The Loans Affair: The Treasury Files

The Loans Affair: The Treasury Files

The following paper has been prepared by Ian Hancock, Visiting Fellow, Dictionary of Biography, Research
School of Social Sciences, Australian National University and the National Archives historical consultant for
the 1974 Cabinet records release.
The ‘Loans Affair’, which began with the attempt by Rex Connor (Minerals and Energy) to borrow
$US4 billion from Arab sources, proved to be catastrophic for the Whitlam Government, leading to the
forced resignation in 1975 of the Treasurer (Dr Cairns) and of Connor, the Opposition’s decision not to
pass Supply and, thereby, to the Dismissal. Although the ‘affair’ did not become a public issue in 1974,
the events preceding and immediately succeeding an Executive Council meeting at The Lodge on 13
and 14 December were critical to the events of 1975.
Two Whitlam Government ministers – Cairns (then in Overseas Trade) and Connor – became
interested from September-October 1974 in securing loans from the Middle East where soaring oil
prices since late 1973 had created an investment pool of some $US55–60 billion. Their lines of inquiry
were originally directed to official sources in the Middle East, through Australian Government
representatives. Normally, Treasury would have been involved but in this case was bypassed. When
apprised of Cairns’ activities, and noting the lack of contact with Treasury, Sir Frederick Wheeler, the
Treasury Secretary, did not want to make an issue of it – but saw no virtue ‘in letting it go by entirely
unnoticed’.
Matters took a different course with the appearance in Canberra of Tirath Khemlani, a Pakistani
businessman, the General Manager of Dalamal and Sons, London, a company with a capital of
sterling ₤100 but reputedly connected to the second richest family in India. Introduced to Clyde
Cameron, the Minister for Labour, through a contact in Adelaide, Khemlani met Connor on 11–12
November claiming he could negotiate a loan of $US4 billion from unnamed Middle East sources,
repayable over a long term (20 years) at a low interest rate (7.7 per cent). In return, Khemlani wanted
to be paid a commission of 2 to 2.5 per cent (up to $US100 million). Sir Lenox Hewitt, the head of
Connor’s Department, gave Khemlani a letter on 12 November authorising him to proceed. Treasury
was deliberately kept out of the loop and although its officials heard whispers, they did not formally
become involved until Wheeler joined a meeting of Ministers and officials on 9 December. Over the
next four days Wheeler and his officials tried – but failed – to forestall the deal by mounting
arguments against it, raising questions about Khemlani’s credentials and seeking support from the
Reserve Bank of Australia and from within the Attorney-General’s Department.
Overnight on 13–14 December, the Prime Minister, Cairns (who was appointed Treasurer to replace
Frank Crean on 11 December), Connor and Senator Lionel Murphy were all present at The Lodge
where an Executive Council (ExCo) Minute was signed authorising Connor ‘to borrow for temporary
purposes’ a sum not exceeding $US4 billion and to sign the necessary documents, including a
promissory note, in order to secure the funds. The phrase ‘for temporary purposes’ was introduced on
Murphy’s advice to avoid involving the Loan Council. An attached memorandum explained that the
loan was to deal with the current world situation and the energy crisis, to strengthen Australia’s
external position, to protect the supplies of minerals and energy and to deal with current and
foreseeable future unemployment. The intention was to finance long-term resource projects – the
natural gas pipeline grid, a petrochemical plant, uranium and milling plants and the upgrading of coal
export facilities. Sir John Kerr, the Governor-General, who was not present at The Lodge, signed the
ExCo Minute in Sydney on 14 December.
At this point, Whitlam departed for a six-week overseas trip, and officials from Minerals and Energy,
the Attorney-General’s Department and Treasury, as well as the Governor and his representatives
from the Reserve Bank, began drafting the necessary documentation. When, at the end of a frantic
week, it was clear to all but those wanting to believe otherwise that Khemlani did not have access to
$US4 billion, and Khemlani came back with another proposal which required another ExCo Minute,
Wheeler moved into an even higher gear. As the National Times aptly put it (see below), he was ‘a
master of guerrilla warfare in the bureaucracy’ and ‘a bureaucratic virtuoso’, who used ‘skilful tactics,

1974 TREASURY RECORDS: SELECTED DOCUMENTS                                                             PAGE 9

and an adroit mixture of guile, wheedling, charm, brusque dismissal, scarcely veiled contempt and
expressions of open animosity’, to discredit Khemlani and stop Connor in his tracks at a ministerial
meeting on 21 December. Having told his colleagues that the game was up with Khemlani, Connor
promptly phoned him to say ‘Keep playing’. If, at this point, Connor had been held in check the
Opposition would have needed another excuse or cause to engineer the Whitlam Government out of
office. As it happened, Phillip Lynch, the Deputy Leader of the Opposition, had already received
stories about the Government seeking a huge loan from unlikely quarters. And George Harris, the
President of the Carlton Football Club, had made contact with Cairns about obtaining approval for
negotiating an overseas loan. If Cairns had taken Treasury’s advice at the end of December, he might
not hold the record as the only Federal Treasurer never to have handed down a Budget.

The documents
Many of the documents from this period have already been made public. Some were leaked to the
Opposition, or were laid on the Table of the Parliament in July 1975. John Stone’s minute to the
Treasurer on 10 December was published in Alan Reid’s The Whitlam Venture, while the records of
telephone calls and meetings on 20–21 December were published in the National Times between 14 and
27 November 1982. The documents reproduced here, including some that have already been
published in part or in full, have been assembled from Treasury’s records for December 1974. Well
aware of the significance of the ‘Loans Affair’ and thinking it might involve ‘a High Court action, a
Royal Commission and/or other investigations’, Wheeler told his colleagues on 16 December that he
wanted them to get the file ‘right’ and to make sure everything was in ‘apple-pie order’.
Although Treasury’s opposition to Connor’s loan raising activities with those it called ‘carpet baggers’
offering ‘funny money’ became well known during 1975, these documents are valuable in
demonstrating that the arguments Treasury raised were comprehensive, formidable and prescient,
and that, having been deliberately kept out of the loop, just how it proceeded to forestall and then to
thwart Connor’s ambitions. It should be noted, however, that although the Government later focused
on Treasury’s oppositional role, officials in the Attorney-General’s Department and the key figures in
the Reserve Bank also expressed doubts about the proceedings, and that the Reserve Bank was a
crucial ally in the events leading up to, and including, the ministerial meeting on 21 December.
It should be stressed that these documents primarily tell Treasury’s side of the story. It should be
noted that what Wheeler and his senior officers projected as their efforts to protect the Australian
Government from an act of madness could be, and was, regarded by Ministers and other senior
bureaucrats as obstructing the lawful actions of an elected and visionary government in the interests
of protecting Treasury’s status. In addition to what they reveal about Treasury itself, the documents
throw light on the relationships, politics and personalities within the upper reaches of the Public
Service; the extent of the secrecy and the attempts to avoid the Loan Council and Parliament; the
respective roles of Cairns, Connor and Murphy; and the level of passion generated by the whole
episode (including a hint of what Cairns later saw as racial attitudes). Some of the more important
background elements to take into account include the Government’s suspicion and isolation of
Treasury following the Budget discussions of July–September, an economy suffering from rising
inflation and unemployment, Labor’s disastrous defeat in the Queensland State election and its
vulnerability in the Senate, the removal of Crean from Treasury, Connor’s seemingly ‘untouchable’
status within Cabinet, the absence of the Prime Minister, and Cairns’ new personal relationship
occurring at the time he was both Acting Prime Minister and Treasurer.

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Treasury Warnings and the Federal Executive Council Minute

  Letter from Sir Lenox Hewitt to Mr Tiraty Hassaram Khemlani, 12 November 1974
  [A571, 1974/96 Part 1; f. 89]                                                                    12
  Note for file, ‘Proposed loan from Arab source’, 10 December 1974
  [A571, 1974/96 Part 1; ff. 59–56]                                                                13
  Minute, ‘Middle East sources of funds: Possible discussion with Dr Cairns’ from
  Mr A R G Prowse to Sir Frederick Wheeler, 9 December 1974
  [A571, 1974/96 Part 1; ff. 67–65]                                                                17
  Note for file, ‘Overseas loan offer of $US4 billion: Briefing by Mr Denis Rose of
  Attorney-General’s Department’, 10 December 1974 [A571, 1974/96 Part 1; ff. 94–90]               20
  Minute, ‘Department of Minerals and Energy: Proposal for borrowing from Middle East source’
  from Mr J O Stone to the Treasurer, 10 December 1974
  [A571, 1974/96 Part 1; ff. 114–110]                                                              25
  Note for file, ‘Middle East loan offer: Department of Minerals and Energy’, 12 December 1974
  [A571, 1974/96 Part 1; ff. 148–147]                                                              30
  Note for file, ‘Proposed US $4000 million loan: Meeting’, 12 December 1974
  [A571, 1974/96 Part 1; ff. 173–172]                                                              32
  Note for file, ‘Middle East loan’, 13 December 1974 [A571, 1974/96 Part 2; ff. 7–6]              34
  Minute, ‘Middle East loan’ from Mr H B Johnson to Mr A R G Prowse, 13 December 1974
  [A571, 1974/96 Part 2; ff. 9–8]                                                                  36
  Note for file, ‘Proposal for borrowing $US4 billion from Middle East sources: Record of
  conversation with Mr R H Dean (London)’, 13 December 1974
  [A571, 1974/96 Part 2; ff. 2–1]                                                                  38
  Note for file, ‘Proposed Middle East borrowing’, 13 December 1974
  [A571, 1974/96 Part 2; f. 44]                                                                    40
  Note for file, ‘Record of conversation with Mr R H Dean, 7.15pm 13 December 1974’
  [A571, 1974/96 Part 2; f. 45]                                                                    41
  Minute, ‘Proposal to borrow US$4 billion from Middle East Sources’ from Sir Frederick Wheeler to
  the Treasurer, 13 December 1974 [A571, 1974/96 Part 2; f. 47]                                   42
  Note for file, ‘Record of conversation with R H Dean, 10.10pm 13 December 1974’
  [A571, 1974/96 Part 2; f. 55].                                                                   43
  ‘Points that might be made’, 13 December 1974 [A571, 1974/96 Part 2; ff. 61–59]                  44
  Minute paper for the Executive Council, ‘Proposed borrowing not exceeding the equivalent of
  $4000 million dollars in the currency of the United States of America for temporary purposes’,
  Rex Connor (Minister for Minerals and Energy), 14 December 1974
  [A571, 1974/96 Part 2; ff. 78–76]                                                                47
  Minute, ‘$US4 billion loan: Executive Council procedures’ from Mr A P Bailey to Sir Frederick
  Wheeler, 18 December 1974 [A571, 1974/96 Part 3; f. 26]                                          50

1974 TREASURY RECORDS: SELECTED DOCUMENTS                                                     PAGE 11

Letter from Sir Lenox Hewitt to Mr Tiraty Hassaram Khemlani, 12 November 1974
[A571, 1974/96 Part 1; f. 89]

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Note for file, ‘Proposed loan from Arab source’, 10 December 1974
[A571, 1974/96 Part 1; ff. 59–56]

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Minute, ‘Middle East sources of funds: Possible discussion with Dr Cairns’ from
Mr A R G Prowse to Sir Frederick Wheeler, 9 December 1974
[A571, 1974/96 Part 1; ff. 67–65]

1974 TREASURY RECORDS: SELECTED DOCUMENTS                                         PAGE 17

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Note for file, ‘Overseas loan offer of $US4 billion: Briefing by Mr Denis Rose of Attorney-
General’s Department’, 10 December 1974 [A571, 1974/96 Part 1; ff. 94–90]

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Minute, ‘Department of Minerals and Energy: Proposal for borrowing from Middle East
source’ from Mr J O Stone to the Treasurer, 10 December 1974
[A571, 1974/96 Part 1; ff. 114–110]

1974 TREASURY RECORDS: SELECTED DOCUMENTS                                             PAGE 25

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Note for file, ‘Middle East loan offer: Department of Minerals and Energy’, 12 December 1974
[A571, 1974/96 Part 1; ff. 148–147]

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Note for file, ‘Proposed US $4000 million loan: Meeting’, 12 December 1974
[A571, 1974/96 Part 1; ff. 173–172]

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Note for file, ‘Middle East loan’, 13 December 1974 [A571, 1974/96 Part 2; ff. 7–6]

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Minute, ‘Middle East loan’ from Mr H B Johnson to Mr A R G Prowse, 13 December 1974
[A571, 1974/96 Part 2; ff. 9–8]

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Note for file, ‘Proposal for borrowing $US4 billion from Middle East sources: Record of
conversation with Mr R H Dean (London)’, 13 December 1974
[A571, 1974/96 Part 2; ff. 2–1]

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Note for file, ‘Proposed Middle East borrowing’, 13 December 1974
[A571, 1974/96 Part 2; f. 44]

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Note for file, ‘Record of conversation with Mr R H Dean, 7.15pm 13 December 1974’
[A571, 1974/96 Part 2; f. 45]

1974 TREASURY RECORDS: SELECTED DOCUMENTS                                           PAGE 41

Minute, ‘Proposal to borrow US$4 billion from Middle East Sources’ from Sir Frederick
Wheeler to the Treasurer, 13 December 1974 [A571, 1974/96 Part 2; f. 47]

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Note for file, ‘Record of conversation with R H Dean, 10.10pm 13 December 1974’
[A571, 1974/96 Part 2; f. 55]

1974 TREASURY RECORDS: SELECTED DOCUMENTS                                         PAGE 43

‘Points that might be made’, 13 December 1974 [A571, 1974/96 Part 2; ff. 61–59]

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Minute paper for the Executive Council, ‘Proposed borrowing not exceeding the equivalent of
$4000 million dollars in the currency of the United States of America for temporary purposes’,
Rex Connor (Minister for Minerals and Energy), 14 December 1974
A571, 1974/96 Part 2; ff. 78–76]

1974 TREASURY RECORDS: SELECTED DOCUMENTS                                              PAGE 47

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Minute, ‘$US4 billion loan: Executive Council procedures’ from Mr A P Bailey to Sir Frederick
Wheeler, 18 December 1974 [A571, 1974/96 Part 3; f. 26]

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