RDP 2000-04: Keynes and Australia 5. Australia and Bretton Woods: More Keynesian Than Keynes

Keynes's earlier writings had a major influence on wartime plannning for post-war international arrangements in at least two ways. First, many of those involved, influenced by Keynesian economics, wanted world expansion,[306] or at least to enable states to pursue domestic expansion.[307]

Secondly, planners for the post-war world were concerned to lay ‘the economic basis of a-durable peace’; Gardner writes:[308]

Profoundly influenced by the writings of Keynes and others, they believed the Versailles settlement had collapsed because of its inadequate … economic underpinning …

Certainly The Economic Consequences of the Peace featured in some Australian discussion of post-war plans,[309] and HC Coombs has said it ‘greatly influenced’ his own thinking.[310]

Keynes's pre-war writings had stressed both that international monetary arrangements could act as a severe constraint on the capacity of individual countries to pursue expansionary policies and, as he believed was the case with the gold standard, pit country against country in economic and political conflict.[311]

These were amongst the considerations that led Keynes to develop plans for a new international monetary system – based on a Clearing Union.[312] Another factor, important also for Australia, was the problem of working out a means to abide by Article VII of the Mutual Aid Agreement, by which both the UK and, later, Australia had bought American assistance in the war by promising trade liberalisation and non-discrimination, and other broad policy commitments, after the war.

Keynes's first detailed plan for a Clearing Union came in September 1941.[313] His drafts were part of his Treasury work (1940–1946); he became Britain's chief negotiator on the Bretton Woods institutions. His proposals were refined until in August 1942 a copy[314] went to Harry Dexter White, of the US Treasury, who had drafted a rather different monetary plan – for a ‘Stabilisation Fund’. The Keynes and White Plans were published in April 1943.[315] Further negotiations resulted in April 1944 in a ‘Joint Statement by Experts on the Establishment of an International Monetary Fund’.[316] Given Britain's dependence on the US, these proposals more closely resembled White's than Keynes's Plan. International negotiations at Atlantic City in June 1944 and at Bretton Woods in July 1944 finalised Articles of Agreement for the IMF and the International Bank for Reconstruction and Development (or World Bank). The inaugural meetings of both were held at Savannah, Georgia, in March 1946.

Keynes's plan[317] was for an international Clearing Union, with which the central banks would keep accounts through which they could settle their exchange balances with one another. This would involve a new international currency, bancor, ‘which would be transferred from one account to another in the books of the Union in settlement of payments due by members to each other’.[318] The plan aimed at ‘expansionist … pressure on world trade’[319] by ‘allowing to each member state overdraft facilities … [designated its quota], proportionate to the importance of its foreign trade…’[320] This was Keynesianism on a world scale.

Keynes proposed ‘rules … to provide that equilibrium is restored’.[321] This placing of some responsibility for adjustment on creditor countries was a major innovation. The plan embodied short-term fixity and long-term flexibility of exchange rates.[322] Keynes wanted a post-war transition period[323] and controls on capital movements.[324]

White's plan[325] was different. Keynes stressed the right to exchange rate adjustments; White, stability of rates.[326] White proposed both a ‘Stabilisation Fund’ and an ambitious Bank for Reconstruction and Development. Unlike the Clearing Union, which gave ‘each member an immediate addition to its … reserves (… [i.e.] the right to an overdraft)’,[327] the White Plan was contributor operating in national currencies, not bancor. White's formula for contributions was rather different from that for Keynes's quotas.[328] White did not provide for either a transition period[329] or controls on capital movements.[330]

Initially, Keynes was hostile to the White Plan.[331] Above all, he wanted far greater, and less conditional, liquidity provision than White.[332] He distinguished bilateral from multilateral clearing, stressing that White's scheme neither disciplined creditors nor was expansionist.[333]

Negotiations and redrafts ensued.[334] In September–October 1943, Keynes reluctantly accepted White's framework – there was to be a contributory Fund. But key issues remained. The most important were:

– compromise on the Fund's size, the British seeking a larger Fund (as they saw it, more adequate quotas) than the Americans would agree to;

– the British push for disciplines on creditors, resulting in the so-called ‘scarce currency’ clause;

– agreement on less exchange rate flexibility than Keyries wanted;

– the adoption, at Keynes's urging, of transitional arrangements;

– the British push – defeated, as they saw it, at Savannah – for technical, non-political management by international civil servants rather than self-interested national representatives;

– the British emphasis on automaticity of drawing rights, as against the greater US stress on conditionality

On these issues, the Australian position broadly paralleled that of Britain, and on some Australia was more uncompromising. A detailed history of Austraria's role in the creation of the International Monetary Fund (the World Bank figured less prominently in Australian thinking) is beyond the scope of this paper;[335] but some indication can be given of Australia's role in the negotiations.[336]

Australian policy was based on the so-called ‘employment approach’ or ‘positive approach’. Committed to high or full employment levels at home, but pessimistic about the danger of renewed depression and low levels of world trade after the war, Australian officials feared that Australia would face severe and recurrent balance of payments difficulties. It was thought that this might require substantial devaluation, exchange controls, tariffs and other trade restrictions. Australian officials came to the view that Australia could only participate in the open/liberal international economic order the US (and, to a lesser extent, the UK) were planning and surrender the right to take such unilateral action, if it could be guaranteed that international demand for Australian exports would constantly be at high levels. (This was especially important given the vulnerability of most Australian export industries to seasonal conditions at home and fluctuating prices on world markets.) So Australia took the view that an international agreement, with at least the major economies committing themselves to the maintenance of high or full employment, was a prerequisite to Australian membership of the IMF. Pressing for such an agreement was the central thrust of Australia's international economic diplomacy in the 1940s – from 1942–43, with early talks on monetary, trade and food matters, through the Bretton Woods Conference, the San Francisco Conference which created the United Nations, and the London, New York, Geneva and Havana negotiations that were to create an International Trade Organisation, but which resulted only in the General Agreement on Tariffs and Trade.

In the monetary field, the concerns that motivated this ‘employment apporoach’ led Australia (1) to favour Keynes's Clearing Union Plan over the US Stabilisation Fund plan, (2) to push hard for changes in the agreed plan as it evolved (e.g. to increase Australia's quota), and (3) to delay until 1947 before joining the IMF and World Bank.

The important international discussions in which Australia took part, relating to Bretton Woods, included:

  1. in October–November 1942, Dr Roland Wilson (of the Departmen of Labour and National Service) was in London for talks at which Keynes's Clearing Union plan was unveiled;
  2. in April 1943 Dr. H.C. Coombs (of the Department of Post-War Reconstruction) was in Washington for talks with Harry White and E Bernstein on the American plan;
  3. in June 1943, JB Brigden (of the Australian legation in Washington) took part in talks with US officials on their plan;
  4. also in June 1943, Coombs had talks in London with British officials, including Keynes, on trade and monetary matters;
  5. in March 1944, LG Melville (of the Commonwealth Bank) and Frederick Wheeler (of the Treasury) took part in Dominion discussions on the IMF in London;
  6. after a lightning trip back to Canberra, Melville and Wheeler, joined by Brigden and AH Tange, were at the Atlantic City discussions of the IMF and IBRD in late June 1944;
  7. immediately after Atlantic City, the same four delegates represented Australia at the Bretton Woods Conference; and
  8. in March 1946, Australia not having joined the institutions, Melville attended the Savannah inaugural meeting of the institution as an observer.

At Bretton Woods, Australia moved a resolution ‘… that Governments which are to be invited to accept an International Monetary Agreement should be invited to accept con-curren an international agreement in which the signatories will pledge themselves to their own people and to one another to maintain high levels of employment in their respective countries, and to exchange information on measures necessary to prevent the growth of unemployment and its spread to other countries’.[337] This was defeated. The US was strongly opposed, though the UK and New Zealand supported Australia. However, the relevant Commission of the Conference did call on countries to ‘create by cooperative effort the harmonising of the national policies of member States designed to promote and maintain high levels of employment and progressively rising standards of living’. Although the Articles of Agreement refer to ‘the promotion and maintenance of high levels of employment and real income’,[338] Australia entered a reservation to the effect that not enough emphasis was placed on employment.

What is known of Keynes's attitude to the Australian ‘employment approach’? Dr Coombs wrote to Keynes in 1942 or very early 1943 setting out his notions of what became known as the ‘employment approach’, and asked whether obtaining some kind of guarantee of high levels of employment and of demand for traded goods was practical. Coombs received a mildly encouraging reply from Keynes. Coombs understands that after receiving his letter, Keynes wrote to Lord Bruce, the Australian High Commissioner in London, telling him of his correspondence, saying that Coombs's approach was optimistic, but that the Australian Government should send Coombs to the US for talks concerning the monetary plans.[339] This may help explain why Coombs, who was in the process of establishing the Department of Post-War Reconstruction, was asked to go with Dr Evatt (Minister for External Affairs) to the US and UK in 1943.[340]

However, encouragement that Coombs should take part in talks does not endorse his approach. On 22 April 1943, Sir Frederick Phillips of the British Treasury wrote to Keynes from Washington:[341]

The Australians have sent over Coombs, whom I have also seen. Under the influence of Dr Evatt they are taking the line that, before any plan at all is considered, it must be laid down in advance that the primary duty of every country is to raise its own employment and production to the maximum by its own efforts. They will not get far with the Americans on this.

Keynes's reply to this letter made no response to this accurate and dismissive prediction.[342] However, a year later, between the Dominion talks in London and Bretton Woods, Keynes did think it ‘very possible a declaratory statement about full employment on the lines that the Australians are pressing would … appeal to’ President Roosevelt, who was seeking for electoral purposes to emphasise international economic collaboration.[343]

Aside from this, all the evidence of which I am aware suggests that Keynes regarded an international agreement on full employment as unnecessary or impractical. He did include Australia in a list made in October 1943 of a dozen countries that could form ‘a Drafting Committee’ on the international monetary plans.[344] But his comments on Australia's position at Atlantic City and Bretton Woods had a tone of some annoyance; he was more optimistic than the Australians on matters such as the degree of flexibility of exchange rates that would be permitted when the IMF began operating; in telling the House of Lords in May 1944 that the Anglo-American proposals for Bretton Woods provide ‘an international framework for the new ideas and the new techniques associated with the policy of full employment’,[345] he implied that no additional agreement was needed (even for Britain, which he feared would have major balance of payments difficulties); and, in a letter to TS Eliot in April 1945 he ridiculed the Australian position. Keynes wrote:[346]

Not long ago I was at a Conference where the Australians urged that all the Powers in the world should sign an international compact in which each undertook to maintain full employment in their own country. I objected on the ground that this was promising to be ‘not only good but clever’ …

… the main task is producing first the intellectual conviction and then intellectually to devise the means. Insufficiency of cleverness, not of goodness, is the main trouble …

That is the first, ought-to-be obvious, not-very-fundamental point. Next the full employment policy by means of investment is only one particular application of an intellectual theorem. You can produce the result just as well by consuming more or working less. Personally I regard the investment policy as first aid. In US it almost certainly will not do the trick. Less work is the ultimate solution (a 35 hour week in US would do the trick now). How you mix up the three ingredients of a cure is a matter of taste and experience, ie of morals and knowledge.

In a letter in June 1945 to SG MacFarlane, Secretary to the Australian Treasury, Keynes implied that a full employment agreement was not necessarily a solution to Australia's problems:[347]

I expect that both our countries incline to underestimate the difficulty of stabilising incomes where exports play so large a part. One is also, simply because one knows no solution, inclined to turn a blind eye to the wages problem in a full employment economy.

The greater Australian stress on full employment, and on particular means towards it, than Keynes himself thought wise suggests that the Australian position was more ‘Keynesian’ than Keynes.

Apart from a full employment agreement, the issues pressed – with limited success – by the Australians included:

  1. an increased quota for Australia;
  2. a high degree of flexibility of exchange rates;
  3. increased drawing rights from the Fund; and
  4. freedom to withdraw from the IMF without prejudicing membership of other international organisations (e.g. the proposed International Trade Organisation).

Although Australia gained a considerable increase in its quota, and some other concessions, it entered reservations on Articles relating to these matters.[348]

Although Keynes had advocated a larger fund and greater exchange rate flexibility than the Americans would agree to, his comments on the Australian demands are not particularly sympathetic.

On quotas, Keynes wrote between the Atlantic City and Bretton Woods meetings:[349]

Australia's present quota is probably too low, but she demands a figure which is quite out of line with anyone else's, and is quite inconsistent with the limit of 8 billions [$8 billion] for the aggregate. I gather that Melville has instructions which make it difficult for him to compromise; all the same, in the end he will have to. I am going to see White privately again shortly and put up to him a solution which I have reason to believe will satisfy India and help Australia a little. If Australia is still dissatisfied, we are all agreed she must fight her own battle. I have been very anxious to avoid horsedealing agreements about this in public.

A few days later Keynes wrote from Bretton Woods on quotas:[350]

… Here, I am afraid, our proposals for something larger for the smaller people cannot be managed, since White would be under irresistible attack in his own Delegation if he were to agree to go beyond 8 billions for the aggregate; much smaller figures are being pressed upon him. On the other hand, I am hopeful that I have persuaded him to make a sufficient concession to India to keep them moderately satisfied, and enough for Australia to meet their deserts though not their demands.

The Australian quota was increased from £47m. to £62.5m.

On flexibility of exchange rates, Keynes was more optimistic than the Australians. A letter he wrote Melville in March 1944 said that he expected that ‘if there is a good and reasonable case’ for an exchange rate change greater than that permitted unilaterally, ‘approval will be easily given’ by the Fund. On Australia's particular concern to be free to make exchange rate changes in response to collapse of export prices, Keynes wrote:[351]

My difficulty is that I find it extraordinarily difficult to see how an alteration in the exchanges could possibly be the right remedy for a catastrophic fall in some staple export commodity, such as wool. To maintain the incomes of the wool producers by greatly increasing the incomes of all other exporters and diminishing the purchasing power of the public generally, is something like burning down the house for roast pork. Also, if the cause of the collapse is excess supply, it cannot be wise, after all, to temper the wind to the shorn (and unshorn) lambs so easily. Moreover, in the contingency contemplated a quite enormous change might be necessary to do much good. I would suggest that, in so far as the remedy is to be found in the realm of external policy, it should take the form of great enthusiasm for buffer stocks. It is precisely to protect primary producers against such catastrophes that buffer stocks are proposed. I confess I have been rather disappointed by the lack of enthusiasm which the primary producers seem to feel for plans to keep their prices more stable. But is not this really the right line to press on?

Although it was understood, and Keynes himself stressed,[352] that signature to the Final Act of the Conference did not commit countries to the plans the expert delegations had thrashed out, the Australian delegation was under instructions from Canberra to sign nothing without prior approval. A cable from the delegation to Canberra setting out the case for signing[353] received this tart reply:[354]

We are disturbed by contents of your [cable] Financial 5 and desire to be kept fully informed of any developments in this matter. In meantime no documents should be signed without further advice from this end.

The delegation did not receive instructions to vote for the adoption of the Articles of Agreement of either the Fund or the Bank, and so did not. Keynes talked with White about the danger Australia might not sign the Final Act, and they agreed to wait ‘in the hope that the Australian Delegation could convince the Government of the ad referendum nature of the proceedings and the lack of commitment in signing’.[355] At the last minute, a telegram was received by Melville with instructions to sign – but he had to put beside his signature the words – meaningless in the context – ‘for purposes of certification’.[356] Keynes reported to London:[357]

… we have had our final banquet and celebration. The love feast was completed by the two black sheep, the Australians and the Russians, receiving their telegrams just in time. Melville was able to sign the Final Act and the Russians raised their subscription to the full figure of $1,200m. … amidst loud and continued applause, and embraces all round, the erring sheep were received into the fold.

However, because of very considerable hostility to the IMF within the Labor Party, partly based on fear of new Niemeyers, Australia did not join the IMF and World Bank until 1947.

By then, of course, Keynes was dead.


Gardner (1980, p 76). [306]

Gardner (1980, p 79); see also p 92. [307]

Keynes (1975, pp 203–204). See also JMK (25, pp 137, 194). [308]

Wood (1940, pp 82, 85). [309]

Coombs (1981, p 89). [310]

JMK (7, pp 348–349, 382). [311]

For other factors, see Markwell (1983, p 60). [312]

JMK (25, pp 33–40); subsequent drafts are also in JMK (25). [313]

JMK (25, pp 168–195, 449–452). [314]

JMK (25, pp 233–235, 459–468). [315]

JMK (25, pp 437–442, 469–477). [316]

See Markwell (1983, pp 61–64). [317]

Report by HC Coombs, 27 Sep 1943, Reserve Bank of Australia Archives, file C3-9-1-74. [318]

JMK (25, p 113). [319]

JMK (25, p 112). [320]

JMK (25, p 116). [321]

See JMK (25, pp 118–119). [322]

See JMK (25, pp 118, 135–137, 441). [323]

JMK (25, pp 129–130). [324]

See Gardner (1980, pp 72–76). [325]

See JMK (25, pp 220–275). [326]

Horsefield (1969, p 28). [327]

See JMK (25, p 162). [328]

Horsefield (1969, p 28). [329]

Horsefield (1969, p 29); JMK (25, pp 225–275). [330]

See JMK (25, pp 160–167). [331]

See JMK (25, p 216). [332]

See, for example, JMK (25, pp 251–226). [333]

See Horsefield (1969, pp 57–75). [334]

See Butlin and Schedvin (1977, ch 21) and Crisp (1960, ch 14). [335]

What follows is based largely on interviews and research in the Reserve Bank Archives. [336]

US Department of State, Proceedings and Documents of the United Nations Monetary and Financial Conference, Washington, DC, 1948, p.279. [337]

Horsefield (1969, p 111). [338]

Interview with Dr HC Coombs, 1 Sep 1985. [339]

See Coombs (1943, pp 32–46), especially p 45. [340]

JMK (25, p 251). [341]

JMK (25, pp 255–258). [342]

JMK (25, p 444). [343]

JMK (25, p 378). [344]

JMK (26, p 19). [345]

JMK (27, pp 383–384). [346]

JMK (27, p 385). [347]

See Proceedings, pp 188–189. [348]

JMK (26, p 69). [349]

JMK (26, p 79). [350]

JMK (25, p 414). [351]

JMK (26, p 99). [352]

Reserve Bank of Australia Archives, file C3-9-1-77, dated 1 July 1944. [353]

Reserve Bank of Australia Archives, file C3-9-1-77, dated 6 July 1944. [354]

JMK (26, p 98). [355]

Reserve Bank of Australia Archives, file C3-9-1-77, letter from Melville to Curtin, dated 26 August 1944. [356]

JMK (26, p 112). [357]