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Wednesday, 17 May 1972
Page: 2657

Mr SNEDDEN (Bruce) (Treasurer) - by "leave - I have recently returned from an overseas visit, the basic purpose of which was to enable me as the Australian Governor for the Asian Development Bank to attend the 5th annual meeting of the Bank which was held in Vienna from 20th to 22nd April 1972. I do not wish to discuss now the deliberations and developments at that annual meeting. Suffice it to say that I assured the Board of Governors in Vienna of Australia's continuing support for the Bank. In pursuance of that assurance a Bill was submitted to the House recently providing for Australia to make an additional subscription to the capital stock of the Bank. This will involve a paid-in contribution of $US25.5m to be paid over 3 years. Honourable members may wish to go further into the work of the Asian Development Bank and Australia's relations with it, when that Bill is debated before the House. What I do wish to do now is to inform the House about the international monetary situation overseas as 1 found it on this occasion and to make some observations on the outlook for the period ahead.

When I last made a statement to the House on this matter - that was in October 1971 - the world's foreign exchange markets were in a state of great confusion. On 15th August, President Nixon had announced the suspension of the convertibility of the United States dollar into gold and other reserve assets. A 10 per cent surcharge on all dutiable imports into the United States was imposed. Certain other measures were announced and one of these, the job development tax credit, had the effect of discriminating against imports into the United States of capital equipment items. This announcement was followed by a period of just over 4 months during which the currencies of most of the major countries floated upwards against the dollar. Over those 4 months the air was rife with argument between the major countries. There were differences of view about defence burden-sharing, trade concessions, the removal of the import surcharge and the job development tax credit, and the broader issue of how a currency re-alignment would be achieved, who would make a contribution to that, when and how much. We, in Australia, saw great dangers in a continuation of this state of confusion. Both the Prime Minister (Mr McMahon) and f urged early reconciliation of these differences on the member countries of the Group of Ten in statements both here and abroad. We believed it was simply not good enough for the rest of the world to have to sit back and wait and see when the protagonists in this struggle would reach an early settlement - and we said so.

The so-called Smithsonian Agreement reached in Washington on 18th December cut through this impasse. There was agreement between the members of the Group of Ten on a new pattern of exchange rates between themselves, on a 7.9 per cent devaluation of the United States dollar, which also involved an increase in the United States dollar price of gold from $35 to $38 an ounce. The import surcharge was removed together with the related provisions of the job development tax credit. Pending agreement on longerterm monetary reforms, provision was made for 2£ per cent margins of fluctuation above and below the new exchange rates. It was also agreed that reform of the international monetary system should be given prompt consideration. The new pattern of exchange rates agreed to included an appreciation over the existing par value of 7.7 per cent for the Japanese yen, 4.6 per cent for the Deutsche mark and 2.8 per cent for the Netherlands guilder and the Belgian franc. Sterling and the French franc kept their par values unchanged. The Smithsonian Agreement restored the foreign exchange markets to some semblance of order. There was increased confidence in the dollar, at least in the period immediately after the agreement. The countries outside the Group of Ten, and that includes Australia, adjusted themselves in various ways to the new pattern of exchange rates. The net result was a significant appreciation in terms of the United States dollar of most of the currencies of the countries with whom the United States traded to any large degree, and that again included Australia.

The immediate state of euphoria which followed President Nixon's announcement of the Smithsonian Agreement wore off rather quickly. Towards the end of January the United States dollar came under heavy selling pressure. There were a number of reasons for this. In the first place, the United States balance of payments deficit measured on an official transactions basis reached the awesome figure of $US29.8 billion in 19 1. But of that total only SUS2.8 billion was to be accounted for by the deficit on current account. Of the remaining $US27 billion the net outflow on long-term capital account has been estimated at around $US6.5 billion. The rest, some SUS20.5 billion, consisted of short-term capital outflow and errors and omissions which probably represented, in one way or another, movements out of United States dollars for speculative or protective reasons. What was hoped was that the Smithsonian Agreement would lead to an immediate and significant return of confidence and reflow of short-term funds back to the United States. This reflow did not occur to any significant extent. That was the first and perhaps most important reason for the renewed doubts about the dollar early this year. A second reason, and also an important one, was that, although the major countries of the world agreed on a new pattern of exchange rates in relation to the dollar on 18th December, there was no agreement as to where the currencies of those countries would open in the market in relation to their par values or central rates. In point of fact, most currencies opened up at the bottom, or thereabouts, of their permissible range of 2i per cent below or above their central rates. In these circumstances those who were in a position to move back into dollars had nothing to lose, and perhaps a good deal to gain, by delaying that return since the foreign currencies could only move up against the dollar, and with widened margins the possibilities of further gain - up to 4 per cent or so - were quite significant. A third reason was that interest rate differentials at the short end of the market, already in favour of Europe, initially widened further due to a sharp fall in United States rates. This operated as a further factor influencing those who might otherwise have transferred funds back to the United States to defer doing so for the time being since their money was earning rather more where it was. A fourth reason, perhaps of lesser importance, was that doubts arose in some quarters about the permanence of the Smithsonian Agreement because of expected delays in Congress in approval of the gold price legislation.

The net result of this slump in confidence was some further rise in dollar liabilities overseas - though considerably slowed down - and a continued rise in the official reserves of some of the United States' trading partners, particularly Japan. There was a sharp increase in the price of gold in the international gold markets and there were some signs that those operating in foreign currencies had some further incentive now to move out of dollars in anticipation of increased exchange controls in Europe and Japan against further capital inflow.

In these circumstances, the currencies cf the major countries began to move up steadily in the market against the dollar and generally passed out of the lower half of their 2i per cent margin and into the top half. This applied to the Japanese yen, the pound sterling, the Belgian franc, the Netherlands guilder, the French franc, the Deutschmark, and the Swedish kroner. Early in March there was a sharp speculative flurry on the exchanges, with a renewed run into several European currencies. This proved short-lived, partly because of the renewed imposition of a range of exchange controls by many of the major countries whose currencies were threatened. By the end of March, however, these post-Smithsonian Agreement blues appeared to have evaporated, at least for the time being. The financial authorities and the bankers in Europe and Japan are currently taking a more optimistic, certainly a calmer, view of things. And by the beginning of this month the dollar was firming again in the foreign exchanges, and there are some signs that a reflow of short term capital to the United States has emerged.

The role of the prophet is a thankless one, but looking at the international monetary situation at this point of time, and in the light of the discussions I had while in Europe and Japan, I incline to the view that there is indeed a little more brightness on the horizon than there has been for some time. There are many ifs and buts in the situation. But with application and co-operation the rest of 1972 may show signs of a return to a more stable situation. What justification is there for taking that view? Well, for one thing, those concerned one way and another with international transactions are currently taking a longer term view of the currency realignment. No-one can say whether the pattern of exchange rates which emerged from the Smithsonian Agreement was, or was not, exactly what was required. But it has given the American economy a sizable boost in terms of international competitiveness.

Depending on how the calculation is carried out, the currencies of 12 major countries have formally appreciated on a weighted average 7.5 per cent on one basis, or 10.5 per cent on another, against the United States dollar. That must give the United States trader a head start over the next year or so.

Of course it takes time for the effects of these exchange rate adjustments to work themselves out in terms of trade and payments between countries. In the first quarter of this year the United States almost certainly recorded another sizable basic balance of payments deficit, while Japan, in particular, continued in heavy surplus. But the lags involved in adjustment are now more commonly accepted. The effects of the exchange rate changes on the United States balance of payments seem likely, on present evidence, to be supported by trends in the economies of major countries. In particular, price and costs movements in the United States have been in favour of the United States compared with its major trading partners for some time and this, if continued, will further strengthen the competitiveness of the United States. So there could well be some basic improvement in the United States current account position in the period ahead. Meanwhile exchange rate trends within the margins are more likely now to be in favour of the dollar and the speculative reason for deferring a transfer of funds back to the United States has lost its weight. If the basic United States balance of payments begins to show some signs of firmly based recovery in the course of 1972, it is not out of the question thai this could be strongly reinforced by short term flows. Altogether, then, it is certainly possible now to be more hopeful about the outlook for the international monetary situation than was possible 6 months ago.

But it will not be enough to find our way out of the recent monetary crisis. What has to be done now, and this is recognised in the Smithsonian Agreement, is to establish a monetary system which will facilitate international balance of payments equilibrium and which will be conducive to the continuation of a high level of international trade. What we have said in the past is that we should proceed cautiously in this matter of reforming the monetary system. We have said that we needed first to deal with the current crisis and only then should we consider the question of possible reform.

What are some of the major issues to be considered? First and foremost we would put the balance of payments adjustment process. Last year a succession of large United States deficits culminated in a $US29.8 billion deficit. Meanwhile other countries equally persistently earned surpluses culminating in a Japanese surplus, for example, of SUS10 billion. The pressures and incentives for countries to maintain reasonable equilibrium in their balance of payments have broken down. In the second place I would put the problem, and it is allied to the first, of international movements of short term, interest sensitive and speculative capital flows. This is not a new phenomenon, but in recent years the flows have reached unprecedented heights. Ironically the problem has been a consequence in part of the development of the post war monetary system. It has been facilitated by the widening convertibility of currencies and by the growing interdependence of international capital markets. It has been partly a by-product of the very vitality of the western world economy and the growth of the multi-national corporation. And. of course, the problem has been intensified in recent times with some break down in confidence in individual currencies. The closest attention will have to be given to this matter in any discussion of future monetary arrangements.

Then there is the question of exchange rates. The Bretton Woods system has as one objective the replacement of the uncertainties of fluctuating exchange rates by a system of stable rates. There are some who say that the Bretton Wood system, in turn, has led countries to hang on to indefensible rates too long. There is a wide range of opinions on this subject. Australia, for its part, has seen significant trading and financial advantages in stable rates. There has been some support for wider margins and. indeed, the Smithsonian Agreement provides for that on an interim basis. But we have argued that flexibility should not go so far as to derogate from the basic objective of a system of relatively stable parities.

There is the issue of international liquidity. The Fund devised special drawing rights as a rational approach to the question of maintaining an adequate level of international liquidity. Right now, however, the build up of United States dollar balances in other countries' reserves has meant that the world, if anything, is suffering from a surfeit of international liquidity. Will these dollar balances show early signs of being run down? If not, what is our attitude to be to further issues of special drawing rights in the period ahead?

Then there is the issue of the desired composition of world reserves and related to that the question of the degree of freedom countries should have in the disposition of their reserves. There are proposals, for example, which are designed to displace foreign exchange balances from official reserve assets and substitute for them further issues of special drawing rights. Australia has historically been a substantial holder of foreign exchange - mainly dollars and sterling - and we would need to be satisfied about the asset we were being offered before we could even begin to consider accepting such a change.

I have mentioned a number of issues. There are others. They are all issues which will have to be discussed over a period - probably an extended period - before any general agreement is- reached. It would be misguided of us to attempt to take firm positions on such matters now. What we are firm about, however, is that such matters are vital to us and we must be present when they are under discussion.

While the Smithsonian Agreement of last December laid the basis for the present period of relative calm in the foreign exchanges, it was wrong, we believe, that a restricted group of countries, established originally for quite a different purpose, should have played such a dominant role in settling a new pattern of currency arrangements. We would not wish to see that period of confusion and anxiety between President Nixon's statements of 15th August and 18th December repeated. It would be even more wrong if decisions about the basic monetary system of the future should be similarly handled. It is for that reason that 1 spoke in the most forthright terms recently in Europe and Japan on this matter. I said that Australia was determined to insist on its ability and right to participate in the consideration of the important international monetary issues which confront us all, for the international monetary arrangements under which we operate can be of quite critical importance to all Australians - the farmer, the businessman, the trader, the financier and ultimately the man in the street.

I think it is fair to say that the views I have expressed above are now fairly generally accepted. That is to say, it is commonly agreed that there must be a forum where the future of the monetary system can be discussed among a wider group of countries than those which participated in the Smithsonian Agreement. There is a proposal which has received support in many quarters for a group of 20. This would be based on the existing fund constituencies. It would include representation from developing countries and it has been suggested that it would cover some trade matters as well as finance. Whether such a group will be established and, if so, what its terms of reference would be and how it would be managed and serviced remains to be seen. But I have made it quite clear that if such a group is established, Australia would wish to participate in it.

I will be returning to Europe at the end of this month - in fact, I will be leaving on Saturday and I will be away for 8 or 9 days - to attend the ministerial council meeting of the Organisation for Economic Co-operation and Development. This meeting will be concerned with a number of issues, but most discussion will revolve around matters relating to the working of the international monetary system, to interconnexions between trade and monetary affairs and to the appropriate forum for future negotiations. I will be taking the opportunity to press Australia's viewpoint, and particularly our claim to representation, in future discussion of these vital issues.

The contribution we can make in such discussions has many sides. For one thing, whereas most countries in the existing Group of Ten are capital exporters, we are a significant importer of long term development capital. With Britain entering the European Common Market, our relations with the enlarged European Economic

Community will undergo fundamental change and it will be more important to take every opportunity to make our own point of view known to Europe. In pressing our case for inclusion in any wider group I have been fortified by the consideration that Australia is rapidly emerging as one of the more significant of the developed economies in the free world and it has a role to play in discussions on the international monetary system. I am referring here not so much to the fact that in terms of gross national product we probably rank now about eighth among the OECD countries but more particularly that in terms of our trade and financial relations with the outside world we are now a country which is of some significance. By the end of this financial year we will have a level of reserves which will not be too far short of $4 billion. Of course, this build up in our reserves has principally come about through the sharp increase in the rate of capital inflow, but it has also been a consequence of a considerable and relatively unnoticed improvement in our basic trade position. On both counts our position in the world has changed considerably in the past 2 years or so.

Beyond that Australia is a major exporter of basic raw materials and commodities and as such is bound to have a strong position in the future in a resource hungry world. We are a very important holder of foreign exchange, holding as we do roughly $1 billion in United States dollars and $li billion in sterling. As an industrialised and rapidly developing country in South East Asia we have a unique and important perspective on world trade and financial matters and we intend to make sure that our point of view is heard, whatever forum of discussion may be agreed upon. I present the following paper:

International Monetary Situation - Ministerial, Statement, 17th May 1972.

Motion (by Dr Mackay) proposed:

That the House take note of the paper.

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