Former Treasury Secretary John Stone has told his version of the debates that lead to the float of the Australian dollar. (Linked here)
Like Sir Harold Knight at an earlier time, on this matter the message - perhaps not intended - is that Mr Stone also wished to be pure, but not just yet. (This is perhaps unfair, but it is in my view the 'bottom line' of Mr Stone's testimony, both on the long version of the matter published in Quadrant and in the short version in The Australian.)
Here are a few snippets from a biographical essay written by me in 1995 following an invitation to address Melbourne University alumni. I should say that I undertook this exposition with a distant memory of Spike Milligan's Adolf Hitler. My role in his downfall.
Sadly I did not (and do not) have access to the details of dates and specific debates, having played by what I was told were the rules in not keeping a diary and not taking papers written by me when I left the Reserve. But I feel confident the facts that I recount are accurate. (This is not a shot at Mr Stone but rather reflects a later episode when I was specifically denied the right to read papers written by me following a bare-faced lie about my views on monetary policy told by the Treasurer of the day.)
Except as stated, I was not a player at the most important meetings. But just as a cat may look at a king, a lower ranked animal is entitled to give his version of big events, especially when he has knowledge of matters not included in the official record or in books reflecting the opinions of others.
Here is a link to the biographical essay. It covers my time until leaving the Reserve, including an account of why I left (a matter the existing RBA leaders seem to have misremembered). Part two is now being written.
1. Settled RBA views. 'When I arrived at the Reserve I was delighted to discover that people in its Research department at least believed that the financial system needed to be deregulated, with credit for this mostly going to the Head of Research, Austin Holmes. As a relative newcomer I was appointed to a committee to help write a talk for the then Deputy-governor, Harry (later Sir Harold) Knight. ... After briefing us, Harry asked if there were any questions. 'Do you believe Australia should have a floating exchange rate?' I asked. Harry pursed his lips and said something to the effect that, with Saint Augustine, he wished to be made pure, but not yet. This was his attitude to the same question asked some years later by the Campbell committee.
2. Research supporting the float #1. At the Reserve my full-time job was part of the “Special Projects” section of Research dept. Most of the team was working on the 'RBA Model' [later called RBI] of the economy under Bill Norton's expert leadership. I was on the edges of this activity, developing my ideas about the generation of inflation in a small open economy. ... With Graeme Thompson and Ken Mahar I 'explained' the decisions of the Arbitration Commission, as partly based on movements in inflation, partly based on increases in productivity and partly (and controversially) based on a direct effect of the state of the balance of payments. This 'endogenized' a vital link in the RBA model's chain of causation, including a direct link to the external part of the economy.
It was about this time that a senior bank bureaucrat asked me (in Bill Norton's absence) to use the [RBI] model to show the effect of a 10% rise in the price of imports. I argued the toss about the relevance of this to anything important and got told to do the exercise anyway, 'I'll show the ignorant bastard' I swore. The simple exercise he had asked for showed a minor effect of imported inflation, as he had expected (I did not know it then but there was a debate raging as to whether the exchange rate should be upvalued). I also jury-rigged the model, including the controversial new wage equation and an endogenous money supply feeding into inflationary expectations, and got a much stronger result.
I do not know if my alternative formulation was used in the policy debate, but I submitted a paper to the 1973 Adelaide conference of economists. On the evening before my presentation Chris Higgins of the Treasury came to my room. He explained that it was his job to demolish my paper tomorrow but he thought it was only fair to warn me first and give me the chance to prepare my defence. This was typical of Chris, and also of the Treasury, who in my experience always played hard but fair. Our confrontation went according to plan and the following day the headline in the Australian Financial Review said something like: 'Treasury Reserve Bank Split on inflation.' My thesis was that inflation was largely imported, while the Treasury line was that it was due largely to 'wage push'.
It was heady stuff, and about three years later in London Chris was good enough to say that Treasury had come to believe that I had got it right. The academics were both harder to convince and less generous in their attribution when subsequent studies reached the same conclusion.
3. Research supporting the float #2. The RBII model, as it came to be called, had only 30 equations and a lot of strong monetary and international linkages. It was estimated with [Cliff] Wymer's 'full information maximum liklihood' techniques, then (and probably still) the most advanced available. At a conference to review the model I was gratified when John Helliwell, himself a master builder of the earlier kind of model, said generously that in its scope and ability to explain things it was 'more nearly maximal than minimal'.
The RBII model was used to analyse the effects of controlling inflation by controlling growth of the money supply. The model, as well as the usual theoretical analysis, showed the necessity of having a flexible exchange rate and flexible interest rates if money and inflation were to be controlled. Harry Knight had me give these messages to the Bank's board and skilfully wound me up to provide a more radical message when the initial presentation was too tame.
Gradually Harry drew me into more practical policy work, including a stint in the Bank's International department. Here I was for a time in charge of managing Australia's foreign currency resources, ...
Part of the job involved managing the Bank's book of 'forward' currencies, and as this was highly technical and done more or less by rote there was scope for innovation. There was in any case a problem of excessive swings in the forward book and I was asked to find a solution. After a lot of hard thinking I discovered that the rote rules for adjusting the forward rates meant that gaps opened up between domestic and international interest rates when overseas rates rose or fell. After a lot of hard talking I persuaded Harry and others that the answer to our problem was to move the forward rate much more aggressively when overseas rates moved. When this approach was put into place the forward book quickly moved into balance where it remained, for all I know to this day.
The effect of this minor administrative reform [This description was intended to be ironic] was of course to throw more pressure on the 'spot' rates for foreign currencies.
4. Role of non-Treasury advisors 'The Hawke-Keating government introduced many important economic reforms. The ANU economist Ross Garnaut has been rightly acknowledged for his major contribution, but I believe that the Reserve Bank and its combination of powerful research and market savvy was also important.
5. Crucial points of political economy. The election of Labor had coincided with a standard currency crisis. In the week leading up to the election approximately $3B left the country and over the weekend of the election the inevitable currency devaluation (10% as I recall) occurred. In the following week almost $3B flowed back into Australia, a two way tide that earned the speculators a cool $300M. As the debate about currency management hotted up I constantly asked Keating whether a Labor government wanted speculators to have such easy pickings at the taxpayers' expense.
Treasurer Keating picked up on this point, which I believe was a crucial reason for the acceptance of the case to float the currency in 1983. In fact Keating generalised the argument in the debate on financial deregulation generally. 'What have the banks ever done for us?' he would ask his caucus colleagues. 'Let's deregulate the joint and give 'em hell.' I frequently argued at the time that financial deregulation would be a wedge driven into an ossified economy and that it eventually would lead to deregulation of even the labour market. ...
At a crucial time in the discussions leading up to the float Bob Johnston returned a bit discouraged from a meeting in Canberra. "John Stone says to float would be a mistake. How do I counter this?" I was a bit sick of all the shilly-sallying. "Simply counter-assert, Bob. He can't prove his case and we have".
Next time Bob returned from Canberra it was to report that the currency was to be floated and we were going to abolish the exchange control department that day - no ifs or buts were allowed from the cautious men who ran that department or supervised its activities. This was Bob Johnston's finest hour.
This ends my testimony. None of this is greatly different from the more formal matters presented by Mr Stone. Maybe Bob Johnston included the word 'now' in the quote presented in point 5, but I do not believe this was the case. The diary note by Tony Cole quoted by Mr Stone about freeing the forward rate is intruiging but I have no knowledge of any communication about this matter with the Treasurer's office. Perhaps the Reserve's leaders communicated the result that seemed to me at the time as a genuine reform, but there was certainly a lot of argument between me and the seniors before my recommendation was accepted.
More generally, I recall the float as: (1) way overdue; (2) solidly backed by economic theory and research specifically applied to the Australian economy; and (3) backed by the sort of points of 'political economy' mentioned in no previous account I have seen on the reform of the Australian economy.
The image below comes from Treasurer Keating's press conference to announce the float. Bob Johnston was at that press conference; John Stone was not.
Image from this article.
Like the first blowfly of summer comes a denial by government that it will reintroduce a fixed, or heavily 'influenced' exchange rate, 24/1.12