Floating the Dollar (II)

My article in the last edition,[1] Floating the Dollar: Facts and Fiction, addressed five propositions:

• The floating of our dollar in December 1983 was opposed throughout, root and branch, by the Treasury.
   
• “The Treasury” was then interchangeable with my name, while other Treasury officials disagreed with me.
   
• Paul Keating was the float’s chief architect (according to both Keating and to the recipients of his “confidences”, Paul Kelly and John Edwards[2]).
   
• Bob Hawke, including those around him, was its chief architect (according to Hawke[3]).
   
• The Reserve Bank of Australia was the strong, and ultimately prevailing, proponent of the float (according to one or two former Reserve Bank officials[4]), in the face of persistent Treasury opposition.

My motivation in writing that article was that, for 28 years, the Treasury, and I personally, had suffered in silence the obloquies cast upon it, and me, by assorted politicians, economists, bankers and journalists too numerous to mention. It set out, chiefly, to address the first two of those five propositions; “the fact that they are essentially untrue sheds light on the last three”, with which the article was “not unduly concerned”.

What follows responds to the Editor’s request for an article surveying the reactions to that piece, and summarizing what a reasonable person would now conclude about who can claim responsibility for the float decision.

First, note a complication about timing. My previous article was based on my personal papers. It was filed with Quadrant on 21 November, prior to the 29 November National Archives Office release, which I attended, of the 1982 and 1983 Cabinet papers (embargoed until New Year’s Day). Since my article owed nothing to the National Archives release, an abridged version of it[5] was published in The Weekend Australian on Saturday, 31 December. However, since the stories on Sunday, 1 January about the Cabinet papers would have been filed well in advance, most writers would not have known of that Weekend Australian article, still less of the Quadrant article itself – for a couple of exceptions, see below.

I said in May 1984 that the float decision was “the most important single step in economic policy to be taken by any Australian government in the post-War period”,[6] and in August 1984 that it “will stand as its [the Hawke government’s] greatest achievement when all else has been forgotten”.[7] Yet as noted in my article in The Australian on 2 January: “National Archives historian Jim Stokes’s ‘background’ address on 29 November barely mentioned that decision, nor is it mentioned in the introductory note to the ‘Economy’ section of the Cabinet papers. Stokes’s address was based on having ‘extensively researched the Cabinet papers for 1982 and 1983’. The fact is there were no Cabinet papers for the float decision. (Two Cabinet memoranda, written after it was taken, only addressed implementation details)”.[8]

Why was this? Bob Hawke, who spoke by video link from Sydney to the assembled audience at the National Archives Office, did not mention the float in his introductory remarks.[9] The subsequent question period was almost equally barren.[10] In response to an early question[11] about what he saw as the highlights of 1983 for his government (“the America’s Cup victory, or the floating of the dollar maybe, or saving the Franklin”), Hawke chose to respond on the first and the last but was silent on the float. Later, responding to a more pointed question about it,[12] he essentially avoided the issue, saying that he was “not going to get into a slanging match” with Keating about it. It may, or may not be relevant that Hawke (as mentioned in response to a later question) knew “that John Stone may be in the audience”.

Press Reactions:

Press reactions touching on the float over the New Year period[13] were:

(1) David Uren’s article, “Treasury backed the principle, but not the pace of change” (The Weekend Australian, 31.12.11 – 1.01.12) appeared side-by-side with my own, presumably to “balance” my claims. He had therefore seen the abridged version of my article but not, probably, the much more detailed Quadrant original. His article carried a photograph of me, captioned “John Stone tackles the claims that he was against reform”, and its headline, “Treasury backed the principle, but not the pace of change”, was accurate.

Uren says “Paul Keating and Bob Hawke… are both agreed [that the float] was over the strenuous objections of Treasury secretary John Stone”. Referring to my accompanying article, he says: “The release by the National Archives of the Cabinet papers for 1982 and 1983 tomorrow will shed further light on the decision-making surrounding the float, but Stone here tackles the claims that he was the obstacle to historic reform. In doing so, he acknowledges for the first time that Treasury formally opposed the float and that his preference was the imposition of capital controls to teach speculators a lesson. He presents the argument as being about the pace of change, not the direction. … the debate between Hawke and Keating over who had the main carriage for the final bold decision is beside the point….It was a decision that repudiated the gradualism Stone advocated”.

Unfortunately, Uren’s article reveals his less than adequate knowledge of the economic history of that period, claiming that “it was years before the float and the removal of controls on capital flows came to be understood as the most revolutionary economic decision of the post-war era”, and that “the float also meant Australia would never again face a foreign exchange crisis”. In a letter to The Australian[14] I referred him to my Quadrant article, in which his first claim is directly contradicted (see reference above to my statements in May 1984 and August 1984), and where his second claim is also contradicted by the reference to Keating’s famous “banana republic” admission that, less than three years after the float, and with the exchange rate dropping like a brick, the economy was going to hell on a rail.

(2) Perhaps the most substantial article was that of Michael Gordon, “Whodunnit? Really, we still dunno” (The Sunday Age, 1.01.12). Although Hawke had said he did not want to get into a “slanging match” with Keating, Gordon notes that he had “essentially stuck with his version – that a reluctant Treasurer had to be persuaded to move. This has prompted Mr Keating to accuse Mr Hawke of having a ‘very poor’ memory….’I am trusting that his utterances on this subject arise from diminished memory of events [almost] 30 years ago, rather than from any express intention to diminish my role, central as it was in this seminal event’, Mr Keating said in a statement to The Sunday Age”.

Keating goes further, “insisting that he raised the issue with Mr Hawke some seven months before the decision was made,…… ‘At around the same time, I authorised the Reserve Bank Governor, Bob Johnston, to have the Reserve Bank ….lay out the field of action the government and the authorities might take when the moment in markets was propitious to move to a float of the spot rate’”.

So, Gordon says, “what do the secret Cabinet papers….say? Despite Mr Keating’s confidence that they would show that he introduced the matter to Cabinet, they make virtually no reference to the issue. Not only is there no formal Cabinet submission, setting out the attitude of the two men and their departments, there is not even a document recording the decision reached on December 9. This confirms the view of John Stone, the Treasury Secretary who opposed the decision…he says it was badly wanting in process. .…”.

“In an expansive interview, Tony Cole, who was Mr Keating’s principal adviser at the time and later became Secretary to the Treasury, insists the two politicians were of like mind on the need to float the dollar within weeks of the government being elected….Within weeks of becoming Treasurer, Mr Keating signaled his support for the thrust of the Campbell recommendations and, in May, established a review chaired by Vic Martin to report the following year…… ‘Paul was trying to manufacture the circumstances in which it would seem like a natural decision….He wanted to have the Martin report available and it wasn’t. Events moved too quickly’…..Mr Cole says his only explanation for Mr Hawke’s assertion that Mr Keating had reservations is the Treasurer wanted his department to back the decision…… In the end, the blessing came only from the RBA, although not in writing,….As for the lack of paperwork, Mr Cole explained that, too. ‘The paperwork was meant to be created by having the Martin committee come out and recommend it, but events transpired so we couldn’t wait’”. [My italics]

As for my comments on these assorted fairytales, see below.

(3) Samantha Maiden’s article, “War over the dollar float” (The Sunday Telegraph, 1.01.12) referred to an accompanying “Exclusive” article by Paul Keating. “Mr Keating said that Mr Hawke’s memories were faulty and that, far from being a reluctant conscript [to the float proposal], he first raised the idea in May 1983”. She goes on to quote the same words as those reported by Michael Gordon from Keating’s (apparently not altogether exclusive) statement to The Sunday Age. Maiden, who was the only journalist to be in touch with me prior to New Year’s Day, was given access by the Editor of Quadrant (with my approval) to my Quadrant article. She notes that “Treasury Secretary John Stone has savaged Mr Keating’s ‘bile-ridden version’ of events in his own memoir to be published this month in Quantum (sic!), Floating the Dollar: Facts and Fiction. He argues Mr Keating had overstated his own role and over-egged Mr Stone’s opposition”.

(4) Uren’s follow-up article, “Labor legends brawl over float” (The Australian, 2.01.12) says that “Keating started to prepare Cabinet for the December 1983 float….five weeks before the decision, with Cabinet documents casting doubt on claims by Bob Hawke that his Treasurer had to be dragged into the decision….the Cabinet documents show that Keating was canvassing the need to float the dollar when, in late October, 1983 the government took a first step by allowing the market to determine” the forward rate “and allowing the market some latitude to set the rate against the US dollar” [during the trading day].

“A Cabinet memorandum by Keating dated November 2, 1983 said that ‘beyond these essentially technical changes lies the possibility of a floating exchange rate…This is an option we may wish or be forced to consider at some future time, but it would represent a quantum leap.This package represents an evolutionary adaptation of the system’. The term ‘evolutionary’ came from his Treasury secretary, John Stone, who was opposed to the ‘revolution’ of a float. However, Mr Keating made it clear he was not convinced that the evolutionary approach would be enough to turn the speculative tide. ‘I will be keeping under review the effectiveness of the exchange rate system under new arrangements’, he said…While denying he was the chief obstacle to the float, Mr Stone has confirmed that on the day the decision was taken, he had favoured imposing a capital control ‘so that the speculators should be taught an expensive lesson’ “. Uren’s account goes on to repeat Keating’s claims in Michael Gordon’s article to have first canvassed the issue with Hawke, and Bob Johnston, in May 1983, and concludes with a reference to “the Cabinet decision on the float, No.2620”.

In fact, Decision No.2620 (EP) was not a Cabinet decision, but merely, as noted below, the rubber-stamping “decision” by the Economic Policy Committee. It repeats, word for word, the proposals in Cabinet Memorandum No. 323 (“Intervention under a Floating Rate System”) – one of the two memoranda called for from officials by Hawke and Keating as they adjourned for lunch on 9 December after the decision to float had been taken – as to how the Reserve Bank should now comport itself in the foreign exchange market.

I say more below about Uren’s parade of Keating’s claims, but I addressed them briefly in a letter to The Australian on the following day. Noting that I had “no wish to enter into the Hawke-Keating ‘brawl’ “, I said that, nevertheless, “Uren’s interpretation of events needs to be corrected…..Look at the date: 2 November. As was made clear in my article in The Weekend Australian….and the Quadrant article from which that was extracted, the key decision to float the forward rate was already taken by ministers on 27 October, based on my minute to Keating of 18 October recommending that as a first (major) step in the ‘evolutionary’ advance to fully floating that I favoured”.

(5) An editorial in The Australian (2.01.12) begins by saying that “the Cabinet papers of the Hawke government remind us of the beginning of the great reform era in Australian politics that continued for at least two decades”, and concludes by saying that “the float of the dollar kicked off a series of significant reforms in a golden era for Australian politics”. This is the theme of the Paul Kelly-inspired myth adumbrated in his interesting, but factually flawed book The March of Patriots.[15] In fact, while the float should have had those consequences, it was ten years before it began significantly to do so.

Of the 9 December, 1983 decision itself, the editorialist says: “The Cabinet papers [read, rather, “the lack of Cabinet papers”] have reignited the long-running debate about just who in the Hawke government was primarily responsible for the dollar decision….The Cabinet papers illuminate a greater truth: at the Cabinet meeting that decided to float the dollar, Hawke and Keating were united, along with the rest of the Cabinet….It was a decision made even more courageous because it was not fully encouraged by the Treasury, headed at the time by John Stone, who went on to become a Nationals senator – and whose reputation for beating his wife is too notorious for comment”. [My italics, and yes, I added the last dozen words to drive home the editorialist’s point].

If I leave aside the gratuitous irrelevancy about my subsequently becoming “a Nationals senator”, this passage contains two simple errors of fact. The 9 December meeting was not a Cabinet meeting; it was one of my Quadrant article’s criticisms that a decision of such political, as well as economic, significance should have been taken by Hawke and Keating only. By definition, therefore, they were not “united, along with the rest of the Cabinet”. In fact, although the other members of the Economic Policy Committee were hastily assembled on that Friday afternoon to rubber-stamp the pre-luncheon decision, the remaining members of the full Cabinet, and the thirteen members of the outer Ministry, first learned of the decision from radio broadcasts later that afternoon.

Perhaps, however, I shouldn’t be too hard on whoever wrote this tosh for The Australian. After all, he or she refrains from saying that I “opposed’ the decision, merely that “it was not fully encouraged” by the Treasury under my leadership. Even such small mercies should be gratefully accepted.

(6) Geoff Kitney’s features article, “The personal touch started China boom” (The Australian Financial Review, 3.01.12) was largely based on an interview with Hawke in which the latter, with characteristic modesty, claimed most of the credit for our present booming relationship with China. On the float, Kitney says, “the first reference in any of the Cabinet papers to floating the currency was in October 1983 in a submission under Keating’s name”, and then quotes from “a further submission on November 2, shortly after the government announced some minor technical changes to try to make the fixed rate more market sensitive”. (This is clearly a reference to the same submission mentioned by Uren the day before; however, while the government announcement of 28 October to which he refers did include “some minor technical changes”, that announcement principally dealt with the crucial decision to float the forward rate). Beyond that date, he notes, the Cabinet papers are silent until 9 December itself.

Much of what Kitney says merely repeats what Uren had said the day before, but his reference to an October 1983 “submission under Keating’s name” (of which I had no recollection) led me to Decision No. 2330(EP) – a decision (without submission) not of Cabinet but of the Economic Policy Committee. More of that anon.

(7) George Megalogenis’s article ,”Treasury mandarins worthy advisers to policy makers” (The Weekend Australian, 7-8.01.12) was, for the most part, unrelated to the Cabinet papers release.[16] However, although he does not mention my Quadrant article (a copy of which I had emailed to him as a matter of courtesy), he had clearly read it. He begins by saying that “when John Stone ran the Treasury in the stagflation decade, he took pride in the department’s briefing notes. The advice, while unable to cure the nation’s economic ills, was often used to intimidate governments”. [My italics] Then, after a reference to one of the peripheral aspects of my Quadrant article,[17] he adds that, although “his Labor masters…… thought he was opposed to the float, he claims otherwise”.

(8) While Mike Steketee’s article, “When good policy came naturally, not luckily” (The Weekend Australian, 7-8.01.12) does not refer to the float, it is interesting because of the personal animus it displays. It comes close to saying that I knowingly and deliberately deceived the Hawke government, both with the 1982-83 Budget outlook figures that I presented to it when it came to office, and with the comparable figures for the 1983-84 Budget outlook both then and later in the lead-up to that Budget. “In 1983, John Stone, the hard-nosed economic boffin retained as Treasury secretary against the wishes of many senior Labor figures, took the first opportunity to get the new government to take its medicine. On the day after the election, he gave Hawke and Keating a projection for the budget deficit for 1983-84 of $9.6 billion – the equivalent of about $64 billion now – or $12 billion when Labor’s election promises were added. They were scary figures,… Whether by accident or design, they were also an exaggeration….Howard’s last budget had estimated a 1982-83 deficit of $1.7 billion. Stone told the new government that it had blown out to more than $4.3 billion… In fact, the deficit turned out to be a more modest $3.3 billion”. As for 1983-84, “by the time Keating brought down the 1983 budget in August, the estimated deficit of almost $8.4 billion looked the epitome of fiscal prudence….That budget estimate also proved too pessimistic, with an actual deficit for 1983-84 of $7 billion”. [My italics]

Fortunately, I still possess copies of the 1983-84 and 1984-85 Budget papers. I was therefore able to point out, in a letter to The Australian, that Steketee’s figures were simply wrong.[18] “In fact, 1983-84 Budget Paper No. 1 shows the 1982-83 Budget deficit outcome as $4,473 million – somewhat larger than Treasury’s estimate on March 6, 1983. 1984-85 Budget Paper No. 1 shows the 1983-84 Budget deficit outcome as $7,961 million – $1 billion higher than Steketee’s figure”. As to his conspiracy theories, the letter added: “Steketee insinuates that the figures I gave the new government may have been exaggerated ‘by design’. I did not compile those figures. The expenditure figures were compiled by the Department of Finance. The revenue figures were compiled by an area of the Treasury”. (My letter, as submitted, added that the area of the Treasury in question was “headed by Ted Evans and the late Dr Chris Higgins. It is to these men (whose integrity, I hope, Steketee would not question) that his slur is therefore in fact directed”. This passage was deleted by the Letters Editor).[19]

Extraordinarily, almost three weeks later Steketee returned to his statistical error in an addendum to his otherwise unrelated article in The Weekend Australian of 28-29 January,[20] forcing me to write yet another letter to his newspaper in a further effort to correct the incorrigible.[21]

Given the foregoing journalistic record, I now ask myself two questions. First, have any of these commentators brought to light new material that would have influenced what I wrote originally? Second, what is my answer to the Editor’s question as to “what a reasonable person would now conclude about who can claim responsibility for the float decision”?

Appraisal

I shall say no more about the articles by Uren (1), Maiden (3), The Australian’s editorialist (5), or Megalogenis (7). As to the others, I should first deal with Keating’s claims in Gordon’s article (repeated there also by Tony Cole) that Keating “raised the issue” with Hawke in or about May 1983 and that, “around the same time”, he authorized the Reserve Bank Governor, Bob Johnston, to have the Reserve Bank” lay out the details of what would be entailed in floating the dollar. These claims are not new. I have previously dismissed them on the grounds that, if true, they would imply a seven month-long pattern of concealment and deceit not only on the part of my Minister at the time but also, and even more seriously, on the part of the then Governor of the Reserve Bank. As noted in my original article,[22] the Reserve Bank Act 1959 imposes a legal obligation on the Governor and the Secretary to the Treasury to “establish a close liaison with each other” and to “keep each other fully informed on all matters which jointly concern” them. I can (just) entertain the thought of such behaviour on Keating’s part, even though it would do him no credit, but I cannot do so on the part of the Governor. Since at no time did the latter mention these alleged conversations to me, I can only assume they did not happen. Rather, they bear all the hallmarks of post hoc rationalisations deriving from the battle between Hawke and Keating as to who should get chief credit for the float.

It is true, as Cole said in his “expansive interview” with Gordon, that Keating supported the establishment in May1983 of the Martin committee for the purpose of reviewing the earlier report of the Campbell committee. (My original article referred to my own role in that process,[23] and to the untruthfulness of Keating’s account of it given in John Edwards’s book). However, so far as I know, this is the first time it has ever been suggested that Keating saw the establishment of the committee, and its prospective report, as a launching pad on which he could float the dollar; and that it was for that reason that no other paperwork on the matter was ever prepared in the lead-up to the float. I think we may assume that, if there were a shred of truth in this fairytale, we should have heard it long ago (and from Keating himself) in what I earlier called “the battle of the books”. In short, while Cole’s continued loyalty to his former boss is unquestionable, these statements are a bridge too far.

The final, even lamer, piece of embroidery, purporting to explain the lack of paperwork leading up to the 9 December decision by saying that “the paperwork was meant to be created by having the Martin committee come out and recommend it” [the float], beggars belief even further. How would the absence of the committee’s report prevent the preparation of appropriate Cabinet documentation anyway?

The chief new material in Uren’s second article is his reference to, and extensive quotation from, what he wrongly calls “a Cabinet memorandum by Keating dated November 2, 1983”. This Cabinet document (actually Submission No. 504, entitled “Recent Monetary and Exchange Rate Developments”) over Keating’s name, and dated 1 November, 1983 was not among the personal papers on which I based my Quadrant article, so I was glad to have this reference to it. Having now obtained a copy of it,[24] a number of things about it are clear:

• The submission comprises a 6-page paper over Keating’s name, plus five attachments.[25] The two substantive ones among these latter deal with money supply questions.
   
• It primarily canvasses (in its first three pages) the matter of the monetary projections for 1983-84, the level of bond sales likely to be required to meet those projections, and the implications of all that for the interest rate outlook.
   
• It then turns, via the related question of capital inflow, to a straightforward report by the Treasurer to his Cabinet colleagues on the 27-28 October developments in this area. As my Quadrant article noted,[26] the decision to float the forward rate (and make some associated technical adjustments) was taken by Hawke and Keating in the former’s office on 27 October and announced the following day (Friday 28th). Submission No. 504 is dated Tuesday, 1 November. It was considered, not by Cabinet, but by the Economic Policy Committee, resulting in Decision No. 2379 (EP) of 2 November that “noted the submission and agreed to hold regular discussions on monetary and exchange rate policy”.
   
• The Submission was clearly drafted in the Treasury.[27] It contains, at a number of points, language taken directly from my minute to Keating of 18 October which, as noted in my Quadrant article,[28] was the basis for the 27 October ministerial decisions. My proposals in that minute were aimed at “developing the market in foreign exchange”, and that precise phrase recurs in the Submission. Similarly, my minute of 16 October had recorded my disagreement (for reasons given) with “a complete and wholesale leap to a full market system overnight”. The Submission, noting “the possibility of a floating exchange rate….at some future time”, said that “it would represent a quantum leap” from the existing system. It added that “the package announced last week represents, by contrast, an evolutionary adaptation of the present system….” – or, as my minute of 16 October said, “evolution not revolution should be the order of the day”.
   
• Uren himself notes that “the term ‘evolutionary’ came from his Treasury Secretary”, but goes on to claim that “Keating made it clear he was not convinced that the evolutionary approach would be enough to turn the speculative tide”, saying that he would “be keeping under review the effectiveness of the exchange rate system under new arrangements”. As to that, my only comment is that to stretch this entirely anodyne closing sentence into purported evidence for Keating’s far-sightedness is an unconvincing attempt to make bricks from straw.
   
• So far from justifying Uren’s claim that this document showed that “Keating started to prepare Cabinet for the December 1983 float…five weeks before the decision”, all it does is to take its place in the chain of events enumerated in my Quadrant article: my conversation with Keating in London on 8 October, my minute to him of 16 October, my further minute to him of 18 October setting the “evolutionary” process in motion, the ministerial decisions in Hawke’s office on 27 October accepting the proposals in that latter minute, and now (not previously recorded in my list) Keating’s formal report to his colleagues on those decisions. 

Kitney’s article also contains one further valuable piece of information not available to me earlier from my personal papers, namely his reference to Decision No. 2330 (EP). Having now obtained a copy of that decision from the National Archives, I see that it was made “Without Submission” on 20 October 1983.[29]

It calls on the Treasurer to “bring forward papers for consideration in the week commencing 31 October 1983 covering (a) an explanation of recent monetary and exchange rate developments,… ; (c) options for avoiding further appreciation of the exchange rate, including restrictions on short-term flows and variable deposit requirements; and (d) possible reforms to the system for setting the exchange rate…”. [My italics]

This is, it seems, the final piece of the jigsaw. Two days after receiving my key minute of 18 October (referred to above), Keating had orally raised the matters covered in it in a meeting of the Economic Policy Committee. The resulting decision (together with the Hawke-Keating decisions of 27 October) had then led to the production of Cabinet Submission No. 504, discussed above. The chain of circumstance is now, I think, complete.

I come finally to Steketee’s article. As noted earlier, it is strictly unrelated to the float, but its timing (7-8 January), and the animus – verging upon the defamatory – which it displays towards me personally has led me, with the Editor’s indulgence, to include it. How dare I claim that “the first draft of history” about this matter, as written at the time and on innumerable occasions since by assorted members of a Press Gallery of which Steketee is such an adornment, should give way before the facts?

Conclusion

The first question is whether any of these commentators have brought to light new material that would have influenced what I wrote originally. On two points of detail – the references to Decision No.2330(EP) of 20 October and to Cabinet Submission No.504 of 1 November – they have, but only in the sense of supplying two further links in the documentary chain. It is good to have them, because they further buttress the record in my earlier article; but as for providing evidence to support Keating’s overblown claims to have had his hand firmly on the tiller, they are effectively worthless.

The second question was, what then would a reasonable person now conclude about who can claim responsibility for the float decision? I may best answer that question by quoting from a message from a friend of mine[30] – something of a student of these matters – who wrote to me after reading my previous Quadrant article.

“I must say that I have long tired of the Hawke-Keating disagreement; they never add anything new…. Nor do I believe they were the key influences in the debate. Rather, they were yourself, Bob Johnston and Ross Garnaut (inasmuch as he influenced Bob Hawke). .… Above all, you have influenced me to think of the float as an evolutionary process that really begins with the discussions on the exchange rate in the early 1970s (and perhaps even earlier), through the series of discrete revaluations and devaluations in the early-mid 1970s, the switch from the sterling peg, to the US dollar, to a trade-weighted index, through the flexible peg arrangement from 1976 to 1983, the float of the forward rate to the full float.…with the decision to float being the culmination of this evolutionary process, rather than something that happened suddenly on 9 December 1983”.

That sums it up. For those still interested in pursuing the respective Hawke-Keating claims to fame, I would only add this: although both men have been serially untruthful on the topic, the number and variety of the Keating untruths have clearly outnumbered Hawke’s.