234 Melville to Burton

Letter, SYDNEY, 7 June 1949

PERSONAL & CONFIDENTIAL

1. I enclose a copy of the report of the Sub-Commission on Employment and Economic Stability prepared at its 3rd Session from 11th to 22nd April, 1949.

2. The report covers the general proceedings of the Sub-Commission and the following comments are intended merely to supplement the report.

3. Of the six members and alternates who attended the session, three, Messrs. Chernyshev, Frisch and I had attended most of the meetings since the election of the Sub-Commission. The other three, however, Messrs. Goldenweiser, Harrod and Leduc had not previously attended any of the sessions. Of these, Mr. Goldenweiser was an alternate for Mr. Riefler and Mr. Leduc an alternate for Mr. Belin. Mr. Harrod was a member but at earlier sessions had been represented by alternates, at the first session by Mr. Loveday and at the second session by Mr. MacDougall. The seventh member of the Sub-Commission, Mr. Lange, was unable to attend the session and was not represented by an alternate.

4. In my letter to you of 18th May, 1948[1], following the second session, I wrote:-

'After my experience at the last two sessions of the Sub-Commission I am satisfied that the Sub-Commission cannot fully perform the functions for which it seems to have been appointed. The Sub-Commission will meet in future once a year at a set time. It cannot, in these circumstances, report usefully on current world economic conditions and trends which might guide organs of the United Nations to make specific recommendations and help national governments to adopt correct economic policies. It seems to me that if there is to be reporting on trends, the United Nations Secretariat will have to be given the task. It is not possible for a body composed of people drawn from all over the world, meeting at rare intervals, to perform this type of work.

The work that the Sub-Commission can most usefully do is to produce reports that would set out agreed principles which might be of help to national governments in framing their own policies.' 5. In an attempt to give effect to this concept of the work which the Sub-Commission could usefully perform, at its second session members mapped out a number of papers which they asked the Secretariat and various members to prepare. It was expected that with the help of these papers the Sub-Commission would be able at its third session to commence the preparation of reports setting out agreed principles. The papers were:-

(1) The problem of the structure of production under full employment (to be prepared by the Secretariat) (2) The methodology to be used in dealing with the problem of maintaining full employment, taking into account economic budgeting, forecasting, and modern techniques of overall review of the current economic situation (to be prepared by Mr. Frisch) (3) The transmission of economic fluctuations from country to country (to be prepared by Mr. Riefler) (4) The re-establishment of international financial and commercial relations (to be prepared by Mr. Belin) 6. Although members were reminded from time to time by the Secretariat of their undertakings to prepare these papers, when the Sub-Commission met on 11th April the only paper that had been prepared was that by the Secretariat. Even it proved to be an inadequate examination of the subject and was not found by the Sub-Commission to be very useful. While Mr. Frisch did not prepare the paper for which the Sub-Commission asked, he did send to members a number of other papers on various topics which he was very anxious that the Sub-Commission should discuss. However, these papers dealt in a highly technical way with matters which other members of the Sub-Commission considered to be either trivial or not relevant to their terms of reference. Mr. Frisch no doubt would not agree with this judgment but, in the circumstances, it is not surprising that the members of the Sub-Commission were not prepared to spend very much time in discussing his contributions.

7. With the lack of suitable working papers, the Sub-Commission commenced its proceedings at a considerable disadvantage. In order that the Sub-Commission might have before it some material which could be used as the basis for its discussions at this session, there were distributed to members the official documents containing the replies received from governments and specialised agencies to the series of questions asked by the Secretary-General concerning national and international action to achieve full employment and economic stability, and to prevent a future decline (see documents E/1111 and E/1111/Add.1-5). Summaries were also prepared by the Secretariat of replies to questions 8 and 12 of the questionnaire dealing respectively with action contemplated by governments to maintain full employment, and measures designed to deal with balance of payments difficulties resulting from full employment policies.

8. The Sub-Commission did eventually use these summaries as the basis of its report, though not altogether in the way I had hoped, and the report which finally emerged contains a rather superficial analysis of the replies of governments to the questionnaire of the Secretary-General. There was at the outset, a considerable loss of time while members debated procedural questions, largely because three of the members were new to the work of the Sub-Commission. When it got to work, the subject which was found to interest members was the extent to which governments were increasingly placing obstacles in the way of international trade and the contrast of this trend with the aims of the Mutual Aid Agreement which sought to induce governments to take action directed to the elimination of all forms of discriminatory treatment in international commerce and to the reduction of tariffs and other trade barriers. While the report of the Sub-Commission, prepared under the pressure of this motive is of some interest, and calls attention to the inadequacy of specialised agencies such as the International Monetary Fund and the International Bank for Reconstruction and Development to provide governments with resources that would enable them in the event of depression to dispense with restrictive measures, nevertheless this does not seem to me to be the sort of work that the Sub-Commission was appointed to do. It is, however, perhaps fair to say that in view of the lack of documents it may have been difficult for the Sub-Commission at this session to have done anything of a more fundamental character.

9. Sections A. and B. of Part III of the report of the Sub-Commission review briefly the answers of Member States of the United Nations to the questionnaire of the Secretary-General and set out some of the principles which, in the view of the Sub-Commission, should be observed by governments in giving effect to their domestic measures for maintaining full employment. All of these principles are to-day widely accepted and no original contribution is made in the report of the Sub-Commission. It may, however, be of some value to have had the Sub-Commission's endorsement of these principles.

10. In paragraph 21 the Sub-Commission draws attention to the contraction in employment and production that has been going on in the United States for some months, and recommends that the subject of developing immediate domestic measures to counteract recession, to be used if and when found necessary, be placed on the agenda of the coming session of the Economic and Social Council.[2]

11. In Section C. the Sub-Commission turns to the problem of balance of payments difficulties in the maintenance of full employment, and draws attention to the fact that in their replies to the questionnaire of the Secretary-General, governments make it clear that in the event of a downturn, most of them propose to make use of import restrictions in order to keep intact their domestic full employment policies.

12. Attention is also drawn to the replies of the International Monetary Fund and the International Bank for Reconstruction and Development which imply that little assistance will be available from these bodies to help Governments meet their balance of payments difficulties without resorting to restrictive measures. The Sub-Commission points out that these restrictive methods of meeting balance of payments difficulties in a depression, and the actions of governments during recent years, are in conflict with the effort made before the end of the war to make a substantial step on the road towards international economic collaboration. The Sub-Commission also comments on the disappointing results that have so far been obtained from the activities of the International Monetary Fund and the International Bank for Reconstruction and Development, and on the slight progress made to create international buffer stocks for primary products. After observing that governments are becoming more nationalistic in their procedures, that we are moving further from the fact of internationally valid money units, and that 'multiplicity' of currencies is growing and the need for each nation to balance its trade bilaterally with each of its neighbours is increasing, the Sub-Commission recommended that the present time, at the end of the inflationary phase, was the right moment for governments to reconsider policy.

13. The following agenda were set down for mutual consultation at the highest level amongst the governments concerned:-

(a) To re-establish the multilaterality and convertibility of currencies. This might be subject to decisions under 'f' below (the dollar problem).

(b) To reconsider the charter of the International Monetary Fund in the light of developments, and to consider whether the size of the Fund is adequate and its procedures and policies are such as to enable nations to proceed through a depression without resorting to deflation or import restriction.

(c) To reconsider the charter of the International Bank, with special reference to its functions in a trade depression and the adequacy of its finance to perform those functions. There is also the question: what is the prospect of the Bank's relying to a greater extent than at present on funds other than those of the United States? (d) To resume discussions on the International Buffer Stocks proposal.

(e) To consider whether the growth of government interventionism requires any modification in the international plans previously agreed to.

(f) To consider whether the dollar is likely to cease to be scarce within the ERP[3] period and, in the event of a negative answer, to consider on what lines the dollar problem should be tackled when that period is over.

(g) To interchange information on domestic full employment policy, consider whether plans now entertained are likely to be adequate and, if not, whether some additional international measures, other than those envisaged under the above headings, will be needed.

14. There were two dissentients from the report, Mr. Chernyshev whose reasons are given in the Summary Record of the 52nd meeting (2.CN 1/Sub.2/SR 52); and Mr. Frisch whose views are given in the document (E/CN 1/67), a copy of which is enclosed.

15. I had no personal difficulty in accepting the report: the logic of it I believe to be sound enough. My objections, as given in the Summary Record, were rather to the selection of the subject matter. Moreover, the proposal that there should be discussions at a high level between governments to reconsider the Charters of the International Monetary Fund and the International Bank, and that there should be a resumption of discussions on international buffer stocks proposals, seemed to me to be unrealistic at the present time. It may be, however, that the progress of the recession in the U.S.A. will make these issues of practical interest sooner than I then believed.

16. The response of the International Monetary Fund and of the International Bank for Reconstruction and Development to the Sub-Commission's report may be of some interest. The International Monetary Fund, as far as I could gather, was not opposed to the report or the recommendations of the Sub-Commission with the exception that the Fund did not wish its Charter to be the subject of re-consideration. It was felt in the International Monetary Fund that the resources of the Fund could be increased by agreement between its members without any alteration of the Articles.

17. The International Bank for Reconstruction and Development, however, regarded some of the comments of the Sub-Commission as critical of its activities. The Bank's reply to the comment that it is finding relatively few openings for the use of the funds available to it is that, in fact, there are very few openings for making loans of the kind contemplated in the Articles of Agreement. It cannot, in any case, make loans where the prospects of repayment are not reasonably good since it would then be unable to borrow in the U.S. market. To the suggestion that in conducting its activities the Bank should act in such a way as to produce an anti-cyclical effect, the Bank replies that this method of operation is not practicable. It will aim to continue its lending whether there is depression or prosperity and thus, to some extent, have an anti-cyclical effect. The Bank, however, does not consider that it is practicable for it to increase the rate of its lending in periods of depression or, for that matter, that countries anxious for developmental loans would be content to postpone their borrowing so as to allow the Bank to operate in this way.

18. While these arguments have some force, they leave the position very much as the Sub-Commission found it, and make it clear that Governments will have little choice other than to use restrictive measures to protect their balances of payments in the event of a depression.

19. Broadly I would agree with many of the comments and criticisms of the Sub-Commission made by Mr. Frisch in document E/CN. 1/67; in particular with the comment in paragraph 36 that 'only qualitative work of the highest level will be able to sustain the prestige of United Nations initiative in this field. The Sub-Commission on Employment and Economic Stability should support this prestige not by the formulation of generalities but by technically competent analysis of difficult matters.' 20. Mr. Frisch sets out how he thinks the Sub-Commission could go about this task. I doubt whether the procedure he suggests would give the results for which he hopes. My own views on procedure were sketched in my letter of 18th May, 1948. Following this last meeting of the Sub-Commission I see no reason to modify the suggestions I then made, except to express greater doubt about the wisdom of continuing the Sub-Commission for the tasks which I then suggested it might do. The continually changing membership of the Sub-Commission, the reluctance of most of the members to attempt anything more ambitious than the making of general comments on some question of topical interest, and the mechanical difficulties of tackling any really fundamental problems in a body constituted in this way, lead me to doubt whether the time and money spent in bringing together the members of the Sub-Commission will be justified by a sufficiently useful addition to the work which could be done in the other ways I have suggested.

[1] Document 228.

[2] The ninth session of the Economic and Social Council was held in Geneva from 5 July to 15 August 1949.

[3] European Recovery Program.

[AA : A1838, 701/8/1/1A]