Canberra, 11 December 1967
Statement on Devaluation
The Deputy Prime Minister and Minister for Trade and Industry Mr J McEwen said today that the cabinet’s decision not to move with the pound sterling was one of deepest importance to the Australian community.
It had far-reaching implications of greatest significance for finance and for industry, deep enough to be of political consequence.
It was understood, he said that the international monetary fund would not have approved an Australian depreciation as our overseas reserves protect us against any problem at present in meeting overseas payments.
Throughout our history of central banking the international value of our currency has always been measured in terms of sterling. Previously the Australian dollar was fixed at 8/- sterling. Now it has been appreciated to 9/4 sterling. By next June, the end of the current financial year, Australia’s own international reserves can be expected to have fallen to about $900 million, little more than three months’ imports at current levels. In 1964 reserves stood at $1700 million, equivalent to seven months’ imports. So in just four years our reserves have fallen from seven months’ imports to three months’ imports. Even in the 1950s when import licensing was most stringent we were never below six months’ imports and mostly we had more than eight months.
It is commonly believed that we have ‘done nothing’. On the contrary, we have revalued our currency upwards. This is in fact one of the classic deflationary acts open to a government. The decision was taken at a time when our very substantial overseas balances were running down at a rate which could not continue for long without causing some concern. It was taken at a time when a number of our main export-earners—wool, sugar, butter—were already in very serious trouble with extremely low export prices, and when others—canned, dried and fresh fruits—faced the double problem of early reduction of British preferences in their main market, and Britain’s urgent efforts to join the Common Market and so end free access to the market which these industries were geared to.
Britain inside the Common Market would also close out our free access for diary products and meat and perhaps with some delay, sugar.
For those products for which Britain can call the price—and they are numerous and important—we can expect a reduced return commensurate with the extent to which we have increased the value of the Australian dollar in relation to the pound sterling.
For other items of our trade where Britain is not a major market, the result for our price realisations is not immediately clear. The only thing clear is that as a result of appreciation of the Australian dollar against Sterling our prices could be lower in result, but not higher. We can’t improve our position.
This is on top of a situation in which Australia has spent in foreign currency, over the past ten years, nearly £5,000,000,000 (five thousand million dollars) more than we have earned by exports and otherwise. We have avoided devaluation, or a dramatic slow-down in our growth, only by the vast inflow of overseas capital.
Our dramatic development, which has importantly been enabled by this capital inflow, is the main cause of the cost pressures which fall so heavily on our export industries. It has created the increased competition for men, money and materials which has produced rising costs.
Today the very fact of this capital inflow is the justification of our write-up of our dollar currency value and of the consequential new giant disability for our export-earning industries. The other sector of producing—manufacturing—is also deeply involved. Depreciation of our currency would make imports dearer and unless offsetting steps were taken, it could be assumed that the local industry would take advantage of the less competitive imports and with rising prices followed by rising wages internal cost pressures would increase.
However, there is no doubt that currency appreciation imposes a massive disability upon the manutacturing industries from competition from Britain’s productions valued in a lower price currency and also from the seventeen other countries which devalued with her.
Our Trade Agreement with Britain obliged us to have tariffs no higher than will enable fair British competition. The same competitive imports, now valued at 14.3 per cent less than previously must in many cases result in imports at prices harmful to our manufacturing industries and in prices to our export markets even more harmful to Australian exports of secondary products.
It is sad and serious that the decision strikes in a most selective manner at our wealth producing industries both primary and secondary. And to exacerbate this situation the decision to appreciate the value of our currency against sterling now suddenly makes it profitable for those who can do so to initiate an outflow of capital from Australia to the United Kingdom.
The new difficulties created for our export industries and for our import replacement industries added to the profitability of returning capital to the United Kingdom makes it clear that our appreciation of the Australian dollar will place important new stresses on our Balance of Payments and on our overseas balances.
If it is a fact that the International Monetary Fund would not have approved an Australian depreciation concurrent with Sterling because of our reserves built from capital inflow, then we must turn to courses which are within our own decision.
The case for deciding whether and to which extent we should apply offsetting policies must be examined against the fact that our decision to appreciate the currency was taken at a time when most traditional and technical indicators pointed to a devaluation:
- Heavy and continuous adverse Balance of Payments on current account
- Overseas funds running down quite sharply
- Terms of trade running heavily against us
- Cost of invisible items rising sharply
- Wages rising strongly
- Prices of essentials in Australia rising
- Our wholesale prices rising more sharply than other major Sterling countries
If a deliberate act of national policy inadvertently or inescapably, strikes a serious blow at industries of great importance—the export earners—the import savers—the main employment providing industries—then other acts of national policy must be applied to offset the consequences of the first.
In essence, the Cabinet has decided to take those other offsetting actions. In the circumstances that was correct, anything else would have been intolerable. It would have been intolerable to have failed to take a concurrent decision to give support to damaged industries.
However, there are many important industries where the effects will not become evident for some months, and therefore the measure of assistance these will need, cannot be calculated, declared, and applied forthwith.
In the meantime, the resolution to stand by these industries must not weaken.
A special Advisory Authority has provided the machinery and the means of avoiding serious damage to industry from imports. Similarly, an Advisory Authority on export compensation could well be the means of ensuring that there will be no serious damage to export industries. As an independent authority it could recommend measures to offset losses to export industries which on its findings are due to devaluation.
The Prime Minister has announced that the steps necessary to protect primary and secondary industry from serious damage resulting from the decision to appreciate our dollar against Sterling will be taken by the Government.
The essential necessity to take such steps is a matter of principle for the Country Party.
However, the realism of this is that there must be a competent unbiased authority to ascertain the facts of damage and make recommendations to the Government so that effect will be given to the assurance in principle, that our industries will not be damaged by our appreciation of the Australian Dollar.
Neither suffering industries nor the Government itself can afford haggling later on.
[NAA: M2684, 124]