26 Report by the Interdepartmental Committee on External Relations

Paper B20 CANBERRA, 20 August 1942

SECRET

[The Interdepartmental Committee on External Relations was formed to coordinate executive action on matters of external economic policy affecting more than one department. It met for the first time on 5 June 1942 and included representatives of the Departments of Commerce, External Affairs, Labour and National Service, Trade and Customs and-the Treasury, together with Professors D. B. Copland and L. F. Giblin. P. M. C. Hasluck of the Department of External Affairs was appointed Executive Secretary, with L. F. Crisp of the Department of Labour and National Service as Associate Secretary.]

AUSTRALIA'S POSITION IN RELATION TO ARTICLE VII OF THE ANGLO- AMERICAN MUTUAL AID AGREEMENT [1]

A. Post-war position without international collaboration 1. Some estimate of post-war prospects without international collaboration must be made as a preliminary to making any judgment on the possible benefits to be obtained from international action in accordance with Article VII of the Mutual Aid Agreement. The successful conclusion of the war would leave us with special problems, both internal and external.

2. There will be an overwhelming public demand after the war for- (a) immediate measures to find employment for members of the Forces and workers in defence industries who will be disemployed when the war ends;

(b) thereafter positive measures whenever necessary to maintain employment at a high level.

3. The measures taken under (a) will tend inevitably to be directed to employment as an end in itself. Even employment on chipping footpaths might be a benefit to the community compared with no employment at all. It is obvious however that, the more productive the employment is, the more goods and services will be available to the community and the higher the standard of living we can maintain. The aim must be therefore with the utmost urgency to shift employment from relatively unproductive fields to those that will give the highest returns per unit of labour.

4. There will be difficulties, practical and political, in making these transfers of labour, which need not here be discussed. We shall certainly go on for a considerable time with our resources not used to best advantage. We shall be maintaining income and spending power for part of the community above the value of its production. If this was offset by taxation or loan from the rest of the community, we could carry on indefinitely, though with a standard of living below the best possible. We must expect however that much of the cost of maintaining employment will be met by monetary expansion. We shall then be trying to maintain a high level of consumption over the whole community, and consequently a high demand for imports. We must then consider whether export income and reserves of London funds will enable us to meet this high demand.

5. The same question of ability to pay for imports will arise whenever, in any future heavy loss of export income, employment is maintained by monetary expansion. In the immediate post-war period, we shall have a further pressure on imports on account of the great mass of spending power, largely in very liquid form, which will be set free when wartime controls are removed.

6. We must therefore now consider the prospects of export income and of London reserves. It is obvious that to maintain employment at anything like the present level would raise consumption greatly above the pre-war period. This implies a corresponding demand for imports. There will be some replacement of old imports by new home production, but this will not greatly affect the position because finished goods have become a comparatively small part of our import requirements. In the pre-war years we were barely able to pay for the imports we required and London funds tended to be low.

We need then a prospect of export income and of London funds appreciably higher than in the pre-war years, if we are to maintain employment in the manner indicated above and at the same time meet our external commitments. This will be true, after allowance is made for reasonable import replacement.

7. So far as can be foreseen at present, Australia's post-war exchange position, without international collaboration, is likely to be somewhat unsatisfactory- (a) London funds will be relatively low.

(b) Export markets may be moderately good for a while, but surpluses accumulated during the war will probably not be immediately marketable. Moreover, Australia is already committed to making gifts to countries devastated by war.

(c) The long-term prospects for export markets are not very good, and markets may be expected to sag after a certain time (differing for various commodities, and depending upon overseas developments).

(d) Hence there will be a tendency for London funds to remain weak.

8. It is then highly probable that the maintenance of employment in Australia in the immediate post-war period will involve acute difficulties in meeting external obligations. Current export income will tend to be insufficient and we shall not have the large reserves necessary to hold the position while adjustments, which would then be unavoidable, are made.

9. These difficulties, moreover, are almost certain to recur after any serious fall in export prices, because- (a) import prices will not fall as quickly as export prices;

(b) it is unlikely that ample overseas reserves will have been built up;

(c) the normal inward movement of capital under these circumstances would probably be small and possibly negative;

assistance in the form of loans from United Kingdom could not be confidently expected, as Britain herself would probably be experiencing exchange difficulties.

10. If the principal countries of the world, and particularly United States of America, adopted consistently and effectively the same policy to maintain employment, the danger of a serious slump in the export market might be much reduced. Without some assurance of this kind, international difficulties over our trade balance must be expected.

11. It will be socially undesirable and politically impossible to meet these difficulties by abandoning the policy of maintaining employment at all costs. In the absence of corresponding policy overseas, possible defences of our international solvency will be- (a) exchange depreciation;

(b) reduction of overseas obligations;

(c) exchange control or import restrictions.

Rationing might be considered a fourth alternative. But no form of rationing would be both politically practicable and effective, which was not in effect import restriction. So it may be grouped with (c).

12. Depreciation is for various reasons unsuitable as a temporary measure, and should be avoided until there is clear evidence that a permanent revaluation of the currency is required. Then the revaluation should be made as boldly and objectively as possible.

13. Reduction of overseas obligations would be a desperate remedy.

As in the case of exchange depreciation, it should be regarded as a long-term measure and not as a convenient escape from temporary difficulties. Adjustment could be safely made only by agreement with our overseas creditors, and would probably require the same kind of prolonged negotiations as were needed to convert Australian loans in London after 1931.

14. It follows that for the short-term difficulty we must examine the possibilities of exchange control and import restrictions.

15. Supervision of capital movements should in any case be maintained after the war. This will involve a supervision of all transactions involving overseas exchange; thus the machinery of the present import and exchange controls will have to be continued after the war. The degree of control exercised may of course be generally nominal.

16. If, then, our employment policy led to pressure on London funds, the import and exchange controls could be used restrictively. Imports might also be checked by higher customs duties. By such measures, imports might be kept down to our ability to pay for them, though it would not be easy. We might, however, be able to continue the policy of maintaining employment with the help of monetary expansion.

17. The restriction of imports necessary under these conditions would, however, involve a very wasteful use of resources. Some waste is almost certain to occur with any large Government action to promote employment (paras 3 and 4 above), but with serious restriction of imports the waste would probably be serious. The imports given up are likely to be replaced by very uneconomic industries, which, on account of the capital involved, will persist and be a lasting drag on the country when active measures are no longer needed to maintain employment.

18. The conclusion is, therefore, that in the absence of effective international collaboration Australia may succeed in maintaining a high level of employment, but at a lower level of average real income-probably a good deal lower-than it would have had, if by international collaboration we had been able to reach the same employment position with a more profitable use of resources.

19. Moreover, while a country in temporary difficulties may reasonably deny itself certain imports because it cannot pay for them, if it seeks to replace those imports by uneconomic home production it is bound to cause resentment in the exporting countries. Retaliation is likely to follow with further adverse effect on our exports, which will have to be met by further restrictions on our part. So we are back into the old spiral of declining international trade, with real income stationary or falling.

B. The possibilities of collaboration 20. It is against the background of paragraphs (1) to (19) that the proposals of Article VII must be considered. Article VII proposes international collaboration- (a) to increase production and employment, consumption and world trade;

(b) to reduce trade barriers and get rid of trade discriminations.

The root of the matter must be the increase in production and employment, from which will flow improved consumption and the extension of international trade, which will further raise consumption standards. The removal of trade barriers should accompany and fortify these movements rather than precede them. It is important then that positive measures to increase productivity should figure largely in any plan to promote world prosperity.

21. Many countries, including Australia, could not risk trade disarmament without a good prospect of a substantial improvement

in world trade, such as would make conditions favourable to the maintenance of employment at a high level. To have such conditions would be a substantial improvement on our prospects without international collaboration (paras 1 to 19). We should then be prepared to risk something to gain that end. We cannot ask for certainties.

22. We want to be able to maintain employment without being forced to restrict imports, and we want an assurance that we shall have sufficient overseas reserves to tide us over any temporary decline in export markets. An absolute guarantee cannot be expected, because that would enable us to raise our standards continuously at the expense of the rest of the world. Some help in maintaining reserves may be provided by the machinery referred to in paragraph 30 below. For the rest, we must look to an expansion of world trade which will enable us to build up overseas reserves, and to international collaboration to maintain employment and reduce depressions to manageable dimensions. If we can see, by either or both of these ways, a good probability of security for our balance of payments, then we should be prepared to pay the price necessary to ensure this international collaboration.

23. It seems clear that there can be no substantial gain without positive action, which must include both internal action in all countries to maintain employment and external help provided by the 'strong' countries for the 'weak'. It is by no means easy to predict which countries will be strong or weak; moreover, a middle group may be distinguished, which can be expected on the whole to do their own reconstruction and will require, in general, protection against fluctuations rather than continuing help.

Australia will probably be in this group.

24. It is fairly certain, however, that the U.S.A. must be the very predominant contributor, at least in the early years after the war; and the main recipients of aid will be, first, those countries which have suffered most severely from the economic effects of invasion and occupation, and then countries which with external help might greatly improve on their pre-war productivity, such as China, India and the countries of the Danube basin.

25. Help from the strong might be given by- (a) Government gifts;

(b) private gifts-e.g. for the education and training of technicians and administrators;

(c) Government loans;

(d) private investment, possibly under Government control or direction.

26. Much will depend on the amount of international investment or gifts which will be made, especially by the U.S.A. in the first period. Contributions on a large scale are probably in the mind of the present administration, but whether U.S.A. will fully support this policy remains to be seen. There is the possibility that the present administration may not be able to get full support from the country when it comes to the practical application of principles. There is the possibility also of a different President and a different administration. Unless America is a full-blooded participant, the results are unlikely to be of great importance.

27. The U.S.A. will probably be willing to go some way in external gifts or loans, if only to find a market for her surplus post-war production. This latter circumstance need not detract from the value of American participation in increasing world trade and productivity, although it may prove an embarrassment to particular countries. If, however, U.S.A. tries to keep up an excess of exports over imports, the scheme must break down unless she lends her exports or gives them away (as in effect suggested by Feis [2]). The question is, therefore, whether the U.S.A. will prefer to raise her real income by an import surplus and submit to the embarrassments of adjusting her excess export production to home consumption, or take the opposite course of avoiding the embarrassments and forgoing the income.

As with Australia, it will be a question of the relative value set on real income in comparison with 'easy' methods of maintaining employment.

28. The vital question is whether the participating countries and U.S.A. in particular are prepared to go far enough in real collaboration to satisfy the general requirements set out in paragraph 22. Such special aspects of collaboration as the loss of preferences in the British market or American dumping of goods competitive with Australia must be merged in the total picture of gains and losses. If the net result is favourable, we should be prepared to put up with the embarrassment of internal adjustments of production. That does not mean that we need give up a long-term policy of industrial development but only that we should carry it- out with the sanity and moderation which are in our own real interests, though they may not accord with the romantic ideals of the Autarkists.

29. The answer to the question of the previous paragraph cannot be given until definite proposals for international collaboration are made and discussed. Australia, with a number of other countries, will stand in some danger of being given the permanent role of hewer of wood and drawer of water to the highly industrialised countries. Any such tendency would wreck the whole scheme and it is important that the interests of these countries should be fully represented at an early stage in the negotiations. In some respects Australia's interests will be with United Kingdom as against U.S.A.; in other respects with other countries against both United Kingdom and U.S.A.

30. If and when the preliminary negotiations show that the participating countries are prepared to go far enough to make the whole plan worthwhile for Australia (in terms of paragraph 22),

then the operating machinery will become of great interest. It will be of importance that this machinery should- (a) give effective representation to countries in the economic position of Australia, which are not great powers;

(b) be subject as little as possible to pressure from producer interests.

31. We may sum up by saying that without international collaboration the post-war prospects for the world are gloomy, and Australia's economic position is such that she will be one of the countries which will suffer most from a condition of chronic world depression. On the other hand, international collaboration offers a fair prospect of escaping these difficulties and embarrassments and taking part in a systematic upward movement of world

prosperity which will benefit no country more than Australia.

There is undoubtedly a large measure of international goodwill towards these ends, which is Steadily accumulating and strengthening. It should be the policy of Australia to do everything possible to bring these aims and aspirations to a successful issue.

C. Some special questions 32. Turning to particular issues raised, it seems that an international clearing bank might serve a useful purpose in cushioning particular countries against the adverse effects of a temporarily adverse balance of payments. The difficulty of securing an objective judgment on overdrafts would be very great indeed. The Bank would have to survey the affairs of participating countries as the Grants Commission surveys those of the Australian States, and make recommendations regarding overdrafts and their renewal based on its conclusions.

33. No close policing of a country's use of the overdraft would be possible. Australia, for example, might be given a standing right to overdraft of a definite amount based on a very general survey, say 30m. If she abused this privilege and did not make a reasonable effort to pay her way, then the privilege could be withdrawn, after Australia had had an opportunity to make her defence. The penalty of withdrawal would probably ensure that there was no serious abuse.

34. Success in stabilising the prices of primary products would be a great achievement and would be an outstanding contribution to international stability. It would, however, require both national and international control of production and of buffer stocks. The difficulties are known only too well. There is no easy solution.

What can safely be said is that the experience of international collaboration in other matters, and an increased authority for international decisions, should make it much more possible to reach agreement also in the field of primary production.

35. The nutrition aspect of an improvement in world conditions may have considerable value in getting support for international collaboration, particularly in America. In many countries nutrition standards cannot be permanently raised except by increased productivity, so that nutrition is one aspect of increased productivity. Nutrition, however, has more colour than productivity or real income and 'the nutrition approach' is more likely to rally popular opinion to Article VII.

36. An international Planning Board has been proposed to give advice to Governments from an international point of view. In the planning of production, trade and finance, such a Board might make a useful contribution. It would have no authority except the moral authority it gradually built up for itself by the wisdom and impartiality of its advice. If its members were of high prestige and it was conducted with tact and discretion, such a Board might in time become an important factor in promoting a better world order.

1 Article VII of the agreement provided that the U.K. and U.S.

Govts should initiate conversations to develop world trade, in particular by the elimination of discrimination and the reduction of tariffs.

2 See the article by Herbert Feis (Economic Adviser to the U.S.

State Department) entitled 'Restoring Trade after the War' in Foreign Affairs, vol. XX, no. 2 (January 1942), pp. 282-92.

[AA:A4144, 11 (1942-43)]