REPORT ON LONDON DISCUSSIONS ON ARTICLE VII FEBRUARY-MARCH 1944
1. The discussions in London between United Kingdom, Dominion and Indian Officials from 23rd February to 21st March, 1944 followed on previous discussions between U.K. and the Dominions and U.K.
and U.S.A. They arose out of Article VII of the Mutual Aid Agreement which provided for agreed action directed towards the expansion of production, employment and consumption, the reduction of trade barriers and the elimination of all forms of discriminatory treatment in international commerce.
2. In order to consider at the official. level what action seemed necessary and desirable to give effect to this undertaking, the discussions covered- 1. Monetary Policy.
2. International Investment.
3. Commercial Policy.
4. Commodity Policy.
5. Cartel Policy.
3. The results of the discussions are summarised in the attached document, A.S.D.(44)16.  It seems necessary for me here to refer only to some general aspects of the proposals and to draw attention to matters particularly concerning Australia.
4. It is important to view these discussions against the background of the difficulties the United Kingdom will face in the post-war years. Even before the war the United Kingdom was drawing upon its overseas investments to maintain the necessary level of imports. During the war the United Kingdom has disposed of a major part of its overseas investments. Its income from shipping and other services is expected to be seriously reduced. Moreover, public opinion and Government policy are both directed to the maintenance of a high level of employment which will result in an increase in imports. For all these reasons it is generally assumed in current discussions that Britain faces the gigantic task of increasing its exports by 50 per cent as compared with pre-war before it can attain a state of balance in its international payments. It must do this too in face of increasing industrialisation in overseas countries stimulated by war and the difficulties of supplies and shipping.
5. The extreme difficulty of this task has led to a sharp division of views in the United Kingdom as to the best methods of setting about it. On the one hand are those who hold that in the long run it can best be done by world-wide agreements for the creation of conditions under which trade could move freely over the whole world unhampered by high tariffs, quantitative restrictions, instability of exchange rates or restrictive currency practices.
Broadly this was the aim of Article VII It is being pressed by U.S.A. officials and was reflected in the proposals that we discussed in London.
6. On the other hand are those who hold that if a solution of Britain's difficulties by these means is possible at all it will be in a very distant future, and they are reluctant to make detailed plans now that will be binding so far ahead. They claim that no-one knows what the world will be like when the time comes for the plans to be put into force and plans made now might prove quite unsuitable. It is absurd too, they say, to make plans for this distant future until we know what we are going to do in the vital period immediately after the war and the energy and time currently devoted to planning for a problematical future are distracting attention from an urgent problem.
7. This group believes that to enter into agreements now with the United States that seem to promise freely moving trade over the whole world within a few years of the end of the war can lead only to unfortunate misunderstandings that will threaten harmonious relationships between the two great English-speaking nations. It is much better, they say, to put our position frankly before the people of the United States than to try to deceive them with fair promises that we cannot fulfil.
8. Moreover they argue that while the Government and people of the United Kingdom are prepared to take whatever action is necessary to maintain a high level of employment the Government and the people of the U.S.A. have not yet reached this stage. Booms and depressions must therefore be expected to continue in the U.S.A.
and, if the United Kingdom enters into close trading and financial relationships with her, plans to maintain employment in the United Kingdom cannot be successful.
9. They argue, therefore, for a regional solution of the problem that will aim eventually at a world solution but not until all countries have reached agreement on the fundamental policies of full employment and methods of removing disequilibria in balances of trade. To try to include in one comprehensive plan countries whose economic philosophies are fundamentally different is to court disaster.
10. They would aim to start this regional plan with the sterling area as a basis but any country could join which gave satisfactory assurances that it would:
(1) within its borders avoid large-scale depressions, (2) keep its accounts with other members substantially balanced, (3) seek to remove any disequilibria by policies of expansion rather than contraction.
11. The adherents of this second group do not attach as much importance to the lowering of tariff barriers as the first group and do not believe that the troubles of the world during the inter-war period were clue mainly to isolationist policies. They believe that the failure of important industrial countries to maintain employment was the root of the troubles, and policies of self-sufficiency sprang from desperate efforts by countries to avoid importing unemployment originating elsewhere. They accept the classical belief in the advantages of the international division of labour and would welcome trends towards lower tariffs.
However, they do not believe the lowering of tariffs of sufficient importance to be elevated to a fundamental principle and would hope that the lowering of tariffs would naturally follow the maintenance of employment.
12. The first group which advocates a world-wide lowering of trade barriers is at present dominant in the formation of policy in the United Kingdom. This group includes those who see a satisfactory solution for Great Britain's post-war problems in these proposals and also some who are doubtful about them but nevertheless see tactical advantages in making an offer to the United States along these lines.
13. The latter believe that we have entered into a deep commitment with the U.S.A. by signing the Mutual Aid Agreement and that the development of any regional long-term plan would provoke great hostility in the U.S.A. and lead to a bitter trade war.
14. The former agree that for a few years after the end of the war we shall perforce have to follow to some extent policies in many ways similar to regional planning, but they hope the United Kingdom will soon be able to discard them and must enter into a long-term commitment to do so to preserve friendly relations with the U.S.A. during the transitional period. They maintain that we need a pattern of international good behaviour which countries will agree to observe in the near future. The existence of this pattern will, they believe, influence transitional arrangements and prevent the use of extreme measures which might be difficult to remove later. They agree that the U.S.A. is not likely to avoid another depression but believe they have provided safeguards in the plans to prevent this spreading to other countries.
15. I have stated this division of opinion at some length because it extends through all sections of opinion in the United Kingdom.
It is to be found in the Cabinet, amongst officials and is widespread in industrial circles and amongst the public interested in these problems. The United Kingdom will, of course, decide for herself what is in her own interests but Australia may be vitally affected by the decision.
16. It is important, therefore, that this division of opinion should be understood in Australia. Should Australia find the proposed international agreements too onerous there is no doubt that a stand for greater freedom within a regional group planned by Great Britain on the lines sketched above would find influential support. Australia would need to consider, however, to what extent such a policy would be consistent with our signature of the Mutual Aid Agreement and also possible dangers to us in the regional approach.
17. For the present it seems to me best that Australia should continue the careful study and discussion of the plans that have so far been put forward to determine to what extent and with what modifications we could accept them. We should turn to the alternative only if we feel that as modified the present plans do not meet our needs, and that we can face with equanimity the possible dangers in the regional approach. This procedure has the advantage of enabling us to wait and see whether other countries are prepared to accept the plans. It may well happen that they will be found so generally unacceptable that they will come to nothing. This is a view widely held in London and Washington. In that event we should avoid whatever discredit attached to being the first to bring about their collapse.
18. The danger of plans of this kind gaining a certain momentum the more they are discussed must, however, be appreciated. If they are really unacceptable to us we may find, if we delay making a stand, that we have left it until too late. There is a further danger that unless we make our attitude on all subjects clear at an early stage we will be misinterpreted in our approach to the raising of living standards and maintaining high levels of employment. I found some difficulty in putting the 'positive' aspects of Article VII before the 'negative' aspects. This led to some suspicion that we were stressing the positive side to evade other obligations. This is due, I believe, largely to the central position given by the U.K. to commercial policy proposals.
19. In what follows I shall consider the plans purely as they affect Australia apart from the fundamental division of opinion in the United Kingdom. It must be remembered that our interests in these plans on certain vital issues are opposed to those of the United Kingdom and the U.S.A. On a short view it would suit the United Kingdom and the U.S.A. to prevent the development and diversification of secondary industries in under-industrialised countries. We on the other hand must be able to develop our secondary industries if we are to increase our population and justify our claim to develop our sparsely populated continent in our own way. It is in our interests, too, that over-populated Asiatic countries should develop their secondary industries as rapidly as possible. We must therefore study the plans carefully to see that nothing in them would prevent these developments.
20. In many ways we need more freedom to handle our affairs in such a way as to avoid unemployment and distress than other more stable countries require. We are dependent for our export income upon a narrow range of staple products which are subject to great fluctuations in price and varying seasonal conditions. We must therefore examine the plans to see whether they leave us sufficient freedom to cope with the problems set by these fluctuations. On the other hand, the United Kingdom and the U.S.A.
will want to leave us as little freedom as possible, partly because what they concede to us they will have to concede to other countries also. The smaller the funds they make available, and the less freedom they allow countries to impose restrictions on imports or to vary exchange rates, the more control over them they will have and the less their own trade can be disrupted without their agreement.
21. It should be said that it is not to our interests either that other countries should have large funds at their disposal or be able to vary their exchange rates or to impose restrictions on imports for insufficient reasons. But this may be a less evil to us than to allow ourselves to be too circumscribed.
MONETARY FUND 22. The Monetary Fund would- (1) provide member countries with working balances of international Funds, (2) prevent members from varying the value of their currency by more than 10% of the initial value without the approval of the Fund, (3) prevent members from imposing restrictions on payments other than of capital without the approval of the Fund, (4) put pressure on countries to correct maladjustments in their balance of payments but by means which would not be destructive of national or international prosperity.
23. It is clearly desirable that countries whose exchange reserves have been depleted during the war should have working balances which would enable them to start trading again as freely as possible. It is also desirable that countries should be debarred from depreciating their currencies for restrictive purposes or using other restrictive monetary measures.
24. At our request the preamble and purposes of the Fund were recast to make it clear that the pressure put on a country to correct a maladjustment in its balance of payments will not prevent it from following a policy of expansion intended to maintain a high level of employment. The increase in certain quotas for which we asked would give Australia a working, balance of 75,000,000 sterling which should be just sufficient, particularly if, as seems probable, we shall be able to use part of our sterling resources to supplement our quota. If the U.S.A.
will accept these modifications, the Monetary Fund, apart from the transitional arrangements, should meet Australia's needs except, perhaps, on two points.
25. The two points on which the Monetary Fund seems to me to fall short of Australia's needs are- (1) the limitation of annual drawings to 25% of the quota or for Australia 19,000,000 sterling, (2) the limitation of the unilateral right to vary our exchange rate to 10% of the initial value.
26. The limitation of our annual drawing to 19,000,000 is likely to be very embarrassing in view of the large fluctuations to which our overseas funds are subjected by the unstable nature of the prices and volume of our exports. We could draw more than 19,000,000 in any one year but only with the permission of the Fund. It would, I believe, be undesirable for the Fund's supervision of our affairs to extend to fluctuations which we must expect to recur from time to time. In this respect our difficulties are greater than those of most of the countries taking part in the London discussions because we have no assurance that we shall have any freely available working balances apart from our quota, whereas most of them have substantial reserves of gold which they could use to reduce the extent to which they would have to lean on the Fund. I believe, therefore, that Australia should continue to press for an increase in the annual drawing to 33% of the quota, at least for those countries whose gold reserves at the commencement of the Fund are low.
27. The limitation of our right to vary our exchange rate is more controversial. In the course of the discussions in London, my conviction has grown that it would be imprudent for Australia to surrender this liberty to an international body. The reasons for which Australia might want to depreciate her currency in an emergency are not well understood or sympathetically received in highly industrialised countries whose problems are very different from ours.
28. The Fund provides three safeguards:
(1) An answer must be given by the Fund within two days to any request from a country for a depreciation of its currency in excess of 10% of its initial value and up to 20%. It is argued, particularly by Lord Keynes, that because of the brief time allowed there is a strong presumption that the Fund must give an affirmative answer. After hearing all the arguments in favour of this viewpoint, I remain unconvinced that there is any such presumption.
(2) The Fund must permit a depreciation to correct any fundamental disequilibrium. The discussions in London, however, seem to me to suggest that the Fund would have no difficulty in deciding, in the circumstances in which Australia might ask for a depreciation, that that was not an appropriate remedy for her difficulties.
(3) We can withdraw from the Fund without notice. But withdrawal from the Fund might require withdrawal from all other international bodies and impose intolerable burdens on us. Until we have seen all the proposals in their final form, it would be dangerous for us to attach any value to this safeguard.
29. At the London discussions I suggested that countries whose export price levels had fallen more than their import price levels should be given greater freedom to vary their exchange rates. I did not finally make a reservation to this effect, partly because of differences between officials, and partly because I felt it might be possible to find some better alternative. Unless, however, a satisfactory alternative can be. found I am strongly of the opinion that Australia should press for this freedom.
32. The Monetary Fund is not intended to provide countries with funds to finance rehabilitation and reconstruction during the transitional period between war and peace. Accumulating deficiencies during this period are likely to be so large as to be outside the scope of the Fund. If an attempt were made by the Fund to handle these problems its future usefulness and strength would be impaired. The United Kingdom may therefore propose that quotas should not be available during this period but that countries should accept the obligations imposed by the Fund to vary their exchange rates only in accordance with the provisions of the Fund.
Unless suitable alternative arrangements can be made for international lending during this transitional period, it seems to me doubtful whether Governments would be prepared to accept, as from the date of the Fund's establishment, the obligation to seek the Fund's approval of variations in their exchange rates. I believe that Australia should therefore press for the simultaneous commencement of obligations and benefits under the Fund.
33. No limit is set to the transitional period but the draft suggests that the period the signatories will have in mind is three years. Critics of the Fund contend that this is misleading and will lead to unfortunate misunderstandings. They believe there is no prospect of Great Britain overcoming her post-war difficulties so soon.
A UNITED NATIONS INVESTMENT BANK 34. The American proposals to establish an Investment Bank  were examined but were found to be unsatisfactory. Certain general principles were suggested by the Conference for further discussions with the U.S.A.
35. The absence of some satisfactory provision for international lending during the transition period leaves a vital gap in the proposals so far put forward. The U.K. recognises the existence of this gap and intends to raise it with U.S. officials but Australia should, I believe, press for a satisfactory solution of this problem before accepting other commitments.
COMMERCIAL POLICY 36. The discussions on Commercial Policy raised some of the most controversial issues of the Conference. The proposals as they now stand would require countries to make a graduated cut in their tariffs. No final figures are given, but the cut suggested was 50 per cent with 5 per cent ad valorem added back. A tariff ceiling of perhaps 25% might be imposed later. British preferential rates are not to be reduced except where the cut of the general rate would bring it to within less than 5 per cent of the British preferential rate. In that case the British preferential rate may be lowered to preserve a margin of 5 per cent ad valorem. No duty need be reduced below 10 per cent. Subsidies could be used to supplement tariffs where more protection was required than provided by the formula. Moderate tariffs would be permitted for new industries subject to a time limit and could be supplemented by subsidies. Quantitative restrictions on imports would be banned except for balance of payments purposes. Two price systems (i.e., one price for local sales and another for exports) would also be banned but direct subsidies to production could be substituted for them.
37. Before it is possible to decide whether or not Australia could accept these proposals decisions are necessary on the following points:-
(1) What reductions in tariffs and preferences is Australia prepared to make and how soon? (2) Can subsidies be used in place of tariffs to give any protection considered necessary for existing or new industries? (3) Would Australia be prepared to face the cut in preferences involved in the proposals? (4) Can we replace the two price system for commodities such as butter, sugar and dried fruits by subsidies? (5) Are we prepared to give up the use of quantitative restriction of imports except for balance of payments reasons? (6) Are the proposals for the use of quantitative restrictions on imports on balance of payments grounds satisfactory? 38. There will also be difficult technical problems to be solved but they will affect many countries even more than they will Australia and we need not therefore hesitate to accept the proposals in principle because of them. If the technical difficulties cannot be overcome the proposals will not come into force and we will have no problems to solve.
39. The question of using subsidies in place of tariffs and two price systems and the acceptance of reduced preferential margins will raise difficult political, fiscal and administrative problems.
40. At the London discussions our attitude was generally critical, but we avoided defining Australia's attitude on these issues. It will become increasingly difficult to temporize in this way and it is therefore urgently necessary for a detailed investigation to be made of the effects (as far as possible in quantitative terms) of the latest proposals on Australian industries, employment and overseas trade. This investigation would need to include a detailed examination of the extent to which subsidies can be used as an alternative form of protection in order to offset all or part of the effects of tariff cuts or the prohibition of the two price system or to enable us to establish new industries. It must be emphasised that the subsidy safety valve is an integral part of the commercial policy proposals and is intended to be used in this way.
COMMODITY POLICY 45. The commodity policy discussions are proceeding satisfactorily from Australia's point of view and there is little that it seems necessary to say. The two central issues are the form and membership of the controlling authorities and whether buffer stock schemes are in certain instances to be supplemented by regulation schemes either of exports or production. At the London discussions we argued against any central authorities being given power to direct the individual commodity controls and urged that, while agreements were being negotiated, Governments should be consulted at all stages. This was accepted by the Conference.
CARTEL POLICY 47. The discussions on cartel policy were not very fruitful. It seems clear that the United Kingdom is nervous lest commodity arrangements should force up the price of the goods she buys while Government control of cartels might reduce the price of the goods she sells. The U.S.A. and the British Dominions are anxious that some measures to control cartel policy should be evolved but no very clear ideas were forthcoming at the Conference.
EMPLOYMENT POLICY 50. We emphasised from the outset of the Conference that we regarded some international undertaking that countries would adopt domestic policies aiming at the maintenance of a high level of employment within their borders as both valuable in itself and as a basic prerequisite for the conclusion of satisfactory plans on currency and commercial policy. We also argued that, without appropriate domestic measures, the international proposals were not likely to achieve their objectives. After some inital reluctance by the United Kingdom officials and by other Dominions, the United Kingdom officials wholeheartedly accepted our proposals  and the other Dominions fell into line.
51. The United Kingdom delegates were not prepared to ask Governments to submit to the judgment of an international tribunal upon the efficacy of their employment policies or to enforce sanctions if the obligation to maintain employment is not fulfilled. They consider that opinion has not yet developed sufficiently for this.
52. The acceptance by the United Kingdom officials of our proposals marks a big step forward and the amended draft agreement  seems to me to be satisfactory. In addition to accepting the draft agreement, the United Kingdom officials quite spontaneously inserted in reports on other subjects paragraphs which emphasised the central position of the employment objective and agreement.
53. If this agreement is accepted by the U.S.A. it will, I believe, do much to ensure that Governments will take the steps necessary to maintain a high level of employment and will help greatly to mobilise public opinion in all countries in favour of the necessary domestic policies. It does not however ensure that high levels of employment will in fact be maintained. In the United Kingdom a high level of employment is the declared policy of the Government and much thinking and planning is being clone at the official level to secure this objective. I have some doubts, however, whether the plans are sufficiently comprehensive and still more doubts about the extent and speed with which they are likely to be translated into action by the Government. There is, I believe, a tendency for the plans to be prepared upon too narrow a front. Under Lord Keynes' guidance, officials are concentrating mainly upon monetary measures and protective clauses in international agreements supplemented by plans for public works expenditure and certain measures in the sphere of taxation. I doubt whether these measures will mobilise sufficient force at the right time to overcome a developing depression. When there is added to this the hesitation of the Government in giving legislative force to plans worked out by Commissions and officials, I do not regard the maintenance of employment in the United Kingdom as at all assured.
54. In the U.S.A. the outlook is much worse. Public opinion at the moment seems to be moving towards opposition to all policies that would make the continued maintenance of a high level of employment possible.
55. It may therefore be difficult to secure acceptance of the draft agreement by the U.S.A. Even if it is accepted, we must not assume that a high level of employment will be continuously maintained. Cogent reasons have been advanced to show that because of its great wealth the maintenance of employment in U.S.A. may be extremely difficult and will require unconventional measures for which public opinion in the U.S.A. is not yet ready. It is therefore necessary for us to examine the other international agreements to make sure that they will enable us to protect ourselves in the event of falling world employment. This is all the more necessary because, while United Kingdom officials have enthusiastically accepted our proposals, it is clear that they would combine with U.S.A. and Canada in expecting us to be bound by the other agreements even if the employment policy failed. We could finally try to secure in a general preamble the acceptance of the principle that all the proposals are interdependent and if one agreement fails all are to be suspended. But this will be strongly resisted and we should try to ensure, by suitable provisions in each of the various plans, that we would be damaged as little as possible.
L. G. MELVILLE