REPORT ON LONDON DISCUSSIONS ON ARTICLE VII FEBRUARY-MARCH 1944

1. The discussions in London between United Kingdom, Dominion and
Indian Officials from 23rd February to 21st March, 1944 followed
on previous discussions between U.K. and the Dominions and U.K.

and U.S.A. They arose out of Article VII of the Mutual Aid
Agreement which provided for agreed action directed towards the
expansion of production, employment and consumption, the reduction
of trade barriers and the elimination of all forms of
discriminatory treatment in international commerce.

2. In order to consider at the official. level what action seemed
necessary and desirable to give effect to this undertaking, the
discussions covered-
1. Monetary Policy.

2. International Investment.

3. Commercial Policy.

4. Commodity Policy.

5. Cartel Policy.

6. Employment.

3. The results of the discussions are summarised in the attached
document, A.S.D.(44)16. [3] It seems necessary for me here to
refer only to some general aspects of the proposals and to draw
attention to matters particularly concerning Australia.

4. It is important to view these discussions against the
background of the difficulties the United Kingdom will face in the
post-war years. Even before the war the United Kingdom was drawing
upon its overseas investments to maintain the necessary level of
imports. During the war the United Kingdom has disposed of a major
part of its overseas investments. Its income from shipping and
other services is expected to be seriously reduced. Moreover,
public opinion and Government policy are both directed to the
maintenance of a high level of employment which will result in an
increase in imports. For all these reasons it is generally assumed
in current discussions that Britain faces the gigantic task of
increasing its exports by 50 per cent as compared with pre-war
before it can attain a state of balance in its international
payments. It must do this too in face of increasing
industrialisation in overseas countries stimulated by war and the
difficulties of supplies and shipping.

5. The extreme difficulty of this task has led to a sharp division
of views in the United Kingdom as to the best methods of setting
about it. On the one hand are those who hold that in the long run
it can best be done by world-wide agreements for the creation of
conditions under which trade could move freely over the whole
world unhampered by high tariffs, quantitative restrictions,
instability of exchange rates or restrictive currency practices.

Broadly this was the aim of Article VII It is being pressed by
U.S.A. officials and was reflected in the proposals that we
discussed in London.

6. On the other hand are those who hold that if a solution of
Britain's difficulties by these means is possible at all it will
be in a very distant future, and they are reluctant to make
detailed plans now that will be binding so far ahead. They claim
that no-one knows what the world will be like when the time comes
for the plans to be put into force and plans made now might prove
quite unsuitable. It is absurd too, they say, to make plans for
this distant future until we know what we are going to do in the
vital period immediately after the war and the energy and time
currently devoted to planning for a problematical future are
distracting attention from an urgent problem.

7. This group believes that to enter into agreements now with the
United States that seem to promise freely moving trade over the
whole world within a few years of the end of the war can lead only
to unfortunate misunderstandings that will threaten harmonious
relationships between the two great English-speaking nations. It
is much better, they say, to put our position frankly before the
people of the United States than to try to deceive them with fair
promises that we cannot fulfil.

8. Moreover they argue that while the Government and people of the
United Kingdom are prepared to take whatever action is necessary
to maintain a high level of employment the Government and the
people of the U.S.A. have not yet reached this stage. Booms and
depressions must therefore be expected to continue in the U.S.A.

and, if the United Kingdom enters into close trading and financial
relationships with her, plans to maintain employment in the United
Kingdom cannot be successful.

9. They argue, therefore, for a regional solution of the problem
that will aim eventually at a world solution but not until all
countries have reached agreement on the fundamental policies of
full employment and methods of removing disequilibria in balances
of trade. To try to include in one comprehensive plan countries
whose economic philosophies are fundamentally different is to
court disaster.

10. They would aim to start this regional plan with the sterling
area as a basis but any country could join which gave satisfactory
assurances that it would:

(1) within its borders avoid large-scale depressions,
(2) keep its accounts with other members substantially balanced,
(3) seek to remove any disequilibria by policies of expansion
rather than contraction.

11. The adherents of this second group do not attach as much
importance to the lowering of tariff barriers as the first group
and do not believe that the troubles of the world during the
inter-war period were clue mainly to isolationist policies. They
believe that the failure of important industrial countries to
maintain employment was the root of the troubles, and policies of
self-sufficiency sprang from desperate efforts by countries to
avoid importing unemployment originating elsewhere. They accept
the classical belief in the advantages of the international
division of labour and would welcome trends towards lower tariffs.

However, they do not believe the lowering of tariffs of sufficient
importance to be elevated to a fundamental principle and would
hope that the lowering of tariffs would naturally follow the
maintenance of employment.

12. The first group which advocates a world-wide lowering of trade
barriers is at present dominant in the formation of policy in the
United Kingdom. This group includes those who see a satisfactory
solution for Great Britain's post-war problems in these proposals
and also some who are doubtful about them but nevertheless see
tactical advantages in making an offer to the United States along
these lines.

13. The latter believe that we have entered into a deep commitment
with the U.S.A. by signing the Mutual Aid Agreement and that the
development of any regional long-term plan would provoke great
hostility in the U.S.A. and lead to a bitter trade war.

14. The former agree that for a few years after the end of the war
we shall perforce have to follow to some extent policies in many
ways similar to regional planning, but they hope the United
Kingdom will soon be able to discard them and must enter into a
long-term commitment to do so to preserve friendly relations with
the U.S.A. during the transitional period. They maintain that we
need a pattern of international good behaviour which countries
will agree to observe in the near future. The existence of this
pattern will, they believe, influence transitional arrangements
and prevent the use of extreme measures which might be difficult
to remove later. They agree that the U.S.A. is not likely to avoid
another depression but believe they have provided safeguards in
the plans to prevent this spreading to other countries.

15. I have stated this division of opinion at some length because
it extends through all sections of opinion in the United Kingdom.

It is to be found in the Cabinet, amongst officials and is
widespread in industrial circles and amongst the public interested
in these problems. The United Kingdom will, of course, decide for
herself what is in her own interests but Australia may be vitally
affected by the decision.

16. It is important, therefore, that this division of opinion
should be understood in Australia. Should Australia find the
proposed international agreements too onerous there is no doubt
that a stand for greater freedom within a regional group planned
by Great Britain on the lines sketched above would find
influential support. Australia would need to consider, however, to
what extent such a policy would be consistent with our signature
of the Mutual Aid Agreement and also possible dangers to us in the
regional approach.

17. For the present it seems to me best that Australia should
continue the careful study and discussion of the plans that have
so far been put forward to determine to what extent and with what
modifications we could accept them. We should turn to the
alternative only if we feel that as modified the present plans do
not meet our needs, and that we can face with equanimity the
possible dangers in the regional approach. This procedure has the
advantage of enabling us to wait and see whether other countries
are prepared to accept the plans. It may well happen that they
will be found so generally unacceptable that they will come to
nothing. This is a view widely held in London and Washington. In
that event we should avoid whatever discredit attached to being
the first to bring about their collapse.

18. The danger of plans of this kind gaining a certain momentum
the more they are discussed must, however, be appreciated. If they
are really unacceptable to us we may find, if we delay making a
stand, that we have left it until too late. There is a further
danger that unless we make our attitude on all subjects clear at
an early stage we will be misinterpreted in our approach to the
raising of living standards and maintaining high levels of
employment. I found some difficulty in putting the 'positive'
aspects of Article VII before the 'negative' aspects. This led to
some suspicion that we were stressing the positive side to evade
other obligations. This is due, I believe, largely to the central
position given by the U.K. to commercial policy proposals.

19. In what follows I shall consider the plans purely as they
affect Australia apart from the fundamental division of opinion in
the United Kingdom. It must be remembered that our interests in
these plans on certain vital issues are opposed to those of the
United Kingdom and the U.S.A. On a short view it would suit the
United Kingdom and the U.S.A. to prevent the development and
diversification of secondary industries in under-industrialised
countries. We on the other hand must be able to develop our
secondary industries if we are to increase our population and
justify our claim to develop our sparsely populated continent in
our own way. It is in our interests, too, that over-populated
Asiatic countries should develop their secondary industries as
rapidly as possible. We must therefore study the plans carefully
to see that nothing in them would prevent these developments.

20. In many ways we need more freedom to handle our affairs in
such a way as to avoid unemployment and distress than other more
stable countries require. We are dependent for our export income
upon a narrow range of staple products which are subject to great
fluctuations in price and varying seasonal conditions. We must
therefore examine the plans to see whether they leave us
sufficient freedom to cope with the problems set by these
fluctuations. On the other hand, the United Kingdom and the U.S.A.

will want to leave us as little freedom as possible, partly
because what they concede to us they will have to concede to other
countries also. The smaller the funds they make available, and the
less freedom they allow countries to impose restrictions on
imports or to vary exchange rates, the more control over them they
will have and the less their own trade can be disrupted without
their agreement.

21. It should be said that it is not to our interests either that
other countries should have large funds at their disposal or be
able to vary their exchange rates or to impose restrictions on
imports for insufficient reasons. But this may be a less evil to
us than to allow ourselves to be too circumscribed.

MONETARY FUND
22. The Monetary Fund would-
(1) provide member countries with working balances of
international Funds,
(2) prevent members from varying the value of their currency by
more than 10% of the initial value without the approval of the
Fund,
(3) prevent members from imposing restrictions on payments other
than of capital without the approval of the Fund,
(4) put pressure on countries to correct maladjustments in their
balance of payments but by means which would not be destructive of
national or international prosperity.

23. It is clearly desirable that countries whose exchange reserves
have been depleted during the war should have working balances
which would enable them to start trading again as freely as
possible. It is also desirable that countries should be debarred
from depreciating their currencies for restrictive purposes or
using other restrictive monetary measures.

24. At our request the preamble and purposes of the Fund were
recast to make it clear that the pressure put on a country to
correct a maladjustment in its balance of payments will not
prevent it from following a policy of expansion intended to
maintain a high level of employment. The increase in certain
quotas for which we asked would give Australia a working, balance
of 75,000,000 sterling which should be just sufficient,
particularly if, as seems probable, we shall be able to use part
of our sterling resources to supplement our quota. If the U.S.A.

will accept these modifications, the Monetary Fund, apart from the
transitional arrangements, should meet Australia's needs except,
perhaps, on two points.

25. The two points on which the Monetary Fund seems to me to fall
short of Australia's needs are-
(1) the limitation of annual drawings to 25% of the quota or for
Australia 19,000,000 sterling,
(2) the limitation of the unilateral right to vary our exchange
rate to 10% of the initial value.

26. The limitation of our annual drawing to 19,000,000 is likely
to be very embarrassing in view of the large fluctuations to which
our overseas funds are subjected by the unstable nature of the
prices and volume of our exports. We could draw more than
19,000,000 in any one year but only with the permission of the
Fund. It would, I believe, be undesirable for the Fund's
supervision of our affairs to extend to fluctuations which we must
expect to recur from time to time. In this respect our
difficulties are greater than those of most of the countries
taking part in the London discussions because we have no assurance
that we shall have any freely available working balances apart
from our quota, whereas most of them have substantial reserves of
gold which they could use to reduce the extent to which they would
have to lean on the Fund. I believe, therefore, that Australia
should continue to press for an increase in the annual drawing to
33% of the quota, at least for those countries whose gold reserves
at the commencement of the Fund are low.

27. The limitation of our right to vary our exchange rate is more
controversial. In the course of the discussions in London, my
conviction has grown that it would be imprudent for Australia to
surrender this liberty to an international body. The reasons for
which Australia might want to depreciate her currency in an
emergency are not well understood or sympathetically received in
highly industrialised countries whose problems are very different
from ours.

28. The Fund provides three safeguards:

(1) An answer must be given by the Fund within two days to any
request from a country for a depreciation of its currency in
excess of 10% of its initial value and up to 20%. It is argued,
particularly by Lord Keynes, that because of the brief time
allowed there is a strong presumption that the Fund must give an
affirmative answer. After hearing all the arguments in favour of
this viewpoint, I remain unconvinced that there is any such
presumption.

(2) The Fund must permit a depreciation to correct any fundamental
disequilibrium. The discussions in London, however, seem to me to
suggest that the Fund would have no difficulty in deciding, in the
circumstances in which Australia might ask for a depreciation,
that that was not an appropriate remedy for her difficulties.

(3) We can withdraw from the Fund without notice. But withdrawal
from the Fund might require withdrawal from all other
international bodies and impose intolerable burdens on us. Until
we have seen all the proposals in their final form, it would be
dangerous for us to attach any value to this safeguard.

29. At the London discussions I suggested that countries whose
export price levels had fallen more than their import price levels
should be given greater freedom to vary their exchange rates. I
did not finally make a reservation to this effect, partly because
of differences between officials, and partly because I felt it
might be possible to find some better alternative. Unless,
however, a satisfactory alternative can be. found I am strongly of
the opinion that Australia should press for this freedom.

[matter omitted]

32. The Monetary Fund is not intended to provide countries with
funds to finance rehabilitation and reconstruction during the
transitional period between war and peace. Accumulating
deficiencies during this period are likely to be so large as to be
outside the scope of the Fund. If an attempt were made by the Fund
to handle these problems its future usefulness and strength would
be impaired. The United Kingdom may therefore propose that quotas
should not be available during this period but that countries
should accept the obligations imposed by the Fund to vary their
exchange rates only in accordance with the provisions of the Fund.

Unless suitable alternative arrangements can be made for
international lending during this transitional period, it seems to
me doubtful whether Governments would be prepared to accept, as
from the date of the Fund's establishment, the obligation to seek
the Fund's approval of variations in their exchange rates. I
believe that Australia should therefore press for the simultaneous
commencement of obligations and benefits under the Fund.

33. No limit is set to the transitional period but the draft
suggests that the period the signatories will have in mind is
three years. Critics of the Fund contend that this is misleading
and will lead to unfortunate misunderstandings. They believe there
is no prospect of Great Britain overcoming her post-war
difficulties so soon.

A UNITED NATIONS INVESTMENT BANK
34. The American proposals to establish an Investment Bank [4]
were examined but were found to be unsatisfactory. Certain general
principles were suggested by the Conference for further
discussions with the U.S.A.

35. The absence of some satisfactory provision for international
lending during the transition period leaves a vital gap in the
proposals so far put forward. The U.K. recognises the existence of
this gap and intends to raise it with U.S. officials but Australia
should, I believe, press for a satisfactory solution of this
problem before accepting other commitments.

COMMERCIAL POLICY
36. The discussions on Commercial Policy raised some of the most
controversial issues of the Conference. The proposals as they now
stand would require countries to make a graduated cut in their
tariffs. No final figures are given, but the cut suggested was 50
per cent with 5 per cent ad valorem added back. A tariff ceiling
of perhaps 25% might be imposed later. British preferential rates
are not to be reduced except where the cut of the general rate
would bring it to within less than 5 per cent of the British
preferential rate. In that case the British preferential rate may
be lowered to preserve a margin of 5 per cent ad valorem. No duty
need be reduced below 10 per cent. Subsidies could be used to
supplement tariffs where more protection was required than
provided by the formula. Moderate tariffs would be permitted for
new industries subject to a time limit and could be supplemented
by subsidies. Quantitative restrictions on imports would be banned
except for balance of payments purposes. Two price systems (i.e.,
one price for local sales and another for exports) would also be
banned but direct subsidies to production could be substituted for
them.

37. Before it is possible to decide whether or not Australia could
accept these proposals decisions are necessary on the following
points:-

(1) What reductions in tariffs and preferences is Australia
prepared to make and how soon?
(2) Can subsidies be used in place of tariffs to give any
protection considered necessary for existing or new industries?
(3) Would Australia be prepared to face the cut in preferences
involved in the proposals?
(4) Can we replace the two price system for commodities such as
butter, sugar and dried fruits by subsidies?
(5) Are we prepared to give up the use of quantitative restriction
of imports except for balance of payments reasons?
(6) Are the proposals for the use of quantitative restrictions on
imports on balance of payments grounds satisfactory?
38. There will also be difficult technical problems to be solved
but they will affect many countries even more than they will
Australia and we need not therefore hesitate to accept the
proposals in principle because of them. If the technical
difficulties cannot be overcome the proposals will not come into
force and we will have no problems to solve.

39. The question of using subsidies in place of tariffs and two
price systems and the acceptance of reduced preferential margins
will raise difficult political, fiscal and administrative
problems.

40. At the London discussions our attitude was generally critical,
but we avoided defining Australia's attitude on these issues. It
will become increasingly difficult to temporize in this way and it
is therefore urgently necessary for a detailed investigation to be
made of the effects (as far as possible in quantitative terms) of
the latest proposals on Australian industries, employment and
overseas trade. This investigation would need to include a
detailed examination of the extent to which subsidies can be used
as an alternative form of protection in order to offset all or
part of the effects of tariff cuts or the prohibition of the two
price system or to enable us to establish new industries. It must
be emphasised that the subsidy safety valve is an integral part of
the commercial policy proposals and is intended to be used in this
way.

[matter omitted]

COMMODITY POLICY
45. The commodity policy discussions are proceeding satisfactorily
from Australia's point of view and there is little that it seems
necessary to say. The two central issues are the form and
membership of the controlling authorities and whether buffer stock
schemes are in certain instances to be supplemented by regulation
schemes either of exports or production. At the London discussions
we argued against any central authorities being given power to
direct the individual commodity controls and urged that, while
agreements were being negotiated, Governments should be consulted
at all stages. This was accepted by the Conference.

[matter omitted]

CARTEL POLICY
47. The discussions on cartel policy were not very fruitful. It
seems clear that the United Kingdom is nervous lest commodity
arrangements should force up the price of the goods she buys while
Government control of cartels might reduce the price of the goods
she sells. The U.S.A. and the British Dominions are anxious that
some measures to control cartel policy should be evolved but no
very clear ideas were forthcoming at the Conference.

[matter omitted]

EMPLOYMENT POLICY
50. We emphasised from the outset of the Conference that we
regarded some international undertaking that countries would adopt
domestic policies aiming at the maintenance of a high level of
employment within their borders as both valuable in itself and as
a basic prerequisite for the conclusion of satisfactory plans on
currency and commercial policy. We also argued that, without
appropriate domestic measures, the international proposals were
not likely to achieve their objectives. After some inital
reluctance by the United Kingdom officials and by other Dominions,
the United Kingdom officials wholeheartedly accepted our proposals
[5] and the other Dominions fell into line.

51. The United Kingdom delegates were not prepared to ask
Governments to submit to the judgment of an international tribunal
upon the efficacy of their employment policies or to enforce
sanctions if the obligation to maintain employment is not
fulfilled. They consider that opinion has not yet developed
sufficiently for this.

52. The acceptance by the United Kingdom officials of our
proposals marks a big step forward and the amended draft agreement
[6] seems to me to be satisfactory. In addition to accepting the
draft agreement, the United Kingdom officials quite spontaneously
inserted in reports on other subjects paragraphs which emphasised
the central position of the employment objective and agreement.

53. If this agreement is accepted by the U.S.A. it will, I
believe, do much to ensure that Governments will take the steps
necessary to maintain a high level of employment and will help
greatly to mobilise public opinion in all countries in favour of
the necessary domestic policies. It does not however ensure that
high levels of employment will in fact be maintained. In the
United Kingdom a high level of employment is the declared policy
of the Government and much thinking and planning is being clone at
the official level to secure this objective. I have some doubts,
however, whether the plans are sufficiently comprehensive and
still more doubts about the extent and speed with which they are
likely to be translated into action by the Government. There is, I
believe, a tendency for the plans to be prepared upon too narrow a
front. Under Lord Keynes' guidance, officials are concentrating
mainly upon monetary measures and protective clauses in
international agreements supplemented by plans for public works
expenditure and certain measures in the sphere of taxation. I
doubt whether these measures will mobilise sufficient force at the
right time to overcome a developing depression. When there is
added to this the hesitation of the Government in giving
legislative force to plans worked out by Commissions and
officials, I do not regard the maintenance of employment in the
United Kingdom as at all assured.

54. In the U.S.A. the outlook is much worse. Public opinion at the
moment seems to be moving towards opposition to all policies that
would make the continued maintenance of a high level of employment
possible.

55. It may therefore be difficult to secure acceptance of the
draft agreement by the U.S.A. Even if it is accepted, we must not
assume that a high level of employment will be continuously
maintained. Cogent reasons have been advanced to show that because
of its great wealth the maintenance of employment in U.S.A. may be
extremely difficult and will require unconventional measures for
which public opinion in the U.S.A. is not yet ready. It is
therefore necessary for us to examine the other international
agreements to make sure that they will enable us to protect
ourselves in the event of falling world employment. This is all
the more necessary because, while United Kingdom officials have
enthusiastically accepted our proposals, it is clear that they
would combine with U.S.A. and Canada in expecting us to be bound
by the other agreements even if the employment policy failed. We
could finally try to secure in a general preamble the acceptance
of the principle that all the proposals are interdependent and if
one agreement fails all are to be suspended. But this will be
strongly resisted and we should try to ensure, by suitable
provisions in each of the various plans, that we would be damaged
as little as possible.

[matter omitted]

L. G. MELVILLE