Canberra, 1 December 1967
Confidential
Effect of the British Devaluation on the Australian Economy
Although the British decision to devalue the pound sterling may not have taken entirely by surprise those Australian officials most directly concerned with the issue, the timing of the announcement of Saturday, the 18th November, cannot have been wholly welcome to Australian Ministers, all of whom were scattered throughout Australia at that particular time, deep in the throes of a hotly contested electoral campaign for the Senate. In the event, the devaluation issue may have proved something of a blessing in disguise for the Prime Minister, since it enabled him to make a statesmanlike appearance on the national television network at the height of the campaign, and must have distracted public attention to some extent from other issues on which the Government was being painfully needled by the Opposition. At a hastily summoned Cabinet meeting on Monday, the 20th of November, the Australian Government decided not to follow the British example but to maintain the currency value of the Australian dollar. This must have been a difficult decision, and in announcing it the Government has been obliged to give certain pledges both to primary producers and to manufacturing interests, the implementation of which may still give rise to much public debate and be a source of considerable embarrassment to the Government. In this despatch I have the honour to submit some observations on the factors which the Government must have taken into account in reaching its decision and on the possible repercussions this may have on future trade policy.
2. Even before the Federal Cabinet had met to discuss the devaluation issue, Mr. McMahon, the Federal Treasurer, made a statement to the press which indicated fairly clearly that his line would be to oppose devaluation. He drew attention to the difficulty of justifying to the International Monetary Fund the need for such a move on balance of payments grounds. He pointed out that the major trading nations overseas were proposing no change in their exchange rates in order that devaluation might have the desired effect on the British economy; and he indicated that Australia, as one of the twelve leading trading nations in the world, had a similar responsibility. To the Australian people, however, his most convincing argument—and one which Mr Holt in his television address had clearly accepted—was that devaluation would create serious inflationary pressures in Australia by increasing the cost to manufacturers of raw materials and capital equipment imported from abroad. To supplement devaluation by a credit squeeze and other restrictive measures, as Britain had done, would retard the development of the Australian economy at a time when every effort is being made to mobilise domestic and foreign capital for the full exploitation of newly discovered mineral resources. Moreover, devaluation would have increased the burden of the debt (estimated by the Prime Minister at $1,000 million) which Australia has incurred towards the United States of America, on a year-by-year basis, now the principal provider of foreign capital. Mr McMahon’s task of convincing his Cabinet colleagues of the rightness of his case against devaluation was no doubt eased by the absence from Australia of Mr McEwen, the Minister for Trade and Industry, and the protagonist of the interests both of Australian manufacturers and (in his capacity as Leader of the Country Party) of Australian primary producers. I understand that the decision not to devalue was in fact taken on the morning of 20th ofNovember, before the full Cabinet assembled, at a small informal meeting which was attended only by the Prime Minister, Mr McMahon, Mr Sinclair (Mr McEwen’s Deputy) [sic], Mr Bury (Minister for Labour and National Service) and the senior officials concerned. No doubt the case for both points was fully argued at the Cabinet meeting in the afternoon at which Mr Anthony, the Deputy Leader of the Country Party, was present.
3. The strength of the case for devaluation stemmed from the effect of the British move on exports of Australian primary products. Given the heavy dependence of these products on the British market and the announcement before the Cabinet meeting that two of Australia’s strongest competitors in that market, Denmark and Ireland, were to devalue, it was clear that Australian exports would be severely affected. The depth of the New Zealand devaluation, already anticipated in Australia, would clearly have a similar result. The Prime Minister in his television broadcast referred to ‘rural industries producing for exports who still depend largely on selling their products in Britain and which could be adversely affected, perhaps critically so.’ He promised ‘an intensive study to decide what measures might be necessary in each particular case.’ The effects of the British devaluation would not, of course, fall evenly over the whole sector of primary products. The immediate financial effects were indeed limited to relatively few commodities. The Wheat Board has lost about $29 million on contracts expressed in sterling, mainly for wheat sold on credit terms or forward to China and Japan; the meat trade about $2 million and the Egg Board about $500,000. The returns from stocks of dairy products and dried and canned fruits held in London may be seriously affected, but many primary industries have been safeguarded against immediate losses by forward cover. Indeed, the sugar industry is said to have protected its return from sterling sales in this way up to the end of 1968.
4. The long-term effects on Australia’s income from primary products, as seen at the present time, also seem likely to vary widely from one commodity to another. Although nearly all primary producer organisations have expressed considerable fears of the effects of devaluation on income from their products, these fears seem greatly exaggerated in some instances. Indeed, the devaluation of sterling appears to be being used as a scapegoat, and a means of levering subsidies from the Government—to cover up structural, over-production or marketing difficulties for some products. Thus, although Britain now takes little more than ten per cent of the wool clip, the graziers have expressed anxiety about the future price of wool; but indications from the first post-devaluation sale, held after a week’s closure, are that the prices of finer types are not affected, though some drop in the price of coarser wools is to be expected following New Zealand’s devaluation. Many products, wheat, meat, dried and canned fruits, and apples and pears, should prima facie be able to hold their price on the British market since, with the exception of Spain for canned fruits and New Zealand for lamb, none of their competitors devalued. The main fear for these commodities is the possible effect of disinflationary measures on the British housewife’s spending on imported foodstuffs. The possibility of increasing competition from British agriculture has not yet been realised. At the other extreme, income from dairy products, and particularly butter, is likely to take a severe knock, estimated by the Chairman of the Australian Dairy Produce Board at between $14 and $18 million a year, primarily from the effects of devaluation by New Zealand and Denmark. New Zealand may also make inroads into the Australian share of the market in third countries for dairy products and lamb. The already sick sugar industry will also be severely hit in the long term by the effective fall in the Commonwealth Sugar Agreement price and devaluation by its main competitors in the West Indies, Fiji and elsewhere, although devaluation will probably stimulate Australian pressure for an upwards revision of the agreed price at the end of next year. And following devaluation by Cyprus, the wine industry will face sharper competition in the British market for its sweet sherries
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10. In summary, whilst the British devaluation faced the Australian Government with some difficult problems of a domestic political rather than an economic or financial nature, the decision not to devalue was a courageous one which must have appealed strongly to the growing national pride and sense of independence in this country. In presenting the Government’s decision to the nation, Mr. Holt referred to the Australian dollar as being a currency in its own right and capable of standing on its own feet. (He has since said publicly that the effects of sterling devaluation on Australia would be quite small and in the long term they should be favourable; a copy of his full statement is enclosed.)1 He went on to point out Australia’s interest in helping Britain and in seeing sterling regaining strength and certainly the desire ‘to give Britain a chance’ accorded well with Australia’s realisation of her international responsibilities. I would hope that our exporters will now take full advantage of the opportunity with which they have been presented, but they should bear in mind that Australian manufacturers are on the alert for any reckless disruption of that part of the market which they supply and will not be slow to urge corrective action. Basically, however, the decision was seen by the Government to be in Australia’s own long-term interests. It may hasten changes, already somewhat overdue, in the least productive sectors of her economic fabric. It will certainly ensure that Australia will not be impeded in the fulfilment of what she regards as her main task, the full exploitation of her newly-discovered mineral resources, and it is further evidence, if any were needed, of the emergence of independent Australian policies based on self-interest, but tempered by Australia’s awareness of her new international status.
1 Document 252.
[UKNA: FCO 20/50]