168

19th June, 1928

PERSONAL & CONFIDENTIAL

My dear Prime Minister,

I have read the confidential Report of the Committee on the Tariff [1] with the greatest interest. Possibly you may be interested to have my reactions and in this letter I shall attempt to set them out as briefly as possible.

I do certainly think that the Committee accomplished a good deal and have in most respects adequately stated the lines of enquiry that are essential if Australia is to follow a policy of economic sanity. In what follows, I do not propose to make any comments where I find myself in full agreement with the Committee.

This letter will probably be rather long and I shall, therefore, divide it into three parts:

(a) Comments on certain omissions.

(b) Comments on the Report and Appendix.

(c) Certain suggestions as to the Organization of Economic Research.

A. Before considering the actual points of the report, I was rather struck by the difference in attitude between the Report itself and the questions and tentative answers which were appended to the Report. My guess would be that Wickens [2] had a great deal to do with the form of the Report but that some one with a very strong tendency towards orthodox economics had a predominant part in the answers to the questions. This guess may be ridiculously wrong.

To my mind the two main omissions from the document are these:-

(a) No weight has been given to the question of the extent to which the indiscriminate application of high protection to secondary industries, for which Australia, at her present stage of development, is not well suited, is limiting the effectiveness of those secondary industries in which Australia ought to have a reasonable chance of production on a basis of cost not too far removed from that of older industrialised countries.

(b) It is commonly argued in Australia that one reason for using high protection to establish new secondary industries is that such action has a very marked effect in increasing the population. The Committee does not seem to have either expressed a view on that problem or to have set it out in the questionnaire as a major matter for consideration.

I would like to see this question considered- Having regard to the history and present circumstances of secondary industries in Australia, will the expenditure of a given amount of capital, ability and energy on the development of new secondary industries lead to a more rapid development of population than the expenditure of an equal amount of these factors devoted to the development and/or improvement of (a) primary industries; (b) well established secondary industries? B. Coming now to the Report. Section 1 (The Effect of the Australian Tariff Policy). I should think that paragraph 7 could be expressed a good deal more forcibly without departing from the truth. I do not think the comparison of the cost of living between 1914 and today is nearly so significant as comparisons based on post war years. The following table shows the way in which wholesale prices in Australia have failed to react to the same degree as those of other countries.

Wolesale price. Index numbers.

Table shows relative increases from 1914 level in various countries.

Country Australia Great Britain Canada (Melbourne)

1914 100 (1913) 100 100 1922 162 159 152 1923 179 159 153 1924 173 166 155 1925 169 159 160 1926 168 148 156 1927 167 141 152

Again, the Australian price indices for manufactured goods show that, during the last three years, there has been a fairly substantial rise in the price of manufactures whereas in other countries there has been a marked decrease.

Sect. 1. Para 8. I am doubtful as to the value of comparisons of 'production efficiency' as between the whole of secondary industries and the whole of primary industries. It would be much more instructive if the productive efficiency of four groups of production were compared-(1) Unsheltered agricultural and pastoral industries i.e. wheat and wool; (2) Semi-sheltered primary industries, Dairying (Paterson Scheme) [3], Fruit; (3) Secondary Industries not based on protection i.e. Power, Light, etc.; (4) Protected Secondary industries.

Sect. 11. Suggested modifications of Tariff Policy.

Para. 1. After reading and re-reading this paragraph, I am not quite clear as to whether the Committee recommend a Tariff holiday. Naturally this has been made quite clear to you. Pending the further consideration of tariff policy, a tariff holiday has much to recommend it.

Para. 5. I cannot too heartily endorse the views expressed in this paragraph. It is the argument for a discriminating protection.

Para. 6. In this paragraph and later in the appendix the Committee has referred to the question of increasing returns in manufacturing and decreasing returns in agriculture. They have not made any definite assertion but have suggested and have quoted Marshall [4] in support of the idea that, in agriculture, in contra-distinction to manufacturing industries, the law of diminishing returns comes into effect. I wonder whether this is at all the case where agriculture has remained in the main extensive as in Australia rather than intensive as in England, and Eastern Europe? It seems to me that for many years to come the application of brains, capital and energy to Australian agricultural and pastoral pursuits will give increasing returns i.e. returns larger than the expenditure and I personally doubt whether under undiscriminating protection the same will hold good for secondary industries.

Para. 11. I suggest that in the last sentence the word 'would' should be amended to 'might'! The appointment of an economist to the Tariff Board might have very useful results but a great deal would depend upon the individual. A pure free trader would be useless. What would, in my judgment, be necessary would be an economist or perhaps better a practical man with an understanding of economics who realised that the problem to be faced is not the height of the tariff on certain articles but the economic muddle that has resulted from years of undiscriminating protection. I will return to this subject at the end of this letter.

The Appendix. Section 1-'The effect of Australian Tariff on the extension of Local Industry'.

Q.3. The doctrine of comparative advantage is most important and if it could be realised in Australia great progress would become possible. It seems to me that the following gospel ought to be preached-'Industries that must permanently rely upon a high tariff (say of 25 % ad valorem) may be desirable for political or sociological reasons (sugar) or for defence but the country should realise that economically speaking every such industry costs the country something and the industry does not contribute to the national dividend. It obviously follows that Australia cannot afford the luxury of an unlimited number of such industries, in other words Australia cannot afford undiscriminating protection'.

Q. 4. Probably the way in which the tentative answer to this question is stated is quite accurate. The case of the Tinplate industry in U.S.A. might, however, have been cited. America protected her tinplate industry, found the competition from South Wales so serious that I believe the tariff rates were brought up to 100% ad valorem. Owing to her huge home market, she has, however, been successful and today is exporting tinplate in competition with South Wales to a very considerable extent. A very strong point in favour of discriminating protection but no argument for a tinplate industry in Australia at the present time.

For my information I should be very glad to know whether the Committee would agree that 'comparative advantage' can be assessed by the ability of an industry to compete in the world's markets with exports.

Sect. 111. Tariff and Revenue.

Q. 3. Preferential Tariffs. The section dealing with this subject is doubtless theoretically sound but I think a closer study of the facts would show that each year there are less goods upon which a preferential tariff is not of marked value to Great Britain. One is so accustomed to the economist who says that where Great Britain has practically a monopoly of supply the preference is meaningless. Of course this is true. It's true that the Australian preference on British Whisky is of little practical value, it's equally true that the British preference on Empire teas has comparatively little point but today there are few articles on which this would be true. Perhaps the finer counts of cotton cloth and a few other things. just because Great Britain supplies Australia with over 90% of her requirements of certain forms of iron and steel, that does not mean that the preference is meaningless-very far from it. The dictum should run that where Great Britain has a world monopoly in the supply of certain goods, a preference on those goods is meaningless. To estimate whether an Australian preference is of value to Great Britain one should examine the position of Great Britain in the supply of those goods to a foreign country such as Argentina.

Q. 4. Tariff level indices. I was very interested to find that the Committee had studied the League of Nations document. [5] I might have spared you the infliction of my own summary of the document.

Schedule 4. This table is intensely interesting. In my stupidity, I had to study it for some time before I could see exactly what column (g) meant and I am not yet quite clear as to column (c). I should like to see this method applied to a number of other industries. It is a subject which Wickens and I discussed in a rather different form when I was in Melbourne in 1924. If you think it expedient, I should particularly like to hear from Wickens in further elaboration of this table but I shall not write to him about it as your letter indicates that I must regard this report as very confidential and I do not know whether Wickens knows that you have sent me a copy.

Sect. V. Tariff and International Trade.

Q. 4. I was very interested in the remarks of the Committee on Labour costs. There can be little doubt that a much larger volume of reliable information is needed under this head. Has it occurred to the Committee that the Economic Section of the League of Nations and/or the International Labour Office might be moved to provide this information? The British Empire must contribute a very large share of the funds for the League of Nations and he who pays the piper ought to be entitled to call at least some of the tunes. I feel that we ought to make these bodies do a good deal of work that would be directly advantageous to the solution of some of our Economic problems. The Economic Section is, of course, ideally situated to obtain data.

C. Suggestions about the Economic Research recommended by the Committee.

The proposal to entrust the Council for Scientific & Industrial Research with the duty of forming an Economic Research Department seems to me to be the most practical step at the present time, although one is a little doubtful whether it is entirely fair to the C.S.I.R. with its very heavy load of Scientific problems, all needing time before results can be achieved and all needing public confidence in C.S.I.R. if they are to be proceeded with properly.

An Economic Research Department might lead to the extreme protectionist becoming hostile to C.S.I.R. However I cannot make a better suggestion as to where an Economic Research Department should be based. [6]

I assume it will be your intention to make such a Department small and inconspicuous, at least initially. One really first class man with two or three assistants and with your Committee to consult would be able to do a good deal especially if a considerable proportion of the work was farmed out, a point to which I will return.

I feel very strongly that the officer in charge ought to visit London at a very early stage. For political reasons, it might be better if he was sent over here before he commenced his duties at least publicly. I have already mentioned this to you. Such a man could get the atmosphere here very quickly and I could help him a good deal. I should suggest a visit to Geneva to make contacts with the Economic Section of the League of Nations, who could be useful. I would try to take him over there, if you approved.

As regards farming out some of the work-would it not be possible to interest the Universities in a number of problems and to arrange with the Economic faculties that really promising young men might do post graduate theses upon some of the problems with the assistance of (a) the teaching staff; (b) the proposed C.S.I.R. Economic Dept.; (c) the Statistical office.

The C.S.I.R. might pay small fees for such work. These theses would have no official significance but good young men ought to be able to do a great deal of the donkey work and to put forward the facts in an orderly way and thus help towards the clear vision of the position which must precede sound solutions.

In addition to work in the Australian Universities, it might be possible to arrange for some similar work to be done at the London School of Economics or at Cambridge. I expect I could make some such arrangements. If the subject matter could be described as having any bearing upon agricultural economics, the Empire Marketing Board could finance some such research either in the United Kingdom or on a 50-50 basis in Australian Universities.

This letter has grown to an inordinate length and has occupied a very large part of my last day of convalescence from the mumps! I trust you will not find it too boring.

Yours sincerely, F. L. MCDOUGALL

1 For an account of the formation of the committee see notes 13 and 16 to Letter 130. The revision and subsequent publication of the report is outlined in note 7 to Letter 188.

2 C. H. Wickens, Commonwealth Statistician; member of the private committee which produced the report.

3 A levy on production to finance a bounty on exported butter; the cost of the levy was recovered from higher prices on butter consumed in Australia. The scheme was introduced in 1926 by Thomas Paterson, Minister for Markets and Migration.

4 Alfred Marshall, 1842-1924, Professor of Political Economy, Cambridge, 1885-1908; author of Principles of Economics (1890), Industry and Trade (1919), Money, Credit and Commerce (1928).

5 Tariff Level Indices, League of Nations Publication, 1927.11.34.

See Letter 163.

6 In a letter dated 27 August (file AA:M111, 1928), Bruce explained that this matter was being considered by a sub-committee comprising H. W. Gepp, Chairman of the Commonwealth Development and Migration Commission, David Rivett, Vice-Chairman and Chief Executive Officer of the Commonwealth Council for Scientific and Industrial Research, Hugh McConaghy, Chairman of the Commonwealth Tariff Board, M. M. Stewart, Industrial Registrar of the Arbitration Court, and Wickens. The committee recommended establishment of an Economic Research Division in CSIR, with Gepp strongly dissenting from the proposal on grounds similar to those put forward by McDougall. Bruce, while appreciating the dissenting view, was, like McDougall, unable to make a better suggestion. The report of the committee, together with separate submissions by individual members, is on file AA:A461, C398/1/2.