17 Coombs to Chifley

Memorandum [CANBERRA], 7 May 1948

I attach a note I have prepared on the dollar situation and action which might be taken here particularly from a long-term point of view.

I am giving copies of this to Watt [1] and Wheeler of the Treasury and would be glad of an opportunity to discuss the suggestions made with you at an appropriate time.

Attachment

DRAFT MEMORANDUM FOR THE PRIME MINISTER

Policy in relation to the Dollar Problem

The recent memorandum from the United Kingdom [2] on the 1948 dollar position makes it clear- (1) that in the absence of Marshall Aid the United Kingdom would be in a desperate position;

(2) that the rate of improvement which it seems reasonable to anticipate will still leave the United Kingdom in a critical position when the end of the Marshall Aid period is reached;

(3) that the United States does not intend that Marshall Aid should be used for meeting dollar deficiencies of the sterling area;

(4) that this deficiency, while small in relation to the total, represents a substantial proportion of the total sterling area reserves held by the United Kingdom, and it is clear that the United Kingdom will be unable to continue to finance it on its present scale for a number of years.

It seems inevitable, therefore, that we will continue to be subject to pressure by the United Kingdom further to reduce our dollar expenditure and probably to borrow from the Monetary Fund.

Both from the point of view of our responsibility as a member of the sterling area and in order to maintain effective independence in the conduct of our own economic affairs, it is essential that we should plan to place ourselves in a position where we do not make any net drawings on the sterling area dollar pool. This win require- (a) long-term policy which will so alter the character of our trade that we are capable of meeting our own dollar requirements;

(b) a short-term policy which makes a maximum contribution to our essential requirements during that period and facilitates the development of the longterm programme.

Limitations of present action So far it has not been practicable to do much more than impose the most severe restrictions on dollar expenditure. This produces the quickest results and, furthermore, by its severity justifies any remaining calls on the dollar pool which we are obliged to make, but it seems certain that it is of a severity which it will be difficult to sustain, and in some cases by preventing the importation of capital equipment may, in fact, slow up the replacement of goods previously imported from dollar areas.

Similarly on the export side, such stimulation of exports to dollar areas as has been possible has of necessity been confined to marginal increases in such exports by diversion of slightly larger quantities from the domestic market. The aggregate of our exports of manufactured goods in particular to dollar areas is small, and it is obvious that this approach can make little contribution to the problem.

Long-term Policy It seems desirable, therefore, that an approach should be made to a long-term solution of the problem by the formulation of plans which it is recognised will take a number of years to put into effect.

These plans would be prepared in relation to the main items in our balance of payments in dollar countries and would need to be formulated in as concrete terms as possible. At this stage it is practicable only to give an indication of the type of measures which should be investigated in more detail and to suggest procedure for such investigation and for the development of concrete projects out of them.

Imports The main commodities entering into our dollar import programme are set out in Table 1 attached. The possible lines of action in relation to imports include 1. Restrictions.

2. Replacement by Australian production.

3. Diversion to other sources of supply in soft currency countries.

It seems that restriction has probably gone as far as is wise, and adequate machinery is in existence for the review of import programmes. No further attention is, therefore, given to restriction in these notes.

Import replacement by Australian production is not likely to be easy. Australian aggregate production is already at a maximum and we are facing widespread shortages of manpower, materials and equipment. Furthermore, we are likely to experience problems in relation to the techniques and costs in a rapid stimulation of such replacements. However, a development of Australian production to replace imports is a normal characteristic of Australian development and much could probably be done by concentrating development in the next few years deliberately into channels likely to make a maximum contribution to replacement of dollar imports.

The classes of commodities which appear to offer the best prospect of replacement by Australian production are- Tobacco leaf Chemicals Motor chassis and tractors Tinplate Newsprint Paper and pulp Cloth and yarn Tobacco is an agricultural product and the limits within which Australian production can be increased may be determined by climatic and other technical considerations.

The remainder of the commodities mentioned are manufactured products, and in some cases plans are in existence for expansion of Australian production. In these cases Government action to expedite this expansion by assisting the firms concerned to obtain the necessary manpower, materials and equipment, appears to be the most hopeful line of action. The means whereby this can be done presents some administrative problems.

Diversion to other sources of supply is in some cases impossible, and in others difficult, but diversion to United Kingdom sources seems possible in relation to Chemicals Machinery Tractors Motor chassis Over a longer period it might also be possible to obtain some of our requirements of these products from European countries whose currencies are less difficult. For instance, France, Italy, Germany, Czechoslovakia and Sweden. For those diversions to take place, however, changes in certain forms of production, e.g. motor bodies, may well be necessary and, furthermore, established commercial connections might have to be varied. This can only be done slowly and with the collaboration of the commercial enterprises concerned.

Of the remaining commodities it seems to be possible that diversion could take place in relation to- Tobacco Timber Newsprint Paper and pulp Diversion of the tobacco demand to South Africa and Rhodesia apparently does not effect any dollar saving since the net settlement with these countries is in gold, but some possibility may exist in Greece, Turkey and other Middle East countries. So far as timber, newsprint, paper and pulp are concerned, there appear to be some possibilities of diversion to New Zealand and Russia.

The procedure for such diversions may be inter-government negotiations followed by direct trade contacts or perhaps by the negotiation of formal bilateral treaties of the kind concluded by the United Kingdom.

Exports Here we have two possible fields of action. Firstly, in relation to foodstuffs and raw materials, of which Australia is already a substantial producer, it may be possible to divert some of our present production into dollar markets. On the other hand, in some of these products such as beef and dairy produce, increased production is certainly practicable over a long period. The question will arise as to whether we should continue to export all our surpluses of foodstuffs to the United Kingdom or whether we should seek to establish ourselves in the United States' markets.

From a long-term point of view there seems to be a good case for diverting sufficient to establish effective commercial connections in the United States markets themselves. However, since sales to the United Kingdom of increased production of these commodities probably reduces their purchases in South America and reduces purchases in the Western Hemisphere, they probably represent net savings of dollars to the sterling area as a whole even if these do not accrue directly to Australia.

Action in this field has already been commenced with the investigations arising out of the United Kingdom request for increased food production.

In the field of manufacturing there are not the same opportunities for producing large numbers of dollars. Individual classes of production cannot hope to do more than contribute on a small scale. Nevertheless, such contributions are well worth while and are comparable in scale to the savings which can be made from imports restrictions and replacements. They are preferable to these forms of action since they tend to increase the aggregate level of production and contribute to Australian industrial development.

It seems, however, that a new approach to the export trade will be necessary if significant results are to be achieved. In the past exports of manufactured goods have been an incidental to production for the local market. This has meant both discontinuity of supplies and frequently inappropriateness to the market to be served. It will be necessary for production to be undertaken specifically for export and on a scale which will enable costs to be competitive not merely in the present period of excessive demand but on a long-term basis.

It is clearly difficult with the present general shortage of labour and the irregular supply of basic raw materials such as coal, steel, etc. to anticipate very early results in this field, but it seems reasonable to expect steady improvement in the supplies of these basic requirements and, in the meantime, plans can proceed for the development of the export side of certain industries. The most promising appear to be- Wool textiles both woollen and worsted, but especially the latter Iron, steel and steel products Selected machinery and machinery parts Felt hats Men's and children's hose Felt products Selected chemicals Processed foodstuffs.

In some cases action necessary will be fairly obvious, although perhaps difficult to give effect to. For instance, it seems likely that production of woollen textiles for export could be considerably increased if increased manpower were available. This is in some cases associated with the shortage of accommodation and could perhaps be overcome by development of the policy already partly in effect of providing hostels for housing migrants closely in association with this industry. In other cases long-term plans for the extension of capacity and for the adaptation of existing capacity to export requirements may be necessary. In these cases plans would need to be worked out in some detail in collaboration with the firms concerned, and action may be called for from a number of Departments. This raises the administrative problem of the means of collaboration with outside firms and the co- ordination of governmental action between Departments concerned.

Another possible line of action is the stimulation of exports by relatively small enterprises. It is known that there are possibilities for the sale of the products of such enterprises in dollar areas, but such firms are frequently unable to establish the necessary commercial connections, and there appears to be a relatively limited number of reputable export houses who can place firm orders with manufacturers operating on a small scale. It was to meet this particular need that a proposal was put forward some time ago for the establishment of a joint government and private enterprise export corporation. Consideration might be given to the revival of this project.

Greater possibilities may well exist in the field of mineral development, where the problems of equipment, manpower, etc. are in many cases similar to those of manufacturing enterprises.

Services There are only two items of great significance in this group of payments, i.e. films and tourist expenditure. The action which has been taken so far in relation to films is essentially negative and short-term in character, although it appears to have led to some interest by American film enterprises in the possible production of films in Australia. The development of plans of this sort both by producing films in Australia for local showing and the possible earning of dollars in the United States from the showing of the films produced here represents a line of action worthy of detailed examination.

Similarly, United States' citizens are the world's heaviest spenders abroad. The possibilities of bringing American tourists to Australia at present are clearly limited by transport difficulties and shortage of hotel and other accommodation in Australia. These, however, can be temporary factors and a conscious plan of development of accommodation directed to the requirements of tourists could almost certainly lead to a very marked expansion of expenditure of this sort in Australia.

Capital transactions Normally there is a small flow of dollar capital into Australia, and to the extent that this can be expanded it will make an immediate contribution to our dollar problem and, if directed into appropriate forms of production here, may reduce our long-term dependence on dollar supplies.

Government policy has been opposed to government borrowing overseas but, generally, private capital has been welcomed. It may be possible to stimulate the flow of American private capital into Australia. For instance, consideration has been given from time to time to the establishment in London of an office designed to promote the transfer of British enterprises to Australia by interesting British industrialists in the possibilities of development here. There seems good reason to believe that the establishment of such an office in the United States could have significant effects.

While government borrowing abroad is contrary to government policy, there seems less objection to borrowing where it is related directly to the import of capital equipment for the development of Australian industry, particularly where the industry concerned would be producing commodities for which we would otherwise have to pay dollars. It may be sound economy to borrow in order to finance such development. Consideration might be given to borrowing from the International Bank for Reconstruction and Development for financing imports of this character.

To ensure that the relevant funds were used only for this purpose, a special account might be established to which specific imports of this kind could be charged. It has been estimated that in the present import programme there is roughly 6,000,000 for capital equipment and that 10,000,000 might more truly represent the essential needs of industry especially in view of present import replacement projects. It would be legitimate to borrow for these purposes and this would have the double effect of reducing our immediate claims on the sterling dollar pool and of reducing our long-term dependence on dollar supplies. A borrowing transaction of this sort is fundamentally different from a proposal that we should use up our drawing rights from the Monetary Fund, rights which are established to deal with temporary difficulties in our balance of payments rather than the correction of a long-term disequilibrium.

Organisational problems In effect the suggestions made above amount to a general influencing of Australian development in order to promote the production of goods capable of reducing our dependence on dollar supplies. It is a policy which will take some years to produce substantial effects and will require to be implemented through a number of Departments by steady and continuous action.

Furthermore, it may require the preparation of detailed plans in collaboration with individual and private enterprises which will call for a variety of forms of government action. The working out of such policies and giving effect to them presents unusual organisation problems for Government Departments.

It seems to me that it is necessary for a continuous watch to be maintained on the development of this policy both at the Ministerial level and the departmental level. I suggest, therefore, that there should be established- (1) a Policy Committee at the Ministerial level consisting of the Prime Minister and Treasurer, the Minister for Post-War Reconstruction and the Ministers for Commerce and Customs;

(2) a Policy Committee at the departmental level consisting of the departmental heads of the Departments of Post-War Reconstruction, Treasury, Commerce and Customs.

It would be the responsibility of the Departmental Committee to prepare proposals in general terms for the consideration of the Ministerial Committee, and, having obtained general approval for them, to arrange for their working out at an inter-departmental level in greater detail. In some cases the working out of these plans would fall within the responsibilities of individual Departments. In other cases, for instance in the preparation of plans for the development of particular manufacturing enterprises, for action from a number of Departments, e.g. the Division of Industrial Development, Treasury, Department of Commerce, Commonwealth Bank, Department of Immigration, Department of Works & Housing and Department of Labour & National Service. For this phase of the work it would probably be appropriate to set up small working parties from the officers of the Departments concerned who would be able to give a substantial proportion of their time to this work.

Work in its relation to manufacturing industry would be detailed and complex and require continuous attention for some considerable time. Direct negotiations with senior business executives would be involved as well as collaboration with State Governments and Commonwealth Departments. In this field, therefore, it may be worth considering establishing a small full time working party at a high level which would be responsible to the Heads of Departments Committee. Men such as S. F. Cochran, Chairman of the Queensland Electricity Commission, J. Breden of the Commonwealth Bank and Capital Issues Board staff, and J. L. Knott of the Division of Industrial Development might be appropriate for this purpose.

For work in agriculture, mining and services, and in connection with diversion of import trade to soft currency areas, other forms of working parties might be more suitable. This question should receive early attention.

Short-term possibilities Since some time must elapse before any long-term policy can produce significant results, and since we are under pressure from the United Kingdom to exercise our borrowing rights from the Monetary Fund, pressure which it seems likely will be renewed, consideration might be given to other forms of short-term action capable of helping the immediate position.

The action suggested above for the stimulation of private investment and the possible borrowing from the International Bank of Reconstruction and Development to finance specific imports of capital goods would of course make an early contribution to the short-term problem.

Other possibilities which might be examined are-

(1) Sales of Australian products to Europe against Marshall Aid Dollars European countries receiving Marshall Aid are substantial purchasers of Australian wool, and if the wheat harvest in the coming year provides a surplus over our commitments to the United Kingdom and other normal Australian markets closer at hand, they would be substantial purchasers also of Australian wheat.

Particularly in view of American insistence that Marshall Aid to the United Kingdom should not be used to finance deficiencies of the rest of the sterling area, there seems to be a good case for representations to them that Marshall Aid money should be capable of being used for the purchase of essential foodstuffs and raw materials from Australia. It should be noted that it has been agreed that Marshall Aid money can be expended in South American countries.

(2) Realisation of stocks Australia and the United Kingdom are joint owners of substantial stocks of wool which are of possible interest to the United States. The transfer of ownership of the part or whole of this stock could make an immediate contribution to sterling area dollar resources. This might be done either by a direct sale of the products to the United States' Government or, alternatively, by United States' participation in the Joint Organisation. [3] If the latter alternative were adopted, the United States could make an immediate payment to the other two partners to cover her share of the stocks. United States' participation might have other advantages in that it would give greater stability to the future of the wool market and remove the justification for United States' objections to the operations of the Joint Organisation. It might also become the forerunner of a general international wool agreement, studies for which are in progress.

Conclusions and Recommendations The suggestions included in the above-mentioned notes are made in many cases by way of illustration rather than from the certainty that they can be put into effect and will produce the results suggested. However, it seems certain that sufficient possibilities exist for a substantial change to be brought about in our net dollar requirements over a number of years.

It is recommended, therefore- (1) that the Policy Committees at the Ministerial and Permanent Head level be established immediately;

(2) that the Departmental Committee should be asked to examine the suggestions in this Paper and any others which arise out of its work and to submit proposals as its work proceeds to the Ministerial Committee for action;

(3) that the Departmental Committee in particular advise upon the desirability of a full time working Party at a high level to develop plans for manufacturing industries. [4]

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

2 See note 2 to Document 8.

3 The Joint Organisation (or United Kingdom-Dominion Wool Disposals Ltd) was responsible for wool stocks held on behalf of the United Kingdom, Australia, New Zealand and South Africa.

4 This memorandum was considered at a meeting of permanent heads in June. Coombs's views were approved but it was decided that the recommendations should take account of Australia's sterling area relationships. As a result, an agreed document was drawn up and submitted by Coombs to Chifley. It is published here as Document 26.

[AA: M448, 128]