149 Coombs to Chifley

Memorandum [CANBERRA], 15 January 1947

STERLING BALANCES

Before I left for London you agreed that it would be desirable for me to discuss informally with the United Kingdom Treasury officials the suggestion that Australia's sterling balances might be written down in order to assist the United Kingdom international position.

Accordingly I discussed the question with Sir W[ilfrid] Eady and Sir David Waley of the Treasury, and Mr Cobbold [1], the Deputy Governor of the Bank of England.

The United Kingdom views have been substantially modified since your visit in April as to the amount by which the balances should be written down. At that time you will recall they suggested writing off 50% of the total. They now suggest an amount from 20 to 30 million, with an unwritten but definite understanding that, should Australia's balances fall to a critical level, the amount would be written back.

I discussed with them the possible alternative suggested originally, I believe, by Dr. Evatt that we might, instead of writing off our own balances, take over responsibility for some of the British obligations to India. It would, of course, be necessary for Australia to limit the rate at which India could draw upon any balances we took over, and probably it would be necessary to limit the classes of goods of which they could purchase. These provisions might prove to be contrary to the general rule included in the draft Charter for an International Trade Organisation [2], although I believe this difficulty could be overcome. From the Australian point of view a proposal of this sort would have an advantage compared with the writing off of sterling balances, in that we would establish definite trade relations with India and acquire Indian goodwill. Both of these might be important to Australia's industrial future. On the other hand, of course, writing off of sterling balances, particularly if there is an understanding that in times of acute difficulty they might be written back, might amount to nothing more than a gesture and could prove to have imposed no real economic burden on Australia at all. Furthermore, from the United Kingdom point of view, the taking over of Indian liabilities would be of little assistance to them unless the amount involved were substantially greater than the C20 or 430 million they hope will be written down from Australia's balances.

While the United Kingdom will press strongly for some writing down, it is clear that they would accept an alternative arrangement whereby Australia made the United Kingdom a very long- term loan at nominal rates of interest. It is hard to see what they would gain by this since it would merely mean that Australia would be holding basic international reserves in long-term securities rather than short and be accepting a rate of interest presumably approximately the same as at present we earn on short- term securities.

Whatever writing down is agreed to by Australia, India, and other countries similarly placed, it is inevitable that the United Kingdom will have to limit the rate at which remaining accumulated balances can be drawn on. It seems likely that the United Kingdom would agree to an arrangement where we would determine both the amounts and the composition of our expenditure abroad subject to targets for such expenditure being discussed with them in advance.

The United Kingdom Treasury officials believe that they will obtain a settlement with India by which approximately a third of the existing balances (about 1,500 million) would be accounted for. The Indian Government has substantial annual obligations for pensions and similar payments to British ex-members of the Indian Civil Service. The amount of these payments is likely to increase substantially with the departure from India of British members of the Indian Civil Service now that the Indian Government itself is taking over. The United Kingdom proposes to accept responsibility for these payments in return for the elimination of part of her debt to India to an amount which is to be calculated by a generous capitalisation of the annual obligations the United Kingdom Government will assume. Similarly, it is proposed that the Indian Government would take over from the United Kingdom a number of wartime installations in India at valuations approximating to their cost of construction rather than at normal disposal values.

The United Kingdom drew attention to the fact that sterling balances were much stronger than we (and they) had anticipated some months ago. They suggested that a valuable way of giving effect to the writing down would be for the Australian Government to announce that its sterling position had since the war been strengthened to an unexpected extent at a time when we might reasonably have expected these resources to be depleted and that the Government, therefore, proposed, in view of the acute difficulties which the United Kingdom was experiencing in her international position, to write off a part of these recent additions to our sterling reserves as a contribution by the Australian people to the solution of the difficulties being experienced by the people of Britain.

1 C.F. Cobbold.

2 The draft charter enunciated a general rule, in Article 25, which was intended to achieve the elimination of import and export restrictions (subject to exceptions).

[AA : M448, [126]]