AUSTRALIA'S MEMBERSHIP OF THE STERLING AREA
In response to your request, I am attaching copy of some notes setting out reasons why it would be to Australia's disadvantage to withdraw from the Sterling Area dollar pool.
You will see that in the notes the flexibility of Australia's arrangements with the United Kingdom on dollar drawings is contrasted with the more rigid quota arrangements between the United Kingdom and certain other sterling countries. India and Burma are quoted as examples.
You will, no doubt, have seen the recent reports of new agreements between the United Kingdom and India and Pakistan. Detailed official advice of the contents of these agreements has not yet reached us. It seems, however, that the quota limitations on India's and Pakistan's hard currency drawings have been removed and have been replaced by undertakings to cut imports in accordance with the London Conference decisions.
This is a point you may wish to have in mind in any discussion which may take place in Cabinet. It does not, however, materially affect the validity of the general argument developed in the attached notes.
No reports of any new agreement with Burma have come under notice as yet.
AUSTRALIA'S PRACTICAL INTEREST IN SUPPORTING THE STERLING AREA AND THE POOLING SYSTEM
9. The main considerations which make it advantageous for Australia to continue membership of the Sterling Area and to participate in Sterling Area pooling arrangements are:-
(a) Australia's large sterling holdings.
Australia's 'London funds' (or sterling balances held in London) now stand at well over A.400m. Apart from a small gold reserve totalling about A.27m. these sterling balances represent virtually the whole of Australia's external reserves.
While existing Sterling Area pooling arrangements continue these reserves can, if necessary, be drawn upon to meet Australia's commitments not only in the United Kingdom and other parts of the Sterling Area, but also in any other country in the world. (The 1947 'gentleman's agreement' not to draw on sterling balances held at 30th June, 1947 )A.156m.) to meet current commitments does not significantly affect the position since the substantial balances accumulated since that date may be freely drawn against.) Withdrawal by Australia from the Sterling Area dollar pool would automatically convert Australia's sterling balances into blocked balances available only for payments to Sterling countries, except with the express permission of the United Kingdom authorities.
Such permission might be forthcoming for payments to 'easy' currency non-sterling countries but could not be expected where 'hard' currency payments were involved.
Put more generally, Australia has the strongest interest in supporting sterling and assisting in restoring its convertibility, if only as a means of protecting the value of her own sterling reserves.
(b) Australia's Dollar Deficit.
Because of the pattern of Australia's overseas trade and payments, Australia normally has a deficit on current account with the Dollar Area. This was the position before the 1939/45 War. During the war years when Australia was receiving war supplies under Lend-Lease and large numbers of American troops were stationed in Australia, dollar receipts temporarily exceeded dollar expenditure. Since the war, however, the traditional pattern has been resumed. Despite restrictions on dollar imports, Australia's dollar deficits have in fact been substantially larger than before the war. The main reasons for the larger dollar deficits are that North America has been the only source of supply for many categories of essential imports and that the general level of commodity prices has been much higher than before the war.
The estimates of Australia's net dollar deficits (after allowing for sales of gold) prewar and since the war ended are shown below:
1936/37-1938/39 9.2 35.9 (three years average) 1946/47 16.9 54.4 1947/48 51.2 164.8 1948/49 (provisional) 23 73
Australia has been able to finance these deficits because, under the Sterling Area pooling system, she has been able to purchase the necessary dollars from the U.K. against payment in sterling.
Without the pooling system imports from dollar countries would have had to be cut to a level which could be financed from Australia's own dollar resources. This would have required much more drastic restrictions on imports of essential equipment and raw materials from the Dollar Area, the effects of which would inevitably have been felt throughout the whole field of industrial activity in Australia.
It has, on occasion, been suggested that Australia would fare better outside the pool if action were taken to divert Australian exports away from the United Kingdom and other sterling countries in order to increase Australia's direct dollar earnings by increased sales in dollar markets.
In practice, such a policy would almost certainly react to Australia's detriment. It would mean sacrificing secure, long-term markets in the United Kingdom and other British Commonwealth countries with which Australia has traditionally close economic relationships to take advantage of market opportunities in the dollar countries which may well prove temporary or at least extremely unstable. The possibilities of diversion are, in any case, limited and, even if such a policy were pushed to the limit, it is unlikely that Australia would cam enough dollars to finance the level of dollar imports she is at present able to obtain within the framework of the pooling system.
The decisive argument against the adoption of such a policy is, however, that it would prove a two-edged weapon. Australia could not expect to continue to draw on the United Kingdom and other sterling countries to meet her essential requirements of goods in short supply if she were unwilling to reciprocate. The exchange of dollar-saving commodities is an essential feature of the Sterling Area partnership and, if Australia withdrew from the partnership the losses in this direction might well outweigh any possible gains.
The further suggestion sometimes made that Australia could earn more dollars by requiring countries outside the Dollar Area to pay wholly or in part in U.S. dollars for any short supply goods supplied to them by Australia is open to similar objections. If Australia were to adopt such a policy, the countries concerned would certainly require Australia to pay U.S. dollars for any essential goods which they supplied to Australia.
Putting aside proposals of this kind, a more general consideration to be home in mind is that, if Australia were to sever her connection with the Sterling Area dollar pool, an effort would have to be made to keep immediate dollar expenditure below the level of current dollar receipts in order to build up a dollar reserve to cushion fluctuations in dollar earnings. The size of Australia's dollar deficit has varied widely from year to year, partly because of changes in the value of dollar imports, but primarily because earnings from exports of wool (Australia's main dollar earner) to the United States are extremely unstable. The volume of American wool purchased over the years has proved very sensitive to changes in general business conditions in the United States and wool prices have also been subject to wide variations.
Similar fluctuations must be expected in future and, in a bad year, dollar earnings could fall to such a low level that, in the absence of adequate reserves, import cuts of intolerable severity would have to be imposed.
CONCLUSION 10. The Sterling Area pooling system can continue to operate only so long as sufficient funds are available in central gold and dollar reserve to meet the demands made upon it. The current drain on the reserve, therefore, represents a serious threat to the continuation of the pool and calls for immediate action by all partners in the arrangement.
11. The value of the pool and of the close economic association of its members was, however, recognised at the London Conference by surplus and deficit countries alike. An attempt by each member to operate independently and maintain its own reserve would disrupt the wide multilateral trading system based on sterling and represent a retrograde step towards narrow bilateralism with a lowering of trade levels all round. While the United Kingdom continues to act as the central banker, the Sterling Area can operate with a lower level of reserves than would be possible if each country had to work on a reserve of its own.
12. Australia's interests are clear. So long as the pool can be made to work it is to Australia's advantage to remain a member and to share both in its benefits and in the responsibilities which membership entails. This implies not merely co-operation in the immediate action required to check the drain on reserves but also in the longerterm measures needed to achieve equilibrium and build up the central reserves to a level which will enable sterling to be made once again freely convertible into any currency.
13. Restoration of the widest possible multilateral trading system based on sterling offers the best hope of promoting economic development and higher standards of living throughout the world.
There can be no doubt that such a system is also the best adapted to meet Australia's own economic and financial interests.