The Money Men Chris Bowen (the red fox clan .txt) 📖

considerable courage in defying his secretary, the quietly spoken but determinedly pro-market assistant secretary, Ted Evans, said simply, ‘I support you, treasurer.’ Thus, the first crack in the edifice of Treasury’s opposition appeared.

Keating did not yet have enough self-confidence or authority to overrule the Treasury secretary, but after that fateful meeting he told Stone privately, ‘This is the last time you will hold me on this John, the last time.’

Keating did not need to wait long. The inflow of capital to Australia got worse, not better. By December, Australia was facing the most serious inflow-of-capital crisis in history, and speculators bet that the government would soon buckle under the pressure being brought to bear and would appreciate the currency. As Love recounts: ‘The currency was now under full-blooded speculative pressure. In the last four months of 1983 a net $4 billion flowed from abroad into the Australian money base. In the first nine days of December, $1.5 billion flowed in.’11 Over dinner with key advisers on 8 December, Hawke and Keating agreed to act the next day. Keating phoned Johnston at 1.30 a.m. and asked him to come to Canberra that day with the RBA’s pre-prepared ‘battle plan’ for putting in place the float. Keating also consulted informally with key ministers Hayden, Willis and Button, who all supported the decision.

On 9 December, the Economics Committee of Cabinet met to formally endorse the decision that had effectively been taken the night before. Stone was not about to back down. He warned that a float was wrong for a small commodity-trading nation like Australia. He predicted that the dollar would become the plaything of speculators and that national sovereignty would be at risk. Many years later, in a conversation with me, and elsewhere, Stone would claim that he had not opposed the float per se, simply its timing and the lack of preparation. However, no other participant in the process that day detected any subtlety in his approach or nuance in his opposition.

Having lost the argument against the float, Stone argued that the government should restore capital controls so that it could regulate the amount of capital inflow or outflow. But Hawke and Keating knew that this would defeat the purpose of deregulation and overruled him. Stone persisted. After the move had been formally made, as the committee meeting was breaking up, he loudly warned that the government had taken a decision that would be just as economically disastrous as the Whitlam government’s 25 per cent tariff reduction. This final warning was unlikely to sway a government that, in its first few months, was already developing its pro-market instincts.

Later that day, Keating, with Johnston at his side, announced that currency speculators would now be betting against themselves, not the nation. He also argued that the float of the dollar would open up Australia to the rigours of internationalisation, and make it both easier and more important to tackle inflation. It is certainly the case that the float was both a necessary precursor to further financial deregulation and a deliberate mechanism to make more economic reform inevitable.

Befitting a decision of this magnitude, it was, of course, controversial. Stone was not its only opponent. Many years later, Malcolm Fraser was still railing against the float as the beginning of the end for Australia’s economic sovereignty (giving weight to Howard’s thesis that a Liberal government would not have floated the dollar, even in the teeth of a currency crisis). Junior minister Brian Howe wrote to the Labor Caucus Economics Committee and likewise protested that the decision amounted to a loss of economic sovereignty, as well as a breach of the ALP’s platform—it was an argument that was reminiscent of Stone’s. However, Keating did not need Caucus approval for this executive action, and Howe’s plea was too late to derail Keating’s agenda.

The dollar has ridden a roller-coaster since that day thirty years ago. The float did bring the rigour to economic policymaking that Keating was seeking. It provided a shock-absorbing capacity that saw Australia deal successfully with successive international economic crises. As a group of RBA economists recently argued:

The decision to introduce a floating exchange rate is now widely recognised as having brought substantial benefit to the Australian economy. In addition to the advantages associated with monetary policy independence, exchange rate flexibility has played a crucial role in buffering the economy from external shocks, in particular—given Australia’s status as a small open commodity exporter—from terms of trade shocks. The exchange rate’s role as a buffer was also exemplified during the Asian financial crisis in 1997–98, the tech boom and bust in the early 2000s, and again during the global financial crisis in 2008–9. Sharp depreciations of the Australian dollar during each of these episodes served to offset part of the contractionary effects of these crises.12

The float also increased the power and status of the RBA, which had hitherto been regarded as a branch office of the Treasury. Removing responsibility for setting the currency’s value increased rather than diminished the bank’s power, as it enabled it to concentrate on tackling inflation instead of trying to resist international forces on the dollar. It is hard to disagree with Love, who describes the float as the ‘boldest, most profound reform by a Treasurer in the relatively brief history of Australia’.13

Floating the dollar was the first and most important move in Australia’s financial deregulation, which occurred as quickly in this country as it had anywhere else in the world.14 The Martin report released in 1984 was then used by Keating as a catalyst for ushering in his policy of allowing foreign banks into Australia. This decision had been taken in principle by Howard, but no banking licences had yet been issued to foreign entities. On this occasion, Keating faced a bigger battle within the ALP. The July 1984 ALP National Conference debated the entry of foreign banks, with the party’s Left mounting a strong defence of the status quo, invoking economic nationalism. NSW deputy premier Jack Ferguson, a senior left-winger,