Your 876 - E.R.P. Rest of Sterling Area Deficit.
1. At time of London visit position was that Americans seemed likely to insist that E.R.P. Aid to United Kingdom should be determined after taking into account dollar earnings of United Kingdom and Colonies with result that dollar deficit of sterling area Dominions could be financed only by an equivalent reduction in the central reserve.
Discussion in London revealed - A. United Kingdom was still pressing on the Americans the principle that the central reserve of gold and dollars should be maintained throughout the E.R.P. period and therefore that the E.R.P arrangement with United Kingdom should be such as to permit the finance of the rest of sterling area deficit without any reduction in reserves:
B. Discussions were proceeding in London with Finletter of E.C.A. who stated that E.C.A. now fully understood and agreed with the case of the maintenance of the sterling area but was precluded from making an E.R.P. arrangement to cover the deficit of the sterling area Dominions because of the legislative history of the Act:
C. Possibility of United Kingdom meeting the position by first obtaining maximum E.R.P. allocation and then covering deficit of sterling Dominions out of earnings (as foreshadowed by McFarlane and yourself) was precluded mainly because of American insistence on retrospective adjustments:
D. Matter was likely to be finally settled between Chancellor and Hoffman during latter's imminent visit to Paris.
3. Thus the position was as follows:
A. There seemed little or no hope that E.R.P. Aid would provide for rest of sterling area deficit.
B. It was firm United Kingdom policy to avoid any reduction in central reserves during E.R.P. period.
At the same time the Chancellor confirmed the right of the sterling Dominions to draw on the United Kingdom for dollars to finance their essential dollar deficit and that Australia would continue to operate under 'gentlemen's agreement' as hitherto, i.e. there would be no quota or target figure for Australia. This meant that if the Americans persisted in their attitude the Chancellor's undertaking could only be implemented by giving up (b).
4. In view of this the question of Australia obtaining offshore purchases from E.R.P. recipients other than United Kingdom was fully discussed with Chancellor and his senior advisers.
5. The Chancellor warmly supported this idea as means of improving the dollar position of both Australia and the pool and indicated that he would probably be putting to Hoffman the principle of offshore purchases in the sterling Dominions as one means of overcoming the impasse arising out of the legislative history of the Act.
6. In response to my question the Chancellor stated that an immediate approach by Australia to the United States and/or E.R.P. recipients for offshore purchases would not embarrass the overall United Kingdom negotiations for an E.R.P. arrangement between the United States and the United Kingdom to cover the whole of the rest of sterling area deficit.
7. Separate discussions between Australia and United Kingdom officials, however, revealed that United Kingdom officials were unanimously in favour of deferring any Australian approach until the final outcome of the United Kingdom negotiations was known.
8. I did not pursue this apparent difference of views because it seemed certain that the matter would be finalised between the United States and the United Kingdom during Hoffman's imminent visit and also because it seemed wise to defer any direct approach by Australia until the amount of wheat available for export could be known with greater certainty.
9. In the latter connection we were thinking of making our approach to the American and or E.R.P. recipients (other than United Kingdom) on the basis of our ability to supply certain important commodities rather than on the basis of a general financial case presented to the Americans and arguing our position as a member of the sterling area and our need for dollars. Action on a commodity basis could be on one or more of the following lines:
A. Divert from United Kingdom Australian exports readily saleable for dollars (E.C.A. or otherwise) thereby reducing Australia's dollar deficit and increasing the United Kingdom deficit, and hence the United Kingdom E.R.P. allocation. Any significant diversion of this kind would necessarily become known to the United States and O.E.E.C. countries and would require their concurrence for it to result in an equivalent increase in the E.R.P. allocation to the United Kingdom. The Chancellor and his advisers strongly rejected the proposal on the grounds that it would merely lead to a reduction in the availability of goods to the United Kingdom. The Chancellor definitely stated that action of this kind would not increase the E.R.P. allocation to the United Kingdom. Accordingly we do not propose to pur[sue] this line.
B. Offer of sale to United States for dollars (instead of foreign markets such as France, Belgium, etc.) any export surplus of scarce raw materials and foodstuffs appearing in E.R.P. programme remaining with us after satisfaction of United Kingdom needs. Outstanding product in this category is wheat although because of United Kingdom requests a good harvest is necessary to make quantities available really important. McCarthy feels that proposition of this kind might interest that part of the United States Administration responsible for commodities and that they might have been attracted even apart from E.R.P.
C. Request E.R.P. recipients other than United Kingdom to pay in E.C.A. dollars for Australian products formerly paid for in sterling. Major possibility here is wool for France, Italy, Belgium, etc. This line would require concurrence of E.R.P. recipients as well as approval by E.C.A. of principle of offshore purchases in Australia.
10. Methods 9 (b) and (c) were discussed (without firm conclusions) with United Kingdom authorities on the basis that they could be best followed up by our Commerce people working through their contacts in commodity field (McCarthy tells us he and Garside have had a lot to do with Fitzgerald, the Food Director in E.C.A.). In any discussions with Smithies on 9 (b) and (c) at this stage it might be best to keep your approach fairly general.
11. Subsequent developments have been fully reported to you in our telegrams 691, 99 and 707.
12. Report in C.R.O. Telegram H.319 of Hoffman's reactions to Chancellor's representations is more hopeful and as discussions will probably be continued in Washington any progress you can make with Smithies on lines that E.R.P. arrangement between United States and United Kingdom should be such as to provide for finance of whole of rest of sterling area deficit without drain on central reserves will be useful. However, these negotiations are primarily responsibility of United Kingdom and we should be careful not to cut across them. I shall be glad if you will keep me as fully informed as possible on all phases of developments in this connection.
13. Possibility that position will be met by E.C.A. permitting a Colonial dollar surplus to be set against the deficit of the sterling Dominions or by the particular variant of offshore purchases outlined in paragraph 3 of H.319 raises question, however, as to whether Australia should at this stage make any strenuous efforts to obtain offshore purchases along the lines mentioned in paragraph 9 (b) and (c) above. I have in mind - (a) Possible adverse or [un]favourable effects on United Kingdom negotiations as a result of any approaches by Australia.
(b) Possibility of our losing opportunity to gain offshore purchases if we hold up action now and final outcome of United States - United Kingdom negotiations i[s] unfavourable.
(c) Possibility that even if final outcome of United States - United Kingdom negotiations is favourable action now may enable Australia to obtain incidental offshore purchases because of availability of important commodities here with consequent advantage to Australia and the dollar pool.
14. On question of further aid from Australia to United Kingdom and Europe generally raised by Bissell (see telegram No. 707) and in publicity statement by E.C.A. spokesman (this has not been featured in Australian press and I do not intend to make any public reply) I feel there is a lack of understanding in American circles of Australian position and also of what Australia has in fact done and is doing. My following telegram sets out points which you might use (together with any additional points of your own) in an attempt to remove these misunderstandings. It also covers paragraph 2 of your 876. It might also be useful if you were to brief local United Kingdom representatives along these lines.
15. This still leaves question of whether Australia should make any specific gestures to E.R.P. recipients other than United Kingdom. For your confidential information and not for use in discussions, my present feeling is that, if necessary, and in appropriate circumstances, we could consider small short or medium term wool credits to European countries such as France, Italy and Czechoslovakia up to an aggregate of �5 millions. Any proposal for grants (as distinct from credits) would be difficult here and even giving of credits should appear as measures of help to United Kingdom (and perhaps on request from them) and not as result of American pressure. I would be glad to have your comments on this aspect. I am also asking McFarlane to discuss this question in London with views to ascertaining whether United Kingdom authorities consider it would make any contribution to the problem.
16. With regard to American suggestion that we should borrow from Export-Import Bank reported in your 876, I confirm that Government policy is strongly opposed to borrowing of any sort, particularly dollar borrowing.
17. I am repeating these messages to McFarlane.