RBA didn’t trust politicians to handle floating dollar: ex-RBA chief

AS Australia marks 31 years since the floating of the dollar, a former RBA governor says the real question is why it took so long,

Former Reserve Bank governor Ian Macfarlane.

AS Australia marks 31 years since the floating of the dollar, former Reserve Bank governor Ian Macfarlane says the real question is why it took the country so long to make the move.

In an exclusive interview with The Australian, Mr Macfarlane said it was distrust by bureaucrats in the Treasury and the Reserve Bank of the politicians in the 70s and early 80s that made them cautious about dumping the fixed exchange rate.

“Everyone else did it (floated their currency) 10 years earlier,” Mr Macfarlane said.

“Why did it take another 10 years for us to do it? That really is the question.

“There was distrust by the ­bureaucrats of the politicians at the time. There was a feeling that the only thing that restrained politicians from more populist big spending and low interest rates was the fear of a balance of ­payment crisis or a run on the ­currency.”

He said the view of the bureaucrats had “very much got established in the Whitlam years (that) the last thing you do is to take off the balance of payments constraint”.

Mr Macfarlane joined the research department of the Reserve Bank in 1970, before going to work at the Institute of Economics and Statistics at Oxford University in 1971.

He worked at the OECD in Paris from 1972 to 1978 before returning to the Reserve Bank in 1979.

Returning to Sydney in the late 70s, he was aware of the difference in views of bureaucrats in Australia from those in other countries where there were floating exchange rates.

“It was the widely held view of the RBA that the politicians could not be trusted with a floating exchange rate,” he said.

“That was also the view of the Treasury when I came back to Australia.”

He said the bureaucrats felt that the “fear of a currency crisis” was a powerful tool to constrain politicians from overspending.

Mr Macfarlane said it was not surprising that people like former Whitlam government treasurer Jim Cairns said that he had been a supporter of floating the dollar.

“The big spending ones (politicians) were the ones who were happy to have that constraint released,” he said.

Mr Macfarlane said he believed “there was a lot of justification (at the time) in the Treasury and the Reserve Bank line that they couldn’t be trusted … (that by floating the dollar) you would take off the one constraint that held them back.”

While recollections of the events leading up to the floating of the dollar differ, it is widely believed that the Treasury was still wary of the move in 1983.

However, once the move was made, Mr Macfarlane said it had worked well.

“In the end it turned out that the politicians could handle a floating exchange rate,” he said.