Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 538

The Aussie dollar was floated 40 years ago

These days, we take for granted that the value of the Australian dollar fluctuates against other currencies, changing thousands of times a day and at times jumping or falling quite a lot in the space of a week.

But for most of Australia’s history, the value of the Australian dollar – and the earlier Australian pound – was ‘pegged’ to either gold, pound sterling, the US dollar or to a value of a basket of currencies.

The momentous decision to float the dollar was taken on Friday December 9 1983 by the Hawke Labor Government, which was elected nine months earlier.

As they approached the cabinet room at what is now Old Parliament House, Treasurer Paul Keating asked Reserve Bank Governor Bob Johnston to write him a letter to say the bank recommended floating.

The letter, dated December 9, referred to the bank’s concern about the “volume of foreign exchange purchases and its belief that if these flows are to be brought under control we shall need to face up without delay either to less Reserve Bank participation in the exchange market or capital controls”.

By “less Reserve Bank participation”, Johnston meant a managed float. Direct controls were to be considered “as a last resort”.

The bank had long maintained a 'war book', bearing the intriguing label 'Secret Matter', outlining the procedures to be followed in the event of a decision to float.

An updated version was handed to the treasurer the day before the decision.

The US and the UK floated their currencies in the early 1970s. Since the early 1980s the value of the dollar had been set via a 'crawling peg' – meaning its value was pegged to other currencies each week, and later each day, by a committee of officials who announced the values at 9.30 each morning.

If too much or too little money came into the country as a result of the rate the authorities had set, they adjusted it the next day, sometimes losing money to speculators who had bet they wouldn’t be able to hold the rate they had set.

Keating had Johnston accompany him to the December 9 press conference instead of Treasury Secretary John Stone, who had argued against the float in the cabinet room, putting the case for direct controls on capital inflows instead.

Johnston’s presence was meant to make clear that at least the central bank supported floating the dollar.

Speculators now speculate against themselves

Keating told the press conference the float meant the speculators would be “speculating against themselves”, rather than against the authorities.

One banker quoted that night confessed to being “absolutely staggered”. “I’m not sure they know what they have done,” the banker said.

The following Monday on ABC’s AM program, presenter Red Harrison heralded “a brave new world for the Australian dollar”. He said, “from today the dollar must take its chance, subject to the supply and demand of the international marketplace, and there are suggestions that foreign exchange dealers expect a nervous start to trading when the first quotes are posted this morning”.

At the time, the Australian dollar was worth 90 US cents. At first it rose, before settling back.

Since then, the Australian dollar has fluctuated from a low of 47.75 US cents in April 2001 to a high of US$1.10 in July 2011.

The long road to the float

The idea first took hold in Australia when Commonwealth Bank Governor “Nugget” Coombs visited Canada in 1953, at a time when it was one of the few countries with a floating exchange rate.

On his return, Coombs wrote the bank should consider Canada’s experience.

A strong advocate from the mid-1960s was the bank’s economist Austin Holmes. Among those he mentored at what by then was called the Reserve Bank were Bob Johnston, Don Sanders, and John Phillips.

All three were in the cabinet room when the decision was taken.

Backed by Cairns, opposed by Abbott

An unlikely advocate in the 1970s was the left-wing Labor Treasurer Jim Cairns.

But asked in 1979 whether he was in favour of a float, the then Reserve Bank governor Harry Knight responded by quoting Saint Augustine, saying “God make me pure, but not yet”. An oil shock was making markets turbulent at the time.

In 1981, the Campbell inquiry into the Australian financial system delivered a landmark report to Treasurer John Howard, recommending a float. The idea was backed by neither the Treasury nor Prime Minister Malcolm Fraser.

Two years later, Howard watched from Opposition as Labor did what he could not.

The Liberal Party generally backed Labor’s move, with one notable exception – the later Prime Minister, Tony Abbott, who in 1994 wrote that, “changing the price of the dollar moment by moment in response to each transaction makes no more sense than altering the price of cornflakes every time a buyer takes a packet off the supermarket shelves”.

A success by any measure

The floating exchange rate has served Australia well.

When the Australian economy has slowed or contracted – in the early 1990s, the Asian financial crisis, the global financial crisis and in the COVID recession – the Australian dollar has fallen, making Australian exports cheaper in foreign markets.

When mining booms have sucked money into the country, the Australian dollar has climbed, spreading the benefit and fighting inflation by increasing the buying power of Australian dollars.

It’s why these days, hardly anyone wants to return to a pegged rate.

 

Selwyn Cornish is Honorary Associate Professor, Research School of Economics, Australian National University. John Hawkins is Senior Lecturer, Canberra School of Politics, Economics and Society, University of Canberra.

This article was originally published on The Conversation.

 

RELATED ARTICLES

Currency winners and losers

Can the battling Aussie dollar find a friend?

3 reasons the Aussie dollar has not collapsed

banner

Most viewed in recent weeks

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

Welcome to Firstlinks Edition 583

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

The quirks of retirement planning with an age gap

A big age gap can make it harder to find a solution that works for both partners – financially and otherwise. Having a frank conversation about the future, and having it as early as possible, is essential.

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

Latest Updates

Risk management

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

Planning

The gentle art of death cleaning

Most of us don't want to think about death. But there is a compelling reason why we do need to plan ahead, and that's because leaving our loved ones with a mess - financial or otherwise - is not how we want them to remember us.

Property

Why has nothing worked to fix Australia's housing mess?

Why has a succession of inquiries and reports, along with a plethora of academic papers, not led to effective action to improve housing affordability? Because the work has been aimless and unsupported by a national consensus.

Investment strategies

How to find big winners in the energy transition

The received wisdom that investors should “take a long-term view” is as well-worn as it is simplistic. Because while the long run matters, when it comes transition materials, there’s also a strong case for a bit of constructive myopia.

Economics

A Nobel Prize for work on why nations succeed and fail

The 2024 Nobel Prize in Economics has been awarded to three US-based economists who examined the advantages of democracy and the rule of law, and why they are strong in some countries and not others.

Gold

Gold: trustless, rustless, shiny, and tiny

While gold can create divisive views - Buffett called it a valueless pet rock - this assesses its place in portfolios from a supply-demand standpoint and versus currencies. Both angles suggest some exposure to gold is prudent.

Infrastructure

How will the US election impact energy infrastructure?

The US election is not far away and the result will have a key bearing on a host of markets and sectors. Here's a look at the possible ramifications for the global energy infrastructure industry, and the opportunities and risks.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.