29 Coombs to Chifley

Letter [LONDON], 5 October 1948

Although discussions here have not yet gone very far, it may be useful if I set out for you my preliminary impressions. I have taken it that my prime function was to find out as much as possible about the U.K.'s long-term plans and to analyse their implications for Australia.

Independence of Marshall Aid by 1952/1953 The purpose of the plan to be presented to the O.E.E.C. is to demonstrate how the United Kingdom proposes to become independent of further American aid by 1952/1953. Broadly, the United Kingdom plans to use Marshall Aid to enable a greater proportion of her resources to be used for capital equipment to increase productivity and to establish new forms of productivity. The increased production thus planned for will to a large extent be direct replacement of goods at present being imported from the western hemisphere and less than I had anticipated expansion of export production while exports are expected to be 50% higher than 1938 compared with a present level of 43% above 1938. Consequently much improvement in the U.K. standard of living as is contemplated comes primarily from domestic production and includes relatively little improvement, for instance, in imported food supplies.

Continuance of food rationing on something very much like the present levels is assumed to be necessary. This is the source of some of the strongest internal criticism of the plan.

If the plan is achieved the United Kingdom will be independent of dollar aid only in the sense of not requiring further abnormal loans and grants. It is accepted that after 1952/1953 severe restrictions on dollar purchases will be continued apparently indefinitely. In other words, the plan does not hope to establish by 1952/ 1953 a multilateral trading world of which the United States is a part. The sterling area will continue to have a deficiency of dollars in normal trading conditions and those concerned here see no prospect of offsetting this deficiency with surpluses with other countries. As you know, this is a phase of the problem to which, in my opinion, insufficient attention is being directed. It is one on which little progress can be made except with the co-operation of the United States and runs into acute political difficulties.

On the other hand, the United Kingdom plan does assume that trade and payments for the world, excluding dollar areas, will by 1952/1953 be multilateral in character. The major obstacle to such multilateralism is the sterling deficiency of the other participating countries. If this is to be overcome it will be necessary for France, Holland, etc. to establish surpluses with countries outside the sterling area and Western Europe with which they can offset their sterling deficiencies. Possibilities are the Middle East, Eastern and South-Eastern Europe and Asia. There can be nothing in the United Kingdom plan to indicate whether the achievement of this surplus by the other participating countries is likely or whether the countries concerned are aware of the necessity for development along these lines. Until the plans of all O.E.E.C. countries are examined this must remain a major uncertainty.

It is clearly of considerable importance to Australia. The Western European deficiency with the sterling area includes a large deficiency with Australia. if these countries are unable to establish the necessary surpluses, we are likely to be faced with either a continuance of sterling grants to these countries or an attempt on their part to bring their trade with the sterling area, including Australia, into more direct bilateral balance. This may mean a contraction of their purchases from us, particularly of wool, and pressure for us to purchase more of their export commodities. To the extent that they hope to sell more to us they are likely to find that the U.K. is also planning to sell us substantially the same classes of goods.

Two major questions for us to look into in more detail are:-

(1) What are the implications for Australia of a prolonged continuance of restricted trade and payments between the sterling area and dollar countries? (2) What are the implications for Australia of a failure to achieve the multilateralism for the rest of the world which is assumed by the plan, and, in particular, the effects on Australia of an attempt by other participating countries to establish a closer bilateral balance with the sterling area and with us?

Australia and the United Kingdom balance of payments in 1952/1953 In preparing balance of payments estimates United Kingdom officials have first attempted to estimate their prospective international income. To do so they have attempted to assess for their major export commodities the prospects for 1952/1953 on a market by market basis. In doing so, they have assumed the continuance of high levels of employment and economic activity and rising levels of productivity. On the other hand they have made allowances for the recovery of domestic production in some countries replacing goods now imported from the United Kingdom and have probably assessed conservatively the demand for imports likely to be associated with the higher levels of income.

On the whole this seems to be a reasonable approach. However, it has produced an estimated volume of exports significantly less than that which British industry is expected to be able to produce for export if the market is available. U.K. officials are aware of this conservative margin but are unwilling to produce too favourable a picture lest it lead to a relaxation of effort in the United Kingdom or to some reduction in United States' aid in the meantime. Furthermore, there are other uncertainties which could substantially change the picture.

(a) Future price changes.

By direction of the O.E.E.C. prices have been assumed constant at 1948/1949 levels. This would perpetuate what some United Kingdom officials believe to be unfavourable terms of trade for them, and that consequently this introduces another conservative element into their calculations. They are perhaps unduly optimistic on this point. The 30S with which they tend to make comparisons were years exceptionally favourable to manufacturing countries in their exchanges for primary products. Furthermore, the indications are that there will over the next few years be a substantial increase in the supplies of manufactured goods. On the other hand production of foodstuffs and raw materials is unlikely to expand correspondingly. A radical improvement in the terms of trade for manufactured goods seems to me improbable. However, some fall in prices of particular import commodities of great importance to U.

K., e.g. wheat and other grains and possibly wool, is not unlikely. On the other hand 1948/1949 records exceptionally high prices for coal and oil, both of which figure prominently in the anticipated improvement in the U.K. international income.

(b) Coal and oil.

A substantial increase in coal production is planned with a corresponding increase in coal exports. This increase may be difficult to achieve.

The greatest increase in international earnings is in invisible exports for which the sale of British-owned or controlled oil is largely responsible. This increase depends upon the successful completion of the vast programme of development being carried out in the Middle East and in Venezuela by British oil companies.

Supply problems and political difficulties represent the main obstacles. We have not yet got a clear picture of the oil situation but hope to get more light during the week. I notice that the United Kingdom still seem to regard oil as a net dollar user if expenditure on equipment etc. is included even in 1952/1953, which is puzzling in the light of suggested developments and their anticipation that the United States win become increasingly an importer of oil.

(c) Relations with the rest of the sterling area.

The figures for the rest of the sterling area, i.e. colonies and Dominions, etc., are expected between them to show a balance in their payments with dollar countries (excluding exports of gold).

This apparently assumes a continuance of severe restrictions against dollar goods. I have not yet got clearly what assumptions they are making about our own net dollar usage, but I have emphasised very strongly that forecasting so long ahead as 1952/1953 is exceedingly speculative.

(i) We ourselves must continue to judge the appropriate degree of restrictions in the light of our current circumstances;

(ii) Large-scale capital goods requirements might quite easily throw out the most reasonable of estimates;

(iii) Our balance of payments with dollar countries is dominated by two or three export items and relatively minor price changes of these commodities can make nonsense of earlier estimates.

It is hoped that we will obtain more light on the nature of their assumptions this week, but I think importance of the points I have raised is recognised. U.K. officials have emphasised that to complete the task imposed upon them by the O.E.E.C. they must include some figures covering sterling area position but that they do not wish this to be taken to indicate any firm expectation that these will be achieved.

It is assumed that sterling area countries, including Australia, will buy United Kingdom goods on a scale considerably greater than in 1947/1948. The figures for Australia are, however, somewhat less than the current rate of inflow of imports from the United Kingdom into Australia, and, so far as we have been able to judge at a quick glance, do not appear unreasonable if we can assume a continuance of 1948/1949 prices for Australian exports, normal increases in production, average seasons and a continuance of a fairly substantial capital inflow. On the other hand, a moderate fall in export prices would require us to cut imports significantly below the figures they have in mind. So far we have not obtained any clarification of the makeup of their figure for total exports to Australia but hope to be able to get more light on that this week.

(d) Shipping and tourist income.

The anticipated increases in both shipping and tourist incomes are substantial, but some United Kingdom officials believe that they are conservatively estimated. Increase in shipping income depends upon the completion of the current ship construction programme, particularly tankers, but, given this, the estimates are probably conservative for the level of world trade contemplated by the plan as a whole. Similarly, tourist income has increased in the current year substantially more than was anticipated and many of the difficulties which it was thought would prove a barrier to the inflow of tourists from the United States and other countries are not proving as acute as was anticipated. Furthermore, a number of changes affecting consumption controls do appear to be making the way of the tourist a good deal easier than it was previously.

These two items may represent an additional conservative factor in the estimates of the international income.

Implications for Australian export industries Given the estimate of international income from all sources and the assumption that it will be generally available outside dollar countries, the completion of the plan requires only the allocation of this income between alternative sources of supply to the best advantage. The major problem is of course to allocate expenditure in such a way as to replace goods at present purchased from the western hemisphere which cannot be replaced by domestic production and for which it will not be practicable to pay after American aid is terminated.

The most striking thing from Australia's point of view is that the United Kingdom does not anticipate spending more in Australia in 1952/1953 than in 1948/1949. At the same time she is hopeful that Australia will contribute significantly to the replacement of basic foodstuffs and raw materials at present obtained from dollar areas. In particular she seeks more meat, butter, fats, cheese, sugar, eggs and base metals. We have emphasised how entirely unsatisfactory this position is from our point of view. It requires us at considerable capital outlay to develop production of our staple exports and to sell the increase to the United Kingdom. On the other hand, this increase is apparently to be at the expense of other foodstuffs, which would include fruits, wine, and various processed foods. To keep the total within the amount set by the balance of payments approach, purchases of these commodities are expected to fall approximately the same amount as purchases of basic commodities increase.

It is difficult to know how seriously to take this picture. The amount is not large-the reduction is 8m. out of a total import programme of 194m.-and it is clear that the United Kingdom officials are hopeful that international income has been under- estimated and that the improvement will enable then to spend more, particularly on foodstuffs. If their optimism proves justified, they would almost certainly continue to buy the other foodstuffs from us and perhaps to increase their purchases. Despite this possibility, there is obviously a real danger for Australia here, and I believe that consideration must be given in discussions of food contracts with the United Kingdom to requiring continued purchase of such commodities as canned and fresh fruits, wine, and so on, as a condition of priority of supply of the more basic commodities.

Similarly, it seems to me to emphasize the importance of Australia seeking alternative markets now while demand conditions are universally good. In discussions with officials we have advanced the point of view that it was in the United Kingdom's interest to ensure that we were able to take the present opportunity to establish our basic foodstuffs in United States and other dollar markets where the opportunity exists. This for two reasons:

Firstly, at some point general purchasing power in the form of more dollars might be more important to the United Kingdom than additional food supplies. Secondly, effective sales to dollar markets because of their current high prices might prove a more effective stimulus to increased production than any other possible measure. It was agreed that United Kingdom officials should give careful consideration to this question and that we should look into what would be the minimum diversion of such products as meat, butter, etc. effectively to test available dollar markets.

Furthermore, it was agreed by United Kingdom officials that the arguments for permitting diversion from United Kingdom contracts were particularly strong in the case of markets such as the Philippines which were natural markets for Australia and perhaps not subject to the same uncertainties as the United States market itself.

Australian development (a) In primary industries.

The United Kingdom is anticipating expansion by Australia of the output of her basic food and raw material industries, but, as I mentioned above, she is assuming that her increased expenditure on these items will be offset by reduced expenditure on less important foodstuffs and other products. This seems on the face of it an unsatisfactory basis for developmental plans, and it is difficult to assess how far this general position may be altered if the United Kingdom estimates for international income prove to be unduly conservative. On the other hand, discussions here reinforce my general opinion that the long-term situation for foodstuffs and raw materials is hopeful. Rising levels of population, rising expectations about standards of living and new interest in under-developed countries in economic development, particularly industrialisation, seem to constitute favourable market factors for such products. Nonetheless I think we should avoid considerable expansion in industries where the increased product is designed solely or predominantly for the United Kingdom market and where we are aware that alternative sources of supply at lower cost exist within the dollar area. Whatever the United Kingdom may say now, I am satisfied that if conditions change so as to bring these commodities within the area of availability from a currency point of view, they will be obliged to go back to purchasing from them. This applies particularly to products such as sugar and wheat.

My impression is that the United Kingdom is willing to consider participation in one form or another for developmental projects directly relating to her needs. So far I have not had detailed discussions of any possible projects of this kind beyond a preliminary discussion of developments after the visit of the United Kingdom Food Mission in relation to cattle industry development in Northern Australia. Further discussions on the possible degree and methods of United Kingdom participation in this enterprise are listed. Similarly, it is expected that we will hear more from them in relation to developments which they may wish to see undertaken in aluminium, timber, and generally in relation to New Guinea.

(b) Manufacturing industries.

I have outlined to the United Kingdom officials in general terms some of our plans for reducing our own dependence on imports from United States, including some reference to projects such as the production of the Australian car, the tractors, agricultural equipment, newsprint, aluminium, tinplate, and so on. I have emphasized to them that, while we are approaching this problem on the basis of a series of projects, it is our general impression that almost any development of a reasonably economic character in Australia at the present time would tend to reduce our dollar requirements or to make possible exports to dollar areas. Any great expansion of manufacturing industry, however, either of a concentrated project character or a generally dispersed development is held back because of limitations imposed by the coal industry and partly as a result of this in basic materials industries. I emphasized to them that the greatest direct, assistance Australia could receive in enabling it to contribute to a reduction of net dollar expenditure was to expedite the recovery and expansion of the coal industry. In this I indicated the United Kingdom could make two definite contributions- (i) assisting the Joint Coal Board in obtaining equipment for mechanisation which it had placed in this country;

(ii) speeding up the proposed development by a British Company of the Blair Athol fields.

In support of this claim I pointed out that Australia can produce coal more quickly with the use of less labour and more cheaply than the United Kingdom. There would, therefore, be a net gain in the expansion of our coal mining industry even if it was at the expense of the United Kingdom. United Kingdom officials asked whether, in the event of our plans for the expansion of the coal industry being implemented, it would possible for us to supply coal for export. I have cabled for more details on this phase of the question, but I am certain myself that any assistance we can get from the United Kingdom in relation to the coal industry can make a major contribution to the development of our economy generally.

A related question is the long-term position of the iron and steel industry. It is clear that the United Kingdom is carrying out a major expansion in this field, but it is equally certain that their own production of basic steel will be insufficient for their export markets and the requirements of their steel fabricating industries. The major redeployment of industry taking place in this country is an increased concentration on the production of engineering goods, and it is to this concentration that the United Kingdom looks to re-establishment of its traditional place in international trade. They expect to fill the requirements of their fabricating industries which they cannot meet themselves from imports of basic steel from Western European countries, and there are agreements by which the United Kingdom will obtain portion of these quantities. At the same time some U.K. officials do not seem entirely happy about this dependence and in any case there seems to be a practical certainty of a continued world-wide shortage of basic iron and steel and iron and steel products. While I hope to look into this question further, it is my firm impression at this stage that the further development of the Australian iron and steel industry may well fit in to the United Kingdom's own plans and also enable Australia to contribute to the solution of a world-wide economic problem to her own economic advantage. It will not be possible for me to do anything more than a very preliminary examination of this question, but if my first impressions are confirmed, I suggest that this should be a question to which attention should be given by those adequately equipped technically both in the government and in industry in Australia.

In outlining in general terms our plans for replacement of dollar imports and the development of dollar exports, I have emphasized to the United Kingdom officials that these developments should not lead them to anticipate necessarily any reduction in our dollar requirements. These dollar requirements have been cut to a degree which in our opinion cannot be sustained without detriment to the economy, and we may in any case have to import more to meet the requirements of industry.

I think the foregoing sums up general impressions I have built up so far. I had a telegram from Watt which suggested that one of our earlier cables had somewhat misled you as to the nature of the discussions we were having. This misunderstanding arose partly from some words I myself had used in drawing attention to some of the difficulties associated with estimates so far ahead as 1952/1953. I am sorry about the misunderstanding, but you may be sure that there has been no tendency to discuss basic policy questions already determined or to suggest that we were in any way willing to modify our insistence on complete independence in the formulation and execution of our economic policies.

I went over to Paris for a couple of days at Dr. Evatt's request to talk over the background of the economic questions for the Prime Ministers' meeting. He seems to be in good form and enjoying his job as President. He certainly is going to have his hands full with that, the Prime Ministers' Conference and the Banking case.

The weather here has been splendid-almost as nice as springtime in Canberra!

[AA: M448, 137]