Box 1790, AA.
and Australians would as a consequence spend more abroad. Australians would spend most of this international income in the United Kingdom and to the extent that it was spent in countries like France and Belgium it would promote the reconstruction of western Europe. The only problem was that greater expenditure by the United Kingdom on Australian goods would cause Australians to spend more heavily in the dollar area. Evatt argued that sterling area import restrictions would take care of this problem.
He also questioned the British assumption that the western European countries would be in a position by 1952 to make all the purchases they wanted from the sterling area. If that were not so, the alternatives were that the Commonwealth would have to provide continued sterling aid to them, or the western European countries would have to impose import restrictions against the sterling area. Evatt hoped that the problem could be solved by countries outside the sterling area and western Europe, such as eastern Europe, earning surplus sterling. The western European countries, through trade with eastern Europe, could then earn enough sterling to make all the purchases they wanted from the sterling area, purchases which they would not otherwise have been able to make. Evatt declared:
We would be anxious to see even greater energy being devoted to the restoration of trade and building of new trade between western Europe and other parts of the world outside the sterling area since we think that success in doing so is a necessary condition for re-establishment at high standards of living of multilateral international trade in the non-dollar world.
Evatt made a similar point in relation to trade with the United States. The United Kingdom professed to be in favour of the full restoration of multilateral trade, yet the United Kingdom economic plan assumed that there would continue to be import restrictions against the dollar area after 1952. Evatt pointed out that Australia was being asked to undertake the development of goods previously purchased from North America. He warned that insofar as this could be done for industries which were natural and economic to Australia, the government would proceed with them as part of its development programme. But in cases where production was of a kind which would
com pete w ith norm ally cheaper supplies from dollar countries, the A ustralian
government did not want to embark on major developments without very precise long
term assurances as to the security of its markets in the United Kingdom. E vatt’s
remarks revealed a great deal of uncertainty about how the world economy would
develop. There could be a full restoration o f multilateralism throughout the world if
the Americans acted to solve the dollar shortage. On the other hand the sterling area
and western Europe might be forced to insulate themselves from the United States and
set up as a non-dollar trading area. Australia could continue in its traditional economic
relationship with the United Kingdom or it could diversify its trade and economy
according to A m erica’s global plans. There could be no doubt that the Chifley
government saw Australia’s economic future with the United Kingdom and the sterling
area rather than with the United States. 50
The Chifley Government and the 1949 Dollar Crisis
The M arshall Plan was moderately successful in 1948. In Britain, agricultural and
industrial production each rose by twelve per cent, and the dollar gap between the
United States and Britain was reduced by one third.51 Yet this improvement had not
occurred under multilateral conditions. Convertibility o f sterling had been suspended
since 1947 and the sterling balances had not been scaled down. M oreover British
exports to the United States were still only one third of the imports received from the
U nited States. These sober facts caused the British cab in et’s econom ic policy
committee to remark in March 1949 that ‘unless we can greatly increase our exports to
Canada and the US A, we cannot become independent of ERP aid without a reduction in
our present standard o f living.’ 52
50 Cablegram 3618 Evatt to Chifley, 13 October 1948, CRS A5954/1 Box 1790, AA.
51 Thomas Balogh, The Dollar Crisis: Causes and Cure, Oxford, 1949, pp.22-7; cablegram 48 Beasley to Chifley, 25 February 1949, CP 286/2 Bundle 31 611 Part 2 AA.
52 ‘Expansion o f exports to North America’, 29 March 1949, PRO PREM 8/1145 EPC(49)31 quoted in A.J. Rotter, The Path to Vietnam: Origins of the American Commitment to South East Asia, Cornell, 1987, p.53.
However in the first half of 1949 the gains of 1948 were reversed. A recession in the United States led to a decline of American purchases of sterling area commodities at the same time as American exports to the sterling area were increasing. This recession caused the United Kingdom’s reserves of gold and dollars to fall below £500 million ($2000 million) - the level of reserves which the British hoped to retain at the end of the Marshall aid period. In the three months from April 1949 a sharp deterioration occurred so that by June the United Kingdom’s reserves had fallen to $1624 million. The net gold and dollar deficit of the sterling area as a whole in the same three months was $628 million. At this rate of decline, it was obvious that the entire sterling area reserve would soon be exhausted. The British government attributed this sharp decline to two causes: first, reduced dollar earnings from sterling area exports of goods and services to North America; and second, an expectation of devaluation of the British pound, causing Americans to delay their purchases from the United Kingdom and hasten receipts.53 The interesting thing about the 1949 dollar crisis, as Sir Stafford Cripps himself noted, was that only one third of the dollar loss in the second quarter of 1949 was due to a decline in British exports. Two thirds of the loss was attributable to a fall in dollar receipts for sterling area raw materials -such as Malayan rubber and tin, Indian jute, and Australian and New Zealand wool. 54
Chifley sent a personal message to Cripps in July 1949 outlining Australia’s dollar position. Chifley told Cripps that the Australian government, having originally planned to import £A120 million from the dollar area in 1947/8, had limited Australia’s dollar imports to £A82 million as a result of cuts made after the convertibility crisis. Despite these substantial dollar savings Chifley had still been obliged to draw $164 million from the sterling area dollar pool in 1947/8. In a personal conversation with Cripps in London in April 1949, Chifley had informed Cripps that the Australian government would try to restrict net drawings from the pool
53 ‘Australia's commitments on dollar expenditure’, 22 January 1950, CRS A571/2 49/1860 Part 2, AA.
to $55 million in 1948/9. Chifley was reasonably confident of being able to limit Australia’s dollar import programme to the dollar equivalent of £ A57 million. But he lamented that Australia’s net dollar result would be swamped by fluctuations in the price of wool which Australia had no ability to influence whatever. In 1946/7 the value of wool exports to the United States had been £53 million. But in 1948 wool exports had fallen to £A29 million. And on the basis of slow wool trading in May 1949 Chifley predicted that the value of Australia’s wool sales to America in 1948/9 would be as low as £A26 million, and Australia’s total exports to the United States £A40 million. Chifley predicted therefore that Australia’s net drawings on the sterling area dollar pool in 1948/9 would be closer to $70 million than $55 million. 55
Because of disappointing wool sales to the United States Chifley had to draw down Australia’s sterling balances slightly more than expected in 1949. Consequently the American ambassador to the United Kingdom, Lewis Douglas, noted that one of the causes of the dollar drain was abnormal purchasing from America by India and Australia. But he attributed the dollar crisis mainly to the general diminution of American purchases abroad of important sterling area dollar earning commodities. The ambassador thought that when the British public came to realise that their gold and dollar reserves had fallen by one sixth in only three months, the shock might ‘throw the country into an economic as well as a financial crisis’. He predicted that a full scale economic crisis would develop in the United Kingdom and spread throughout the British Commonwealth some time after August. He suggested that the United Kingdom would respond by making drastic cuts in dollar imports, food consumption, and investment, shedding military and political commitments abroad, increasing the pressure on the sterling area to reduce the dollar drain, and tightening the bond between sterling and other soft currencies. He had been told that the United Kingdom government had developed a programme to prevent Britain from having to devalue sterling and he warned his government: