My dear Prime Minister,

It was with very much pleasure that I received your letters of
April 20th and April 21st. [1] In the former you briefly commented
upon certain points raised in my own letter to yourself, in the
latter you discussed tariff problems and made a most interesting
suggestion for a piece of research on the effect of Australian
Tariff changes upon British trade.

AUSTRALIAN TARIFF POLICY

It is a curious, and I hope a happy chance that your letter asking
me to let you have any views I could put forward on this subject
should have crossed two recent letters of mine in which I have
discussed this matter. I hope they may prove of some value to you.

I am, however, resurveying the whole question and realising from
your letter that the time factor may be important, I shall try to
forward to you by the next mail a fairly comprehensive memorandum
setting out my views.

In looking through my papers on this subject, I find that from
1924 I have given you a number of memoranda, some purely of
ephemeral interest but one or two others which might be useful.

The more important ones are as follows: One entitled 'Protection
and Efficiency' dated 14.10.24, two that I handed you just before
you left London in December 1926 and my letter sent by last mail
on the Julius [2] address. If your young man is still studying
this subject for you, perhaps you might care to refer these papers
to him. [3]

THE AUSTRALIAN TARIFF AND EMPIRE PROPAGANDA

The point I should like to stress in this letter is the serious
effect that Australian tariff tinkering is having on the Imperial
idea in Great Britain. I am enclosing a copy of a letter from Page
Croft [4] which is very pertinent. In questions in the House of
Commons and in the press, there appears a stream of comments
drawing attention to the way in which extreme Australian
protection is handicapping certain British industries. I do all I
can to put the other side and I enclose a letter to the Liverpool
journal of Commerce and another to the Shipping World, as examples
of my counter propaganda. It is, however, extremely difficult to
answer the man who asks why Australia needs a 100% ad valorem duty
against the British manufacturer of, say, hosiery or the cheaper
forms of woollens.

I do not believe that the really efficient Australian manufacturer
of such goods needs any such degree of protection.

Last week, at the invitation of Mr. Pethick-Lawrence [5] (Labour
M.P.), I met five Hosiery Manufacturers from Leicester and
Nottingham and while I was able to put up a pretty good case on
the basis that in spite of everything Australia probably remained
in 1927 the chief market for the exported products of the knitted
goods industries, yet the questions fired at me were difficult in
the extreme.

I feel sure that Australia can, without any material sacrifice,
alter things to her own real advantage and also to a great
improvement of understanding here. However this subject shall be
fully treated next week,
I enclose an interesting and judicial leading article from the
'Times Trade Supplement' which I hope you will find time to read.

AUSTRALIAN TARIFF CHANGES AND BRITISH TRADE

I shall, as soon as possible, start an economic research into the
subject suggested in your letter. I shall try to find out how one
can show that, although the Australian tariffs of 1908, 1914 &

1921 increased duties against Great Britain and detrimentally
affected certain British trades, yet British general trade
constantly expanded. I shall try to get out graphs etc. I may find
that the available information here will not enable me to make a
proper job but if so, I can send you the outline and perhaps you
can have the gaps filled in in Melbourne.

THE WINE DUTIES

Sir Horace Hamilton, Chairman of the Board of Customs, asked me to
call last Thursday. He said that British merchants held about
1,000,000 gallons of Tarragona wines upon which the duty had been
increased from 2/6d. per gallon to 8/- per gallon. They were
protesting that, at the new duty, the losses they would incur
would be ruinous. Hamilton was considering whether he should
advise the Chancellor [6] that the Finance Bill should be amended
to allow a rebate of from 2/- to 3/- per gallon on Tarragonas
actually in bond at the present time but wanted to consult me as
to whether this would have a detrimental effect upon the sale of
Australian wines.

I promised to make some enquiries and Hamilton promised to let me
know if the Chancellor was seriously considering such action, in
order that I might let you know of the probability of such action.

So far I have not been able to get any definite line upon the
possible effect on Australian sales nor have I heard further from
Hamilton.

BRITISH ECONOMIC POLICY

I had a very interesting and encouraging talk with Hamilton about
his possible line of country when he succeeds Chapman [7] at the
Board of Trade. He agreed with me that today no concerted plans
are being made to meet the situation that will arise if the
Treasury, Bankers and Economists happen to be wrong and if
prosperity does not return to British industry. We discussed the
possibility of general Economic staff work at the Board of Trade
and I came away decidedly encouraged.

While on this subject I regret I omitted to enclose the 'Times'
cutting giving details of the changes in the Civil Service. I
enclose it herewith.

AUSTRALIAN LIQUID FUEL SUPPLIES

Last week I received from Gepp [8] a cable pointing out that
Australia pays 12,000,000 annually for imported liquid fuel and
that it is almost entirely from foreign sources and asking me to
discuss with Sir Frank Heath [9], Mr. Tizard [10] F.R.S. and Dr.

Lander [11], the Director of the Fuel Research Board, the question
of what immediate practical steps Australia could take in order to
derive a larger proportion of her oil fuel from her own resources.

On looking into the matter I found that the 12,000,000 statement
was somewhat incorrect, presumably Gepp having taken the retail
price of liquid fuel to Australian users instead of the c.i.f.

price at which the fuel is actually imported. Even so, however,
the drain on Australian resources amounts to 7,000,000.

I had a two hour Conference in Sir Frank Heath's office, and I
think that you would be interested to have a copy of the report
which I have had prepared on this interview. To summarise the
matter briefly the recommendations made were that the most
immediate practical step would be for Australia to import the
whole of her supplies in the form of crude oil. This would reduce
the cost of importations from some 7,000,000 to 3,000,000 and
would involve the establishment of cracking plants in Australia.

These cracking plants would be essential if, at a later stage, the
hydrogenation of Australian brown coal served to procure for
Australia the bulk of her liquid fuel supplies.

Tizard in particular emphasized the strong probability of the
Diesel engine being adapted to land transport problems. He told us
that promising experiments were being carried out on Diesel
engines for aeroplane construction. In the event of the Diesel
type becoming a real factor in motor transport, crude oil could
directly take the place of motor spirit and therefore an
Australian policy of importing crude oil would be a very sound
one.

Apart from this major method, they recommended the expenditure of
a considerable amount of money on discovering the best type of
motor engine to use to produce a gas obtained from charcoal for
motor vehicles in country districts far removed from sources of
liquid fuel. I would rather definitely draw your attention to the
points that I urged in this connection and which are set out on
page 4 of the accompanying memorandum. I would also draw your
attention to the section dealing with the hydrogenation of coal on
pages 6 and 7.

BRITISH TRADE

I enclose copy of a further article which I sent to the 'Times
Trade Supplement' which carries on the story set out in a pamphlet
on 'Where we sell our goods' to the quarter ending March 31st
1927. The graphs illustrating it are interesting and worth your
attention.

Yours sincerely,
F. L. MCDOUGALL
P.S. COLONIAL OFFICE CONFERENCE

I am enclosing a report from today's 'Times' of the official
summary of the proceedings of the Colonial Office Conference. [12]
I would particularly draw your attention to the paragraphs devoted
to transport problems which bear definitely on the section of my
letter dealing with Australian Liquid Fuel supplies and also with
the attached memorandum. I have today been discussing at length
with Walter Elliot [13] the bearing of the Colonial Office
Conference upon the general work of the Empire Marketing Board and
hope to be able to send you an intelligent account of how we view
it by next mail.

F. L. MCD.