Former PM Paul Keating on Australia’s coming of age when floating the dollar in 1983
That momentous decision, 40 years ago this week, was Australia’s coming of age. Paul Keating reflects on a leap into the unknown that carried considerable economic and political risk.
When treasurer Paul Keating sat down with Reserve Bank governor Bob Johnston at 5pm on December 9, 1983, and announced at a press conference that the Labor government had floated the Australian dollar and abolished most exchange controls, it was a leap into the unknown with considerable economic and political risk.
“It’s like riding one of those big waves at Waimea Bay,” Keating recalls in an exclusive interview with Inquirer. “You’re on your surfboard, but you don’t quite know how it’s going to finish. And the good thing about Bob Johnston is that, like me, he was a policy gambler. He would ride the wild surf. And that’s what I loved about him.”
That momentous decision, 40 years ago this week, was Australia’s coming of age. It linked Australia strongly to the global economy, turbocharged the competitiveness and efficiency of industry, boosted productivity by providing flexibility and resilience, and acts as a shock absorber when the economy is buffeted from headwinds abroad. It was the most significant economic reform in the post-war period.
“The exchange rate was the killer of competitiveness,” Keating says. “The exchange rate management system was really sitting there as a sort of a de facto wages policy to keep downward pressure on local prices through imports.
“I shared the desire with Johnston to break out of this deregulatory system.
“The exchange rate is the most important price in the economy. In 2006-07, when the terms of trade had blown the roof off the place, and the income would have threatened the inflation rate and the wages system, the exchange rate moved up to take that surge off. It nominates, by its virtue, which businesses are viable and which businesses are not. So we are not putting national savings into immature or uncertain investments.”
Before the float, a group of senior officials would set the value of the dollar within a range established by cabinet. This was known as the “crawling peg”. The dollar had also been tied to the US or British currencies, a trade-weighted basket of currencies, or gold. Johnston supported a float but Treasury, then led by the formidable John Stone, was opposed.
The dollar was often overvalued, with speculators making windfall gains by betting on devaluations, and it placed upward pressure on inflation. Bob Hawke, who led Labor to power in March 1983, was a float enthusiast. Keating, who had consulted extensively with business before Labor’s return to government, recognised the need to move from a price-based system to a quantity-based system. He saw it as inevitable; the only issue was process and timing.
The Campbell committee report into Australia’s financial system was handed to treasurer John Howard in September 1981. It recommended floating the dollar. Howard was persuaded and tested the idea with Malcolm Fraser but could not win agreement to take it to cabinet. Labor’s policy before returning to government in 1983 was also to oppose a float. But Hawke and Keating, then in shadow cabinet, voiced support for the thrust of the Campbell report. The float of the dollar, weighted with so much significance, became a battle in the history wars between Hawke and Keating. Hawke claimed Keating opposed it and had to be dragged along. But they both supported the decision when it was made. It could not have been made without the prime minister and treasurer supporting it.
Having reviewed Treasury and the Reserve Bank files, and talked to senior staff and public servants at the time, it is clear Keating supported the float through 1983. The issue, again, was process and timing. Keating also had to deal with Stone. Going against Treasury advice was a significant step for a new treasurer to take.
When Keating met Johnston before being sworn in as treasurer, the meeting record reveals they discussed revisiting the Campbell committee. When I interviewed Johnston in May 2016, he recalled Keating supported a float but was mindful of Treasury opposition, the timing of the decision and economic impact. “I had the impression all along that he was very much in favour of doing it,” Johnston said.
Two senior Treasury officials, Ted Evans and David Morgan, were also talking to Keating through 1983 and confirmed the treasurer supported a float. Stone, who was not fully aware of these conversations, insisted he supported an “evolutionary” approach to exchange rate management.
“I did believe in a process where they were entitled to have their views heard,” Keating says of Treasury. “Even though we were not going to accept their view, we were not going to ride roughshod over them.”
In May 1983, Keating asked Johnston to update the Reserve Bank’s “war book” for implementing a float. At this time, he also told Hawke he supported a float. In October, Evans recalled in a minute, Keating was “inclined” towards a float. Hawke announced the float of the forward rate on October 28. Events now moved fast.
In early November, Keating told cabinet there was little value in maintaining strict currency controls and flagged “a floating exchange rate”. Later that month, Tony Cole from Keating’s office spoke to John Phillips at the Reserve Bank who recorded in a note that “further changes” were now planned, that Hawke and Keating were agreed, and the “green flag” was up.
The momentous step was decided overnight on December 8-9. A flurry of meetings was held while the end-of-year parliamentary sitting parties were in full swing. It was decided to throw caution to the wind and float the dollar. According to a note by Treasury deputy secretary Dick Rye, Keating told officials that “the present system” was “beyond redemption” and momentum could not be halted.
At a meeting in the cabinet room at 10.20am on December 9, Johnston put the case for the float and Stone against. Hawke stated his strong support for it. Keating formally canvassed the options and, following further discussion, Hawke concluded there was “a clear majority view” in support. It was formalised at the cabinet economics committee that afternoon.
That Keating announced the float with Johnston and, as The Weekend Australian noted, against Treasury advice, means he took political responsibility for the decision. The dollar initially rose and then fell, providing a boon for local industry, allowing greater access to international capital and accelerating productivity, competitiveness and efficiency.
“If it had failed, I would’ve just been dismissed,” Keating says. “Bob would have remained prime minister, but he probably would’ve brought in Ralph Willis to do the job, who he wanted in the first place.”
The float of the dollar was the most important thing Keating did as treasurer (1983-91). It meant Australia was no longer “a derivative economy”. The lesson, he reflects, is that courage and bravery in policy is its own reward. Too many contemporary politicians are reluctant to take risks and burn political capital in pursuit of reform, fretting about polls and worrying about re-election.
“I was determined never to be a mouse,” Keating says. “I never wasted a day and I never took bum decisions, ever. I always went for the highest quality decisions and rapidly, deciding quickly … I’m hoping the current Labor government can see the value of the Waimea wave, you know, riding on the front of the board.”
Troy Bramston is the author of Paul Keating: The Big Picture Leader (Scribe)
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