London, 5 July 1968
Secret
Australia and UK Portfolio Investment
The attached envelope has just been handed me by Mr Fleming of Australia House. It contains Mr McMahon’s reply1 to the Financial Secretary’s request that the Australian Government should make a statement that, in the period ahead, any abnormal outflow of capital to Australia would be matched by a corresponding rise in Australia’s reserves.2
2. As you will see, the reply is disappointing—though perhaps not surprising. In effect, Mr McMahon says that it is not possible for him to give such an undertaking, if only because Australia’s sterling reserves, as a trading country, rise or fall unpredictably within a fairly wide range. This, of course, is not a real objection—which seems to be that Australia has had to absorb quite a lot of trouble one way and another, resulting from devaluation and the Voluntary Programme, and that she is already doing all that can be expected in holding considerable amounts of sterling. Indeed, Mr McMahon goes on to say that, if we were to impose Exchange Control to stop the portfolio outflow, public reaction would be highly adverse and, hence, that there might then be substantial further diversification.
3. This letter will, of course, to some extent be overtaken by the Chancellor’s message on the Basle arrangements—but, even if all these go through, as we hope, portfolio investment— if it remains high—will continue to give us trouble and will need some special agreement with the Australians in addition to the main Basle arrangements.3
1 Document 259.
2 Document 257.
3 The ‘Basle arrangements’ (also known as the ‘Basle Agreements’) referred to the UK Treasury’s bid to rescue the City from the ongoing effects of the Sterling crisis by turning to the European central banks for a massive injection of dollars. The idea was for US$2 billion to be made available as a rescue package, but in order to seal the agreement with the Europeans the British needed the cooperation of the various major holders of Sterling reserves. Australia, as the single largest overseas holder of Sterling, was the key, because unless Australia’s reserves could be stabilised the British would be unable to live up to the terms of Basle. So, as a partial solution to both of these problems, the Australians were to be asked to keep a minimum percentage of their reserves in Sterling for a set period of time, in return for a partial UK guarantee of those reserves in dollars. The minimum percentage of holdings, the percentage of the guarantee and the duration of the agreement were to become the subject of tough negotiations in July–August 1968.
[UKNA: T 295/384]