225 Note by Coombs of Discussion with United Kingdom Treasury Officials

LONDON, 1 May 1946 [1]

INTERNATIONAL MONETARY FUND

Freedom to vary Exchange Rate Melville states that in his opinion the chief danger to Australia from membership of the Fund would be that our freedom to depreciate may be too rigidly restricted. [2] I discussed this with the United Kingdom officials who pointed out:-

(a) that member country could depreciate its currency up to 10% without reference to the fund, and (b) that the Fund must reply to an application for a further depreciation within 72 hours. They believe that the shortness of this period indicates that except in the most extreme cases approval by the Fund must be almost automatic.

They agreed, however, that Australian conditions are such that variations of the exchange rate will be rare but that when circumstances make a variation necessary a substantial change will almost certainly be required. However, they point out that the Latin American countries are strongly represented in the Fund and they face problems essentially of a similar character to Australia in relation to exchange and they consider it unlikely that we would not find adequate support for any exchange depreciation we wished to undertake in a position of acute difficulties. This they suggest would be practically certain if Australia were in fact represented by an executive director.

Freedom for domestic economic policy They pointed out that the United Kingdom also was concerned to ensure that the Fund would not be used to exert pressure upon a member country to modify a domestic policy of full employment to meet its exchange difficulties and that accordingly the United Kingdom Government has sought an interpretation of the relevant article of the Fund Charter to determine whether 'steps necessary to protect a member from unemployment of a chronic or persistent character arising from pressure on its balance of payments shall be measures necessary to correct a fundamental disequilibrium' and consequently measures to which the Fund must agree. I pointed out that the wording of this request was somewhat limited since chronic or persistent unemployment may not arise solely from international factors and that we would have preferred a reference to 'unemployment of a chronic or persistent character accompanied by pressure on its balance of payments.' [3] We could, of course, ourselves seek a further interpretation on this aspect of the matter.

Australian membership to the Fund The United Kingdom Treasury Officials stated that in their opinion it was of the utmost importance that Australia should participate in the Fund and that they should join the Fund before September.

They pointed out that at present the United States is in a position with the support of Brazil, Mexico and China, to dominate the Board of Directors. This group has a majority over all other powers even if they vote solidly as a bloc.

However, with the non-accession of Russia to the Fund it will be necessary to elect another director and the election will take place as soon as sufficient countries have joined the Fund in order to leave countries with votes totalling 4,000 between them represented by an executive director. Denmark is already a member but not represented; Syria, Lebanon have already indicated their intention to join. New Zealand, Italy and perhaps Turkey are expected to follow and it seems probable therefore that an election will take place at the next meeting of the Board of Governors towards the end of September. If Australia has joined by this time, either she or New Zealand, if it were so preferred, would be able to carry the election. This new director will represent all the new countries and might carry as many as 7,000 votes which would give the non-American bloc a clear majority of votes.

H. C. COOMBS

1 The date given reads 'About 1st May, 1946'.

2 See Document 212.

3 See also Document 115.

[AA:A1067, ER46/12/2, i]