On 1 July 1944, scarcely three weeks after the D-Day landings in Normandy, forty-four nations met at Bretton Woods in New Hampshire to plan the international postwar monetary system. As representatives of Allied governments gathered at the Mount Washington Hotel, where they would create the International Monetary Fund and the World Bank, the fate of the war hung in the balance. News from the battlegrounds of Europe, the Middle East and the Pacific was awaited anxiously.
The major agenda items for the conference had been foreshadowed nearly two years before, in February 1942, shortly after the United States and Britain had signed a mutual aid agreement. The Americans, mindful of the difficulties they’d had in collecting loan repayments from allies after the first world war, signalled that they were prepared to forgo repayment this time so long as their allies in the latest conflict agreed to meet a number of commitments after the war.
Australia signed the mutual aid agreement in September 1942. For its advisers — among whom were some of the nation’s most distinguished economists, including L.F. Giblin, Roland Wilson, Leslie Melville, and H.C. “Nugget” Coombs — the most contentious clause, Article VII, committed the signatories to two things: first, “the expansion, by appropriate international and domestic measures, of production, employment and the exchange of goods”; second, “the elimination of all forms of discriminatory treatment in international commerce, and… the reduction of tariffs and other trade barriers.” The agreement also called for signatory governments to meet and determine how best to attain these objectives, as they eventually did in part at Bretton Woods.
By the time Australia signed the agreement six months later, it was clear that the priority of the United States was the second part of Article VII, the removal of impediments to international trade. But the Australians argued that priority should be given to the first part: the expansion of employment and production by “appropriate international and domestic measures.”
The British government summoned the Dominion governments — Canada, Australia, New Zealand and South Africa — and India, which was then a British colony, to London for preliminary talks on postwar reconstruction in October–November 1942. There, John Maynard Keynes presented his plan for an International Currency (or Clearing) Union to promote external economic stability. But, as Roland Wilson learnt when he visited the United States on his way back to Australia, a rival American plan had been devised by Harry Dexter White, a senior US Treasury official. Whereas Keynes’s plan proposed what in effect was a world central bank, White’s planned United Nations Stabilisation Fund was more akin to a global credit union.
Once Wilson was back in Australia, the merits of the two plans were thoroughly dissected by the economists. They supported Keynes’s plan, which was more generous than its rival, and allowed for greater discretion, including greater exchange rate flexibility in certain circumstances.
The Australian economists were also developing their own response to Article VII, later to be known as the “positive approach” or the “full employment approach.” It called on the Allied powers to sign a treaty committing them to domestic policies aimed at maintaining full employment. This would keep world demand for goods and services high and thus make it easier for governments to reduce trade barriers. In other words, the pursuit of the first requirement of Article VII would create the necessary conditions for the achievement of the second.
The United States, the economists contended, was putting the cart before the horse, expecting the elimination of trade barriers to create the conditions necessary for the expansion of production and employment. This would fail, they argued, for governments would never agree to the dismantling of trade barriers if unemployment stayed high.
Australian officials promoted this response to Article VII at international meetings in 1943 and through the early months of 1944. Once it became clear that Washington would not accept his plan, Keynes tried to use his powers of persuasion to have White’s plan amended. But he was able to achieve very little, and when delegates assembled at Bretton Woods in July 1944 they were presented with an only slightly modified version of White’s plan.
The Dominions and India were summoned again to London in April 1944 to clarify the positions they intended to take at Bretton Woods. It was then announced that Australia’s delegation to Bretton Woods, unlike those of most other nations, would be led not by a senior minister but by Australia’s leading authority on international financial matters, Leslie Melville, economic adviser to the Commonwealth Bank. The other three members of the delegation were F.H. Wheeler of Treasury, Arthur Tange of the Department of External Affairs, and J.B. Brigden, adviser to the Australian Legation in Washington. All were notable economists.
The Australians fought hard at Bretton Woods to have three modifications made to the draft plan for the International Monetary Fund (there was little objection to the World Bank). On the first point — a commitment by all members of the IMF to pursue policies aimed at maintaining full employment — it won the support of Britain, France, Poland, New Zealand and a number of other countries, but was defeated by objections from the United States and most of the South American countries (nineteen of the forty-four countries at Bretton Woods were from South America), with Russia, China and India providing little support.
To drive home the point, the United States and Canada announced that, while they recognised the relationship between employment and monetary policy, any resolution implying that acceptance of the IMF should be contingent on signing the employment agreement was outside the conference’s terms of reference.
On the other two issues — an increase in drawing rights and greater exchange rate flexibility for primary exporting countries — the Australians gained some minor concessions. When it came to ratifying the draft agreement at the end of the conference, Australia signed at the eleventh hour, but Melville was forced by the government to declare that he was signing “for purposes of certification only.”
Weighing up the pluses and minuses of membership on his return to Australia, Melville considered that, on balance, it would be to Australia’s advantage to join the IMF. He saw no difficulties with joining the World Bank (then known as the International Bank for Reconstruction and Development). After a bitter fight within the Labor Party over whether Australia should endorse the Bretton Woods Agreement, the government finally accepted membership of both organisations.
When he announced in parliament on 13 March 1947 that Australia would join the Bretton Woods institutions, prime minister Ben Chifley noted that Australia had “consistently maintained the view that the successful working of international economic organisations, and the expansion of international investment and trade, depends to a very great degree on the achievement and preservation of full employment in the major industrial countries.”
After “a long series of formal and informal discussions,” Chifley insisted that the “positive approach” had “finally succeeded.” He highlighted the references to employment in the UN Charter and the fact that the British government had obtained from the International Monetary Fund “a ruling that steps necessary to protect a member country from chronic or persistent unemployment arising from pressure on its balance of payments are among the measures necessary to correct a fundamental disequilibrium.”
As a result of the prolonged political battle, Australia missed the deadline for membership as an original member of the IMF and World Bank, though it was able to join — on 5 August 1947 — on the same terms as original members. When the number of executive directors of the IMF was increased from thirteen to fourteen in February 1948, Treasury secretary Stuart McFarlane was elected to fill the position, with Roland Wilson becoming the alternate director. And when Macfarlane retired in 1950, he was replaced — quite appropriately — by Leslie Melville. •