Extracts 26 April 1946

REPORT ON THE INAUGURAL MEETING OF THE GOVERNORS OF THE WORLD FUND
AND BANK HELD AT SAVANNAH, U.S.A. FROM 8TH TO 18TH MARCH, 1946

PART I-GENERAL COMMENTS
PART II-THE PROCEEDINGS AT THE INAUGURAL MEETING

Part I-General Comments

Recent developments
1. Since the publication of my review of the Articles of Agreement
drawn up at Bretton Woods [1], there have been a number of
disturbing developments which have fundamentally modified the
proposals.

(a) The Anglo-American loan agreement [2] provides that the
transition period of five years which member countries of the
Monetary Fund were allowed before they had to face its full
rigours is to be reduced to one year in the case of the United
Kingdom.

(b) In my review, I assumed that, if we were at any time denied
the right to depreciate our currency, we should still be free to
avoid deflation by imposing quantitative restrictions on imports
(see paragraphs 22, 43 and 46 of review). The draft proposals for
an International Trade Organisation [3] make this assumption
uncertain. [4]

(c) This same draft provides that the International Trade
Organisation and the Monetary Fund are to have a common membership
so that withdrawal from the Fund, which was to be unfettered, now
involves withdrawal from the International Trade Organisation
also.

(d) We have seen that the United States near monopoly of lending
can lead to arrangements in other economic fields which profoundly
modify the Articles of Agreement drawn up at Bretton Woods. This
makes uncertain any attempt to interpret the meaning or measure
the effects of the Articles.

2. It will be necessary to have these developments and their
effects on the Bretton Woods proposals in mind when reading the
following comments on the proceedings at the inaugural meeting of
the Fund and the Bank.

Dominance of the United States and major countries
3. Perhaps the outstanding features of the inaugural meeting were
the use by the delegates of the United States of their power to
secure the adoption of policies in which they were interested and
the reluctance of countries seeking loans from the United States
to offer much opposition.

4. It is true that a compromise was reached on one of the
contentious issues relating to the functions and remuneration of
directors, but the compromise will not modify greatly the
principle for which the United States was contending. (See
paragraphs 69 to 79.) [5]

5. However, this decision and the selection of Washington as the
site for the Fund and the Bank (see paragraphs 65 to 68) were
perhaps less important in themselves than as a demonstration of
the power and will of the United States to dominate the
organisations.

6. The meeting also revealed a growing tendency for vital
decisions to be made outside the meetings by a few powerful
countries with little freedom left to the formal meetings to
reject or amend them.

Weakness of small countries
7. With Russia not a member, the votes of the United States and
the United Kingdom are nearly sufficient to carry any resolution
for which a simple majority is required. The votes of the United
States, the United Kingdom, China, France and India are nearly
sufficient to carry any resolution for which a two-thirds majority
of voting power is required.

8. Because of this preponderance of voting power in the hands of
the major countries, some of whom are financially dependent on the
United States, small countries can influence the decisions of the
Fund only by the appeal of their arguments to the United States
or, occasionally, when the United States and the United Kingdom
are divided on an issue. Lord Keynes stressed that, with Russia
not a member, the combined voting power of the British
Commonwealth and European countries is sufficient to out-vote the
United States, China and Latin America. However, even if this vote
were solid, it would help Australia only when the United States
and the United Kingdom were divided; on some issues, the interests
of both countries are likely to be similar and opposed to those of
Australia.

9. For these and other reasons, the interests of large and small
nations in the Fund are not well balanced. Though the United
Kingdom has been overborne by the United States in matters of
administration, which are of some importance, there can be little
doubt that, if either country wanted a decision from the Fund
which it considered vital, it would have its way. As the
Chancellor of the Exchequer stated in the House of Commons, 'We
are not nobodies in this world'. [6] The withdrawal of either the
United States or the United Kingdom would mean that the Fund would
cease to exist. The same is not true of smaller nations, and their
vital interests may be ignored.

Danger of inflexibility on exchange rates
10. The possibility of the Fund, dominated as it is by the United
States, and to a less extent by the United Kingdom, becoming too
inflexible in its attitude to exchange alteration cannot be
disregarded. Lord Keynes thought that the Fund might be too ready
to approve exchange depreciation. This may well be true for a
time. The economic difficulties facing belligerent and occupied
countries, many of whose currencies are at present being kept
above their appropriate values, may result in variations being
freely conceded in the next few years.

11. What is of more importance to Australia will be the attitude
of the Fund when the initial period of instability has passed. One
of the consequences of this early instability is likely to be a
subsequent reluctance to start any fresh waves of exchange
depreciation.

12. A rigid exchange rate would tend to transmit to Australia,
with their full intensity, any depressions developing in the major
industrial countries.

13. Under the Anglo-American loan agreement, the United Kingdom,
and perhaps in consequence the whole sterling area, will have to
face the full rigours of the Monetary Fund within twelve months
instead of after the five years provided in the Articles of
Agreement. At the same time, there is as yet little guarantee of
the United States following employment and investment policies
that will ensure satisfactory world economic conditions. Unless
the present draft proposals for an International Trade
Organisation are modified, it is doubtful whether the Fund and the
Bank can achieve their main purposes of restoring trade and
maintaining economic stability. If they fail, the effect of the
Fund will be to harness the world to an unstable American economy.

14. Australia is likely to be amongst the earliest of the
countries to feel the impact of restriction and depression. We
could secure some relief by a depreciation of our currency but,
because of its effects on our imports and on foreign investments
in Australia, it would be contrary to the interests of both the
United States and the United Kingdom to grant a request for a
depreciation of the Australian pound. Other smaller nations whose
exports compete with ours would also have reason to oppose us.

15. At the risk of being denied use of the Fund's resources and
possible expulsion, we could depreciate our currency without the
approval of the Fund. However, unless we were free to impose
quantitative restrictions on imports, it might be hazardous to
defy the Fund in this way, particularly since expulsion from the
Fund would automatically mean expulsion also from the
International Trade Organisation.

Quantitative restrictions on imports
16. For the reasons given in paragraphs 22, 43 and 46 of my review
of the Articles of Agreement, a refusal by the Fund to permit
Australia, faced by balance of payments difficulties, to
depreciate its currency might not be vital if we were free to
impose quantitative restrictions on imports. Though this might not
be the best way out of our difficulties, and would probably do
more harm to world trade, we could nevertheless for a time protect
our domestic economy from deflation by this alternative means
until we were conceded the right to depreciate our currency. We
shall not know, however, what freedom we may have temporarily to
take this alternative course to exchange depreciation until the
proposals for the International Trade Organisation begin to take
final form.

17. Informal discussions which I have had in Washington and
elsewhere have made it clear that the United States will seek
conditions and procedures that will apply to the way in which
quantitative restrictions on imports can be imposed as well as to
supplying criteria to determine whether balance of payments
difficulties exist. It was pointed out to me that this was already
made clear in the existing draft, which provided for non-
discrimination and consultation in the application of
restrictions. United States officials do not feel that they are
limited to these conditions, and other countries may have further
conditions to suggest.

18. At the same time, I believe that the United States officials
have no further conditions in mind at present. The principal
dangers would seem to be that the elaboration of non-
discrimination might make the use of this method impracticable,
and consultation might in the end turn out to mean approval by
some international organisation.

19. On the whole, I believe that the conditions governing our
freedom to impose quantitative restrictions will not prove onerous
provided we press our case when the discussions on the
International Trade Organisation take place. At the same time, if
they proved unsatisfactory, Australia, her external reserves
depleted, refused exchange depreciation by the Fund, and barred
from restricting imports by the International Trade Organisation,
might be unable to escape the deflationary consequences of a
depression in the major trading countries of the world.

[matter omitted] [7]

Possibilities of loss
25. Australia will have 125 million of its international reserves
committed in the Fund and the Bank, though of course the amount to
be invested at once is very much smaller, and the possibility of a
very heavy loss is remote. Were the Fund and the Bank to succeed
in their main purposes of restoring trade and maintaining economic
stability, we would gain heavily through the resulting buoyancy of
our overseas trade, while we could expect that any losses made by
the Fund and the Bank would be comparatively small. This was the
assumption made in my review of the Articles of Agreement. As
already stated, however, the terms of the Anglo-American loan
agreement and the draft proposals for an International Trade
Organisation do not seem to me to hold out much promise of
providing a world economic order in which the Fund and the Bank
can thrive. The prospects of gain are, therefore, dubious, and the
possibilities of the Fund and the Bank making losses cannot be
ignored. In the present and prospective disturbed state of the
world, stabilisation and reconstruction loans and even short-term
advances from the Fund may well suffer the fate of the League of
Nations loans after the last war.

26. The Fund and the Bank will need to be well managed if these
losses are to be avoided or kept at a minimum. However, the form
of directorates accepted at Savannah is cumbersome and will make
good management difficult. What may happen is that a few powerful
countries will take the management out of the hands of the
directorates. This might well improve the technical efficiency of
the organisations but might conceivably have some adverse
consequences for smaller countries.

27. With the Fund and the Bank facing an uncertain future, it does
not seem wise to load the Fund and the Bank with heavy charges for
such large directorates as were in fact decided upon at Savannah.

just what useful work these directors can do is far from clear. It
would have been better to leave these new institutions with novel
duties free to evolve the most efficient means of conducting their
business in the light of actual experience. If so many full-time
highly paid directors were found necessary, they could have been
recruited at a later stage. Meanwhile the revenue of the Fund at
least is uncertain. The charges for borrowing from the Fund are
high, and borrowers incur other onerous obligations. Only
countries with weak currencies may, therefore, be eager to use it.

Cost of not joining Fund and Bank
28. This outline of the implications of the Fund and the Bank, as
modified by recent developments, is not reassuring. Nevertheless
we must consider the cost to us of not joining. As the proposals
now stand, unless we join the Fund we shall not be allowed to join
the International Trade Organisation. What that means, we do not
yet know, but the price might be heavy, and we might be condemning
our wool industry, for example, to a bleak future.

29. We could save substantial annual sums by converting our dollar
loans at lower rates of interest. I discussed with a number of New
York bankers what were likely to be the effects of our not
accepting the Bretton Woods plans on our credit and found opinion
divided. Some believe it would make no difference. Others believe
it would adversely affect us. Others again believe that we would
have to explain why we had not joined and, provided the
explanation was a reasonable one, we would not suffer. But that
presumably means that Wall Street would judge whether our
explanation was satisfactory. My conclusion is that we would have
to pay higher rates of interest if we did not join but that the
cost would not be great.

30. I have discussed only briefly with Senator Keane the effect of
our not joining on our lend-lease negotiations. So far the two
issues have been kept separate. This aspect will no doubt be
referred to the Senator for further comment.

31. It is possible that our accumulated sterling balances will not
be freely convertible into dollars, and part may be frozen. If so,
in order to pay for the heavy imports needed to make good our
wartime shortages, we may require more dollars in the next few
years, and perhaps more sterling too, than can be provided out of
our own resources. In that event, membership in the Fund would
provide us with a means of securing dollars, or other currencies,
which might be of great value.

32. An attitude of isolation on the part of Australia towards
international plans for economic collaboration may have other
adverse effects on our economic and political interests. These
effects are not measurable, but in a dangerous world may be
substantial.

A voice in the management
33. At the inaugural meeting, with India not a contestant, had
Australia been a member she could have secured the election of an
executive director to both the Fund and the Bank with the support
of New Zealand.

If we join in the near future, say before the September meeting of
the Boards of Governors, and Russia does not join, or India's
interpretation of the Articles dealing with the appointment of
executive directors is accepted, there is still a possibility that
we might be able to secure a voice in the administration of the
Fund or the Bank until the next elections in September, 1948. If,
however, Russia, Italy, Sweden, and some other countries join, it
would be more difficult to secure a place in future elections,
unless the number of executive directors is increased. It should
be possible for us, however, to make arrangements with some other
countries involving the rotation of directorships and alternates
which would ensure us representation on one or other of the bodies
more or less continuously.

34. This, however, might involve making arrangements with
countries with whom we did not have much in common.

35. With the doubts that must continue for a time about the
usefulness of executive directors, and how much real power will be
left to them by the United States and the United Kingdom, it is
difficult to know what importance should be attached to this
privilege. However, it might give us an opportunity to exercise
some influence during the formative periods of the organisations.

Conclusion
36. If there were reason to expect that the economic collaboration
resulting from current discussions were likely to restore world
trade and maintain economic stability, it would, I believe, be in
Australia's interests to join the Fund and the Bank. The Anglo-
American loan agreement and the proposals for an International
Trade Organisation, as at present drafted, do not seem to me to
hold out that promise. The reduction in the transition period for
the United Kingdom from five years to one year will make the
restoration of her economy, and consequently our own, much more
difficult. The International Trade Organisation will impose
restraints upon other action that the United Kingdom might have
taken to restore her export income and upon measures which
Australia has, in the past, found necessary to protect her
domestic economy from adverse international conditions and to
provide a balanced development of her resources. So far there is
little guarantee that, in return, the United States will follow
domestic policies likely to maintain internal economic stability,
or international investment, commercial and tariff policies that
will secure satisfactory world conditions.

37. It is, of course, possible that we might secure significant
changes in the International Trade Organisation proposals which
would clarify the obligations of the United States to provide an
economic framework within which the various components, such as
the Fund and the Bank, could hope to function successfully.

38. The difficulty confronting Australia is that a well based
opinion about the effects that the Fund may have on us cannot be
formed until we know the substance of the International Trade
Organisation, including some indication of the future lending,
employment, commercial and tariff policies of the United States.

We are, however, unlikely to know enough about the International
Trade Organisation until after 31st December, 1946, to be able to
take these matters into account in making a decision before then.

39. A delay in making a decision until after 31st December, 1946,
would involve Australia in some risks. On our admission after that
date, the Fund would be entitled to revise our quota and our
exchange rate. The delay might also have some adverse effects upon
our credit, our conversion loans and lend-lease negotiations. We
might lose the opportunity of having an executive director elected
to the Fund or the Bank. We might also arouse some antagonism
towards us and become involved in other political complications.

40. Provided a statement explaining carefully our reasons for
delay were issued by the Government, I do not believe the delay
would have much effect upon our credit in New York. Information
should be sought from Senator Keane about the effect it would have
upon our lend-lease negotiations. Any attempt by the Fund to
revise our exchange rate, I believe most unlikely. The possibility
of an alteration in our quota is, perhaps, more likely but less
important. I do not attach any great importance to Australia
having an executive director elected.

41. I feel I am not in a position to express a useful opinion
about the political effects of our delay or the antagonism towards
Australia that it might create.

42. It would, in my view, be best if we could defer our decision
whether or not to join the Fund and the Bank until we knew more
about the International Trade Organisation. Not only would this
enable us to know just what obligations we were accepting by
joining the Fund, but we could expect our position in the trade
and employment discussions to be strengthened. It was largely for
these reasons that we were anxious to extend the time for joining
the Fund and the Bank on the original terms for as long as
possible.

43. if, however, the Government considers that the political and
other risks are sufficiently important, an alternative course of
action may perhaps be available to us as a result of the United
Kingdom and Indian statements of intention to resign in certain
circumstances. [8] (See paragraphs 53 and 54.) This possible
alternative would be that Australia should join the Fund and the
Bank in the near future but at the same time, by means of a public
statement, and official communications to the Fund and the Bank,
make it clear that her accession is merely tentative and that she
must be expected to resign if the provisions of the International
Trade Organisation do not hold out the prospect that the combined
effect of both organisations will be to provide an international
economic order to which Australia can reasonably be expected to
adapt her domestic affairs.

[matter omitted]

L. G. MELVILLE