COMMONWEALTH OF AUSTRALIA
SPEECH BY
The Rt Hon. W. McMAHON, M. P.
ON
INTERNATIONAL CURRENCY
Ministerial Statement
[ From the ' Parliamentary Debates', 26 A ugust 1971]
Mr McMAHON ( Lowe Prime Minister)
The right honourable member for
Melbourne ( Mr Caiwell) has asked that I
make a statement on the measures for the
protection of the United States dollar
announced by President Nixon on 15th
August. As honourable members will be
aware, the situation in the international
currency markets is changing from day to
day -and any assessment of the situation
has to be treated cautiously at this point of
time. ' However, in the view of the importance
of the developments I feel it desirable
to give the House a preliminary
assessment. As honourable members will
know, the present disturbed situation in the
international currency markets was sparked
off by the -announcement of the President
of the United States last week that convertibility
of United States dollars into gold
and other reserve assets was to be suspended,
and a 10 per cent surcharge on all
dutiable imports into the United States,
other than those subject to quotas, was to
be imposed. Both these decisions were
announced by the President to be temporary.
But it was made clear that the removal
of the 10 per cent surcharge, and the
resumption of convertibility of United
States dollar balances, would be dependent
on certain objectives being -achieved by the
United States as a result of negotiation in
the fields of international trade and -finance
and the sharing of defence burdens.
19f2271 As to trade, the President claimed that
American products were at a disadvantage
because of unfair exchange rates. He said
that the import tax would be ended when
the unfair treatment ended. In the field of
finance, the President asserted the need
for a widespread major realignment of
exchange parities, and also for an
improved system of international monetary
arrangements generally. The President also
said that the time had come for other economically
strong nations to bear their fair
share of defending freedom around the
world. This latest disturbance on the international
currency markets is only the most
recent of a long succession of similar disturbances,
centring on one major currency
after another, and sometimes on groups of
currencies. In 1967 we had the disturbances
leading up to the devaluation of
sterling. In 1969, the pressure was transferred
from London to Paris and we had
the devaluation of the French franc * and
the revaluation of the Deutschemark. More
recently, the trouble has centred on the
United States and has been attributable in
large part to the growing balance of payments
deficit of that country. This has led
to a fall in United States official reserves
and a sharp increase in its official shortterm
liabilities. At the same time, there has
been a substantial transfer of United States
dollars on private account into the international
monetary markets of the world.
All this has served to weaken confidence in
the United States dollar on the foreign
exchanges. A number of factors has contributed to
the United States' external deficit. Prominent
among these is the rapid price and
cost inflation in the United States over the
last 5 years. The United States' position
has been exacerbated by the growing competitiveness
of some of its trading partners
and by restraints on the access of United
States' exports to markets abroad. Superimposed
on this has been the heavy
defence burdens of the United States.
Defence expenditure abroad by the United
States has recently been running at the
level of about SUS5 billion annually. One
way and another, the balance of payments
deficit has built up until, in the first half of
this year, the deficit has been running at
an annual rate of SUS23 billion.
It is not surprising, in these circumstances,
that the United States dollar is now
commonly regarded as being ' over valued'.
In other words, the existing exchange
parity for the United States dollar overrates
its international purchasing power. This, of
course, is a matter of critical worldwide
importance because of the pivotal position
in the international monetary system of the
United States dollar.
The United States dollar is the largest of
the reserve currencies in the world today
and many countries have fixed rates of
exchange on the dollar. A great proportion
of international trade and financial transactions
has been settled through the dollar in
the past. And the dollar has been adopted,
along with gold as one of the two basic
units of value in the Bretton Woods
monetary system. Other currencies have
had their par values expressed in terms of
the United States dollar and gold.
There is no doubt that the Bretton
Woods system has made a major contribution
to full employment, economic growth,
and the orderly development of world
trade and financial arrangements in the
post-war period. It has achieved this as -a
result of the adoption of a number of
working principles, not least of which has
been the system of agreed parities of rates
of exchange between participating
countries, adjustable only with the consent
of the International Monetary Fund in the
case of fundamental balance of payments disequilibrium. This system of pegged parities
has been of particular value to smaller
countries as a protection against the prewar
practice of currency manipulation and
competitive depreciations. It has also been
of value to rapidly developing countries
like Australia who do not have access to
the economic dialogues centred on the
United States and Europe.
Nevertheless, no system is proof against
the ravages of time and the Bretton Woods
system is no exception. The need for further
development of the Bretton Woods
arrangements has long been recognised,
and the most recent innovation has been
the establishment of special drawing right
which, in themselves, offer some alternative
to the United States dollar and gold as an
international reserve asset.
Another innovation, and this is very germane
to the present situation, is that the
Executive Board of the Fund ' has been discussing
the case for a greater flexibility in
-the mechanism of exchange rate adjustments.
There is a strong body of opinion
which suggests that the present arrangements
whereby exchange rates should not
vary more than I per cent from parity
should be changed by extending somewhat
the operating limits within which currencies
could be exchanged without being held
to infringe their par values -at the International
Monetary Fund.
The action taken by the United States
last week has short-circuited this debate
and take the question of exchange rate
adjustments into the field of immediate
practical necessity in the foreign exchange
markets. The 10 per cent surcharge on
dutiable imports would, were it to be continued,
strike heavily at the exports of
countries like Japan which have had a
large and growing market in the United
States for goods of the kinds subject to the
surcharge. Through the effect of this on
industries in such centres it would in turn
tend to reduce their demand for materials
supplied by other countries in the normal
course of events. The surcharge is currently
under consideration in the General
Agreement on Tariffs and Trade.
The United States has, however, said
that it sees this trade* action as a means of
securing revaluation of the currencies of
countries which it considers to have an
unwarranted advantage over it in point of
trade competition because of their existing
parities. If and to the extent that other
countries were to revalue their currencies,
the United States dollar would be devalued
in relation to them. The United States
Government has chosen this approach to
its problem in preference to seeking a formal
devaluation of its currency against all
other currencies.
Amongst other things that course would
involve the United States in altering the
value of the dollar in terms of gold. The
President has said that his Government
does not intend to alter the present dollar
price of gold. We have, as yet, no real
idea as to what the final response of other
major countries to the United States initiative
is going to be.
Under the rules of the International
Monetary Fund, the exchange parity of
any country which is a member of the
fund can be altered only if the country
itself seeks a change. It seems reasonable
to suppose that few, if any, major
countries are likely to seek such a change
unless and until other countries take steps
to do so. As yet there is no firm indication
of concerted action amongst major
countries to that end.
On Thursday of last week the Finance
Ministers of the European Economic Community,
meeting in Brussels, failed to reach
agreement on any form of common action
in the matter. The foreign exchange markets
in Europe were closed last week but
have re-opened this week. There have been
no formal revaluations on the dollar but
the majority of European countries have
allowed their buying rates for dollars to
exceed the Monetary Fund limits of 1 per
cent beyond parity with the dollar. In
point of fact, however, the markets so far
this week have been fairly steady on the
dollar and the dollar has fallen in value in
most markets by something in the region
of only 2 per cent to 3 per cent below the
rates ruling before the markets closed.
I want to stress that this is likely to be
an interim situation since it has done
nothing to achieve the more significant realignment
of exchange rates which the
United States, and the Managing Director
of the International Monetary Fund, consider
to be necessary. This fact must be
borne in mind in all our thinking and calculations. If, of course, a number of
major currencies were to seek and obtain
adjustments of their exchange parities
under the International Monetary Agreement
a question could arise as to whether
Australia should seek some such adjustment.
If such a situation were to arise, we
would need to make the most careful
assessment of it from the standpoint of our
own interests both international and
domestic. But no such situation has arisen
yet. We are keeping closely in touch with
developments and studying all possibilities.
At the same time we are preserving for
ourselves the greatest possible scope for
independence of action. If it should come
to a decision whether or not to seek some
alteration of our exchange parity there will
be only one proper basis for decision-the
interests of the Australian economy and
the Australian nation as a whole. Meanwhile,
in the state of uncertainty which
must prevail until the large issues I have
mentioned are crystallised and intentions
on the part of major countries become
clearer, foreign exchange markets are
likely to be very unsettled and changeable.
We may also see large movements of funds
between financial centres. It will be a matter
of adjusting our own exchange dealing
arrangements to meet changing situations
as they arise.
In this state of uncertainty in the foreign
exchange markets it is not possible to settle
on a firm exchange rate for the Australian
dollar. However, in order to enable overseas
transactions to be resumed, it has been
decided to continue to fix an exchange rate
with the pound sterling on a daily basis.
For purposes of the last 3 days trading the
existing parity with sterling-that is,
$ A2.1429 for œ 11 sterling-has been maintained.
It is true that, as sterling has been
traded at a rate about 2 per cent above
parity with the United States dollar, this
means that at the moment there is, in
effect, a similar small appreciation of -the
Australian dollar in relation to the United
States dollar. However, the situation is
being reviewed on a day-to-day basis and
any short term change in the rate should
not, of course, necessarily be taken as an
indication as to the long term rate that will
eventually be settled for the Australian
dollar.
For the time being, and until further
notice, banks have been advised that they
may undertake foreign exchange transactions
in respect of normal trade transactions,
other current account payments contractually
due, and the reasonable requirements
of travellers. Rates of exchange for
these transactions are quoted by the banks
under arrangements with the Reserve Bank
and are based on developments in the London
and other main foreign exchange markets
overseas. forward transactions and, of course, this
limits the scope of banks to offer such
cover to their customers. I think this is
reasonable in view of the present unsettled
circumstances on the foreign exchanges.
We will be ready to adjust our position as
required in accordance with the emerging
situation. I present the following paper:
International Currency-Ministerial Statement,
26 August 1971.
The Reserve Bank is not yet offering Motion ( by Mr Swartz) proposed:
facilities to the banks to cover them for That the House take note of the paper.
W. G. MURAY, Government Printer. Canberra