244

LETTER, SNELLING TO JOHNSTON

London, 16 November 1967

Confidential

Thank you for your most interesting letter of 20 October about Australian reactions to the recent talks with Alan Westerman and other Australian officials, with particular reference to EEC questions. 1

2. The extract from the Australian Financial Review which you enclosed does not specify in what way Australian officials found our line ‘surprisingly hard’. We suspect that what they mean is simply that we made it clear to them beyond a peradventure that Britain would not be seeking on behalf of Australia anything more than the safeguarding of the Commonwealth Sugar Agreement contract for its existing term and otherwise transitional arrangements; and that we considered this to be consistent with our undertaking to safeguard essential Commonwealth interests. The Australians may choose, for domestic reasons, to claim that they found all this surprising; but we cannot believe that they really did. At the time of the EEC consultations in London last June,2 although we explained to the Australians that British Ministers had not by then taken any decisions about our negotiating objectives, we hinted very plainly that the latter were unlikely to include anything more for Australia than what we are now asking. The position was made perfectly clear—though implicitly rather than explicitly—in the Foreign Secretary’s statement of 4 July to the WEU Council, which in effect constituted our shopping list to the Six.3 And, as you know, this was followed on 27 September by a speech from the Secretary of State to the Commonwealth Correspondents’ Association in which he said quite explicitly that ‘for those Commonwealth exports not covered by these safeguards [i.e. association, continuation of the Commonwealth Sugar Agreement, etc] we would expect that the application of Community tariffs and levies would be phased over a transitional period, the length of which would, of course, be the subject of negotiations’. The Commonwealth Secretary went on: ‘Now that is the general approach we make to the problem of essential Commonwealth interests’. In the circumstances, we could hardly do less at our talks with Westerman and other Australian officials than to draw their attention to these statements. It was only when they themselves insisted that they could not see in what way the Foreign Secretary’s statement to the WEU Council was relevant to our undertaking to safeguard essential Commonwealth interests that we felt obliged rather to labour the point. The plain fact is that neither we nor the Australians had anything very positive to offer; the atmosphere was therefore bound to be a little depressing. But we do not think there is more substance than that to the complaint voiced in the Financial Review.

3. Equally, we are not clear what is meant by the reference in the extract from the Financial Review to the ‘off-handed treatment’ accorded to the Delegation or what is behind your statement that some of the officials felt the atmosphere was ‘not markedly friendly’. If this is anything more than another way of saying that they were disappointed with our attitude, as described in the last paragraph, it is completely without justification. I can conceive of no ground on which the Australians might feel that we were in some way lacking in courtesy. We offered hospitality on the scale customary on such occasions and we invariably fell in with Australian suggestions about the timing of meetings, etc (which they sometimes wanted to change at short notice). Although I was myself away at the time, I understand that the discussions were serious and detailed and, in fact, looking back on it, the British participants are clear that they took more trouble and spent more time over this Australian approach than was justified by anything which the latter had to put forward.

4. In any case, we doubt whether the views expressed by the supporting cast of Australian officials were shared by Westerman himself. […] The tone of the final meeting between Westerman and Sir Richard Powell was very friendly. Indeed, the concluding paragraph of the fuller record of this meeting made at the time by the Board of Trade reads as follows:–

‘ Sir Alan thanked Sir Richard for the friendly and co-operative attitude shown by all the British team at the talks. Both Sir Alan and Sir Richard agreed that the talks had been conducted and terminated in an amicable manner’.

5. We were interested to read the speech by Mr McEwen made in Parliament on 19 October which you enclosed with your letter and his reply to a question by Mr Killen4 on 26 October which you have since forwarded. He seems to have made crystal clear to the Australian Parliament what we are planning to do. I see that he ascribed to us an intention ‘to interpret essential Commonwealth interests very narrowly indeed’. But that is mild criticism coming from Mr McEwen. It would seem from this that, as you yourself forecast in paragraph 6 of your despatch No. 5 of 19 May,5 the underlying attitude of Australian Ministers is realistic. Is it too early to draw the conclusion that the Australian Government have decided not to have a public row with us on EEC questions? Sir Alexander Downer’s speech at the Royal Commonwealth Society lunch on 11 October, which received a certain publicity here, might, at first sight, suggest the contrary;6 but it antedated Mr McEwen’s remarks and it may be that Downer was talking out of turn. I think the lack of balance in what he said weakened the impact of his speech. Certainly it does not seem to have impressed the Financial Review (their leader of23 October refers).

6. You drew attention, in paragraph 4 of your letter, to the Australians’ failure to offer us a reasonable list of their essential interests. At an earlier stage it might perhaps have suited us to be presented with such a list. But, now that we have handed in our own shopping list to the Six, Australian action on those lines would really be something of an embarrassment. We should probably be forced to respond by saying that, insofar as the Australian list went beyond the Foreign Secretary’s statement, there was nothing we could do about it in negotiations. As you will have noticed, we have so far avoided defining what constitutes an essential Commonwealth interest in this context—except so far as sugar and New Zealand are concerned—and it is our general policy to avoid further definition.

7. One final point. We agree that developments in Australian thinking on the question of our approach to Europe should be closely watched. We would probably be right to expect some further hardening of their general attitude towards us on trade matters; the trend is not new, but it is perhaps likely to accelerate. We shall look forward to further reports from you on these matters from time to time. If at any stage you feel that any action is necessary on our part ( pace the final sentence of paragraph 4 of your letter) please let me know. […]

The devaluation of Sterling and its consequences

Britain’s EEC negotiations were thwarted once again by General de Gaulle in November 1967—a humiliating double rebuff for the British. At a press conference on 27 November, de Gaulle announced that ‘a very vast and deep transition is still needed’ before the British would be ready to join the EEC. On this occasion, he chose to bring down his verdict before formal negotiations had commenced. The EEC Council of Ministers issued a communique on 19 December stating what had by then become obvious: the conditions did not exist for the membership negotiations to proceed.

In the meantime, the Wilson Government faced a further severe setback when renewed pressures on Sterling forced a long-awaited devaluation of the pound. On 19 November, following weeks of feverish speculation and massive expenditure by the Bank of England to try to shore up the currency, Wilson announced his decision to devalue Sterling by 14.3 per cent. This was an event of global significance, confronting all major trading nations with a choice between adjusting their currency values in line with Sterling (and thereby risking a run on exchange rates with ensuing monetary chaos) or retaining their values against the pound and seeking to exploit the balance of advantage in the new exchange conditions. Wilson conveyed his government’s decision to Holt immediately prior to the public announcement (Document 245).

The key issue for Anglo-Australian relations, then, was the Holt Government’s decision not to devalue the Australian dollar (in contrast to New Zealand and a number of other smaller trading nations). This was an unprecedented move for a country which had traditionally kept the vast majority of its reserves in Sterling, and a currency which had long been pegged to the pound. The decision was essentially taken by the Australian Treasury, with William McMahon at the helm. McMahon argued that the losses to Australia in terms of the value of its Sterling reserves and competitiveness in the British export market were outweighed by the needs of the now diversified Australian economy: devaluation would have raised severe problems for Australia vis-a-vis third countries like Japan and the US in terms of rising import costs with attendant inflationary pressures and balance of payments difficulties (Document 246). The British themselves hoped that Australia would not devalue, as this would have worked against the benefits they hoped to secure for British exporters. Thus the decision itself was indicative of the new Anglo-Australian relationship that was emerging into focus—a point underlined by Holt himself, who declared roundly that as a result of the decision Australia had ‘come of age as a nation’.

yet the decision was by no means straightforward, as it aggravated deep divisions within the government (and the Coalition partners)—between McEwen’s Country Party and Trade Department on the one hand, and the Holt-McMahon Liberals supported by the Treasury on the other. McEwen’s constituency of primary producers was worst hit by the devaluation. At a time of depressed commodity prices, and the imminent prospect of British entry into the EEC, the sudden loss of a 14.3 per cent competitive edge in Australia’s traditional market was a crushing blow. McEwen, who was overseas at the time of Cabinets decision, felt moved to repudiate the decision publicly, in a barely disguised breach of Cabinet solidarity (Document 251). Such was the impact of this statement that Holt was forced to the extraordinary measure of issuing a public ‘Reaffirmation of Government’s Decision’ (Document 252)—effectively announcing the decision twice. Seen from a British perspective, Holt’s move was ‘a courageous one which must have appealed strongly to the growing national pride and sense of independence in this country’ (Document 253). It also received broad support in the Australian press.

One of the immediate consequences of the devaluation was an increased outflow of Sterling to Australia in the first half of 1968, which raised further difficulties between the two countries. The reasons for this were complex, but a combination of dwindling confidence in the pound, the attractions of the Australian mining boom, and growing rumours about the imposition of exchange controls to Australia seems to have prompted investors to get in before the axe fell. By February 1968 the UK Treasury was experiencing sudden and dramatic outflows of portfolio investment to Australia. An approach was made to the Australian Government, asking them to rectify the problem by countering the outflow by increasing their reserves in Sterling by a corresponding amount. This, it was suggested, was the only viable alternative to the direct imposition of exchange controls (Document 257). Yet the Australian Treasury was not inclined to go along with any of this, and in a detailed reply to the Chancellor of the Exchequer, Roy Jenkins, McMahon warned that any attempt to curtail the free flow of Sterling to Australia ‘would be seen by many people as the severing of a long-standing and most valuable link between the United Kingdom and Australia’. He added that there were influential people in Australia who felt that Australia already held too great a portion of its reserves in Sterling, and that pressure to diversify would be difficult to resist if the UK went ahead with exchange restrictions (Document 259).

There the matter might have rested, but three years later the story was very publicly leaked by Jenkins in the context of Australian complaints over their treatment in the 1971 EEC membership negotiations. By this time Jenkins was in opposition, but at a party meeting debating the effects of EEC entry on the Commonwealth he declared that he saw no basis for ‘kith and kin politics’ when dealing with a country like Australia. His experience with the Australians over capita flows in 1968, he claimed, had revealed them to be ‘without exception the toughest, roughest and most self-interested Government with which I ever had to deal’ (Document 260). This elicited an indignant public rebuttal from the McMahon Government (Document 261), at what was a particularly low point in the history of diplomatic relations between the two countries. Whatever the merits of the arguments of either side, Jenkins’ observation was surely borne out by events: ‘kith and kin’ politics had indeed, over the course of the 1960s, ceased to resonate meaningfully in the conduct of Anglo-Australian relations.

1 Document 243.

2 Document 233.

3 See extract in Document 262.

4 Federal Member for Moreton (Liberal Party).

5 Document 231.

6 Document 241.

[UKNA: FCO 20/54]