Report [LONDON], 23 June 1947
STERLING BALANCES The only remark the Chancellor made when I called on him  was to remind me of the difficulties of the United Kingdom in my talks with the Treasury. I later called on the head of the Treasury (Bridges ). My talks were to be with Rowe-Dutton. 
2. Preliminary talks with Rowe-Dutton.
At the outset he accepted my suggestion that there would be no formal agreement. The question of an exchange of letters was left for the time being. Formal agreements are contemplated with India, Egypt and foreign countries.
3. After the expected preliminaries the main points of the U.K.
(a) Australia should not run down its accumulated balances for current purposes. The hope was expressed that we would want to increase them.
(b) There should be a tight hold on imports generally to ensure that we would keep within our current earnings.
(c) There should be further talks in twelve months.
(d) If difficulties occur in the meantime, Australia could consult U.K.
4. Accumulated balances.
For the purpose of discussion I put these down at 30 million sterling at 30th June, 1947, excluding gold reserve.
5. In my reply I said the prospects for r2 months were good and with difficulties of supply it may well be that our current balances would be adequate. However, we were a vulnerable economy (export prices, seasons, etc.) and had a backlog of import needs and were looking forward to some developments, consequently we would be unable to meet his request. We desired some access to accumulated balances. The extent of the access could not be predicted, but we wanted a flexible arrangement. Nevertheless, he came back at the 130 million several times later with reasons which I appreciated, but I explained why I could not agree. He pressed that U.K. could not release accumulated balances except for a dole. He added that they could not agree to release any balances to meet a difficulty unless Australia was prepared to do something herself to combat the position. It was understood, of course, that accumulation would be available to meet debt repayments.
6. Arrangements with India and Egypt.
I asked on two occasions whether he could advise the stage reached with India and Egypt re the running down of their balances. He explained that they both had current deficits and could not carry on without some relief, but beyond this and a suggestion that they would be hard terms I got nothing specific.
7. He added on my enquiry that it was impracticable to work on some percentage basis in the sterling balance settlements. Each country had to be dealt with as a separate issue. For instance 5 per cent. for one country might be reasonable, but it would mean over 60 million for India. I did not think a flat rate percentage basis reasonable; in any case India had run down 100 million last year.
8. I mentioned that I would be in a difficult position if I agree[d] on an official level to little or no access to our balance, and then, later, found that a more generous arrangement in this regard had been made with other countries.
9. I also enquired about Iraq. (The Chancellor gave them a dinner.) I was informed that development was necessary in Iraq. I appreciated this, but added that we also contemplated developments because, next to the Middle East, Australia was on a long view probably the most vulnerable spot in the world. They are also dealing with Uruguay. (I will seek further information later as to the progress with these countries.) 10. I naturally emphasised that our balances arose in a different manner to the Indian and Egyptian and mentioned all the points in the Advisory Council's minute -(e.g. the U.S.A. spending, curtailment of imports, no profiteering in export prices, etc.) 11. Import Policy This has been the subject of a lot of discussion. There have been some inconsistencies in the U.K. approach which need clarification in the light of obligations in the proposed I.T.O. Charter and the significance of 15th July, 1947, when our current sterling becomes convertible.
12. The approach from Rowe-Dutton was on these lines (a) 15th July had no significance and called for no relaxation of import licensing with U.S.A.
(b) Imports from U.S.A.-The dollar position was more acute than ever. The loan was expected to run out about the middle of 1948.
Australia should confine imports to essential durable goods and restrict consumable goods to a bare minimum. (He didn't mention tobacco, so I suppose it is 'durable' in Australia as in U.K.) (c) Imports from other countries, including U.K.-We should keep a close scrutiny and immediately there was any tendency for them to overrun current earnings we should restrict either piecemeal or more comprehensively as the need arose. The reason was to avoid running down accumulated balances which would absorb current production in U.K. that was so necessary to exchange for imports.
13. I dealt with these proposals at some length. The points included the following:
(a) 15th July, 1947-His interpretation was in contrast to our own views. As current sterling would be convertible, we might easily incur criticism and possibly some retaliation if we did not avail ourselves of the right, even though we had no legal binding obligation like U.K. We had already received complaints [of] discrimination in favour of Canada, (axes and floor coverings).
Moreover, we would be off-side with the proposals in the Trade Charter. I suggested that they should talk to the Americans. This point has still to be clarified to my satisfaction.
(b) Volume of imports from U.S.A.-In 1946 we had a favourable balance with U.S.A. Our policy had been to restrict to essential needs-e.g. motor vehicles for our starved transport, Constellations (U.K. were using them), some textiles to meet our ration coupons-but we had cut down recently and incurred criticism. For 1947 to date we were just about square on our payments balance with U.S.A., but we might have to draw later.
Much depended on wool sales to U.S.A. We would be prepared to stall for time but did not want to incur risks.
(c) Imports from countries other than U.K. and hard  currencies:
I outlined Coombs' proposal that Australia should, during the course of the Geneva negotiations, announce its intention to relax (not abolish) import licensing.  With Coombs' consent I gave them details of his proposal and the reasons. At a later talk they brought in two officers in touch with Geneva (Clark and a Bank of England man just back from Geneva). If the proposal is to be approved the question of timing will be important so as to avoid any appearance of its being a tariff bargaining weapon. It must be associated with the Charter and it should await a proposed easing of Article 28(i)(e)  which might make discrimination a little more respectable. The question of 'devastated countries' was also mentioned, and it was suggested that the 'war-shattered' clause justified. substantial discrimination in favour of U.K. I am not satisfied on this point.
I have conveyed my tentative views on Coombs' proposal by cable  and am keeping in touch with Coombs.
The U.K. Treasury's desire for a close scrutiny over imports did not add up with the proposed relaxation, which would necessarily involve some non-essentials.
(d) Imports from the U.K.-We had abolished licensing (except for a few non-essentials) with the encouragement of the United Kingdom itself. We would not want to re-impose licensing to correct an adverse trend. It would be jumping too quickly from one foot to the other.
(e) General-Finally, I said that import licensing was a dreadful business, both from the governmental and business point of view and we would not want to re-impose it either piecemeal or over a wide field unless we faced a serious reverse. Moreover, licensing could not correct an adverse trend except after a period of some months. On the contrary, it was desirable that we should relax licensing (e.g. Coombs' proposal). Further, we might be obliged to ease up on U.S.A. while our balance of payments outlook was favourable. In short, the proposals outlined above by Rowe-Dutton were actually in conflict with other representations that had been made by U.K. itself, and also with our desires and what we felt would be our obligations. This whole position of import policy is complex and wants very close study before any commitments could be accepted.
14. Right to draw on Monetary Fund-Rowe-Dutton asked whether, if we faced a deficit, we would be prepared to draw on the Monetary Fund rather than on accumulated balances. Drawing of sterling from the Monetary Fund would help U.K.'s external position, whereas running down balances would embarrass U.K.
15. The reply was that if the option rested with us, we would naturally prefer to draw on balances, and would look at the Monetary Fund as a last ditch reserve.
16. Gold reserve: Rowe-Dutton also raised this question and asked very definitely that we should include current gold production in our exports and sell it to the Bank of England.
17. This gave me an opportunity to refer to our experience of 1930 when our approach for help from the Bank of England met with a very cold reception. Consequently, the reserve was the 'Sacred Cow' and it would be difficult to touch it in the light of past experience and the need to guard against a future contingency. The reserve was not large. We had not accumulated gold like South Africa during the war. It was not until 1943 that we had commenced, with the concurrence of the Bank of England, to build up a reserve, which was now equal to about, 24 million sterling-a small chest as it were. He enquired about current production-now about 6 million sterling per year-which he said would be a very valuable help to U.K. in her position of need. He pressed that this should form part of the sterling gold pool.
18. He said we wanted two last ditch reserves-gold and the Monetary Fund and wanted to draw down balances and keep these two reserves intact. U.K. would be taking all the risks, but not Australia. I thought that this was quite a good point in his favour and promised him I would give it consideration, but added that gold would be jealously regarded because of past experience.
19. I think there is a good deal of reason in the request that we should make current gold available to help U.K.'s position, provided in other respects the final proposals are acceptable to us. I suggest that the Bank should consider this.
20. Reserve and working balances-It is not contemplated by U.K.
that our balance should be actually frozen, but that it should remain as at present with the Commonwealth Bank on the understanding that we would finish up the year with at least the same balance so far as current transactions were concerned. Then we should come here and talk again. If it was still k13O million they might suggest we should carry on for another 12 months on the same basis. Rowe-Dutton had a little discussion with his off- siders at this stage as to what would happen if our balance increased by, say, 5 or 10 million. I thought they could reach the right answer to this one without any help from me, and they eventually did so.
21. The accumulated balances would be available for debt redemption (we have a lot of definite maturities as well as options in the next five years). Also they would be prepared to discuss assistance from the balances in emergency if our export position suffered a serious reverse.
22. Having explained the practical difficulties involved by their suggestions for prompt import control (they are still examining this) I emphasised that we wanted a flexible arrangement and put forward the proposal for a reserve and working balance which we would only use if necessary. On enquiry I mentioned 40 million sterling. When they recovered, they asked whether I wanted a formal agreement on this basis with a freezing of the remainder. I said no, just an understanding, and we would be reasonable. Rowe- Dutton suggested that a working balance would be unnecessary, because our funds would permit fluctuations. All he had asked was that we finish up the year on the same figure as we started. To this I said the term 'reserve and working balance' had a better ring, would cover a period longer than one year, and we would be reasonable. I am not hopeful of a satisfactory response to this suggestion. I was afraid to use the Governor's 5O million. The shock would have been too great altogether.
23. Rowe-Dutton kept making the point that we should finish the year the same as we started-i.e. live within current earnings-and if there is an adverse trend, then control imports promptly so as to avoid drawing down balances and absorbing production which could be sold elsewhere. If we got into difficulties, then we could come and discuss them; in any case the whole position would be reviewed again next year.
24. General comments: I have written as above so as to give you the atmosphere. You will appreciate that I am aiming at something much more flexible than the Treasury want to concede. I propose to continue my talks with the object of trying to secure something on the lines attached.
25. I should be glad if the points in this outline could be examined and comments cabled back to me for guidance.
AUSTRALIAN PROPOSALS FOR CONSIDERATION
1. Period-2 years.
12 months is too short. It also means our approaching U.K. for further talks. In any case the next 12 months should be easy for us and we would have to go over same ground again. Therefore 2 years suggested.
2. Consultation-U.K. to consult with us rather than we should consult with them.
Their idea is that we promise to live within current income and if we get into difficulties we should come and discuss our difficulty under an escape arrangement.
My idea is that we should have flexibility within our own hands but that we would be reasonable. This means a right to a 'Reserve and Working Balance'. This flexibility would enable us to meet a temporary difficulty without reimposing import licensing. We could take some risk before imposing any necessary corrective action or approaching the Fund for dollar assistance to meet a temporary set-back in our Balance of Payments. It may well be that we can get through two years within our current earnings, but the future is very unpredictable-much depends on the Marshall plan-and it is important to start off on the right foot now rather than to seek variations in our favour later.
Moreover, we don't want to be so tied up that we have to go to the U.K. Treasury when we want some greater freedom.
The method I have outlined above would make it necessary for U.K.
Treasury to approach us if they wanted some tightening-up or thought we were unreasonable. This particularly applies to our import policy if we meet difficulties on this point. Both Wheeler and Woodrow  stressed to me the difficulties we would face if we had to consult from time to time.
3. Import Policy-A flexible arrangement but we will be reasonable.
For the reasons given above we want a more flexible arrangement than they propose, and provided we can secure acceptance of the idea of a 'Reserve and Working Balance' it should be sufficient.
We would then have freedom to regulate our own import policy. I propose to avoid commitment, except in relation to a temporary stalling, on the future import licensing of American goods in case we desire to make relaxations either because of obligations or in our own interests.
4. Reserve and Working Balance-4O million (or less) The idea is a 'Reserve and Working Balance' with full rights to us to draw on it without consultation but we will be reasonable.
A working balance for one year is useless. Therefore I suggest the whole arrangement should cover two years. I am afraid it will be difficult to get acceptance of 25m. stg. for two years and I would be prepared to make 20m. stg. or 25m. stg. to secure agreement to this principle. The year 1947-48 should be good.
5. Current Gold-The U.K. request to be favourably considered.
The Treasury request is that current gold production (about 5 1/2/6m. stg. a year) should be sold to the Bank of England and they will press it hard because of the great need for dollars. As we have the right of convertibility of our current sterling into dollars (which U.K. have borrowed) it is not unreasonable for them to expect current gold to be exported in the same way as wool and wheat. If we want to hold our current gold and drawing rights on the Monetary Fund as two last-ditch reserves and draw down our accumulated balances to the embarrassment of U.K., they would have some justification for regarding us as very difficult.
I think therefore the request should receive favourable consideration as regards the two year period. If we agreed, it would be a very useful factor in getting flexibility in other directions.
6. Escape Provision-Some understanding in an emergency.
If I could secure an understanding on the lines set out above I would still seek an escape clause to meet an emergency but in this case it would be up to us to approach the U.K.
7. Agreements with other countries-Prior information.
I'm afraid it is going to be difficult to [secure] [1O] any precise information in the next few days on the proposals being discussed with India, I have asked two or three times about India and Egypt but the only line I could get was that they were running current trade deficits (which suggests some access to accumulated balances) but in other respects the arrangements will be tough.
[In] the case of Iraq, I was informed that development was necessary. I feel that if we can secure an understanding satisfactory to us, we should not insist on knowing the full details of these other countries. I would appreciate comments on this point.
8. Interest and Sinking Fund-These cost about 18/20 million a year. I raised the point whether interest and sinking fund could be treated as debt transactions and come out of accumulated balances if necessary. I added that other countries had used their balances to wipe out sterling debt. The reply was that these were proper charges to current earnings. I do not feel I can successfully press the point re interest, but may follow up sinking fund if I think it worth while.
9. Definition of current earnings and payments-to be considered later: In the talks we have referred generally to imports and exports and I haven't taken up yet the question of definition. I regard both as covering 'invisible' as well as pure trade items-in other words the items in our balance of payments (except such items on both sides as can be properly allocated to accumulated balances) would all come under the heading of current earnings or current payments, which are more descriptive than 'imports' and 'exports'. We could, of course, ask that private capital transfers should be excluded, but that would not suit us at present, as the trend is still our way. It may well continue in that direction, although a remark from one quarter indicated that it is probably on the decline for the time being. The U.K. Treasury could, with some justification, ask that capital transfers from U.K. be excluded from current earnings, but if they do, I will counter it.
I would be glad of any comments by the Bank on the above.
10. Form of understanding: I will not raise this until we have actually secured an agreement. The alternatives are:
(a) an exchange of official letters on a Government level.
(b) exchange of understanding between Treasury officials and initialled by them.
It depends upon the nature of the understanding and whether it would be desired by both parties to publish it. An exchange of letters on a Government level would no doubt provoke a request in Parliament for publicity. I suggest a decision be made over for the time being.
11. General: I suggest that brief comments might be telegraphed to me to guide me in further talks. It will be sufficient to refer to item numbers.