The chancellor invited me to call on him Thursday evening. He
outlined seriousness of present drain on sterling area gold and
dollar reserves and emphasised importance of maintaining reserves
at highest level prior to receipt of Marshall Aid. He also
stressed that Marshall Aid may not cover existing United Kingdom
dollar deficit and almost certainly not total sterling area
deficit and that sterling area reserves must be maintained to meet
acute situation that will arise when Marshall Aid ceases. In view
of this situation he requested that Australia-
(A) Reduce her expenditure in dollar area to absolute essentials
only.

(B) Increase dollar exports to maximum extent possible but not to
divert goods which other sterling area countries would otherwise
be compelled to buy from dollar area.

(C)Draw her full quota of United States dollars from I.M.F.

Cripps stressed that if we do not draw our I.M.F. quota of dollars
now we win lose our rights i.e. our ability to draw is not
cumulative. [1] I asked whether Australia would be assured that
she would retain right to purchase reasonable amounts of dollars
from sterling area central dollar pool. Cripps replied that last
thing the United Kingdom wanted was to pay dollars for Australian
foodstuffs. As long as there was a sterling area dollar reserve
Australia would be entitled to draw reasonable requirements. I
also enquired whether Belgian suggestion for a new Western Union
currency for European trade was likely to be adopted. Cripps
pointed out that Belgium obviously favoured idea because Belgian
monetary area had an export surplus with many European countries
which Belgium wish settled in dollars or gold. As a result of this
it was becoming increasingly impossible for France and Holland to
trade with Belgium.

Cripps nevertheless envisaged three currency blocs-east of Iron
Curtain, Western Union and Western Hemisphere, with Western Union
as part of sterling area. Introduction of a new European currency
is most remote. Most serious and authoritative American thinkers
realise that only practicable world currency is sterling.

Canada after five years of high post war living has been made to
realise by her failure to obtain a loan from United States that
her economic position is un[tenable]. [2] Outflow of capital to
South Africa is causing grave concern to United Kingdom. Only
effective means of stopping this would be to exclude South Africa
from sterling area but this is unthinkable as long as she provides
us with gold.

I mentioned that Australia had noticed a certain redirection as
well as expansion of British exports. Australia realised that
Britain is compelled to offer commodities in world short supply to
Argentine and other countries in return for imports essential to
minimum British standards. In addition it would seem reasonable
that Britain increase her exports to Europe under scheme of
European self-help which is the sine qua non of Marshall Aid.

Naturally Australia is worried lest this observed policy will
result in reduced exports of goods essential to Australia and
which if unobtainable from United Kingdom may have to be obtained
from dollar areas. Cripps replied that apart from textiles it was
impossible for United Kingdom to increase appreciably her exports
to dollar area. If we can stimulate increased production in Europe
this should react to Australia's benefit as well as our own
because United Kingdom regards members of Western Union as
virtually members of sterling area. When I suggested that United
Kingdom membership of a European Customs Union (progress towards
which has been more rapid than we originally believed possible)
would seem to entail a reduction in Imperial preference, Cripps
replied that a European Customs Union would open new markets for
Australia.

I also asked whether Australia would have some guarantee that we
would be permitted to draw on accumulated sterling balances in
advent of a bad season or if increased supplies of world scarce
essentials were available from United Kingdom. Cripps agreed that
we were free to do so.

Fact that Australia has continued to supply United Kingdom with
non ferrous metals for which there is at present a ready market in
America was appreciated by Chancellor. He also stated that if
Australia had any queries about trade or finance policy he would
welcome any approach to him. I believe that present Government in
United Kingdom is and intends to play the game with Australia but
I cannot rule out possibility that at some future date Australia
may be informed that United Kingdom simply has not dollars to sell
us. In view of cable from C.R.O. on United Kingdom export policy
and imperative need of this country to satisfy American public
opinion that she is supporting European self help we shall not
receive from United Kingdom in immediate future the quantity of
world scarce goods we desire. Placing of forward orders is
essential and official assistance may be desirable. Cripps
appreciated our anxiety about scope of Marshall Aid and our
continuing right to draw dollars for our own needs. Whilst Cripps
maintained attitude that Britain although a part of Europe still
had its obligations to other members of sterling area I feel that
United States view will be that this aid is for Europe.

Having in mind the non-discrimination clause in last Loan
Agreement and not yet being in full possession of details as to
how this additional aid is to be administered you will note how
important it is to keep close to this question. Situation here
associated with all movements in Western countries is most
delicate and political considerations are weighing heavily upon
decisions. It is a real struggle for survival economically,
strategically and politically and in a situation of this kind no
one can accurately forecast future events.

It means constant attention on our part and through our
representative (Nimmo) on Sterling Area Statistical Committee plus
acceptance of Cripps's offer to discuss with me at any time events
as they arise. We hope we will be able to keep abreast of
situation.