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49 Wheeler to Dedman

Memorandum [CANBERRA], 17 August 1949


In response to your request, I am attaching copy of some notes
setting out reasons why it would be to Australia's disadvantage to
withdraw from the Sterling Area dollar pool.

You will see that in the notes the flexibility of Australia's
arrangements with the United Kingdom on dollar drawings is
contrasted with the more rigid quota arrangements between the
United Kingdom and certain other sterling countries. India and
Burma are quoted as examples.

You will, no doubt, have seen the recent reports of new agreements
between the United Kingdom and India and Pakistan. Detailed
official advice of the contents of these agreements has not yet
reached us. It seems, however, that the quota limitations on
India's and Pakistan's hard currency drawings have been removed
and have been replaced by undertakings to cut imports in
accordance with the London Conference decisions.

This is a point you may wish to have in mind in any discussion
which may take place in Cabinet. It does not, however, materially
affect the validity of the general argument developed in the
attached notes.

No reports of any new agreement with Burma have come under notice
as yet.



9. The main considerations which make it advantageous for
Australia to continue membership of the Sterling Area and to
participate in Sterling Area pooling arrangements are:-

(a) Australia's large sterling holdings.

Australia's 'London funds' (or sterling balances held in London)
now stand at well over A.400m. Apart from a small gold reserve
totalling about A.27m. these sterling balances represent
virtually the whole of Australia's external reserves.

While existing Sterling Area pooling arrangements continue these
reserves can, if necessary, be drawn upon to meet Australia's
commitments not only in the United Kingdom and other parts of the
Sterling Area, but also in any other country in the world. (The
1947 'gentleman's agreement' not to draw on sterling balances held
at 30th June, 1947 )A.156m.) to meet current commitments does not
significantly affect the position since the substantial balances
accumulated since that date may be freely drawn against.)
Withdrawal by Australia from the Sterling Area dollar pool would
automatically convert Australia's sterling balances into blocked
balances available only for payments to Sterling countries, except
with the express permission of the United Kingdom authorities.

Such permission might be forthcoming for payments to 'easy'
currency non-sterling countries but could not be expected where
'hard' currency payments were involved.

Put more generally, Australia has the strongest interest in
supporting sterling and assisting in restoring its convertibility,
if only as a means of protecting the value of her own sterling

(b) Australia's Dollar Deficit.

Because of the pattern of Australia's overseas trade and payments,
Australia normally has a deficit on current account with the
Dollar Area. This was the position before the 1939/45 War. During
the war years when Australia was receiving war supplies under
Lend-Lease and large numbers of American troops were stationed in
Australia, dollar receipts temporarily exceeded dollar
expenditure. Since the war, however, the traditional pattern has
been resumed. Despite restrictions on dollar imports, Australia's
dollar deficits have in fact been substantially larger than before
the war. The main reasons for the larger dollar deficits are that
North America has been the only source of supply for many
categories of essential imports and that the general level of
commodity prices has been much higher than before the war.

The estimates of Australia's net dollar deficits (after allowing
for sales of gold) prewar and since the war ended are shown below:

A.m. $m.

1936/37-1938/39 9.2 35.9
(three years average)
1946/47 16.9 54.4
1947/48 51.2 164.8
1948/49 (provisional) 23 73

Australia has been able to finance these deficits because, under
the Sterling Area pooling system, she has been able to purchase
the necessary dollars from the U.K. against payment in sterling.

Without the pooling system imports from dollar countries would
have had to be cut to a level which could be financed from
Australia's own dollar resources. This would have required much
more drastic restrictions on imports of essential equipment and
raw materials from the Dollar Area, the effects of which would
inevitably have been felt throughout the whole field of industrial
activity in Australia.

It has, on occasion, been suggested that Australia would fare
better outside the pool if action were taken to divert Australian
exports away from the United Kingdom and other sterling countries
in order to increase Australia's direct dollar earnings by
increased sales in dollar markets.

In practice, such a policy would almost certainly react to
Australia's detriment. It would mean sacrificing secure, long-term
markets in the United Kingdom and other British Commonwealth
countries with which Australia has traditionally close economic
relationships to take advantage of market opportunities in the
dollar countries which may well prove temporary or at least
extremely unstable. The possibilities of diversion are, in any
case, limited and, even if such a policy were pushed to the limit,
it is unlikely that Australia would cam enough dollars to finance
the level of dollar imports she is at present able to obtain
within the framework of the pooling system.

The decisive argument against the adoption of such a policy is,
however, that it would prove a two-edged weapon. Australia could
not expect to continue to draw on the United Kingdom and other
sterling countries to meet her essential requirements of goods in
short supply if she were unwilling to reciprocate. The exchange of
dollar-saving commodities is an essential feature of the Sterling
Area partnership and, if Australia withdrew from the partnership
the losses in this direction might well outweigh any possible

The further suggestion sometimes made that Australia could earn
more dollars by requiring countries outside the Dollar Area to pay
wholly or in part in U.S. dollars for any short supply goods
supplied to them by Australia is open to similar objections. If
Australia were to adopt such a policy, the countries concerned
would certainly require Australia to pay U.S. dollars for any
essential goods which they supplied to Australia.

Putting aside proposals of this kind, a more general consideration
to be home in mind is that, if Australia were to sever her
connection with the Sterling Area dollar pool, an effort would
have to be made to keep immediate dollar expenditure below the
level of current dollar receipts in order to build up a dollar
reserve to cushion fluctuations in dollar earnings. The size of
Australia's dollar deficit has varied widely from year to year,
partly because of changes in the value of dollar imports, but
primarily because earnings from exports of wool (Australia's main
dollar earner) to the United States are extremely unstable. The
volume of American wool purchased over the years has proved very
sensitive to changes in general business conditions in the United
States and wool prices have also been subject to wide variations.

Similar fluctuations must be expected in future and, in a bad
year, dollar earnings could fall to such a low level that, in the
absence of adequate reserves, import cuts of intolerable severity
would have to be imposed.

10. The Sterling Area pooling system can continue to operate only
so long as sufficient funds are available in central gold and
dollar reserve to meet the demands made upon it. The current drain
on the reserve, therefore, represents a serious threat to the
continuation of the pool and calls for immediate action by all
partners in the arrangement.

11. The value of the pool and of the close economic association of
its members was, however, recognised at the London Conference by
surplus and deficit countries alike. An attempt by each member to
operate independently and maintain its own reserve would disrupt
the wide multilateral trading system based on sterling and
represent a retrograde step towards narrow bilateralism with a
lowering of trade levels all round. While the United Kingdom
continues to act as the central banker, the Sterling Area can
operate with a lower level of reserves than would be possible if
each country had to work on a reserve of its own.

12. Australia's interests are clear. So long as the pool can be
made to work it is to Australia's advantage to remain a member and
to share both in its benefits and in the responsibilities which
membership entails. This implies not merely co-operation in the
immediate action required to check the drain on reserves but also
in the longerterm measures needed to achieve equilibrium and build
up the central reserves to a level which will enable sterling to
be made once again freely convertible into any currency.

13. Restoration of the widest possible multilateral trading system
based on sterling offers the best hope of promoting economic
development and higher standards of living throughout the world.

There can be no doubt that such a system is also the best adapted
to meet Australia's own economic and financial interests.


[AA: A9790, 511, X]
Last Updated: 11 September 2013
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