Cablegram 1179 [1] CANBERRA, 28 September 1943
SECRET
1. Stabilisation Fund-The Commonwealth Government has not yet considered the international currency proposals. Pending this consideration the following departmental views on the Stabilisation Fund are forwarded for your guidance and transmission to the appropriate United Kingdom and United States officials.
2. Unless member countries maintain a high level of employment and avoid persistent credit balances, the operations of the Fund will not with certainty protect Australia and other dependent economies from exchange difficulties. Accordingly, we still feel that the importance of this issue should be publicly recognised by the inclusion in Section 7 of an appropriate undertaking. [2]
3. In any event we consider it essential for Australia to retain sufficient freedom of action in the control of its exchange rate and foreign exchange transactions to protect itself immediately it becomes clear that a critical position is impending.
4. For this reason we feel that the clauses referring to the withdrawal from the Fund must provide that where a Member withdraws on the grounds that its exchange difficulties are due to the serious failure of major countries to maintain employment and to avoid persistent credit balances, it will be free, upon giving notice of withdrawal, to reimpose complete exchange control (including quantitative control of imports) and to alter its exchange rate with other countries. In all other respects the Member’s obligations to the Fund should continue during the period of notice.
5. With regard to the question of exchange control, we are still not clear what is intended. Clause 7 (2) of the draft refers to the removal of ‘all restrictions (other than those involved in capital transfers) over foreign exchange transactions’. We think that this clause should be amended to make it clear that we may retain the machinery of import and export licensing and the scrutiny of all overseas payments for the purpose of controlling capital transfers and that the quantitative control of imports is not regarded as a ‘restriction over foreign exchange transactions’.
6. On general grounds we have already urged (see our telegram 1068 [3]) the establishment of international machinery for recording the level of employment in major countries and for promoting regular international consultation on domestic economic policies affecting employment. Regular consultation and the circulation of adequate data on the employment and exchange position of countries would help to prevent the abuse of the limited freedom of action (see paragraph 4) which we feel it essential to retain.
7. We also feel that provision should be made for a withdrawing country to be able to redeem any excess holdings of its currency from the Fund over a long period, e.g. 10 years.
8. With regard to quotas the Fund should provide accommodation adequate to meet normal fluctuations in the balance of payments.
In our view a quota of 80m. sterling would be necessary to give Australia reasonable security on the assumption that world employment and income are being fairly well maintained.
9. In 1929 our reserves of 95m. sterling were found much below requirements even before the general world depression. Between 1934 and 1939 Australia twice found herself in a critical position in respect to overseas funds in spite of deflationary pressure at home. In 1937 overseas reserves were about 70m. sterling and yet in 1939 they were depleted to danger point and only rises in prices due to the war saved the situation. The future is full of uncertainties for Australian exports and the value of money is generally lower than pre-war. Moreover, if our level of employment is to be maintained at even average pre-war figures, reserves of a higher order will be required in the future.
10. We understand that the United Kingdom officials propose to suggest modifications along the following lines:-
(a) Unitas to become the true international currency in which payment can be made to bring about a balance in international accounts.
(b) Provision to be made for more adequate pressure on countries with persistent credit balances.
(c) The inclusion in the plan of a direction to the Board of the Fund to use its powers at a time of declining world activity for the maintenance of world employment and income and the prevention of the spread of deflation.
(d) Variations in exchange rates to be made easier.
11. These proposals would effect considerable improvements in the plan and they have our strong support.
12. We shall be glad if you will keep us fully advised of the progress of the discussions on these matters.
13. If satisfactory modifications to the present plan cannot be achieved consideration might be given to a more limited plan for collaboration between the major countries. Dependent economies such as Australia would participate through their link with one of the major currencies.
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1 Repeated to Bruce as no. 141.
2 The text discussed in this Document is the U.S. Treasury’s ‘Preliminary Draft Outline of a Proposal for a United and Associated Nations Stabilization Fund’ of 26 June 1943 on file AA:A989, 43/735/56/2.
3 See Document 273, note 1.
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[AA:A989, 43/735/56/3]