political difficulties.

On the other hand, the United Kingdom plan does assume that trade
and payments for the world, excluding dollar areas, will by
1952/1953 be multilateral in character. The major obstacle to such
multilateralism is the sterling deficiency of the other
participating countries. If this is to be overcome it will be
necessary for France, Holland, etc. to establish surpluses with
countries outside the sterling area and Western Europe with which
they can offset their sterling deficiencies. Possibilities are the
Middle East, Eastern and South-Eastern Europe and Asia. There can
be nothing in the United Kingdom plan to indicate whether the
achievement of this surplus by the other participating countries
is likely or whether the countries concerned are aware of the
necessity for development along these lines. Until the plans of
all O.E.E.C. countries are examined this must remain a major

It is clearly of considerable importance to Australia. The Western
European deficiency with the sterling area includes a large
deficiency with Australia. if these countries are unable to
establish the necessary surpluses, we are likely to be faced with
either a continuance of sterling grants to these countries or an
attempt on their part to bring their trade with the sterling area,
including Australia, into more direct bilateral balance. This may
mean a contraction of their purchases from us, particularly of
wool, and pressure for us to purchase more of their export
commodities. To the extent that they hope to sell more to us they
are likely to find that the U.K. is also planning to sell us
substantially the same classes of goods.

Two major questions for us to look into in more detail are:-

(1) What are the implications for Australia of a prolonged
continuance of restricted trade and payments between the sterling
area and dollar countries?
(2) What are the implications for Australia of a failure to
achieve the multilateralism for the rest of the world which is
assumed by the plan, and, in particular, the effects on Australia
of an attempt by other participating countries to establish a
closer bilateral balance with the sterling area and with us?

Australia and the United Kingdom balance of payments in 1952/1953
In preparing balance of payments estimates United Kingdom
officials have first attempted to estimate their prospective
international income. To do so they have attempted to assess for
their major export commodities the prospects for 1952/1953 on a
market by market basis. In doing so, they have assumed the
continuance of high levels of employment and economic activity and
rising levels of productivity. On the other hand they have made
allowances for the recovery of domestic production in some
countries replacing goods now imported from the United Kingdom and
have probably assessed conservatively the demand for imports
likely to be associated with the higher levels of income.

On the whole this seems to be a reasonable approach. However, it
has produced an estimated volume of exports significantly less
than that which British industry is expected to be able to produce
for export if the market is available. U.K. officials are aware of
this conservative margin but are unwilling to produce too
favourable a picture lest it lead to a relaxation of effort in the
United Kingdom or to some reduction in United States' aid in the
meantime. Furthermore, there are other uncertainties which could
substantially change the picture.

(a) Future price changes.

By direction of the O.E.E.C. prices have been assumed constant at
1948/1949 levels. This would perpetuate what some United Kingdom
officials believe to be unfavourable terms of trade for them, and
that consequently this introduces another conservative element
into their calculations. They are perhaps unduly optimistic on
this point. The 30S with which they tend to make comparisons were
years exceptionally favourable to manufacturing countries in their
exchanges for primary products. Furthermore, the indications are
that there will over the next few years be a substantial increase
in the supplies of manufactured goods. On the other hand
production of foodstuffs and raw materials is unlikely to expand
correspondingly. A radical improvement in the terms of trade for
manufactured goods seems to me improbable. However, some fall in
prices of particular import commodities of great importance to U.

K., e.g. wheat and other grains and possibly wool, is not
unlikely. On the other hand 1948/1949 records exceptionally high
prices for coal and oil, both of which figure prominently in the
anticipated improvement in the U.K. international income.

(b) Coal and oil.

A substantial increase in coal production is planned with a
corresponding increase in coal exports. This increase may be
difficult to achieve.

The greatest increase in international earnings is in invisible
exports for which the sale of British-owned or controlled oil is
largely responsible. This increase depends upon the successful
completion of the vast programme of development being carried out
in the Middle East and in Venezuela by British oil companies.

Supply problems and political difficulties represent the main
obstacles. We have not yet got a clear picture of the oil
situation but hope to get more light during the week. I notice
that the United Kingdom still seem to regard oil as a net dollar
user if expenditure on equipment etc. is included even in
1952/1953, which is puzzling in the light of suggested
developments and their anticipation that the United States win
become increasingly an importer of oil.

(c) Relations with the rest of the sterling area.

The figures for the rest of the sterling area, i.e. colonies and
Dominions, etc., are expected between them to show a balance in
their payments with dollar countries (excluding exports of gold).

This apparently assumes a continuance of severe restrictions
against dollar goods. I have not yet got clearly what assumptions
they are making about our own net dollar usage, but I have
emphasised very strongly that forecasting so long ahead as
1952/1953 is exceedingly speculative.

(i) We ourselves must continue to judge the appropriate degree of
restrictions in the light of our current circumstances;

(ii) Large-scale capital goods requirements might quite easily
throw out the most reasonable of estimates;

(iii) Our balance of payments with dollar countries is dominated
by two or three export items and relatively minor price changes of
these commodities can make nonsense of earlier estimates.

It is hoped that we will obtain more light on the nature of their
assumptions this week, but I think importance of the points I have
raised is recognised. U.K. officials have emphasised that to
complete the task imposed upon them by the O.E.E.C. they must
include some figures covering sterling area position but that they
do not wish this to be taken to indicate any firm expectation that
these will be achieved.

It is assumed that sterling area countries, including Australia,
will buy United Kingdom goods on a scale considerably greater than
in 1947/1948. The figures for Australia are, however, somewhat
less than the current rate of inflow of imports from the United
Kingdom into Australia, and, so far as we have been able to judge
at a quick glance, do not appear unreasonable if we can assume a
continuance of 1948/1949 prices for Australian exports, normal
increases in production, average seasons and a continuance of a
fairly substantial capital inflow. On the other hand, a moderate
fall in export prices would require us to cut imports
significantly below the figures they have in mind. So far we have
not obtained any clarification of the makeup of their figure for
total exports to Australia but hope to be able to get more light
on that this week.

(d) Shipping and tourist income.

The anticipated increases in both shipping and tourist incomes are
substantial, but some United Kingdom officials believe that they
are conservatively estimated. Increase in shipping income depends
upon the completion of the current ship construction programme,
particularly tankers, but, given this, the estimates are probably
conservative for the level of world trade contemplated by the plan
as a whole. Similarly, tourist income has increased in the current
year substantially more than was anticipated and many of the
difficulties which it was thought would prove a barrier to the
inflow of tourists from the United States and other countries are
not proving as acute as was anticipated. Furthermore, a number of
changes affecting consumption controls do appear to be making the
way of the tourist a good deal easier than it was previously.

These two items may represent an additional conservative factor in
the estimates of the international income.

Implications for Australian export industries
Given the estimate of international income from all sources and
the assumption that it will be generally available outside dollar
countries, the completion of the plan requires only the allocation
of this income between alternative sources of supply to the best
advantage. The major problem is of course to allocate expenditure
in such a way as to replace goods at present purchased from the
western hemisphere which cannot be replaced by domestic production
and for which it will not be practicable to pay after American aid
is terminated.

The most striking thing from Australia's point of view is that the
United Kingdom does not anticipate spending more in Australia in
1952/1953 than in 1948/1949. At the same time she is hopeful that
Australia will contribute significantly to the replacement of
basic foodstuffs and raw materials at present obtained from dollar
areas. In particular she seeks more meat, butter, fats, cheese,
sugar, eggs and base metals. We have emphasised how entirely
unsatisfactory this position is from our point of view. It
requires us at considerable capital outlay to develop production
of our staple exports and to sell the increase to the United
Kingdom. On the other hand, this increase is apparently to be at
the expense of other foodstuffs, which would include fruits, wine,
and various processed foods. To keep the total within the amount
set by the balance of payments approach, purchases of these
commodities are expected to fall approximately the same amount as
purchases of basic commodities increase.

It is difficult to know how seriously to take this picture. The
amount is not large-the reduction is 8m. out of a total import
programme of 194m.-and it is clear that the United Kingdom
officials are hopeful that international income has been under-
estimated and that the improvement will enable then to spend more,
particularly on foodstuffs. If their optimism proves justified,
they would almost certainly continue to buy the other foodstuffs
from us and perhaps to increase their purchases. Despite this
possibility, there is obviously a real danger for Australia here,
and I believe that consideration must be given in discussions of
food contracts with the United Kingdom to requiring continued
purchase of such commodities as canned and fresh fruits, wine, and
so on, as a condition of priority of supply of the more basic

Similarly, it seems to me to emphasize the importance of Australia
seeking alternative markets now while demand conditions are
universally good. In discussions with officials we have advanced
the point of view that it was in the United Kingdom's interest to
ensure that we were able to take the present opportunity to
establish our basic foodstuffs in United States and other dollar
markets where the opportunity exists. This for two reasons:

Firstly, at some point general purchasing power in the form of
more dollars might be more important to the United Kingdom than
additional food supplies. Secondly, effective sales to dollar
markets because of their current high prices might prove a more
effective stimulus to increased production than any other possible
measure. It was agreed that United Kingdom officials should give
careful consideration to this question and that we should look
into what would be the minimum diversion of such products as meat,
butter, etc. effectively to test available dollar markets.

Furthermore, it was agreed by United Kingdom officials that the
arguments for permitting diversion from United Kingdom contracts
were particularly strong in the case of markets such as the
Philippines which were natural markets for Australia and perhaps
not subject to the same uncertainties as the United States market

Australian development
(a) In primary industries.

The United Kingdom is anticipating expansion by Australia of the
output of her basic food and raw material industries, but, as I
mentioned above, she is assuming that her increased expenditure on
these items will be offset by reduced expenditure on less
important foodstuffs and other products. This seems on the face of
it an unsatisfactory basis for developmental plans, and it is
difficult to assess how far this general position may be altered
if the United Kingdom estimates for international income prove to
be unduly conservative. On the other hand, discussions here
reinforce my general opinion that the long-term situation for
foodstuffs and raw materials is hopeful. Rising levels of
population, rising expectations about standards of living and new
interest in under-developed countries in economic development,
particularly industrialisation, seem to constitute favourable
market factors for such products. Nonetheless I think we should
avoid considerable expansion in industries where the increased
product is designed solely or predominantly for the United Kingdom
market and where we are aware that alternative sources of supply
at lower cost exist within the dollar area. Whatever the United
Kingdom may say now, I am satisfied that if conditions change so
as to bring these commodities within the area of availability from
a currency point of view, they will be obliged to go back to
purchasing from them. This applies particularly to products such
as sugar and wheat.

My impression is that the United Kingdom is willing to consider
participation in one form or another for developmental projects
directly relating to her needs. So far I have not had detailed
discussions of any possible projects of this kind beyond a
preliminary discussion of developments after the visit of the
United Kingdom Food Mission in relation to cattle industry
development in Northern Australia. Further discussions on the
possible degree and methods of United Kingdom participation in
this enterprise are listed. Similarly, it is expected that we will
hear more from them in relation to developments which they may
wish to see undertaken in aluminium, timber, and generally in
relation to New Guinea.

(b) Manufacturing industries.

I have outlined to the United Kingdom officials in general terms
some of our plans for reducing our own dependence on imports from
United States, including some reference to projects such as the
production of the Australian car, the tractors, agricultural
equipment, newsprint, aluminium, tinplate, and so on. I have
emphasized to them that, while we are approaching this problem on
the basis of a series of projects, it is our general impression
that almost any development of a reasonably economic character in
Australia at the present time would tend to reduce our dollar
requirements or to make possible exports to dollar areas. Any
great expansion of manufacturing industry, however, either of a
concentrated project character or a generally dispersed
development is held back because of limitations imposed by the
coal industry and partly as a result of this in basic materials
industries. I emphasized to them that the greatest direct,
assistance Australia could receive in enabling it to contribute to
a reduction of net dollar expenditure was to expedite the recovery
and expansion of the coal industry. In this I indicated the United
Kingdom could make two definite contributions-
(i) assisting the Joint Coal Board in obtaining equipment for
mechanisation which it had placed in this country;

(ii) speeding up the proposed development by a British Company of
the Blair Athol fields.

In support of this claim I pointed out that Australia can produce
coal more quickly with the use of less labour and more cheaply
than the United Kingdom. There would, therefore, be a net gain in
the expansion of our coal mining industry even if it was at the
expense of the United Kingdom. United Kingdom officials asked
whether, in the event of our plans for the expansion of the coal
industry being implemented, it would possible for us to supply
coal for export. I have cabled for more details on this phase of
the question, but I am certain myself that any assistance we can
get from the United Kingdom in relation to the coal industry can
make a major contribution to the development of our economy

A related question is the long-term position of the iron and steel
industry. It is clear that the United Kingdom is carrying out a
major expansion in this field, but it is equally certain that
their own production of basic steel will be insufficient for their
export markets and the requirements of their steel fabricating
industries. The major redeployment of industry taking place in
this country is an increased concentration on the production of
engineering goods, and it is to this concentration that the United
Kingdom looks to re-establishment of its traditional place in
international trade. They expect to fill the requirements of their
fabricating industries which they cannot meet themselves from
imports of basic steel from Western European countries, and there
are agreements by which the United Kingdom will obtain portion of
these quantities. At the same time some U.K. officials do not seem
entirely happy about this dependence and in any case there seems
to be a practical certainty of a continued world-wide shortage of
basic iron and steel and iron and steel products. While I hope to
look into this question further, it is my firm impression at this
stage that the further development of the Australian iron and
steel industry may well fit in to the United Kingdom's own plans
and also enable Australia to contribute to the solution of a
world-wide economic problem to her own economic advantage. It will
not be possible for me to do anything more than a very preliminary
examination of this question, but if my first impressions are
confirmed, I suggest that this should be a question to which
attention should be given by those adequately equipped technically
both in the government and in industry in Australia.

In outlining in general terms our plans for replacement of dollar
imports and the development of dollar exports, I have emphasized
to the United Kingdom officials that these developments should not
lead them to anticipate necessarily any reduction in our dollar
requirements. These dollar requirements have been cut to a degree
which in our opinion cannot be sustained without detriment to the
economy, and we may in any case have to import more to meet the
requirements of industry.

I think the foregoing sums up general impressions I have built up
so far. I had a telegram from Watt which suggested that one of our
earlier cables had somewhat misled you as to the nature of the
discussions we were having. This misunderstanding arose partly
from some words I myself had used in drawing attention to some of
the difficulties associated with estimates so far ahead as
1952/1953. I am sorry about the misunderstanding, but you may be
sure that there has been no tendency to discuss basic policy
questions already determined or to suggest that we were in any way
willing to modify our insistence on complete independence in the
formulation and execution of our economic policies.

I went over to Paris for a couple of days at Dr. Evatt's request
to talk over the background of the economic questions for the
Prime Ministers' meeting. He seems to be in good form and enjoying
his job as President. He certainly is going to have his hands full
with that, the Prime Ministers' Conference and the Banking case.

The weather here has been splendid-almost as nice as springtime in

[AA: M448, 137]
Last Updated: 11 September 2013
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