I just finished uni for the year. I had to have my last essay in by midnight tonight. And Libby and I worked until the last minute (and a little beyond) tweaking it until it was absolutely perfect (sort of). But I sent it. And it's finished. And so am I. So tomorrow we're going to the beach unless it rains.

I heard The White Stripes for the first time yesterday. Maybe I'm the last person in the world to realise this, but they're way good.

Everyone knows that communism is hopelessly inefficient and has been entirely discredited. There might have been some doubt 50 years ago, but since the end of the Cold War there's no question that capitalism has won. The bureaucratic, centralised control of the economy could never have really expected to compete with the dynamism of the free market.

Which makes me assume that the Economist had made an enormous mistake when it says that China has 20% of world GDP, the US has the same and India has only 8% of world GDP. Surely they must mean China has 2% or something like that. Maybe they mixed up the numbers for India and China. India is a promising capitalist democracy, and has approximately the same number of people as China. The Economist is usually very reliable with their figures, so I'm surprised they made such an embarassing mistake.

I was wondering why my computer music was sounding so much better than normal this morning. I discovered it was because I had both the laptop speaker and the external speakers turned on. The external speakers have good bass but almost nothing else. And the laptop speakers, as usual, have no bass at all but really nice sounding tinniness. Combined together they actually don't sound that bad.

Apparently, according to the CIA unemployment is lower in Australia than in the US. Quite a bit lower. 5.5% in the US, and only 5.1% in Australia. Wasn't their low, low unemployment rate the one thing Americans had going for them? I actually did think it was lower in the US, but I guess the CIA don't have a lot of interest in inflating the figure.

Poverty Reduction and Growth Facility arrangements seek to promote poverty reduction by removing impediments to strong, sustainable growth and a viable external position. IMF Conditionality Guidelines

The Poverty Reduction and Growth Facility looks pretty similiar to what I'd expect to see if I was to develop a Poverty Perpetuation and Growth Facility. In fact I get the impression that the biggest difference between the old Growth Facility and the new Poverty Reduction and Growth Facility is the first two words. I like the IMF in many respects, but they sure say a lot of funny things.

...disqualifying "odious" debt [(i.e., debt related to arms purchases, debt accumulated by previous non-democratic or corrupt regimes, etc.)] would involve a radical change in the validity of creditor claims and the sanctity of contracts, which would have adverse implications for the operation of capital markets. IMF

So that's why they can't drop the debt. It's obvious when you think about it. We can't allow any "adverse implications for the operation of capital markets."

When I read the reasons they offer, it sounds even more bollocks than when I try to explain it. I'm opposed to their policy, and I think I could make a better argument than that.

I love this sort of statement. It typically comes from business people, and right wing politicians who've got what they wanted. There's not question that the reforms are beneficial. That goes without saying. I'm sure left wing politicians would be the same, except they don't often seem to get what they want these days.

... politicians have shown considerable leadership, that is, political courage in support of some ideal. Many if not most pillars of economic reform were highly unpopular when initiated, and remain so to this day. Nicholas Gruen in Reforming the Agenda

Hugo Chavez has just arrange a deal to provide heating oil to a bunch of poor families in America for a heavy discount. Oil prices have gone up a lot in the past little while, and a lot of families can't afford the to buy it. So Chavez is selling some of his cheap oil to them. What a bastard!

If you didn't know how keen Chavez was to use his oil to help everyone, then you'd think it was purely political. But he's been selling cheap oil to the poor in other countries too, and no one talks about it. I'm no supporters of pseudo-democracies, but all us western democracies only do a marginally better job of representative government. If you look at what it is, and not what it claims to be, then perhaps there isn't much difference.

Telecoms thriving in lawless Somalia This is an amazing article about the private telecommunications industry in Somalia. The country had no government at all, and yet phone and internet services were booming. Small villages were getting access to wireless internet just by running in single phone lines. Very nifty.

In analyzing the competitive processes of a laissez-faire economy, one must recognize that capital outlays (investments in new plant and equipment either by existing producers or new entrants) are not determined solely by current profits. An investment is made or not made depending upon the estimated discounted present worth of expected future profits. Alan Greenspan

A while back I talked about investment by monopolies. I said that monopoly profits aren't required for a good level of investment, and that it was up to capital markets. Although I don't agree with some of his assumptions, in that article he makes a very persuasive case for eliminating antitrust laws and letting capital markets manage prices for us. Using the capital markets and not the "productive" markets to manage competition is the key point, and one I haven't heard discussed properly before. It's not up to consumers to keep business honest, but up to investors. And I trust investors to know what's good for them far more than I trust consumers.

The other interesting distinction he makes, which is related to my post about predatory pricing below, is that between high prices and low costs. Both can contribute to high profits, but only high prices are a problem. If a company makes money because it's the only one efficient enough to charge prices low enough, that isn't the fault of the company. But if it charges prices that are high, and uses other methods to keep competitors out, then that is a problem. As he says, the problem is prices and not profits.

I have to read about predatory pricing for my business subject. Apparently most economists don't believe it really exists, because it's not rational. Because the incumbent company makes a loss, and there's no guarantee it will work anyway, they say that no one would try and do it.

But does it count as predatory if they are still making a profit on their reduced price? An incumbents costs will almost invariably be lower. They have previous investment, brand awareness, technical knowledge and economies of scale. You could make a pretty deadly pricing scheme that was above cost in most cases. Which means that the predatory pricing can continue indefinitely, and so no one is likely to enter. Perhaps in the big "natural monopolies" which require large investment any potential entrants know what the behaviour of the incumbent will be and don't bother. Perhaps the reason you rarely see predatory pricing is because business people know how effective it is.

I still feel that Jetstar's pricing is clearly competitive. We had decades of no low-cost airlines, and high profits for Qantas. Within 24 months or something of Virgin Blue arriving, Jetstar shows up and starts selling flights at below cost. I guess we'll find out how predatory it is if Virgin Blue sticks around.

It got working good at uni the wireless on Ubuntu. Good stuff Ubuntu. And Debian. And even UNSW. When the software is supported by OS community it just works. Stupid Cisco.

In my study-induced meanderings I found a nice post on Walmart, much of which I disagree with.

I agree that the return on equity is the real figure to be looking at. That's the "profits to capitalists" that the left complain about and 22% is mighty high. There's nothing wrong with a high ROE, but when Walmart complains that it can't pay wages that are any higher or prices would go up, that's not strictly speaking true. I suspect that the issue is that if they paid their staff more than minimum wage there'd be the opportunity for other businesses to come in and undercut them on price. I think this is supported by Walmart execs recently suggesting that the minimum wage be increased. The point is that even if a worker is worth a lot more than their current wage, the stock market will punish you if you don't extract as much as you can from them.

In poor countries I agree that Nike factory jobs are often the best option available. However, in many cases options have been previously removed from farmers by taking their land by force. Whether it's economic or physical force, they end up effectively have only one choice, and that is to work in a factory. I realise that this process usually has very little to do with the foreign companies that benefit from their labour, although not always, but I think it's misleading to suggest that a Nike factory is the best option of many.

The issue of wages vs prices is a valid point, but I suspect that the overall effect is a transfer of wealth from the poorest to the middle class. It's true that the poorest Walmart workers get cheaper food, but so do the middle class workers who haven't had their wages cut. Even if output is increased, "making the pie bigger" and all that jazz, I would argue that the workers on minimum wage need the income more than America needs the cheaper food.

One interesting outcome is that I reckon America's low minimum wage makes the economy look very good. It forces workers to work far more, even while their productivity is increasing. If you doubled minimum wage to something like the Australian minimum, output would probably drop significantly as people went from 60 hour weeks to 40 hour weeks.

I've wanted to do a study on the relationship between the proportion of female employees in a company and the company's return on assets. There are so many problems with attempting to determine wage discrimination against women. Last year I read a pretty convincing study suggesting that gender-based wage discrimination didn't really exist. Women earnt less for the same sorts of jobs, but not because they were women. It's always going to be very hard to measure things like "how bad do you want it?" I would guess men tend to want it badder, but I don't know and I don't know how I would find out.

So I thought about other ways of measuring discrimination. Ultimately it's a violation of the efficient market hypothesis. In theory, if women earn less for providing identical skills, then businesses that employ them should make more money. You can really look at stock market returns, because at that level the profits are abstracted. If a business earns higher than normal profits for any reason, people will invest and the rate of return will eventually fall to a normal level. Which means you have to look at the return on assets, and importantly the assets per employee. That's because companies that use assets well will be given more assets. So you need to look at how well assets are used by each employee. If women are discriminated against in wages, then they'll utilise their assets better than men.

I just found an article that talks about a study that's related. Except it's look at female business owners, rather than female employees. It found that the return on assets for female-owned businesses was that same as for business owned by men. Which doesn't tell you that women aren't discriminated against, just that their management style isn't any more profitable. Their style might even be better, and their employees might be happier and so on, but they don't make more money. Or, use their assets better. However, they didn't look at return on assets per employee which I think is a more significant figure.

I don't think there is a lot of doubt that capital markets are pretty efficient, but that doesn't necessarily mean that labour hiring practices are efficient. I'm inclined to think they are, because the temptation to exploit any inefficiency would be too great. If there was discrimination, then you'd be a fool not to try and hire only women. Which would eliminate the discrimination pretty quick.

But I'd still like to do the study.

With the amount of violence our governments get us involved with, you can make a case that terrorism is really just grassroots politics. The same people in charge of a pro-market government would be applauded by most of the world.

I know it's politically incorrect to equate government-sanctioned violence with terrorism outside vegie coop sorts of circles. But I really do think that sometimes it's that simple. It's not that terrorism is necessarily acceptable or justifiable, but that government-sanctioned violence is so unbelievably bollocks. Whether or not terrorism is acceptable or justifiable is a whole other, much uglier conversation.

I did real bad in my accounting exam. I've done nowhere near enough study. I only started looking at some of the topics this week. 40% of the exam (two questions) were really hard. Well, actually pretty easy. But since I hadn't done any study, they seemed hard. Which is annoying. I prefer it when exams are hard, than when I just feel stupid or lazy.

There's a small chance I'll fail. Especially if they give me no marks for those two questions, which they could because my answers were pretty random. I just wrote done everything I could think about the topics in no particular order. At first I was worried about failing. Then I got more worried about getting my first pass mark. Then I realised that I can only fail or get a credit, because of the way the averages work, so I felt a bit better and went back to worrying about failing.

The other funny thing is that while I was plonked down reading about stupid foreign currency translation reserves before the exam the girl came and sat down opposite me. We kind of sat and studied together for an hour and had erudite conversations about stupid foreign currency translation reserves. It's good to hang out with someone that I have have so much in common with. I found out her name too.

Some people claim to love jihad but don't respect their own parents … you need permission from your parents to go to jihad. If your mother says no to jihad, then no jihad. Allegedly said by Benbrika, one of folk who've recently become popular with the police

I love that! If only more politicians and terrorists listened to their mothers.

Matt made a good point. It's often difficult to work out someone's value to a business. However, the theory is that if someone is working for less their the value of their labour another business will come along and offer them more. It never works like this, because there are so many cleaners and not enough cleaning jobs. And people can't shift out of industries into other industries that easily.

But if labour markets were fluid, and no one was forced to work to survive, then efficient market theory would suggest that everyone would earn the equivalent of what they are worth to a society. And what they are are worth is the maximum society is willing to pay to have something done. Even if a business doesn't think cleaning is valuable, the government does and so it has a value.

If the costs of that cleaning get too high, then businesses will start going bankrupt or prices will go up. Eventually the government will decide that cleaning isn't important enough and will remove the regulation. But I'm sure there are plenty of businesses in Australia that would be willing to pay someone $100,000 a year to get them to clean somewhere. Lucky for them they won't ever have to because there are enough cleaners that prices are continually bid down.

But if someone would be willing to pay $100,000 a year for something, and someone else is willing to accept minimum wage (or less) to do it, who is to say what that person should be paid? If someone is paying them to do it, then they are definitely worth it. Bob Snuffles might not be worth minimum wage to his employers, but he's worth it to society. It we want clean floors then we should pay for them.

I reckon that the supply and demand for cleanliness looks something like this.

Cleaning is pretty important, so I'd reckon that businesses wouldn't reduce their consumption that much with price rises. Which is why the orange line is so steep. But the blue line is really unsteep because there are lots of cleaners, they don't have many other skills, and it's probably hard for them to get other skills. And most importantly, they have to work to survive, so they'll take what they can get.

The blue line is very much determined by the sort of society we've built. It's not really the fault of cleaners that they get hardly any of the value of their cleaning. And it's not really anything clever that businesses have done that means they get almost all the value of their cleaning. In this instance minimum wage is trying to make sure workers have enough to live on, but also to divide the value a bit more evenly.

By the way, that diagram doesn't relate particularly to my previous post about minimum wage. That was about what doesn't get shown on these diagrams.

I don't think there is an ethical line. Why are sweat shops unethical when poverty wages in Australia aren't? Is it the degree of oppression that determines whether or not it is ethical? Poor workers in Australia are in a very similar position to sweat shop workers. Sure, they're willing to work for that wage - no one is forcing them. But if you give all the power to employers, then I'm almost sure that the majority of people will be working on wages that are just enough to feed them and their children. Which is economically efficient? You're getting the right amount of output, and allocating your resources to all the right places. But then crime goes up, and you start having social revolutions. I'm all for social revolutions, but unlike those Marxist fellows I don't think that oppressing the poor is a good way to create one.

I strongly believe in the social contract. I think that we're only obliged to participate in the society as long as it lives up to the contract of distributing the benefits of community around. And when you get a bunch of people who've decided not the participate in society, it tends to get very bloody and crazy. You don't even have to use words like equity at all. I look at redistribution of resources as an investment in avoiding a class war. It's perfectly rational, and has nothing to do with compassion at all.

Despite our crazy accounting group being so crazy, for some reason we got full marks for our group assignment on income taxes. I think it's mostly thanks to Xuan, who's a total champ.

I found an IMF article suggesting what I suggested last year. They reckon you need an institution that evaluates borrowers not just on the the credit risk, but on the degree to which the leaders of that country speak for the people. I think it's a brilliant idea, and there's no reason why you couldn't apply it retrospectively, since it's not about justice for the banks, it's about future efficiency. Besides, the banks should have done the same thing themselves decades ago.

I don't know how encouraging it is that I found that on the IMF website. Finance and Development (their quarterly magazine) seems to be a lot more flexible than the rest of the IMF. The article was written by a professor of economics at Harvard anyway, and everyone knows university professors are all hippies.

I disagree with the government on the issue of minimum wage. Which means I disagree with most economists as well. But I think there's very simple and obvious proof for why they are all wrong.

Australia currently has 1.6 million people on the minimum wage. Which is a good chunk of our working population, which is around 10 million I believe. The theory is that many of those 1.6 million are overpaid. If there was no minimum wage, then their wage would fall to the "correct" price. However, no one seems to notice that these 1.6 million people currently have jobs, so presumably they are making their employers at least minimum wage in profit. Economic theory suggests that people will be paid approximately the same amount as the revenue they generate for the company they work for. However, it seems highly unlikely that 1.6 million people are generating exactly the same amount of revenue. You'd expect it to be spread out a lot. And we know that it isn't less than the minimum wage, because if it was they'd get fired. So it must be higher. So there are 1.6 million people currently generating different amounts of profit for their employers, who are being told their wages are too high.

The theory would predict a smooth spread of wages down to minimum wage, and then a whole bunch of people beneath it who aren't productive enough. The clustering around minimum wage also tells you that people aren't able to negotiate their wages. It tells you that the labour supply curve assumptions are wrong. People worth more than minimum wage are negotiated down to it by employers who have more power than them. They must have more power, or it would be impossible for them to do it. And this is now, when we have unions, and unfair dismissal laws and a vaguely reasonable minimum wage. I think the evidence clearly suggests that minimum is far lower than it could be. One way of finding out would be to gradually increase the power of unions and workers until that clustering was flattened out. Then you'd have a labour market that satisfied the assumptions of the theory, and you could bring in your models. If you can eliminate the clustering then you actually have a good argument for removing minimum wage in favour of some other safety net. But by that point business-owners won't care anyway, because the level of minimum wage will be irrelevant since no one will be working for it.

Basically, if economic theory on labour markets was even remotely close to reality (which I've talked about previously), you wouldn't have 16% of the workforce clustered at minimum wage. Non-economic forces, like bargaining power, have to be at work for something like that to happen. And those forces, surprisingly, will continue operate even after you remove further power from workers.

95% of all workers are worth more than the current minimum wage. After the IR deregulation 16% of workers will be paid significantly less than the current minimum wage.

What a great idea. It makes me want to go to so many more countries.

Today is a great day. I'm studying in Asquith. And my arms are sore from the gym, which I like because it reminds me of when I used to move bricks with dad as a kid. The chicken is sitting just outside the door, seemingly waiting for something to happen. Or maybe she just wants to come in and poo again like she did before. The sun is out and so bright and toasty. The good thing about this Asquith house is that so much of the sun is allowed to come inside because there are so many welcoming windows.

I've just had some delicious muesli of mum's. And to top it all off, there is sour dough bread in the toaster waiting patiently for me.

I wish Wordpress had a grammar checker. My rants of late are particularly susceptible to sentences that don't really make any sense because words are in the wrong order, or even missing altogether.

If the raids justify the new laws, and the new laws justify the raids, then where does that leave you? I've forgotten where we started.

Australian police foiled a 'large scale' terrorist attack with the arrest of 15 people in a series of pre-dawn raids in Sydney and Melbourne, officials said. Sydney Morning Herald

Well that's lucky. Sounds like it was a close call.

I read somewhere the other day that several big banks had lent three times their total capital to just Latin American countries. Which means that if Latin America defaulted they would almost certainly go out of business, because their liabilities to their investors would be far higher their their assets. Since this silliness objectively makes their businesses rather rickety looking, their share prices should be pretty low. In theory, if Latin America was their only loan client (which actually isn't the case), then you could argue that their share price should be close to zero, or even zero if their liabilities are much greater than their assets. Even if the likelihood of default was not that big, the overwhelming size of liabilities might mean the expected value of the future profits was kind of tiny. I think you can make a good case that an efficient market should punish people invested in those banks by taking all their money from them outright. Since the banks were silly to invest in Latin America the way they did, and the people were silly to invest in those banks. It's not an ethical argument one way or the other, simply an argument about market efficiency and the risks associated with high reward. And the rewards were very high for quite a while. You could even go further and say that if the markets didn't punish them by taking their money, then there's not much disincentive to do it again.

Of course, this all assumes that the banks were silly to lend what they lent. And not everyone believes this. But assuming that you do believe it, I think this is a reasonable sort of conclusion to draw. So if Latin America has a few hundred billion dollars of outstanding debt it can't pay, but the companies that own that debt aren't really worth that much, then what is stopping Latin America from buying those banks outright. No one else in their right mind would want them. The only people the debt assets are valuable to are Latin America, for political reasons as much as economic ones. So Latin America could buy the banks, and write off all the bad debt. The only reason the banks have survived so long without having to write off the debt is because they've formed these crazy cartels, and keep lending more and more money. But if you didn't particularly care what the share price of your bank was (because you own it), and if you said it wasn't ethical to operate in a cartel, then there'd be no reason to stop you from writing off the debt. Even if the banks operated under US or UK jurisdiction and regulation, which restricted the actions of owners, they could easily argue that the responsible course of action was to write off the debt. Investors could hardly sue the owners for minimising investor exposure to future bad debt. Lots of commentators and government regulators have been telling banks to write off this debt for decades, but they've kept the system afloat by doing a whole lot of wacky things.

I believe that Latin American governments could practically do something like this. I think it's hardly the fault of the poor in Latin America that banks in the rich world leveraged themselves so blithely. It would hurt those invested in the banks, but if you want to start appealing to a sense of fairness then you'd be crazy to compare the plight of even the poorest Western families with the plight of poor Latin American families. It wouldn't trouble me that much to see the US and UK governments directly paying adversely affected families with some of the wealth they've siphoned out of Latin America in the past few centuries. The US and UK governments (particularly) could have got involved in (re)regulating the banking business far earlier.

I think there are two morals to my little rant. Firstly, if you want to construct a worldwide economic system that rewards amorality, then you shouldn't lose your knickers when the oppressed take you up on the offer. Secondly, you're an idiot to leverage your bank to the hilt making loans to military dictators more interested in filling their pantries with fancy cheese than with paying back loans. Finally, an extra moral I just thought up then, if you're lending money to a country hoping to get paid back from the economic surplus that is generated you should think long and hard about whether or not the guy across the hall working for that other investment bank has already spoken for that surplus. Colonialists and imperialists and neofeudalists had completely perfected the art of taking all surplus long before the banks showed up. It was far more than a matter of simply generating additional surplus - the banks actually had to figure out ways of prying it from the claws of the existing folk. And I don't think they ever did. So the third and final moral is, think about stuff before you do it.

In summary it's not the fault of the Latin American poor that American and European investors have been investing in the cheese pantries of dictators for the past 20 years, and they should stop making the poor pay for their stupidity. When corrupt country leaders tell you to give them money for extra cheese, and by eating this extra cheese they'll be able to give you 14% return, don't believe them.

I've had a brilliant idea. All these poor countries have enormous loans to rich countries. And then the IMF is encouraging/forcing countries to sell off all the government businesses to improve their efficiency. You could easily argue that the most inefficent parts of government are the indebted public works sections. Governments have been paying huge amounts of interest on public works that never achieved the growth they were meant to. The solution to this wasteful inefficency is actually quite obvious. Sell off all the indebted sectors to private limited liability corporations. You'd eliminate public debt and private ownership would vastly improve efficiency. The blessed free market would have those companies out of debt and humming along in no time I reckon. When you think about it, it's really so simple.

If individual companies shouldn't be held accountable for the bad debts of other companies, then why should governments be held accountable for the bad debts of other governments? Unless of course there is some continuity of mandate, like democracy, which there clearly isn't in most indebted poor countries.

Cheddi Jagan, also known as Cheddi Berret Jagan (March 22, 1918 – March 6, 1997), was the chief minister (1957-1964) and president (1992-1997) of Guyana. The son of ethnic Indian sugar plantation workers, Jagan managed to attend Queen's College High School in Georgetown. He later studied at the Howard Dental School in Washington, D.C., and Northwestern University in Chicago before returning home in the early 1940s.

Disgusted by conditions in British Guiana, he founded the People's Progressive Party with Forbes Burnham in 1950. He was elected to the colonial legislative body in 1947 and was the controversial leader of the Guyanese government in the late 1950s and early 1960s.

Jagan won in a colonially administered election in 1953, but was removed from power militarily by Britain which, under strong behind-the-scenes pressure from the United States and the CIA, asserted that he had ties to the Soviet Union. Jagan resigned as British Guiana prime minister after 133 days. Britain suspended the constitution and chose interim government. Jagan's movements were restricted to Georgetown from 1954 to 1957.

Having broken off links with the increasingly authoritarian Burnham, Jagan was active in the government as a labor activist and leader of the opposition. In 1992, after 28 years in opposition, he was elected president in the first free elections since independence. He died in office less than 5 years later.

His presidential tenure was characterized by the revival of the union movement and a re-commitment to education and infrastructure improvement. Towards the end of his life, he abandoned his socialist philosophy and began to move his country to a free-market capitalist system.

Wikipedia

295. Memorandum of Conversation

US/MC/21 Birch Grove, England, June 30, 1963, 10 a.m

SUBJECT British Guiana

PARTICIPANTS United States The President The Secretary of State Ambassador Bruce Mr. McGeorge Bundy Mr. William R Tyler

United Kingdom Prime Minister Macmillan Lord Home Sir David Ormsby Gore Lord Hailsham Sir Harold Caccia Mr. Duncan Sandys Mr. Peter Thorneycroft Lord Hood Mr. Philip de Zulueta

The Secretary reviewed his talks with Lord Home and Mr. Sandys [4½ lines of source text not declassified]

Mr. Sandys then spoke and confirmed the Secretary's account of the conversations which had been held in London. He said he thought that theoretically, there were four courses open: (1) To muddle on as we are now doing, which he thought should be rejected as a choice; (2) To move forward by granting British Guiana independence now (he said the although this would be a move forward it obviously presented grave problems); (3) To suspend the constitution and institute direct colonial rule (he said that this would be a move backward politically); (4) to establish a Burnham-D'Aguiar government and then grant British Guiana independence.

He said that if we were to persevere with the present exercise and succeed, we could perhaps give British Guiana independence. [2½ lines of source text not declassified] On the whole he thought that a referendum on proportional representation would have a favorable outcome though this was not certain. The reaction of the people was problematical. If the referendum was successful, there would have to be new elections. He said another factor in the situation was the predictable increase in support for Jagan as time went by. He said that presumably Burnham if he came to power, would make a defense agreement with the United States, and that the US had the legal right to reactivate the base in British Guiana, [1½ lines of source text not declassified]. He thought that a Burnham-D'Aguiar government would certainly wish to have a defense agreement with the United States.

The President asked Mr. Sandys how long he thought the UK could string out the process of establishing proportional representation. Mr. Sandys said he was not sure, as it depended on the outcome of the present strike situation. He said there was a financial problem if the UK was prepared to keep Jagan going. In the meantime, the UK could string out the process for a number of months. He said we had to be careful that Jagan should not be put in a position where he would ask for dissolution and new elections, because he would certainly win again. Under the present constitution he had the right to ask for dissolution, and the governor would have to grant it. He said that under direct rule, two serious problems would emerge, apart from the financial one: (1) it was not certain that after five years we would be any better off than we are now, (2) it was quite likely that Jagan would take off and create a movement of underground resistance of the Malayan type. Mr. Sandys said he did not know whether in this case the Indians and the Negroes would fight against each other, or band together against us. There was also the consideration that, in the event of the UK resuming direct rule, it would be greatly criticized. "Its image would be pretty severely tarnished," said Lord Home. "There would also be the effect on Southern Rhodesia. People would say that if the UK could resume power in British Guiana, why would it not be able to do the same thing in Southern Rhodesia."

The President said he thought that Mr. Sandys had made a very good and fair presentation. It was obvious that if the UK were to get out of British Guiana now it would become a Communist state. He thought the thing to do was to look for ways to drag the thing out. The situation was inflammatory at this time. He thought that Latin America was the most dangerous area in the world. The effect of having a Communist state in British Guiana in addition to Cuba in 1964, would be to create irresistible pressures in the United States to strike militarily against Cuba. There would be great US resentment against the UK for having pulled out. He thought the UK should say that it could not make British Guiana independent because of the danger of unleashing a racial war, and that the UK should not say that it was because of the danger of British Guiana becoming Communist. The Prime Minister asked whether it was not worth while going on with the present strike pressure. Mr. Sandys asked what the US reaction would be to the UK granting independence to a Burnham-D'Aguiar government. Under present conditions, such a government would collapse by itself. However if the United States Government was prepared to shore it up, this would change the situation, specifically if the US could provide money [1½ lines of source text not declassified]. The Secretary pointed out that Africans control the police and the towns, so that Jagan would be relegated to agitating in the countryside. The President asked Mr. Sandys if the UK could tell Jagan that HMG was going to hold on for another two years. Mr. Sandys said that Jagan would then ask for dissolution. The Secretary asked whether, in this event, the UK could insist on holding a referendum on proportional representation. Mr. Sandys said that this would be in the worst circumstances, because it would be clear to everyone that we were only doing this because we were afraid of the outcome of elections.

The President said he agreed with the analysis of all the difficulties, but that these still paled in comparison with the prospect of the establishment of a Communist regime in Latin America. Mr. Sandys said he thought the best solution was that of a Burnham-D'Aguiar government to which the UK would grant independence. [5 lines of source text not declassified] The President again repeated his view which he had previously expressed, that the great danger in 1964 was that, since Cuba would be the major American public issue, adding British Guiana to Cuba could well tip the scales, and someone would be elected who would take military action against Cuba. He said that the American people would not stand for a situation which looked as though the Soviet Union had leapfrogged over Cuba to land on the continent in the Western Hemisphere. Mr. Sandys asked whether the United States Government was prepared to give the UK real support in the United Nations and publicly, if the UK were to resume direct rule in British Guiana. "It would be a pleasure," said the President, "we would go all out to the extent necessary." "You didn't give us that much support on Southern Rhodesia," piped up Lord Home. "Well, for that matter," said the President, in a light tone of banter, "you haven't given us that much support on the MLF." The President added that we would be willing to review our stand on the resolution of the Committee of Twenty-four. He said he thought that the aspects of the situation in British Guiana which we should stress were its instability and the danger of racial strife.

Declassified Memorandum of Conversation