> So how did Australia's role as a commodity exporter enter into all this? The
> rule in the markets these days is that in times of rising commodity prices,
> you buy the A$ (and the C$). That would put a damper on domestic prices. How
> did that work during the era of fixed exchange rates? But countering the
> currency effect, strong commodity prices would heat up the Australian and
> Canadian economies, which would increase inflationary pressures. Since the
> 1945-80 period was one of generally rising commodity prices, how'd this
> effect Australian inflation, if at all?
Good question! Yeah, commodity prices were a big influence, but it’s a complicated story. Minerals were actually not very important until the great discoveries of the mid-1960s. Before that the main thing was wool. In the early years Bretton Woods wool prices were taking off (along with other primary commodities, but wool was by far the most important to Australia), and around the Korean War spiked to several times their 1945 level. Then they collapsed, but in the meantime the boom had a ratchet effect on domestic prices and money-wages: The massive windfall flowed through farm income-expenditure and generated a CPI inflation rate of more than 20 percent in 1950/51, which automatically flowed into wages via Award cost-of-living adjustments.
Under Bretton Woods in the 1950s it was illegal for residents to export capital, and there wasn’t a lot of speculative capital movement (although there was a surprising amount flowing in during the late 1940s speculating on a revaluation before fixed exchange rates were cemented in). But external discipline was enforced through the trade account. Because domestic costs and incomes were ratcheted up by the wool boom, there was a persistent tendency towards balance-of-payments problems – with crises in 1951/52, 1955/56 and 1960/61 as foreign exchange reserves threatened to run out. Each time the government was forced into disinflationary action, and policymakers saw the only long term hope in holding down domestic money-wages and prices to narrow the real exchange rate gap. Devaluation was prevented by fears of an inflationary spiral and the political power of farmers – the Country Party being an essential part of the conservative Coalition government. (The economic technocrats tended to fear the farmers more than the unions, because the union leadership could be persuaded to think macroeconomically, while the farmers’ politics was wild and irrational.)
In the early 1960s policy did manage to stabilise prices (basically zero inflation) for a few years at the cost of over-3-percent unemployment. Then the mineral discoveries began, and a torrent of foreign direct investment relieved the pressure on exchange reserves forever. It changed everything. By the turn of the 1970s, Australia was a balance-of-payments (but still not trade) surplus country. A flood of speculative capital joined the FDI (actually you can’t draw a firm line between them) and there was a stockmarket and housing boom and bubble. When Bretton Woods was obviously in its twilight, most expected the $ Aus to go up and that intensified the inflow. Generalised inflation was a result – it was undeniably ‘imported inflation’ in the beginning.
Once Bretton Woods finally broke, the Coalition tried to hold down the dollar for a while against great market pressure (though it had effectively revalued against the US with Nixon’s original devaluation). The new Labor government in 1972 lifted it once and allowed the second US devaluation to have its full effect – for a total revaluation against the $US of 25 per cent since 1971 – and welcomed this as a counter-inflation measure. For the same reason, it cut tariffs 25% across the board. But manufacturing was hammered, recession ensued, and before long market pressure was pulling the dollar back down. It was chaos for the rest of the decade - a bucking of the dollar up and down – and governments had to progressively let it move more and more flexibly until it was finally floated in 1983. Since floating, currency movements have tended to work as a shock-absorber for commodity price fluctuations and they haven't had as destabilising an impact. But now discipline on macroeconomic policy works through the currency market rather than the foreign exchange reserves.
Mike Beggs