THIS DOCUMENT IS THE PROPERTY OP HIS 3 RITANNIC MAJESTY'S GOVERNMENT.)
S E C R E T .
C P . 1 0 0 ( 5 5 ) .
C A B I N E T.
Second R e p o r t of Committee on I n t e r n a t i o n a l
Economic P o l i c y of the Economic A d v i s o r y
Council,,
Note by t h e S e c r e t a r y .
The a t t a c h e d second r e p o r t of the Committee on
I n t e r n a t i o n a l Economic P o l i c y of t h e Economic A d v i s o r y
C o u n c i l i s c i r c u l a t e d f o r the i n f o r m a t i o n of the C a b i n e t b y d i r e c t i o n of t h e Prime M i n i s t e r .
( S i g n e d ) M.P.A.
H A N K E Y o
S e c r e t a r y t o t h e C a b i n e t .
2 , W h i t e h a l l Gardens;, S . W . 1 .
S
A p r i l 1 2 t h , 1 9 5 5 .

THIS DOCUMENT IS THE PROPERTY OF HIS BRITANNIC MAJESTY'S GOVERNMENT
Printed for the Economic Advisory Council. April 1933.
S E C R E T .
Oopy No.
u 0
E.A.O. (H.) 155.
E C O N O M I C A D V I S O R Y C O U N C I L
S E C O N D R E P O R T .
2, Whitehall Gardens, S .W.
1,
April 6, 1933.
(8.W7)

C O M M I T T E E ON" I N T E R N A T I O N A L E C O N O M I C P O L I C Y .
COMPOSITION 7 AND TERMS OF REFERENCE.
ON the 29th July, 1932, the Prime Minister appointed an informal
Committee to consider the programme of subjects to be discussed at the forth­ coming World Economic and Financial Conference, and to advise him personally as to the points to which British policy should be specially directed.
2. The Committee is constituted as follows :—..
Sir Charles Addis, K.C.M.G..
Chairman.
Viscount Astor.
Sir Basil P . Blackett, K.C.B., K.C.S.I.
Lord Essendon.
Mr. J. M. Keynes, C.B.
Sir Walter Lay ton. O H . , C.B.E.
Sir Arthur Salter, K.C.B.
Sir Josiah Stamp, G.B.E.
Mr. H . D . Henderson, J o i n t Secretary.
Economic Advisory Council
Mr. Francis Hemming, C.B.E Joint ,
t Q
Secretary, Economic Advisory
Council
^
C o m m i t t
* e .

I N our first report (Council paper E . A . C . (H.) 153), we surveyed the major problems likely to arise at the World Monetary and Economic Conference, and indicated our views as to the policy which H i s Majesty's Government should pursue. Since this report was completed in October, t w o meetings of the
Preparatory Commission of Experts have been held at Geneva, and a draft annotated agenda, representing the report of the Commission, has been prepared.
W e have studied this report, and we have been enabled by the Chancellor of the
Exchequer to see the report prepared by the British representatives (Sir Frederick
Leith-Ross and Sir Frederick Phillips) on the meetings of the Commission. W e are also indebted to the Chancellor of the Exchequer for permitting us to see a memorandum containing the observations of the Treasury on certain proposals put forward in our first report.
2. W e do not propose to cover again the range of topics which w e dealt w i t h in our previous report. U p o n two questions, however, upon which we then laid special emphasis we desire to add some supplementary observations, in the light of subsequent developments and the comments made on our proposals. W e also attach to our report a brief supplementary note on certain aspects of shipping policy.
[ 8 3 9 7 ]

3.
W e foreshadowed in our first report that certain countries would be likely to press for a modification of the most-favoured-nation clause, so as to facilitate the conclusion of regional tariff arrangements; and we urged that it would be unwise for H i s Majesty's Government to adopt an obstructive attitude upon this matter. W e expressed the belief that it is probably only by the method of multilateral concession based on the principle of reciprocity that effective progress can be made towards a reduction of tariff barriers; and w r e argued that progress along these lines is likely to be impeded by the operation of the most­ favoured-nation clause in its present form. W e were also influenced by the fear that " t h e practical alternative to a reinterpretation of the most-favoured-nation clause will be. first, an increasing evasion of it, and ultimately its general abrogation," leading to " a chaotic period of complicated discriminatory systems and tariff retaliations." W e suggested accordingly that the British Government should indicate its readiness to consider the question of reinterpreting the most­ favoured-nation clause, so as to facilitate collective low-tariff agreements, provided that these did not assume an exclusive character.
4. The question of the most-favoured-nation clause received considerable attention at the proceedings of the Preparatory Commission. The report declares that " in normal conditions, the unconditional and unrestricted most-favoured­ nation clause should form the basis of commercial relations between nations." and proceeds to " recommend that the conference should reach an agreement at any rate as to the scope of the most-favoured-nation clause, if not as to its precise form." It states that " a suggestion which has been strongly pressed in various quarters is that States should admit an exception to the most-favoured-nation clause whereby advantages derived from plurilateral agreements should be limited to the contracting States and to such States a s may voluntarily grant equivalent advantages." I t urges that this proposal " should certainly be most carefully studied," and. after setting out impartially its advantages and its disadvantages or dangers, it enumerates the following as indispensable c o n d i t i o n s : —
" I n any case, these exceptions must be subject to the conditions that agreements of this kind be open to the adhesion of all interested States and that their aim should be in harmony with the general interest. A m o n g s t the conditions that might be considered for this purpose, mention may be made of a proviso that these agreements shall have been concluded under the auspices of the League of N a t i o n s or of organisations dependent' on the
League. Further, these agreements must not involve new hindrances to international trade vis -a -vis countries having most-favoured-nation rights.
Finally, ' collective agreements' can only be regarded as such when they comply w i t h certain conditions, to be determined, as to the number of the participating States."
The report then proceeds to discuss in a similar spirit the question of temporary exceptions to facilitate such special agreements as those designed to give a preference to the cereal exports of the Danubian countries.
5. The definition of the conditions with which collective agreements must comply, if they are to be admitted as exceptions to the most-favoured-nation clause, is in our judgment excellent; and the arguments in favour of and against collective agreements are fairly marshalled in the report. I t is evident, however, that there are at present great differences of opinion between different countries both as to the desirability of collective agreements, and, still more, as to the expediency of facilitating them by a relaxation of most-favoured-nation rights.
These differences may be expected to reassert themselves at the conference itself, and it is clear that it will not be an easy matter to do what the Preparatory
Commission urge and "find a solution for the whole of this question which will reconcile the interests of all."
6. Great, however, as are the difficulties presented by this question, its wise handling will prove, w e believe, of crucial importance for the future of inter­ national commercial relations. The precise line which it will be best for the
British Government to take must necessarily be affected by the movement of

opinion and the development of policy in other countries; and for this and other reasons there has been much to be said for maintaining up to the present a non­ committal attitude, such as we gather was adopted by the British representatives at the Preparatory Commission. A t the conference, however, it will probably prove essential for the British Government to assume a more definite position; a n d much may depend upon whether we throw our influence in the scales on the one side or the other. W e regard it, therefore, as vital that our attitude upon the questions of the most-favoured-nation clause and collective agreements should be carefully thought out in the meantime.
7.
W e adhere to our opinion that this attitude should be one of sympathy to the idea of an exception to the most-favoured-nation clause in favour of collective low-tariff agreements. W e are not unmindful of the important part which the most-favoured-nation clause plays in our existing commercial treaties, a n d of the valuable safeguards which it provides against a chaotic regime of discriminaton- tariffs. On the contrary, we regard it as a vital objective of world statesmanship to preserve the essentials of the clause. But we believe that a stage has been reached at which these essentials can only be preserved by modifying their application. For this reason criticism which takes the form of dwelling on the advantages of the most-favoured-nation clause or on the dangers w h i c h would follow its abrogation, seems to us to miss the mark. We argued a t some length in our previous report that it was unlikely that European States would continue to acquiesce indefinitely in an interpretation of the most-favoured­ nation clause which permits the British Empire to develop a comprehensive system of Imperial Preference while precluding other countries from entering into regional agreements. W e think it desirable, however, to convey more precisely than we attempted to do in our previous report how great is the clanger o f international tariff anarchy if the existing tendencies develop unchecked.
8.
The Preparatory Commission enumerated the following four methods by w h i c h reductions of tariffs might be effected :
(a) a general agreement of the conference;
( 6 ) a collective agreement of a group of governments;
(c) bilateial negotiations;
(d) autonomous action on the part of governments individually.
W h i l e nothing could be more welcome than an agreement of the conference providing for the simultaneous reduction of tariff barriers throughout the world, it can hardly be expected that any concrete agreement of this character can be reached, in view of the diverse economic conditions and tariff systems of different countries. Indeed, if any attempt were made to define a general standard for tariffs that would be universally accepted, it would be so far from securing the degree of freedom of trade that is needed that it might easily become a hindrance rather than a help. The most, therefore, that can reasonably be hoped for under heading (a) is the assertion of general aims and principles which will leave the practical work of tariff reduction to be achieved by one of the three other methods. In some degree it is possible that effect might be given to general conference resolutions by action along the lines of method (d), i.e., by autonomous action on the part of individual governments. The most obvious possibility under this heading is opened u p by the change of government in the United States, as the result of which an administration favourable in principle to tariff reduction is now in power.
Apart, however, from the special case of the United States, the prospects of reducing tariffs by autonomous action are not encouraging. Governments have not hesitated to take autonomous action with regard to tariffs in recent years, but it has been, with scarcely an exception, in the direction of higher tariffs. General conference resolutions might exercise a restraining influence upon this tendency, but it is difficult to suppose that they would suffice by themselves, and without a n y application of the principle of reciprocity, to reverse it.
9. W e are left thus with methods (b) and (c), collective agreements and bilateral negotiations. These methods are alike in the respect that they both embody the principle of reciprocity; this makes both of them potentially more effective instruments for promoting a widespread reduction of tariffs than the autonomous action of individual Governments can be under the world conditions o f the present day. These two methods are alike again in that the existing

most-favour ed-natibh clause presents itself as an obstacle in both cases, and the attempt to apply either method extensively is thus likely to' lead to a revolt against the clause in its present form. B u t the pursuit of the method of bilateral negotiations would constitute in bur judgment a far more serious threat to the essentials of the most-favoured-natioh clause than would the pursuit of collective agreements.
10. We are, indeed, at present in a phase of bilateral negotiations with regard to tariffs; Great Britain is taking a foremost part in them, and even a t this early stage the experience of these negotiations serves to confirm the state­ nients in the preceding paragraph. The debate on the World, Economic
Conference, which took place in the House of Commons on the 15th March, 1933, was significant in this connection. A motion was proposed urging the British
Government, among other matters, " to take the initiative in the formation of a group of free -trade or low-tariff countries, and to make agreements for such modifications in the most-favoured-natioh clauses of existing treaties as may be necessary." To this motion an amendment was moved, urging the British
Government to bo ready " so to modify existing treaties as to give tariff advantages to those countries which are ready to reciprocate in the promotion of freer trade and to raise tariffs against those countries which do not desire t o reciprocate." Thus t h e most-favoured-nation clause was subjected to criticism, both from the advocates of low tariff agreements and from those concerned primarily to improve the bargaining position of Great B r i t a i n i n the existing commercial negotiations. In the course of the debate, the President of the Board of Trade, referring to the trade negotiations now in progress, used the following­ words :—
"Moreover, in negotiating, both sides must make concessions. I want to make it clear that if any nation sits back in the hope that w e will enter into successful negotiations w i t h another power and t h a t they will be able to achieve most-favoured-nation treatment without consideration coming from them, they will come to a deadlock. I f they g a i n any advantages from us, they must be reciprocal in their action. They must be ready to make concessions similar to ours and to those of other countries. Unless they do that, we cannot agree to most-favbured -natiOn treatment being retained as a permanent element in the conditions which control their traffic and ours.
I f it is used against us in any instance we will drop it at once, and w e will be ready to enter into individual relationships without regard to most­ favoured-nation treatment i n such cases as I have in mind. I hope those who now are doing so, after discussing it w i t h us, will bear in mind, therefore, the fact that while this system plays such a large part in the commercial l i f e of this country, we are not so firmly wedded to it that w e can allow it to be used to our disadvantage."
T h i s passage, hypothetical though it was. marks, none the less, a noteworthy change i n the attitude of the British Government towards the most-favoured­ natiori clause. I t illustrates, moreover, the difficulty, which w e believe - to be fundamental, of reconciling the clause w i t h any extensive pursuit of the method of bilateral negotiations.
11. The main purpose of bilateral negotiations is to obtain specially favourable treatment from the other party. The m a i n purpose of the most-favoured-nation clause is to prohibit special favours. I t is true that, under present conditions, the existence of abnormal trade impediments, such as exchange restrictions, quota schemes, &c.,' provides considerable scope, outside the.sphere of tariffs, for mutually advantageous bargains between two countries., without running up against the veto of the most-favoured-nation clause. I t i s further true that the possibilities of reducing tariff rates upon goods which are largely imported from the other country, and sub-dividing tariff classifications so as to discriminate between its specialities and those of rival producers, affords some scope for such bargains within the tariff sphere. But these are the exceptions which prove the rule, in the proper meaning of the phrase. Notoriously, to the extent to which the flow of international trade is determined by exchange restrictions and quota schemes, most-favoured-nation treatment is rendered nugatory; and already the international commercial air resounds w i t h complaints of adverse discrimination in the administration of these restrictions. I n t h i s

% connection, we m a y q u o t e a f u r t h e r p a s s a g e from t h e speech of the P r e s i d e n t of t h e B o a r d of T r a d e : ­
" I w o u l d like to p o i n t out in p a s s i n g t h a t , a l t h o u g h most-favoured­ n a t i o n t r e a t m e n t p l a y s a p a r t in those t r e a t i e s , t h e r e a r e some cases, such a s F r a n c e , w h e r e most-favoured-nation t r e a t m e n t is not likely t o be c o n t i n u e d t o us. T h e q u o t a system, a s i t h a s been worked in F r a n c e , m a y become r e a l l y a form of d i s c r i m i n a t i o n . I t h a s been my d u t y t o d r a w t h e a t t e n t i o n of t h e
F r e n c h r e p r e s e n t a t i v e to t h e way t h a t d i s c r i m i n a t i o n in other m a t t e r s i s o p e r a t i n g to o u r d e t r i m e n t , a n d we m a y h a v e to t a k e t h e m a t t e r f u r t h e r . W e c a n n o t allow i t t o r e s t whei'e i t is. T h e r e h a s been d i s c r i m i n a t i o n w i t h r e g a r d t o t h e s u r t a x i n F r a n c e . W e a r e not receiving t h e m o s t - f a v o u r e d - n a t i o n t r e a t m e n t t h e r e . F r a n c e is g i v i n g B e l g i u m a d v a n t a g e s w h i c h a r e n o t held by t h e citizens of t h i s country. A g a i n , we have n o t only to d r a w t h e a t t e n t i o n of t h e F r e n c h t o t h i s fact, b u t we have to m a k e i t clear t h a t i t is a condition to w h i c h we c a n n o t p e r m a n e n t l y be p a r t i e s , a n d t h e t i m e m u s t a r r i v e when action is necessary \yith r e g a r d t o t h e i r exclusion of us from tjie benefits which they give to o t h e r s . "
S i m i l a r l y , t h e p r a c t i c e of c o n f e r r i n g favours by m e a n s of tariff classification h a s a l w a y s been r e g a r d e d a s a n objectionable one, a m o u n t i n g to a n evasion of t h e m o s t - f a v o u r e d - n a t i p n clause.
12. I n expressing, therefore, our belief t h a t t h e active p u r s u i t of t h e m e t h o d of b i l a t e r a l n e g o t i a t i o n s is likely to e n t a i l " first, a n i n c r e a s i n g evasion " of t h e m o s t - f a v o u r e d - n a t i o n clause, " a n d ultimately its g e n e r a l a b r o g a t i o n , " w e a r e n o t c o n j u r i n g u p a vision of a remote a n d speculative clanger, w e a r e calling a t t e n t i o n t o a tendency w h i c h is a l r e a d y a t work, a n d , indeed, in t h e course of a development so r a p i d t h a t i t is m a n i f e s t l y u n d e r m i n i n g t h e t r a d i t i o n a l m a x i m s of B r i t i s h commercial policy. I t is still less t h a n a y e a r a n d a h a l f since the commercial policy of G r e a t B r i t a i n w a s essentially one of F r e e T r a d e ; a n d , a s a F r e e T r a d e country, we were accustomed to r e g a r d t h e m o s t - f a v o u r e d - n a t i o n clause as a n i n v a l u a b l e s a f e g u a r d of B r i t i s h interests in a world which m a i n t a i n e d h i g h tariffs a n d was disposed t o tariff b a r g a i n s . W e a r e now actively e n g a g e d in u s i n g t h e power t o exclude i m p o r t s from t h e B r i t i s h m a r k e t s a s a lever t o e x t r a c t favourable t e r m s for B r i t i s h exports, d e a l i n g w i t h o u r customers one by o n e : a n d t h e i m p o r t a n c e of t h e B r i t i s h m a r k e t to m a n y o t h e r countries is so g r e a t t h a t w e a r e becoming conscious t h a t we have a t o u r disposal a b a r g a i n i n g w e a p o n w h i c h is p o t e n t i a l l y f a r s t r o n g e r t h a n a n y w h i c h other countries have enjoyed in t h e past.
T h e c h a n g e h a s been so recent t h a t we have not a s yet fully a d j u s t e d ourselves t o i t s i m p l i c a t i o n s : we have not a s yet sought to denonnce the most-favoured­ n a t i o n c l a u s e ; n o r have we decidedly a b a n d o n e d o u r a t t i t u d e of extolling i t a s a valuable s a f e g u a r d of B r i t i s h commercial i n t e r e s t s . B u t , a s t h e above e x t r a c t s sufficiently reveal, t h e r e is a noticeable w a n i n g in the wholeheartedness of o u r a t t i t u d e ; a n d t h e present p h a s e is m a n i f e s t l y a t r a n s i t i o n a l one. I n c r e a s i n g l y w e shall find, a l o n g t h e road of bilateral n e g o t i a t i o n s , t h a t t h e most-favoured­ n a t i o n clause l i m i t s our power to exploit t h e full p o t e n t i a l i t i e s of t h e b a r g a i n i n g - i n s t r u m e n t of t h e B r i t i s h m a r k e t . I n c r e a s i n g l y we shall find t h a t t h e clause p r e v e n t s us from r e t a l i a t i n g effectively a g a i n s t adverse d i s c r i m i n a t i o n in the a d m i n i s t r a t i o n of q u o t a schemes a n d e x c h a n g e controls. T h e d i s p o s i t i o n to free ourselves from these l i m i t a t i o n s will g r o w correspondingly. I n other c o u n t r i e s , s i m i l a r reasons for discontent w i t h t h e m o s t - f a v o u r e d - n a t i o n clause will a c c u m u l a t e .
13. I t seems to us i m p o r t a n t to consider w h i t h e r w e a r e h e a d i n g , w h i l e we a r e still in the t r a n s i t i o n a l phase, a n d while the m o s t - f a v o u r e d - n a t i o n clause is still i n t a c t . Some of t h e d i s a d v a n t a g e s which would arise if the most-favoured­ n a t i o n clause were to d i s a p p e a r from the w o r l d ' s commercial treaties, a n d the t r a d e r e l a t i o n s of different countries were to be governed by a complex series of b i l a t e r a l b a r g a i n s , were excellently s t a t e d by the P r e s i d e n t of the B o a r d of T r a d e in the speech from which we have a l r e a d y m a d e q u o t a t i o n s : —
" One a d v a n t a g e of the most-favoured-nation clause is t h a t i t ensures a general absence of d i s c r i m i n a t i o n , a n d t h a t in itself is a g r e a t a d v a n t a g e for o u r business men here. F u r t h e r m o r e , if we h a d not t h e m o s t - f a v o u r e d - n a t i o n clause in o u r commercial treaties, it would be necessary for u s to deal w i t h

every item in our tariffs, with probably a different series of rates applicable to particular countries, and the duties which would have to be considered by our business men, our contractors, our salesmen and those who are drawing­ up estimates would be enormous almost beyond imagination. Every item o f every country, all varying and none of them on any one settled principle and covering such a variety of conditions, make it almost impossible for the ordinary business man to know where he is. The advantage of the most­ favoured-nation clause as it stands at present is that he can look at the tariffs and see what is the lowest rate, and he knows that he is entitled by commercial treaties to claim that treatment. H e knows that that is an advantage which ought not to be too readily thrown a w a y . "
B u t there would also be dangers of a far graver kind. Detailed discrimination would almost certainly provoke detailed retaliation. A n era of intensified economic warfare would be opened up. Complete anarchy would replace t h e elements of order and uniformity which have hitherto existed in the international commercial sphere. These seem to us by no means remote contingencies along the path of bilateral negotiations; and they are contingencies Avhich should disturb a foreign-trading country like Great Britain, even though the b a r g a i n i n g position with which we would enter into this anarchy might be initially strong.
14.
I t is from a sense of these dangers that w e urge that the B r i t i s h
Government should give serious and sympathetic consideration to the method of collective agreements. W e are not blind to the difficulties in the wa3 r of such agreements; and we do not suggest that the problem they present is an easy one.
W e are convinced, however, that the method of collective low-tariff agreements represents the true via media between the probably barren method of autonomous action on the one hand and the dangerous method of bilateral negotiations on the other. T h i s method would give reasonable scope to the principle of reciprocity while providing safeguards against the danger that this principle may lead to a heightening of tariffs, retaliation and unlimited confusion. I t is hardly too much to say that the essential problem in connexion w i t h tariffs is to effect a reasonable compromise between the principles of reciprocity and most-favoured-nation treatment, neither of which can safely be allowed to devour the other. T h e method of collective low-tariff agreements would effect such a compromise; and for this reason we remain of the opinion that it offers the only practicable means of real progress in the direction of lower tariffs.

15.
financial
I n our
problem
first
was report, we argued that a
an essential prerequisite
solution of the
of the solution
int
of erna
the tional
other problems with which the conference is faced. W e pointed out that the abnormal trade impediments which have been imposed in recent years are for the most part the direct and natural outcome of the international financial crisis, and we inferred that though it would doubtless be comparatively easy to secure resolutions deploring the growth of these trade impediments, it would probably prove impracticable " to make any considerable progress towards their removal so long as the financial conditions which have given rise to them prevail ". W e are confirmed in this view by the course of discussion at the Preparatory Commission.
The account which is given in the report of the Commission of the causes which have led to the growth of trade restrictions is very similar to that which we gave ourselves, laying stress on such matters as the natural preoccupation of the weaker financial countries with their trade balances and exchange stability, and the anxiety of the stronger financial countries to maintain a measure of stability for their home producers amid the demoralisation of world price conditions. The report of the Commission concludes its account with the following observation :—
" The foregoing summary is not intended in any way to justify the restrictions; none the less, it seems desirable to indicate the causes which have led to their adoption, since the most effective w a y of endeavouring to bring about the removal of these grave obstacles to trade will be to attack their causes."
10. W e argued further that in order to break through the existing inter­ national financial deadlock, it w a s essential to secure an increase in the supply of international purchasing power at the disposal of the weaker financial countries.
W e expressed scepticism as to the possibility of meeting this need by international loans from the creditor countries; and we turned therefore to the possibility of meeting it by action w i t h i n the monetary sphere. W e examined and supported the proposal which had already been put forward by the Committee on Economic
Information that the Bank for International Settlements should be authorised to issue international certificates, to be accepted by Governments as the equivalent of gold, as the basis of a scheme for advances from the Bank of International
Settlements to Governments. W e pointed out that this idea w a s capable of being applied in a great variety of ways. The Committee on Economic Information had suggested that advances might be made at a nominal rate of interest to all
Governments agreeing to participate in the scheme up to a large aggregate sum of, say, £1,000 millions gold, this sum being distributed among them i n accordance w i t h some agreed criterion of economic importance. W e suggested as an alternative plan which might possibly stand a greater chance of acceptance that the advances might be limited to loans to the Governments of financially embarrassed countries, and might carry a gilt-edged rate of interest. Both these plans included provisions for the gradual recall of the advances and cancellation of the notes in the event of a rise in world prices, together w i t h other technical features which w e need not recapitulate.
17. W e are grateful to the Chancellor of the Exchequer for the privilege of studying the observations of the Treasury upon these proposals. W e under ­ stand that the Treasury have no criticisms to offer from the economic or technical standpoints, but agree that there would be much to be said for a scheme on the above lines if other important countries could be persuaded to accept it. I n the opinion of the Treasury, however, there would be no real chance of the acceptance either of the larger scheme suggested by the Committee on Economic Information^ or of the more limited scheme which we had suggested as an alternative; and that the latter scheme would be even less likely to w i n acceptance than the former.
I n these circumstances, moreover, the Treasury would regard it as unwise for the British Government to put forward any such proposal, on the ground that distrust of sterling might be aroused if we were to appear as champions of w h a t
[ 8 3 9 7 ] c

w o u l d be described as novel a n d o r g a n i s e d inflation. T h e T r e a s u r y agreed, however, t h a t i t m i g h t be a n a d v a n t a g e if t h e P r e p a r a t o r y Commission could be i n d u c e d , p r e f e r a b l y a t the i n s t a n c e of a c o n t i n e n t a l r e p r e s e n t a t i v e , to spend some l i m e in t h e e x p l o r a t i o n of proposals of t h i s c h a r a c t e r .
18. F i n a l l y , t h e T r e a s u r y , as we u n d e r s t a n d t h e i r position, do n o t question t h e need for a c t i o n in t h e m o n e t a r y s p h e r e to remedy t h e i n t e r n a t i o n a l financial position, a n d a r e disposed t o suggest, as r e p r e s e n t i n g a more p r o m i s i n g a p p r o a c h t h a n t h a t of a n i n t e r n a t i o n a l note-issue, some scheme by w h i c h c o u n t r i e s possessing s u r p l u s gold reserves would in effect deposit p a r t of t h e i r excess reserves w i t h t h e B a n k for I n t e r n a t i o n a l S e t t l e m e n t s , t h u s p r o v i d i n g a basis u p o n w h i c h t h e B a n k for I n t e r n a t i o n a l S e t t l e m e n t s m i g h t m a k e a d v a n c e s to financially distressed c o u n t r i e s .
19. W e h a v e recognised from t h e first t h a t so u n f a m i l i a r a n i d e a as t h a t of i n t e r n a t i o n a l gold note-issue w a s not likely to commend itself i m m e d i a t e l y to t h e other G o v e r n m e n t s r e p r e s e n t e d a t the W o r l d Conference. B u t w h i l e we do n o t t h i n k we u n d e r r a t e t h e difficulties w h i c h s t a n d in t h e w a y of i t s acceptance, w e a r e loth t o believe t h a t a p r o p o s a l w h i c h is sound in i t s economic a n d technical a s p e c t s ( a n d no c r i t i c i s m h a s yet been m a d e of i t in those aspects), a n d w h i c h is w e l l - a d a p t e d to meet t h e f u n d a m e n t a l needs of the economic s i t u a t i o n ( a n d no c r i t i c i s m h a s been m a d e of t h e d i a g n o s i s on w h i c h we base t h i s claim), m u s t be dismissed as u t t e r l y i m p r a c t i c a b l e merely because it conflicts w i t h c e r t a i n i n s t i n c ­ t i v e p r e j u d i c e s a n d lends itself easily to m i s u n d e r s t a n d i n g a n d superficial ridicule. T h e r e a r e , moreover, two reasons w h y t h e p r o p o s a l m a y p r o v e less i n a c c e p t a b l e t h a n it w o u l d seem a t first s i g h t , t h e one concerned w i t h t h e c h a r a c t e r of t h e p r o p o s a l itself, t h e other w i t h t h e developments of t h e world s i t u a t i o n .
20. I n t h e first place, t h e suggestion of a n i n t e r n a t i o n a l note-issue is by no m e a n s so eccentric or b i z a r r e , so cut off from t h e w i s d o m a n d e x p e r i e n c e of t h e p a s t , as m a y be supposed. I t r e p r e s e n t s t h e a p p l i c a t i o n to t h e i n t e r n a t i o n a l s p h e r e of t h e classic p r e s c r i p t i o n evolved by t r i a l a n d e r r o r , a n d a p p r o v e d by­ a b u n d a n t experience, for t r e a t i n g a n i n t e r n a l financial crisis. I t w a s n o t uncommon i n E n g l a n d i n t h e last c e n t u r y for one or t w o s e n s a t i o n a l business failures to p r e c i p i t a t e a g e n e r a l financial p a n i c , in w h i c h c r e d i t o r s d e m a n d e d from t h e i r d e b t o r s r e p a y m e n t s w h i c h w e r e beyond t h e i r p o w e r a n d i n w h i c h t h e p u b l i c b e g a n to " r u n " u p o n t h e b a n k s for cash. By long a n d p a i n f u l experience w e l e a r n t t h e m e t h o d of d e a l i n g w i t h a s i t u a t i o n of t h i s t y p e . T h e B a n k of
E n g l a n d m u s t be freed from t h e n o r m a l l i m i t a t i o n s u p o n its r i g h t to issue n o t e s ; a n d , so fortified, i t m u s t lend r e a d i l y to all a p p l i c a n t s w h o h a d good security to offer. I n o t h e r w o r d s , a n i n t e r n a l financial crisis m u s t be m e t by C e n t r a l B a n k a d v a n c e s m a d e possible by a n emergency i n c r e a s e of t h e c u r r e n c y . T h i s r e m e d y i s b e i n g a p p l i e d a t t h e p r e s e n t m o m e n t by t h e a u t h o r i t i e s of t h e U n i t e d S t a t e s a s t h e m e a n s of d e a l i n g w i t h t h e p r e s e n t b a n k i n g crisis in t h a t c o u n t r y .
2 1 . T h e necessity for a p p l y i n g t h i s r e m e d y to a n acute financial crisis arises from t h e essential c h a r a c t e r i s t i c s of t h e m o d e r n c r e d i t system. T h e s u p p l y of l e g a l - t e n d e r c u r r e n c y i n a m o d e r n c o m m u n i t y a m o u n t s n o r m a l l y to only a small f r a c t i o n of t h e money claims w h i c h t h e p u b l i c hold in t h e form of b a n k deposits or o t h e r supposedly l i q u i d forms. I f accordingly, for w h a t e v e r reason, c r e d i t o r s g e n e r a l l y p r e s s t h e i r d e b t o r s for cash p a y m e n t , a n a u g m e n t a t i o n of t h e currency, u n t i l such times as n o r m a l confidence is restored, is essential, if w i d e s p r e a d d e f a u l t w i t h f a r - r e a c h i n g a n d d i s a s t r o u s repei-cussions is to be avoided. Nor is t h e r e a n y t h i n g i n f l a t i o n a r y in t h e a u g m e n t a t i o n of t h e c u r r e n c y u n d e r such c o n d i t i o n s . T h e a d d i t i o n a l c u r r e n c y serves merely t o c o u n t e r a c t t h e decline i n effective p u r c h a s i n g - p o w e r r e s u l t i n g from t h e loss of confidence a n d t h e r e l u c t a n c e t o give credit.
22. N o w i t is of t h e essence of our i n t e r n a t i o n a l difficulties t h a t w e have a c r i s i s i n t h e s p h e r e of i n t e r n a t i o n a l financial relations a n a l o g o u s t o a n i n t e r n a l b a n k i n g crisis. I n t h e last t w o y e a r s w e have seen i n t e r n a t i o n a l " r u n s " u p o n

countries, u p o n G e r m a n y , u p o n G r e a t B r i t a i n , even u p o n t h e U n i t e d S t a t e s . *
A c o u n t r y s u d d e n l y called u p o n to meet a n e x t e r n a l r u n finds itself in essentially t h e same difficulty as a b a n k confronted w i t h a r u n by i t s depositors. I t s long­ t e r m position m a y be sound a n d solvent; but it does n o t follow t h a t it h a s immediately a t its command gold or foreign exchange sufficient to meet all t h e e x t e r n a l d e m a n d s t h a t m a y be m a d e u p o n it. I t m a y be d r i v e n accordingly t o some such e x p e d i e n t as a " s t a n d s t i l l ' ' a g r e e m e n t which is analogous to a b a n k i n g m o r a t o r i u m or to a d e p r e c i a t i o n of its currency w h i c h is e q u i v a l e n t from t h e i n t e r n a t i o n a l s t a n d p o i n t to a composition of so m u c h in t h e p o u n d . M e a n w h i l e all countries become a n x i o u s to s a f e g u a r d or improve t h e " l i q u i d i t y " of t h e i r i n t e r n a t i o n a l p o s i t i o n ; they a r e less w i l l i n g either to buy or to lend, e x p r e s s i n g t h i s u n w i l l i n g n e s s by m e a n s of q u o t a schemes, exchange restrictions a n d embargoes on foreign l e n d i n g ; a n d t h e lack of i n t e r n a t i o n a l financial confidence t h u s c o n t r i b u t e s w i t h a formidable p o w e r to the progressive c u r t a i l m e n t of the volume of i n t e r n a t i o n a l t r a d e .
23. I f a n i n t e r n a l financial crisis w a s allowed to proceed unchecked, i t would exercise s i m i l a r l y d e v a s t a t i n g effects u p o n the volume of i n t e r n a l t r a d e activity. W i t h i n a country, however, effective o r g a n s of g o v e r n m e n t exist, which, sooner or later, s l i p in to t a k e remedial action. T h e absence of effective o r g a n s of g o v e r n m e n t in t h e i n t e r n a t i o n a l s p h e r e a d m i t t e d l y m a k e s t h e t a s k of i n t e r ­ n a t i o n a l a c t i o n f a r more difficult. B u t t h e p r i n c i p l e u p o n w h i c h such action should be based is t h e same. F o r a crisis of confidence in t h e sphere of i n t e r ­ n a t i o n a l financial relations, a special increase in the s u p p l y of i n t e r n a t i o n a l l y accepted money, w h i c h will m a k e debtors more able to p a y t h e i r e x t e r n a l c r e d i t o r s , a n d c r e d i t o r s less a n x i o u s t o o b t a i n i m m e d i a t e p a y m e n t from t h e i r e x t e r n a l debtors, is t h e f u n d a m e n t a l l y a p p r o p r i a t e remedy. T h e r e is n o t h i n g inflationary i n such a proposal, any more t h a n in a n increase of c u r r e n c y to deal w i t h a n i n t e r n a l b a n k i n g crisis, t h o u g h we should c e r t a i n l y hope t h a t it w o u l d f a c i l i t a t e a recovery of prices sufficient to redress t h e e x t r e m e d i s e q u i l i b r i u m w h i c h h a s recently g r o w n u p between prices on t h e one h a n d a n d costs a n d debts on t h e other.
24. O u r second reason for u r g i n g t h a t t h e i n a c c e p t a b i l i t y of o u r proposal should n o t be t a k e n for g r a n t e d is t h e n e w p l a s t i c i t y of p u b l i c o p i n i o n i n all countries u n d e r d e e p e n i n g m i s f o r t u n e . A s we observed i n o u r previous r e p o r t : —
" I n t h e absence of a constructive policy, t h e i n t e r n a t i o n a l financial problem is likely to r e m a i n w i t h u s for a long p e r i o d to come, a n d t h e sense of t h e v i t a l necessity of solving i t m a y be expected to g r o w r a t h e r t h a n to d i m i n i s h . I n these circumstances it w o u l d be s h o r t - s i g h t e d to r e f r a i n from p u t t i n g f o r w a r d proposals now, merely because time m a y be r e q u i r e d t o w i n for t h e m g e n e r a l a c c e p t a n c e . "
Since we w r o t e these words, the s i t u a t i o n h a s a l r e a d y developed in a w a y t h a t offers a d i s t i n c t l y better prospect for t h e acceptance of bold proposals t h a n existed a few m o n t h s ago. T h e r e h a s been a r a p i d g r o w t h of t h e sense t h a t t h e p r e s e n t s i t u a t i o n is one of d e s p e r a t e g r a v i t y , a n d t h a t a prolonged c o n t i n u a n c e of t h e p r e s e n t deflationary t r e n d t h r o u g h o u t the world will t h r e a t e n t h e w h o l e s t r u c t u r e of c r e d i t a n d c o n t r a c t a n d p e r h a p s of social o r d e r . T h e r e is a n i n c r e a s i n g disbelief t h a t so formidable a s i t u a t i o n will e i t h e r r i g h t itself or be corrected by n a r r o w l y conventional policies s u p p l e m e n t e d by e x p e d i e n t s i m p r o ­ vised to meet t h e latest symptoms of d e t e r i o r a t i o n . Moreover, t h e recognition t h a t our troubles a r e t r u l y world troubles a n d call for concerted i n t e r n a t i o n a l
* Tho following extract from a speech by Mr. H o o v e r ab the Lincoln D a y Dinner of t h e
National Republican Club in N e w York on the 13th February, 1933, is of interest in this connection : —
" To add to the confusion, another phenomenon of the gold situation h a s increased disturbance and wrought havoc. That is the effect of waves of fear and apprehension. W e have a parallel in nations to an unreasoning panic run on a bank. The fears and appre­ hensions directed in turn to the stability of first one nation and then another have caused the withdrawal of foreign balances from a particular nation, followed by flights of capital, through purchases of exchange by its own citizens seeking refuge and security for their property.
Those m o v e m e n t s are followed by large flows of gold to meet exchange demands, t h u s under­ mining the domestic currency and credit s y s t e m of the victim nation and lending to an unnatural piling up of gold in some nation temporarily considered s a f e . "
[ 8 3 9 7 ] c 2

action h a s made rapid strides. W e do not suggest that these changes of opinion have yet gone f a r enough to overcome all the prejudices and resistances which the proposal of an international note-issue would arouse. B u t we suggest that it would imply a lack of foresight, a lack of imaginative perception of the transi­ tional nature of opinion in times of rapid change, to treat the probable attitude of Continental bankers at the moment as a sufficient reason for dismissing an inherently sound project as impracticable.
25. The drift of events and of opinion has an even stronger bearing upon the contention that H i s Majesty's Government should refrain from putting forward publicly such a proposal as that for an international note-issue, for fear that this would arouse distrust of the pound in Continental eyes. The Treasury comments in w h i c h this argument w a s used were written some months ago. W h a t ­ ever force it may have then seemed reasonable to attach to it, w e do not think that it now retains any substantial validity. Largely owing to the misfortunes of other countries, the financial prestige of Great Britain, w i t h her balanced budget and her strong banking system, is again very h i g h ; and it would take more than the public advocacy of a project for international action at the World
Conference to disturb it. W e are, indeed, once more in the unquestioned position of a financially strong country; and it would not be consistent w i t h the respon­ sibilities of that position, if w e were to refrain from g i v i n g the world a lead and proposing w h a t we believed to be right, merely from a fear that our motives might be misunderstood.
26. The drift of events has also, i n our opinion, removed the feasibility of the type of plan preferred by the Treasury, for a pooling of surplus gold reserves w i t h the Bank for International Settlements, as a basis for advances to financially distressed countries. For with, the growth of both internal and international financial distrust, it is improbable that any country would agree that it could prudently afford to immobilise any part of its gold reserves. In the U n i t e d States the combination of an internal w i t h an external gold drain in the recent banking crisis quickly swallowed up most of the large surplus gold reserves of the Federal
Reserve system; and though internal gold hoarding has now been effectively pro­ hibited, the renewal of a flight from the dollar remains an ever-present possibility.
I n France a serious gold-hoarding movement m i g h t begin in the event of any un­ toward development. Switzerland, whose surplus gold reserves mainly represent the deposit of foreign balances, might a t any time have to face a withdrawal of those balances. Indeed, w e are now entering on a phase of the world crisis in w h i c h the distinction between financially strong and financially weak countries is becoming blurred. The position of every country to-day is, in some degree, pre­ carious; and this, w e fear, renders fundamentally impracticable any plan which rests on the principle of the stronger countries coming to the assistance of the weaker, whether by a pooling of surplus gold reserves, or by organised inter­ national loans.
27. The same consideration suggests that of the two alternative variants of the international note-issue project set out in our previous Report, the larger scheme, originally put forward by the Committee on Economic Information, may perhaps be the better adapted to the psychological as well as to the economic requirements of the present situation. I t might be better, that is to say, to propose that Bank for International Settlements advances should be made available at a nominal rate of interest to every Government w h i c h complied w i t h the conditions of the scheme, rather than limited to especially distressed countries. A scheme framed upon these lines would exert a far stronger recuperative influence, as w e recognised in our previous report. W e suggested the more limited scheme merely a s an alternative which m i g h t offer a greater prospect of acceptance. W e think, however, that there is force in the Treasury comment that the limitations would remove much of the potential attractiveness of the idea to countries like France and the U n i t e d States. W e conclude, therefore, that the bolder scheme is the one which should be put forward at the Conference, at all events in the first instance.
The main outlines of this scheme are recapitulated as an appendix to this report.
28. W e urge, therefore, that in the interval before the World Conference meets H i s Majesty's Government should consider very seriously the question of proposing to the Conference a large scheme for an international note-issue as a major constructive remedy for the world's economic troubles. W e recognise that

t h e r e is likely to be a reluctance to a d o p t such a course o w i n g to the technical a n d difficult n a t u r e of m o n e t a r y questions. T h e r e is a n obvious a d v a n t a g e in p u t t i n g i n t h e forefront of a policy, designed to i m p r e s s world opinion a n d to win w o r l d s u p p o r t , propositions of a n a t u r e w h i c h can be widely a n d readily understood in a l l t h e i r implications, r e s e r v i n g more technical proposals, whatever t h e i r i n t r i n s i c i m p o r t a n c e , for u n o s t e n t a t i o u s discussion in e x p e r t sub-committees. W e doubt, however, w h e t h e r t h e p r e s e n t problem lends itself to such t r e a t m e n t . I f proposals of a m o n e t a r y type a r e to be k e p t in the b a c k g r o u n d , we a r e unable to see in w h a t q u a r t e r ideas can be found calculated to s t r i k e t h e w o r l d ' s i m a g i n a t i o n a n d to s t i m u l a t e hone.
29. W e are confirmed in t h i s view by our s t u d y of t h e D r a f t A n n o t a t e d
A g e n d a s u b m i t t e d by t h e P r e p a r a t o r y Commission of E x p e r t s . T h e e x p e r t s are, we t h i n k , to be c o n g r a t u l a t e d on t h e i r success both m finding formulas to reconcile divergent s t a n d p o i n t s over so m a n y problems and in p r e s e n t i n g so objective a n d so well-balanced a survey of the v a r i o u s issues. None the less, t h e m a i n impression t h a t a s t u d y of t h e document conveys is one of the extreme difficulty t h a t is likely to be encountered in each several sphere in s e c u r i n g a g r e e m e n t of a concrete a n d effective c h a r a c t e r . T h e d a n g e r is m a n i f e s t t h a t t h e Conference m a y lose its w a y in the d r e a r y discussion of i n h e r e n t l y fruitless formulas.
30. T h e only m e a n s of a v e r t i n g t h i s d a n g e r is t h e submission of constructive p r o p o s a l s w h i c h go to t h e root of t h e causes of t h e w o r l d ' s economic difficulties.
T h i s , w e claim, the p r o p o s a l w h i c h we advocate does. W e r e p e a t that, so f a r a s w e a r e a w a r e , t h e technical m e r i t s of t h e p r o p o s a l have not been challenged.
I n these circumstances, t h o u g h t h e proposal itself is technical in character, the question w h e t h e r it w o u l d be wise to b r i n g it f o r w a r d is not a technical issue, b u t a b r o a d issue of s t a t e s m a n s h i p .
(Signed) C. S. A D D I S , Chairman.
A S T O R .
B A S I L P . B L A C K E T T .
E S S E N D O N .
J . M. K E Y N E S .
W A L T E R T. L A Y T O N .
A R T H U R S A L T E R .
J . C. S T A M P .
(Signed) H . D.
HENDERSON \ Joint Secretaries to
FRANCIS HEMMING J the Committee.
2, Whitehall Gardens, S.W.1,
April 6, 1933.

I N paragraph 4 8 of their fourth report (Council paper E . A . C . (S.C.) 4), the
Committee on Economic Information summarised their scheme as follows :—
" (a) T h e B a n k for International Settlements might make advances, at a very low rate of interest, or possibly free of interest, to the various
Governments of the world, up to an aggregate sum of, say, £ 1 , 0 0 0 millions gold, this s u m being distributed among them in accordance w i t h some agreed criterion of economic importance The advances could be made subject to appropriate conditions, such as the removal of restrictions on exchange dealings.
(&) To enable it to do so, the Bank for International Settlements would be authorised to issue International Certificates, declared to be the equivalent of so many grains of gold, and accepted as such by the various Governments, u p to the amount of the advances made.
(c) I f and when the gold price level of commodities rose substantially, the advances would be gradually recalled and the issue of certificates reduced correspondingly. I t would be the object of the Bank for International
Settlements, m determining the proportion of the advances to be recalled at any time, to prevent an undue rise of prices, without precipitating a recurrence of depression by an over-drastic curtailment. I f any Government w a s unable to make immediate repayment of any sum w h e n called upon to do so, the advance of this sum might be extended at a comparatively high rate of interest."
( N O T E . — I n our last report we suggested as an additional provision that
" a country which was subject to an outward movement of funds should not be entitled to meet this outflow entirely by a release of International
Certificates, but should be required to release part passu a proportional amount of gold.")

FTiD 332
W e note with satisfaction that the Preparatory Commission of E x p e r t s appreciate the importance of the abolition of Government subsidies to shipping, which, along with other artificial measures, disturb the channels of international trade.
W e observe, however, that the Preparatory Commission suggest t h a t " certain possibilities of agreement might be considered w i t h regard to the scrapping of old tonnage, the utilisation of existing tonnage and the laying down of new ships." I f the Commission contemplate international schemes for the scrapping of old tonnage, coupled with the building of new tonnage, w e are opposed to this suggestion. W e hope that no support will be given by the British delegates at the conference to a policj' of increasing or maintaining the surplus of tonnage by an artificial stimulus to the building of ships.
According to Lloyd's Register of British and Foreign Shipping, the world's steamship and motor tonnage in June 1932 amounted to 68,368,141 gross tons, as compared w i t h 44,000,000 gross tons in June 1914. Since 1929 world trade h a s decreased by 50 per cent.; over 13,000,000 gross tons of world shipping, nearly 2 0 per cent, of the whole, is laid up, while liner tonnage is trading w i t h a large amount of empty space.
Advocates in this country of the policy of g r a n t i n g facilities for the scrapping of old ships, and the building of new ships in their place, base their arguments partly on the mistaken assumption that the British mercantile marine is less modern than that of its competitors. The following table shows the world's tonnage and the percentage of that total under 5 years of age, under 10 years of age, and over 20 years of age, w i t h comparable figures for the tonnage of
Great Britain.
World Ship-ping, June 1932.
(Total gross tonnage ^ 68,368,141.)
Gross Tonnage.
Percentage of
Total Tonnage.
Under 5 years ... ...
U n d e r 10 years ... ...
Twenty years an d over ...
11,074,117
20,572,741
18,484,923
1 6 - 2
3 0 - 1
27 0
British Shipping, June 1932.
(Total gross tonnage = 19,562,143.)
Percentage of
Gross Tonnage. Total Tonnage.
Under 5 years ... ... 3,941,140 2 0 - 1
U n d e r 10 years ... ... 8,007,701 4 0 - 9
Twenty years and over ... 3,574,154 1 8 - 3
From the above it will be seen that our mercantile marine compares favourably w i t h world tonnage generally. Moreover, Great B r i t a i n has a larger proportion of tonnage under 10 years of age and a smaller proportion of tonnage over
20 years of age than any other country, though in the case of Germany the difference in our favour is small.
In our opinion no support should be given to any scheme which provides for a combination of the scrapping of existing ships and the building of new tonnage.
The force of circumstances will, in itself, bring about the necessary scrapping.
I t is only lack of demand for, and the low price of scrap, that is at present retarding this process.
Attractive as it would be to provide work for the shipbuilders and engineers of this country, the unnecessary building of ships would only aggravate, and prolong, the present shipping depression.