Inflation and the Making of Macroeconomic Policy in Australia, 1945-85
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Inflation and the making of macroeconomic policy in Australia, 1945-85 Mike Beggs A thesis submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy, Political Economy, Faculty of Economics and Business, University of Sydney, August 2010. Statement of originality This is to certify that to the best of my knowledge, the content of this thesis is my own work. This thesis has not been submitted for any degree or other purposes. I certify that the intellectual content of this thesis is the product of my own work and that all the assistance received in preparing this thesis and sources have been acknowledged. Mike Beggs 2 Abstract This thesis traces the impact of inflation on the making of macroeconomic policy in Australia between the end of World War II and the mid-1980s. I take issue with accounts of policy change that focus primarily on ideological change on the part of policymakers. Instead, I present policy as strategic activity within a complex, evolving economic system which is not centred on policy, and in which, therefore, policy does not have a monopoly on initiative. I draw on Marxian state theory and Tinbergian theory of economic policy to explore why counter-inflationary policy emerged as an imperative for the capitalist state and how it came to play a dominant role in organising macroeconomic policy in general. I also focus in detail on the development of central banking in Australia, drawing on post-Keynesian structuralist monetary theory. The body of the thesis is divided into two parts, one dealing with ‘the long 1950s’ and the other ‘the long 1970s’. Both are treated as periods of transition, rather than of stable policy regimes. In ‘the long 1950s’ macroeconomic policy was brand new, and the authorities had to build an effective system of macroeconomic management, sometimes against the active opposition of other groups. A contradiction developed between full employment and price stability, and the latter was prioritised because of limits set by the balance-of-payments under the Bretton Woods international monetary system. The long 1970s was a period of crisis and distributional class conflict. The break-up of Bretton Woods and the movement towards flexible exchange rates changed the form of constraint but continued to impose a counter-inflationary imperative. Monetarism provided an organising and legitimating principle for extremely restrictive macroeconomic policy and the abandonment of full employment as a policy goal, even though policymakers were sceptical of its propositions. Finally, I discuss the movement towards deregulation as something which strengthened rather than undermined the central bank’s power to pursue monetary policy. 3 Contents List of figures and tables 5 Acknowledgements 8 Notes 9 PART I: INTRODUCTION 10 1: Introduction 11 2: Explaining economic policy 28 3: The central bank in an evolving financial system 45 PART II: THE LONG 1950s 64 4: ‘External balance’ and the counter-inflationary imperative 65 5: Inflation and the Keynesianism of restraint 104 6: From the ‘battle of the banks’ to the ‘credit squeeze’ 142 PART III: THE LONG 1970s 177 7: From Bretton Woods to the float 178 8: Inflation and macroeconomic policy in the long 1970s 211 9: Monetary policy in the long 1970s 248 PART IV: CONCLUSION 287 10: Conclusion 288 Bibliography 315 4 Figures and tables Figures Figure 4.1: Swan’s zones of economic unhappiness 77 Figure 4.2: Australian export, import and consumer price indices 81 Figure 4.3: Goods exports by type 82 Figure 4.4: Goods exports at current prices 82 Figure 4.5: Goods imports at current prices 83 Figure 4.6: Current account and its elements 83 Figure 4.7: Capital inflow 85 Figure 4.8: Net private capital inflow and capital account 85 Figure 4.9: Reserve Bank of Australia foreign exchange reserves 86 Figure 4.10: Consumer price indices, three countries 93 Figure 5.1: Commonwealth Government deficit 112 Figure 5.2: Changes in public revenue and expenditure 114 Figure 5.3: Changes in public revenue and expenditure, departure from trend 115 Figure 5.4: CPI inflation and unemployment rates 117 Figure 5.5: Reserve Bank of Australia foreign exchange reserves 119 Figure 5.6: Phillips’ Australian results: money-wage growth and factors 136 Figure 5.7: Phillips’ Australian curve 137 Figure 6.1: Face value of securities listed on the Sydney Stock Exchange 147 Figure 6.2: Money supply, % to GDP 152 5 Figure 6.3: Loans outstanding by institution type 153 Figure 6.4: Financial assets by institution type 153 Figure 6.5: Yields on Commonwealth Government securities 161 Figure 6.6: Private capital raisings by type 170 Figure 6.7: Private capital raisings by industry 170 Figure 6.8: Outstanding loans to private sector by financial institutions 175 Figure 7.1: Central bank foreign exchange reserves 183 Figure 7.2: CPI inflation in Australia and major trading partners 184 Figure 7.3: Cost ratio: consumer price index / export and import price indices 184 Figure 7.4: Current account balance 186 Figure 7.5: Capital account: official and private 187 Figure 7.6: Non-official capital account by type 188 Figure 7.7: Australian dollar exchange rate vs. trade-weighted index 206 Figure 8.1: Nevile’s deficit measures 216 Figure 8.2: OECD deficit measures 216 Figure 8.3: Unemployment rate 217 Figure 8.4: CPI inflation 218 Figure 8.5: Pitchford’s model of inflation 228 Figure 8.6: Estimated time-varying NAIRU 234 Figure 8.7: Money earnings and labour productivity growth 235 Figure 8.8: Real unit labour costs 236 Figure 8.9: Industrial disputes 238 Figure 8.10: Commodity price indices 241 Figure 8.11: Real earnings and productivity growth 242 Figure 8.12: Profit share of money value added 244 Figure 8.13: Pre-tax rate of profit 245 6 Figure 9.1: Assets of financial intermediaries by type 251 Figure 9.2: Indicators of bank liquidity 253 Figure 9.3: Selected interest rates 254 Figure 9.4: Holdings of government securities by institution type 260 Figure 9.5: New capital raisings by listed companies, by type 261 Figure 9.6: New capital raisings by sector 262 Figure 9.7: Non-bank financial institutions, total assets 262 Figure 9.8: Contributions to M3 growth 278 Figure 9.9: Long-term real interest rates 282 Tables Table 5.1: Auld’s multiplicand 116 Table 5.2: Auld’s multiplicand, inflation and output 117 Table 6.1: Sources of funds for companies 150 Table 6.2: Components of changes in bank liquidity 154 Table 6.3: Change in trading bank liquidity and advances 158 Table 6.4: Liquidity ratio, major trading banks 160 Table 9.1: Forecast and actual M3, real GDP, CPI and velocity growth 280 7 Acknowledgements I would never have embarked on this project without the encouragement of my wife, Raych Green, who had to shift across the Tasman Sea with me and never complained. I never would have got very far with it if she had not helped in many ways and been understanding about my working into evenings and weekends. Finally, I never would have finished it if she hadn’t gently hinted that it was about time to, and been generally wonderful during the last few months of pulling it together, despite the stresses of her own work and study. My supervisor, Dick Bryan, has been extremely important to this thesis – not only in giving vital feedback as it started to take form, but from the outset helping me to realise exactly what questions I was trying to answer. I would like to thank him in particular for taking on a student who started out with a plan that must not have sounded very promising – to write a thesis on ‘the history of money’ – and helping to turn it into a much more focused project. I would also like to acknowledge the Department of Political Economy at the University of Sydney, as a whole, faculty and fellow students. There are not many ‘political economy’ departments around and my excitement in finding it existed was never disappointed – it has been a wonderfully stimulating place to work. Among the faculty, I would like to thank in particular Evan Jones – for being an excellent guide the literature of postwar policy-making early on in my research – and Stuart Rosewarne – who has been a very supportive research co-ordinator, and who set up a regular seminar series for us research students to share our ideas. Among fellow students, I would especially like to thank Roni Demirbag, Luke Deer, Sam Russell, Chris Jefferis, Sharni Chan, Tom Barnes, Joy Paton, Danielle Spruyt, and Natasha Cortis, for academic and social support. Finally, I would like to thank Peter Kelly for help with proofreading, and I am glad I could help educate his stepdaughter about the meaning of such terrible things as ‘mixed metaphors’ and ‘anthropomorphism’. 8 Notes Throughout I have followed the regular practice of the Reserve Bank of Australia’s historical statistics in converting pre-decimal prices into dollars at the 1966 conversion rate of £1 = $2. Where the original publication or speaking date of a reference is relevant, I have indicated it in parentheses alongside the publication date of the edition consulted. For example, [Coombs, 1971 (1954)] refers to a lecture given in 1954, but published in 1971. 9 PART I Introduction 10 1: Introduction 1.1 Social structures, systems and historical time With no disrespect to history, one is obliged to believe that an excessive concentration on research into the past can be a source of confusion in analysing the present, at least as far as money and credit are concerned.