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T H I S D O C U M E N T I S T H E P R O P E R T Y O F H I S B R I T A N N I C M A J E S T Y ' S G O V E R N M E N T

Printed for the War Cabinet. October 1943.

S E C R E T . Copy N o .

W . P . (43) 428 . 2nd October, 1943.

W A R C A B I N E T .

C U R R E N C Y T A L K S A T W A S H I N G T O N : E X C H A N G E S T A B I L I T Y .

N O T E BY THE CHANCELLOR OF THE E X C H E Q U E R .

1. A n i m p o r t a n t ques t ion has a r i sen out of the d iscuss ions p roceed ing between our Delegat ion ancl the r ep resen ta t ives of the A m e r i c a n T r e a s u r y on the procedure for secur ing a reasonable flexibility for exchanges w i t h i n the t ramewor k of a policy for exchange s tab i l i ty .

2. The d i rec t ive to the De lega t ion is conta ined in W . P . (43) 383, p a r t i c u ­larly p a r a g r a p h 5 (i) of S i r Kings ley WoocFs covering note, a n d p a r a g r a p h s 7 (d) and 10 (iii) of the M e m o r a n d u m by the T r e a s u r y . T h e genera l d i rec t ive w a s approved in the Conclus ions of the W a r Cab ine t on the 2nd September , 121 (43), in the fol lowing t e rms : —

" W h i l e coun t r i e s should r e t a i n a reasonable measure of e las t ic i ty over the i r own exchange ra tes , an endeavour should be made to ensure t h a t decisions to modifv exchange ra t e s were taken by reference to some object ive t e s t . "

3. The o r ig ina l C l e a r i n g U n i o n scheme a n d both publ ished versions of the American S tab i l i sa t ion F u n d scheme con templa ted fa i r ly precise rules g o v e r n i n g the ad ju s tmen t of exchanges . T h e prev ious discussions between our officials a n d the Amer ican T r e a s u r y h a d m a d e it clear t h a t those rules were too r i g i d to fit t h e facts; some qual i f icat ion would be necessary, p a r t i c u l a r l y for the t r a n s i t i o n a l period a n d for the problem of the l ibera ted t e r r i to r i e s . O u r Delega t ion were n o t given a more precise i nd i ca t ion of t h e p r inc ip l e s on which the a r r a n g e m e n t s m i g h t be made because the ques t ion forms p a r t of the genera l s t r u c t u r e of the scheme, and there were also ques t ions of p r e l i m i n a r y tac t ics in the discuss ions wh ich the Delegation would have to dec ide for themselves.

4. T h e p r e l i m i n a r y discuss ions in W a s h i n g t o n on th i s m a t t e r ancl the " ten ta t ive p roposa l s " submi t t ed in w r i t i n g to the A m e r i c a n s by our De lega t ion about the 17th Sep tember a re shown in A b i d e 4173 ancl 4174 ( iVppendix A ) . These t e legrams were cons idered by the T r e a s u r y and the B o a r d of T r a d e in con­sultat ion w i t h the B a n k of E n g l a n d . I t was agreed tha t an a u t o m a t i c a d j u s t m e n t of exchange r a t e s by reference to objective s t a t i s t i c s on the balance of p a y m e n t s w a s imprac t icab le ; even in our own count ry , where the t echn ique of exchange contro l is well developed, complete d a t a have not yet been evolved.

I n agreement w i t h the B o a r d of T r a d e , t he T r e a s u r y sent a te legram, 6356 (Appendix A) , on the 22nd September , r a i s i n g ques t ions about the m e r i t s of the proposal a n d the difficult m a t t e r of the p rocedu re for app rova l . The De lega t ion replied on the 24th Sep tember in t e l eg rams A b i d e 4274 ancl 4275 ( A p p e n d i x A) .

5. The d r a f t t e legram to W a s h i n g t o n , A p p e n d i x B. r ep resen t s the view which I took upon the m a t t e r . I a r r a n g e d t h a t th is d r a f t should be considered by all the D e p a r t m e n t s in teres ted , many of whom, however, are d isposed to the view tha t the proposa ls in 4 f74 represen t a reasonable f lexibil i ty for us and reasonable p ro tec t ion aga ins t unchecked dep rec i a t i on by o ther countr ies , a n d that the unden iab le difference be tween the way of a p p r o a c h in A p p e n d i x B and

["26174] B

the proposals in 4174 might embar rass our Delegat ion, and might, even be regarded by the Amer icans as evidence tha t we were r e t r e a t i n g from the policy of t ry ing to hold the in te rna t iona l exchange posit ion p re t ty firmly.

6. Whi l e these a r g u m e n t s must be carefully weighed. 1 am impressed also by o ther considera t ions govern ing th is ma t t e r which 1 should like to develop to my colleagues.

J . A.

Treasury Chambers, S.W. 1. 2nd October. 1943.

A P P E N D I X A.

From Washington to Foreign Office, dated IQth September, 1943.

(No. 4173. Abide.) Fol lowing for T rea su ry from Keynes :— I n p re l imina ry discussions before the first meet ing of the J o i n t Anglo-

Amer i can Commit tee the Br i t i sh currency delegat ion considered w h a t proposals we should make with a view to r e t a i n i n g freedom for i nd iv idua l count r ies to vary thei r exchange ra te a t need while still g iv ing proper recogni t ion to the pr inc ip le of s tabi l i ty . W e explored the possibi l i ty of a precise objective test or formula which, if its requi rements were satisfied, would confer upon a member coun t ry a n und i spu ted r igh t to vary i t s r a te . W e concluded tha t no precise formula could be devised which would have a hope of w o r k i n g in prac t ice , but tha t ce r ta in objective tests of a more genera l cha rac te r m i g h t be specifically prescribed, and tha t this in combination wi th a l imited unfe t t e red discretion and an emergency r igh t to act in absence of approva l m i g h t meet the case.

2. Our ten ta t ive proposals a r e given in my immedia te ly fol lowing telegram. 3. A t the meet ing wi th the Amer icans I emphasised our belief in the

pr inc ip le of exchange s tabi l i ty , but out l ined the poli t ical a n d economic objections which were felt very s t rongly on our side to any a t t e m p t to enshr ine the principle in r ig id obl igat ions. Af t e r ske tch ing our own t en ta t ive ideas we h a n d e d our proposals to the Amer i cans as an informal note of suggest ions which had occurred to some members of the Br i t i sh delegat ion, but which h a d no t been referred to London and should not be regarded as hav ing any a u t h o r i t a t i v e app rova l or as being more than a s t a r t i n g point for discussion.

4. W h i t e ' s p re l iminary react ion was not favourable . (a) T h e U n i t e d S ta tes T r e a s u r y desired to avoid r i g i d i t y and recognised

the p a r t which flexibility must p lay in a n y i n t e r n a t i o n a l scheme. (b) H e was s t rongly aga in s t any precise objective formula , and sa id that

thei r own conclusion was tha t it would be wiser to rely on the collective j u d g m e n t of those in charge of the i n t e r n a t i o n a l i n s t i t u t i on . B u t he did not a p p e a r to object to our more genera l c r i t e r i a .

( 6 - ) H e recognised t h a t any public discussion of a contempla ted movement in ra tes was out of the question, bu t felt sure t ha t in p rac t i ce any movement in a major currency would be discussed beforehand between the th ree or four major Treasur ies . I t was inconceivable t h a t there would not be ample w a r n i n g of a need for such a move a n d previous discussion in the P ress . H e could not see the objection to providing in the rules confidential discussions which would be bound to occur in any case. A suggestion was made and pursued by the A m e r i c a n s that pr ior consultat ion should not be l imited to the C h a i r m a n , bu t should extend e i ther to the Execut ive Commit tee , which would be in constant session and of l imited membership , or to a s t a n d i n g Sub-Committee of the Execut ive . The Amer icans a p p e a r to have moved a w a y from the idea of discussions in full session r e q u i r i n g specific m a j o r i t y votes, bu t we did not press them to reconcile the i r new view wi th the published d ra f t rules of the s tabi l i sa t ion fund.

(d) W h i l e W h i t e m a i n t a i n e d t h a t confidential discussions between t h e l ead ing members of t h e fund could not. g ive r i se to specula t ion , he a r g u e d t h a t specula t ion would in p rac t i ce be held in check by the exchange controls which he recognised mus t r ema in in exis tence t h r o u g h o u t most of the world . H e d i s t i n g u i s h e d between exchange controls ancl exchange res t r ic t ions . Cont ro ls he envisaged as a mach ine ry of sc ru t iny which would be m a i n t a i n e d even by coun t r i es in a s t rong posi t ion , b u t would normal ly be a d m i n i s t e r e d w i t h the g r ea t e s t possible leniency. If, however, a coun t ry found itself g e t t i n g [ ? g r o u p omit ted : ? i n t o ] difficulties, the control m a c h i n e r y would be admin i s t e r ed w i t h inc reas ing s t r i c tness to enforce the necessary exchange res t r i c t ions for so long as they m i g h t be r equ i r ed .

(c) So cr i t ic ism was offered of the indefinite ex tens ion in p o i n t of t ime of the unfette?'ed 10 per cent, d iscre t ion or of a bare m a j o r i t y being sufficient for the app rova l of changes.

5. No a t t e m p t was m a d e to reach conclusions. T h e A m e r i c a n s do not propose to give us the i r considered reac t ions un t i l a f t e r they have al l o u r suggestions before them.

(5. P lease in form us as soon as may be whe t he r the note in my i m m e d i a t e l y following te legram has your genera l app rova l . W e hope t h a t our t r e a t m e n t of objective tests goes far enough. T h e Amer i can react ion to these proposa ls seemed favourable, bu t they expressed relief t h a t we d i d not ask for precise a r i t h m e t i c a l formulas, which would clear ly have met wi th severe c r i t i c i sm.

From Washington to Foreign Office, dated 17th September, 1943. (Xo. 4174. Abide. )

Fol lowing for T r e a s u r y from Keynes : — My immedia te ly p reced ing te legram. Fol lowing is text lognote : — Exchange ra tes . 1. Members shall agree not to propose changes in exchange

value of the i r cur rency unless they consider it essent ia l to correct ion of f u n d a ­mental d i sequ i l ib r ium in the i r balance of paymen t s , a n d changes shal l be m a d e only w i th a p p r o v a l of the fund subject to qual i f icat ions below.

2. F u n d shal l no t wi thho ld i ts a p p r o v a l if p roposed change inclusive of any previous changes since es t ab l i shment of fund does not exceed 10 pe r cent , wi th las t ten years .

3. A count ry which h a s exhaus t ed i ts faci l i t ies u n d e r 2, and des i res a fur ther change in p a r value of i ts currency in t e rms of u n i t a s shall , if possible, expla in i ts reasons to fund beforehand and seek funcEs p r i o r approva l . F u n d , in g iv ing or w i t h h o l d i n g app rova l , shall ac t . in accordance w i t h fol lowing pr inc ip les : (a) I t shall t a k e account of changes in re la t ive money costs of product ion in coun t ry m a k i n g app l i ca t ion , ancl shall a l low a n a p p r o p r i a t e c h a n g e if i t a p p e a r s t h a t increase in re la t ive costs has led to an over -va lua t ion of currency, (b) I t shall also t ake in to account balance of p a y m e n t s of c o u n t r y mak ing app l i ca t i on w i t h res t of world , and shall a l low a n a p p r o p r i a t e change if ba lance on cu r r en t account , toge ther w i t h i n w a r d long- te rm c a p i t a l t r a n s ­actions, has (measured as a pe rcen tage of i ts fore ign t r ade ) been seriously adverse over a per iod , or if c o u n t r y ' s r e m a i n i n g ho ld ing of l iqu id reserves (measured as a percentage of i ts quota) is i n a d e q u a t e , provided a lways t h a t proposed a l t e r a t i on in the exchange seems likely to improve posi t ion, (c) A p p l i c a t i o n by a member to a p p r e c i a t e i t s exchanges shall be s imi lar ly cons idered mutatis mutandis, (d) The fund shall not be en t i t l ed to refuse a change on g round of social or poli t ical policies which may have led to s i t ua t ion , a n d shal l app rove a change which in the de facto s i t ua t i on would t end to restore equ i l i b r ium.

4. I f c i rcumstances a re such t h a t i t is not p rac t i cab le to ob ta in fund ' s p r i o r approval to a change , a member shal l be en t i t l ed if necessary, a f t e r consulting­cha i rman , to make a change not exceeding 10 per cent, w i t h o u t seeking funcfs pr ior approva l , in which case i t shal l immedia te ly seek funcEs confirming approval . I f fund is unab le to approve change by a ma jo r i t y vote, the coun t ry shall have op t ion of revers ing it ancl of conforming to views of fund or shail w i t h d r a w from membersh ip w i t h o u t f u r t h e r notice given.

[26174]

Foreign Office to Washington, dated 22nd September, 1943.

(No. 6356. Abide. ) Fol lowing fo r R e v u e s from Treasury : —

Your t e legrams Nos. 4173 and 4174 [ E x c h a n g e R a t e s ] . 1. It is not clear from p a r a g r a p h s 4 and 6 of 4173 whether Americans

d i s l ike the objective cr i te r ia suggested by you, which seems to us on sound lines, o r the p r inc ip le of an appea l to objective d a t a as just if icat ion for al tering exchanges in place of reliance upon collective j u d g m e n t of executive committee! Bu t in e i the r case the i r present a t t i t u d e u n d e r r a t e s difficulty of persuading P a r l i a m e n t tha t in an ins t rumen t which is to have someth ing of the sanct i ty of a Trea ty the Government should su r r ende r the r ight to protect employment by exchange ad jus tmen t , which is r ega rded in many q u a r t e r s as app rop r i a t e defensive act ion. S imi l a r point is bound to be ra ised by o ther countr ies such as Ho l l and , Belgium. F rance and L a t i n Amer ican countr ies , and w e should have expected Congress also to take it. I f the m a i n clause dea l ing wi th exchange rates were to be too r ig id , there would be a risk of insistence or g rea t emphasis on escape provision or that acceptance would be subject to undisclosed reservations. N e i t h e r s i tua t ion would be sa t i s fac tory as we th ink you will agree that genuineness of app roach is essential to this pa r t of proposed in te rna t iona l set-up.

2. A t present ten ta t ive s tage of discussions ins t ruc t ions to you are undesi rable , but you ought to know our reaction to Amer ican a t t i t u d e as \vt: u n d e r s t a n d it from your te legrams.

3. The re is an obvious re la t ion between the clause dea l ing with exchange ad jus tmen t s and the general form of the whole scheme. The present published A m e r i c a n scheme may remain in the background of your present discussions, but we assume tha t i t still is in existence. I t could be represented as having the appea rance of a gold s t a n d a r d scheme, and precise exchange obligat ion in such a scheme would be regarded as ty ing us to a gold s t a n d a r d dol lar .

4. I t is not clear from p a r a g r a p h 10 of your Abide 4125 at wha t da its a n d by wha t s tages af ter the wa r the scheme is to come into opera t ion . The r ange of exchange ad jus tmen t s which is permissible could be much more easily seen when we know something about the relat ive levels of prices a n d production costs t h a t will follow upon the ear ly unse t t led post -war period. Several Europeans have expressed view tha t in i t ia l exchange rates would have to be exper imenta l W e agree w i th th is , and in such c i rcumstances precise definition of ranges of ad jus tmen t seems to us unwise a t this s tage.

5. The rea l i ty of the condit ions unde r which consul ta t ion would be conducted mus t be app rec i a t ed by W h i t e . I t is t rue t h a t in count r ies which re ta in exchange control the d r a i n i n g away of resources which normal ly precedes exchange ad jus tmen t could to a considerable ex ten t be checked. B u t if s i tua t ion is developing where a major ad jus tmen t of exchange ra tes is on the horizon exchange control would soon show itself an imperfect in s t rument . I n such a s i tuat ion consul ta t ion would have to be v e r y speedy and v e r y confidential. So long as the centra l mone ta ry a u t h o r i t y is not mani fes t ly d i s tu rbed , exchange values could be reasonably held w i t h the he lp of exchange control. Bu t once it leaks out that discussions a re proceeding which would be likely to lead to an exchange ad ju s tmen t of significance, pressure upon exchange value would become insis tent . Moreover , W h i t e ' s idea seems to us to presuppose free dealings even in currencies which are subject to control, and any major currency would therefore be open to a t t ack d u r i n g consul ta t ion. W e th ink it would be wiser for the moment to p u t aside detai led definitions and to be content wi th a clause by which member count r ies agree not to make changes in the exchange value of the i r currency unless they consider it essential to correction of fundamenta l d i sequ i l ib r ium in the i r balance of payments , and then only a f te r consultation wi th the a p p r o p r i a t e committee of the Board . W e should h o p e u n d e r t a k i n g s to consult would lie m o r e effective in prac t ice t han obl igat ion to obtain formal approva l . Moreover, we believe that a t th i s s tage it would n o t be pract icable to obtain agreement tha t changes should be subject to approva l by any system of vo t ing of the govern ing body. The clause could also h a v e a descr ipt ive s ta tement of the objective condi t ions t h a t might const i tu te evidence of the fundamental d i sequ i l ib r ium on t h e lines of p a r a g r a p h 3 of y o u r 4174.

6. W e are in general a g r e e m e n t w i th the idea in (c) of p a r a g r a p h 4 of 4173 that in the u l t ima te analys is all the issues involved in the whole scheme wil l res t upon the j u d g m e n t and competence of the m a n a g e m e n t of the scheme. W e suggest that it is not inconsistent wi th th is view tha t , for the s t a r t i n g per iod , we should be content with a firm s ta t ement of adherence to the p r i n c i p l e of exchange stability and agreement to consul t before m a k i n g change. A s the s i tua t ion develops the management would doubt less be able to e labora te closer definitions to which member S la tes would be wi l l ing to agree.

7. P a r a g r a p h 5 of your 4173. You and your colleagues mus t be j u d g e s of the development of tact ics in the discussions, but we do not w a n t to sl ide in to a position in which each suggestion we m a k e is p u t f o r w a r d in de t a i l a p a r t from o-eneral cons idera t ion of the whole scheme, so t h a t the A m e r i c a n s may a t t e m p t to dispose of each one separa te ly w i t h o u t p rope r r ega rd to the s h a p e of the scheme as a whole. You a re fully a w a r e of th i s , a n d we ment ion the po in t only because your express reference to us of the problem of exchange r a t e s h a s come r a t h e r in isolation.

From Washington to Foreign Office, dated 23rd September, 1943.

(No. 4274. Abide.) Fol lowing for T r e a s u r y from Keynes :—

Your te legram No. 6356. i nd ica t ions a re t h a t the A m e r i c a n s will accept, subject to only minor

modifications to the pr inc ip les la id d o w n in p a r a g r a p h 3 of my 4174. W h a t they disliked was any a t t e m p t to make these c r i t e r i a a r i t hme t i ca l l y precise, a view with which we have considerable sympa thy .

2. W e are not overlooking the cons idera t ion u rged in your p a r a g r a p h 3. White has now had all our subs t an t i a l p roposa l s and the J o i n t G r o u p wil l have had them by tomorrow. W e will emphas i se aga in t h a t they all h a n g toge ther in our m inds and difficulty about any one of them migh t have repercuss ions on other poin ts , since each of our de ta i led sugges t ions has to t ake in the f ramework of our sugges t ions as a whole.

3. Your p a r a g r a p h 4, which has a r r ived possibly co r rup t . W e felt t h a t the difficulties of the in i t ia l per iod would be sufficiently me t by unqual i f ied d iscre t ion to make 10 per cent, change. Our proposa ls , however, were main ly concerned w i t h longer term. W e migh t s t r en g th en the provision r e l a t i n g to the ear ly pe r iod with a clause s imi lar to the conc lud ing pas sage of C l e a r i n g U n i o n 6 (3).

4. W e are no t clear how fa r the last sentence but t h ree of your p a r a g r a p h 5, in conjunct ion w i t h your p a r a g r a p h 6, qualifies read iness to accept d r a f t p roposa ls in my 4174. Our latest impression is t h a t the A m e r i c a n s wi l l accept the whole of these proposa ls subject only to minor modifications. T h e above sentence of your p a r a g r a p h 5 would modi fy p a r a g r a p h 4 of my 4174 in two respects . I t would allow [ g r o u p undecyphe rab le ] the r i g h t of act ion to the F u n d if i t s advice is d i s rega rded a n d would a p p l y u n i l a t e r a l changes of any size. I t would be a very d r a s t i c change to propose t h a t every count ry should be free to m a k e unlimited un i l a t e r a l a l t e r a t ions in i ts exchange merely a f t e r consul ta t ion . A l l of us here t h i n k t h a t the proposa ls of 4174 give sufficient e las t ic i ty a n d independence and would be sorry to have to go back so completely on the i dea of having some definite rules to preserve exchange s tab i l i ty . O u r d r a f t a l r e a d y preserves an u l t ima te freedom of act ion to [ g r o u p undecypherab le : ? every] member. P lease let us know very u rgen t l y if we a re to w i t h d r a w the p roposa l s of my 4174, which, unless we have misunders tood your t e l eg ram u n d e r reference, seems to us more in conformity w i th the Cab ine t direct ive. I f we a r e to w i t h d r a w them wc should no t delay in do ing so. W e fear the effect of w i t h d r a w a l on discussion as a whole, which is exceedingly sa t i s fac tory . W h i t e h a s ind ica ted to me p r iva te ly t h a t in the las t r esor t he would not res is t any of our f u n d a m e n t a l principles as so far p ropounded to h im, provided t h a t we a r e successful in persuading his colleagues.

From Washington to Foreign Office, dated 23rd September, 1943.

(No. 4275. Abide.) My immedia te ly p reced ing- te l eg ram. Fol lowing from Waley : — W i t h the permission of Keynes I would like to set out my views. To comply

wi th the Cabinet ins t ruc t ions we have— (a) To avoid being forced to deflate if H i s Ma je s ty ' s Governmen t should at

any t ime th ink , r ight ly or wrongly, that it would be bet ter to deprec ia te and tha t th i s would avoid deflation.

(b) To prevent o ther count r ies dep rec i a t ing for compet i t ive reasons on the pre text that this would correct a d i sequ i l ib r ium when by some test as objective as possible it could be shown tha t th i s p re tex t was not justified.

(c) To avoid bear specula t ion which would be caused by formal consultation w i t h fund beforehand. I t seemed to me tha t on the wdiole our proposals met all three po in t s .

A . A p a r t from special l a t i t u d e which migh t be necessary in the immediate pos t -war per iod, it seems to me tha t it will be a very i m p o r t a n t achievement if we can secure freedom to deprec ia t e to the ex ten t of 10 per cent, un i la te ra l ly .

B . Obstacles to fu r the r deprec ia t ion wi thou t real just i f icat ion seems to me as effective and as objective as could be hoped.

C. A r r a n g e m e n t s for m a k i n g changes wi thou t consul t ing the fund before­h a n d seems to me to avoid the dange r of bear specula t ion.

2 : I am surp r i sed to find so l i t t le emphas i s in your te legram on the danger of deprec ia t ion by o ther count r ies for i n a d e q u a t e reasons. At first r ead ing the promise to deprec ia te only in order to correct d i sequ i l ib r ium, and then only after consul ta t ion, seems more a t t r ac t i ve than our proposal from the poin t of view of avo id ing any a p p e a r a n c e of aga in cruc i fy ing ourselves on the cross of gold or s u b m i t t i n g our affairs to the decision of an u n t r i e d in t e rna t iona l body. But I t h ink tha t this appea rance is to some ex ten t deceptive. In p rac t ice in view of our posi t ion in the world and our in t ima te re la t ions wi th the U n i t e d States , it will be very difficult indeed for us to deprec ia te unless the commit tee of the fund approve . I t will be fa r eas ier for many other count r ies to d i s r ega rd the advice of the fund.

3. T h e prospect tha t t he A m e r i c a n s will agree to the te rms of the proposals t aken as a whole a p p e a r s unexpectedly favourable . T h i s p a r t i c u l a r point must be j u d g e d aga ins t t h a t of the general background . T a k i n g a severelv practical poin t of view, our proposals give us completely free hand to deprec ia te to the ex ten t of 10 per cent, and ano the r 10 pe r cent, w i thou t the necessity of securing commit tee ' s approva l whi ls t l ay ing down sa t i s fac tory rules on c i rcumstances in which countr ies should or should not be allowed to dep rec i a t e fu r the r . Your proposal in prac t ice m i g h t well mean tha t we could never deprec ia te at all w i t h o u t ob t a in ing p r io r app rova l of the fund or i t s commit tee whi ls t o thers will feel less embar ra s smen t in ac t ing a g a i n s t the wishes of the fund.

4. Even if you a re not a t all convinced by these a r g u m e n t s the position probably is t ha t we may have the choice of some in t e rna t i ona l mone ta ry arrange­ment on l ines of our presen t proposals or no i n t e rna t i ona l mone ta ry arrangement at all . The general view among the A m e r i c a n s he re is t h a t if we fail to reach agreement on moneta ry a r r a n g e m e n t s the re is much less chance of reach ing any definite u n d e r s t a n d i n g about commercial policy, in which field there is also an unexpectedly la rge measure of ag reement between A m e r i c a n views and those of H i s M a j e s t y ' s Government .

A P P E N D I X B.

To Washington. (Abide 4274 and 4275.)

1. Quest ion has been considered by Min i s t e r s . W h i l e p resen t discussions are, and remain , non-committal so f a r as Government is concerned, you would wish when i m p o r t a n t issues define themselves to know w h a t Min i s t e r s believe P a r l i a m e n t would accept. Moreover, c i rcumstances out of which p resen t discussions arose p u t upon us some responsib i l i ty for cons ider ing pos i t ion of other countr ies . W e do not wan t s i t ua t i on to develop where we and A m e r i c a n s

( are expected to ra i l road an agreement t h rough re luc tan t U n i t e d Na t ions . 2. W e a p p r e c i a t e fully the in ten t ion of your proposals in 4174 t h a t each

country should have l imited un i l a t e ra l r i g h t s g iv ing reasonable flexibility, but that un i l a te ra l r i g h t s should not lead to unchecked i r responsibi l i ty .

8. The two issues raised by your proposals a re whether proposed rules a re suitable and whe the r p rocedure of app rova l or consul ta t ion is to be p re fe r r ed .

4. B u t there is a th i rd issue : W h e t h e r there should not be clear d i s t inc t ion between rules and procedure a p p r o p r i a t e to t r ans i t i ona l pos t -war per iod and those a p p r o p r i a t e to la ter posi t ion.

5. I t is genera l ly agreed tha t for many count r ies in i t i a l pos t -war r a t e s must, be expe r imen ta l . Revised S tab i l i sa t ion F u n d scheme recognised problem of l iberated t e r r i to r i e s , and Clea r ing U n i o n scheme recognises difficulties of t ransi t ional per iod . W e th ink i t qu i te p r e m a t u r e to es t imate now whe the r permissible r ange of 10 per cent, wil l meet inevi table ad ju s tmen t s of expe r imen ta l rates. I f any such figure were inser ted a t th is s tage it would have to be surrounded by numerous qualif ications for l ibera ted t e r r i to r ies and other problems and the quoted percen tage would have l i t t le real mean ing . The instrument c r ea t i ng the currency o r g a n i s a t i o n is to have someth ing of the sanc t i ty of a T rea ty and all condi t ions bound to precise figures would need to be looked ai very closely in o rder to make sure t h a t the figure would s tand u p to unexpected developments. C h a n g e of any figure in the i n s t r u m e n t m i g h t obviously involve complicated and long-drawn-ou t p rocedure .

6. Whi l e we agree tha t as between ourselves and U n i t e d S ta tes the p r ac t i c a l difference between consul ta t ion w i t h the Boa rd and approva l of the B o a r d is qualified by a r g u m e n t in p a r a g r a p h 2 of 4275, the difference in form between consultation and approva l is real. W e cannot yet know the size of the B o a r d or the cons t i tu t ion t h a t will emerge. A p p r o v a l must contempla te possibi l i t ies of difference of op in ion on Board , a n d therefore mus t p rov ide vo t ing procedure . Quite a p a r t from our belief, which we know you share , t h a t i m p o r t a n t business of the B o a r d canno t really be conducted by vot ing, all ques t ions of vot ing on th i s mat ter wil l ra ise P a r l i a m e n t a r y difficulties, and also probably difficulties w i t h other countr ies . Mos t count r ies have recollections of decisive vot ing influence a t Geneva of count r ies often remotely concerned w i t h effect of issues before m a n y League Commit tees .

7. T h e t h i r d issue ment ioned in p a r a g r a p h 4 ra i ses quest ion when i t is hoped t h a t i n t e rna t i ona l currency o rgan i sa t ion migh t be in opera t ion . Desp i t e obvious difficulties we believe t h a i it is h igh ly des i rable t h a t o rgan i sa t ion should be in existence as ea r ly as possible in the t r a n s i t i o n a l per iod a n d should be able to gain exper ience and exercise influence i n the difficulties of t h a t per iod. T h i s , in our j udgmen t , probably enta i l s s e t t i ng B o a r d u p w i th l imi ted powers of formal approval bu t w i t h wide and g rowing powers of influence, leaving the B o a r d as it gains exper ience on this difficult t e r r i t o r y to develop more precise rules. I f the Board acts wisely and caut iously it wi l l ga in genera l accep tance a n d i t s position wil l become very s t rong . W e do not believe t h a t i ts posi t ion wil l be m a d e any s t ronger by p r e m a t u r e g r a n t to i t of specific powers of detai led app rova l and d isapproval .

8. I n the l i g h t of the foregoing we r e s t a t e for you the views we should wish you to u r g e s t rongly upon the Amer i can r ep resen ta t ives :—

(a) The re should be definite ag reemen t to accept s tab i l i ty of exchanges as founda t ion of i n t e rna t i ona l economic re la t ions .

(b) E x c h a n g e a d j u s t m e n t should be in accordance w i t h objective pr inc ip les . W e agree wi th Amer ican view t h a t precise ma thema t i ca l tests are probably imprac t icab le and ce r t a in ly p r e m a t u r e a t this s tage. You

will recognise difficulty of p r o v i d i n g unchal lengeable d a t a on balance of payments even wi th our own e labora te t echn ique of exchange control. W e like the objective p r inc ip les in your 4174 a n d th ink they could well be enshr ined in tex t of i n s t rumen t .

(c) W e should wish to see Board in exis tence as ear ly as possible after t e rmina t ion of hos t i l i t ies a n d able to exercise influence upon the problem of exchanges in t r a n s i t i o n a l per iod.

(d) The re should be agreement in the i n s t r u m e n t t h a t no ad jus tmen t of exchange ra tes shall be made except a f te r consu l ta t ion w i t h the Board, though not subject to the B o a r d ' s a p p r o v a l . I t is for discussion whether the in i t i a l exchange ra t e s fixed should be subject to consulta­tion w i t h the Board or only subject to notification. W e would have no objection to consul ta t ion, though i t would have to be recognised that the views of the member count r ies on the expe r imen ta l ra tes would normal ly have to be accepted. W e would much r a t h e r in t roduce the doct r ine of consul ta t ion from the beg inn ing than a mathemat ical range of ad jus tmen t allowed w i t h o u t consul ta t ion .

9. A t the conclusion of 5 yea r s from the s e t t i ng up of the B o a r d or a t such ear l ie r per iod as migh t be agreed upon by the member countr ies , the Board should be r equ i r ed to fo rmula te for cons idera t ion by member count r ies ru les governing procedure for a d j u s t m e n t of exchanges. A t t h a t s tage it m igh t well be possible to in t roduce ranges of ad ju s tmen t such a s you con templa te , ancl cer ta in ly i t might be prac t icab le to provide for more formal app rova l by the Board if satisfactory p rocedure for r a p i d act ion could be evolved.

10. W e hope you will not feel t h a t th i s a p p r o a c h to a crucial problem involves a w i t h d r a w a l from the t en ta t ive proposa ls in 4174 which would embarrass you in your discussions. You will see t h a t we have t r ied to p u t our policy in a posi t ive manne r which you could u rge upon the A m e r i c a n represen ta t ives . On these l ines we believe we could ca r ry inf luent ial op in ion not confined to this count ry .