Dr David Kemp presented this paper at the National Archives on 5 December 2006. David Kemp was a senior adviser to Prime Minister Malcolm Fraser in 1976. Below, you can download the audio of his presentation.

My brief today is to offer an insider’s perspective into the key events and issues of 1976. In 1976 I was a senior adviser in Malcolm Fraser’s private office. I was asked to join Fraser’s office because, among other things, I had written about the need for the Liberal Party to have a leader who had a philosophy and could define directions that went beyond short-term political considerations. 

In Opposition Fraser had developed a critique of Labor and an alternative program that by the second half of 1975 had been dubbed by Robert Haupt of the Financial Review 'Fraserism'. 

'Fraserism' was a critique of big government, of centralism, of industrial lawlessness, and of excessive intervention in people’s lives. It was a reassertion of the importance of the private sector in the economy, and of individual rights and the family in social life. In the course of 1976 'Fraserism' was seen to embrace socially liberal policies to do with women, human rights, aboriginal land rights, open government and environmental protection.

I worked closely with Malcolm Fraser on all his major statements about the national and international scenes and policy directions during 1976, and had daily contact with him in relation to almost every major issue facing the government. I would say that my role combined the tasks of speech writer and general adviser. It was a relationship in which there was a high level of trust and confidence on both sides.

To understand the course of policy in 1976 it is important to recognise the context of government and settled policy tradition within which Fraser operated. The Australian economy in 1976, and in the decades leading up to that year, was politically managed – it might be more accurate to say interfered with by government - to a degree that we would now think was incredible and almost unimaginable. While the Federation policy settlement – as Paul Kelly has called it – had already begun to be dismantled – White Australia by Holt and tariff protection by Whitlam – Fraser truly stood at the transition point in relation to the role of government in the economy, and 1976 was a year that saw several of the key turning points in the management of the economy.

Fraser deserves defending against ahistorical criticisms that he failed to implement in 1976 policies that no one was advocating until after he left office, especially in relation to the labour market. The Cabinet Papers released today reveal the same Malcolm Fraser who is still an active participant in national debates.

Despite being in one sense so close to the Prime Minister I should point out that there were important aspects of his role and relationships of which I had only a very partial knowledge. Staff were rarely present during Cabinet meetings, though we worked just outside the Cabinet Room door. We talked with Ministers as they went in and out, and often experienced the emotional impact of Cabinet debates and decisions on them through their reactions and comments as they emerged. We were frequently present at meetings with Ministers and others within the Prime Minister’s own office. The Prime Minister’s relations with his Ministers and backbenchers we generally became aware of through conversations with all parties rather than direct experience. The Prime Minister had many links with people in business, the media, and the wider community that we were often aware of but in which we had little direct participation. We had regular and frequent contact with the senior officials in the Prime Ministers Department, and to a lesser extent, the Treasury, both formally and informally. I make these points to clarify the perspective from which I am describing the events of 1976.

The internal policy debate

From my point of view 1976 was dominated by its policy debates: debates about economic policy, foreign policy, family policy, health policy (especially Medibank), uranium and the environment, human rights, and aboriginal land policy in particular. They were in reality political struggles over the direction of the country and the ideas and philosophy that would govern the course of policy. All involved in the government were drawn into them – Ministers, backbenchers, political advisers, lobby groups, and the States – but at the core of government, above all, there was an epic battle for control over the direction of policy between the Prime Minister and the government’s senior official advisers in the Treasury, the Department of Foreign Affairs, and the Department of the Prime Minister and Cabinet. The Prime Minister has the ultimate power to take decisions (usually with the support of Cabinet), but if those decisions are to be sound and sustainable they need to be taken with full consideration of the options. Throughout 1976 Malcolm Fraser found himself often frustrated by the absence of what he considered an adequate analysis of policy options from the official sources of advice.

This contest over who was to have primary influence over the policy outcomes of 1976 cannot be understood without recognizing the nature of the people involved and the circumstances with which they were attempting to deal. Some of the truly remarkable personalities of Australian twentieth century politics were now centre stage, and they were grappling with political and policy issues of almost unprecedented difficulty in peacetime.

The perspective I wish to put on these debates – which revealed sharp disagreements over national directions – is that the participants were each presenting a case they believed was in the national interest. People with very different viewpoints and different perspectives were acting with integrity, though not always in ways others approved. Their disagreements led to substantial changes in the way the central institutions of government operate in Australia up to the present. They spurred on an evolutionary process of change that continues to this day.

The Prime Minister himself was a man of great personal force and policy daring, who was deeply concerned over the condition of the country. It was perhaps less obvious to outsiders than it is today that Malcolm Fraser was intensely focused on policy issues and brought to them a formidable intelligence. He worked tirelessly to find the right policy response to the problems to which he gave priority. He read, listened to and debated advice with critical intensity, and constantly demanded accurate quality input to his thinking. He engaged with the whole range of advisers, business people, trade unionists and others as he sought to understand the nature of the problems Australia faced and the best ways of addressing them. Advisers – political, official and private were always under challenge.

The primary task Malcolm Fraser set himself in 1976 was to repair what he saw as the pervasive damage inflicted over the previous three years by the Whitlam government on the domestic economy and on Australia’s external security. This was a perspective shared by his major advisers. Today, after a decade of remarkable growth, stability and prosperity, it is extraordinary to look back on an inflation rate that had peaked at 16 percent, and a system of quarterly national wage cases that in December 1975 had increased wages by 6.4 per cent, against a background of rising unemployment. Whitlam government spending increases of 20 per cent in 1973–74, 46 per cent in 1974–75 and 22 per cent in 1977–76 had undermined confidence and investment.

Both Fraser and his official advisers saw these circumstances as endangering Australia’s economic future. It was this perception that had fueled the emotions leading to the Dismissal and accounted for the intense heat of the internal debate in 1976 about what should be done.

Fraser had already had some six years of Ministerial experience prior to 1972 as Army Minister, Defence Minister and Minister for Education and Science. In 1975 he had wrested control over the careening vehicle of national policy before it crashed, and he was determined to set it on a stable course and bring it safely home. He came to the Prime Ministership with a philosophy of government and a strategy to restabilise the economy and reset the national policy direction, and that was the direction he was going to see implemented.

The official advisers of the government in the public service were themselves a formidably talented bunch, and for them as a group Fraser had considerable respect. He admired Sir Arthur Tange, whom he had worked with in Defence, and Sir Frederick Wheeler seemed a steady and reliable hand in Treasury. Foreign Affairs, on the other hand, he saw as a department under the sway of a Whitlamesque belief in détente that he believed was hamstringing countries such as Australia in their dealings with the Soviet Union, and threatening longer term national security.

Despite this, and although he had brought with him a set of political advisers acquired in Opposition, Fraser’s inclination on coming to government was to be quite traditionalist in his relations with the public service, so much so that he decided to retain John Menadue, a Whitlam appointment, as head of his own department. I did not think this was a good idea, but I believe Fraser made this decision as a signal of his intentions to a public service whose morale had been shaken by the Whitlam experience. As the months went by, the senior official advisers of the government felt increasingly confident that they would have access to the Prime Minister and be listened to.

Nevertheless, it was not long before it became evident that there were significant differences between the economists in Treasury, the Prime Minister’s department, and the Reserve Bank on the one hand, and the Prime Minister on the other over budgetary policy, over the deficit and expenditure cuts, wages policy, monetary policy and the management of the exchange rate. The key protagonist of the official view was Treasury’s rising star John Stone, whose brilliant mind, acerbic tongue, and deeply held values were accompanied by a determination to win the policy debates that was no less than the Prime Minister’s.

Stone did not lag behind the Prime Minister in his belief in the need for political will to pull Australia back from the economic abyss it was approaching. The Treasury believed that that the necessary action was major cuts to public expenditure to kill inflation.

It seemed increasingly however to the Prime Minister that Stone had succeeded too well in convincing the Reserve Bank, the economists in the Prime Ministers own department, and indeed the Treasurer himself and his office and that what should have been alternative sources of advice were in danger of becoming one. In Cabinet submissions presumably drafted by Stone for the Treasurer that are remarkable for the clarity and power of their argument, a policy case was presented that was compelling throughout the government’s advisory institutions and beyond. The Prime Minister however was far from being convinced. He thought the damage to the private sector had been greater than Treasury conceded, and that a failure to recognise this could lead to further industry collapse, with its attendant unemployment and social consequences.

I viewed the disagreements between these two men with dismay, as I admired both – indeed Stone was a friend of my father’s of long standing (though they did not always agree either), and during the year on several occasions I enjoyed his hospitality. I sought to ensure that the key issues in dispute were fully considered, so that policy decisions would be based on the best analysis possible. 

Social liberalism

The year began as it continued though to its finale, with a ceaseless round of meetings and decision-making to address what Fraser said was a much more serious situation than he had believed at the election. Sir Henry Bland, a respected mentor of Fraser, was reporting on administrative saving and large cuts were decided on in January with more to come. There was a risk of backbench members, especially the social liberals in the Senate, feeling left out. Fraser had recognised the importance of holding some of them on side during the Supply crisis. On 29 March he held a significant meeting in his office with Senators Missen, Chaney, the two Baumes Peter and Michael, and Ian Wilson (from the House), and John Hyde to consider the development of a package of socially liberal reforms, which he saw as the key to maintaining unity within the government parties when spending cuts were rousing deep concern. The Cabinet submissions and legislation on the Ombudsman, Aboriginal Land Rights, the Human Rights Commission and the decision to end sand mining on Fraser Island were examples of policy decisions that not only engaged the Prime Minister’s interest and support, but that together played a key role in maintaining Coalition unity.

While there were many important Cabinet discussions that year on a large range of policy issues, these remarks are focused on two areas in particular: foreign affairs and economic policy. These were both close to Fraser’s heart and they occupied a considerable amount of the time of his private office advisers as well as his Ministers and senior public servants.

Foreign policy

In foreign policy the major issue that concerned Fraser was the global balance between the Soviet Union and the United States. He saw Australia as having profound national interests in the state of this balance, and he was concerned that the balance had been upset by the unwillingness of the West to match the Soviet’s forces in Europe, and by America’s demoralisation after Vietnam. The result particularly affecting Australia was the forward push of the Soviets in the Pacific with little balancing from the United States.

The Prime Minister’s policy making problem was that many in what might be called the foreign policy establishment were anxious not to antagonise the Soviet Union, either by criticising its strategy, or actively seeking to arouse to counter the Soviets the countries who might provide the balance: the US, China and Japan. They tended to see Australia as almost powerless to change this situation. Fraser would not accept this. He thought ‘détente’, as it was known, was being used as an excuse for inaction. He believed the US had to resume its international leadership and that it would be helpful to Australia to have China acknowledge Australia’s opposition to Soviet expansionism.

Before Christmas 1975 I was already hearing the new Prime Minister state his views clearly to officers of the Department. The policy debate in this area in 1976 focussed around a major speech Fraser determined to give in the Parliament establishing a new strategic posture for Australia, which we called in the office the State of the World speech, and the visits he was to make in June and July to Japan, China and the United States.

The internal debate over this statement lasted for three months – from March until the statement was made on 1 June. The internal difficulties for relations between the government and its official advisers continued through the China visit that followed. The head of Foreign Affairs, Alan Renouf was strongly against the Prime Minister’s proposed stance. On one occasion he said of the Prime Minister’s view: “Even if it is true, a small country like Australia can’t say it”. He feared provoking confrontation with the Soviet Union while Fraser, with his experience in the management of power, was confident that a stronger stance would buy Australia respect.

Because of his dissatisfaction with the advice from Foreign Affairs Fraser found himself turning to Sir Arthur Tange, who commented on at least two drafts of the statement, and Alan Griffiths, First Assistant Secretary in the area in his own Department.. Peacock using his diplomatic skills to encourage wide consultation was able to push forward the views of Owen Harries who had worked with him on the Opposition’s election statement, and was promoting the concept of “enlightened realism”.

The low point in relations with the official advisers came during the China visit with a leak to Peter Costigan of a distorted version of confidential discussions between Fraser and his official advisers that had occurred one evening at the official guesthouse in Peking, suggesting that Fraser was actually looking to set up an alliance between China, Japan, the United States and Australia to check the Soviet Union. This was not accurate, as the Prime Minister had merely been musing about possibilities in the far distant future. He himself later acknowledged that such musings can be dangerous, and that he should not have taken the discussion in that direction.

Malcolm Fraser believed the leak was a deliberate attempt to embarrass him by the Department of Foreign Affairs, and it further lowered trust. Throughout the whole internal debate Fraser had shown himself scrupulous in seeking and getting alternative advice. He had confidence in his capacity to weigh it, and on several occasions modified his stance in the light of advice. He also showed however that massive determination to achieve the outcome he thought best for the country, and was highly satisfied with the outcome.

Economic policy

The economic policy differences between the Prime Minister and his official advisers became evident in the course of the preparation of the May Economic Statement, to some extent over the Budget, over the government’s role in the quarterly National wage Cases, and reached a crescendo in November with the 17 ½ per cent devaluation of the currency.

Both the Prime Minister and his official advisers put the highest priority on the control of inflation. The difference that emerged between them was over the balance to be struck between this goal and the level of activity in the private sector. Fraser saw the maintenance of strong private activity as fundamental to the social wellbeing of the community, not to mention to the political survival of the government. Nothing else would stop unemployment continuing to rise, and from working its disastrous impact on individuals and family life. He was determined to avert this if he could. He was to make the same judgement Reagan would later make in the United States – that private sector activity was crucial to the achievement of other goals - but Fraser showed himself more traditionalist than Reagan in his concern to keep the deficit under control. Treasury believed the priority was to bring inflation under control as quickly as possible and that major reduction in government spending was the principal instrument with which to do this. Fraser saw Treasury advice as one sided and likely to undermine further the private economy and lead to damaging social consequences.

In Fraser’s view private investment was being undermined by a number of factors, each of which needed to be dealt with. First among these was the crowding out effect of the massive growth in government spending increases of the Whitlam years, and the consequent increases in taxes and interest rates. On this score his and Treasury’s perspectives were not dissimilar, though as the year went on they were to differ on the speed with which spending should be cut and on the balance to be struck between tax restraint and the deficit. 

With the Report of the Mathews Committee on Taxation in his hand, warning that rising tax thresholds in the inflationary environment that existed, could destroy the private sector, Fraser determined to hold down taxes by indexing the thresholds. The electorate and industry applauded. Treasury disliked all forms of indexation because it believed they undermined the will to fight inflation. Nevertheless it was prepared to support personal income tax indexation if it judged expenditure restraint was satisfactory.

Fraser also placed great weight on the job-destroying impact of industrial lawlessness and the cost and inflation impact of quarterly national wage cases. His plan to deal with this underlines the way in which national economic policy in the 1970s was constrained by the highly regulated and politically managed labour market of the day. In an economy whose management was deeply entangled in political processes he proposed a political solution, as Hawke was to do after 1983 with the Accord. The difference between the two approaches was that Fraser’s strategy involved carrots and sticks, and a lot of ‘jawboning’ of both business and unions, while Hawke offered the unions real power.

Not until after 1983 and the Hancock Inquiry did any significant voice emerge outside government for a non-politicised deregulated labour market. Stone was to be one of the leading advocates of this policy position. But in 1975–76 Fraser proposed a strengthening of the Arbitration Commission through the creation of an Industrial Relations Bureau, and an attempt to work with responsible union leaders to restrain wage claims. This involved attempts to gain their support through such decisions as the retention of the Prices Justification tribunal, and hopes of tax cuts, and public criticism of companies such as GMH for breaching wage guidelines. Personal income tax indexation and family allowances supported this strategy. Treasury simply did not believe this would work.

Treasury at that time was not proposing an alternative to the independent Arbitration system, which it disliked but regarded as politically immovable. It seemed to believe that a big enough expenditure cut would force reality onto the Commission and the government. The Prime Minister – while willing to make substantial cuts - believed Treasury’s prescription was unbalanced and would produce further collapses in the private sector.

By March he was calling for economic advice that he thought was not rigidly laissez-faire in its attitude to the consequences of policy, and was keen to get John Rose – who later became an influential member of his private office - involved. Rose had been Senior Adviser to the Senate Committee on Securities and Exchange in the early seventies, and subsequently adviser to the Government on legislation to regulate the Australian securities market. He had first met Fraser with the members of the Senate Committee.

On 19 May, as the final elements of the Economic Statement were being put together, Stone told me that Treasury did not understand the government’s wages policy, and could not draft the relevant section of the Treasurer’s speech. The section was drafted in Prime Minister and Cabinet. This foreshadowed a much more serious breakdown in the conversation between the elected and the permanent officials that was to come later in the year over the devaluation of the currency.

Devaluation

A centerpiece of the politically managed economy – with its highly regulated labour market and wage system, import and export controls, government owned utilities and industries, anti-competitive legislation, industry subsidies and tariff protection, was the politically managed exchange rate and accompanying exchange controls. A visit from the Managing Director of the IMF, Johannes Witteveen on 12 October, as I later learnt, aroused the Prime Minister’s concern that the exchange rate was over-valued and was holding back Australia’s export industries.

In the course of their conversation Witteveen had spoken about the desirability of a more flexible exchange rate and indicated that if freed he thought the dollar would float down. He told Fraser that overseas investors were especially concerned with the underlying cost structure. Coincidentally six days later Fraser was to meet in his office Friederick Hayek, probably the most influential liberal thinker of the second half of the twentieth century. Hayek opened the conversation with the suggestion that the exchange rate should be allowed to float. Fraser pressed him as to what further action might be required if this were to happen. Hayek disclaimed detailed knowledge of the Australian economy. A more flexibly managed exchange rate was, in fact, to emerge from this debate.

Over the next six weeks a debate about the implications of devaluing the dollar dominated the internal councils of the government.

The Prime Minister saw the overvalued exchange rate as depressing Australia’s export industries at a time they needed to be revived. He thought the claims of a major inflationary impact were speculative, and ignored the impact of reviving productivity.

The policy debate was not just between the Prime Minister and the official economic advisers. It put strain on relations between Ministers, and was potentially damaging for Philip Lynch, as Treasurer, who accepted and voiced the Treasury position. As the weeks went by he began to show the strain. “I am worried about Philip, I think Treasury are badgering him – the bastards” said the Prime Minister emerging from Cabinet on 2 November.

We in the private office were more concerned by the damage the unresolved debate within the government might inflict on confidence in its economic leadership. Until then what had been perceived in the media and electorate as tough decisions had been accepted because the government was united. As the internal debate went on, the public awareness of differences grew. It is important to make the point that it was unresolved because the Prime Minister was still weighing the views put to him.

For many weeks the officials’ position was that the external balances were strong, there was no need for devaluation, and that such a move would be highly inflationary. The Prime Minister did not believe this, especially with the information he was getting from his industry sources, and having heard both Witteveen and Hayek’s views. He suspected a Financial Review Editorial on 12 November had been based on Treasury briefing. He heard Treasury’s voice in other press comment.

Fraser wanted an independent view from the Reserve Bank of Australia, and pressed its Governor Harry Knight for his views. On 12 November I was told that Knight had provided hand-written advice to Treasury to type up, and was shocked to discover in the following Cabinet discussion that not all his response had been included in the typed document. Knight was overheard to speak sharply to Wheeler about the incident.

At the Lodge on Sunday 14 November he said to me that he thought Treasury believed we would not act against its publicly known views. “I have seen other governments get into trouble with Treasury in this way…No government can be intimated by a Department in this way”. His view was clear: “We are using the exchange rate to attack inflation at the cost of no activity. It would be better for overall confidence if there were more activity”. Around 16 November Fraser heard that the BHP order book was at its lowest for 20 years. With the support of Carmody, head of Prime Ministers, and against Wheeler’s written advice, on 18 November the splitting of the Treasury Department was announced, along with an expansion of the capacity of Prime Minister and Cabinet to evaluate programmes and the forward estimates.

The strength of the departmental opposition to devaluation, reinforced by our concerns over the political impact of appearing to shift course in such a major way, delayed a decision. This ran the risk of political damage to the government. On 24 November Fraser returned from a visit to the Torres Strait, heard in Cairns of a further wage increase by the Arbitration Commission, and told his advisers that he had made the worst decision he had ever made in not insisting on devaluation earlier in the month. He feared economic recovery could be delayed six months. On the Friday he met with Lynch and Sinclair for over an hour, and followed with a further discussion in the Cabinet room.

It transpired he had received a joint document from the Treasury and the Reserve Bank presenting two policy options: no devaluation, which involved approaching the IMF and raising for a loan of around $1 billion to support the currency, or devaluation. Fraser was appalled that a possible approach to the IMF could be seen as an acceptable option. The announcement of the devaluation was made Sunday. Fraser later told me how the decision was taken. He had asked Harry Knight, the Governor of the Reserve Bank, what would be the lowest figure that would certainly lead to an upward valuation on the first following move. Knight suggested the figure would be around 15 ½ per cent to 17 ½ percent. Lynch thought that Knight had not advised a specific figure. The devaluation was in fact 17 ½ per cent. Fraser said that it was a figure chosen to ensure the next adjustment was upward. Nothing would be worse than having a further devaluation shortly thereafter.

The decision was a blow to Lynch, and for a while his usual cheeriness gave way to gallows humour. The same cannot be said of some of the government’s official advisers. The Prime Minister’s Department economists were very gloomy. In their view, doubtless the same as Treasury’s, the decision had torpedoed the fight against inflation. One official told me that in his view (unofficially) both the economy and the government were ‘stuffed’. It is a measure of how strong the group consensus among the official advisers had become that, by contrast with their despair, the directors of the Board of the IMF supported the decision to devalue and welcomed the new more flexibly managed exchange rate arrangements.

So intense was the reaction against the decision among the government’s official advisers that it led to a quite extraordinary situation in which neither the Prime Ministers Department nor Treasury would draft a statement for the Prime Minister to give in the Parliament on 9 December. The Prime Ministers department went through the motions and sent over a few desultory pages. Treasury under huge pressure managed a paragraph.

This refusal was essentially a strike that threatened to remove the government’s capacity to defend its position. It would not occur today, and in my view demonstrated how essential it was that elected leaders had their own private staffs. Indeed, without his private office, the Prime Minister would have been unable to respond in the way he wanted. John Edwards of the National Times expressed the view that if Fraser could come through the difficult times he faced over the next six months he could be one of Australia’s greatest Prime Ministers. Brian Toohey in the Financial Review referred to the Prime Minister’s “spectacular iconoclasm”.

One of the advantages hindsight gives us is that we can tell how it turned out. The government of course survived and Fraser won two more elections. The March 1977 CPI figures demonstrated to the Prime Minister’s advisers that his skepticism about Treasury’s warnings of the inflationary impact of devaluation had been sound. The more frequent adjustments of the currency that followed led to some revaluation of the currency, and the inflation rate did not blow out. The private sector did not plunge into recession. Growth in GDP was 3.2 per cent in 1976-77. Unemployment continued to creep up through 1978, falling again to 5.6 per cent in 1981.

Later governments have accepted that having both a Treasury and Department of Finance to provide separate advice on government spending and economic policy is appropriate. Out of the Prime Minister’s demands for alternative advice the Reserve Bank came to accept that it should put independent advice to the government, and the move to an independent Reserve Bank was thus set in train. In 1977 two of the government’s key Ministerial advisers John Rose and John Hewson were to initiate a move towards further flexibility in the exchange rate to avoid any repeat of the 1976 experience. Elected governments- Hawke/Keating and Howard, continued to strengthen the political advisory functions at the centre of the Australian Government and to assert their control over the public service.

The economic system in which government, politics and business were inextricably entangled has been largely consigned to the dust bin of history, though the issue of labour market regulation continues to be contested. 1976 was a year in which there were still hopes that this distinctively Australian entanglement of political manipulation and economic life might work, and in which the political resistance to big government began to gather strength.

The views expressed in this paper do not necessarily represent those of the National Archives of Australia.