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January 01st 2012 print

John Stone

Part II: Floating the Dollar: Facts and Fiction

Part I of this article is here…

Friday 9 December: About 10 o’clock on Thursday evening I received a phone call at home from Keating. An account of that conversation (and a later one at 11:15 pm), as related early Friday morning to my two Deputy Secretaries, is given in the 9-page Note for File (copy in my possession) recorded by one of them (Dick Rye) covering Friday’s events as a whole. Two paragraphs are worth quoting:

13. The Treasurer rang again at 11:15 pm. He said that he was ‘afraid’ that the matter was getting away from us. Because of the need for an EPC [Economic Policy Committee meeting] on the Friday, some ministers had already been told to hold off their travel plans. This news had reached the press gallery……

14. The Secretary noted that this was the first reference to an EPC on Friday. His understanding had been that the Friday meeting was to be confined to the Treasurer, the Prime Minister and officials in order to give the two ministers a proper opportunity to form their own minds. He noted that, if the markets were closed [on Friday], they could not be opened again on the same basis on Monday – i.e., the decision to hold the EPC meeting was a decision to change the system one way or another. His own advice, therefore, was for the Treasurer to tell the Governor not to come, to cancel the EPC meeting and to arrange for a more ‘covert’ meeting, preferably over the weekend, involving the Treasurer, the Prime Minister and officials.…… If, in the light of these more mature deliberations, there was an agreement to change the system, the markets could be closed on Monday and the EPC could be convened for that day. The Treasurer then asked what he should say if the Prime Minister was still ‘gung ho’ on an EPC meeting tomorrow. The Secretary said that, if so, he agreed that it would be necessary to close the markets – and confirmed his advice that this would require a change of substance.

Discussion in the Cabinet room on Friday morning commenced about 10:20 am, with the Prime Minister, the Treasurer, the Governor and his two RBA colleagues, myself with my two Deputies, Professor Garnaut and some Prime Minister and Cabinet officials. Two things were quickly apparent: first, that the decision to float had already been taken – we were merely going through the motions; second, that a good deal, involving both the Treasurer and the Governor, had been going on of which the Treasury had been unaware (a fact later confirmed by the revelations in Kelly’s and Edwards’s books, and by some writings by Johnston[27]).

Hawke’s conduct of the meeting itself was entirely proper, with everyone invited to give their opinions – even though (as he has since written) his own “summing up” had already been formulated. In the circumstances, my own contributions were, in effect, pro forma. After the Governor had admitted (Rye’s Note for File, para. 22) that “he did not know what would happen” in the aftermath of a float, I ran through what I saw as the risks to the economy (to be clear, risks, not predictions). Those arguments have been stated earlier , and I shall not repeat them. Two further passages from Rye’s Note for File, however, are worth noting:

28. The Secretary then noted that the Treasurer [whom Hawke had invited to open the discussion] had omitted one alternative, that of introducing an embargo on short-term capital flows. He said that nobody likes capital controls – but he thought it better, in present circumstances [a reference to the fragile state of the economy], to give a shock to the financial sector than to the ‘productive’ sector. The Prime Minister brusquely dismissed any thought of capital controls….

Later, after the Governor said that the RBA Board “had recently confirmed the appropriateness of the 9-11per cent [M3 monetary target] objective” :

34.… In contrast to the Governor, the Secretary maintained that the sort of money that has been coming in recently does not damage the real economy [i.e., so long as it is not allowed to push up the exchange rate], and we ought not to ‘crucify the economy on the cross of the monetary target’.

Two further passages in the discussion merit comment.

Two Regrets: The more important one is recorded in Edwards. “He [the Governor] argued that a float could not operate successfully with exchange controls….”.[28] I heard this claim with disbelief – but it also left me in a quandary. The truth is that any exchange rate mechanism operates within a regulatory framework to produce a price for the currency, being the product of the transactions that regulatory framework allows. A float, a crawling peg, an adjustable fixed rate can all be operated within a framework of no exchange controls, moderate controls, or severe restrictions. Until 1979 Sterling had floated along with extensive exchange controls. France, and many other European countries, maintained currencies floating with exchange controls long after ours were abandoned. Japan was still doing so well into the 1990s.

The quandary was this. Here was a respected colleague stating to ministers what I knew to be flatly false. Was he simply ignorant of the facts (surely unlikely from one in his position)? Was he deliberately misleading ministers in the interests of freeing the Bank’s own hands? Whatever, could I really humiliate him in front of ministers by so fundamentally correcting him? Rightly or wrongly – and I am still not sure – I said nothing, and the moment passed.

The second passage concerns a misunderstanding that should be cleared up. Hawke refers to a remark of mine,[29] as the morning discussion was concluding, comparing the current decision with the Whitlam Government’s 25 per cent across-the-board tariff cut decision. What I was referring to (as noted above) was the absence on both occasions of “due process”. Just as the Whitlam decision would have been significantly improved by a few days further deliberation, so, I was suggesting, would this one. I should have realized, however, that since neither Hawke nor Keating (nor indeed anyone else there apart from Rye) knew what had really happened in 1973, my remark was bound to be misunderstood (as it has been), and would have been better left unsaid.

The Aftermath: The great achievement of the 1983 decision lay in changing the framework within which, thereafter, economic policy would have to be conducted. The irony is that none of those claiming chief credit for it went on to cover themselves with glory in that respect. The two men who chiefly emerge with credit from Labor’s economic history over 1984-1990 are Peter Walsh and John Button. After Keating’s 1986 “Banana Republic” admission that, three years on, the economy was going to hell on a rail, Walsh almost single-handedly drove the federal budget into surplus for the first time since 1981-82, while Button’s industry policies, despite being perpetually dogged by trade union resistance, steadily moved towards more openness.

In that OECD statement quoted earlier I had noted that the decision to float would “enhance the authorities’ ability to control the money supply and hence – if the will is there to do so – inflation”. Clearly, throughout 1984-1990 the will to do so was not there, with inflation during those six years averaging 7.4 per cent per annum. Nor was the supposedly “clean” float at all clean. As I said to the Melbourne Stock Exchange annual dinner in October 1985: “In passing I must say that I do find it paradoxical that, now that we have a floating exchange rate for the $A, the first aim of policy is not to allow it to float. More precisely, I suppose, it is not to allow it to float down [30]any further than it has done already”.[31] [Original emphasis]

The Battle of the Books: Success has many fathers. Hawke and Keating have every right to claim credit for the 1983 decision – even if neither did much after it to carry through its philosophy into related policies. What has been remarkable, however, is the subsequent “battle of the books” between the two, each claiming chief credit.

Kelly’s Book: This battle began with Kelly’s book in 1992, with its repeated – and overblown – claims about Keating’s role in pushing for a float. While these claims were low-key compared with those made later via Edwards’s book, they were significant. There are also statements by Keating (in quotes) purporting to demonstrate how he had often remonstrated with me personally on the matter. Those statements were never made; they are the products of that fantasy land in which, by 1992, Keating was already beginning to dwell. The metamorphosis to “Captain Wacky” – as the then Federal Director of the Labor Party, Gary Gray, was to call him in 1996 – was already underway. The two most egregious examples are:

  • “The split within Treasury was revealed during a meeting of senior officers with Keating around September or October 1983 which canvassed exchange-rate policy… Ted Evans…split with Stone: ‘Treasurer, I don’t agree with that. I think we should float’”.[32] On reading this passage, I was puzzled. I could certainly recall no such incident, and I doubted that I would have forgotten it. Years later – and after the appearance of Edwards’s book, which contains the same canard[33] – I spoke to Evans about it. He confirmed (and I have his authority to say so) that no such incident occurred.
     
  • “In October 1983… Keating met his senior advisers one evening at the Reserve Bank quarters in Canberra. …The meeting was split, with all Treasury officers opposed to the float….When the meeting finished Keating muttered: ‘John, this is the last time you’d hold me on this’. His real message to Stone was – you’ve got a few weeks to come aboard or be humiliated”.[34] Such a meeting, with such a policy outcome, did occur, but I can say with absolute certainty that no such words were ever uttered to me by Keating, then or at any other time. I would certainly not have forgotten them, still less the even more offensive version given later in Edwards’s book.[35] This downright untruth was presumably designed to bolster the self-constructed image of a macho-Treasurer determined on floating the currency in the face of resistance to that course from an obdurate official.

Keating’s statements were made in the comfortable assurance, of course, that I would feel unable to reply for another 21 years (if ever). They were not put to me by Kelly prior to publication. (He did make one phone call to me re the 9 December events themselves; I said that I could not really help him).

(To avoid misunderstanding, I should say that, insofar as Kelly’s book refers to me personally other than by way of repeating Keating’s obloquies, it does so in terms which could even be regarded as flattering – see, for example, his references to my Shann Memorial Lecture[36]).

Hawke’s Book: Kelly’s book was received with great acclaim. Hawke would have been both surprised – and, not unreasonably, piqued – at the role Keating had arrogated to himself in the float episode. In his own memoirs – having left the Parliament – he is clearly determined to set the record straight. Thus:

  • “The theoretical arguments for these radical steps [letting the dollar float and ridding the system of exchange controls] were fashioned early on. In this, as with so much else throughout that first year in government, the engine room driving economic change in Australia was my personal office”.[37]

  • “….my office was always ready to help the new Treasurer,… and to guide, if necessary”.[38]

  • “… I was often caught in alternate moods of not knowing whether to pat him [Keating] on the head or wave a disapproving finger at him”.[39] [Emphasis added in all cases].

His personal ascendancy over Keating thus established, Hawke then refers to the 27 October meeting in his office:

  • “On this occasion, with Treasury’s senior officers present and the Secretary, John Stone, at their head, one got the impression that he [Keating] was more in their tow than they in his….In my view… the time for grabbing the currency by the scruff of the neck, floating it and freeing it, was imminent…”.[40]

  • “At that October meeting Stone’s vociferous opposition and Paul’s obvious reluctance were at odds with the desire of my office to float the dollar immediately, so the decision was delayed. A compromise was fashioned but one which, inevitably, prefigured the final outcome. We decided to float the forward rate… Surprisingly, Stone seized on that….”.[41]

Hawke’s further reflections on Keating aside, the astonishing thing here is that the proposal to float the forward rate had been advanced nine days earlier in my minute to Keating referred to above. My recollection is that Hawke had a copy of that minute at that meeting; but if he didn’t, why hadn’t Keating given him a copy? Whatever, the statement that I “surprisingly seized on” my own proposal is ludicrous.

Edwards’s Book: This book is a strange mixture. Edwards worked in Keating’s office in 1991, and wrote the book in 1994 and 1995. He had unparalleled access to Keating. Moreover, “the whole treasure trove of documents of the 1980s was opened” to him,[42] and when Keating left the Treasurer’s office in June 1991, Edwards “took the entire collection of his personal office files” over to the Australian National University.[43]

From these very different sources Edwards constructs a book in which, to the informed reader, the fault lines are clearly visible. Where he sticks to the documentary record, it is generally sound. Much of it, however, relies on the slippery ground of the author’s personal conversations with Keating. I do not know to what extent Edwards checked the latter’s observations with other sources. (Insofar as they concern me, he checked nothing). The result is a curiously confused compilation of fact on the one hand and, in many cases, fiction on the other, to the point of internal contradiction.

Keating clearly saw the book as a vehicle for denigrating Hawke generally, and (re-) claiming credit for the float in particular. Thus:

  • “He had been contemptuous of Hawke’s intellect, and of the emptiness of a series of lectures Hawke had given on national radio….”.[44] While the verdict on those Boyer Lectures is appropriate, and while I have never held Hawke’s intellect in high regard, for Keating to deliver such a judgment is both silly and revealing.
     
  • “These days the people he [Keating] thought of as his opponents or who had contested his supremacy in economic policy were more likely to be treated with contempt than with respect. Ross Garnaut… was really …a B-grader. John Stone… was really a B-grader”.[45]

  • He resented to the point of fury stories alleging that it was Hawke, or at least Hawke’s private office and the Department of Prime Minister and Cabinet, who had pushed him and an unremittingly hostile Treasury head, John Stone, towards the float in 1983”.[46] [Emphasis added].

Similar quasi-pathological statements occur at many other points of the book.[47]

Keating’s more general disregard for the truth is evident in the following two episodes. Edwards records Keating telling him in December 1991 that the Martin Committee “was appointed at his suggestion, not Stone’s”, and that “in appointing as its members Vic Martin, economics professor Keith Hancock, and Treasury official Richard Beetham, ‘I did not even consult Hawke’ “.[48] This claim, so far as it concerns Hawke, does not stand up well against the latter’s statement that the Committee had grown out of his letter to Keating “on 20 April, 1983 …about commissioning a group to report on the recommendations of Campbell’s committee”.[49] As to myself, when it came to nominating the Committee (other than Dick Beetham, one of my own officers), it was I who suggested Vic Martin as its Chairman and Keith Hancock (whose well-established Labor Party sympathies would, I suggested, make the Committee’s prospective recommendations more palatable to Keating’s colleagues) as its other member. After Keating had accepted those suggestions, I personally telephoned both men to persuade them to accept appointment. Martin did so warily, and only after receiving my personal assurance that the Committee’s role would be to “revive” the Campbell Committee’s recommendations. Hancock, whom I knew personally, accepted readily, particularly when I told him that, apart from his expertise, his chief role would be to provide political “cover” for Keating.

As for the second episode, as the 1983 election campaign drew to a close, and Labor’s impending victory became increasingly certain, newspaper stories began to appear predicting that one of the new government’s first actions would be my sacking.[50] Edwards however says that “although Hawke and Ross Garnaut….both thought Stone should be promptly sacked as Treasury head”[51] (a statement he repeats later), “Keating had already decided to keep him on”.[52]

Unfortunately, this was untrue. On 11 December 1990 I attended in Canberra the funeral service for Chris Higgins, who had become Secretary to the Treasury in 1989 and who, tragically, had died from a massive heart attack. I did not stay long at the ensuing wake at the Higgins home, but on taking my leave of Chris’s widow, Dr Paula Higgins, she walked with me to the front door. Quite unsolicited, she then told me how highly Chris had thought of me. Thus, she said, “when Paul Keating rang him [in Paris, where he was then working with the OECD] after the 1983 election to tell him that you were going to be sacked, and to offer him your job, Chris said: ‘Why would you want to do that? You already have the best man for the job’ “. I publish this anecdote – with Paula’s permission – not because of what Chris then said about me, and not even because of what it says about his own integrity, but because of what it says about Keating’s propensity for stating, years later, a clear untruth.

Edwards was, during the 1970s and 1980s, one of Canberra’s most prominently left-wing journalists. It is not surprising then to find myself described as “a visceral right-winger who had applauded the US intervention in Vietnam, and was now [late ‘70s] strongly in favour of a smaller government and slowly moving towards the right of Australian politics”.[53] He says that I had been “tactfully exiled to Washington as a director of the International Monetary Fund and of the World Bank from 1967 t0 1970”,[54] and makes a particularly nasty suggestion that Chris Higgins “did not return from Paris until…Stone was clearly on a course that would take him out of the Secretary’s office”.[55]

Such general denigrations notwithstanding, there are nevertheless parts of Edwards’s book where he obviously recognizes that, in seeking to reconcile the documentary evidence with what he is being told by Keating, he has a problem. For example, he prints excerpts from my key minutes to Keating (referred to above) of 16 and 18 October, and notes that “the minutes make it clear that Treasury supported and in fact proposed… the freeing of spot against forward…”.[56] He also acknowledges that: “None of the participants making the decision to float had a clear idea of its consequences. There were no studies predicting its effect….Stone’s complaint that there were no high-quality studies of the issues was quite right – the quality of the papers provided by the Reserve Bank to Keating was very poor,… “.[57] He even goes so far as to remark that “Keating would later say that he was aware of what the decision would come to mean [for various government policies], but this does not seem credible… “.[58] [Emphasis added throughout].

Edwards is clearly troubled by these and other aspects of the episode, and on pp. 216-217 he discusses the differing accounts of it. “The float of the dollar”, he says, “has generated a deep and abiding controversy between Hawke and Keating….Other than the leadership itself, it is the most enduring of their disagreements, and one way or another it colours most accounts of the decision”. [Emphasis added]. It surely does!

Edwards’s doubts do not stop there. He eventually persuaded Keating to write, in March 1996, “his own version of the decision to float”, and that account appears as an Appendix in the book.[59] It is a rather thin account, and Edwards is clearly not satisfied by it. “Keating’s account, however, does not include advice he received from the Reserve Bank and Treasury, which is crucial to understanding the sequence of events….Keatings version also places too little weight [i.e., not as much weight as Edwards wishes to place] on Treasury’s opposition to the float”.[60] [Emphasis added].

Summing Up: As counsel for the defence I have presented evidence in this article along two lines. First, I have provided a plethora of evidence for my own and the Treasury’s general receptivity to change – evidence that cuts at the roots of the charge of having opposed the float. I have also provided documentary evidence (acknowledged by Edwards, albeit without allowing it to affect his verdict) as to the Treasury position on these matters from, at least, 8 October 1983 onwards. In addition, I have provided documentary evidence of the sheer stupidity of the decision-making processes involved – evidence that, again, is largely accepted by Edwards.

My second line of argument has gone to the bona fides of the witnesses (and the case more generally) for the prosecution. As enumerated above, Keating in particular cannot be judged to be a witness of truth, a fact that even Edwards to some extent concedes. As for Edwards himself, his biases are palpable. On such bona fides grounds alone, therefore, the case for the prosecution labours under a heavy burden.

I therefore suggest that the first of the five propositions listed earlier – that the float was opposed throughout, root and branch, by the Treasury – cannot stand. It is true that, had due process allowed it – that is, had the decisions of 9 December not already been taken before the meetings that day began – I would have argued then that the “hot money” speculators should be taught an expensive lesson via the imposition of a control on capital outflows, perhaps akin to the previously successful Variable Deposit Requirement measures enforced during 1972-77 and referred to above. The evolutionary processes could then have continued as envisaged in my minute of 18 October. Although, on the day, the Treasury did formally oppose the decisions then being rubber-stamped, that is quite different from the charge against it (and me).

As to the second proposition – that “the Treasury” was then interchangeable with the name John Stone – I can only say that, while I hope that my views within the Department might generally have been respected, the whole “collegiate” basis on which the Treasury then operated renders any such charge laughable. (I once said that the Treasury was the only institution in Australia where genuinely untrammelled academic debate prevailed). The three officers who, apart from myself, were directly concerned in the matter were my senior Deputy Secretary, Dick Rye (a man of both high intellect and unimpeachable integrity), the other Deputy, Des Moore (ditto), and the head of the Overseas Economic Relations Division, Bob Whitelaw – now, sadly, deceased, but describable in the same terms. All of them – as Tony Cole has ruefully acknowledged[61] – were fully in agreement with the Treasury position. For Edwards, or anyone else, to suggest that these men were too afraid of me to dissent is bizarre, and would be seen as such by anyone who knew them.

As to alleged disagreement by other officers (other than Tony Cole himself), in the one case asserted by Keating, the man concerned (Ted Evans) has no more recollection of the alleged incident than I have.

With the remaining three propositions – as to whether Keating, Hawke, or in some accounts the Reserve Bank, should be accorded chief credit for the float – I am not unduly concerned. On the 20th anniversary of the float, in the only article I have previously written on these matters (drawing on the documents published by Edwards and hence already in the public domain), I said: “Both Bob Hawke and Keating (via Edwards) have given their accounts of the float. Both accounts, but particularly Keating’s, are seriously inaccurate.…Where that [Edwards’s] book falls back on mere assertions by its subject (Keating) it is often staggeringly untruthful”.[62] Ten years later, I would not alter a word.

In that same article I added: “None of the foregoing should be taken as in any way detracting from what I said in my Shann Memorial Lecture in August 1984, namely that it [the float] was the most important economic decision taken by any Australian government during the postwar period, ‘and the best’. At this remove perhaps I could now add that, as an example of the manner in which decisions of such significance should be taken, it was almost certainly the worst”. At this further remove, I would not alter a word of that either!

As the noted American diplomat Dwight Morrow once said in a letter to his son: “The world is divided into people who do things and people who get [he might have said “claim”] the credit. Try, if you can, to belong to the first class; there is far less competition”.[63] 



[27] For example, Bob Johnston, Floating Clean into the Unknown, in The Australian Financial Review, 18 October 2010.

[28] Edwards, op. cit., p.228.

[29] Hawke, op. cit., pp.246-7.

[30] On 8 December 1983 the $A closed at 90.25 US cents. After rising to around 95 cents for a brief period after the float, by end-June 1984 it had fallen to 86.1 cents. A year later, at 66.6 cents, its cumulative fall from its pre-float level was 26.2 per cent. On a Trade Weighted Index basis it fell even further.

[31] John Stone, Address to the 1985 annual dinner of the Stock Exchange of Melbourne, 31 October 1985. Ironically, I was asked, at short notice, to give this address because the speaker originally scheduled to do so – Paul Keating – had unexpectedly gone overseas. The Governor of the Reserve Bank was a fellow guest, and after I sat down Ian Roach, a decent man (now, sadly, deceased) who was then Chairman of the Stock Exchange, told me sotto voce that Johnston had been so upset by my remarks (in part quoted above) that he had threatened to storm out of the room. Glass jaws are like that; but in this case (as often in the Bank in those days) wiser counsel prevailed.

[32] Kelly, op.cit., p.82.

[33] Edwards, op.cit., p.224.

[34] Kelly, op.cit., p.82.

[35] Edwards, op.cit., pp.223-4.

[36] Kelly, op.cit., pp.143-4.

[37] Hawke, op. cit., pp.237-8.

[38] Ibid., p.238.

[39] Ibid., p.239.

[40] Ibid..

[41] Ibid., p.240.

[42] Edwards, op.cit., p.xi.

[43] Ibid,, p.xii.

[44] Ibid,, p.363.

[45] Ibid., p.362.

[46] Ibid., p.363.

[47] See, for example, p.205 (another alleged conversation with me on the exchange rate that never occurred); p.205 again (another alleged conversation with me about the establishment of the Martin Committee – as to which, see below); and the list goes on.

[48] Edwards, op.cit., pp.207-8.

[49] Hawke, op. cit., pp.235-6.

[50] I retain among my papers two thick folders of newspaper clippings, entitled “Sacking JOS”, put together at the time by my then personal assistant, Ken Page.

[51] After Edwards’s book appeared, several newspaper articles published this statement. I then received a phone call at my home in Melbourne from Garnaut; he referred to these articles and said that it was untrue that he had ever wanted me sacked. As a fellow Western Australian, I gave him the benefit of the doubt. “Ross”, I said, “I never thought that you did”. I did think of adding that, given his statement to me, perhaps he should write brief letters to the newspapers concerned to correct the record. I didn’t – and he didn’t.

[52] Edwards, op.cit., p.177.

[53] Ibid., p.366.

[54] Ibid., p.181. Some “exile”! At the age of 37, I was nominated to fill this exceptionally high level post because Maurice O’Donnell, who was serving in it at the time, was recalled to Canberra by Dick Randall to become his Deputy Secretary. O’Donnell recommended that I replace him.

[55] Ibid., p.366. The anecdote related above disposes, I think, of this slur.

[56] Ibid., p.222.

[57] Ibid., p.228.

[58] Ibid., p.228-9.

[59] Paul Keating’s Account of the Decision to Float, in Edwards, op.cit., pp.543-548.

[60] Edwards, op.cit., p.217.

[61] Edwards, op.cit., p.231: “We couldn’t even get Bobbie Whitelaw to support it” [i.e., an immediate decision to float].

[62] John Stone, Keating’s account was seriously inaccurate, in The Australian Financial Review, 12 December 2003.

[63] After quoting this injunction in my 1981 Stan Kelly Memorial Lecture, I added that it “might well serve as a motto for public servants”.