Canberra, 5 July 1968
Secret
I was glad to receive your message of 14th June informing me of the discussion which had been taking place at meetings of Central Bank Governors in Basle about a new facility for sterling.1 We heard a little about these discussions from other sources and officers of your Treasury have given our representatives in London an outline of the arrangements which were being considered.
2. I was particularly glad to have your assurance that there is no question of any of the arrangements which you hope to make in Basle interfering with the liquidity or usability of sterling balances without our consent. Since our knowledge of the proposals does not go far, however, we can offer no particular judgement upon them. Moreover, having had no part in the discussions, we must as I am sure you will agree, hold ourselves to be entirely uncommitted to any proposals which may finally emerge.
3. In saying this I do not wish you to think that we are disposed to take up in advance an aloof or uncooperative attitude. On the contrary, if it appears to us that the proposals which eventually come forth are likely to strengthen sterling, we will stand ready to discuss with you ways and means by which we might help to make them effective on a mutually advantageous basis. It is, of course, too early to go into details of this. In the meantime, however, I shall be grateful if you will keep me as fully posted as you can about the course of the Basle negotiations. It may be that, at an appropriate time, senior officials from here should come to London to explore the subject with your advisors.
4. I have also had under consideration a letter which Mr Harold Lever wrote to our High Commissioner in London on 31st May,2 following a talk they had had earlier, on the outflow of United Kingdom funds to Australia for portfolio investment. He assured us that your Government would be reluctant even to contemplate controls to check this flow, but went on to say that if you were to be in a position publicly to emphasise this he felt it necessary for the Australian Government to state that, in the period ahead, any abnormal outflow of capital to Australia would be matched by a corresponding rise in Australia’s holding of sterling in its reserves.
5. I have since read your answer to a recent series of questions on this subject in the House of Commons and I appreciate the attitude you stated. At the same time I was made very keenly aware of the pressures being brought upon you in this matter.
6. We have accordingly given close and sympathetic consideration to the idea Mr Lever put forward. I am bound to say, however, that as a specific proposition, we find it difficult to accept on both technical and policy grounds, for reasons which I shall explain presently.
7. Perhaps I should first say, however, that the criticisms I have seen of recent British portfolio investment in Australia seem to be highly unfair. Concentrated on this one conspicuous item they overlook other facts that ought to be weighed against it.
8. Let me recount a few of these facts. The devaluation of sterling last November reduced by an amount equivalent to $A113 million ($US127 million) the value of our sterling reserves at that time in terms of non-sterling currencies. I recall this fact without the slightest sense of grievance on our part. It is fair to point out, however, that the loss to us was a gain to the United Kingdom. It meant that, in terms of currencies other than sterling, the liability which our sterling reserves represent was very considerably reduced.
9. Next, it is a fact that while, during this year, the flow of portfolio capital to Australia has risen sharply there has also been over the past couple of years a heavy falling away in the flow of direct investment (excluding undistributed income) from the United Kingdom to this country. Over the past two years we have paid off a net amount of £42 million in London. This of course represents a back flow of capital from Australia to the United Kingdom.
10. Meanwhile, we have been making quite heavy repayments of official sterling debt. Since 1964, there has been a reduction of some £90 million. Over the past two years we have paid off a net amount of £42 million in London. This of course represents a back flow of capital from Australia to the United Kingdom.
11. Our non-sterling indebtedness has, however, been moving strongly in the opposite direction. Over the past twelve months our gross official loan raisings abroad in non-sterling currencies amounted to $US270 million. With non-sterling repayments deducted, the net amount for the year was $US190 million. Direct private American investment in companies in Australia in this period would probably have exceeded $US200 million.
12. As to portfolio investment it may be worth recalling that, at the pressing request of your Government, we agreed in the negotiations on the recently concluded United Kingdom – Australia double tax agreement to waive the credit which was previously available for underlying tax levied in Australia on portfolio investments in this country by United Kingdom residents. As we understand the matter, this removed any taxation advantage which such investments previously had as against investments at home.
13. Again, it is a consideration that, under our guidelines for borrowings in Australia by overseas-owned enterprises, we have been permitting quite generous access on the part of such enterprises to the Australian capital market and British companies have been taking advantage of this along with the rest. Over the two years to 30th June last, requests from companies, wholly or predominantly British-owned, to borrow in the Australian market, totalled $A260 million. Approvals were granted to an amount of$A146 million. I might mention that I have before me at the present time a request by a great company, largely British-owned, to allow it access to Australian loan funds over the next three years to an amount of the order of $A120 million.
14. It does seem to me that facts of this character provide an impressive counterweight to the flow of portfolio capital in our direction—which, in any case, could well prove to be no more than a transient phenomenon.
15. To return to the suggestion by Mr Lever, we find it difficult to see how, with the best will in the world, we could give an undertaking on the lines sought and be sure that in the circumstances as they actually arise we would be able to make it good. Inevitably, the reserves of a trading country like Australia tend to rise and fall more or less unpredictably within a fairly wide range. The item of net capital inflow is not only impossible to identify until considerable time has elapsed but is itself liable to sharp and frequent fluctuations. In brief, we think that even if such an undertaking as Mr Lever has proposed were couched in general terms and interpreted broadly, it could still prove an embarrassment, both to your Government and to ourselves.
16. Rightly or wrongly, also, we sense that there is an impression to the effect that Australia has been using the net proceeds of portfolio investment here to facilitate a shift of its reserves out of sterling into gold or other currencies. l want to make it perfectly clear that we have been doing nothing of the kind. In a letter to your predecessor last year I explained to him that while, over a good many years, we had been gradually building up our holdings of gold and U.S. dollars, so that the ratio of these assets to sterling assets in our reserves had been increasing, we had always been careful, and would continue to be careful, in pursuing this long-term policy, not to take action which could weaken sterling in which, after all, we had a very large interest. Despite the undoubted shock to confidence in this country from the devaluation of sterling, we have held steadily to this line through the ensuing months. Although final figures from 1967–68 are not yet available, estimates I have been given lead me to expect that, over the year to 30th June, there will have been little change in the composition of our gold and foreign exchange holdings. Our gold holdings will have increased by the amount of our gold purchases from the Fund while our U.S. dollar holdings will probably have declined to some extent. Our sterling balances are expected to have shown very little change in terms of sterling over the year. Of course, expressed in Australian currency, our total reserves and our sterling balances will reflect the devaluation loss on sterling holdings last November.
17. I want you to know that we have adhered to this policy in opposition to a view, which was pressed on us last November and has since gained considerable strength, that we ought, without further delay, to seek to turn a considerable part of our sterling into gold or into other currencies.3 Whether, in the light of such arrangements as may emerge from the Basle discussions, there will be scope for wider diversification of our reserve holdings it is not possible to say until the nature of such arrangements becomes known. It could be, however, that some further degree of diversification would be an advantage to both the United Kingdom and to ourselves. I have an open mind on the matter, but can assure you that on anything we might seek to do in that direction we would, as always, endeavour to reach agreement with you.
18. It would, in my view be wholly unfortunate if your Government were to take further action to restrict the flow of capital to Australia. In this country, I am sure, public reaction would be highly adverse. It would be seen by many people as the severing of a long-standing and most valuable link between the United Kingdom and Australia in the field of economic relationships. I fear too that it would add strength to the considerable body of opinion in this country which favours an early and substantial shift of our overseas reserves out of sterling. That opinion I am bound to say is now held here by more than a few highly responsible people.
19. At this distance, it is of course impossible for me to form a judgement on the necessities of the situation as they will be presenting themselves to you. Nevertheless I venture to suggest that, as a preferable alternative to our giving the sort of undertaking which Mr Lever has sought but which we feel to carry risks of non-fulfilment and embarrassment, there should be an adequate statement of the other side of the relationships that have prevailed between the United Kingdom and Australia during this difficult period and that still prevail. The facts I have quoted as to the falling off of direct investment, our redemptions of sterling debt, our considerable non-sterling borrowings on official account, the extensive financing of United Kingdom enterprises from Australian sources, the losses we sustained at devaluation and what l may fairly claim to have been our unvarying firmness as a holder of sterling through thick and thin, should add up, in my estimation, to a powerful counter argument. Indeed, regardless of this particular issue, I feel that this is a viewpoint which ought to be much better known to the British public than apparently it is.
20. This being our record,I feel it should give ample assurance that we shall continue as in the past to act with a full sense of responsibility towards sterling.
1 See note to Document 258.
2 Referred to in Document 257.
3 These pressures came primarily from the Reserve Bank.
[UKNA: T 295/384]