283 Memorandum by Coombs

[CANBERRA], 27 September 1943

STABILISATION FUND AND CLEARING UNION REPORT OF DISCUSSION IN WASHINGTON AND LONDON

1. While in Washington and London I took part in talks with United States and United Kingdom Treasury officials on international monetary plans. The following comments set out the main issues involved and the outcome of the talks.

2. Two plans for establishing new international monetary machinery have been advanced. They are the Clearing Union plan which originated with Lord Keynes and has been published by the United Kingdom Treasury and the Stabilisation Fund which is the work of Mr. H. D. White of the United States Treasury.

Objectives of the Plans 3. The two schemes have basically the same objectives.

They are:-

(a) to provide countries during the post-war period with additional international exchange reserves;

(b) to prevent countries introducing, without the consent of an international body, measures such as exchange control or currency depreciation which are detrimental to the economic condition of other countries;

(c) to put pressure on countries to modify their domestic policies where there is a persistent lack of balance between their international receipts and expenditure.

4. As a result of the war many countries will have depleted exchange reserves. Income from exports will be uncertain and the capacity to pay for the level of imports required by internal reconstruction and maintenance of employment will be in doubt.

There are circumstances which, in the absence of concerted international planning, may force some of the major trading countries to protect themselves with restrictive exchange and trade policies, and engage in the kind of economic warfare which leaves little prospect of a stable and prosperous world economic system.

5. Financial policy alone will not avoid these developments. But if the overriding threat of exchange difficulties can be even partially removed, world economic conditions are more likely to be stable and prosperous.

6. Improvements in Australian standards of living still depend to an important extent on our being able to pay for imports: that is to say, on our ability to find growing primary and secondary export markets. Our reserves in London at the end of the war will not be strong. Britain's ability to trade on terms favourable to us is in doubt. Therefore a Clearing Union or Stabilisation Fund which offers to expand international buying power of our oversea markets, and at the same time offers us temporary borrowing facilities, deserves the most careful examination.

Difference between the Plans The Stabilisation Fund proposes that the additional international reserves made available will be obtained from contributions of gold and the local currencies of member countries. The Clearing Union, on the other hand, proposes that these reserves would be provided by the creation of a new international currency, which would be transferred from one account to another in the books of the Union in settlement of payments due by members to each other.

7. In addition to technical differences, there are significant differences in the power to be transferred to the international authority, and in the borrowing rights proposed for Members.

Generally speaking, the Clearing Union would permit more extensive use, by countries experiencing exchange difficulties, of measures such as exchange and import control and currency depreciation. The Clearing Union also would appear to be more expansive in its effect on world economic activity than the Stabilisation Fund.

Weaknesses of the Plans 8. Both plans offer potential advantages to Australia. But since membership involves the surrender by us of some of our rights, for example to depreciate our exchange rate by independent decision, we should have to consider membership cautiously for these important reasons:-

(a) Neither plan takes adequately into account the influence which the level of employment and economic activity in major economic countries has upon world trade and the economic position of dependent economies such as Australia. A depression in the United States or the United Kingdom will cause falling markets and exchange difficulties in Australia and other dependent economies, irrespective of any assistance provided by either the Stabilisation Fund or the Clearing Union.

(b) Both plans have effective means for exerting pressure on countries which are unable to meet their international expenditure from their current receipts, but neither imposes a serious pressure on those countries whose balances persistently tend to be in credit. It is obvious that if, for example, the United States persistently sells abroad more than she buys and as a result accumulates gold or foreign exchange, other countries will be forced into the position of being unable to meet their current international expenditure. If Australia were one of these countries she might be subjected to pressure to reduce her standards of living or to follow a deflationary policy because of a refusal by the United States or other major economic country to expand their international purchases to the level of current income.

(c) Whether the Fund or the Union were adopted, the international organisation set up would be dominated by representatives of economically powerful countries, who would be likely to take a conservative and creditor view of international financial problems and be inclined to force any necessary adjustments on to dependent economies rather than modify their own internal policy.

United States Views 9. In the discussions with the officials of the United States Treasury we emphasised both the respects in which the Stabilisation Fund was more restrictive than the Clearing Union and also the basic deficiencies of both plans. In reply they emphasised there was considerable opposition in Congress to any measures tending to increase United States responsibility in international economic affairs, particularly if the action could be interpreted as financial assistance to other countries. They emphasised that there was no chance of persuading Congress to accept a plan based upon a Clearing Union. They regarded the following four points as essential to any plan if it were to have a chance of being accepted by the United States Congress:

(a) the scheme must be contributory in character;

(b) the share of the countries in the control of the organisation must be related to the size of their contributions;

(c) the exchange rates between major currencies must be fixed before the Fund is established and variations in these rates made possible only with a substantial agreement from countries other than that desiring to alter its own exchange rate;

(d) there should be a definite limit to the financial obligations of the United States to the organisation.

10. Furthermore, they stated that, while they were sympathetic with our views that a high level of employment in the United States was essential to post-war stability, they believed that any attempt to write into the scheme obligations to maintain employment, or to avoid accumulating international balances, would render it politically suspect to Congress and therefore unacceptable. They pointed out also that any provision for increasing pressure on countries with persistent credit balances could be in the form only of requiring additional contributions or loans by the country concerned to the Fund. This would conflict with their fourth requirement that there should be a definite limit to United States financial obligations to the Fund. While they agreed that the control of the Fund would tend to be in the hands of representatives of the major countries, they believed that the Fund would in fact operate in a way which would tend to stimulate rather than depress economic activity.

United Kingdom Views 11. The United Kingdom officials with whom I discussed these plans appear to have accepted the view that agreement can only be reached by accepting the Stabilisation Fund plan, at least as a basis. I understood from Keynes that he would be prepared to seek a compromise of this kind. In his view the real difficulty would not be to obtain agreement between him and White, but to get a satisfactory scheme accepted in the face of opposition in the United States from banking interests and Congress.

12. The British would desire to see the Stabilisation Fund amended in the following respects:-

(a) That, while countries should contribute to the Fund in gold and their own currencies, they should be credited with balances in Unitas which would be transferred from one country to another in bringing about a balance in their international payments. This insistence on the establishment of an international currency is, I believe, based upon the hope that at some future date it will be possible for the Stabilisation Fund itself to become a credit- creating agency and so operate more expansively.

(b) That greater freedom should be given to countries to vary their own exchange rates at least within narrow limits. A possible variation of 5% is acceptable to the United States but the United Kingdom officials, I understand, consider 10% a minimum. Neither figure would be of much value to Australia, where small variations in the exchange rate have little effect on our international balance of payments, but where a major adjustment to the exchange rate is perhaps the most effective method of meeting a long-term change in the relative prices of our exports and imports.

(c) That there should be provision for more effective pressure on countries with persistent credit balances. It is difficult to work out methods by which this pressure may be exerted which do not involve increasing contributions or loans by the United States to the Fund.

(d) That there should be written into the plan a direction to the Executive of the Fund that in periods of declining economic activity their operations should be conducted in a way likely to check the spread of depression and to restore world employment and incomes.

Conclusion 13. It is probable that any common plan agreed upon by United Kingdom and United States officials and subsequently presented for discussion by other nations will contain the basic features of the present Stabilisation Fund proposal. While the amendments sought by the British would improve the Stabilisation Fund, it would still from the Australian point of view be open to the following criticisms:-

(a) the additional foreign exchange reserves which it will make available to Australia are unlikely to be adequate for her possible needs;

(b) it may require Australia to accept, as a condition of using overdraft facilities, advice and pressure concerning her domestic economic policy from an international body on which her representation is negligible;

(c) it calls for a serious sacrifice of economic freedom to vary her own exchange rate, and to impose exchange controls;

(d) it offers no assurance that the major economic countries of the world will maintain a high level of employment and incomes and avoid the accumulation of persistent credit balances. Only confidence in these conditions would justify Australia continuing to accept these limitations to her freedom of action.

14. On the other hand, in a world of generally high employment the existence of a Stabilisation Fund liberally operated would do much to ease the burden of year to year fluctuations in our balance of payments and promote more stable economic conditions within Australia, and in the world generally. Furthermore, if agreement is reached concerning the establishment of the Fund between a large number of countries, it might be politically unwise for Australia to refuse to participate.

15. I feel that firstly, we should continue to stress the fundamental importance of full employment policies by major countries, and seek, as part of general economic collaboration, international machinery for the recording of employment and for regular consultation between nations on domestic policy affecting employment.

16. Secondly, since the Fund cannot give Australia certain protection against exchange difficulties we should leave the way open for withdrawal. For instance, it may be necessary to resume our freedom of action if the Fund fails to permit us to protect the balance of payments and thereby maintain our employment policies, when it is clear that our exchange difficulties are caused by the failure of major economic powers to maintain economic activity. We would be wise to have our position clearly understood on entry so that if withdrawal became necessary, we could justify the action and avoid stigma of default on obligations.

17. We should continue to press for modifications which will meet in other ways the basic criticisms outlined in paragraph 13 above.

We can hope for some concessions to our point of view, which in important respects will be supported by the United Kingdom.

Therefore I believe we should continue to play an active part in future discussions.

H. C. COOMBS

[AA:A989, 43/735/56/3]