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The Whitlam Papers show how poorly past mistakes have been understood

By James Cumes - posted Wednesday, 21 January 2004


The Whitlam Papers, just released, are important not so much because they demonstrate a certain degree of incompetence on the part of the Whitlam Government as because they show us that our incapacity to handle economic and social policy wisely and positively is as great today as, and much less excusable than, it was between 1972 and 1975.

I was then a First Assistant Secretary in the Department of Foreign Affairs. Sir Keith Waller was Secretary and "Mick" - later Sir Keith - Shann Deputy Secretary.

The Whitlam government was initially a two-man team of Whitlam and Barnard. Charlie Jones told me that he had been setting off, with his family, for a Christmas holiday break late in December 1972, when a telephone call came to his home. It was from Whitlam's office telling him that the government was about to announce a lift in the value of the Australian dollar.

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At the time, Shann asked me what, in the light of that appreciation, I thought of the government's prospects. My response was: "It's a Scullin government."

By that, I meant that, just as Scullin assumed office as Prime Minister in 1929, at a time when public policies and academic advice were comprehensively unable to handle a deep economic and social crisis that had worldwide implications, so the Whitlam Government was confronted with the same intractable situation - and one of course with which other governments around the world had been and, long afterwards, continue to be unable to deal.

In its simplest terms, the essence of the problem was the belief - a belief that persists today - that inflation can be cured by a hike in interest rates or, more generally, by "damping down the economy". In fact, those policies increase inflation, inter alia, by reducing supply while demand is held up by unavoidable government expenditures. The appreciation of the Australian dollar was only one factor inhibiting real investment, productivity and production in Australia while the Whitlam government was, of course, intent on expanding government expenditures especially to improve social welfare and the living standards of the working man and woman.

At the end of 1970, I had already written a book called The Indigent Rich, which explained the sort of policies that were needed, especially in the light of the experience of the policies of the Nixon government since July 1969 and their impact on production, employment and inflation. The term "stagflation" had not then been coined but it was a phenomenon that would preoccupy governments throughout the 1970s. (Since then, American and Australian domestic consumer-price inflation has not been "solved" but shifted into large, chronic balance-of-trade/payments deficits.)

The then Minister for Foreign Affairs, Nigel Bowen, saw merit in the policies advocated in The Indigent Rich and recommended them to Treasurer Billy Snedden. However, the Treasury could neither tolerate such a turnaround in policies nor entertain proposals for economic and financial policies coming from a senior officer of the Department of Foreign Affairs. One senior Treasury officer described the author of The Indigent Rich as a "dilettante." Mainstream academic attitudes at the time - and indeed since - supported the Treasury position.

This was the atmosphere of economic policymaking when the Whitlam government assumed office in December 1972. They had little or no option but to follow mainstream economic policies - which had been, of course, explicitly adopted by the United States, Britain and most other Western governments - and to intensify a range of economic and financial problems by embarking on labour and social policies to which they had become dedicated during the 23 years they had spent in the political wilderness.

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The decision to appreciate the Australian dollar was taken by Whitlam in consultation probably with Treasury and with the team of officials, including such gifted people as Peter Wilenski, in the Prime Ministerial office. The full Cabinet had not then been appointed and Barnard is unlikely to have played an active role. Whether Frank Crean was consulted, I do not know.

I might interpolate here that, in the few exchanges I had with Crean, before and after he became Treasurer, I found him more flexible and imaginative in his approaches than Treasury, but no doubt the weight of Treasury dogma pressed down on him as time passed.

The decision to cut tariffs by 25 per cent was taken without any prior consultation with the Department of Foreign Affairs nor, so far as I am aware, with Minister of State Willesee. (Whitlam was originally his own Foreign Affairs Minister - until 1974 - with Don Willesee doing the day-to-day work as Minister of State.)

I was told of the decision on the tariff cut only when it was already publicly promulgated. I was asked only to convey the decision to other governments through diplomatic channels.

Whitlam says that the "credit squeeze" was his "greatest mistake" and this may well be. Hikes in interest rates, though they curb asset-price inflation and, with it, much highly valuable fixed-capital investment, do not curb consumer-price inflation. On the contrary, they increase those inflationary pressures. During the Whitlam years, the "credit squeeze" did this at the same time as he discouraged production through such measures as appreciation of the Australian dollar and the unilateral 25 per cent cut in tariffs.

I do not know how extensive the release of Cabinet papers from the Whitlam era has been. However, within the usual departmental and ministerial channels, I continued to advocate policies to stimulate fixed-capital investment and, with it, to increase productivity and production. At the same time, I suggested, as in The Indigent Rich, that "demand must be held down while production is pushed up, so that an equilibrium between demand and supply is achieved at a level at or above what we now regard as the level of full employment of the economy". These views were put to Prime Minister/Foreign Affairs Minister Whitlam, for example, as I recall, for a Commonwealth Heads of Government Meeting or something of the kind in Canada in 1973 or 1974. However, the dead hand of the Treasury weighed too heavily, as I think Whitlam himself noted on one of my submissions to him that came back to me around that time.

Since I had failed to turn policies around by my efforts within the government and administration, I decided to try to turn them around by "going public" and writing another book, Inflation: A Study in Stability. This was published around the middle of 1974. The blurb on the new book recorded that The Indigent Rich had been "acclaimed as an 'erudite book', 'perceptive and stimulating', 'forceful', 'imaginative', 'brilliant', and 'highly readable'." However, neither book had any practical impact on policy. The dead hand of the Treasury and conservative financial and economic policies more generally steered policies away from positive reform, not only then, but in the three decades that have followed.

Since I could not change policy, I decided to accept an ambassadorial appointment overseas from early 1975. From there, I watched the inevitable collapse of what was, in many ways, an imaginative, energetic and well-intentioned Whitlam government. I also watched, later, the mostly feckless attempts of successor governments to do better.

If the policies of The Indigent Rich had been followed, not only might the Whitlam government have survived as one of our country's greatest administrations but we would have become one of the Asian Tigers, riding along an open highway to their kind of economic and social miracles. We would have done this by exploiting the ill-advised American and other Western policies, instead of dumbly following those policies and so presiding over the chronic decline of our economy and our society, relative to so many of our Asian neighbours, and, at home, the spread of unemployment, poverty and inequality.

It would be nice to think that, whatever the failures of the Whitlam government, they have been redressed in the three decades since. But is that the case? In this new year of 2004, we will hold our breath - as long as we can! - while the Reserve Bank decides whether it will, yet again, raise interest rates to curb inflation and bounce us up and down, painfully, just one more time. We still look for salvation to even closer ties with the United States economy - an economy and society that has lost its way in the past 30 years, becoming the world's largest debtor, gutting its own industry for the benefit of some of the world's most dynamic economies and, in the process, even putting at risk its superpower/hyperpower status by massive transfers of economic power. At the same time, poverty and inequality have spread and the rewards for the ordinary, everyday American working man have hardly moved, except downwards.

Allowing for the differences in size and economic and financial consequence, that story is the story of Australia in the past 30 years too. Now, as a sort of culmination, our government's ambition is to solve our chronic economic and social problems by tying ourselves, in a free-trade area, to the very economy that epitomises the failure of our own economic and social policies.

Let us hope that the release of the Whitlam Papers will show us what to avoid and how to get back on that road to economic prosperity, progress and greater social equality that we travelled in the period from 1945 to 1969.

The present Australian government seems unlikely even to consider such a turnaround. So we must ask: Is there an Opposition anywhere out there that, in an election year, might offer us, not another Scullin government, not another Whitlam government, but a brand new, updated, wise and determined Chifley-like government to lead us out of the fog of misconceived policies and fake remedies, into a clear light in which we will use to the full the great human and material resources that our country has to offer?

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About the Author

James Cumes is a former Australian ambassador and author of America's Suicidal Statecraft: The Self-Destruction of a Superpower (2006).

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