Australia floats its dollar

December 11, 2018

On 12 December 1983, the Hawke-Keating Labor government floated the Australian dollar (A$, or $AUD) which, up until that point, had been fixed or pegged at a level determined essentially each day by the Reserve Bank of Australia (RBA) and Treasury in consultation with the government. The government also abolished its foreign exchange controls in its quest for a more market-oriented exchange rate system. It signalled a key departure from the idea that governments could control everything or regulate prices.

The United States of America and United Kingdom had floated their currencies in 1971, with many other major Western economies doing likewise during the 1970s.

The important deregulatory reforms of floating the dollar and abolishing foreign exchange controls left our balance of payments – the supply and demand for the AUD on world currency markets, the net sum of our current and capital accounts (see definitions below) – to determine our exchange rate, rather than the educated morning guesses of the authorities or the short-term political desires of a government of the day. 'The Float' shifted the RBA's focus to the money supply through short-end interest rates as the major mechanism of keeping inflation in check.

Floating the dollar also gave Australia - a great trading nation - a 'shock absorber' against the rest of the world – for example, cushioning us against:

  • booms in terms of trade 
  • falls in global interest rates, or
  • suddens increase in positive sentiment towards Australia

any of which, with a fixed dollar, required the RBA to issue more Australian money to keep it at the day’s agreed or target level (ie preventing an A$ rise). The RBA defending the peg in these circumstances had led to increases in money in the system and thus potential inflation, to which strong unions, in a then centralised wage-fixing system, would make ambit wage claims to redress. Such break-outs of wage-price spirals - unrelated to productivity - were all too common over the 1970s and early 1980s in Australia. Floating the dollar provided a badly needed circuit-breaker to this boom-bust habit.

The National Museum of Australia observes that since floating the dollar, the AUD has fluctuated from a high of US$1.10 in July 2011 to a low of 47.75 US cents in April 2001. A high dollar is good - for example - for consumers and Australian travellers overseas, increasing their purchasing power.  A low dollar is good for producers, particularly, Australian farmers, miners, manufacturers and other exporters as their produce becomes more competitive against their rivals on the world stage. The equivalent adverse impacts also apply.

Celebrate the floating of the Aussie dollar – a necessary reform, despite the poorly managed subsequent reforms of the 1980s (see further details below) – by:

Further details on subsequent reforms to the floating of the Aussie dollar

Whilst the floating of our dollar and removal of foreign exchange controls was significant, more reform was still needed in the 1980s, particularly in Australia’s labour and product markets (and arguably before the deregulation of our financial markets occurred).

  • Wage rises and industrial relations were not enterprise-based or productivity-based and industries were often uncompetitive and protected through high trade barriers, large obscure subsidies or government ownership (eg nationalised).

Labour and product market reform was glacial and timid, even though the Coalition opposition (and especially under leader, John Howard, from the mid-1980s) encouraged reform and provided the political space for Labor to fast-track them. But first Labor had to convince their own union and “industrial club” mates – eg big protected, unionised businesses and our then numerous, bloated government business enterprises (GBEs).

The banking system was thoroughly deregulated from 1985 – constituting the bulk of our financial sector deregulation which included:

  • allowing foreign banks to operate here
  • allowing banks to set their own interest rates
  • loosening prudential controls
  • allowing non-bank lenders to compete with banks, and
  • further access to foreign credit markets.

However, the new access to bank debt and world credit markets too often went to sheltered industries (eg protected from market forces), the padding of expenditures and exorbitant wage rises (still unrelated to productivity improvements, let alone at the enterprise level).

Too much of this blow-out in the broad money supply was splurged, as it fell beyond what the RBA and our then blind-sided and inexperienced prudential authorities could control, despite the float giving them increased autonomy over the base money supply and short-end interest rates. Too often this “hot cash/credit” went to unproductive uses. It also artificially inflated the prices of poorly market-tested or market-disciplined assets and activities. These new gearing levels created a huge debt hangover when interest rates eventually rose and repayments became too difficult. (See Paul Keating’s “the recession we had to have”.)

If there are some key lessons to be learnt from the reforms of the 1980s, it is that:

  • the real sector of the economy (eg product and labour markets, traded and non-traded goods sectors – aka “the current account”) should be largely liberalised and deregulated before the financial sector, to prevent the inevitable rush of new access to debt and foreign credit going to so many unproductive uses, rather than market-tested or market-disciplined assets, operations and activities,* and
  • financial deregulation (even with a reformed real economy) still needs to be carefully managed to limit the blow-out in the supply of broad money relative to the real value of goods and services in the economy, otherwise debt-fuelled asset price bubbles and inflation are unduly risked with their potential harm for future growth.

* In essence, the capital account (also known as the nominal or financial sector) had been liberated, but the current account (also known as the real sector, or product and labour markets) had not, or insufficiently.

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