Extracts 26 April 1946
REPORT ON THE INAUGURAL MEETING OF THE GOVERNORS OF THE WORLD FUND AND BANK HELD AT SAVANNAH, U.S.A. FROM 8TH TO 18TH MARCH, 1946
PART I-GENERAL COMMENTS PART II-THE PROCEEDINGS AT THE INAUGURAL MEETING
Part I-General Comments
Recent developments 1. Since the publication of my review of the Articles of Agreement drawn up at Bretton Woods , there have been a number of disturbing developments which have fundamentally modified the proposals.
(a) The Anglo-American loan agreement  provides that the transition period of five years which member countries of the Monetary Fund were allowed before they had to face its full rigours is to be reduced to one year in the case of the United Kingdom.
(b) In my review, I assumed that, if we were at any time denied the right to depreciate our currency, we should still be free to avoid deflation by imposing quantitative restrictions on imports (see paragraphs 22, 43 and 46 of review). The draft proposals for an International Trade Organisation  make this assumption uncertain. 
(c) This same draft provides that the International Trade Organisation and the Monetary Fund are to have a common membership so that withdrawal from the Fund, which was to be unfettered, now involves withdrawal from the International Trade Organisation also.
(d) We have seen that the United States near monopoly of lending can lead to arrangements in other economic fields which profoundly modify the Articles of Agreement drawn up at Bretton Woods. This makes uncertain any attempt to interpret the meaning or measure the effects of the Articles.
2. It will be necessary to have these developments and their effects on the Bretton Woods proposals in mind when reading the following comments on the proceedings at the inaugural meeting of the Fund and the Bank.
Dominance of the United States and major countries 3. Perhaps the outstanding features of the inaugural meeting were the use by the delegates of the United States of their power to secure the adoption of policies in which they were interested and the reluctance of countries seeking loans from the United States to offer much opposition.
4. It is true that a compromise was reached on one of the contentious issues relating to the functions and remuneration of directors, but the compromise will not modify greatly the principle for which the United States was contending. (See paragraphs 69 to 79.) 
5. However, this decision and the selection of Washington as the site for the Fund and the Bank (see paragraphs 65 to 68) were perhaps less important in themselves than as a demonstration of the power and will of the United States to dominate the organisations.
6. The meeting also revealed a growing tendency for vital decisions to be made outside the meetings by a few powerful countries with little freedom left to the formal meetings to reject or amend them.
Weakness of small countries 7. With Russia not a member, the votes of the United States and the United Kingdom are nearly sufficient to carry any resolution for which a simple majority is required. The votes of the United States, the United Kingdom, China, France and India are nearly sufficient to carry any resolution for which a two-thirds majority of voting power is required.
8. Because of this preponderance of voting power in the hands of the major countries, some of whom are financially dependent on the United States, small countries can influence the decisions of the Fund only by the appeal of their arguments to the United States or, occasionally, when the United States and the United Kingdom are divided on an issue. Lord Keynes stressed that, with Russia not a member, the combined voting power of the British Commonwealth and European countries is sufficient to out-vote the United States, China and Latin America. However, even if this vote were solid, it would help Australia only when the United States and the United Kingdom were divided; on some issues, the interests of both countries are likely to be similar and opposed to those of Australia.
9. For these and other reasons, the interests of large and small nations in the Fund are not well balanced. Though the United Kingdom has been overborne by the United States in matters of administration, which are of some importance, there can be little doubt that, if either country wanted a decision from the Fund which it considered vital, it would have its way. As the Chancellor of the Exchequer stated in the House of Commons, 'We are not nobodies in this world'.  The withdrawal of either the United States or the United Kingdom would mean that the Fund would cease to exist. The same is not true of smaller nations, and their vital interests may be ignored.
Danger of inflexibility on exchange rates 10. The possibility of the Fund, dominated as it is by the United States, and to a less extent by the United Kingdom, becoming too inflexible in its attitude to exchange alteration cannot be disregarded. Lord Keynes thought that the Fund might be too ready to approve exchange depreciation. This may well be true for a time. The economic difficulties facing belligerent and occupied countries, many of whose currencies are at present being kept above their appropriate values, may result in variations being freely conceded in the next few years.
11. What is of more importance to Australia will be the attitude of the Fund when the initial period of instability has passed. One of the consequences of this early instability is likely to be a subsequent reluctance to start any fresh waves of exchange depreciation.
12. A rigid exchange rate would tend to transmit to Australia, with their full intensity, any depressions developing in the major industrial countries.
13. Under the Anglo-American loan agreement, the United Kingdom, and perhaps in consequence the whole sterling area, will have to face the full rigours of the Monetary Fund within twelve months instead of after the five years provided in the Articles of Agreement. At the same time, there is as yet little guarantee of the United States following employment and investment policies that will ensure satisfactory world economic conditions. Unless the present draft proposals for an International Trade Organisation are modified, it is doubtful whether the Fund and the Bank can achieve their main purposes of restoring trade and maintaining economic stability. If they fail, the effect of the Fund will be to harness the world to an unstable American economy.
14. Australia is likely to be amongst the earliest of the countries to feel the impact of restriction and depression. We could secure some relief by a depreciation of our currency but, because of its effects on our imports and on foreign investments in Australia, it would be contrary to the interests of both the United States and the United Kingdom to grant a request for a depreciation of the Australian pound. Other smaller nations whose exports compete with ours would also have reason to oppose us.
15. At the risk of being denied use of the Fund's resources and possible expulsion, we could depreciate our currency without the approval of the Fund. However, unless we were free to impose quantitative restrictions on imports, it might be hazardous to defy the Fund in this way, particularly since expulsion from the Fund would automatically mean expulsion also from the International Trade Organisation.
Quantitative restrictions on imports 16. For the reasons given in paragraphs 22, 43 and 46 of my review of the Articles of Agreement, a refusal by the Fund to permit Australia, faced by balance of payments difficulties, to depreciate its currency might not be vital if we were free to impose quantitative restrictions on imports. Though this might not be the best way out of our difficulties, and would probably do more harm to world trade, we could nevertheless for a time protect our domestic economy from deflation by this alternative means until we were conceded the right to depreciate our currency. We shall not know, however, what freedom we may have temporarily to take this alternative course to exchange depreciation until the proposals for the International Trade Organisation begin to take final form.
17. Informal discussions which I have had in Washington and elsewhere have made it clear that the United States will seek conditions and procedures that will apply to the way in which quantitative restrictions on imports can be imposed as well as to supplying criteria to determine whether balance of payments difficulties exist. It was pointed out to me that this was already made clear in the existing draft, which provided for non- discrimination and consultation in the application of restrictions. United States officials do not feel that they are limited to these conditions, and other countries may have further conditions to suggest.
18. At the same time, I believe that the United States officials have no further conditions in mind at present. The principal dangers would seem to be that the elaboration of non- discrimination might make the use of this method impracticable, and consultation might in the end turn out to mean approval by some international organisation.
19. On the whole, I believe that the conditions governing our freedom to impose quantitative restrictions will not prove onerous provided we press our case when the discussions on the International Trade Organisation take place. At the same time, if they proved unsatisfactory, Australia, her external reserves depleted, refused exchange depreciation by the Fund, and barred from restricting imports by the International Trade Organisation, might be unable to escape the deflationary consequences of a depression in the major trading countries of the world.
[matter omitted] 
Possibilities of loss 25. Australia will have 125 million of its international reserves committed in the Fund and the Bank, though of course the amount to be invested at once is very much smaller, and the possibility of a very heavy loss is remote. Were the Fund and the Bank to succeed in their main purposes of restoring trade and maintaining economic stability, we would gain heavily through the resulting buoyancy of our overseas trade, while we could expect that any losses made by the Fund and the Bank would be comparatively small. This was the assumption made in my review of the Articles of Agreement. As already stated, however, the terms of the Anglo-American loan agreement and the draft proposals for an International Trade Organisation do not seem to me to hold out much promise of providing a world economic order in which the Fund and the Bank can thrive. The prospects of gain are, therefore, dubious, and the possibilities of the Fund and the Bank making losses cannot be ignored. In the present and prospective disturbed state of the world, stabilisation and reconstruction loans and even short-term advances from the Fund may well suffer the fate of the League of Nations loans after the last war.
26. The Fund and the Bank will need to be well managed if these losses are to be avoided or kept at a minimum. However, the form of directorates accepted at Savannah is cumbersome and will make good management difficult. What may happen is that a few powerful countries will take the management out of the hands of the directorates. This might well improve the technical efficiency of the organisations but might conceivably have some adverse consequences for smaller countries.
27. With the Fund and the Bank facing an uncertain future, it does not seem wise to load the Fund and the Bank with heavy charges for such large directorates as were in fact decided upon at Savannah.
just what useful work these directors can do is far from clear. It would have been better to leave these new institutions with novel duties free to evolve the most efficient means of conducting their business in the light of actual experience. If so many full-time highly paid directors were found necessary, they could have been recruited at a later stage. Meanwhile the revenue of the Fund at least is uncertain. The charges for borrowing from the Fund are high, and borrowers incur other onerous obligations. Only countries with weak currencies may, therefore, be eager to use it.
Cost of not joining Fund and Bank 28. This outline of the implications of the Fund and the Bank, as modified by recent developments, is not reassuring. Nevertheless we must consider the cost to us of not joining. As the proposals now stand, unless we join the Fund we shall not be allowed to join the International Trade Organisation. What that means, we do not yet know, but the price might be heavy, and we might be condemning our wool industry, for example, to a bleak future.
29. We could save substantial annual sums by converting our dollar loans at lower rates of interest. I discussed with a number of New York bankers what were likely to be the effects of our not accepting the Bretton Woods plans on our credit and found opinion divided. Some believe it would make no difference. Others believe it would adversely affect us. Others again believe that we would have to explain why we had not joined and, provided the explanation was a reasonable one, we would not suffer. But that presumably means that Wall Street would judge whether our explanation was satisfactory. My conclusion is that we would have to pay higher rates of interest if we did not join but that the cost would not be great.
30. I have discussed only briefly with Senator Keane the effect of our not joining on our lend-lease negotiations. So far the two issues have been kept separate. This aspect will no doubt be referred to the Senator for further comment.
31. It is possible that our accumulated sterling balances will not be freely convertible into dollars, and part may be frozen. If so, in order to pay for the heavy imports needed to make good our wartime shortages, we may require more dollars in the next few years, and perhaps more sterling too, than can be provided out of our own resources. In that event, membership in the Fund would provide us with a means of securing dollars, or other currencies, which might be of great value.
32. An attitude of isolation on the part of Australia towards international plans for economic collaboration may have other adverse effects on our economic and political interests. These effects are not measurable, but in a dangerous world may be substantial.
A voice in the management 33. At the inaugural meeting, with India not a contestant, had Australia been a member she could have secured the election of an executive director to both the Fund and the Bank with the support of New Zealand.
If we join in the near future, say before the September meeting of the Boards of Governors, and Russia does not join, or India's interpretation of the Articles dealing with the appointment of executive directors is accepted, there is still a possibility that we might be able to secure a voice in the administration of the Fund or the Bank until the next elections in September, 1948. If, however, Russia, Italy, Sweden, and some other countries join, it would be more difficult to secure a place in future elections, unless the number of executive directors is increased. It should be possible for us, however, to make arrangements with some other countries involving the rotation of directorships and alternates which would ensure us representation on one or other of the bodies more or less continuously.
34. This, however, might involve making arrangements with countries with whom we did not have much in common.
35. With the doubts that must continue for a time about the usefulness of executive directors, and how much real power will be left to them by the United States and the United Kingdom, it is difficult to know what importance should be attached to this privilege. However, it might give us an opportunity to exercise some influence during the formative periods of the organisations.
Conclusion 36. If there were reason to expect that the economic collaboration resulting from current discussions were likely to restore world trade and maintain economic stability, it would, I believe, be in Australia's interests to join the Fund and the Bank. The Anglo- American loan agreement and the proposals for an International Trade Organisation, as at present drafted, do not seem to me to hold out that promise. The reduction in the transition period for the United Kingdom from five years to one year will make the restoration of her economy, and consequently our own, much more difficult. The International Trade Organisation will impose restraints upon other action that the United Kingdom might have taken to restore her export income and upon measures which Australia has, in the past, found necessary to protect her domestic economy from adverse international conditions and to provide a balanced development of her resources. So far there is little guarantee that, in return, the United States will follow domestic policies likely to maintain internal economic stability, or international investment, commercial and tariff policies that will secure satisfactory world conditions.
37. It is, of course, possible that we might secure significant changes in the International Trade Organisation proposals which would clarify the obligations of the United States to provide an economic framework within which the various components, such as the Fund and the Bank, could hope to function successfully.
38. The difficulty confronting Australia is that a well based opinion about the effects that the Fund may have on us cannot be formed until we know the substance of the International Trade Organisation, including some indication of the future lending, employment, commercial and tariff policies of the United States.
We are, however, unlikely to know enough about the International Trade Organisation until after 31st December, 1946, to be able to take these matters into account in making a decision before then.
39. A delay in making a decision until after 31st December, 1946, would involve Australia in some risks. On our admission after that date, the Fund would be entitled to revise our quota and our exchange rate. The delay might also have some adverse effects upon our credit, our conversion loans and lend-lease negotiations. We might lose the opportunity of having an executive director elected to the Fund or the Bank. We might also arouse some antagonism towards us and become involved in other political complications.
40. Provided a statement explaining carefully our reasons for delay were issued by the Government, I do not believe the delay would have much effect upon our credit in New York. Information should be sought from Senator Keane about the effect it would have upon our lend-lease negotiations. Any attempt by the Fund to revise our exchange rate, I believe most unlikely. The possibility of an alteration in our quota is, perhaps, more likely but less important. I do not attach any great importance to Australia having an executive director elected.
41. I feel I am not in a position to express a useful opinion about the political effects of our delay or the antagonism towards Australia that it might create.
42. It would, in my view, be best if we could defer our decision whether or not to join the Fund and the Bank until we knew more about the International Trade Organisation. Not only would this enable us to know just what obligations we were accepting by joining the Fund, but we could expect our position in the trade and employment discussions to be strengthened. It was largely for these reasons that we were anxious to extend the time for joining the Fund and the Bank on the original terms for as long as possible.
43. if, however, the Government considers that the political and other risks are sufficiently important, an alternative course of action may perhaps be available to us as a result of the United Kingdom and Indian statements of intention to resign in certain circumstances.  (See paragraphs 53 and 54.) This possible alternative would be that Australia should join the Fund and the Bank in the near future but at the same time, by means of a public statement, and official communications to the Fund and the Bank, make it clear that her accession is merely tentative and that she must be expected to resign if the provisions of the International Trade Organisation do not hold out the prospect that the combined effect of both organisations will be to provide an international economic order to which Australia can reasonably be expected to adapt her domestic affairs.
L. G. MELVILLE