~ SOT ER'S Drp
FOR PRESS* 148RAPF0 PM. NO. 135/ 1967
DEVALUATION: REAFFIRMATION OF GOVERNMEI'WS
DECISION
Statement by the Prime Minister, Mr Harold Holt
Since the Commonwealth Government* decided on
November to maintain the value of the Australian Dollar when Britain
devalued the Pount Sterling, the effect on Australian Industries and the
economic outlook in general have been under continuous study.
Nothing has emerged to alter the assessmnents made at the
time of the British devaluation and on which the Government's decision
was based. If anything, subsequent developments have strengthened our
confidence in the wisdom of our decision. The Government was confident,
and remains confident, that in sum, the net direct effects on our balance
of payments and on our economy are not likely to be more than marginal.
We beI eve they will, in the long term, be favourable.
We have recognised, however, that some particular
Industries might be significantly affected in the short term.
Representations on behalf of industries likely to be affeced
have been made to -the Government and are being studied. The Economic
Committee of Cabinet, the, departments directly concerned with trade and
Industry, and the industry groups themselves, are also active in asse~ sing
effects and are in close* consultation.
To ensure -that during this period of adjustment misconceptions
do not arise and thereby distort the decision the Government has taken'and
the reasons for taking that decision,' it seems desirable to restate the
basis on which our judgments have been formed.
My colleague, the Minister for Trade and Industry has
suggested that the decision, as taken, was contrary to the traditional and
technical indicators. Because of his absence abroad at the GATT meetings
In Geneva, my colleague did not have the advantage of participating In the
wide-ranging Cabinet discussions, nor did he have the detail before him
of the latest appreciation of the likely effects of British devaluation on our
own economy. The facts we faced were that, while Sterling was beind devalued
by a moderate percentage, nnst other countries, Including those who haye
the largest share of our overseas trade today, decided not to devalue.
The United States, Ca n ad a and the Common Market countries made
immediate decisions, and we had the benefit of this In forming our own
Judgment. We knew that, of the twelve leading trading nations, including
Australia, only the United Kingdom had devalued.
In the final result, of 107 countries who are members of the
International Monetary Fund, only 16 devalued their currencies. The other
91 countries, which include all major countries of the Western World
except the United Kingdom, decided to adhere to their exchange rates. ./ 2
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We had to see things in perspective. Only 13 per cent of our
exports went to the United Kingdom last year and, all told, the countries which
have devalued took only 20 per cent of our total exports. Had we followed
Sterling, we would have been devaluing against the greater part of the Western
World and our principal markets.
Such a step would have been justifiable only If our own domestic
and external relations made it absolutely necessary.
There were no elements In our economic situation to warrant
this. The economy is sound, and we have a steady growth rate.
While our external reserves have fal~ sn to some extent from the
very high level they reached In 1963-64, they are still relatively strong.
Our reserves In gold and foreign exctiange amount to 070
million. Our drawing rights with the International Monetary Fund total
$ 630 million. Therefore, our total first and second line reserves is 700
million. On a longer view, our balance of payments prospects are highly
promising. Our capacity to produce for export is growing rapidly. Developments
In mineral production will add greatly to our export earnings. Our
export capacity is also being enlarged in other directions, and import saving
production is increasing.
We do not foresee any drastic reversal in the general level of
capital inflow from abroad.
It has been said that, by maintaining the value of the Dollar, we
appreciated our currency. The truth is we neither appreciated nor devalued it.
Since 1948, the Pound value of our currency in relation to other
currencies has been established with the International Monetary Fund as
have the Pound values of most other national currencies outside the Communist
world. Most other countries took the same decision. They decided to
stay where they were.
What happened was that the United Kingdom was forced Into a
devaluation of her currency because of a crisis in her balance of payments and
her domestic economy. The leading trading nations of the world, including
Australia, had no substantial reason to change.
There was no crisis in our balance of payments or in our
domestic economy. There is none now.
Devaluation for Australia at this stage would have brought costs
and penalties. It would have meant we would have had to pay more for our
Imports and, in our case, imports mean, very largely, materials for
production and capital equipment. To add to their costs means adding to
costs through industry, Including export industry.
Furthermore, it could have set inflationary forces moving. It
could have provided grounds for higher wage rates and for support to industries
afflicted with excessive costs. / 3
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These things we did not want to happen. V" e have a valuable
reputation for stability and for good management of our economic affairs.
have no intention whatever of impairing that reputation.
It has been suggested that we face a massive inflow of cheap
British goods competing with our own manufactures. This does not stand the
test of facts today. There will be changes in Britain which bear directly on her economy
and on the extent of her new ex: port potential. Sterling costs of Britain's
imports will rise. Corporation tax is being increased from 40 per cent to
42 per cent. Export and selective employment tax rebates for most
manufacturers will be abolished. These alone, it is estimated, could add
7 per cent to British costs. There is little doubt too, there will be increases
in wage costs as time goes on.
The United Kingdom does not have a great deal of surplus capacity
for production, and her work-force is more or less constant. To raise export
production, resources will have to be shifted from other industries, and this
will take time. Our assessment here is that the United Kingdom will concentrate
its export drive on North American and continental markets. We take only
about 5 per cent of Britain's total exports, and it is reasonable to expect that,
of any additional exports she builds up, only about that proportion will find
their way into Australia.
In any case, some 70 per cent. of our imports from Britain
come in free of duty, which indicates that largely they represent goods of
various kinds which are not produced here.
There was no sound nor obvious justification for devaluation. Had
we done so we would have struck at the confidence which other countries have
acquired in the stability of Australia, and could have compromised our
prospects of attracting a continuous and increasing capital inflow.
The question has been raised whether the International Monetary
Fund would have approved an Australian devaluation. Under the rules of the
Fund, members must secure approval for any variation in their currency values.
To support a claim for a change, it is necessary to establish a
chronic external imbalance which shows no reasonable prospect of correction
by increased exports or by reduced imports, or by the imposition of tolerable
domestic measures. We were not and -are not in a state of economic ill-health, V7e
did not seek approval from the Fund for devaluation. We had no case to make for
devaluation, but we did have confidence in the strength of our own currency and
the capacity of our economy and the Australian people to adjust to change.
Nevertheless, the Government is conscious that certain industries,
which still depend largely on selling their products in Britain, could be adversely
affected. It was apparent that since the impact would vary from industry to
industry, creating a different set of problems for each, the right course would
be to study their problem intensively and decide what measures would be
necessary in each particular case. / 4,
7
.8 The Government is doing this now. Until results of Its
current industry consultaticas cnnbe weighed, Cabinet will not decide what
new machinery, if any, is necessary to give effect to the Government
policy, already announced, of giving special assistance in those areas
where industry may suffer directly because of the British decision to
devalue. There have been, since the decision on 20th November, a
series of talks with industry groups, departments and marketing boards.
There is a good deal of information coming from overseas which also has
to be weighed in our conclusions am to the future course of action.
What has been done by the Government has been designed
directly and deliberately to protect the strength of the Australian Dollar.
This is fundamental to the soundness of our economy and or prospects for
continued expansion. We are satisfied we made the right decision on every
count.
CANBERRa,, 12th December, 1967