114 Watt [1] to Brigden

Letter CANBERRA, 12 September 1946

PERSONAL

As you probably know by this the Prime Minister has cabled to Mr.

Makin a request that you should attend the meeting of Bretton Woods Governors on 27th September as Australian observer.

2. It is not intended to send you any formal instructions from here but I have thought that I might suggest one or two points which have a particular interest for us and which may have a relevance to the business to be done at the meeting of the Monetary Fund Governors.

3. No decision as to membership will be taken here until the new Cabinet is formed after the elections on 28th September. We understand, however, that unless one or more new members are admitted to the Fund at this meeting of the Governors this delay on our part might not destroy our chance of gaining an Executive Directorship, were we to join at a comparatively early date thereafter. You might therefore consider the possibility of suggesting to the United Kingdom Delegation that in order to keep the opportunity open for us they might find ways and means of delaying the entry of countries like Italy and Sweden who are not members of the United Nations and who were not Bretton Woods 'originals'. The United Kingdom people, as you will remember, were extremely anxious that we should get a Directorship at this stage and they might be prepared to do a good deal to keep the path clear. I am enclosing an extract from the recent Annual Report of the Governor of the Commonwealth Bank in which he gives it as his opinion that Australia should join the Monetary Fund. This might be of some assistance to you in persuading them that such a move on their part would be worthwhile.

4. Perhaps the argument could be used that since the time within which original participants in the Bretton Woods discussions may join on original terms has been extended to 31st December 1946 it would be reasonable to leave open till then an opportunity for such countries to nominate for a Directorship or at least to take part in the election of a Director, which they would be precluded from doing if a sufficient number of other countries are admitted at this meeting to make the immediate election of a member necessary.

5. We are assuming that the resolution which the United Kingdom put forward at the Savannah Meeting and which seeks a interpretation of Article 4 Section 5 of the Monetary Fund Agreement will come forward for discussion. [2] A good deal of attention has been given to this matter here and when Mr. Melville went to the Savannah Meeting he was asked to suggest to the United Kingdom Delegation an amendment of their draft resolution which would give it a wider applicability. By way of background I am enclosing a copy of a letter which Mr. McFarlane gave to him before he left. [3] You may have seen this letter and as you will recall Mr. Melville discussed the subject with the late Lord Keynes who thought that our suggested wording might be more suitable than their own. Since their draft had been given a set form, however, it could not be altered at that stage. Later when Dr. Coombs was in London with the Prime Minister he discussed the question with officials of the United Kingdom Treasury and put our views before them.

6. I have thought that I might also draw your attention to one aspect of Article 23 of the revised U.S. draft trade charter which, as we interpret it, appears to curtail quite considerably the facilities of Article 14 (Transition Period) of Monetary Fund Agreement. Under para. 2 of Article 23 of the trade charter countries which belong to both the I.T.O. and the Monetary Fund may not invoke Article 14 of the I.M.F. Agreement for the purpose of imposing exchange restrictions except such as 'complement and correspond to' quantitative restrictions authorised for balance of payments reasons by the trade charter. Under the I.M.F. Agreement of course member countries have a general right to maintain exchange controls for a three or five year transition period and I think this has carried a good deal of weight with countries contemplating membership of Bretton Woods. The revised U.S. trade charter of course no longer requires common membership of the I.T.O. and Bretton Woods and I might mention that when Messrs.

Winthrop Brown and Phillips [4] were here recently they told us that this provision had been deliberately omitted in the hope that countries which could not see their way clear to join Bretton Woods might nevertheless be able to enter the trade organisation.

However for countries which may be contemplating membership of Bretton Woods and also regard membership of the I.T.O. as unavoidable the point does become very material. While it is not likely to come under formal discussions at the meeting of Governors it may be a factor in the background of any discussions as to the accession of new members and we would be greatly interested to know of any reactions which you may hear. I am enclosing a preliminary note on Article 23 of the U.S. trade charter which has been prepared at the Treasury.

G. P. N. WATT Acting Secretary

P.S. I do not want para. 3 to be read as a forecast of what the Government decision will be as regards membership of Bretton Woods.

G. P. N. W.

Enclosure 1 Extract from Annual Report of Governor of the Commonwealth Bank 30th June, 1946

International Monetary Arrangements:

The International Monetary Fund constituted by the Conference at Bretton Woods, New Hampshire, U.S.A., in July, 1944, entered into force on 31st December, 1945, by which time governments having the prescribed 65 per cent. of the total of quotas had signed the agreement. Of the countries whose delegations attended the Bretton Woods Conference, Australia is one of a small number which so far have not joined the Fund. At the present time membership has reached 83 per cent. of the total of quotas. At the first meeting of the organisation at Savannah early in 1946 it was decided to extend the date up to which the Agreement should remain open for signature by countries represented at Bretton Woods, to 31st December, 1946. Thereafter, Australia could become a member of the Fund only at such time and in accordance with such terms as the Fund might describe.

In appraising the issue of joining the Fund or of remaining outside it, the national interests must be studied. No country can for long, at any rate, be expected to make disproportionate sacrifices or to yield up lightly some measure of control of its destiny to fresh international agencies which are as yet untried.

Nothing is more certain, however, than that in this atomic world, a purely self-regarding nationalism will be the surest road to the destruction of all the things which constitute in the long run the real national interest.

The basic fact has to be borne in mind that in economic matters particularly, the countries of the world are mutually dependent.

Complete freedom of action is in reality quite illusory. Freedom to resort to currency depreciation, to impose exchange controls, or to discriminate through various trading devices may confer short run advantages, but past experience indicates that other countries quickly follow suit in self-protection. No country can expect to have it both ways.

It is my view that by active participation in the International Monetary Fund, where she may be successful in obtaining a voice on the governing body, Australia would be playing her proper part in shaping the future and at the same time safeguarding her own interest by helping to ensure that the problems of young and developing countries, some of which share Australia's apprehensions, receive due consideration by the larger powers.

H. T. ARMITAGE Governor

Enclosure 2

CHAPTER III-GENERAL COMMERCIAL POLICY SECTION F (EXCHANGE CONTROL) Treasury Comment

Interpretation Broadly the interpretation of Article 23 in the revised U.S. draft appears to be as follows:-

(1) A general ban is imposed upon trade restrictions and discriminations through exchange techniques.

(2) Members may however impose exchange restrictions on transactions with non Members provided that in the view of the I.T.O. these do not injure the interests of Members.

(3) Members of the I.T.O. who also belong to the I.M.F. may impose exchange restrictions permitted under the I.M.F. Agreement.

(4) However Members who belong to the I.M.F. may not invoke the Transition Period clause of the I.M.F. Agreement to justify restrictions on transactions with members of the I.T.O. unless these 'complement and correspond to' quantitative restrictions permitted under Articles 20, 21 and 22 of the Charter.

(5) Further Members of the I.T.O. who also belong to the I.M.F.

may not invoke Article XI of the I.M.F. Agreement (which permits exchange restrictions on non Members of the I.M.F.) to justify restrictions on members of the I.T.O. who are not Members of the I.M.F.

(6) The authority of the I.M.F. is to be paramount in exchange matters and the I.T.O. is enjoined to co-operate with the Fund with a view to a common policy on exchange and trade matters.

Comment This Article appears to curtail the provisions of the Bretton Woods Transition Period clause for countries who are Members of both Organisations. Under the Transition Period clause countries had a general right to retain exchange restrictions for three years and probably five years after the Fund commenced business.

For dual Members, however, this right would now be restricted.

Exchange restrictions could only be such as 'complement and correspond to' quantitative restrictions imposed for balance of payments purposes-justifiable that is according to the provisions of Articles 20, 21 and 22 of the Charter.

Some extra measure of freedom to use quantitative restrictions for balance of payments purposes is allowed under paragraph 2 of Article 20 of the draft Charter for a period which would expire in June, 1950. Presumably this extra freedom would extend to 'parallel' exchange restrictions. After that period, however, exchange restrictions would have to conform to the conditions laid down for quantitative restrictions in the Trade Charter. The right to use exchange restrictions would of course expire at the end of a five year period from the time the Monetary Fund commenced business.

Thus the right conferred under the 'Transition Period clause' of Bretton Woods which was subject [on]ly to a general obligation to withdraw exchange restrictions if considered possible by the Member country, is now qualified to the extent that exchange restrictions must be in keeping with and serve the same purposes as quantitative restrictions permitted under strict conditions by the trade charter.

It may be noted that in the former U.S. draft quantitative restrictions were to be no more restrictive of trade than the exchange controls permitted under Article 14 of the I.M.F.

Agreement (Transition Period). Now the position appears to be reversed and the trade charter is to become the governing document in this matter.

Recommendation Any attempt to curtail by means of the Trade Charter the right of countries who are Members of both the I.M.F. and the I.T.O. to use exchange restrictions during the transition period should be opposed by the Australian Delegation.

1 G. P. N. Watt, Deputy Secretary, Department of the Treasury.

2 Section 5 of Article 4 sets out the conditions upon which a member may change the par value of its currency.

3 Volume IX, Document 115.

4 See Document 95, note 1.

[AA:A3300/2, 46/387]