Following the conversation I had with yourself, Mr. Dedman, and
Mr. Wheeler regarding the present critical financial position of
Britain, I would like to submit to you certain relevant
considerations.

Britain's problem is, no doubt, created primarily by the loss of
her overseas income, together with the results of devastation in
Britain itself during the war. However, it did seem early this
year that the United Kingdom Government was bringing about the
necessary adjustments to meet the changed position.

The circumstances which are perhaps basically less important than
these losses, but which nevertheless seem to have provoked the
present emergency, are (a) the fall in business activity and
employment in the United States, leading to a fall in prices of
dollar-earning goods, (b) the absence of beneficial East-West
trade in Europe which would gradually avoid the necessity of
United States loans, and (c) the development of competition from
Germany and Japan due (i) to measures taken by the United States
and the United Kingdom to build up their economies, and (ii) to
endeavours to integrate these economies in the Western rather than
the Eastern European orbits.

I cannot judge the importance of these factors in the absence of
reliable information, but it appears that they are important now
and will become increasingly important as time goes on.

(a) Fall in Employment in the U.S.A.

You will remember that, from 1943 onwards, we struggled
persistently and with apparent success to convince the United
States as to the importance of their maintaining full employment,
not merely high levels of employment. For instance, at San
Francisco in 1945, we had included in the Charter of the United
Nations a specific obligation to maintain full employment.

More recently, in respect to the I.T.O. Charter, we endeavoured to
balance any obligations we undertook with benefits we might derive
from undertakings by the United States to maintain employment.

Insofar, therefore, as reduced levels of activity in the United
States are responsible for Britain's financial plight, we have,
under the United Nations Charter and under the I.T.O. Charter, a
clear right to press, on the basis of an international obligation,
for United States co-operation in forms which might prove
beneficial to the sterling area.

Your own officers would be able to suggest the type of actions the
United States could take to assist the position, for instance,
reduction of duties on certain dollar-earning goods, and even,
perhaps, if the matter were handled on a high enough level, a
reintroduction of some type of unconditional lend-lease system to
overcome the present post-war emergency.

In the immediate future, the United States of America could
perhaps assist most by co-operating in discriminatory plans which
would assist in the conservation of dollar income and the
maintenance of existing exchange rates. This is quite contrary to
present U.S.A. policy; but the raising of the matter at a high
political level, and, if necessary, on an international platform,
is perhaps the only means of resisting U.S.A. policy in this
respect.

(b) Restraints on East-West Trade
I understand that certain United Kingdom Government Departments
are in favour of increased East-West trade, and, in fact, the view
has been expressed that the only hope of European recovery is a
greatly increased measure of this trade. I suppose that the
resistance in the United Kingdom comes primarily from the Foreign
Office.

Here again, without the necessary facts, it is impossible to
assess the importance of East-West trade to Britain's recovery, It
would seem to me, for example, that over-stringent restrictions on
the present sale of so-called strategic materials, such as rubber,
are probably preventing Britain and other Western European
countries from obtaining many agricultural products which might
otherwise be available from Eastern Europe.

From a political point of view, the whole policy of restricting
trade in these so-called strategic materials seems to me very
anomalous in the present circumstances. As a result of the
pressure of world public opinion, some of the political obstacles
to East-West agreement have been overcome, and a wise policy at
the moment would endeavour to extend the area of agreement which
might exist between the Eastern and Western groups. But any such
extension is immediately prejudiced by the policy of over-
restriction of trade in crucial materials, at any rate those which
are not in short supply and can be beneficially used for trading
purposes. In other words, British foreign policy, to a large
degree no doubt forced on the United Kingdom Government by the
U.S.A., is actually bringing about increased financial burdens
upon the United Kingdom.

In this respect it may well prove that U.S.-U.K. foreign policy is
self-destroying. Restraints on East-West trade for strategic
purposes are likely to bring about [even the failure] [1] of
Marshall Aid, which has the same strategic objective. The
countries of Western Europe cannot be built up and stabilized by
Marshall Aid unless East-West trade is gradually re-established as
Marshall Aid is tapered off. United States policy prevents the re-
establishment of East-West trade. Yet the United States is
terminating, or at least reducing, aid, particularly to the United
Kingdom, thus suddenly leaving not only the United Kingdom but all
other Western countries in a hopeless financial position.

(c) The Development of German and Japanese Competition
I must point out too that German and Japanese competition is
beginning to be serious for Britain. This is being brought about
in two ways: there is actual competition as a result of these two
countries being built up by U.S.A. aid; and there is the indirect
competition which results from the fact that the United States of
America has endeavoured to incorporate Germany and Japan in the
Western economic 'bloc', with the result that they both compete
with Britain for the U.S. market, and compete with Britain for
U.S. goods, thus forcing up the price of these dollar goods.

(i) Both Germany and Japan have been deliberately built up as part
of the 'cold war'. Dollars have been diverted on a large scale to
both countries, and the competitive production of both countries
has increased Britain's problems. I was able, while in Berlin [2],
to obtain enough information to make me believe that Britain was
pursuing the 'cold war' tactics in Europe at the cost of already
developing German competition which she could not bear. I attach
some recent statistical information I obtained. The United States
Government should be made to realise that the post-war
rehabilitation of Britain is of far greater value to her than the
building up of Western Germany.

Substantially the same is true in the case of Japan. Japan must be
allowed to reestablish itself, and the choice may be between
building Japan up within the Western economy and in competition
with the United Kingdom, ourselves and others, or allowing Japan
to find her raw materials and markets in China, which would be of
mutual benefit to Japan and China without adversely affecting
Western economies. But U.K.-U.S.A. policy with respect to Japan
and China may prevent this development.

(ii) The effects on Britain of Germany and Japan being diverted
from natural markets in Eastern Europe and in China could not be
easily measured. It is clear, however, that the effect has been to
force up prices of U.S.A. goods and to force down prices of
British and Western European exports to America. An examination
might be made of the extent to which trade has been diverted from
Eastern Europe and the Asian continent. The diversion is political
in intent, but the political judgment seems to have been taken
without any assessment of cost.

Australian Approach
If it were not for these considerations which I have mentioned,
that is, the United States obligations to maintain full
employment, and the financial implications of U.S.-U.K. foreign
policy, there would be a strong case for co-operation amongst all
the countries in the sterling area to build up within that area a
kind of self-sufficiency group. It would seem to me, however, that
the United States responsibilities for full employment should
first of all have been brought home to the United States
Government and the people of the United States on the basis of
existing international agreements, and that the United States and
the United Kingdom Government should have been persuaded in
foreign policies to bear in mind financial and economic
consequences which, in turn, tend to affect or even reverse the
general trend of foreign policies.

There may be some danger in the fact that any conference that
might be convened to deal with this seemingly financial problem
will be largely a conference of Treasury officers. [3] They will
naturally endeavour to find solutions, taking for granted existing
political policies and circumstances. But it will be seen that
these financial and political matters are inter-related; for
example, probably the most effective means of resisting United
States pressure for non-discrimination and for devaluation would
be to face the United States Government with the political problem
in relation to Europe which will be created if Western Europe and
the British Commonwealth is forced to develop a non-dollar area
and is forced, therefore, to seek a far greater degree of economic
co-operation with the countries of Eastern Europe.

I would suggest that you may press for consideration of the
current financial problem of Britain in this broader background,
so that some of the financial and economic implications of U.K.-
U.S.A. foreign policy can be examined and the costs of existing
foreign policies carefully weighed. It may then be decided that
Australia should join with the United Kingdom in making immediate
approaches on the highest level to the United States Government
and, if necessary, through international agencies on the question
of United States economic obligations to the rest of the world,
and the question of East-West relationships would necessarily be
involved.

As I see it, the procedures might be, after consideration of the
existing problem, a (a)decision that United States pressure on the
question of non-discrimination and the question of devaluation
should be resisted, (b) consideration of the steps which might
have to be taken within the sterling area in order to maintain for
the present the sterling position, and, finally, (c) consideration
of the way in which America can be approached, both at a
governmental level and publicly, on these broader issues.

In the light of what I have said, it would probably be of
advantage to you if one of my officers, for instance Mr. Tange,
accompanied you to the proposed Financial Conference of
Commonwealth Members in London. [4]

I am attaching several documents which give factual information in
support of the points made above.