The Money Men by Chris Bowen (superbooks4u .txt) 📕

May 1978, the Monetary Policy Committee decided to make no changes at that time, but it did ask the Treasury and the RBA to report on a step-bystep process for floating the dollar in due course. The government’s central economic policy agencies duly ignored this request, reporting back in August that they had not changed their views.28 Thus the bold move to float the Australian dollar would have to wait another five years, until the Hawke government took office.

It is to stretch credulity for Fraser to argue, as he does in his memoirs, that ‘had Howard been pressing for the floating of the dollar at this time he would have been sailing with the wind,’29 given Fraser’s oft-expressed opposition to the Hawke float. By the same token, it is very clear that Howard did not press for a float at the time. If a treasurer had been arguing robustly for such a policy approach, strongly supported by the prime minister’s central agency, it would have made for a very interesting Cabinet debate.

As mentioned earlier, the decision on how the price of government bonds should be set was also subject to a robust policy debate within the Fraser government. In this instance, the government made the right, deregulatory decision. But it was a very close-run thing.

For many years, the government had set the price at which it would sell its bonds, by which it financed its debt. This was a clunky system and meant that the government might not attract enough buyers if the price was too high. Even more importantly, the fact that the government set the interest rates meant there was often a political imperative to keep the interest rates lower than the fight against inflation would stipulate was necessary.

Treasury notes were used to finance government debt in the short term, while Commonwealth bonds were issued for much longer terms. Key advisers in Fraser and Howard’s office knew the irrationality of the system and argued for change. Fraser raised the issue in Cabinet in January 1978, at the same time as he raised the prospect of a market mechanism for setting the price of the dollar. Treasury was asked to prepare a paper on the issue, but it came back warning there was no advantage in letting the market determine the interest rates on Treasury notes and Commonwealth bonds, and that the premiers, who also financed their deficits through state bonds, would never agree.

The Monetary Policy Committee of the Cabinet, however, with Fraser doing the prodding, was not easily deterred. In February, the committee instructed Treasury and the RBA to prepare another paper, which would look at the issue in greater depth. This time, the Treasury’s tactic was to hope the issue would go away. In May, the committee issued a reminder to the Treasury that the paper was outstanding and asked for it as a matter of urgency. When the paper was finally submitted, it repeated the well-worn arguments against reform, especially in relation to Commonwealth bonds.

Undeterred, the Monetary Policy Committee decided that it wanted, by September, Treasury notes issued by tender and a ‘tap system’ introduced for bonds, by which the market would be tested regularly to ensure that the interest rate the government was charging was in keeping with market expectations. Despite this decision, in December, the Prime Minister’s Department was still sending reminders to Treasury to implement the decision. Fraser then pressed Howard, who agreed to ensure that the tender system for notes was introduced later that month, and that the tap system for bonds was implemented by April 1980.

Fraser, encouraged by his advisers, was not long satisfied, however. The prime minister continued to push for a full move to a market system to set the interest rate of bonds. Fraser and the co-author of his memoirs, Margaret Simons, record that Howard resisted the move. They then take up the story of how Fraser convened an urgent meeting to push the issue to its limits:

Treasury officials were being called over. Everyone was to be asked into the Cabinet room to debate the issue. The discussion was bruising, with John Stone vigorously arguing the case against change. The debate went round and round. Stone said that the premiers would not like such a change and it would cause instability. Finally, Fraser called a halt … Fraser said he was convinced of the need for change, but that without the support of the Reserve Bank and the Treasury it was not going to be possible to move.30

Eventually, Fraser took his own soundings and found that contrary to the Treasury warnings, the premiers were quite relaxed about the proposed change. He again took the issue to Cabinet, by now with Howard’s support, but Cabinet decided to wait until the Campbell Inquiry had reported. It is interesting that the Cabinet was still reluctant to make the move. It is difficult to imagine a joint recommendation from a prime minister and treasurer in any of the governments that succeeded Fraser’s being rejected by a Cabinet.

Inevitably, the Campbell Inquiry recommended that Commonwealth bonds be sold by tender. This was enough to convince the Fraser Cabinet to act. Finally, in July 1982, the first tender for Commonwealth bonds was announced. Four valuable years had been lost in wrangling as this worthwhile reform sat on the backburner.

The eventual delivery of the Campbell report marked a transition in the respective roles of Fraser and Howard. Fraser, rattled by a leadership challenge by Andrew Peacock and concerned by poor poll results, became exceedingly timid, just as Howard, boosted by his election as deputy leader of the Liberal Party (on Lynch’s resignation from the post in 1982), and feeling more assured in his pro-market tendencies, became a stronger advocate for pro-market reforms. If they had been more in sync during the various phases of their government, worthwhile financial reform may have come to Australia sooner.

Howard’s transformation had been gradual. In November 1980, he had recommended to Cabinet that the government-imposed ceilings on interest rates be revoked.