Australia and the great depression: a study of economic development and policy in the 1920s and 1930s 9780424066608

Table of contents :
Frontmatter
List of Tables (page ix)
List of Figures (page xi)
Preface (page xiii)
Acknowledgements (page xv)
Abbreviations (page xvi)
I OUTLINE (page 1)
II THE INTERNATIONAL SETTING (page 12)
III THE NINETEEN-TWENTIES AND THE DEPRESSION (page 47)
IV INSTITUTIONS AND DOGMAS (page 76)
V AUSTRALIA AND THE LONDON CAPITAL MARKET, 1927-9 (page 96)
VI DRIFT INTO DEPRESSION, 1929 (page 108)
VII TOWARDS THE MOBILIZATION AGREEMENT (page 130)
VIII THE BALANCE OF PAYMENTS AND DEVALUATION (page 140)
IX CRISIS IN GOVERNMENT FINANCE (page 169)
X THE FORMATION OF THE PREMIERS' PLAN (page 213)
XI MODUS OPERANDI OF THE PLAN (page 256)
XII ECONOMICS OF RECOVERY (page 283)
XIII RECOVERY POLICY: THE CANONS OF SOUND FINANCE (page 311)
XIV DOMESTIC RECOVERY POLICY: PUBLIC WORKS, RELIEF AND WAGES (page 329)
XV RECOVERY POLICY: EXTERNAL (page 351)
XVI CONCLUSION (page 372)
Appendixes (page 379)
A. Loan Raising and Stock Prices, 1972-32 (page 380)
B. Estimates of the Size of the 'Outside' Exchange Market in the half-year August 1930 to January 1931 (page 383)
C. Stock of Money, Proximate Determinants of Money and Velocity (page 384)
Bibliography (page 393)
Index (page 405)

Citation preview

AUSTRALIA AND THE GREAT DEPRESSION

AUSTRALIA AND THE

A STUDY OF

ECONOMIC DEVELOPMENT AND POLICY IN THE 1920s AND 1930s

| by C. B. SCHEDVIN

SYDNEY UNIVERSITY PRESS in association with

OXFORD UNIVERSITY PRESS

SYDNEY UNIVERSITY PRESS

in association with

OXFORD UNIVERSITY PRESS AUSTRALIA © C. B. Schedvin 1970 First published 1970 Reprinted 1973, 1977, 1988

This book is copyright. Apart from any fair dealing for the purposes of private study, research, criticism or review as permitted under the Copyright Act, no part may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without prior written permission. Inquiries to be made to Oxford University Press.

Copying for educational purposes Where copies of part or the whole of the book are made under section 53B or section 53D of the Act, the law requires that records of such copying be kept. In such cases the copyright owner 1s entitled to claim payment. National Library of Australia Cataloguing-in-Publication data: Schedvin, C. B.

Australia and the great depression. Index. First published, Sydney : Sydney University Press, 1970. Bibliography. ISBN 0 424 06660 2. 1. Depressions — 1929 — Australia 2. Australia — Economic conditions — 1920-1939. I. Titie. 330.994042

Printed by Peter Chong Printers, Malaysia Published by Sydney University Press in association with Oxford University Press, 253 Normanby Road, South Melbourne, Australia

CONTENTS

List of Tables 1X List of Figures x!

Preface X11 Acknowledgements XV

Abbreviations Xvi

I OUTLINE 1

11 THE INTERNATIONAL SETTING 12 The Role of the United States 12 International Trade between the Wars 21 International Currency and Investment 34 Comparative Magnitudes 43

DEPRESSION 47

III VHE NINETEEN-TWENTIES AND THE Post-War Economic Growth 47 Industrial Development 51

(a) Expansion 1919-24 53 (b) Stagnation 1925-8 59 Rural Development 62 The Public Sector and Structural Change 68

IV INSTITUTIONS AND DOGMAS 96 The Banking System 76

(a) The Trading Banks 76 (b) The Gommonwealth Bank 82 © Government Treasuries and the Loan Council 87 Vv

Contents (a) The Commonwealth Treasury 88 (b) State Treasuries 89 (c) The Loan Council 91 The Labor Movement, the Banks and the Bondholders 94

MARKET, 1927-9 96

V AUSTRALIA AND THE LONDON CAPITAL The Voracious Borrower 96 The Loan Council Hesitates 101

In the Red 104

VI DRIFT INTO DEPRESSION, 1929 108 ‘There is Something Wrong Somewhere’ 108 Growth of the External Floating Debt 113 The Scullin Government 116 Departure from Gold 121

> Interest Rates 126

VIE TOWARDS THE MOBILIZATION AGREEMENT 130 The Collapse of Credit 131 In the Hands of the Bank of England 132 The Agreement 136 VIII THE BALANCE OF PAYMENTS AND DEVALUATION 140

The Tariff Wall 140 Expanding Exports 145 (a) ‘Grow More Wheat’ 146

(b) Wine Export Bounty 153 (c) Gold-Mining Bonus 154 Devaluation 155

IX CRISIS IN GOVERNMENT FINANCE 169 The Immediate Problem 170 An Essay in Mistrust: the Central Reserve Bank Bul 172 The Orthodox Solution 176 Balancing Budgets and the Melbourne Agreement 178 The Aftermath of the Melbourne Agreement 184

(a) The London Position 184 | (b) Repudiation and the New South Wales Elections 186 (c) An Economy Session of Parliament? 188 v1

Contents ‘Release of Credit’ 191 Deficit Finance and the Loan Council 196 ‘Buy a Bond of Honour’ 201 Contraction and the Stock of Money 203 1930: A Summary 210

x THE FORMATION OF THE PREMIERS’ PLAN 213 The Return of Scullin and the Parkes By-election 213 ‘Sharing the Burden’ 215 (a) The Federal Wage Judgment 215 (b) The Economists 218 Planning for National Emergency 225 The East Sydney By-election and Default 232 The London Floating Debt Again 236 The Atrophy of the Scullin Government 239 Reducing the Patient’s Diet 244 The Plan: Summary of Origins and Assessment 250

XI MODUS OPERANDI OF THE PLAN 256 Reduction of Interest Rates 256

(a) Bank Interest 256 (b) The Conversion Loan’ 262 (c) Mortgage Interest and Rent 266 Budgets and Deficit Finance 267 Unemployment and Wheat Industry Relief 274 London Credit and Exchange 278

XII ECONOMICS OF RECOVERY 283 International Recovery 283 Course of Recovery 287 External Factors in Recovery 291 (a) Export Prices 291 (b) Capital Movements 294 Impact of Fiscal Policy 295 Monetary Changes 299 Industrial Expansion 301

FINANCE 311

XIII RECOVERY POLICY: THE CANONS OF SOUND

The Defeat of the Scullin Government and the General Elections of 1931 312

, vu

Contents ‘Balanced Budgets and More Employment’ 316 Budget Finance and the Premiers’ Plan, 1932-5 320 XIV DOMESTIC RECOVERY POLICY: PUBLIC WORKS,

RELIEF AND WAGES 329

Finance of Public Works 329 Unemployment Relief Policy 337 Wheat Industry Assistance, 1932-5 340 (a) Direct Assistance 341 (b) Debt Adjustment 342 Wages Policy, 1932-5 345

XV RECOVERY POLICY: EXTERNAL 351 Lang’s Second Default 351 Refunding the Overseas Debt, 1932-5 354 Exchange Rate, 1932-5 359 The Note Issue Reserve 365 Tariff Revision, 1932-5 366

XVI CONCLUSION 372

Appendixes 379 A. Loan Raising and Stock Prices, 1927-32 380

B. Estimates of the Size of the ‘Outside’ Exchange Market

in the half-year August 1930 to January 1931 383

Velocity 384 Bibliography 393

C. Stock of Money, Proximate Determinants of Money and

Index 405 vu

TABLES

Indices, 1920-9 | 14

1. United States: Per Capita Real Income and _ Industrial

2a. The Effect of Depression on National Product and Industrial

Production in Ten Countries 44

Countries 45

2b. The Effect of Depression on National Expenditure in Five

3. Unemployment Rates in Seven Countries 46

4. Indicators of Economic Growth 48

1928-9 55 Years, 1907 to 1927-8 56

5. Rates of Growth in Manufacturing Industry, 1907 to 1938-9 52

6. Manufacturing Investment in the “Twenties 53 7. Import Replacement in Selected Industries and Years, 1907 to

8. Indices of Manufacturing Output, Selected Industries and

Years, 1907 to 1927-8 57

g. Shares of Manufacturing Output, Selected Industries and

10. Composition of Imports for Selected Years, 1909-10 to 1938-9 62 11. Share of Rural Sector in Gross Domestic Investment, Selected

Periods, 1870 to 1928-9 67

12. Social and Productive Investment in Gross National Product,

Selected Periods, 1871 to 1928-9 71

1919-20 to 1928-9 73

13. Ratio of Overseas Interest and Dividend Payments to Exports,

14. Average Annual Balance of Payments, 1925-6 to 1928-9 73 15. Geographical Distribution of New British Overseas Invest-

ment in Government Securities, 1907-13 and 1922-8 100 16. Merchandise Imports and Exports, Quarterly, 1929 113

1929 115

17. Selected Banking Statistics, Quarterly, 1929 114 18. Australian Short-Term Debt in London as at 31 December

1g. Australian Short-Term Debt in Lordon as at 31 August 1930 139 20. Merchandise Imports and Exports, Quarterly, 1930 and 1931 145

21. Selected Banking Statistics, Quarterly, 1930 203

1928-9 tO 1931-2 207

22. Rate of Change in Money and Real Magnitudes, Annually, 1X

Tables 23. Change in Money Stock that would have been produced by one determinant under ceteris paribus assumption, March

1929 to June 1931 208 1928-9 tO 1931-2 211 2%. Selected Banking Statistics, Quarterly, 1931 260 24. Rates of Change in Employment, Selected Annual Series,

26. Estimated and Actual Budget Results, 1931-2 273 27. Indices of World Production and Trade in Manufactures and

Primary Products, 1932-7 284

28. Extent and Rate of Recovery in Nine Countries 286 29. Recovery in National Expenditure and Product, Total and

Per Capita, 1931-2 to 1936-7 289

30. Share of Increase in Real National Product, Main Industry

Groups, 1932-3 to 1936-7 290

31. Share of Increase in Employment and Money Income, Main

Industry Groups, 1932-3 to 1936-7 , 290

32. Balance of Payments on Current Account, 1928-9 to 1936-7 293 93. Proximate Public and Private Overseas Capital Movements,

1930-1 to 1936-7 294

34. Commonwealth and State Budget Deficits and State Net Loan

Expenditure, 1927-8 to 1936-7 296

35. Composition of Government Current Expenditure, Alternate

Years, 1928-9 to 1936-7 297

36. Change in Money Stock that would have been produced by one determinant under ceteris paribus assumption, 1932-8 300 37. Rate of Change in Manufacturing Employment, Total and

Selected Industries, 1931-2 to 1936-7 803

to 1936-7 307 tO 1934-5 327 to 1936-7 340

38. Gross Investment in Selected Manufacturing Industries, 1931-2 39. Commonwealth and State Government Budget Results, 1931-2

40. Internal Cash Loans Raised, 1932-5 336 41. Government Expenditure on Unemployment Relief, 1929-30

42. Indices of Money Wages, Selected Countries, 1929-37 348

43. Indices of Real Wages in Manufacturing, 1927-8 to 1936-7 350

44. Australian Conversion Loans Issued in London, 1932-5 358 A-1. External Commonwealth and State Loan Flotations and

Results, 1927-30 380

A-2. Average Monthly Net Prices of Commonwealth (1945-75)

® Per Cent Stock in London, 1929-32 381

A-3. Average Monthly Net Prices of Commonwealth (1933) 5+ Per Cent Stock in Melbourne, January 1929 to August 1931 381 A-4. Average Monthly Net Prices of Commonwealth (1938) 4 Per Cent Stock in Melbourne, September 1931 to December 1932 382 x

Tables

1930-1 tO 1934-5 383

B-1. Merchandise Exports and Trading Bank Sterling Receipts,

C-1. Components*of the Stock of Money, Quarterly, 1911-38 384 C-g. Components of High-Powered Money, Quarterly, 1926-38 387

C-3. Currency and Reserve Ratios, Quarterly, 1926-38 390

C-4. Velocity of Money, 1911-12 to 1937-8 391 FIGURES 1. Trends in World Production and Trade in Manufactures and

Primary Products, 1870s-1938 23

‘Materials, 1925-38 28 g. Growth Trends in the 1920s 49 2. World Production and Stocks of Foodstuffs and Raw 4. Trends in Import Replacement in Selected Australian Manu-

facturing Industries, 1907-37 54

to 1927-8 60

5. Import Prices and Australian Manufacturing Prices, 1913-14

6. Trends in Rural Output, 1870 to 1938-9 65 7. Wool, Wheat and Export Prices, Monthly, 1928-30 111

8. Level of the Australian Tariff, 1927-8 to 1938-9 144

g. Anglo-Australian Exchange Rate, 1929-31 155

10a. Treasury Bills Outstanding, 1929-38 197 10b. Trading Banks: Treasury Bill-Liquid Asset Ratio 197

Velocity, 1911-38 205

11. Money Income, Industrial Production, Money Stock and

12. Stock of Money and Three Determinants, Quarterly, 1926-32 206

13. Interest Rates, 1929-38 261 14. Export, Wool and Wheat Prices, Monthly, 1928-38 292

15. Stock of Money and Three Determinants, Quarterly, 1932-8 299 16. Trends in Import Replacement in Selected Australian Manu-

facturing Industries, 1926-7 to 1936-7 304

17. Trends in Manufacturing Output in Selected Australian

Industries, 1931-2 to 1936-7 305

x1

PREFACE

This book has taken on a life of its own. It began as a PhD dissertation in

the early 1960s and was prepared for publication between lecturing commitments. As more than one reviewer has pointed out, it was infused with the Keynesian optimism of that era. The book made its appearance at a time of renewed economic instability, and was reprinted on several occasions in the 1970s. After a lapse of forty years, there was a renewed interest in the dramatic events of the early 1930s, an interest that has continued into the turbulent 1980s.

Although my views have changed on a number of points, I have decided not to make changes to the text. It is now a quarter of a century since the original dissertation was completed and tampering with the text 1s no longer appropriate. Moreover, most of the conclusions have stood the test of time.

I would alter the emphasis here and there, and give more attention to the behaviour of the labour market. But in my judgement the work that has been published since 1970 has not altered my interpretation in any basic way.

There has been a continuing interest in the policy responses to the depression, and on this important issue my views have changed a little. My view was that a serious depression was unavoidable in Australia’s small relatively open economy, but that more could have been done to moderate the impact. Certainly more could have been done, but I now believe that the constraints were even greater than I had supposed. The overriding problem was of external imbalance, and this left the authorities with little room to

manoeuvre. : Discussion has concentrated on the exchange rate and tariff policy, the

stance of fiscal policy and wages policy. My view is that the heavy reliance on tariff policy and the comparative inflexitivity of the exchange rate was the major policy mistake. The Scullin Tariff of 1930 remained virtually unaltered

until the 1970s and ensured that industrialization was indiscriminate and relatively inefficient. A more flexible exchange rate policy would have redistributed income to exporters and directed resources to the most efficient producers.

There continues to be argument about fiscal and wages policies. Fiscal policy could have been more expansionary, as argued in this book, but only to a modest degree. Wages exhibited a reasonable degree of flexibility because

of automatic quarterly adjustments, but unemployment could have been absorbed more rapidly if real wages had been allowed to fall by more than the 10 per cent cut of 1931. Thus, the more appropriate policy mix would Xill

Preface have been greater exchange rates and wages flexibility, mild fiscal expansion, and avoidance of any increase in tariff protection. The Australian recovery in an international context was the subject of a recent symposium published as R. G. Gregory and N. G. Butlin, Recovery from the Depression: Australia and the World Economy in the 1930s (Cambridge University Press). Considerable attention was given to the operation of labour markets, although the results were far from conclusive. The one finding that differs from my own interpretation concerns the role of manufacturing in the recovery process. Expansion of manufacturing is not denied, but it is argued that manufacturing expansion was the consequence rather than the cause of general economic recovery triggered by a revival in international commodity prices.

The merits of this argument cannot be addressed here, but I do not believe that the attempted revision has been successful. ‘The recovery in some elements

of manufacturing was evident as early as late 1931, and continued more broadly in 1932-3, well before the improvement in commodity prices. This is not to suggest that manufacturing expansion was robust or based on productivity improvement. On the contrary recovery in this sector was sluggish and was not associated with efficiency gains. But the evidence 1s clear that import penetration of manufactures was cut sharply, and that local firms were able to take advantage of the steep rise in import prices.

September 1988 C.B.S.

X1V

ACKNOWLEDGEMENTS Grateful acknowledgement is made to the following organizations and individuals for permission to include extracts from manuscript material. Australian Bankers’ Association for correspondence of Associated Banks of Victoria with the Bank of New South Wales; .Australian Mercantile

Land and Finance Company Limited for correspondence with the Commonwealth Bank of Australia; Bank of Adelaide for correspondence with the Bank of New South Wales; Bank of England for correspon-

dence with the Commonwealth Bank of Australia; Bank of New South Wales; Mrs Dorothy Brigden for the Brigden Papers in the National Library of Australia; Commonwealth Archives Office for the Commonwealth Department of the Treasury; Dalgety and New Zealand Loan Limited for correspondence of Dalgety and Company Limited with the Commonwealth Bank of Australia; National Library of Australia for the Giblin Papers; Reserve Bank of Australia for the Commonwealth Bank of Australia. Also, for permission to include copyright extracts to Australasian Insur-

ance and Banking Record; Australian Government Publishing Service for Commonwealth Arbitration Reports; Commonwealth Government Printer for Commonwealth Parliamentary Debates and Commonwealth Parliamentary Papers; Cumberland Newspapers Pty Ltd for Caucus Crists by Warren Denning; Government Printer of New South Wales for Parliamentary Debates of New South Wales; John Fairfax and Sons Ltd for Sydney Morning Herald; Melbourne University Press for The Growth of a Central Bank by L. F. Giblin.

XV

ABBREVIATIONS AIBR Australasian Insurance and Banking Record BNSWA Archives of the Bank of New South Wales

CAR Commonwealth Arbitration Reports CPD Commonwealth Parliamentary Debates, first series CPP Commonwealth Parliamentary Papers

d. document

NLA National Library of Australia NSWPD_ New South Wales Parliamentary Debates, second series NSWPP_ New South Wales Parliamentary Papers RCMB _ Royal Commission on Money and Banking

SAPD South Australian Parliamentary Debates

VPD Victorian Parliamentary Debates WAPD Western Australian Parliamentary Debates

XVI

Outli

As one commences a study of the depression of the 1930s in Australia, a number of questions spring to mind almost automatically. In view of the world-wide nature of the depression and the acknowledged fact that its

severity and rapid spread were deeply rooted in the character of the international economy of the 1920s, is there much to explain about the experience of a small, open economy? In other words, to what extent did the international collapse swamp the Australian economy, so that all the historian can meaningfully attempt is an outline of the expedients which were forced on the country from outside? Or were there long-term charac-

teristics of Australian development which meshed with the external impact to impart a distinctive flavour to the local depression? Such questions have not yet received serious consideration. The bulk of the available accounts of the period were written during, or shortly after, the 1930s at a time when the international factors in the Australian contraction appeared all pervasive.! To these writers, collapse in the United States and Europe was a reality, as was the transmission of its effects to Australia. Local elements may have contributed to the timing and intensity of the downswing, but these were of small moment in view of the day-to-day struggle to maintain national solvency. Of primary interest at

the time were the means employed to moderate the effect of the fall 1 The first work of this type was E. R. Walker’s Australia in the World Depression, London 1933. Despite its title, this book was not primarily concerned with Australian events and policies during the depression. As Walker explained in his preface, it was ‘an essay in applied economics’. Written in Cambridge during the intellectual ferment prior to the publication of Keynes’ General Theory, its main object was to consider Australian wages and monetary policy in the light of Keynesian analysis. Of greatest influence in colouring opinion about Australia’s response to the depression, both at home and abroad, were D. B. Copland’s Alfred Marshall Lectures for 1933 (published as Australia in the World Crisis, 1929-33, London 1934) . Copland chose as his theme the Australian ‘policy experiments’ of the crisis years 1930-1 leading to the adoption of the premiers’ plan in June 1931. His argument was that

the flexibility of Australia’s policy-forming institutions enabled her to adopt a comprehensive plan of economic adjustment before other countries had begun to

tackle the problem of depression policy, and that this plan which avoided the 1

Australia and the Great Depression in export income and overseas borrowing, mobilize sufficient foreign exchange to meet international obligations in full, and devise policy measures which would lay the foundation for recovery. ‘To be sure, there were some who recognized a connection between heavy government overseas borrowing after World War I and the country’s exceptional difficulties between 1929 and 1932. By common agreement governments were found guilty of extravagance, of loose financial control and of bidding resources away from the private sector. But charges of incompetence and wasteful-

ness by public authorities were by no means new in the 1920s, and no attempt was made at the time to explain the comparatively high level of public expenditure. Taking a longer view of economic development in the inter-war years, it is apparent that the seizure of the international economy is only part of the explanation of the way the Australian economy reacted during the depression. Any individual country’s response to the collapse in commodity and capital markets which was triggered by the United States in 1929 depended on a large number of its structural and institutional characteristics, including the commodity composition and size of its overseas trade, its dependence or otherwise on capital inflow, its degree of industrialization and capacity and willingness of its government to prevent the growth of unemployment. In Australia’s case, the economy was especially vulnerable for two main reasons. First, its comparatively high ratio of trade to national product was based on two main export commodities— wool and wheat—which were more than usually subject to price instability at the end of the 1920s. As a luxury textile fibre, the demand for wool was

particularly sensitive to a fall in incomes. Even more unstable was the international market for grain. Whereas demand in the main importing countries stagnated after World War I, output increased rapidly throughout the decade (particularly in Canada, the United States and Australia).

In the absence of tight international control of marketing, the huge extreme of either inflation or deflation promoted an earlier recovery than otherwise would have taken place. Following the lead given by Copland, W. R. Maclaurin in Economic Planning in Australia, 1929-36, London 1936, attempted to establish the relationship between government policy and the Australian recovery. An American who spent 1934-5 in Australia on a Fellowship from Harvard University, Maclaurin set out to establish ‘whether a democracy can intelligently interfere with capitalism to speed up the natural process of readjustment which occurs in a depression’. His general answer based on Australian experience was that it could, although it is difficult to relate the evidence to the conclusion. Nevertheless, the book does provide a reasonably comprehensive account of economic policy in depression although it is heavily weighted in favour of the period after the adoption of the premiers’ plan. In a post-Keynesian world, little remains intact of the central argument that Australian government policy was either deliberate or successful. Although not primarily concerned with the depression, one further study deserves special mention—L. F. Giblin’s The Growth of a Central Bank, Melbourne 1951. The book is not easy to read for Giblin maintained an austere and unyielding control of his material. But for sharp and incisive comment on many aspects of the depression period, the book has no equal. This study owes much to Giblin’s balanced judgement. Among the scores of articles published on the subject, A. G. B. Fisher provides the best short account of depression policy in ‘Crisis and Readjustment in Australia’, Journal of Political Economy, December 1934. 2

Outline national stockpiles that were accumulated were flung onto the market for what they would fetch after 1929. This sent prices into an uncontrolled downward spiral from which they did not begin to recover until 1935. Second, the Australian economy in the 1920s was unusually dependent on overseas sources of capital. In the decade as a whole, about one-fifth of total investment was financed by overseas borrowing. In the last half of the decade, however, this proportion rose sharply to average one-quarter. It is true that these ratios fall far short of the position in the 1880s, when most estimates indicate that at least 45 per cent of investment was financed externally. Nevertheless, the degree of overseas dependence was still high by historical standards, particularly in the few years before 1929. This in itself rendered the economy extremely sensitive to overseas disturbance, but other features of capital inflow in the period added to potential instability. Much more than in the 1880s, externally-financed investment was provided by public fixed-interest borrowing. Although direct estimates of private overseas investment are not available, it is reasonably clear that about 70 per cent of total capital inflow in the decade took the form of

borrowing by public authorities. Combined with the large addition to external indebtedness during World War I, heavy loan operations in London and New York added greatly to international interest commitments. Moreover, these commitments rose far more rapidly than export income and import replacement. From 16 per cent of exports in 1919-20, interest (and dividend) remittances abroad climbed sharply to reach 28 per cent in 1928-9. Again, this is not as high a proportion as at the end of the 1880s, when more than one-third of export proceeds were absorbed by interest and dividend remittances. The main difference between the

two periods (which are on other counts quite similar) is that export income had climbed steadily during the 1890s but collapsed in the 1930s. In the latter period the result was that the transfer problem assumed far greater proportions than in the ‘nineties, and the struggle to avoid default on public interest obligations abroad underpins the entire history of the depression.

If the scale of public borrowing in the 1920s (and the potential transfer

problem that was thus created) is an important part of the explanation of the severity of the Australian contraction, it is necessary to account for the behaviour of public authorities. It cannot reasonably be maintained that easy money market conditions in London encouraged heavy borrowing, as was probably the case in the 1880s. As is well known, the City of London was under severe financial pressure during most of the decade, the volume of long-term lending was substantially less than before 1914, interest rates were comparatively high, and Australia was the only traditional debtor area to attempt large-scale operations at the time. Combined with massive German borrowing in the United States, capital transfer to Australia represented a high proportion of total long-term international lending in the inter-war. period. In this context, strong pressure from within

Australia to augment the supply of investible funds must have been responsible for the spate of borrowing. The basic source of this pressure was closely related to the major shift 3

Australia and the Great Depression in the structure of the economy that occurred in the first half of the twentieth century, away from the primary sector and the creation of rural assets towards the industrial sector and the creation of urban assets. The shift began slowly in the decade following the depression of the 1890s, gathered pace in the half dozen years before World War I, and was the dominant feature of the inter-war decades. Measured by the size of its industrial labour force and the proportion of its population classified as urban, the

Australian economy was highly urbanized well before the turn of the nineteenth century. Nevertheless, the source of growth remained firmly tied to the rural sector (especially the pastoral industry), and the bulk of asset creation was designed to service this sector. The depression of the 1890s destroyed the established hierarchy of investment priorities and encouraged a reallocation of available resources. In the late 1890s and early 1900s, this reallocation favoured the smaller rural industries and mining, but after the mid-1go0s the industrial-urban sector was able to attract a rising share of new resources. The links between the rural sector

and growth were further weakened by World War I, so that industrial expansion in Australia’s main coastal cities became the focal point of economic development in the 1920s. Although Australian economic growth proceeded in traditional fashion by progressive re-orientation from a rural towards an industrial economy,

similarity with nineteenth-century European experience ends at this superficial level. First, the transfer involved a lowering of average productivity. Rather than drawing factors into higher productivity activities, the transfer was encouraged by falling marginal returns in the main rural industries and by slowly rising marginal returns in manufacturing. Nevertheless, average returns in the rural sector were still much higher than in manufacturing during the early industrial phase, so that industrialization involved some retardation in the rate of economic growth. It also slowed the rate of increase in domestic savings. Second, an industrial economy was

built on the foundation of high per capita income and consumption standards. This imposed special difficulties in the financing of industrialurban growth. Consumption could not readily be restrained or lowered as was possible during ‘primary accumulation’ in Europe. Combined with the small scale and disaggregation of the market, this made it difficult for

industrialization to gather much momentum of its own. Indeed, the process would in all probability have been even more protracted without the intervention of two world wars and a major depression. In the context of the 1920s, these features gave rise to an unusually

high demand for public capital formation. At the same time as industrialists were pressing hard on the supply of locally-generated savings to construct and equip the new factories,? the high income and increasingly urbanized community required the creation of social assets consistent with its standard of living. New and improved housing, extension of water 2 As noted earlier, there was comparatively little direct overseas investment in manufacturing during the primary stage of industrialization (again unlike the experience

of most Continental European countries), so that there was little addition to

domestic capital supply from this source.

4

Outline and sewerage facilities, the creation of a sealed roads network, the provision of domestic and commercial electrical installations, telecommunications, and extensive additions to educational buildings were all among

the social requirements which competed for finance; and all except housing depended on the public sector. In addition, about one-third of the government loan fund was required to improve railroad communications, and a further proportion was used (with little benefit) for closer settlement on the land and rural diversification. Combined with the capital needs of the first major phase of industrialization, it was this heavy demand for social asset formation which sent public authorities to London on such a large scale in the 1920s. Moreover, little of this public investment added to export earning or import replacement capacity in the short

run. Most of it was long term in character and was undertaken without reference to immediate market considerations. Although not consciously designed to do so, it played an important part in laying the foundation for subsequent industrial growth. Extreme exposure to international disturbance was, however, the short-run consequence.?

The technique and circumstances of government borrowing abroad added further elements of instability. Money market conditions in London during the "twenties made it extremely difficult to regulate loan flotations so as to keep the inflow of funds and the level of works expenditure reason-

ably stable. There were lengthy periods when Britain was forced to suspend overseas lending, as in the immediate post-war years and prior to resumption of the gold standard in 1925. The London loan market was also disrupted by frequent movements of speculative balances within Europe, by large funding operations of the British government, and by the liquidity drain associated with the New York stock market boom of 1928-9. Funds were occasionally sought in New York when London was out of action, but American loans were not generally favoured because of comparatively high rates of interest and underwriting fees and technical difficulties in establishing access to the market. The expedient most commonly employed by state governments was to borrow on overdraft when long-term funds could not be obtained. The overdraft then became a first charge on the next cash loan. When used occasionally and in moderation, this was a convenient and cheap way to prevent interruption to works projects. In the 1920s, however, it became an established feature of financial policy in most states. In New South Wales, overdrafts played an even 3 Readers familiar with N. G. Butlin’s Investment in Australian Economic Development 1861-1900, Cambridge 1964, will recognize the similarity between the 1880s and 1920s. Writing about the dominant form of public investment in the earlier period, Butlin concludes that ‘the whole objectives and pattern of railway investment had

created a situation in which foreign interest obligations were rising rapidly but neither exports nor import replacement were capable of increasing at a rate sufficient to keep pace. ... This was a critical element of instability by the end of the ‘eighties, much of which could be ascribed to the acceptance of a set of objectives which made impossible a specific calculation of the gains secured from additional comunications investment.’ (p. 369) Although the retreat from market considerations may not have been as great, these words could be used to describe the situation in the 1920s (with the substitution of urban for railway investment) . 5

Australia and the Great Depression more prominent part in borrowing practice. The normal procedure in this instance was for overdrafts to finance regular interest payments even when long-term funds could be obtained, and the overdraft was added to the permanent debt only after it had reached a convenient size for funding. The sole reason for this cavalier approach was to avoid interest payments on unspent loan proceeds. To be sure, this is the extreme example, but is also the most important one because of the scale of New South Wales borrowing.

Works expenditure on the basis of anticipated loan raising was obviously a dangerous practice, particularly in the unstable conditions of the 1920s. It was made even more so when combined with the extreme sensitivity to interest rates of the newly-formed statutory Loan Council. The Australian Loan Council was formed on a voluntary basis in 1923 to co-ordinate the borrowing of the Commonwealth and the states. It operated with reasonable success on technical matters during its time as a voluntary body, although several of the states distrusted the centralist tendency which it embodied. Under the Financial Agreement of 1927 between the Commonwealth and states, the Council was to be reformed as a Statutory body with power to decide the amount and terms of government loan raising. Before the Financial Agreement could become law, a complex constitutional procedure had to be followed. The most important step was the submission of the proposals to a referendum, to be held in

November 1928. Before and during the referendum campaign it was essential that the Council avoid any appearance of accepting less favourable borrowing terms than had been established by Australian govern-

ments in the past. To do so, it was believed, would have strengthened opposition to the Agreement. It was unfortunate that the lead up to the referendum campaign coincided with the major exodus of funds from Europe to help finance specu-

lation in Wall Street. London money market conditions hardened in response, and the Loan Council found that new loans could not be placed on the old terms. It therefore decided to delay and allow overdrafts in London to accumulate. Despite ratification of the Financial Agreement

by the referendum, the Council (constituted as a statutory body on 1 January 1929) was still reluctant to depart from the customary borrow-

ing terms. The need to avoid criticism until all states passed enabling legislation, unwillingness to accept a higher rate for the first major loan floated by the Council in its new form, and a hope that market conditions

would soon improve were the main factors which contributed to the decision. ‘The outcome was that the short-term debt accumulated rapidly throughout 1929. Not until the third quarter of the year did the Council accept the fact that a new loan was not likely to be forthcoming in the near future. By this time a sharp reduction in domestic loan expenditure could not prevent overdrafts from rising, for short-term borrowing was necessary to meet interest payments. At the beginning of 1930 the debt

had grown to £23.1m (part now in the form of three or six months’ Treasury bills) and prospects for conversion to a long-term basis were

bleak.

6

Outline The existence of this floating debt in London, superimposed as it was on an intrinsically unsound external position, became a key element in the determination of policy in the crucial years 1930-1. Given the prevailing doctrine of sanctity of contracts, the need to negotiate renewal of a proportion of this debt every few months added bite to external and internal pressure for the adoption of orthodox deflationary measures. The problem of short-term indebtedness was an important reason for the visit to Aus-

tralia during 1930 of Bank of England representatives (led by Sir Otto Niemeyer) to impress on governments the need to balance budgets and reduce wages in line with the fall in prices. It played a part in the build up of pressure which forced devaluation in January 1931, and the continual spectre of default on the principle of the debt strengthened the hand of the Commonwealth Bank in its refusal to continue to finance deficit expenditure on the scale reached in 1930-1. It was thus an active element in the orthodox solution embodied in the premiers’ plan of June 1931.

Three distinct phases of the contraction can be isolated. The phases overlap in time, but each was connected with a different aspect of the overseas impact. Extending from mid-1929 to early 1930, the first of these took the form

of a severe liquidity crisis which sprang from the rapid depletion of London funds. In the 1920s as a whole new public capital raising abroad

approximately equalled interest payments due to non-residents. With the reluctance and then inability to borrow in 1929, the problem immediately arose of how to finance interest commitments. As noted, overdrafts

were allowed to carry the burden for about twelve months, but by the third quarter of 1929 Australia’s creditors understandably refused to grant further assistance. As governments had financed their own exchange re-

quirements hitherto, the banks were not prepared for the onslaught on their reserves by the public sector. By shifting the bulk of the burden of financing interest obligations from government borrowing to bank reserves in a few months, a dramatic fall in London funds was precipitated. In the six months June-December 1929, London funds fell 60 per cent, cash reserves were eroded and banks were forced to exért strong downward pressure on new lending. Clearly, the banks could not continue to sell governments exchange on this scale until imports had been substantially reduced, and until this was accomplished alternative means of finance had to be devised. The expedient employed was to abandon gold payments and concentrate trading bank gold reserves in the hands of the Commonwealth Bank (January 1930). Gold in excess of the amount legally required to back the note issue was subsequently sold abroad to finance external obligations. Although adequate for normal purposes, gold holdings were not of a size to enable them to be used in this way for any length of time. By mid-1930 this source of foreign exchange was virtually exhausted, and in the absence of fresh borrowing governments returned to dependence on bank funds. At first the banks strongly resisted this new call on their sadly depleted sterling reserves, but faced with the alternative of allowing the 7

Australia and the Great Depression country to default or co-operation with governments they chose the latter as the lesser evil. The Mobilization Agreement (August 1930) secured a regular supply of exchange to meet interest payments, but insufficient was available to liquidate the floating debt.4 Thus, the Agreement reduced but did not remove the possibility of default, and growing difficulty in obtaining renewal of the debt exercised a highly restrictive influence on domestic policy decisions until after the adoption of the premiers’ plan. Following hard on the heels of the liquidity crisis was the more fundamental problem of the balance of payments. Indeed, the liquidity crisis

was merely the early symptom of payments disequilibrium, and the struggle to reduce imports sufficiently rapidly to prevent ultimate default occupied the centre of the stage during most of 1930. There were two elements in the situation. First, on the assumption that

export prices and volume remained unchanged, imports needed to be reduced by one-third compared with 1929 to allow interest commitments to be covered by current earnings. This by itself was a substantial adjust-

ment and was greater than found necessary in many other countries. Second, imports had to be reduced even further because of the sharp fall in commodity prices. In 1929 wool prices fell disastrously, as did wheat prices the following year. In total, export income fell by one-third between 1928-9 and 1930-1, an even heavier fall than this being prevented by a substantial lift in output and devaluation. Thus, the required reduction

in the value of imports amounted to no less than two-thirds (or about one-half in real terms). Even Germany with a heavier contraction in national product and employment than Australia was able to avoid such a drastic cut in imports, and of those countries for which trade statistics are available only Chile, Hungary and Czechoslovakia experienced a greater withdrawal from dependence on overseas supplies.® The measures employed to slash imports: were blunt but effective. In April 1930 the governing Labor Party introduced the first of a long series of tariff revisions, and by 1931-2 the tariff on British goods was no less than

80 per cent above the pre-depression level. Quotas and absolute prohibitions were also imposed on a wide range of goods. Although no formal exchange restrictions were imposed, rationing of customers by individual banks brought about the same result. Many willing to import at existing rates of customs and primage duty were simply unable to obtain exchange

in sufficient quantities. The build up of demand for foreign exchange finally undermined the determination of the majority of banks to hold the exchange rate as close to parity as possible, and in December-January 1930-1 the rate was pushed to a premium of go per cent which built even

higher the barrier against imports. Finally, the fall in national income itself was a potent force lowering the propensity to import particularly in view of the wide price difference that had been created between imports and domestic products. The combination of these influences successfully restored payments 4'The Commonwealth Bank had been able to redeem portion of the debt from its own funds, but £15m remained in English hands on 31 August 1930. 5 Review of World Trade 1938, Geneva 19309.

8

Outline balance around mid-1931, although this was achieved without the exhaustion of international reserves by the barest of margins. ‘The process of adjustment was aided by a fortuitous sequence of excellent seasons, which allowed rural output to expand rapidly as primary producers attempted to restore some of their lost income. Partly in response to the promise of a guaranteed price (a promise which was not honoured), the wheat industry lifted output particularly rapidly and played a significant part in helping to maintain national solvency. The consequences for many in the industry were, however, disastrous. The third phase of crisis in government finance sprang from the severe

decline in income, employment and imports that had occurred during 1930. From the end of 1930 through 1931, the problem of mounting budget deficits provoked intense political controversy and a direct clash between Labor governments and the banking system. The main source of

difficulty for the Commonwealth government was the fall in customs revenue, on which its budget depended heavily. In the states deficits grew more slowly than at the national level, for the states were less reliant on volatile sources of revenue; but in time state deficits proved to be the more intractable. Three main alternatives emerged from the controversy: (1) whether rates of deficit expenditure prevalent in 1930-1 should remain in force plus a moderate addition for the relief of unemployment and distressed sections of the wheat industry, finance to be provided by the extension of central bank credit; (2) whether governments should default on. external interest commitments, which would permit a diversion of expenditure for the relief of unemployment; and (3) whether governments should immediately contract expenditure so as to balance budgets in the shortest possible time and prevent the devastation of chronic inflation. The first emerged from the moderate wing of the Labor Party; the second was the contribution of the radical wing of the same party; and the third was the solution of the conservative parties and financial community.

Rational examination of these alternatives was, however, buried beneath a dense layer of prejudice, personal conflict, doctrinal rigidity and antediluvian economics. Choice between the alternatives was thus determined by the strategic strength of the respective parties and the institutional support at their command. Unilateral default was rejected not only because of the conviction that it would destroy Australia’s long-term borrowing prospects, but also because the radical proponents of the policy found little support in the relevant decision-making authority—the Loan Council. Although proposed by the government, the policy of mild deficit expansion was thwarted by the combined opposition of the conservative parties (with an overwhelming majority in the upper chamber) and the monetary authorities. The government was prevented from overriding this opposition by deep divisions within its own ranks. ‘Thus the way was left relatively clear for the adoption of the third alternative with a minimum of concession to other views, and the principle of progressive reduction in budget deficits was embodied in the premiers’ plan of June 1931. Although a small group of professional economists appeared to play an 9

Australia and the Great Depression important part in the preparation of the plan, their primary role was to envelop it in a shroud of technical competence and expertise. Probably too much attention is given in the following pages to the forces which moulded policy decisions in the early 1930s, but I have been driven to do so by the substantial body of mythology that has been built around the subject. Despite the scepticism of those at Cambridge in 1933 to hear the Marshall Lectures, Copland’s claim about the effectiveness of policy decisions and the source of recovery in Australia has proved remarkably resilient. Practically every international publication covering the subject in the 1930s accepted this view without qualification, and as recently as 1967 a British writer stressed that deliberate policies rather than market forces were responsible for rapid internal adjustment.® It appears plain that market forces were dominant in Australia’s reaction to the depression, and that the strength of these forces was derived from the long-term character of industrial-urban development which by the end of the 1920s had created a fundamentally unsound external position. It is manifest that currency devaluation—which did help to soften the external impact—was a market reaction. Despite the appearance of institutional control over wage determination, so too was the decision to reduce the real basic wage by 10 per cent in January 1931, for this decision was little more than an ex post recognition of a situation that already existed for the vast majority of wage earners. The Australian cost structure was forced

not brought into line with the rest of the world in the 1930s. Even the decision to use the tariff to curtail imports was predicated by the huge trade imbalance. As the exchange rate was outside government control, the only real alternative was more extensive use of prohibitions. Finally, I hope to show that the premiers’ plan, while not strictly a market reaction

in its own right, was forced on governments by strong external and internal market pressure. It also followed in broad outline the changes which had already been brought about by the market. The tragedy for the half million or more unemployed in 1932 was that so little was done to counteract the market reaction. Much of the misunderstanding about the nature of economic policy in the depression springs from a basic misconception about the mechanics of the recovery process. It was a firm contemporary conviction that recovery would follow only after commodity prices improved sufficiently to allow the restoration of profitable production for export. In other words, it was

assumed that recovery depended on a rise in export income (with the possible support of a moderate amount of overseas borrowing), just as the depression had been precipitated by a fall in exports and capital inflow. Given this assumption, the emphasis on a reduction in internal costs for the benefit of export production had some validity. Recovery in exports was, however, only one side of the process, and until late in the 1930s it proved to be a minor one. What was neglected at the time was the scope for expansion by way of import replacement. Depression-created protection provided most established manufacturing industries with a clear price advantage over imports. As domestic expenditure fell far less heavily than 6H. W. Richardson, Economic Recovery in Britain, 1932-9, London 1967, pp. 307-9. 10

Outline imports, the demand for locally-made products recovered earlier and more swiftly than national product. Indeed, manufacturing expansion was the focal point of recovery throughout the 1930s, but particularly in the early years 1932-5. Textiles was the first industry to benefit from the diversion of demand, and as early as 1931-2 employment jumped sharply to easily

exceed the pre-depression peak. Thereafter heavy industry became the driving force in the process based on the growth of the iron and steel industry. During the 1920s the industry was hampered by teething difficulties, high internal costs, intense import competition and poor location of one operative. By effectively eliminating import competing and reducing costs more rapidly than overseas producers, the depression provided the industry with an opportunity to achieve economies of scale; and in 1933 the Tariff Board reported that it could operate profitably with a minimum of protection despite very low world prices. Expansion in iron and steel

carried with it a wide range of engineering and metal processing industries, and from there to the economy as a whole.

Emphasis on the central role of manufacturing in recovery is not to underrate the part played by the rural sector. It is easy to overlook the significance of a high and rising volume of rural output in helping to prevent a far greater disaster in the early ’thirties. But export prices recovered slowly and the rise in rural income added little to domestic expenditure until after 1934. Moreover, many primary producers were so heavily in debt (particularly in the wheat-growing and irrigation areas) that a large proportion of any additional income was absorbed by debt

redemption, thus being lost from the expenditure flow. Thus the rural sector played a comparatively minor part in the initial recovery process, and, in the absence of strong assistance by governments, manufacturing was required to carry the burden. Long-term structural features of internal

economic development therefore provide an important part of the explanation of both the characteristics of the contraction and the nature of the recovery process.

11

II

The International Setting

As a small country heavily dependent on trade and overseas sources of capital, Australia’s experience during the depression of the nineteenthirties was closely linked with the fortunes of the international economy. The characteristics of internal economic development in the 1920s (to be

considered in Chapter III) played an important part in determining the depth and timing of the contraction, but overseas factors were comparatively more important than in either the depression of the 1840s or the 18gos. The purpose of this chapter is to provide an outline of international events after World War I which contributed to the collapse of 1929, and to compare the magnitude of the depression in Australia with the experience of some other countries. This should add perspective to Australia’s domes-

tic difficulties and the nature of her economic policy in the early 1930s. This task does, however, involve considerable problems of compression

and selection. The immensely complex chain of cause and effect which led to and shaped the international catastrophe of the 1930s cannot begin to be covered satisfactorily in a few pages. All that can be attempted here is a precis of the more important relationships, and purely factual material has been kept to a minimum. With these limitations in mind, the chapter has been built around the three elements which contributed most to instability in the period: the trade cycle in the United States, the decline in world trade and specialization, and the disintegration of the international financial system. The last two, because of their particular importance to Australia, have been dealt with at somewhat greater length. The Role of the United States By the 1920s international economic leadership had clearly passed from Britain and Germany to the United States. Rapid growth during World War I and after had taken American industrial production to an average

of 42.5 per cent of the world total in the second half of the ‘twenties, which compares with 11.5 per cent held by Germany and 9.5 per cent by Britain.! Her status as an international trader in manufactured goods had 1(F. Hilgerdt], Industrialization and Foreign Trade, Geneva 1945, p. 128. 12

The International Setting also changed rapidly. At the end of the nineteenth century her exports represented 7 per cent of total trade in manufactures, only slightly more than the proportion held by Austria-Hungary. Thirty years later, despite a continued low proportion of trade to national product, her share had increased to 16 per cent—the same as Germany and second only to Britain with 21.5 per cent.2 Even more pronounced was the rise of the United

States as an international creditor. In the period 1925-9 her overseas lending amounted to $2,700m, or almost one-half of total capital exports from the principal creditor countries in the period. Any major reversal in the American economy was, therefore, bound to have serious repercussions throughout most of the world.

In considering the American boom in the 1920s, it is important to recognize that World War I did not bring a sharp break in the pattern of economic growth as it did in Europe. The war consolidated her position in international trade and accelerated the rate of change; but it did not

alter fundamentally the direction of expansion. The ‘twenties can be viewed, therefore, as the final phase of a brilliant period of sustained and rapid growth which extends from 1869 to 1929 without major interruption. It is true that there were set-backs, notably in the mid-1890s and in 1920-1, but these fade when measured against the overall performance. In these sixty years, despite an increase in population from 39 million to 122 million and the effective settlement of the bulk of the country, per capita real income very nearly quadrupled.t This represented a rate of growth in national product per head of the employed labour force which averaged

2.2 per cent, a long-term performance matched only by Japan and Sweden.® It is hardly surprising, therefore, that by the end of the ’twenties

Americans firmly believed in the permanent growth and prosperity of their country. Nevertheless, by retarding parts of the private sector, the war did have an important influence on the shape of the subsequent trade cycle. ‘This was the more significant because of changes taking place in the sources of American growth prior to the outbreak of war. Railway construction and westward expansion had been the focal points of growth after the Civil War, but their impetus had been spent by the turn of the century. Thereafter the centre of activity shifted to the rapidly growing urban concentrations and the manufacturing industries which supported them. The change was reinforced by the opening up of new technological frontiers in a wide range of manufacturing activities. The most notable was, of course, the development of the internal combustion engine leading to the manufacture of a low-priced motor vehicle; but also important was the use of electrical power in industry, the beginning of the home appliance industry, and the use of new chemical products for industrial purposes. 2 Ibid., pp. 157-8. 3 World Economic Survey, 1931-32, Geneva 1932, p. 39. 4U.S. Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1957, Washington, D.C. 1960, Series F 4. 5D. C. Paige et al., ‘Economic Growth: The Last Hundred Years’, National Economic Review, No. 16, July 1961. 13

Australia and the Great Depression Exploitation of these new innovations was gathering momentum when World War I intervened. A mild depression slowed the rate of expansion in 1914-15, while sharp increases in taxation kept consumer expenditure in check during the latter stages of the conflict. The severe contraction of 1920-1 prolonged the effect of war-time dislocation in some industries, so that there was a sizeable back-log of demand to be met when normality was restored around 1922. This ensured that the boom which followed started at a spanking pace. The building industry, more severely affected by the war than others, was the first to respond. As early as 1922 the rate of construction was almost three times as great as in 1913. Manufacturing

was not long in following, with the lead taken by motor vehicles and consumer durables. Motor vehicle sales more than doubled between 1919 and 1923, and for the remainder of the ’twenties output was maintained at around 3.5 million units annually. Output of furniture, electrical ap-

pliances and other household equipment increased rapidly throughout the period, so that by 1929 total expenditure on these items was roughly treble the 1919-21 average. Only the farm sector failed to share in the widespread prosperity. Improvements in farm efficiency occasioned by the introduction of the tractor were more than offset by declining commodity

prices, and net income tended to fall in the latter ‘twenties. In the economy as a whole, however, income increased more rapidly in the ‘twenties than in any previous decade since the 1870s. Per capita real income in 1929 was 24 per cent higher than in 1920, as indicated in

Table 1.

Table 1: UNITED STATES: PER CAPITA REAL INCOME AND INDUSTRIAL INDICES, 1920-9

realincome =_———_$ $ | All Motor vehicle sales New

| Per capita 2 Index numbers 1920-9 = 100

(1929 prices) , manufacturing (units) construction

1920 688 || 86 | 47 61 61 56 1921 660 66 1922 689 || 99 86 117 | 73 86 1923 766 95 1924 775 95 103 106

1925 781 106 120 118 1926 821 110 11g 125 1927 817 110 95 124 1928 817 115 122 120, 1929 | 857 | 128 | 143 109

Source: Historical Statistics of the United States, Series F 4, P 11, Q 310, N 2, 85.

The most important factor in sustaining the rate of expansion throughout the ‘twenties was the remarkable growth in manufacturing productivity. Effective exploitation of the new products required the development 14

The International Setting and application of new sources of energy, new techniques of metal fabrication, improved methods of road construction, greater use of chemicals in a wide range of production processes, and changes in factory organiza-

tion. All were forthcoming and each contributed in some degree to lowering costs; but the most significant contribution was probably made by the application of electric power in industry because of the number and range of production processes which benefited. Some of the new products also helped to improve efficiency. The motor vehicle lowered transport costs directly; indirectly it encouraged new steel-making techniques, the use of alloys, and the development of petrochemicals. ‘The net result was an increase in output per man-hour in manufacturing by 72 per cent between 1919 and 1929; in the economy as a whole the increase was 247 per cent. Thus, despite the pace of expansion, full employment and easy credit conditions, price stability was maintained. For purposes of analysis the cyclical expansion can be divided roughly into two phases. In the first (1922-6) output of both consumer and producer goods increased rapidly, without any notable tendency for either group to run ahead of the other. Producer durables recovered with greater vigour from the 1921 depression as one would expect, while after 1923 they tended to lag behind slightly. In the phase as a whole, however, a fairly good balance was maintained between investment and consumption, as is suggested by the following indices (1922-9 = 100) :7

1922 1923 1924 1925 1926 1927 ~1928 1929

Allconsumer goods 83 g! g2 99 105 106 110 114 Consumer durables 69 95 89 107 118 100 108 114 Producer durables 69 99 QI 98 105 O7 107 134 A very different pattern emerges in the second phase (1927-9) A distinct decline occurred in the rate of growth of consumption expenditure. In the first phase it had averaged 5 per cent per annum; in the final three years of the boom it was down to 2.5 per cent. Furthermore, most of the rise in consumption at this stage was due to expenditure on luxury items such as motor vehicles and radios; there was no appreciable rise in output of the bulk of consumer goods. On the other hand, output of producer goods accelerated. All categories participated to some extent, even farm machi-

nery, but the most substantial rise was in industrial plant and equipment. There was, paradoxically, no evidence of a reaction as the crest of the boom approached. Indeed, the most pronounced rise occurred at the end of 1928 and in the first half of 1929, just at a time when other parts of the economy were showing signs of weakness. It is clear in retrospect that manufacturing capacity was being created well in excess of short-term requirements. Although the evidence on movements of inventories is far from conclusive, the information that is available does suggest that stocks of manufactures accumulated during: 1929.8 Even contemporaries were 6 Historical Statistics of the United States, Series W 1, 24. 7 Compiled from Historical Statistics of the United States, Series P 251, 259, 266, 284, 02-5.

, te

8 °B. Onlin}, The Course and Phases of the World Economic Depression, Geneva 1931, pp. 145-6; Historical Statistics of the United States, Series T 379.

Australia and the Great Depression prepared to predict an impending decline in activity, if for no other reason than belief in the philosophy that what goes up must come down.? The steady accumulation of manufacturing capacity in 1928-9 probably

explains the initial decline in industrial production and most other indicators after June 1929. The economy was already in a state of mild recession at the time of the Wall Street stock market crash in October. But two more important questions are still unanswered. First, what caused the perverse behaviour of investment at the end of the boom? Second, and

even more important, why did the decline accelerate in 1930-1, so that when the trough was reached in 1933 real national product had been reduced by go per cent and one-quarter of the work force was unemployed? The extent of overinvestment was not nearly sufficient to account for the

unprecedented magnitude of this contraction. It is reasonably certain that the behaviour of investment in 1928-9 was linked, indirectly, with the spectacular rise in New York stock market prices. ‘The history of the Wall Street bubble is so well known that it is only necessary here to recount a few essential facts. In the early years of the cyclical expansion the market conducted itself with admirable circumspection, and there were few signs of the excitement that was to follow. The value of stock rose persistently, but not out of line with corporate earnings. In 1927, however, the climate was beginning to change, and by early 1928 the speculative mania was in full swing. Between 1922 and 1926 the Standard and Poor’s index of industria] common stock had risen by an average of 12.5 per cent per annum; in 1927, however, the rise was 25 per cent and in 1928 industrial share values increased by a further 34 per cent.!® After 1927 conventional standards of stock market valuation were discarded, and the more rapidly prices increased the firmer was the conviction that further rises were ahead. Even the cynical were converted by the appearance of huge profits available for the taking. By 1929 the escape into fantasy was complete. Those who predicted eventual collapse were rarely heard above the clatter of the teleprinter; and if heard were either ignored or rebuked. In the spring and summer the market was continually on the boil, and in the three summer months alone the industrial index rose by another 25 per cent. On the eve of the crash in October 1929 the market had more than doubled the already high prices of 1927. In such circumstances, therefore, the limitless optimism of Wall Street was bound to spread to other parts of the economy. Consumer spending on luxury items increased, principally on the basis of unrealized stock market profits; and entrepreneurs, anticipating the advent of a new golden age, promptly expanded their industrial capacity to take advantage of it. It is more difficult to explain why the mood of the market changed so decisively during 1928. A great speculative orgy is based, above all, on mass

self-deception, and it is beyond the competence of economics to explain why so many people should have acquired in a few months an unshakeable faith in the ability of the market to support continually rising stock values. It is possible, however, to isolate some of the contributing elements. 9]. K. Galbraith, The Great Crash, 1929, Boston 1955, p. 177. 10 Historical Statistics of the United States, Series X 352. 16

The International Setting (1) The high prosperity of the ‘twenties created a climate of expectations on which speculation thrives. The period after 1921 had been free of significant contraction, so that by the end of the decade anything

more than a minor set-back was unthinkable. (2) The imagination of investors had been excited by the spectacular commercial success of the new consumer durables. Speculation requires an example of actual or potential profitability far above the average on which attention can be fixed. In the nineteenth century the railway had been the symbol of several periods of speculation on both sides of the

Atlantic; in the 1920s the motor vehicle and the radio performed this function by convincing investors that earning rates of 40 per cent and higher were the norm rather than the exception. (3) An ample supply of money was available to support the market. This did not come, as was thought at the time, by excessive credit creation;

indeed from 1928 on there was a mild decline in the money stock, and credit conditions were comparatively tight.1! Rather funds for speculative purposes were derived mainly from accumulated personal saving. ‘The average propensity to save had been maintained at a high level during the ‘twenties because of rapid growth in income and the absence of unemployment; but even more important was the fact that the savings of the very rich increased more than proportionally because of a shift in the distribution of income in their favour.12 Because of the low marginal value attached to these savings, they were the most likely to be used for stock market speculation. The monetary authorities must share some of the responsibility for allowing the situation to get completely out of control in 1929. It was not indifference to the magnitude of speculation which prevented action, but a dispute within the Federal Reserve System about the most appropriate method of control. The Federal Reserve Board refused to approve increases in the rediscount rate, and instead urged member banks to limit credit for speculative purposes by the use of qualitative controls. On the other hand, member banks argued that direct pressure should be used only when the borrowing of individual banks was out of line with the amounts borrowed by others, and that an increase in the rediscount rate was the proper way to check security speculation. The conflict itself went far beyond technical questions of monetary policy. A struggle for supremacy within the System had been brewing since World War I, and the battle was joined over speculation simply because it was the most convenient issue available at the time. A result of the contest was, however, that monetary policy was ‘largely paralyzed . . . during almost the whole of the important year 1929’,13 and the opportunity to curb the worst excesses of speculation was lost. 11 M. Friedman and A. J. Schwartz, A Monetary History of the United States, 1867-1960, Princeton 1963, pp. 270-92.

12 The proportion of disposable income received by the top one per cent of the population increased from 14.5 to 19 per cent between 1922 and 1929. Historical Statistics of the United States, Series G 135. 13 Friedman and Schwartz, Monetary History, p. 255. 17

Australia and the Great Depression No single factor can explain the length and extent of the contraction which followed the initial down-turn in industrial activity in mid-1929. As already noted, overinvestment in productive capacity probably initiated the turn. The economy was due for some measure of adjustment after the exuberance of the late twenties; but there is no reason to believe that this adjustment need have been significantly more severe than those that had frequently occurred before without the same disastrous results. Following the initial down-turn, a succession of confidence-sapping shocks of major proportions was imposed on an already weakened economy, and this is the probable explanation of the protracted decline. The first shock was, of course, the stock market crash of October 1929. The market had actually reached its peak in September, but the first weeks of decline did not cause undue alarm and trading was orderly. After the middle of October, however, fear began to spread as the margin between security values and loans evaporated, and many were forced to dump huge blocks of stocks on the exchange. At the peak of the bull market it was considered an excellent day’s trading if turnover amounted to four million

shares; on 24 October nearly 13 million shares were traded, and at the height of the panic on the 29th recorded sales reached the unheard of figure of 16.5 million stock units. But this was only the beginning. In previous panics the worst was over in a week or at longest a month; in 1929 there appeared to be no end to the trouble. As Galbraith has written: What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune.!4

By December a total of US$26 billion had been erased from the value of all stocks quoted on the New York exchange,!5 a sum equivalent to 27 per cent of net national income in 1929. By shattering the Midas illusion, the crash completely changed the environment within which personal and business decisions were made.

Because so much had been staked on a continually rising market, the psychological reaction to the break was bound to be particularly damaging. here was an immediate downward pressure on plans to spend on both consumer and producer goods,16 and an increase in the demand for precautionary money balances.'7 The crash itself was a reaction, in part,

to the down-turn in economic activity that had already occurred; but there is no doubt that it also played an important part in aggravating the contraction. It is no coincidence that after September the decline became much more pronounced. In the final quarter of 1929 the Federal Reserve Board’s index of industrial production fell by 17 per cent compared with

a moderate 3 per cent fall in the September quarter. No other major industrial country experienced such a severe decline at this time despite 14 The Great Crash, p. 113. 15 Course and Phases of the World Economic Depression, p. 175. 16 J. A. Schumpeter, Business Cycles, New York 1939, Vol. II, pp. 679 ff. 17 Friedman and Schwartz, Monetary History, pp. 306-7. 18

The International Setting the fact that the initial down-turn overseas generally occurred rather earlier than in the United States.18 While by no means conclusive, this does suggest that the stock market crash was the most important element contributing to the rapid deterioration in the position at the end of 1929. There is reason to believe that by the end of 1930 the worst of the de-

pression lay behind and there appeared to be a distinct possibility of recovery in the immediate future. The wounds left by the stock market crash began to heal, and the fall in personal income and industrial production slowed appreciably. Indeed, both income and production staged a mild rally in the first quarter of 1931. Of course, if the cyclical trough had occurred at the end of 1930 the contraction would still have been one of the worst on record. Compared with mid-1929, personal income (in current prices) had already fallen by one-eighth and industrial production by one-quarter. But, after the brief respite, the decline resumed in the June quarter and for almost another two years it was as rapid as in 1930. The dominant factor in further intensifying the depression was a succession of severe banking crises. During the four years 1930-3 the American

banking system was in almost continual turmoil, and about 9,000 banks or more than one-third of the total in existence in 1929 suspended operations.19 There were three main banking crises of increasing degrees of severity—in October 1930, in March 1931, and in January 1933. The total loss sustained by depositors and creditors was large but not crippling, and was in fact much less than the decline in value of all shares quoted on the New York stock exchange in October 1929.2 More important were the indirect effects of the failures. Loss of confidence in the banking system in general resulted in a heavy demand for the conversion of deposits into currency, and, in the absence of strong compensating action by the Federal Reserve System, set in motion a cumulative process leading to a serious decline in the volume of money. Between 1929 and 1933 the money stock fell by one-third, the most rapid fall taking place in the two years after the second banking crisis of March 1931.2! Clearly, a monetary contraction of this magnitude was bound to bear heavily on money income, prices and the willingness to spend on both consumption and investment goods.

There can be little doubt that the onset of the second banking crisis brought to an abrupt end the mild recovery of early 1931. Despite the sharp rise in the number of suspensions at the end of 1930, monetary deflation was comparatively mild in the first phase of the depression and in the eighteen months to March 1931 the total money stock fel] at an

annual rate of 4 per cent. Thereafter, however, the nature of the contraction changed, and in the final nine months of 1931 the annual rate of decline moved up to 14 per cent.?? Not only was the second banking crisis

more severe and protracted than the first, but internal difficulties were 18 For monthly indices of industrial production by major countries see Memorandum on Production and Trade, 1925 to 1929/30, Geneva 1931, Annex VI, pp. 138-9. 19 Historical Statistics of the United States, Series X 119, 123 and 165. 20 Friedman and Schwartz, Monetary History, p. 351. 21 A detailed analysis of the decline in the money stock is given in ibid., Ch. 7, Sect. 2. 22 Calculated from ibid., Table A 1, pp. 712-13. 19

Australia and the Great Depression compounded by the international financial panic precipitated by the failure of the Austrian Credit-Anstalt in May 1931. Previously the United States had been able to add substantially to its gold holdings, and this had

helped to mitigate domestic deflationary pressure; but after May gold began to leave the country as European central banks sold dollar assets in an effort to protect their liquidity. The external gold drain reached a peak

in September and October as it was generally expected that the United States would follow Britain in abandoning the gold standard. Gold stocks

fell to the average level of 1929, which not only rendered the banking system even more vulnerable to internal pressure but also sparked off a new raid on commercial bank deposits. Suspension continued at a high rate for the whole of the last quarter of 1931, and there was another crop of failures in mid-1932, so that it was not until the second half of 1932 that the fall in bank deposits and the money stock began to moderate. The course of events in the nine months after June 1932 was virtually a duplicate of what had happened two years earlier. The lessening of monetary deflation in the second half of 1932 was accompanied by a slow-

down in the rate of decline in personal income and an encouraging rise in industrial production. General revival seemed imminent, and such hopes were reinforced by the first signs of widespread international recovery. But as in 1930 incipient recovery was checked, indeed reversed, by a third and even more savage banking crisis. Once again there was a combination of both an external and internal drain—the external drain resulting from rumours, confirmed by the event, that the incoming Roose-

velt Administration planned to devalue the dollar. On this occasion, however, the internal drain took the form of a demand for currency and gold coin (and certificates) so that the near exhaustion of remaining bank reserves culminated in the declaration of an extended banking holiday in

March 1933. So great was the pressure on the banks that in the first quarter of 1933 the stock of money fell at the alarming annual rate of 36 per cent, and in March alone the rate of decline was much higher still. The primacy of monetary factors at this time can be seen by the behaviour

of income and production indices during the banking crisis. Both fell simultaneously with the renewed decline in the stock of money in early 1933, personal income reaching a new low point and industrial production

cancelling most of the gain recorded in the previous half year. On the other hand, there was an immediate rise in all indices as soon as the money stock ceased to fall, which suggests that the forces making for sustained recovery had been present for some time.

There can be no doubt that the great contraction in the United States had far reaching international repercussions. The deflating psychological impact of the New York stock market crash spread to most important international markets, and in particular was the trigger which set in motion a protracted decline in commodity prices. During the course of the contraction America’s substantial imports of raw materials and foodstuffs fell in real terms by 40 per cent, and her exports of capital dwindled to such an extent that by 1931 new lending fell short of withdrawals. Both of these exerted substantial downward pressure on world prices and the volume 20

The International Setting of international trade. It is no accident that the depression was particularly severe in Germany and Canada (see Table 2b), for these two countries

were more than usually dependent on American trade and capital in the 1920s. But the cyclical contraction in the United States is only a partial

explanation of the international depression. It cannot explain why so many countries were so severely affected, why there was such a devastating

collapse in primary product prices, and why recovery was so protracted. To explain these features of the depression it is necessary to consider the conditions of international trade after World War I. International Trade between the Wars As is well known, one of the principal reasons for the rapid spread of the depression in the early 1930s was the serious decline in international trade. Despite the sharp fall that occurred in production, trade fell even more rapidly. Between 1929 and 1932, world industrial production fell by one-third and world trade in manufactures by two-fifths;?2 and for the

remainder of the ‘thirties the ratio between trade and production remained below the 1929 level. In part this decline was simply a reaction to

the initial slump in the United States, and to measures taken elsewhere to preserve international currency reserves. Vastly more important, however, was the fundamental disequilibrium in world trading conditions which had persisted since World War I and became manifest only after

1929. In order to discuss the nature of this disequilibrium, it is first necessary to consider briefly the basis of trade expansion prior to 1914. The half-century to World War I witnessed a remarkable growth in international trade and specialization. From the 1870s to 1914 manufacturing production grew at an annual rate of 4.1 per cent, trade in manufactures at 3.3 per cent and trade in primary products at 3.4 per cent.*4 This sustained growth was propelled by an increasing division of labour between the industrialized countries of north-western Europe and overseas primary producing countries and also those of eastern Europe. Cer-

tainly, imtra-trade within industrial and primary producing regions increased steadily, but the major element in trade expansion was the exchange of food and raw materials for manufactured goods. So great had become the interdependence between the industrial and primary producing countries that by 1914 the eight leading industrial countries imported 7o per cent of total imports of primary produce, and the leading four of Western Europe—Britain, Germany, France and Belgium—were responsible for one-half of total imports.?5 It is no coincidence that the rate of growth of trade in manufactures and primary products was almost parallel, for the capacity of primary producing countries to import manufactured goods depended on their ability to sell agricultural produce.?¢ 23 A. Maizels, Industrial Growth and World Trade, Cambridge 1965, p. 80. 24W. A. Lewis, Economic Survey, 1919-39, London 1949, p. 176. 25 Calculated from Industrialization and Foreign Trade, pp. 157, 166-7. Classified as leading industrial countries are: Austria-Hungary, Belgium, France, Germany, Italy, Japan, United Kingdom and United States. 26 The development of international specialization and its significance for the growth

of world trade is fully discussed in Industrialization and Foreign Trade; Lewis, 21

Australia and the Great Depression The mainspring of trade expansion was, clearly, the development of industrial countries. The initial impetus was provided by the demand for

imported raw materials such as cotton, and then, in the second half of the nineteenth century, trade was further stimulated by the need to import food for a rapidly increasing urban population. The growth of production and trade in primary products was essentially a response to these prior changes; as Arthur Lewis observes, ‘no one can argue seriously

that the original disturbances making for growth were occurring in the

primary producing countries, and that the industrial countries were merely adjusting themselves to what was happening to primary producers’.27 "The volume of trade in primary products was therefore linked directly with (a) the increase of population and (b) the growth in manufacturing production in industrial countries.

An important feature of trade in primary products was the relative insensitivity of volume to price changes. As shown in Fig. 1, the growth rate of trade in this commodity group was remarkably stable over a long period despite wide swings in the terms of trade. On the other hand, there was a strong inverse association between the volume of trade in manutfac-

tures and relative prices. A movement in the terms of trade against manufactures was normally associated with a rise in volume, and conversely.28 Alternatively, it can be said that an improvement in the terms of trade of primary producing countries allowed them to expand their imports of manufactures, and, therefore, that the relative prices received by primary producers determined in large part the volume of trade in manufactures.”® If this interpretation is accepted, it follows that any major

shift in the terms of trade against primary producers would reduce the level of international trade. Before 1914 there was no such trend.3° Prices

of primary products remained comparatively favourable, and the purchasing power of primary producing countries was augmented by large

Economic Survey, 1919-39, Chs XII-XIII, and the same author’s ‘World Production, Prices and Trade, 1870-1960’, Manchester School, Vol. 20, No. 2, 1952. This section has drawn heavily from these sources. 27 Economic Survey, 1919-39, p. 153.

28 Maizels, Industrial Growth, pp. 82-4. 29 A proportion of trade in manufactures immediately prior to 1914 was roughly one-

half intra-trade (between industrial countries) and one-half with the rest of the world (mainly primary producing areas). Up to the 1930s, however, trade with the rest of the world was growing much more rapidly than intra-trade, which underlines the importance of the import demand of the primary producing areas. (Ibid., Table 4-4, Pp. 89.)

30 Until quite recently there existed a widely-held view that there had been a secular decline in the terms of trade of the primary producing countries since the 1870s. This view was based on misleading British data, which, inter alia, ignored the fall in transport costs. Adjustment of the British series and analysis of data from a variety of other countries does not support the contention that there has been a secular decline in the terms of trade against the primary producers. Only in the inter-war years is there clear evidence of a fall, which was due to a number of non-recurring factors. See T. Morgan, “The Long-Run Terms of Trade between Agriculture and Manufacturing’, Economic Development and Cultural Change, Vol. VIII, No. 1, 1959. 22

The International Setting

200 |

Index: 1913 = 100

100 < ZA yNZ or vY 75 ~~~ 150

,a

50 L_a -—Le” Production ———__.. Manufactures 4

an,

Trade ———

25

, “ 100 44 | a_ 50 a 200 150

75 A Primary products a“ —_ as a

25

Ratio scale

1870 1880 1890 1900 IgIo 1920 1930 Fig. 1: TRENDS IN WORLD PRODUCTION AND TRADE IN MANUFACTURES AND PRIMARY PRODUCTS, 18708-1938

Note: Excludes the present Soviet countries. Sources: Industrialization and Foreign Trade, League of Nations, Geneva 1945; W. A. Lewis, ‘World Production, Prices and Trade, 1870-1960’, Manchester School, Vol. 20, No. 2, 1952.

imports of capital from Europe. Thus trade expansion was able to proceed without significant interruption. After World War I there is clear evidence of a relative decline in inter-

national trade. This can be seen from the divergence between the production and trade indices in Fig. 1. The most conspicuous gap is between

production and trade in manufactures, but there was also a significant reversal of the pre-1914 pattern of production and trade in primary products. The greatest divergence occurred in the 1930s, but what interests us here is that even in the 1920s the historical relationship between production and trade had not been restored. Up to 1914 the trend growth

230

Australia and the Great Depression rate of trade in manufactures had been 80 per cent of the corresponding growth rate of production; between 1911-13 and 1926-9, however, the proportional rate of increase fell to 20 per cent. It is true that most of the

trade contraction occurred during and immediately after the war, and that by the end of the ’twenties there began to emerge something like the old relationship between production and trade; but it is also true that in the period as a whole there had occurred a substantial reduction in international specialization which the brief phase of trade expansion at the end of the ’twenties did little to remove. The war itself was responsible, directly and indirectly, for much of the decline in trade. Its more important effects on the structure of the international economy can be summarized as follows: (a) European exports of manufactured goods fell sharply as a result of

the great shift from civ.l to military production. Many of the markets which had to be vacated, particularly in the Far East and Latin America, were taken over by the United States and Japan, and European countries found it extremely difficult to break back in the 1920s. In short, the war accelerated the shift in international economic power from the old to the new industrial countries. (b) Import replacement of manufactures was also encouraged in pre-

dominantly agricultural countries. This did not result in a decline in imports of manufactures, but rather a change in the composition of imports. Producer goods such as machinery, industrial chemicals and trans-

port equipment were now required, rather than the simple consumer goods that comprised the bulk of manufactured imports prior to 1914.

(c) The war brought important changes in the direction of trade in agricultural products, particularly foodstuffs. A decline in European agricultural production during and immediately after the war was matched by a great expansion in overseas production and exports, so that total supply was well maintained. In the 1920s Western Europe continued to be heavily dependent on overseas exporters for its supply of

grain because of the collapse of Russia as a leading exporter and the reduced surplus available from other eastern European countries.*! (d) Changes in the pattern of European population growth were only partly connected with the war, but they can be mentioned conveniently at this stage. Despite the appalling loss of life during 1914-18, and the demographic distortions which followed, total European population increase in the inter-war years amounting to 56 million was as large as in

any comparable period. A major reason for this was the decline in emigration, which before 1914 operated as a safety valve by removing excess pressure on the domestic labour market. Losses caused by the war tended, therefore, to be counterbalanced by the decline in emigration. Growth was unequally distributed with the bulk of the increase occurring

in the predominantly agricultural countries east of the Elbe. In the highly-industrialized food-importing countries of the west, the rate of 31 The following table illustrates the changes that occurred in the sources of European grain supplies before and after World War I: 24

| The International Setting population growth was distinctly lower than at the end of the nineteenth century.*2

(e) A change in the nature of international capital movements was, in large part, a direct consequence of the war. This will be discussed in greater detail later, but the three main elements of the change were: (1) the rise of the United States as the leading creditor country; (2) a shift in the geographical distribution of lending from the underdeveloped primary producing countries to Europe, particularly Germany; and (3) an increase in short-term loans as a proportion of total foreign lending. In addition, exchange restrictions and currency instability made conditions for longterm international lending extremely difficult, and throughout the ’twenties there was an acute shortage of development capital.

(f) Finally, the Peace Treaties placed an added burden on European post-war reconstruction. A number of new nation-states were created: Estonia, Finland, Latvia, and Lithuania were carved out of Russia; the sovereignty of Poland was restored; and the Austro-Hungarian Empire was divided into Austria, Hungary, and Czechoslovakia. Each of the new countries created its own bilateral tariff system, and embarked on a programme designed to encourage industrial self-sufficiency. The territorial changes were particularly unfortunate in the Danubian basin which had formerly been part of a well-integrated industrial complex. In Germany the economic unreality of the original reparations reckoning diverted attention away from the urgent task of reconstruction and helped to precipitate the damaging hyper-inflation of 1922-3. These threads can now be brought together and merged with a number of longer-term changes in an attempt to explain why trade declined after

World War I. There appear to have been two principal causes. First, a

Areas 1909-13 | 1925-9 | 1934-8 millions of tons

Net European imports:

Western Continental Europe 16.4 17.7 10.5 United Kingdom and Ireland 9.9 g.I 10.4

Total 26.3 26.8 20.9

Main supply areas, net exports:

Eastern Europe 0.61.2 2.0 RussiaContinental (U.S.S.R.) 10.52.70.8

North . 6.4 5.4 SouthernAmerica Hemisphere 7.515.1 13.6 13.9

Total 27.1 30.1 22.5

Source: I. Svennilson, Growth and Stagnation in the European Economy, Geneva 1954, Table 19, p. 88. 32 Svennilson, Growth and Stagnation, Ch. IV.

25

Australia and the Great Depression deficiency in Western European demand for primary products led to a progressive deterioration in the terms of trade of agricultural-exporting countries and a corresponding fall in their capacity to import manufactures. Second, the European industrial economies failed to respond to changes in the composition of demand for manufactures, which resulted in a relative decline in their exports, stagnation in economic growth, and a strong desire to shelter behind tariff barriers at the first sign of trouble. While it is necessary to discuss these causes separately, it should be stressed that it was the reinforcing effect of the combination of the two which was the decisive factor in reducing trade to such an extent in the 1920s. In discussing the deficiency of demand for primary products, it is first useful to distinguish between trade in foodstuffs and in industrial raw materials, for which world market conditions differ significantly. The supply of both is relatively inelastic in the short run, but food production, tied basically to population, tends to be more stable (seasonal variations aside) than production of raw materials, which is determined principally by the level of industrial activity.23 This is confirmed by the fact that in the ’thirties output of raw materials fell and then recovered more rapidly than output of foodstuffs. Furthermore, output of raw materials recovered much more rapidly than foodstuffs after World War I, as indicated by the following indices:*4

1913 1925 1929 Raw materials 100 130 156 Foodstuffs 100 113 12] This was accompanied by a decline in the proportion of trade in foodstuffs

to total trade in primary products. The decline had commenced before 1914, but was particularly pronounced in the 1920s. The following figures give an approximate indication of changes in the relative importance of trade in raw materials and foodstuffs (expressed as a percentage of total trade in primary products) :35

1913 1925 1929 Raw materials (°) 53 57 60 Foodstuffs (%) 47 43 40 33 This does not, of course, apply to all raw materials. In the case of rubber, supply is extremely inelastic. Trees take a long time to reach maturity, and, once productive, there is little incentive to withhold supply whatever the price. This is an important

reason why rubber prices collapsed in the early ‘thirties. |

34 Compiled from Memorandum on Production and Trade, 1923 to 1928/29, Geneva 1930; World Production and Prices, 1938/39, Geneva 1940. 35 The figures for 1913 and 1925 are rough estimates only, based on the assumption that the proportions between production and trade in the two commodity groups remained unchanged in the period 1913-29. This probably understates the increase in the share of raw materials in total trade in primary products. On the other hand, the 1913 Brussels Trade Classification included some ‘partly manufactured’ materials in the category ‘raw materials’ which overstates the relative importance of this group. However, it is impossible to say which is the stronger bias. Figures for 1929 compiled from Review of World Trade, 1938, Geneva 1939. 26

The International Setting Thus it will be necessary to give more weight to the market for industrial raw materials; but it might be better to start with foodstuffs as the less complex of the two. ~ There is no doubt that the secular decline in the proportion of income spent on food in the advanced countries of the western world since the end of the nineteenth century gathered momentum in the period between the two world wars. Associated with this has been a profound change in the relative amounts spent on the various food categories. Consumption

of cereals tended to decline, whereas the dietary importance of meat, dairy products, vegetables and fruit rose. Svennilson has shown that in the

period between 1910-13 and 1934-8 all the countries of northern and Western Europe reached the point where a decline in per capita consump-

tion of cereals set in.2¢ This coincided with a sharp fall in the rate of population growth in Europe’s highly-industrialized food-importing countries. The combined population growth of Britain and Germany—the two main food-importers—fell from 1.2 per cent in the three decades to 1913 to 0.6 per cent between the wars.3? The net result was that total European consumption of grain—the most important commodity in terms of inter-

national trade in foodstuffs—barely increased after 1914, while in the more advanced countries it actually declined. It is not surprising to find that supply was slow to adjust to these new conditions, particularly in view of the widespread confusion and uncertainty after World War I. As noted previously, the war was accompanied by a great expansion in overseas grain production to fill the gap created by the collapse in European agriculture. However, once such a procedure is started it 1s difficult to reverse. Much of the increase occurred in such countries as Canada, Australia and Argentina, whose international

solvency and living standards largely depended on maintaining a high volume of food (and other primary) exports. Rural recovery in Europe was slow and uneven, but by the mid-’twenties most countries had restored production to its pre-war level.38 The result was that, from 1925 onwards, visible supply exceeded current consumption and stocks began to accumulate rapidly. ‘The much greater growth in stocks compared with production in the late ’twenties, illustrated in Fig. 2, makes clear the development of

a highly unstable market for food well before the onset of general depression. Prices fell throughout the second half of the decade, but the really steep fall occurred after the New York stdck market crash had under-

mined confidence to such an extent that large parcels were thrown onto the market for what they would fetch. Matters were made worse by the

growth of agricultural protection in Europe, and the continuation of overseas production at a high level. Food stocks continued to rise until 1934; at their lowest point in 1935 food prices (in gold) stood at 40.5 36 Growth and Stagnation, pp. 85-6. 37 There was no significant difference between the population growth rate in the ’twenties and ‘thirties. 38 For general conditions of European agriculture in the 1920s, see World Agriculture: An International Survey, Oxford 1932.

27

Australia and the Great Depression

/\/

Index: 1929 = 100

120 _——~ 110 v -a~~aN

| IOO =< > 90 Yo Foodstuffs NS yy 130

//

807/ Production —____ : 70a“Stocks —.. 120 oS IIo —a /™~ aN y

Z|

100 —7 | 130

/

go A

80 Raw materials 70

Ratio scale

1925 1927 1929 1931 1933 1935 1937 Fig. 2: WORLD PRODUCTION AND STOCKS OF FOODSTUFFS AND RAW MATERIALS, 1925-38

Source: World Production and Prices, 1938/39, League of Nations, Geneva 1939.

(1929 = 100) °° It must have been cold comfort for producers to know that had it not been for the failure of the U.S.S.R. to regain her former pre-eminence as a grain exporter the collapse in prices would have been

complete. ,

The diversity of uses of raw materials makes it more difficult to generalize about this group of products. Some of the old staple materials like textile fibres and coal were faced with a relatively stagnant demand; others, associated with industries in the vanguard of technical change such as rubber, wood-pulp, oil, and most non-ferrous metals, experienced a rapid growth in demand.* An additional complication is that world 39 Review of World Trade 1938, Geneva 1939, p. 61. 40 Ivar Hogbom, ‘Development of World Production of Raw Materials’ in Report of the Committee for the Study of the Problems of Raw Materials, Geneva 1937, Annex I, pp. 31-5.

28

The International Setting demand for raw materials was more dispersed geographically than for foodstuffs. Whereas Western Europe was the dominant food-importing region, demand for raw materials was more evenly spread between Europe,

North America, and newer industrial countries such as Japan. Europe was still the largest importing area for most products, but the United States played an important part in the international market for rubber, silk, wool and wood-pulp, and Japan was of growing significance in the cotton market.

Broadly, however, it can be said that before 1929 the international market for raw materials possessed few of the inherently unstable features

which plagued the market for foodstuffs. Demand grew fairly steadily throughout the ’twenties, and, as shown in Fig. 2, there was no significant tendency for stocks to accumulate in relation to production until after the onset of general depression. This does not mean that matters were entirely healthy. Technical progress during and after World War I set in motion

a secular decline in industry’s requirements of crude materials. In the inter-war period the switch from steam to electric power and from natural fibres to rayon were the most notable examples, but in many other ways as well small cumulative changes were taking place.4! Prices of some raw

materials also tended to fall at the end of the ’twenties. Wool and silk prices fell almost continuously from 1925, the price of rubber was halved in 1928, and wide fluctuations in cotton prices reflected the element of uncertainty that had developed in the industry. But in none of these products was there excessive stock accumulation before 1929; nor was the price decline as clearly marked or as widespread as it was in foodstuffs.

It is also unlikely that there was significant downward pressure on the level of international trade from this source. Yet in the early ’thirties prices for raw materials fell even more than foodstuffs. In 1935 the general

raw materials (gold) price index stood at 39 (1929 = 100). There was also a greater fall in the volume of production and trade than in foodstuffs, so that, in general, exporters of raw materials were more severely affected by the depression than food-exporters. But why did prices of raw materials fall so heavily? It is easy to see why food prices reacted as they

did; but it is not sufficient to explain, as Arthur Lewis does, the fall in the prices of raw materials in-terms of the decline in food prices, the two lumped together as ‘primary products’.*# Nor is it adequate to claim that the fall was simply a reaction to the general economic collapse in the United States. Certainly this is part of the explanation; but American 41 The relative decline in the use of raw materials in the 1920s was discussed in the Memorandum on Production and Trade 1925 to 1929/30, Geneva 1931, Ch. V.

42 Lewis’ explanation of the decline in trade between the wars, the fall in prices of primary products, and hence the severity and world-wide nature of the depression, is almost entirely in terms of the deficiency in demand for foodstuffs. He uses the terms ‘foodstuffs’ and ‘primary products’ interchangeably. He argues, for example, that the ‘principal reason why the trade in primary products was not higher was the decline of population growth’. (Economic Survey, 1919-39, p. 151.) Although having the appeal of logical simplicity, his explanation is misleading in that it fails to recognize and account for the quite different market situation for raw materials. 29

Australia and the Great Depression imports of raw materials, although large, were not sufficient to attribute to her a dominant role in the market. For an adequate explanation it is necessary to turn to the second of the main problems of the international economy in the 1920s—the stagnation in European economic growth and trade. As is well known, European recovery from World War I was slow. In some countries pre-war levels of income and production were not restored until the second half of the twenties. ‘This was particularly so of the two industrial leaders, Britain and Germany, whose industrial production fell far behind the United States between 1913 and 1929:43

1913 86 1925100 1929 Britain 100 Germany 100 95 117

United States 100 148 181

In part this was a direct consequence of distortion in the use of resources during the war. Industries such as steel-making and shipbuilding were of necessity expanded to well beyond their peace-time requirements. High profits during the war and in the inflationary period immediately after retarded the elimination of excess capacity, and made more difficult the diversion of resources to new and expanding industries.** Political boundary changes and the creation of new sovereign states worked in the same

direction. There was strong pressure on governments to prevent the closure of factories built during the war, particularly in the agricultural countries of eastern Europe which experienced serious balance of payments problems and rapid population growth. The main problem was, however, more fundamental. Most European exports before 1914 consisted of comparatively simple manufactures, of which textiles, clothing and basic metal products were the most important. Well before the outbreak of war the composition of demand for manufactures was moving away from these light products to more sophisticated items such as transport equipment, industrial chemicals, and machinery of an increasingly complex nature. The war greatly increased the rate of change in this direction. By encouraging the spread of industrialization overseas, it enabled many countries to become reasonably self-sufficient in

those products which had formed the basis of trade in manufactures in the nineteenth century. The main requirement now was for plant and

equipment to create and extend new industries, and for technically advanced products which could not be manufactured in the young industrial countries. Even in the old staple products Europe’s comparative advantage was much reduced by the development of Japan as a major exporter of light manufactures. What was required in the post-war decades was a progressive reorientation of European industry towards new and expanding fields. In the circumstances of the 1920s it was found extremely difficult to make 43 Industrialization and Foreign Trade, p. 134. 44 Svennilson, Growth and Stagnation, pp. 44-5.

3o

The International Setting these changes. In the first place, the old sources of growth were much weaker than before. Prior to 1914 industrialists had become accustomed to long periods of rapid demand expansion, and investment and output policies were planned accordingly. With the cessation of hostilities it was expected that growth would continue more or less as before. But in the 1920s the combination of falling population growth in the more advanced countries, reduced overseas demand for the traditional export goods, and lower post-war levels of real income, meant that there was a substantial

reduction in the long-term growth in demand for manufactures. Not

only did this add to the excess capacity and structural unemployment caused directly by the war, it also reduced the incentive and ability to change and was probably the most important single reason for the slow transformation of the European industrial structure between the wars. The administration of the monetary mechanism was also an important

retarding factor. Wild inflation on the Continent in the early ’twenties tended to divert attention away from long-term development towards immediate capital gains by encouraging the preservation of existing assets at the expense of new investment. Excessive interest rates for long-term capital had the same effect, as did the failure of wages to keep pace with rising prices.45 Unstable exchange rates and restrictions on the movement

of capital helped to distort the allocation of resources among the continental countries. Before 1914 there had been a comparatively free flow of capital from west to east, and a reverse flow of labour. After the war, however, countries in the east were faced with an acute shortage of de-

velopment capital and a closure of the traditional outlets for surplus labour. The inevitable result was a sharp decline in intra-European trade. Inflation was necessarily followed by deflation, and the widespread un-

employment which resulted also damaged capacity and incentive to transform. The long period of deflation in Britain was particularly damaging and hindered rationalization of the out-dated coal, steel and cotton

industries.

Furthermore, in many of the new industries technological leadership had passed decisively to the United States. In a large number of industries American labour productivity was higher than European well before 1914 and the war greatly increased this gap. On the whole, technical progress

accelerated during the conflict, but in Europe the war prevented the spread of innovation and eroded the skills of the work force. In the United

States, on the other hand, wartime protection provided the stimulus for rapid diversification and technological improvement, so that in the 1920s America emerged as the clear leader in such strategic industries as heavy engineering, organic chemicals and steel-making.4® Once technological advantage is lost it is difhcult to regain. Full employment and stable money conditions may have enabled Europe to break the vicious cycle of industrial stagnation, declining trade and high unemployment, but in 45 Course and Phases of the World Economic Depression, pp. 87-91.

46 Svennilson, Growth and Stagnation, pp. 45-6, 120 ff. : 31

Australia and the Great Depression the event the technological gap became even wider during the course of the 1920s.

Against this background it is not difficult to trace the course of events leading to the drastic decline in prices of raw materials. The first step was an increase in tariffs and other trade barriers. Confronted with stagnating demand for manufactures and deteriorating balances of payments, it was a natural reaction for Europe’s industrial countries to attempt to protect their home markets from foreign competition. Tariffs on manufactured goods were the first to rise. Lewis has calculated that in 1927 the average European tariff level on these goods was 4o per cent higher than in 1913.47 The seeds of protection were well sprouted long before the general con-

traction. Then came the New York crash, the withdrawal of American capital from Europe, and the international financial crisis. All available means were used to restrict imports: tariffs on both manufactures and agricultural produce were in many cases hoisted to prohibitive levels, and drastic currency restrictions were imposed. Naturally the volume of trade fell sharply, but the important point is that it was the trade between the industrial countries that was the hardest hit. Despite the drive in Europe for agricultural self-sufficiency, imports of manufactures could be more

easily dispensed with. The following indices of trade in manufactures between industrial countries indicate the general trend:48

1913 1929 1937 Intra-trade 80 100 71 Exports to rest of world 71 100 94 Intra-European trade fell most of all, and in 1937 it had only recovered to 63 per cent of its 1929 level.49 This comparatively great fall in the intratrade of industrial countries, together with the slump in the United States, is the principal explanation of why prices of raw materials fell so heavily and remained low for so long.

It is now possible to weave together the various strands of the argument. ‘The analysis thus far rests on the premise that the depression was so widespread and of such exceptional severity because of the disintegration of world trade. International specialization had developed to such an extent before World War I that any subsequent decline in trade relative

to production was bound to have repercussions on levels of income throughout the world. This was especially true for exporters of primary products because of their greater dependence on trade, and one of the most conspicuous manifestations of the trade collapse was the steep decline in prices of these commodities in the 1930s. The discussion has concentrated, therefore, on the reasons for the low level of trade between the wars. 47 Economic Survey, 1919-39, p. 151.

48 Maizels, Industrial Growth, Table 4.4, p. 89. The ‘industrial countries’ for purposes of Maizels’ classification are those of Western Europe, North America and Japan. The ‘rest of the world’ excludes the U.S.S.R. 49 Ibid., Table 4.5, p. 92. 32

The International Setting A reduction in trade was caused in the first instance by the war itself. It is during the conflict that the world production and trade indices begin their pronounced divergence. But the important question is why the indices continue to diverge after 1918, further reducing the level of international specialization.5° Two main reasons have been advanced. First, in the 1920s there appears to have been a deficiency in the demand for foodstuffs in the highly-industrialized countries of Europe which upset the pre1914 pattern of exchange of food against manufactured goods. World food over-production from 1925 onwards resulted in the accumulation of excessive stocks which after the collapse of confidence in 1929 precipitated a steep decline in prices and further restrictions on imports of manufactures. The recovery of prices was so long delayed because’ of three factors: (a) the continued high volume of production in exporting countries in a vain attempt to regain pre-1929 levels of income; (b) the depressing influence of excessive stocks, which because of the high volume of output took until the mid-’thirties to eliminate; and (c) the attempts by European food-importers to develop domestic agricultural industries with the assistance of ample tariff protection. In the second place, distortion in the exchange of food against manu-

factures was joined in the late 1920s by the disintegration of trade between highly-industrialized countries themselves. Many factors were

responsible. In part it was a reaction to the withdrawal of American financial support for European reconstruction which underlined the fundamental balance of payments weakness in many countries. It was a reflection also of lower demand for manufactures by primary producing countries. But most of all it originated in industrial Europe’s inability to respond to changes in the world market for manufactured goods. The result was European industrial stagnation and the development of extreme policies of self-protection. It was this which cut trade and production of manufactures so decisively in the early ‘thirties, and led to the precipitous fall in prices of raw materials. ‘The fall in demand was so rapid

that stocks accumulated despite extensive cuts in production, and these stocks exerted additional downward pressure on prices.*! Of course very low prices for primary products reinforced the trade decline, and their slow rate of recovery made the task of international conferences to reduce trade barriers so very much more difficult. Underlying many of the difficulties of the whole inter-war period was the fact that the market mechanism, so much the driving force of economic change in the nineteenth century, was very much weaker after 1918. This can be seen in the slow adjustment of both agricultural and manufacturing industries to the new post-war conditions. ‘The pace,of change and the magnitude of the adjustments involved had been increased by the 50 The relatively greater growth of the United States during the war and after, and her comparatively low proportion of trade, is partly responsible for the divergence of the production and trade indices. However, exclusion of the United States does little to alter the general trend. 51 Excessive. stock accumulation occurred mainly in raw materials of agricultural origin ——notably rubber, silk, wool and cotton.

33

Australia and the Great Depression war, but the old means of transformation had suffered irreparable damage. The answer was not, as Keynes pointed out, a resurrection of laissez faire: the clock could not be put back.®? It was now up to governments to create a suitable framework within which private enterprise could operate

successfully, and to prod the market mechanism in the right direction when necessary. It was the capacity and willingness of governments to create this framework which was lacking most. Few knew how to interpret or administer the changes wrought by the conflict, while many governments were so beset by political instability and economic uncertainty that the exigency of the moment was the only one that mattered. Despite the innumerable international conferences on reparations, currency stability and trade restrictions, and the excellent work of the League of Nations, international affairs figured less prominently in the political arithmetic of western governments than in the previous century. Thus, inflation and currency depreciation was the easy solution of government finance and external payments problems in the early ‘twenties, while at the end of the decade the response to growing unemployment and declining exports was trade restrictions and wholesale international disengagement rather than the necessarily tough policy of accelerated industrial transformation.®? On the other hand, it is easy in retrospect to sharpen one’s pen at the expense of weak governments and inept policies. The economic nationalism which flourished in this period, and which did so much to exacerbate the international depression, was in the final analysis deeply rooted in the impoverishment and dislocation left by the war.

International Currency and Investment The reversion to economic nationalism is nowhere more clearly manifest than in the post-war history of the world’s financial system. The war effectively destroyed the pre-1914 pattern of international payments based on the gold exchange standard as administered by the City of London, and no machinery emerged after the war to replace it. The result was nothing less than currency chaos. For a while the artificial fabric of the restored gold standard was underwritten by extensive American lending to Europe, but when these loans were withdrawn at the end of the ‘twenties the whole eclifice collapsed in such a way as to reinforce strongly the disintegration of world trade.54

It was widely accepted after World War I that the gold standard should be restored as soon as possible. In a post-war world of rapid currency depreciation and wildly fluctuating exchange rates, a return to gold appeared to offer the restoration of all that was honourable, sensible and prudent

in international finance. The desire to return to pre-war practice was 52]. M. Keynes, The End of Laissez-Faire, London 1926. 53 J. B. Condliffe, The Commerce of Nations, London 1951, Ch. XV. 54 This section is largely based on W. A. Brown, Jr., The International Gold Standard

Reinterpreted, New York 1940 [Ragnar Nurkse and W. A. Brown], International Currency Experience, Princeton 1944; The Problem of International Investment, London 1937; and L. B. Yeager, International Monetary Relations, New York 1966, Pt. OW.

34

The International Setting particularly strong in Britain. By long experience there was an ingrained faith in the gold standard mechanism: its return would restore order to currency and payments systems, and it would place the City of London once again at the fount of the world’s commerce. Thus the Cunliffe Committee recommended in 1918 that the Bank of England should resume gold payments at the pre-war parity, and an international gathering of central bankers and government representatives endorsed this in prin-

ciple at Genoa in 1922.

However, the more urgent problem facing most European governments was currency instability rather than fundamental exchange equilibrium. Runaway inflation had to be stopped, and the anchor of the gold standard was used to achieve this quickly. It is significant, as Condliffe has noted, that ‘the countries which had suffered most from inflation were among the first to return to gold—Austria in 1922, Germany in 1923, and Hungary in 1924’.55 It mattered little at the time whether the particular level chosen was the right one; stabilization became an end in itself. ‘Each country thought of itself as attached to gold rather than attached to other countries through gold’,5® so that ‘exchange stabilization was carried out as an act of national sovereignty . . . with little or no regard to the resulting interrelationships of currency values in comparison with cost and price levels’.57

In the unsettled conditions of post-war reconstruction, it was, of course, extremely difficult to judge when exchange parity had been reached. The

information available to make inter-country comparison of costs and prices was meagre and unreliable. The only readily applicable test was the condition of a country’s balance of payments; but during most of the ‘twenties both capital and trade accounts were buffeted by a variety of destabilizing influences. Wide fluctuations in exchange rates encouraged an abnormal movement of short-term capital. Much of this was hot money in search of quick profits, but so complete was the destruction of liquid wealth by uncontrolled inflation in the early ‘twenties that even patriotic balances were quick to take flight. Moreover, the direction of capital transfers was frequently unpredictable. In the early stages of the depreciation of the franc, for example, short-term capital actually flowed into France in anticipation of stabilization at a higher level than the current market rate. The mass exodus of funds occurred only after continued inflation shattered the prospect of an early revaluation.5§ In Britain the

expectation of impending restoration of the pre-war exchange parity probably helped to hasten the event. Certainly, the inflow of short-term balances prior to 1925 strengthened sterling sufficiently to enable the Bank of England to justify its decision to resume gold payments before costs and prices had been reduced sufficiently. Transfers on account of war debts and reparations, unrelated to capacity to pay, further distorted the pattern of international settlement. Generally 55 Commerce of Nations, p. 505. 56 Brown, International Gold Standard, p. 386.

58 Ibid., pp. 35-6.

57 International Currency Experience, p. 116. |

35

Australia and the Great Depression the main burden of these payments occurred after currency stabilization, so that Germany and Britain in particular were faced with an additional problem in maintaining their new rates. In the final analysis, these payments could be made only so long as the United States was willing to provide debtor countries with loans. Funds were then shunted from one country to another and usually ended up back in the United States. The futile transfer of balances in this way disrupted exchanges and diverted capital from the urgent task of reconstruction. Underlying instability in exchange and capital movements were, of course, the large and persistent trade deficits in those countries which had been most heavily involved in the war. Earnings of foreign exchange fell owing to a reduction in capacity to export, and to depletion of overseas assets and merchant shipping facilities. At the same time reconstruction required extensive purchases of industrial plant and equipment available only from abroad. Abnormal food imports were also necessary pending the recovery of European agriculture. The problem facing governments was that these inescapable deficits fed domestic inflation. Internal political and economic considerations demanded currency stabilization sooner

rather than later, yet it was virtually impossible to predict the correct exchange parity until after normal trading conditions had been restored. Well before this was achieved, however, expediency forced unilateral currency stabilization in one country after another. The inevitable result was a patchwork of over- and under-valued currencies, which introduced a new set of difficulties into an already complex situation.

The difficulties occasioned by arbitrary exchange valuation are well illustrated by the history of two key currencies—the pound sterling and the franc. When the Bank of England resumed gold payments at the prewar parity in 1925 sterling was overvalued by about 10 per cent; the franc, on the other hand, was stabilized in 1926 at rather less than parity.®° The strain created by the subsequent interaction of these two currencies

was to play a vitally important part in the final disintegration of the restored gold standard in the 1930s. Before World War I London’s strength as the centre of international finance was based on her large short-term money market dealing primarily in trade acceptances. ‘The turnover in short-term investment funds was also substantial, but these were largely placed by Britain’s main trading partners who regarded their sterling balances as part of their international reserves. In both cases the volume of credit was effectively regulated by the Bank of England’s discount rate. Britain’s dominance of world trade and investment forced other countries to adapt their own financial policies to changes in monetary conditions in London if they wished to remain on the gold standard.® ‘The problem of a number of competing financial 59 Yeager, International Monetary Relations, pp. 277-86.

60 A growing body of opinion suggests that under the pre-1914 gold standard the weight of the adjustment mechanism fell not within Britain itself, as it was in classical theory supposed to, but on those primary producing countries dependent on the English capital and produce markets. Thus a rise in Bank Rate exerted little if any

deflationary pressure at home, but it did cut overseas investment and tended to 36

The International Setting centres each with different interest rate structures and following their own policy objectives, which was so much a feature of the post-war period, did not arise; even the independent gold markets of Berlin, Amsterdam and New York followed the guide lines set by London. Thus the Bank Rate mechanism, designed as it was to regulate London’s own liquidity, pro-

vided the means of comparatively smooth balancing of international payments.®!

Little of this delicate mechanism remained intact after the war.

Changes in money market operations and the emergence of competing financial centres effectively disabled Bank Rate policy. In the first place, the deterioration of Britain’s overseas trade and the development of new techniques of remittance—telegraphic transfers and bankers’ drafts— reduced sharply London’s dealing in trade acceptances. In 1922 it was estimated that the volume of bills current was only one-half the pre-war level, and that the general quality of the paper had also declined.® Increasingly, money market operations revolved around the funding of the internal public debt. The war had bequeathed a greatly expanded public debt, much of it in the form of Treasury bills. Funding and conversion operations occupied most of the ’twenties, and during this time interest rates had to be kept as low as possible. As a corrective for a payments deficit, an increase in Bank Rate could rarely be used at the right time or in the right proportion. Even if the Bank had been free to alter its discount rate in the traditional way, however, it is doubtful if such changes would have proved effective. Unlike the days before 1914, a large proportion of the short-term balances accepted by London were now held on the Continent by those

wishing to escape from currency instability. Particularly in the early ‘twenties, flight capital was attracted to London (and New York) as a hedge against inflation, and then, because of the general gold shortage and expansion in the number of continental central banks, the habit developed of holding a significant proportion of overseas reserves in the form of sterling assets. These balances were always likely to be unfaithful. They bore no relation to the volume of trade; nor were they influenced in any predictable way by changes in Bank Rate. They were likely to be withdrawn at a moment’s notice for any number of unpredictable reasons. A rise in Bank Rate, for instance, could be taken as a sign of weakness,

and so precipitate a sizeable outflow rather than attract capital. This radical change in the nature of the short-term market rendered obsolete much of London’s traditional financial machinery, and the future of the depress prices of foodstuffs and raw materials. See A. I. Bloomfield, Monetary Policy Under the International Gold Standard, 1880-1914, New York 1959; and R. Triffin,

The Evolution of the International Monetary System: Historical Reappratsal and Future Perspectives, Princeton Studies in International Finance No. 12, 1964. 61In practice Bank Rate policy was supported from time to time by various ‘gold devices’ which enabled it to slightly vary the price at which it bought gold. See R. S. Sayers, ‘The Bank in the Gold Market, 1890-1914’ in T. S. Ashton and R. S. Sayers (eds) , Papers in English Monetary History, Oxford 1953. 62 Condliffe, Commerce of Nations, p. 520. 37

Australia and the Great Depression restored gold standard was largely in the hands of a group of nervous and capricious speculators.® The growth of competing financial centres further impaired London’s ability to influence the course of events. It is customary to cite the rapid rise of the brash newcomers of New York to share the board room of high finance with the old masters of the City of London, and to argue that this

placed an additional strain on the management of international finance. It is no doubt true that in matters of technical competence and experience New York dealers were no match for their counterparts in London. They also lacked the specialized institutions and world-wide trading connections: the partial] success of New York in establishing an acceptance market of its own was not paralleled by effective influence over the value of world trade. With overseas trade such a small proportion of American national product, internal monetary considerations were bound to predominate. In short, New York was able to exercise power without responsibility. But the importance of the conflicting interests of London and New York can be overdrawn. New York was by no means the only centre helping to divide financial responsibility. Paris, Berlin, Zurich and Amsterdam emerged from the war with a measure of independence anknown before 1914, and each used this new-found freedom as an instrument of national economic policy. The attempts of the French to operate the gold standard along orthodox lines after 1926 were, as we shall see, directed mainly against Berlin; and for her part Berlin retaliated by borrowing excessively in New York so as to accumulate large (and unstable) credits abroad. London was usually the pawn in this highly-complex game. It was the manoeuvres of these secondary financial centres as much as the conflict between London and New York which shattered the brittle facade of the post-war international monetary system. The inherent weaknesses of the system became evident soon after the

general resumption of gold payments. Sterling was the first to run into trouble. The immediate difficulty was caused by the fairly large volume of overseas long-term lending undertaken by London at the end of the ‘twenties. Although the scale of lending was modest in comparison with pre-war operations, Britain’s overseas earnings were not sufficient to finance the capital outflow. The difference was made up by accepting short-term balances—largely from the United States, France and Germany. It has been estimated that by 1928 Britain’s short-term external liabilities amounted to £500m gross (£200m net), whereas before the war she was a

net short-term creditor... From 1925 onwards, therefore, sterling was generally weak, and the Bank of England found itself resisting the tendency to lose gold. The Bank was able to keep these losses to a minimum while foreigners were willing to add to their sterling balances, but as soon as funds were withdrawn it was powerless to resist a major gold outflow. 63 Generally Report of the Committee on Finance and Industry [Macmillan Report], 1931, paras 347-55.

64D. Williams, ‘London and the 1931 Financial Crisis’, Economic History Review,

Vol. XV, No. 3, April 1963.

65 Yeager, International Monetary Relations, p. 279.

38

The International Setting Such an outflow was precipitated by the decision of the French authorities to convert their substantial holding of sterling assets into gold on the

London market. This was not a frontal attack on sterling; the Bank of France was simply abiding by the technical rules of the pre-1914 gold standard. Following de facto stabilization of the franc in 1926 (de jure in 1928) funds, accumulated abroad in the period of rapid inflation, tended to flow back into the country. This trend was strengthened by improvement in France’s balance of trade. Stabilization at a low level encouraged exports and held back imports, so that at the end of the ‘twenties a succession of trade surpluses was recorded. There were a number of reasons for the French decision to convert their surplus foreignexchange earnings into gold. First, there was some legal obscurity about

the right of the Bank of France to add to its foreign-exchange holdings under the law of 1928 which re-established the obligation to redeem notes in gold. In the circumstances it felt obliged to convert surplus exchange

earnings into gold. Second, the Bank was understandably reluctant to accumulate balances in a seriously weakened currency, and saw no reason

why it should underwrite sterling so that the Bank of England could continue to play the role of an international financial centre.®¢ Finally, the French objected to German citizens building up privately-held assets abroad financed by borrowing in New York, while the German government professed its inability to meet reparations payments on the agreed scale. The Bank of France hoped that a squeeze on London would be transmitted to Berlin, so that the Reichsbank would then be forced to take over these balances. Germany would then find it difficult to argue that it could not lay its hands on sufficient foreign exchange to meet its obligations in full.®7

Sterling and with it the international gold standard may have collapsed much sooner under the weight of French pressure had it not been temporarily reprieved hy an acceleration of American lending to Europe in 1927-8. Nothing demonstrates more clearly the powerful influence of the United States on the timing of the world-wide decline than the monetary events of the late ’twenties. In the three years prior to 1927 American overseas investment had averaged US$860 million annually. The bulk of this was direct or other long-term investment in Europe, with Germany by

far the largest debtor country.®* Due to a mild recession in the United 66 Henry Clay, Lord Norman, London 1957, pp. 227-37; L. V. Chandler, Benjamin Strong, Washington 1958, pp. 378-80. 67 Condliffe, Commerce of Nations, pp. 509-10.

68 It should be noted that the 1920s witnessed a substantial change in the direction of international investment. The main channels of investment before World War I were from Britain to the more wealthy primary producing countries and India, and from France and Germany to eastern Europe. After the war continental Europe became the largest debtor area, and the United States the largest capital supplier. British investment was still significant, but France virtually retired from the field following her heavy losses as a result of the Russian Revolution. Germany was easily the largest debtor country, and in the period 1925-9 she borrowed four times as much as Australia, the next largest debtor. The diversion of funds away from the traditional borrowers to Europe acted as a further depressing influence on the level of international trade in the ‘twenties. It encouraged primary producers to increase 39

Australia and the Great Depression States and the easing of internal interest rates, American overseas lending

increased by about two-thirds in 1927-8 to an annual rate of US$1,390 million. Again Europe was easily the largest recipient, although on this occasion as much as 40 per cent of the outflow was on a short-term basis.® This flood of American capital temporarily eased pressure on sterling.

Bank Rate was cut from 5 to 4.5 per cent in April 1927, and for the re-

mainder of the year sterling hardened to reach gold import point in December. The Bank of France shifted its gold buying to New York, and during the first half of 1928 the Bank of England was able to make up some of its earlier gold losses.7° Overseas borrowers—particularly Australia—took full advantage of the easier credit conditions, and in the two years 1927-8 the volume of new overseas issues floated in London reached a post-war record.7! The Indian summer of illusion lasted until late in 1928 when the New York stock market boom broke from a fast trot to an unbridled gallop. Interest rates immediately stiffened, and American funds overseas were hastily withdrawn wherever possible to partake of easy profits. The era of an abundance of dollar loans and the uncritical American investor was over. Capital exports from the United States continued during 1929 and 1930, but on an ever-decreasing scale and largely in the form of direct investment in American subsidiary companies operating abroad. Very little was placed at the disposal of foreign companies. Once again pressure on sterling mounted, and during most of 1929 the Bank of England lost large amounts of gold. A brief respite was afforded by the bursting of the

Wall Street bubble, but the familiar difficulties reappeared in 1930 as world trade contracted and unemployment grew. The crisis was precipitated in May 1931 by revelations that the Austrian Credit-Anstalt was heavily overextended with its assets tied up in frozen advances. This touched off what was ‘in all essentials an oldfashioned run on the banks’.?? A syndicate headed by the Bank for International Settlements provided some financial assistance, but this was not sufficient to stem the tide. Further efforts to save the Bank fell through when prospective French creditors withdrew fearing that the proposed

customs union between Germany and Austria would amount to an Anschluss. Eventually the Bank of of England provided a loan to the Austrian government (through the Austrian National Bank) which enabled the Credit-Anstalt to make arrangements with its creditors, but by this time the damage had been well done. The scramble for liquidity spread to a number of eastern European countries, leaving behind it a

their exports of commodities already in world over-supply, and reduced capacity to import manufactures. 69 Estimates of American capital exports from Historical Statistics of the United States, Series U 185-8. 70 Brown, International Gold Standard, Chs 18-19. 71 The Problems of International Investment, pp. 139, 157. 72 Condliffe, Commerce of Nations, p. 514. 73 E. W. Bennett, Germany and the Diplomacy of the Financial Crisis, 1931, Cambridge, Mass. 1962, Ch. IV.

40

The International Setting train of broken banks with gold and currency stashed away in the bottoms

of cellars. It then moved north to Germany, whose large external shortterm indebtedness justifiably alarmed nervous creditors. Again an international syndicate provided assistance, but it came too late and was not nearly sufficient. As so often happened in this period, news of the proposed rescue operation tended to heighten fear rather than allay apprehension. In July the influential Danat Bank closed, which was followed by a government-declared bank holiday; in August the Reichsbank raised its discount rate to 15 per cent, and stringent exchange controls were imposed.

In this atmosphere the worst possible construction was likely to be placed on any news about economic and financial difficulties, and in the middle of 1931 events in Britain provided plenty of evidence that all was not well with sterling. As a result of the banking crises on the Continent, the pound was already weakened when the Macmillan Report warned of the dangers in a situation in which London’s short-term indebtedness was far in excess of its assets. By itself there was nothing unusual in this re-

lationship. An international banking centre, just as any ordinary commercial bank, could only be expected to cover a small proportion of its liabilities with liquid assets. The point was rather that compared with the period before the war, London’s external liabilities were highly unstable and likely to be withdrawn on very short notice. In these new circumstances, the available liquid asset cover was far from adequate." The Macmillan Report was followed a few weeks later by publication of findings by a parliamentary committee that government finances were in a serious condition, and that drastic cuts in expenditure were urgently required to restore budget balance. Attempts to implement these recommendations produced a major split in Ramsay MacDonald’s governing Labour Party, and served once again to focus attention on Britain’s precarious financial position. Massive withdrawals from sterling followed, and a Franco-American loan of $Us4oom was exhausted within a few weeks.

The formation of a National government and the swift introduction of a balanced budget proved to be of little assistance. It was then too late. The bear market in sterling had developed a momentum which could only be checked by a clear demonstration that ample liquid resources were available, or that foreign central banks were prepared unconditionally to support sterling whatever the cost. But it was manifest that Britain

could not mobilize its assets, and no further international loans were forthcoming. Indeed, the Bank of France, sensing that the end was near, ordered £6m to be sold in New York for its account on 19 September.7® This proved to be the final straw, and the Bank of England immediately initiated proceedings to suspend gold payments. Britain formally left gold on 21 September.”é 74 Macmillan Report, para. 349. 75 Yeager, International Monetary Relations, p. 297. 76 It is noteworthy that during the final weeks of the crisis the Bank of England made no attempt to raise its discount rate. Gold payments ceased with Bank Rate at a low

4.5 per cent. Some have claimed that the Bank erred in not raising its Rate before 41

Australia and the Great Depression The fall of sterling marked the end of attempts to reconstruct the world’s monetary and trading system on the basis of nineteenth-century modes of thought and conduct. After 1931 the semblance of order provided by the facade of the gold standard vanished, and the already enfeebled fabric of world trade was torn apart by the anarchy of monetary nationalism. The world divided into a number of distinct financial and trading groups. The largest group, which comprised most of the primary producing countries (including those such as Australia and New Zealand which had devalued before Britain), the Scandinavian and Baltic states, Austria and parts of the Middle East, aligned itself with Britain to form the Sterling Area. France, with her vast gold stocks, chose to maintain the existing parity, and with Belgium, the Netherlands, Italy, Switzerland and Poland she forged a loose alliance known as the ‘gold bloc’. The German solution was to remain on gold nominally, but to support the overvalued mark by an incredibly complex and stringent network of exchange controls and bilateral trading agreements. The United States withdrew into national self-sufficiency.

This diversion of trade and payments within regional groupings, with all its disruptive effects on the pattern of international specialization, was

the epitaph to those efforts which found national solutions for international problems. Each country wanted the convenience of the gold standard, but none was willing or able to make the necessary adjustments to enable it to function effectively in radically different post-war conditions. The gold standard had not become obsolete; it had simply become

more difficult to manage. The trouble was that few recognized that it needed to be managed at all. The decline in London’s influence and the emergence of competing financial centres was not matched by the creation

of international machinery to co-ordinate the activities of the various centres or to regulate the balancing of international payments. Indeed, the

need for such machinery was not grasped until the end of the ’thirties. Meetings between central bankers were usually formal and perfunctory, and effective co-operation lasted only so long as it was convenient to all parties. In monetary affairs as in trade, the war had left a legacy of intractable national problems, and while these persisted international considerations were bound to be neglected. Thus instability within one country was linked through gold to instability within another. Rather than providing an automatic adjustment process, the restored gold standard became the means for the rapid transmission of the American depression throughout the western world. the flight from sterling developed, and that a sharp increase at the right time might have saved the gold standard. This is extremely unlikely. At best it would simply have postponed the final collapse; at worst it would have accentuated the exodus of funds. It is immaterial, however, whether Bank policy was ill-advised or otherwise. The historically significant fact is that the authorities felt that no useful purpose would be served by a change in the Rate at this time, which is clear evidence of the decline in the effectiveness of London’s traditional machinery of monetary control. 42

The International Setting Comparative Magnitudes Australia was more than usually vulnerable to disruption of the inter-

national economy between the wars. Her export proceeds were largely derived from the sale of wool and wheat, two commodities which were severely affected by industrial stagnation in Europe and the subsequent world depression. Unfortunately her exports of non-ferrous metals declined sharply during the 1920s, for prices in this group fell less severely than for wool and wheat. Similarly, gold output was substantially less than in the decade before 1914. Furthermore Australia was heavily dependent on overseas sources of capital. When the London capital market was Closed to her in 1929, the multiplier effect of reduced government ex-

penditure was more immediate and damaging than the fall in farm incomes.

The severity of the depression is not fully apparent, however, from

an inter-country comparison of the extent of decline in (total) real national product and industrial production (Table ga). It would seem from the table that the Australian experience was no more severe than in the bulk of primary producing countries, and significantly less so than in the United States, Canada, Poland and Germany. To be sure, the quality of the figures on which the table is based vary considerably. ‘The Polish

and Hungarian estimates in particular are subject to a wide margin of error. The decline in Australian national product may also have been ereater than the table suggests because of shortcomings in available price indices. However, important as these statistical discrepancies undoubtedly are, the main deficiency of the table as an indicator of the comparative magnitude of the depression springs from the failure of national product to reflect fully the impact of short-term movements in international capital flows and the terms of trade. In general, the greater the involvement in international trade and overseas lending or borrowing, the less reliable are movements in national product as a guide to depression experience. Australia is a case in point. The comparatively moderate fall in national product was primarily due to the tendency of rural output to rise strongly in the early 1930s. With the aid of a succession of favourable seasons, farmers increased production in an attempt to counteract the fall in commodity prices; but despite the rise in output, rural income fell heavily. Thus, national product fell less heavily than other aggregate indicators such as national income and expenditure, so that the intensity of the depression is underestimated by exclusive use of this measure. Conversely, national product tends to exaggerate the situation in a highly-industrialized

capital-exporting country such as Britain. Because of the diversion of savings to domestic use after 1929 (and the favourable shift in the terms of trade) , real national expenditure in Britain continued to rise during the depression despite a sizeable fall in product.

Thus, as a counter to the deficiencies of Table 2a, an additional

depression measure has been compiled based on peak-to-trough movements of gross national expenditure (GNP plus imports of goods and services minus exports of goods and services). Although by no means 43

Australia and the Great Depression Table 2a: THE EFFECT OF DEPRESSION ON NATIONAL PRODUCT AND INDUSTRIAL PRODUCTION IN TEN COUNTRIES

Y = real national product P = industrial production

Period of decline Extent of decline

| From of peak) To Y P

(trough as percentage

1929 1932 | 70 55 UnitedYP 1929 States 1933 |

Y 1929 ! 1932 | 68 Canada 71 P 1929 1933 Poland Y,P 1929 1932 | 73 63 Y 1928 1932 | 99 Germany 34 P 1929 1932 | |

France | 74 82 P 1929 1932 | Y | 1929 1936

Hungary ! 83 82 Australia | go 70 Y =| 192g 1933 | P : 1929 1932 Y | 1927 1932 P | 1928 1932 Y | 1929 1932 United Pp Kingdom | 1929 193! i

86 Q4

Japan P 1929 1931 no fall g2 South Africa Y 1929 1932 99 no fall Note: For Australia, Hungary and South Africa, year ended 30 June. Sources: D. C, Paige et al., ‘Economic Growth: The Last Hundred Years’, National Institute Economic Review, No. 16, July 1961; World Production and Prices, 1937-38, Geneva 1938; A. Eckstein, ‘National Income and Capital Formation in Hungary, 1900-50’, Income and Wealth, Series V, London 1955; S. H. Frankel, ‘An Analysis of the Growth of the National Income of the Union ...’, South African Journal of Economics, Vol. 12, 1944; N. G. Butlin, Australian Domestic Product, Investment and Foreign Borrowing 1861-1938/39, Cambridge 1962, Table 26g. 44

The International Setting

=:

ideal, it is believed that this measure reflects more accurately the experience of those countries heavily involved in the international economy. Unfortunately, sufficient detail is not available to compile the expenditure figure for an adequate range of countries, but on the basis of Table 2b it

would appear that Australia was, indeed, among the countries most severely affected by the depression.

Table 2b: THE EFFECT OF DEPRESSION ON NATIONAL EXPENDITURE IN FIVE COUNTRIES

Period of decline Extent of decline

anFrom (trough Toasofpercentage peak)

United States 19291932 1933 76 73 Australia 1927 Germany 1928 77 United Kingdom 19291932 1932 105 Note: For Australia, year ended go June. Sources: Canada: M. C. Urquhart and K. A. H. Buckley (eds) , Historical Statistics of Canada, Cambridge 1965, Series E41-5. United States: Historical Statistics of the United States, Series F1-5, U168 and 175. Australia: N. G. Butlin, Australian Domestic Product, Tables 1, 256-7, 263 A & B, 264 A & B and 269 (for implicit deflator), S. Bambrick, ‘Indexes of Australian Import Prices, 1900 to 1927-28’, Australian Economic History Review, Vol. VIII, March 1968, Commonwealth Bank, Statistical Bulletin, 1937-9, W. Phillips, ‘Australian Export Prices, 18801935’, Economic Record, December 1935, p. 185. Germany: Statistisches Jahrbuch fiir das Deutsche Reiche, 1933, pp. 498-9 and Statistisches Jahrbuch fir die Bundesrepublik Deutschland, Wiesbaden 1961, p. 544. United Kingdom: R. B. Mitchell and P. Deane, Abstract of British Historical Statistics, Cambridge 1962, pp. 284, 335, 368 and 478.

This conclusion is broadly confirmed by international comparison of unemployment rates. It is true that a comparison of this type is also subject to stringent qualification. On the one hand, measurement is com-

plicated by differences in the definition of unemployment and in the sources of the statistics, and on the other by variations in the stage of economic development, the degree of industrialization and the importance of the public sector. By selecting a group of fairly highly-industrialized countries depending on broadly similar statistical sources—such as trade union returns—it is possible to eliminate some of the more conspicuous inconsistencies.?7 This approach has been followed in Table 3. Important

statistical differences still remain and the figures are by no means fully 77 This is the method used by W. Galenson and A. Zellner in their important work on ‘International Comparison of Unemployment Rates’ in Universities—National Bureau Committee for Economic Research, The Measurement and Behavior of Unemployment, Princeton 1957, pp. 439-74. 45

Australia and the Great Depression comparable, but they probably provide an approximate guide to the orders of magnitude involved. In the final analysis, of course, comparison of the impact of the depres-

sion in countries with widely differing economic, social and political structures defies precise quantification. All that can be said with con-

||

Table 3: UNEMPLOYMENT RATES IN SEVEN COUNTRIES

Five-year

Peak | Percentage average Type of return

year 1930-4

Germany : 1932 | 43.8 31.8 Trade Union Australia | 1932 | 28.1 23.4 Trade Union Canada | 1933 | 26.6 20.7 Trade Union

||||

United States | 1933 24.9 19.0 Official estimates United Kingdom | 1932 | 22.1 | 19.2 Trade Union

Poland | 1935 | 16.7 | 12.3 Employment exchange Japan | 1932 | 6.8 | 5.6 Official estimates Sources: W. Galenson and A. Zellner, ‘International Comparison of Unemployment Rates’ in Universities—National Bureau Committee for Economic Research, The Measurement and Behavior of Unemployment, Princeton University Press, 1957; Historical Statistics of the United States, Series D 47; Year-Book of Labour Statistics 1937, Geneva 1937.

fidence is that among the more developed countries Australia can be counted with the United States, Canada and Germany, and also much of eastern Europe outside the Soviet Union, as the group most seriously affected by the great depression.

46

Ill | The Nineteen-twenties

and the Depression ~ The impact of the international collapse on Australia was immediate and savage. The coincidence of a sharp fall in export prices and the stoppage

of overseas borrowing in 1929, superimposed on an economy already weakened by domestic recession, sent income and employment into an uncontrolled tail spin from which they did not begin to recover until the early months of 1932. The figures speak for themselves. Gross national product in current prices fell by 9 per cent in 1929-30, by 18 per cent in 1930-1, and by a further 7 per cent in the trough year of 1931-2. Unemployment, which had averaged 8 per cent during the 1920s as a whole, rose to 10 per cent in 1929, and then climbed steeply to 18 per cent in 1930, to

27 per cent in 1931, and reached a peak of 28 per cent in 1932. The greatest fall in all indices occurred in 1930-1—the year when overseasinduced deflationary pressure was at its maximum.

The primacy of overseas factors in the contraction is not in doubt. However inadequate domestic policies may have been, it is certain that Australia could not have escaped the cold blast of world depression. But to begin the story in 1929 with the initiation of external pressure, as most historians have tended to do, is to beg a number of important questions. Why, for instance, was Australia more than usually vulnerable to overseas disturbance at the end of the ’twenties? And why did she feel the effects of depression earlier than most other countries? To be sure, her involve-

ment in international trade as a large exporter of primary products 1s part of the explanation. But it is only part: it does not explain the important part played by domestic factors in shaping the Australian contraction; nor does it account for the comparatively rapid process of recovery. To answer these questions it is necessary to consider the characteristics of Australian economic development after World War I. Post-War Economic Growth It has always been difficult for those writing since the ‘twenties to recog-

nize that the decade following World War I was anything less than a period of steady economic progress and consistently rising living standards. 47

Australia and the Great Depression The impression was formed during the ’thirties when pre-depression levels of income and living standards were held to be the ideal for all to aim for, and it has remained so ever since. That the post-war decade began a new phase of Australian development is recognized, but the significant changes were thought to be in economic organization and in institutional arrangements rather than in basic sources of growth. Thus historians have tended

to concentrate on the form rather than the substance: they have highlighted government policies to promote immigration and closer land settlement; they have attempted to unravel the increasing complexity of Commonwealth-State financial relations; and they have discussed at length

the growth of the tariff and the consolidation of the arbitration system.} They have assumed throughout that the ’twenties formed part of a con-

tinuous phase of expansion (the war years aside) extending from recovery from protracted drought in the mid-1goos to the collapse of 1929. The ‘twenties did not, however, reproduce the characteristics of prewar development. Indeed, the period is quite exceptional in the history of Australian economic development since 1860. In an aggregate sense, the most conspicuous change was the sharp fall in the speed of expansion. The rate of growth of gross national product in constant (1911) prices averaged 2.7 per cent for the decade as a whole. This represented a significant departure from normal growth performance. In all other decades free from major disturbance such as war, depression or drought, growth has consistently been within the range 4 to 5.5 per cent per annum. The

figures in Table 4 are, of course, highly approximate, and are merely intended to convey the general contour of growth over a long period. There is little doubt that the use of 1911 prices for deflating gross national product for all decades prior to World War II has led to some distortion, particularly in the 1860s and 1870s. Nevertheless, whatever the statistical Table 4: INDICATORS OF ECONOMIC GROWTH

(per cent per annum) |

| Real GNP Population Real GNP

__ | |

per capita

1861 to 1870 |5-7 5.3 || 3.1 3.9 2.6 1.4 1871 to 1880 1881 to 1890 4.4 i 3.6 0.8 1904-5 to 1913-14 4.6 | 2.3 2.3 I9IQ-20 1928-9 4.0 2.7 || 2.3 2.0 1.7 0.7 1948-9 toto1962-3

Note: From trends fitted by least squares. Sources: N. G. Butlin, Australian Domestic Product, Investment and Foreign Borrowing, Cambridge at the University Press, 1962, Table 269; ‘Report of the Committee of Economic Enquiry, May 1965’, Vol. II, Canberra 1966, p. 467; Demography Bulletins.

1 See, for example, Gordon Greenwood (ed.) , Australia: A Social and Political History, Sydney 1955, Ch. VIII.

48

The Nineteen-twenties and the Depression

__ 450 . G. 400

= ; . y = (357.8) (1.0272)

5 359 € XR

300 Ratio scale 1920 1921 1922 1923 1924 1925 1926 1927 1928 Fig. 3: GROWTH TRENDS IN THE 1920S

Note: Exponential trend fitted by least squares; curvi-linear trend drawn freehand. Source: N. G. Butlin, Australian Domestic Product, Investment and Foreign Borrowing, 1861-1938/39, Table 269, Cambridge at the University Press, 1962.

limitations of long-period comparison of growth rates, there is no doubt that growth in the 1920s was exceptionally slow. Furthermore, the trend rate of growth in the 1920s Is a poor reflection of the growth experience of the whole decade. As shown in Fig. 3, the period divides into two quite distinct phases. In the first, from the end of the war to about 1925, expansion was fairly rapid under the stimulus of high export prices, the continuation of heavy government expenditure, relative freedom from import competition (at least until 1921-2), and substantial increases in tariff protection. In the second half of the decade, however, the economy stagnated: real national product fell gradually, and product per head more rapidly, so that by 1927—-well before the overseas collapse—Australia was already in a state of serious recession. Viewed in longer perspective, the record of the post-war decade is even more dismal than these figures suggest. Professor N. G. Butlin has recently

shown that a lengthy period of stationary or declining per capita income is usually followed by a number of years of comparatively rapid expansion, but that this latter phase simply serves to maintain the long-period trend rate of growth.? The relatively rapid growth between 1919 and 1925 should be interpreted in this way. Per capita income fell heavily during World War I, and the post-war rise in national product did little more than re-establish the average income level of 1913. Thus, with the gradual erosion of real income in the second half of the ’twenties, income per head (and also per worker) was virtually the same in 1928-9 as it had been 2‘Long-run Trends in Australian Per Capita Consumption’ in K. Hancock (ed.) , The National Income and Social Welfare, Melbourne 1965, pp. 5, 7. The argument was used to explain the behaviour of per capita consumption, but it can also be applied to per capita real income. 49

Australia and the Great Depression immediately before the war. This is surely the basic explanation of why there was such an obsession about maintaining the Australian ‘standard of living’ in the ‘twenties, and why major industrial disputes were so rampant at the end of the decade. How do we account for this retardation of growth? Is the explanation to be found in the peculiarities of internal development? Or can the Aus-

tralian experience be connected with general stagnation in the international economy?

There is no doubt that the post-war disruption of international trade is part of the explanation. Although Australian governments had little real difficulty in borrowing abroad prior to 1929, the fall in primary commodity prices in the second half of the twenties eroded export income and this in turn exerted some downward pressure on national product. General deflationary tendencies in Europe, especially in Britain, also played a part.

Despite the steady growth of tariff protection in Australia during the ‘twenties, domestic manufacturers found increasing difficulty in competing with imports because of the growing divergence between local and overseas prices. While world prices fell as all the major industrial countries

prepared to resume gold payments, Australian costs and prices drifted upwards. The result was a profit squeeze on wide sections of domestic manufacturing industry, a squeeze which increased in intensity as the ‘twenties drew to a close. This largely accounts for the slower growth in manufacturing output and employment after 1925, the rise in the proportion of factory workers unemployed, and the sharp pre-depression fall in industrial investment. Fundamental changes in the structure of the economy were, however, even more important in explaining poor post-war growth performance. The main changes were (a) a shift in the use of labour and capital from the high productivity rural sector to the comparatively low productivity manufacturing and tertiary sectors; (b) the growth of large-scale public investment for the creation of non-productive social assets predominantly

in industrial-urban areas; and (c) the failure of some rural industries to maintain pre-war rates of productivity improvement. These will be considered later in a wider context, but it is important to note at the outset the close connection between the first two changes. An obvious although neglected fact of Australian development is that industrialization occurred with average income already high by world standards. In the United States with its very large market high wages proved to be a positive advantage by encouraging the adoption of capital-intensive techniques;? but in Australia the small size of the market prevented the rapid adoption of Jabour-saving devices. This affected the pattern of development in two main ways. First, high costs restricted the speed and scope of industrial growth, so that there was an unusually long time-lag by modern standards between the emergence of import-competing industries shortly before World War I and reaching something like industrial maturity around 1960. Second, and more important for our immediate purpose, compara3H. J. Habakkuk, American and British Technology in the Nineteenth Century, Cambridge 1962.

50

The Nineteen-twenties and the Depression tive affluence in a highly-urbanized community created a demand for the full range of amenities which could be provided by contemporary technology. ‘There was a heavy post-war demand for new and improved housing, and for the extension of water and sewerage facilities; while the introduction of the motor vehicle led to a large scale expenditure on transport and communications installations. Not since the 1880s had such a high proportion of investible funds been used for the creation of social capital;

but even more than in the ’eighties this investment was financed by government fixed-interest borrowing abroad. Moreover, as the ‘twenties progressed the dependence on public capital inflow increased. The result was serious distortion of Australia’s balance of payments, with a sharply rising percentage of export income committed to the service of international indebtedness. ‘This made much more difficult adjustment to lower export prices and the stoppage of overseas borrowing after 1929, and the continual threat of default in 1930 and 1931 dominated economic policy and significantly affected the shape of the contraction. The remainder of this chapter will be mainly concerned, therefore, with the relationship between industrialization in a small high-cost market, public investment, and the structure of the balance of payments.

Industrial Development

Before World War I Australia had already achieved a fairly high degree of industrialization. The classical process of transfer of resources from primary to manufacturing industries, which has dominated most of Australian economic history in the twentieth century, was clearly under way. By 1913 manufacturing accounted for 14 per cent of gross national product and employed 20 per cent of the work force. The greater part of this activity was, however, in industries naturally sheltered from import competition and in those associated with processing primary products. Industrial development at this time was largely a function of population growth and urbanization. With only a few exceptions factory operations were small scale, labour intensive, and required little technological sophistication. It is true that some import replacement had taken place, notably during and after the depression of the 1890s;4 but replacement was confined to a few metal-based industries whose output was geared to railway workshops and the rural sector, and to a small range of simple goods such

as candles, spirits, blankets and clothing. There was as yet no general industrial expansion embracing a wide range of manufacturing activities.

The outbreak of war in 1914 placed a formidable strain on the country’s industrial capacity. With the disruption of shipping and the new requirements of a wartime economy, existing industry was found depressingly inadequate to meet the emergency conditions. The troops could, by and large, be clothed, but they could not be armed or equipped. It was fortunate that before the war plans had been laid for the establish-

ment of a coastal steelworks, for with the completion of the first blast

, 51

4.W. A. Sinclair, Economic Recovery in Victoria, 1894-99, Canberra 1956, Ch. 4; also Fig. 4 below.

Australia and the Great Depression furnace at Newcastle in 1915 it was possible to expand rapidly and diversify basic metal-using industries. Expansion of capacity was continually hampered by the shortage of essential capital equipment, but by the end of the war many forms of heavy and light engineering, basic chemical and textile manufacture had been commenced for the first time. But the war did not induce general industrial growth. Many industries, particularly building, suffered acute depression during the conflict; unemployment remained high, and industrial investment declined from its pre-war level.° The significance of wartime development was that it stimulated diversifcation, creating industries which could not normally compete with im-

ports. It also altered fundamentally the path of industrialization. No longer was manufacturing simply dependent on population growth and the processing of primary products, so that in the post-war period it was able to achieve a direction and momentum of its own. As with economic growth, manufacturing development in the 1920s divides into two reasonably distinct phases. In the first, from the end of

the war to 1924-5, output and employment grew rapidly under the stimulus of a continuation of inflationary government expenditure, the relaxation of price and capital-issues controls, high prices for wool and wheat, and a sharp increase in resident population and the marriage rate as the troops returned from abroad. Manufacturers were also aided by

a:

relative freedom from import competition until 1920, and this encouraged

particularly rapid expansion in the immediate post-war years. World depression, over-importation in 1920 and deflationary monetary policy checked growth in 1920-1, but the granting of substantially increased pro-

tection in the Greene Tariff of 1921 blunted import competition and allowed a further three or four years of steady expansion.

Table 5: RATES OF GROWTH IN MANUFACTURING

INDUSTRY, 1907 to 1938-9 (Annual average percentage rates)

Labour

1919-20 to 1928-9 1924-5 6.3 3.3 3.1 3.0 1925-6 to 4.2 |1.0

1929-30 —1.6 —0.2 1935-6toto1934-5 1938-9 6.4 5-4—1.5 1.0

Noite: Slight discrepancies are due to rounding. Sources: N. G. Butlin, Australian Domestic Product, Investment and Foreign Borrowing 1861-1938/39, Cambridge at the University Press, 1962, Table 269; M. Keating, ‘Australian Work Force and Employment, 1910/11 to 1960/61’, Australian Economic History Review, September 1967; Production Bulletins. 5 See C. Forster, ‘Australian Manufacturing and the War of 1914-18’, Economic Record,

November 1953, for the general effect of the war on Australian industry.

2

| The Nineteen-twenties and the Depression After 1925 the comparative buoyancy of the early period was replaced by sagging expectations, a marked slow-down in the rate of expansion, and enforced idleness for a growing proportion of manufacturing capacity and the. industrial labour force. Two partly related causes were responsible.

First, the intensity of import competition increased sharply. Despite a 13 per cent increase in the British Preferential Tariff between 1924-5 and

1928-9 (and a similar increase in the general tariff) 6 manufacturing profits were eroded as a result of the steep fall in import prices and the failure of domestic costs to move in sympathy. Second, it appears in retrospect that additions to plant capacity in the early post-war years had been excessive. Investment at this time had been stimulated by rapid growth

in demand and the low volume of imports, but in planning its capital stock local industry had overestimated the normal peace-time demand for growth and its ability to compete with imports. These factors combined to precipitate a serious decline in industrial investment in the second half of the decade. The fall in the rate of investment is illustrated in Table 6, which compares gross industrial capital formation with gross manufacturing product. It is true that capital formation was unusually high in the three post-war years, but the near halving of the investment rate over the decade is evidence of the progressive deterioration in the conditions for further industrial growth. Table 6: MANUFACTURING INVESTMENT IN THE ’TWENTIES

(per cent)

Gross Industrial Investment to

Period - Gross Manufacturing Product

| 1919-20 toto1921-2 17.2 1922-3 1924-5 1925-6 to 1928-914.6 9.9 Source: N. G. Butlin, Australian Domestic Product, Investment and Foreign Borrowing 1861-1938/39, Cambridge at the University Press, 1962. For a revision of the gross

private investment series, see N. G. Butlin, Investment in Australian Economic

Development, pp. 451-3.

(a) Expansion 1919-24 ‘The backbone of industrialization in the 1920s was replacement of a wide range of imports by local manufactures. A few

import-competing industries had emerged before World War I, but the major change in the composition of output occurred during the war and in the following decade. It is true that replacement was of minor proportions if measured in aggregate: in the half-dozen years before the war imports as a proportion of gross national product averaged 19 per cent, whereas in the ‘twenties the ratio was only marginally lower at 18.5 per 6 A. T. Carmody, “The Level of the Australian Tariff: A Study in Method’, Yorkshire Bulletin of Economic and Social Research, January 1952. 53

|/

70 ra 60 / 50 oS | Australia and the Great Depression

Percentage of total market supply

4.0 | a

a

aa

_—-~

4 Production

Imports 20

| 5 years moving average

IQid 1920 1930. 1937 Fig. 4: TRENDS IN IMPORT REPLACEMENT IN SELECTED AUSTRALIAN MANUFACTURING INDUSTRIES, 1907-37

Note: Only industries in which the element of import competition is significant have been included This consists principally of the metals, clothing and textiles, chem1cals and paper groups. Source: Compiled from Production and Overseas Trade Bulletins.

cent. Within the aggregate, however, there were significant changes in the proportion of imports to domestic output in key industries. By selecting those industries which were broadly competitive with imports (excluding those industry segments of the Statistician’s classifications which were

clearly not competitive), it 1s possible to measure in broad terms the change in the contribution of domestic manufacturing output to total

market supply. The aggregate result of this procedure is shown in Fig. 4. The visual impact of the figure does perhaps exaggerate the trend rate

of import replacement in the inter-war years. This is mainly due to the sharp drop in the average propensity to import following the severe exchange and balance of payments crises of the early 1930s. Under these exceptional conditions domestic manufacturers were able to seize a larger share of the local market than improvements in their competitive position warranted, so that the trend was temporarily reversed after World War I] with the rise in primary commodity prices and the gradual relaxation of exchange control. Well before 1930, however, the strong downward trend

in the proportion of imports to total market supply is unmistakable. Although partly obscured in the figure by the use of five-year moving averages, the greatest fall in the import component occurred during World War I and the immediate post-war years. Between 1913 and 1919-20 the contribution of imports to market supply in the import-competing sector

fell from 59 to 46 per cent. With the growing severity of international competition in manufactures in the 1920s, it is hardly surprising to find 54

The Nineteen-twenties and the Depression that this rate of import substitution was not maintained. Nevertheless, some replacement did occur, although slowly; and by 1928-9 the import component was down to 43 per cent. The significance of the ’twenties is not in the rate of replacement that was achieved, but in the fact that the substantial gains made during the war were more than fully maintained. A general description of the contour of import replacement is, however, only the first step to understanding the nature of industrial growth during and after World War I. The more important questions are: What were the structural features of growth? What were the leading industries? Was growth accompanied by a significant increase in scale? How was growth

financed? And to what extent did the initial stages of growth favour capital goods or consumer goods industries? It would take us well beyond the scope of the present chapter to attempt to answer all of these questions in detail, but some consideration of the more important structural features

of manufacturing development is necessary for an appreciation of the nature of the contraction and also the mechanism of recovery after 1932. A broad indication of the leading industries, their growth performance and relative size is given in Tables 7-9. Attention is again focused on the import-competing sector. Table 7 breaks down the aggregate figure used Table 7: IMPORT REPLACEMENT IN SELECTED INDUSTRIES

AND YEARS, 1907 to 1928-9 (Percentages of domestic output to total market supply)

oo [3 [es [

Industrial metals and machines 39.7 43.8 59.1 58.3 60.7 Textiles 4.9 7.8 20.1 24.2 36.5 Clothing 63.7 69.4 84.1 80.5 84.7 Paper 17.6 18.7 33.0 36.6 38.1 Chemicals 38.7 32.3 48.0 52.2 53-1

Weighted average 35-3 4I.g 53-5 52.2 57-2 Note: Any industry segment of the broad classifications used in the table which benefited from heavy ‘natural’ shelter and was not normally competitive with imports has been excluded from the calculation. Source: Compiled from Production and Overseas Trade Bulletins.

in Fig. 4 into its components for selected years between 1907 and 1928-9. Fach of the five industry groups records a significant element of import replacement over the twenty-year period, but the most substantial gains were made by the textiles industry? and to a lesser extent by paper products. Textiles also achieved the highest rate of expansion over the period

as a whole as shown in Table 8, but only in a highly-restricted sense should it be regarded as the leading industry. Before World War I it was of negligible proportions, representing little more than one per cent of 7 The textiles industry before World War II consisted predominantly of the manufacture of woollen goods. The term ‘textiles’ will be used in the text, but it should be read to mean woollen textiles. 55

Australia and the Great Depression manufacturing product; and despite the hectic pace of expansion during and immediately after the war its share had only risen to 4 per cent by 1927-8 (see Table 9). More than any other Australian industry at the time, textiles depended on substantial shelter from overseas competition. The local availability of raw materials was a minor advantage because of

the high ratio between the value of the finished product and of raw material input. Also, transport costs provided little natural shelter because of the high value/weight ratio. It was not until the arrival of war-created »rotection, therefore, that the industry was afforded its first opportunity for consistent and rapid growth, while the overall speed of expansion was maintained during the 1920s by steadily mounting customs duties. The unique dependence of textiles on the tariff meant that the industry was a sensitive barometer of changes in relative prices: it responded strongly to a rise in profit expectations, and reacted sharply to any erosion of effective protection. In short, changes in the profitability of the industry tended to be a guide to more fundamental movements in the competitive position of the import-competing sector as a whole, so that textiles anticipated the

general decline in manufacturing after 1927 and also the beginning of recovery 1N 1932.

Although not achieving the narrow distinction of recording the fastest rate of growth of output or import replacement, the metals-based group of industries (comprising iron and steel, machinery and engineering) was in a very real sense the leader in Australian industrial development. Its importance arose from its relative size, the strength of its forward and backward linkages, and its requirement of a reasonably sophisticated technology. Even before 1914 and the wartime upsurge of heavy industry, the metals group represented about 15 per cent of manufacturing product or more than one-half of those industries loosely described as importcompeting. The early prominence of this group deserves a word of explanation. In the first place, it must be conceded that at least part of the Table 8: InDICES OF MANUFACTURING OUTPUT, SELECTED INDUSTRIES

AND YEARS, 1907 to 1927-8

Iron and steel 56.7 97-4 151.4 Machinery and engineering 54.6 110.7 100 186.2 Textiles 25.3 46.6 100 216.2 Clothing 69.9 116.1 100 133.2 Paper 46.3 63.5 100 169.4 Chemicals 50.6 78.9 100 192.4 Electric light and power 39.8 104.2 | 100 152.1

Rubber 23.8103.1 47.4 100 100 139.8 208.4 Food 69.3

Base: 1919-20 = roo.

Source: Compiled from Production Bulletins. Deflated by use of N. G. Butlin’s manufacturing price index in Australian Domestic Product, Table 269. 56

The Nineteen-twenties and the Depression group received a significant element of natural protection. The equipping of pastoral properties, and the construction and maintenance of transport and urban facilities in the half-century to 1914 obviously required local support from a wide range of engineering trades. Government railway workshops were probably the largest employers of iron workers, machinists and engineers, and as such were instrumental in encouraging the growth of a skilled work force familiar with the simpler techniques of the trade. Furthermore, governments encouraged the local iron and steel industry and the manufacture of rolling stock and a wide range of metal products by a piecemeal system of bounties, preferential contracts and a modicum of tariff protection.® But there was more in the growth of the metal-based industries than a combination of natural shelter and government encouragement. The early establishment of plant for the manufacture of agricultural implements and wire netting cannot, for example, be traced to either of these two factors. Here initial cost disadvantages were counterbalanced by ability and willingness to respond to the special requirements of the local market. It is true that these two industries were small prior to World War I, but the response of local manufacturers to the peculiar needs of the Australian environment is a recurring theme in much of the country’s

=,

industrial history. Finally, it should be noted that an unusually advantageous combination of basic natural resources, in the form of ample

quantities of readily accessible high-grade coking coal and adequate supplies of excellent iron ore, encouraged the early growth of the iron and

steel industry and with it a wide range of ancillary industries. The post-war growth of the chemicals industry is another example of response to special internal demand conditions. Before 1914 the industry

was of minor proportions and largely depended on the manufacture of explosives for the mining industry. Production of a few basic chemicals Table 9: SHARES OF MANUFACTURING OUTPUT, SELECTED INDUSTRIES

AND YEARS, 1907 to 1927-8 (per cent)

Cm |» [or | on

Textiles 1.1 1.2 2.8 4.1 Clothing 8.6 8.8 8.0 7.1 Paper 0.7 0.6 0.9 1.1 Chemicals 1.6 1.6 2.1 2.7 Electric light and power 2.1 3.4 3.4 3.5 Rubber 0.722.5 1.621.0 2.2 Food 24.10.6 22.2 Machinery and engineering 8.9 11.2 10.5 13.1

Note: Price adjustment, as for Table 8. Source: Compiled from Production Bulletins. 8 Helen Hughes, The Australian Iron and Steel Industry, Melbourne 1964, Ch. 2. 57

Australia and the Great Depression such as sulphuric acid and ammonia had commenced before the war, but the first period of sustained and rapid growth occurred in the 1920s. In large part the stimulus was provided by the demand for superphosphate by the wheat industry, while the local deficiency of natural sulphur was partly made good by the exploitation of silver-bearing sulphide ores from the Barrier mines at Broken Hill. The range of products was extended after the war to include chlorine, alkalis and dyestuffs from coal-tar pro-

ducts, but the core of the industry continued to be the production of sulphuric acid until after the depression. Despite the industry’s rapid growth in the ‘twenties and its success in replacing a high proportion of imports, it did not play a major part in the early stages of industrialization. The same is true of the even smaller industries making paper and rubber products. The importance of the growth of these new industries is not that they significantly affected the composition of industrial output in the 1920s or even in the 1930s, but that their emergence reflected the beginning of diversification which was to bear fruit during and after World War II. Post-war industrial expansion suffered its first setback in 1921 with the onset of a severe but short-lived depression. The proximate cause of the Australian downturn was the arrival of a flood of imports during 1920-1 which sapped the markets and profits of local manufacturers. ‘The value of imports increased from £106m or 18.3 per cent of gross national product in 1919-20 (itself a substantial increase on the wartime average) to £172m or 24.5 per cent of gross national product in 1920-1. This rate of importation was not exceeded in any of the remaining inter-war years, nor indeed has it been exceeded since. Excessive import competition was aggravated by a decision of the newly-created Commonwealth Notes Board in 1920 to

restrict the supply of bank notes in an attempt to curb inflation. The decision, which limited the ability of banks to lend,® came at a time when

importers were clamouring for credit to finance the rapid build up of stocks that was taking place. The inevitable result was more drastic price competition and decline in manufacturing activity than would otherwise have been the case. The widespread demand for increases in protection which followed found the government sympathetic. The political implications of industrialization had, at least, been accepted. In the major tariff revision of 1921 rates of duty on many items were more than doubled, and, compared with 1913, the proportion of dutiable goods rose from 57 to 71 per cent. In

1920-1 the index of British Preferential Tariff rates stood 40 per cent higher than pre-war, while the rise in the general tariff was no less than 70 per cent. The trend of tariff adjustment in the 1920s is indicated by the following indices (1919-20 = 100) :1°

1913 1918-19 1920-1 1925-6 1927-8

British Preferential Tariff 75, 718 105 117 122

General tariff 61 71 104 114 118 9S. J. Butlin, Australia and New Zealand Bank, Melbourne 1961, pp. 367-9. 10 Carmody, Australian Tariff.

58

The Nineteen-twenties and the Depression The upward shift in the tariff was, however, small compensation for exclusive access to the Australian market, particularly in view of the infant stage of manufacturing development. It is true that greater protection restored profit expectations for a time, so that between 1922 and 1925 there were further substantial additions to plant capacity; but even in this period of comparatively high import prices overseas competition was a continual threat to a wide segment of industry. The textile industry proved, as usual, to be a reliable barometer. Despite the Greene Tariff, the industry found itself in serious difhculty at the end of 1923 and this continued through 1924. Employment in the textile group fell by more than 1,000 in 1923-4,11 and unemployment reached 11 per cent in the fourth quarter of 1924.!? In explaining losses or substantially lower profits for 1924-5, most companies echoed the words of Australian Knitting Mills:

“The marked falling off in earnings in [1924-5] . . . [has] been brought about by excessive overseas competition, which was largely due to the depressed trade conditions existing in other countries’.13 A further lift in customs duties in 1925 was to ease pressure for another two years, but the pattern set by textiles was to be repeated by other industries with increasing frequency in the second half of the decade. (b) Stagnation 1925-8 In Australia as in Western Europe it appeared that by 1925 the difficult years of post-war adjustment were over and that the country could look forward to a new period of solid growth uninterrupted by major swings of the trade cycle. This view tended to be confirmed by the hefty rise of 10 per cent in real gross national product in 1924-5, by the resumption of large-scale borrowing in London (save for a period in 1925 prior to Britain’s return to gold) , and by the upturn in net immigration. The prosperity of the mid-’twenties was, however, little more than skin deep and was largely based on a coincidence of excellent seasons and high prices for primary exports. The price of wool, for instance, jumped to 25.5d per Ib. in 1925 compared with an average of 17.7d

per lb. for the ’twenties as a whole, while wheat prices at around 6s 2d per bushel also allowed adequate returns to growers. The net result was a lift in farm income by £53m or one-third in 1924-5 compared with the previous year. But rural prosperity tended to mask early signs of weakness

in the industrial sector. Around mid-decade growth in manufacturing product slowed appreciably, industrial capital formation had commenced its long decline, and unemployment remained stubbornly high at 8 per cent.

Apart from the probability of overinvestment in the early post-war years, the main reason for stagnation in manufacturing in the second half of the decade was the failure of the Australian price level to follow the pronounced downward trend of import prices. Despite continuous upward

adjustment of the tariff, this led to increasing severity of import competition as the decade drew to a close with sharp increases in excess 11 Production Bulletin, No. 24, Table 100. 12 Labour Report, No. 15-16, Ch. 3/2/4. 13 Jobson’s Investment Digest, 1925, p. 527.

59

& / | ™ Pa | : 3" /“A Australia and the Great Depression

i= __—— a] 100 / a Y &y 150 —____.._ Import prices

——-—— Manufacturing prices

© Ss

— _ eee

a o>)

*%

&

jue

50 Ratio scale

IQI3-14 1918-19 1922-3 1927-8 Fig. 5: IMPORT PRICES AND AUSTRALIAN MANUFACTURING

PRICES, 1913-14 to 1927-8

Sources: S, Bambrick, ‘Index of Australian Import Prices, 1900 to 1927-28’, Australian Economic History Review, March 1968; N. G. Butlin, Australian Domestic Product, Table 267.

capacity in 1925, 1928 and again early in 1929. The trend of import prices

and those of domestic manufactures is shown in Fig. 5. To illustrate further, between 1921-2 and 1927-8 import prices fell by 24 per cent whereas prices of home manufactures rose 5 per cent—a divergence of 2g per cent. It is hardly surprising in the circumstances that the average rise of 15 per cent in the tariff over the same period afforded only temporary relief. Some industries were, of course, more severely affected than

others. Prices of imported textiles fell more than metal products and chemicals, for example, so that the textile industry was, as previously noted, the first to be affected by a new wave of import competition and the first to receive tariff assistance. Particularly in 1928, however, recession

in textiles was the prelude to general contraction in the manufacturing sector which was described at the time as a severe business depression.!+ This decline was the reason for the apparent early Australian entry into the great depression. In fact, domestic depression and world contraction were separate phenomena. The reasons for this marked price divergence need not detain us long,

but it is useful to supplement the traditional explanation. It was widely accepted in the 1920s that the comparative rigidity of Australian prices 14 See, for example, the report on current conditions in the National Bank's Monthly Summary, March 1928.

60

The Nineteen-twenties and the Depression was due to excessive tariff protection and to the peculiarities of the arbitration system. It was claimed that wage rates were slow and difficult to adjust, at least in a downward direction, and that the tariff isolated Australian manufacturers from world price trends.15 ‘To be sure, the tariff did act as a buffer although not as completely as was thought at the time, and wage rates, tied as they were to prices, were necessarily less responsive

than in the main import-supplying countries; but institutional factors alone do not provide a complete explanation. Also of importance was the

accelerated rate of capital inflow after 1925 and hence the increased government expenditure on works projects (see Chapter V). This did not lead to general economic expansion; indeed it merely moderated the industrial contraction of 1927-8. But in so far as this large-scale overseas borrowing postponed adjustment of the Australian price level to the trend in the rest of the world, it intensified contraction after 1929 when external borrowing and further postponement were no longer possible. Despite the difficulties of industrial growth in the 1920s and the virtual stagnation in the second half of the decade, the manufacturing sector had grown and diversified sufficiently by the end of the decade to have effected

an important change in the orientation of the Australian economy. Industry had not yet reached maturity but much of the social capital had been created—the external economies developed!16—upon which more rapid growth in the future would depend. Some idea of the shift to the industrial sector can be obtained from a comparison of the composition of gross national product before the war and at the end of the ’twenties. In the four years between 1909-10 and 1912-13 the rural sector (excluding mining) accounted for 25 per cent of gross national product and manufacturing 13 per cent. In the early post-war years these proportions had changed little, but on the eve of the depression the shift from primary to secondary was unmistakable. Between 1925-6 and 1928-9 rural] industries represented 21 per cent of gross national product while manufacturing had risen to 16 per cent. These may appear small changes, but they represent the early stages of a fundamental change. Manufacturing employment also grew more rapidly than rural. In the decade 1919-20 to 1928-9 rural employment increased by 11.5 per cent while the increase in factory employment amounted to 17.3 per cent. Manufacturing exceeded rural employment for the first time in 1925-6.17 Further evidence of nascent industrialization 1s provided by changes in

the composition of imports. The early growth of derived manufacturing industry is invariably accompanied by a rise in the proportions of imports 15 See, for instance, ‘Report of the British Economic Mission to Australia’, CPP, 1929, Vol. II, pp. 1233-54. 16 It does not appear, however, that there were any significant improvements in internal economies during the period if the size classifications published in the Production Bulletins are any guide. There may, indeed, have been a slight fall in scale which would be one explanation, although a minor one, of the disappointing growth performance of the 1920s. 17 M. Keating, ‘Australian Work Force and Employment, 1910/11 to 1960/61’, Australian Economic History Review, September 1967, Table 4. 61

Australia and the Great Depression of capital equipment and producers’ materials, and Australia is no exception. Again the changes were not great, but they were significant (see Table 10) . These various indicators of industrial change between the wars emphasize that Australia, unlike some of the larger industrial latecomers, found considerable early difficulty in achieving sufficient momentum for full ‘take-off’ into industrial growth. This was a function, in part, of size, of the unusually high living standard achieved prior to industrialization, and of the timing of initial growth in the difficult inter-war years. Slow early growth meant, however, that governments were required to play a

more active part in aiding industrial-urban development than would otherwise have been the case, not simply in providing adequate tariff protection but also in creating much of the social capital on which this development rested. This is the important link between industrialization in the 1920s and the impact of the world depression on Australia; but before considering the nature and effect of government finance of social capital it will be useful to outline some of the more important features of post-war rural development. Table 10: COMPOSITION OF IMPORTS FOR SELECTED

YEARS, 1909-10 to 1938-9 (per cent of merchandise imports)

|| consumer Finished Capital goods materials equipment 1909-10 66.0 27.0 1923-4/24-5 | 63.7 27.67.0 8.7 1927-8/28-9 1932-3/33-4 ||60.0 62.429.5 31.310.5 6.3 1937-8/38-9 | 55:8 30.9 13.3 Source: Compiled from Overseas Trade Bulletins.

Rural Development The industrial development of the ’twenties did not alter the accepted view that the Australian economy’s future lay almost exclusively with primary industries. The adoption of a high tariff policy was primarily a measure of political expediency in recognition of the electoral importance of the urban areas; it did not involve any lessening of the concept of a rural Australia. Paradoxically the period saw a quickening of the belief in an almost unlimited future for primary production, and it gave currency to the misleading aphorism ‘Australia Unlimited’. Government activity was therefore directed towards exploiting the ‘vast resources’ of the country, and ‘development’ was a conspicuous addition to the jargon of both federal and state government economic policy. But ‘development’ had a special and restricted meaning: it referred to land settlement, public works projects necessary for such settlement, and the encouragement of 62

The Nineteen-twenties and the Depression British immigrants to settle on the land. It did not mean the encouragement of ‘unnatural’ manufacturing industries. This view was encouraged by the established imperial view of Empire

in which the Dominions absorbed surplus British labour and in return supplied the mother country with food and raw materials. Indeed, the decade of the 1920s saw the Indian summer of late nineteenth-century neo-

mercantilism. Australia fully accepted its place in the grand design as a supplier of primary produce. These sentiments were articulated in 1927 when the Development and Migration Commission concluded that: . .. the prosperity of the United States of America is due to the fact that America is a homogeneous economic unit. It does not need to go abroad for raw materials—it can make up its own raw materials into the manufactured article for sale to other countries, and thus bring an immense home market to the door of its primary producers. ... the only entity which approximates the United States of America in this respect is the British Empire, and there would seem to be no reason why, on a proper basis of co-operation and adjustment, the white population of the Empire cannot be redistributed so as to reap, in the fullest possible measure, the advantages which the Empire enjoys as an economic unit of the nature mentioned.18

These words were not spoken, as one might easily think, on the arrival of a British trade delegation; they were written by Australians acting in an official capacity. Agreement between the Dominions on overseas settlement was reached

at the Imperial Conference of 1920 and embodied in the Empire Settlement Act of 1922. This legislation authorized the United Kingdom and Dominion governments to ‘formulate and co-operate in carrying out agreed schemes for affording joint assistance to suitable persons in the United Kingdom who intended to settle in any part of His Majesty’s Oversea Dominions’. A detailed Anglo-Australian Agreement, known as the £34m Agreement, followed in 1925, and its provisions were ratified by the Federal Parliament in the Development and Migration Act of 1926.

The Agreement envisaged that 450,000 new British settlers would be absorbed over a period of ten years. Loans raised by the Commonwealth were to be made available to the states at low interest rates, and for every principal sum of £75 loaned one migrant was to sail from Britain to be settled on the land. The United Kingdom government’s contribution to the cost of the project was not to exceed £7,083,000. It was the task of the Development and Migration Commission, established under the 1926 Act, to investigate schemes submitted by the states and report on their suitability for such development. Only after both parties had then agreed to the recommendation could a particular project be commenced.!® The

depression struck before the Agreement had a chance of success and during the financial crisis it was abandoned altogether.

Even if the depression had not interfered it 1s doubtful if the £34m 18 ‘First Annual Report of the Development and Migration Commission, for the period ending goth June 1927’, CPP, 1926-8, Vol. V, p. 479. 19 Ibid., Appendix III, pp. 527-9.

63

Australia and the Great Depression Agreement had any real chance of success, at least as originally constituted. As well as the problems of the suitability of immigrants for land

settlement and the adequacy of finance, there was the difficulty of the economic justification for extensive small-scale settlement. The Development and Migration Commission in its few years of activity found

many areas suitable for more intensive cultivation, but few which could become economically self-supporting within a reasonable period. The

dried and canned fruit industries of the Murray Basin irrigation area were a Case in point. On completion of the Hume and Victoria storages a further 700,000 acres for irrigation would become available, but further

expansion of dried and canned fruit production was not justified at current prices, and prospects for the other principal alternative, the frozen lamb export industry, were not encouraging.2° The Commission was reluctant to concede, however, that agricultural] diversification and smallscale settlement would not have the catalystic effect on ‘development’ that

it had supposed, and no revision of its basic premise followed its early misgivings.

By the end of the ‘twenties Commonwealth and state governments had found that the mixture of closer settlement and diversification was costly

and largely unproductive. The post-war expansive schemes for soldier settlement had failed almost completely, not the least important reason being the tendency to settle ex-servicemen in the new irrigation areas and in commercially untried export industries.2) Difficulties encountered in the early years of irrigated fruit-growing, wine-growing and fat lamb rais-

ing tested the most experienced and astute farmers, and even under favourable conditions marginal returns only could be expected. Badlyplanned irrigation projects also caused the failure of a large amount of immigrant settlement. The group settlement of immigrants in Western Australia and the Dawson Valley project in Queensland were examples of over-enthusiastic and poorly-prepared ‘development’ which proved expensive for the governments concerned.?? Diversification was further encouraged during the decade by the payment of bounties on the export of meat, wine, canned fruits and on the production of cotton, while butter and sugar benefited from home-consumption price support schemes; but,

with the exception of beef, butter and sugar, this assistance did little at the time to establish these industries in overseas markets. Despite government emphasis on more intensive and diversified land settlement, the trend in established rural industries after the early postwar years was in the opposite direction. Both the wool and wheat-growing industries passed through a period of rapid expansion, but this was largely 20 See ‘Second Annual Report of the Development and Migration Commission’, CPP, 1929, Vol. H, pp. 1551-2; and ‘Report on the Canned Fruits Industry of Australia’, CPP, 1929, Vol. II, pp. 1595, ff. 21 ‘Report on Losses due to Soldier Settlement’ by Mr Justice Pike, CPP, 1929, Vol. IT, pp. 1901 ff.

22 See E. Shann, ‘Group Settlement of Migrants in Western Australia’, Economic Record, November 1925, and Gordon Taylor, ‘The Development of Group Settlement

in Western Australia’, Economic Record, May 1930; and ‘Report on the Dawson Valley Irrigation Scheme’, CPP, 1926-8, Vol. V, pp. 541 ff.

64

38 we = 2 3 eog | 175 . 7 Fi eee _ 2 * s=6 o 75e° e The Nineteen-twenties and the Depression

™% 1900 . D2 Cus rs . *? °° coos

Ss ° 600 Wool output ae “7: ™ 200

42pam ar} e ° e e e 2 25 ° *, "ee ° s °. °

= 2 Wheat output rn io

>:

2 1200 °. en Po vale ae o800 ee

9™ N

x. 600Rati l atio scale of ‘all farming’ output ——— 2+S© 1000 Quantumuantum of ‘all farming’ outpu 2

Tc

§

1870 1890 1910 1930

Fig. 6: TRENDS IN RURAL OUTPUT, 1870 to 1938-9

Source: Production Bulletin, Part II, Nos 32-3.

accomplished by a substantial increase in the scale of operations rather than by an increase in the number of rural holdings. Furthermore, although long-period comparison is not possible, it is likely that the rate of growth of the rural work force (which averaged one per cent per annum in the decade) slowed appreciably. Growth in production, particularly in wheat-growing, was accomplished by the diffusion of cultivating and har-

vesting machinery which had been developed before the war, by the widespread use of superphosphate, and by the gradual introduction of the tractor in the second half of the twenties. Governments encouraged farmers to use the new methods by providing easy credit facilities and information services on modern techniques.?3 The result was a marked 23 The best example of government stimulated expansion of this type occurred in Western Australia where the Agricultural Bank and the Industries Assistance Board co-operated to bring credit and technical facilities to the farmer, a policy which was in no small measure responsible for the area under wheat trebling in ten years. See Sean Glynn, ‘Government Policy and Agricultural Development: Western Australia, 1900-1930’, Australian Economic History Review, September 1967.

65

Australia and the Great Depression increase in the capital-labour ratio and in physical production per worker. The most pronounced rise in output occurred in the large agricultural

industries and in dairying. The area under wheat cultivation increased from around 7 million acres before the war to almost 15 million acres by the end of the 1920s, while average annual production rose from 70 million bushels in the pre-war decade to 135 million bushels in the decade following 1918-19. As shown in Fig. 6, this output expansion was a continuation of the strong growth pattern which had been established since recovery from drought in the early 1goos. ‘The growth trend was similar in both butter and sugar production. Butter output in the ‘twenties was nearly double the pre-war average, while output of sugar approximately trebled.

Although the underlying trend of wool output was also strongly upwards, two distinct growth phases are distinguished in Fig. 6 after the turn of the century. The first, from the mid-1goos to World War I, was largely a period of recovery and reconstruction from the disasters of financial collapse, drought and rabbit infestation in the 1890s and early 1900s.

But reconstruction was also accompanied by a change in technology. Growth in the nineteenth century was largely based on expansion of the pastoral frontier; after 1900 increasing emphasis was placed on new and improved fencing, pasture improvement and scientific flock selection. ‘This policy resulted in a strong rise in the average weight of fleece, so that with

15 per cent fewer sheep the peak output figures of the early 1890s had been regained by 1907. The break in growth around World War I was largely due to a succession of indifferent seasons, but it also appears likely that the rate of productivity improvement fell as the immediate benefits

of the new technology declined. Output did not rise significantly until after 1924, and the overall impression of the ’twenties is of weaker growth

in the wool industry compared with either 1870-90 or 1903-14. But the difference in performance was small, and a period as short as a decade is far too short to support such generalizations. Equally important is the fact that on the eve of the depression wool output had risen some 50 per cent above the level of the early nineties even though there had been no significant increase in the interim in the size of the Australian flock. Financially, however, the farmer received little benefit from increased output and efficiency. The official quantity index of ‘all farming’ output increased at an average rate of 3 per cent a year during the 1920s,?4 yet money incomes were little higher at the end of the decade than they had been at the beginning. There were isolated years of high prosperity such as in 1921 and 1925, but the persistent downward trend in prices, particularly in agricultural industries, negated the effects of rising production. There was therefore little rise in rural product after the immediate postwar years, which is one explanation of the poor growth performance of the decade as a whole. But it is clear that the failure of rural product to rise significantly was due to structural weaknesses in the international economy referred to in the previous chapter rather than to deterioration in internal efficiency. 24 Production Bulletin, No. 33, Part I, Table 129. 66

The Nineteen-twenties and the Depression , Despite the increase in production and in the area under cultivation, in investment in plant and machinery, and in government expenditure on closer settlement, the proportion of the economy’s investible resources devoted to the rural sector declined appreciably in the ’twenties compared

with earlier decades. This was the case in both the public and private sectors. By 1914 most of the basic equipment such as railways, fencing and

buildings had been installed, so that rapid expansion was then possible with only modest investment in improved plant and machinery and fertilizers. The clear shift in investment away from rural industries is shown in Table 11. Table 11: SHARE OF RURAL SECTOR IN GROSS DOMESTIC INVESTMENT,

SELECTED PERIODS, 1870 to 1928-9

(per cent) |

Share of Share of Share of

private public total

Investment investment investment

1870 1889 42 1894 toto1912-13 2359 57 48 38 1919-20 to 1928-9 16 45 29

Note: ‘Public investment’ consists of railway construction and government agricultural investment, and is only a rough approximation of public rural investment. Some railway investment in the 1920s, such as the electrification of Sydney and Melbourne systems, did not service rural areas, while a reasonable proportion of road

construction did. However, no amount of statistical refinement would modify the clear-cut trend away from the rural sector. Local and semi-government invest-

ment is not included.

Source: Calculated from N. G. Butlin, Australian Domestic Product, Tables 5 and 8.

The maturity of the leading rural industries and the development of extensive and capital-intensive methods, releasing labour and capital for alternative employment, aided the growth of the industrial sector. Without such a redirection manufacturing industries would have found it more dificult and expensive to raise the required funds, and the supply of labour would have been less plentiful. Governments, for their part, found that as their railway construction commitments fell they could devote more of their resources to the construction of water and sewerage, electricity and telegraph facilities, and road works. ‘The channels of private investment also changed, although in this case the mechanics of the process were more complex. As a large proportion of industrial] capital formation was internally financed or raised directly from the public, the relative

importance of banks and other large financial institutions began to decline, especially those with a high proportion of their business in pastoral or agricultural interests. Furthermore, direct overseas investment in land and pastoral companies, which had been important in the second half of the nineteenth century, had almost disappeared by the 1920s, and overseas

investment in manufacturing was not significant until recovery in the 67

Australia and the Great Depression mid-’thirties, when the practice of establishing local subsidiaries of overseas companies emerged as a result of the growth of heavy exchange and tariff protection during the depression. In general, therefore, without the release of resources at this time from rural industries the pace and character of industrialization would have been different.

One further aspect of rural development worth noting is the rapid increase in the debt structure of many properties in the 1920s, particularly in the new wheat-growing areas. Notwithstanding the fall in the proportion of rural investment, capital expenditure on extending the margin of cultivation and on mechanical equipment was sufficiently large in view of indifferent returns to cause a rapid increase in the debt structure. The Royal Commission on the Wheat Industry in 1934 lamented the ‘extravagance of expenditure in high-priced land, farming machinery, motor cars

and in other ways beyond the limits of prudence during the post-war years’*5 which had followed from the generous credit provided by governments, and the ease of acquiring machinery through time-payment systems.

Perhaps the rapid rise in land values during the decade was the more important cause of debt accumulation. In New South Wales, for example, average unimproved capital values in country districts rose by one-half in the period 1919-29,26 a conservative estimate of the actual increase in more rapidly expanding Western Australia. Rising values were due partly

to the generally high prices in the early post-war years, partly to the demand for new land to expand the area of cultivation, and partly to a series of good seasons. Whatever the precise reason, the extension of the margin of cultivation involved a capitalization which was barely justified even at the comparatively high prices ruling in the early 1920s; and it was to add substantially to the burden of adjustment when prices fell below the costs of even the more efficient producers.

The Public Sector and Structural Change Government enterprise has always featured prominently in Australian economic development, but in no previous period—except during the very early years of settlement—had it been more important than in the decade after World War I. The increased interest of government in promoting agricultural expansion has already been noted, but quantitatively of far greater importance was the attention devoted to providing facilities

for the growing industrial and urban areas. With the development of motor transport, electric power and improved housing standards, the demand for the construction of roads and bridges, electricity and telegraph installations, and water and sewerage facilities expanded rapidly. There

were also the overhead capital requirements of the growing industrial sector to be met; indeed the comprehensive provision of improved public

facilities can be connected with the developing industrial society. Inevitably the concentration of people with comparatively high incomes led to the demand for the products of the most recent technical progress— 25 Royal Commission on Wheat, Bread and Flour Industries, First Report, CPP, 1932-4, Vol. IV, p. 2454. 26 N.S.W. Statistical Register, 1929-30, Table 86.

68

The Nineteen-twenties and the Depression motor vehicles, radios, refrigerators, and electric light and power—and for the facilities for their proper enjoyment. Industrialization, therefore, not only brought about a greater demand by manufacturers for government services (particularly in the form of road, water and power facilities), but also by the industrial-urban community in general for the services associated with the new consumer goods and improved housing standards. This enlarged government commitment and its method of finance was the most important feature of development in the ‘twenties to impinge on the character of subsequent depression experience. Growth in the magnitude of public economic activity is indicated by the rise in the importance of government investment. In the 1920s governments normally contributed slightly in excess of 50 per cent to aggregate

capital formation, compared with around 48 per cent in the pre-war decade and between 35-40 per cent in the period 1870-90.7 In the 1950s the proportion fell to the historically low figure of 30 per cent. Despite the bulge in public investment in the first third of the present century, ageregate figures tend to mask the real extent of the change towards ex-

penditure on social capital in industrial-urban areas. During the long boom of the two decades to 1890 railway construction absorbed as much as 60 per cent of the public capital account, and the proportion was still

in excess of one-half in the decade before World War I; but with the virtual completion of the present railway system by 1914 the share fell to 38 per cent in the 1920s.28 Expenditure on urban facilities, on the other hand, increased rapidly and filled the gap vacated by the railways. Whereas the combined capital expenditure on water, sewerage, telephone, telegraph installations amounted to only g per cent in 1870-90, the pro-

portion in the 1920s had grown to 36 per cent. Although the relative importance of investment in roads and bridges fell—from 18 to 10 per cent over the same period—a much higher proportion of expenditure in the ‘twenties was directed towards improving city and suburban roads.?° Thus the growth in public expenditure on providing the foundation for industrial and urban growth was far more substantial than the increase in the relative size of the public sector suggests. The high capital cost of providing these services would suggest that they were only feasible in areas of high population concentration, and the distribution of water, sewerage and electric power installations in New South Wales supports this contention. Despite the fact that a large number of country towns possessed water supply services, capital expenditure on water supply was mainly in the large cities. ‘(The indebtedness of the 27 From N. G. Butlin, Australian Domestic Product, Table 270 A and B. 28 Ibid., Table 270 B. 29 These figures exclude investment by local government authorities which certainly exaggerates the fall in the share of road investment. However, the emphasis by local authorities was also on metropolitan road improvement. The road mileage controlled by local governments in New South Wales, for example, increased during the 1920s

by just under 20 per cent, while the proportion of metalled and gravelled roads increased from 20 to 40 per cent. Almost all this increase occurred in metropolitan areas. Other improvements such as street lighting, kerbing and guttering were also far more substantial in cities. Cf. N.S.W. Statistical Registers, 1919-20 and 1928-9.

69

Australia and the Great Depression Sydney Metropolitan Water, Sewerage and Drainage Board and the Hunter River District Water and Sewerage Board relevant to the water supply increased £12.5m in the decade, while the combined increase in country shires and municipalities was only £2m.3° Sewerage in country districts was virtually non-existent, but more than half the populations in Sydney and Newcastle lived in sewered areas by the end of the ’twenties.

Capital indebtedness for sewerage in the Sydney and Newcastle area increased by some £7m and in the country by £0.75m.3! The dynamic increase in electrification in the period was almost exclusively confined to the metropolitan areas. The Electricity Authority of the City of Sydney sold 80 per cent of all electricity consumed in the state in 1929, and if we add the amount sold in Newcastle and the outer Sydney suburbs the proportion exceeded go per cent.3? The country districts shared rather more in telegraph facilities, but with the development of automatic exchanges after the war expansion was more rapid in state capitals.33 Public works expenditure was, of course, less concentrated in the predominantly rural

states, but there is no doubt, because of the much larger public works programmes of New South Wales and Victoria, that public investment was subject to heavy urban concentration. Further evidence of the magnitude of investment in basic equipment for the developing industrial-urban society is provided by a rough breakdown of aggregate capital formation into ‘social’ and ‘productive’ investment. Following N. G. Butlin,%4 it is possible to obtain a measure of social investment by adding capital expenditure on residential housing to total public capital formation. By no means all government investment was

undertaken for long-run developmental considerations, but as a crude approximation the division serves reasonably well. What is at first impressive about Table 12 is the high social-productive ratio in all periods con-

sidered. In the nineteenth century this is ‘indicative, above all, of the heavy demands imposed by long-distance communications and by the housing needs of a rapidly expanding population’.*5 In the decades before and after World War I it reflects the requirements of an emerging indus-

trial economy and also continued high demand for new housing. Of special interest, however, is the unusually high ratio in the second half of the 1920s; only in the period of massive railway construction in the first half of the 1880s is the proportion of social investment comparable. The rise on this occasion was due to an attempt of government, only partly conscious, to lift the economy out of stagnation and rising unemployment 30 Ibid., 1919-20, Part XIII, Table 32, and 1929-30, Part II], Tables 139 and 148. As figures for capital expenditure are not available, the increase in capital indebtedness serves as a rough index of the distribution of the service. 31 Ibid., 1929-30, Part IT, Tables 105, 143 and 152. 32 Ibid., 1929-30, Part I¥, Tables 101 and 122; and ‘Report of the Electricity Authority’, Proceedings of the Municipal Council for the City of Sydney, 1929. 33 See ‘Sixteenth Annual Report of the Postmaster-General’s Department’, CPP, 1926-8. Vol. V, pp. 1903 ff. 34.N. G. Butlin, Investment in Australian Economic Development 1861-1900, Cambridge 1964, Pp. 50-1. 35 Ibid., p. 51. 7O

The Nineteen-twenties and the Depression Table 12: sQCIAL AND PRODUCTIVE INVESTMENT IN GROSS NATIONAL PRODUCT, SELECTED PERIODS, 1871 to 1928-9

Social Productive Ratio

70 00 1871-5 1876-80 9.4 11.84.5 7.3 2.1 1.6

investment investment Social/Productive

1881-85 16.3 5-9 2.8 1886-90 15.3 8.2 1904-5 to 1908-9 8.7 4.91.9 1.8

1909-10 11.7 5.1 5.1 2.2 2.3 1919-20 to to 1913-14 1923-4 11.4

Source: Calculated from N. G. Butlin, Australian Domestic Product, Tables 270 A and B.

caused by the increased intensity of overseas competition. The attempt

did little to stem the tide and the consequences of enlarged public indebtedness were to affect profoundly the course of the subsequent depression.

Federal and state governments were able to exercise little effective choice in the method of financing these additional capital commitments. For political reasons budgets could not contribute significantly to loan funds. During the war all forms of taxation had risen sharply, particularly

direct taxation, and all parties were pledged to remove these wartime imposts as soon as possible. Indeed the Bruce-Page Government made a fetish of its annual display of financial virtue by gradually withdrawing

from the field of direct taxation; and rather than oppose this trend the Labor Opposition pressed for more substantial reductions. Most of the capital had, therefore, to be borrowed, but there remained an important choice between local and overseas flotation. Even here however there was little room for flexibility. Prior to 1914 little use had been

made of the local market and as much as two-thirds of the public debt of £313m was domiciled overseas. During and immediately after the war, however, London could no longer shoulder the burden of providing the major share of Australia’s greatly increased requirements and for the first time local savings were fully exploited. So marked was the effect of local borrowing on the distribution of the public debt that by 1921 only 45 per cent of the debt which had grown to £828m was due abroad. But the shift to local flotation was not continued and the old pattern re-emerged. In the period 1921-9 £276m was added to public indebtedness and of this 73 per cent was due in London and New York.*® This reversion to dependence on overseas loan markets was largely outside the control of governments. In the first place there was considerable 36 Finance Bulletin, No. 20, Tables 62-3. 71

Australia and the Great Depression local opposition to a continuation of anything approaching the wartime rate of internal borrowing. Private enterprise was extremely sensitive to the inroads that it felt were being made into its preserves, and throughout the ’twenties the level of government local borrowing was constantly under attack.3? More specifically industry resented the effect of heavy

borrowing on the rate of interest and on the availability of funds; and banks resented the periodic falling away of deposits as a result of new issues. ‘There was also criticism of the extent of overseas borrowing, but in this case the arguments were more academic and carried less political weight. Second, and of more practical importance, was the need to provide sterling cover for overseas interest commitments. As a result of the extensive borrowing in London before the war the annual overseas commitment had grown to £7.5m by 1913; by 1921 it amounted to £16m.38 Instead of purchasing their exchange requirements for the discharge of interest payments from banks when payments became due, governments developed

the habit of holding loan proceeds for the purpose of making interest payments, or made payments first and then raised new cash when overdrafts needed to be funded (see pp. 104-5). It is not clear whether it was because of this practice or mere chance that the yearly programme was very similar to the size of the annual interest commitment, but it is a remarkable fact that in the period 1921-9 total overseas interest payments amounted to £201.3m while the overseas debt increased by £200.8m.3®

It is certain, however, that by allowing the overseas debt position to drift unchecked, by failing to fully develop the potential of the local loan market and thereby diverting internally some of the burden of the public works programme, and by failing to make any endeavour to meet some of the growing interest burden from local sources, governments placed the economy in a precarious position, depending increasingly on the continuation of good seasons, stable export prices and a high rate of capital inflow. By 1929 the overseas public interest burden reached £27.5m or 3.4 per cent of gross national product compared with 2.3 per cent in 1921. Of more immediate significance was the rapid increase in the proportion of exports committed to overseas payments, for in the final analysis inter-

national solvency depended on the ability of exports to finance these obligations. As shown in Table 13, the proportion of exports thus committed grew from one-sixth to more than one-quarter during the course of the decade. As the proportion of committed income increased the more unstable the balance of payments position became. The greater the proportion of fixed payments, the larger the adjustment necessary to the level of imports relative to a given fall in exports or capital inflow. This can be illustrated by considering the structure of the Australian balance of payments in the 37 So general were these attacks that E. C. Dyason was able to remark that they were

repeated in ‘all speeches by all chairmen of all Australian Banks at all annual

meetings, 1900—or even earlier—to 1927’ in ‘The Australian Public Debt’, Economic Record, November 1927, p. 161. 38 Finance Bulletin, No. 20, Table 63. 39 Ibid.

72

The Nineteen-twenties and the Depression Table 13: RATIO OF OVERSEAS INTEREST AND DIVIDEND PAYMENTS

TO EXPORTS, 1919-20 to 1928-9

Interest and dividend Per cent of

payments abroad exports (£m)

1919-2024.2 23.2 17 16 1920-1 1Q2I-2 26.5 21 1922-3 26.2 23 1923-4 28.7 25 1924-5 29.0 20 1925-6 31.7 24 1926-7 33.1 25 1927-8 1928-9 36.0 35.8 28 28 Note: The dividend or private remittance component of total overseas payments was of the order of 30 per cent. Source: R. Wilson, Capital Imports and the Terms of Trade, Melbourne 1931, pp. 27, 31.

late 1920s. Table 14 sets out in abbreviated form the average balance of payments position in the four years 1925-6 to 1928-g. If, for instance, we assume that receipts fell by 20 per cent in a given period, then imports would have to fall by 26 per cent to restore equilibrium (excluding in each case the comparatively stable invisibles items). In the depression itself, with the complete cessation of long-term government borrowing and the drastic reduction in export prices, receipts fell by about 50 per cent and the adjustment necessary to imports was of the order of 65 per cent. Table 14: AVERAGE ANNUAL BALANCE OF PAYMENTS, 1925-6 to 1928-9

(£m)

Receipts Payments

Exports 145 Importsetc. 138 Invisibles etc. 6 Invisibles 15

187 187

Capital inflow 36 Interest and dividends 34

Source: R. Wilson, Capital Imports, Table X.

Adding to the difficulty of adjustment was the tendency of imports to lag appreciably behind changes in the value of exports. ‘The lag between ordering goods and meeting bills was about 12 months although it could be as long as 15 months. In periods of relative stability the consequences 73

Australia and the Great Depression of the lag were not serious, but in times of greater fluctuations serious exchange crises could ensue. It was just such a period of vacillation at the end of the ‘twenties that aggravated the crisis of 1929. As already noted, 1927-8 was a year of marked recession and one in which imports fell and

the level of imported stocks was allowed to run down. Prospects for a good export season in 1928-9 and the likelihood of further tariff increases induced a measure of recovery at the end of 1928 and early in the following year. The demand for imports responded strongly; but when importers

were required to meet their bills at the end of 1929 they found the exchange position already overstrained and that gold was being exported to meet government commitments.

Yet another factor added to the vulnerability of the economy: the dominance of government borrowing in total capital inflow, leading to a very high proportion of fixed commitments in external interest and dividend payments. In discussing the structure of the balance of payments it was assumed that the whole of interest and dividend payments was fixed, representing interest on government securities rather than private

dividend or profit remittance. While this assumption is not entirely accurate it is a close approximation. No entirely satisfactory estimates of

the relation between public and private external payment on capital account are available prior to the official series beginning in 1928-9, but we do have several guesses the most likely of which is N. G. Butlin’s extrapolation from the official series. This suggests that fixed government obligations represented 70 per cent of all payments,#° a much higher pro-

portion than existed immediately before the depression of the 18gos. Because of the boom in direct British investment through banks, pastoral

companies and finance houses, government commitments in 18go represented slightly less than one-half of total payments.41 Hence when depression struck, and when the pressure on exchange reserves increased, dividends and remittances fell thus reducing the burden of adjustment. But there was no such safety valve in the 1930s; indeed because of the severity of the crisis a premium on sterling exchange soon developed, increasing rather than reducing the weight of fixed external obligations. These various elements in the structure of external indebtedness, and relationships within the balance of payments, underpin the entire financial history of the depression. The period from late 1929 until the adoption of the premiers’ plan in June 1931 was one of unremitting struggle to find sufficient London cover to meet government interest obligations,

without at the same time surrendering the outward form of a standard of living which had for so long been proudly nurtured. Even after the immediate problem of meeting these commitments had been solved, political sensitivity towards overseas obligations continued, and the government turned to concentrate its attention on reducing internal interest

rates and refunding the external debt on to a cheaper basis. Other countries dependent on London for development capital, such as New 40N. G. Butlin, Australian Domestic Product, pp. 438-40. 41 Ibid., Table 249.

74

The Nineteen-twenties and the Depression Zealand, India, and Argentina, found themselves in similarly embarrassing positions when new issues were no longer possible, but none more so than Australia. This acute embarrassment was partly due to careless, extravagant and unco-ordinated borrowing methods, a charge not peculiar to the practice of the ’twenties, or to Australia; but it was far more fundamentally connected with the new demands placed on governments for capital

and services to provide the basis for the continued growth of a highlyindustrialized and urbanized society.

75

IV

Institutions and Dogmas

Before examining the events and policies of the depression, it will be useful to consider the institutions which affected the workings of the economy on the eve of the depression and the body of economic dogma and mythology which determined the limits of their effective operation. The discussion falls broadly into three parts: the first is concerned with the banking system; the second with the Commonwealth and State Treasuries, and the Loan Council; and the third with the labour movement and interest payments. The Banking System (a) The Trading Banks Before 1929 the monetary principles in opera-

tion in Britain and Australia were, at least theoretically, identical. The

gold standard was the guiding principle in Australia, except for the period 1914-25, as it was, of course, in Britain. English sovereigns and other coin circulated freely in Australia before the war, and the currencies

were considered, for all intents and purposes, indistinguishable. But these similarities had a tendency to mask certain fundamental differences, and it is doubtful if Australia was on the gold standard in anything more than name. The two currencies were of course far from identical, but this was not evident before 1914 when prices in the two countries moved roughly together. It was not until after the outbreak of war, when British prices rose more rapidly than Australian, and in the post-war period, when they fell more rapidly than Australian, that the fundamental differences between them became evident, and the machinery which had maintained exchange parity in the past came under closer scrutiny. Yet throughout this period of rapidly diverging price levels it was remarkable that the exchange rate did not vary by more than five percentage points,1 and that for most of 1In the period 1893-1929 the sterling-Australian exchange rate did not diverge between g7 (November 1924) and 101.8 (December 1920). These figures represent the mean between the quoted buying and selling rates per f£100stg. R. Wilson, ‘Australian Exchange on London, 1893-1931’, Economic Record, May 1931, pp. 123-5.

76

Instituttons and Dogmas the time the rate remained within the gold points.? On reflection, however, it was even more remarkable that sterling parity was more or less maintained in the half century prior to 1914, which included long periods of drought, rapidly fluctuating agricultural prices, and the depression of the ’nineties; and it became clear that this could not have been achieved without considerable flexibility in the use of exchange reserves, and conservation of these reserves by a well-disciplined domestic banking policy. The mechanism of adjustment which maintained stable exchange rates in the face of such disturbances was first evolved by the Australian banks in the 1850s, when they were able to build up their London balances from the proceeds of gold sales. The level of London funds of each bank reguJated its domestic credit policy and was the centre of the mechanism of

exchange equilibrium until the 1930s.3 It was not, however, closely analysed until A. H. Tocker’s important article “The Monetary Standards of New Zealand and Australia’ was published in 1924.4 The basis of the system depended on London funds being maintained at a level which the banks had found by experience to be both safe and profitable. Each bank had a slightly different convention, and took rather more notice of one ratio than another; but in general the banking system acted uniformly. If a particular bank saw that its London reserves were being depleted, it would also find that its deposits were falling relative to its advances, and hence its advance-deposit ratio was rising. Most bankers watched closely their cash-deposit ratio, and their advance (which in Australia includes securities) to deposit ratio. In the situation described, the first ratio would be falling and the second increasing; and if it proceeded far enough the corrective would be applied of calling up advances or reducing the rate

of increase of new advances, which would (if we now assume that all banks were acting in the same way) cause prices to be less than they would otherwise have been,> and reduce the demand for imports. In the reverse

case when London funds increased to such an extent that the advancedeposit ratio fell to unprofitable levels, advances were encouraged which led to a movement in prices to a level higher than they would otherwise have been, an increase in imports, a fall in London funds, and restoration of the optimum ratios. The sterling-exchange standard, as the mechanism was called, did not amount to a general credit policy designed to influence the general level of activity, or even to correct balance of payment disequilibria. It was 2 The gold point was usually considered to be 355 per cent discount or premium. 3S, J. Butlin, Australia and New Zealand Bank, Melbourne 1961, pp. 121-2. 4 Economic Journal, December 1924. His study was mainly based on New Zealand experience, but with minor modifications his results also applied to Australia. These modifications were made by D. B. Copland in ‘Australian Banking and Exchange’, Economic Record, November 1925. - 5 Roland Wilson emphasized that we cannot say that prices will either rise or fall as a result of an expansion or restriction of advances, but that they will be higher or lower than they would otherwise have been. For this and a number of other refinements of the operation of the sterling exchange standard see K. S. Isles, ‘Australian Monetary Policy’, Economic Record, May 1931; R. Wilson, ‘Australian Monetary Policy Reviewed’, Economic Record, November 1931; and K. S. Isles, ‘Australian Monetary Policy Reconsidered’, Economic Record, December 1932. 77

Australia and the Great Depression basically an inward-looking system depending on the several banks to adjust their ratios in accordance with their own conceptions of prudence

and profitability. Nevertheless it functioned satisfactorily under most conditions, and served very much the same purpose as the gold standard in Britain. Its main virtue was its insensitivity. The aggregate level of London funds which it was considered desirable to maintain was about £40m; but policy was by no means made a slave to this figure. The acceptable limits were between £30m and £50m.° If the aggregates fell to below £30m it was high time to apply the brakes and reduce lending; if it rose to above £50m bank earning rates would be falling and an acceleration of new lending would be necessary. Within such limits each bank was free and pursued its own policy, and was not obliged to anticipate, or even look for, swings in the trade cycle until its own liquidity or earning capacity was threatened.

It was, however, a clumsy and chancy system, and its insensitivity proved to be its principal weakness as well as its main virtue, for it was too slow to react to sudden changes in the trade balance. This was an advantage if such changes were short-lived and of minor dimensions, as it prevented unnecessary switches in credit policy; but in times of more substantial fluctuations the response was so delayed that crisis conditions could develop well before the banks had time to make effective a change in their lending policy. This is what happened in the second half of 1929 and will be described in detail in subsequent chapters. The length of this reaction lag varied considerably from one situation to another, and from one bank to another; but on the average experience of the period 1901-30, Roland Wilson found that the lag between a change in banking funds abroad and a corresponding change in domestic credit policy averaged twelve months.7 Even assuming that a change in credit policy was suffcient to correct balance of payments disequilibrium—a highly suspect assumption—the length of the lag rendered the private banking system quite unable to cope with major cyclical fluctuations. It is tempting to conclude with G. D. Healy, Superintendent of the Bank of Australasia, in evidence before the Royal Commission on Money and Banking: By Mr. Chifley—I was asking you whether you thought any individual bank had power to check a boom?—I do not think a bank can check a boom any more than it can create a depression. And, collectively, the banks do not take any steps to check one?—No. It is a matter of lending, and the class of security they lend against is a matter for each individual bank.8

The banks were hampered in carrying through changes in credit policy by the inflexibility of interest rates. The only significant change in interest 6 Figures of London funds from Royal Commission on Money and Banking 1935-7 [subsequently abbreviated to RCMB, Report, Table 19, pp. 324-5; and the convention of banking practice from the evidence of trading bankers before the Commission in answers to Questions 1-5 under the heading of ‘Credit Policy’. 7 Wilson, ‘Australian Monetary Policy Reviewed’, pp. 210-15. 8 RCMB, Evidence, Vol. 1, p. 101. 78

Institutions and Dogmas rates during the 1920s occurred in the first few years of the decade when prices were changing rapidly. Thereafter rates remained steady, and in the ten-year period 1920-9 there was no variation in trading bank deposit rates.® Neither did advance rates change much from the 7 per cent average which persisted in the second half of the decade, although there was a slight hardening tendency at the end of the period. The main reasons for this inflexibility were the dominance of the government in the long-term

money market, and the complete absence of a short-term market. The frequency of government approaches to the market for cash or conversion loans prevented a liquidity build up which would have allowed interest rates to ease; and as governments were also careful not to float so fre-

quently that rates would be forced up, and thus incur the wrath of business interests, the yield on government securities rarely strayed outside the range £5 to £5.105 per cent, and new cash loans were usually issued to

yield about £51 per cent. The structure of bank interest rates depended on the yield obtainable from government stock, and as these remained virtually constant the possible variations in bank rates were severely limited. In any case the banks preferred the direct method of control— by means of expansion and contraction of advances—to which they were accustomed rather than the subtleties of a variable interest rate policy which they did not appreciate;1° and as there were no facilities to attract short-term balances, such a policy lost much of its value. Banking control

over economic fluctuations would, however, have been more effective despite this qualification had interest rates been more flexible. The right of the private trading banks to determine their own policies, and to guide the economy as they thought fit, was unquestioned prior to

1929. During the depression they lost much of their autonomy, but not without a struggle. The clash between individual private banks, between the trading banks and the Commonwealth Bank, and between the banking system as a whole and the government, forms an important part of the

depression story. In these encounters the banks were guided by wellentrenched principles which had emerged with the experience of many decades, and it will be useful at this stage to mention the more important and dominating of these. The word ‘principles’ is probably a misnomer, as they were more accurately a mixture of prejudice, instinct, self-interest and commonsense;

but they were applied by the banks as inflexibly as principles. Undoubtedly the most pervasive of these was an abhorrence of all forms of

government regulation, particularly in relation to banking. This was more than narrow self-interest, for the bankers genuinely believed that any government interference with banking in general, and the note issue in particular, would inevitably violate the dictates of sound finance, and in the more extreme cases lead to run-away inflation. They had good 9In this period the rates remained at 4 per cent for 6 months deposits, 4} per cent for 12 months, and 5 per cent for 24 months and over. AJBR. ,

10 This was evident at the end of 1929 when the Bank of New South Wales sought the approval of the Associated Banks for an increase in the carded rates on deposits in an attempt to check the rapidly growing banking illiquidity. (See pp. 126-9.)

79

Australia and the Great Depression reason for this belief. In nearly every recent overseas instance of govern-

ment note issue control, the result had been rapid inflation. If a local example was needed, the banks could point to the fact that the note issue, which was under Treasury control during the war, increased from £13m in 1914 to slightly less than £57m at the end of 1919,!! which helped to cause a rapid increase in prices. ‘The consequences of hyper-inflation were indelibly inscribed on the minds of bankers by the chaotic post-war experiences of Germany and other central European countries. ‘This goes a long way towards explaining the apparent anomaly that even during the depression when prices were falling bankers were haunted by a fear of

inflation. Implicitly their attitude was based on the assumption that saving always equalled investment; that any attempt to artificially expand

investment above the level of current saving (in addition to overseas borrowing) must inevitably fail, as a rise in prices would cancel the increased money value of capital expenditure. Thus, in their view, a policy of credit expansion could not possibly remedy depression, and would cause the complete collapse of the economic system if allowed to take control. In the past, depressions had been successfully weathered without undue disturbance to the previous order of things but this had been

achieved only by rigid application of sound financial principles and resolute resistance of any attempt to ameliorate the position by note issue expansion, even if of a ‘controlled’ nature.

Another important influence on the formation of banking attitudes was the great bank crashes of 1893. Even after nearly 40 years the effect of the events of ’93 coloured in no small way the banks’ reaction to the depression. The connection between the two depressions was strengthened by the number of general managers of the early thirties who were already comparatively senior officers at the end of the 1880s and had first-hand experience of 1893. One was C. W. Wren, General Manager of the English, Scottish and Australian Bank from 1909 to 1928, and then Joint General Manager until his retirement in 1933. Wren, who was also Chairman of the Associated Banks of Victoria during the early stages of the depression in 1929-30, joined the E. S. and A. in 1872 as a junior clerk, and in 1888 was appointed Inspector’s Accountant.!? Thus at head office in Melbourne he would have had a first-class view of the collapse of the thirty-nine banks and quasi-banks including his own institution in the period 1891-3. Another with great experience was E. H. Wreford, Chief Manager of the National Bank of Australasia from 1912 to 1935, who had jointed the National in 1882.13 Senior officers in other banks in 1929 also vividly remembered 1893, and carried with them a fear of a repetition of those events.

The bank failures of 1893 and the spurious reconstructions which followed permanently tarnished the reputation of the banking community. They lost the high position of political, commercial and social prestige that they had enjoyed before the crash. A position of honour and 11 AIBR, 1914 and 1919. 12 Ibid., 1933, p. 1015. 13 Ibid., 1935, pp. 388, 489.

80

Institutions and Dogmas trust was forfeited for one of suspicion and uncertainty, and try as they might to regain their former position, they were never quite successful. The great wave of antagonism towards the banking system during the 1930s had its origin in the ‘nineties. The experience of 1893 had a profound effect on banking policy, as the banks struggled in the years that followed to rebuild their finances and reputations. Lending policy was trimmed to conform to sound banking principles. Land and other speculative securities were avoided; long-term lending was discouraged, and preference given to short-term self-liquidating propositions; and security cover on new advances was increased. Established banking ratios received far closer attention, and lending policy was more closely related to changes in theny Furthermore, a long period of conservative dividend payments allowed the banks to rebuild their reserves, which were seriously depleted and in some cases completely lost in the ’nineties.14 This strict application of the canons of sound banking principles was

relaxed only in the latter part of the twenties, when dividends were allowed to claim a larger share of profits, and London funds and cash

reserves were allowed to fluctuate rather more before corrective action was taken. (There was not, of course, at this time any danger that London funds would be suddenly depleted by the withdrawal of British deposits as had been the case in the ’nineties; accumulations of sterling exchange could with safety be treated as reserves.) This relaxation was not, however, allowed to proceed far, and when it became clear that the tide of depression was again running in there was an immediate abandonment of any compromise with rigid orthodoxy. At the end of 1929 the banks were faced with an acute liquidity crisis which occurred so rapidly that the traditional methods of control were completely ineffective. Cash reserves (including Treasury bills) fell alarm-

ingly to around 15 per cent of deposits, and the advances (including securities) to deposits ratio rose to over 100 per cent (see Table 17) .15 Throughout 1930 the banks struggled to regain liquidity. Increased lending was out of the question, particularly for financing government deficits. The very gravity of the situation later forced them to assist governments, but they did so reluctantly. In the banks’ view governments alone were responsible for the disarray of public finance which was a legacy of overborrowing and lax financial methods, and it was not a banking duty to rescue them. Their responsibilities were towards the stability of their own institutions, and this was not compatible with assisting financially reckless governments. In 1930, the banks could not have been expected to foresee the extent of the economic cataclysm into which they were entering; nor could they have foreseen that the traditional palliative of sound finance would be swept away and replaced by a revolutionary set of

, 81

14 See RCMB, Report, pp. 117-19 for the profit appropriations between dividends and reserves in the period 1893-1936.

15 The normal ratios which the banks sought to maintain (averaging the difference between banks) were 18-20 per cent for the cash-deposits ratio and 85-90 per cent for the advances-deposits ratio. Evidence of the trading banks before the Royal Commission on Money and Banking, passim.

Australia and the Great Depression ideas which cut across everything that had been ingrained for decades. It was natural, therefore, that they should cling to the methods they knew to be sensible, and resist what appeared to be the easy solution, and the one which, in the long-run, would not solve anything; and it was equally natural for governments on their part, particularly Labor governments, to resist the destruction of a great part of their social programme which had been painstakingly built over many years. The difficulty was not that either was right or wrong, but that the political environment prevented either side accommodating the Other’s position, and the result was a head-on collision. (b) The Commonwealth Bank Inthe middle of the 1920s central banking was still very much in its infancy. It was generally agreed that a central bank was a desirable addition to the monetary system, but there were few clearly defined principles and objectives which such banks should observe; and there was a good deal of uncertainty about the practical application of those principles that appeared theoretically clear. It was agreed that a central bank should be the government banker, and the service and reserve

bank for the trading banks; that it should not compete with the other banks for ordinary business; that it should manage the note issue; and that it should be responsible for the maintenance of stability.146 How some

of these were to be carried out was not certain, and in particular it was dificult to determine how stability was to be maintained. It was not even clear what stability really meant. Presumably for the Bank of England it meant maintenance of the efficient functioning of the gold standard; but

this was of little assistance to Australia where specie and discount rate movements were not factors in the money market.

It is not surprising, therefore, that the Commonwealth Bank’s first venture into central banking was of a very limited nature. At the conclusion of his second reading speech on the Commonwealth Bank Bill in 1924, the Treasurer, Earle Page, predicted that the proposals before the House would ‘complete [the] transformation of the Commonwealth Bank and the Notes Board into a Central Bank—a Bank of Banks—a Bank of issue, deposit, discount, exchange, and reserve’.17 It may indeed have seemed at the time that this was accomplished; but as central banking is now understood the 1924 Act was only the first tentative step. Its most important provision was the transfer of note issue control from the Notes Board—which had been administered since 1920 by a group of Treasury and Bank representatives—to a fully integrated department of the Bank which would now be administered by eight directors who would not, so the argument went, be under any direct political influence. For some time the government had been embarrassed by the deflationary views of the Notes Board, as there was a tendency to associate these views with government policy; and the 1924 Act was designed as much as a solution of these difficulties as a step towards the establishment of a central bank.!® ‘The 16 See the list of ‘General Principles of Central Banking as suggested by Mr Montagu Norman’ in 1927, which makes iNuminating reading today, in L. F. Giblin, The Growth of a Central Bank, Melbourne 1951, p. 40. 17 CPD, Vol. 106, p. 1292.

18 Giblin, Central Bank, p. 15. 82

Institutions and Dogmas | Bank was also given the power to publish rediscount rates, which it was hoped would add to central banking status; but this power was not used as the volume of trade bills did not warrant such a development.!® An additional function, that of acting as the trading banks’ clearing agent, seemed at the time to be of minor significance but later proved to be one

of its most important central banking acquisitions. The trading bank balances deposited with the Commonwealth Bank for this purpose were small until the onset of depression, and were not viewed as a precedent for more substanial balances to be maintained in the future; but when the banks were called on to sell their goid reserves to the Commonwealth Bank in 1929 and 1930, the way was clear for a rapid increase in these balances and the beginning of Commonwealth Bank control over the volume of credit. Until then, however, the only central banking function which the Bank fulfilled was control over the note issue. The members of the Commonwealth Bank Board shared the same views on inflation, the note issue and government finance as the private banking community. Indeed, the Board’s prejudices were even more pervasive and intractable than those of the private bankers. Apart from the Governor and the Secretary to the Treasury, Board members were drawn from diverse fields of commerce and industry and had little or no banking experience. It could be said that the Board members of the trading banks were similarly handicapped, but there was an important difference in that these Boards had been built up over a long period and at any one time the majority of members would have been associated with banking practice for a lengthy period and become familiar with the corpus of banking tradition and practice. This was not the case, however, with the Commonwealth Bank Board. During the depression only one of its members had previous banking experience, and none had served on the old Notes Board and thus gained some knowledge of currency matters.2° Instead of allow-

ing greater flexibility of approach to the problems of currency and banking, this inexperience led to intransigent conservatism. The doctrines of the private banks were adopted and applied by rote to novel problems

and situations, but without the advantage of an experienced banker’s

19 [bid., p. 16.

instincts.

20 Indeed the 1924 Act specifically prevented anyone actively engaged in banking from being appointed to the Board. The members of the Board in 1920 were: Sir Robert Gibson (Chairman) , R. S. Drummond, M. B. Duffy, R. B. W. McComas, J. Mackenzie

Lees, C. H. Reading, the Secretary to the Treasury (J. T. Heathershaw) , and the Governor (E. C. Riddle). J. Mackenzie Lees was the only member (apart from the Governor) with previous banking experience. He had been General Manager of the Bank of North Queensland from 1898 to 1917 when his Bank amalgamated with the Royal Bank of Queensland to form the Bank of Queensland. He then became General Manager of the Bank of Queensland until 1922. R. S$. Drummond was a well-known wheat grower in the Riverina district, and had also been Manager of the Compulsory Wheat Pools of New South Wales. M. B. Duffy had a long association with the Australian Labor Party. He was president of the party in 1919, and secretary of the Melbourne Trades Hall Council in 1929-30. He was also connected with commercial broadcasting, and served on various Royal Commissions, including the 1928 investigation into the Constitution. R. B. W. McComas was proprietor of 83

Australia and the Great Depression The Board’s Chairman and most dominating personality was Sir Robert Gibson. A small, finely-built, rather gaunt figure with a white goatee beard deeply stained in parts from an incessant chain of cigarettes, Sir Robert pos-

sessed an iron will and an immense capacity for hard work which more than compensated for his lack of formal education. Born in Scotland in 1864, a designer and draftsman by trade, he spent his early years with the Camelon Iron Co., and at the age of twenty-three was appointed manager of the company’s London office. He came to Melbourne in 1892, and later founded Austral Manufacturing Co. and Lux Foundry. During World War I he was appointed as Victoria’s representative on the Central Coal Board and also served on the Military Exemptions and Luxuries Board. Having attracted the attention of the government in this period, he was appointed Deputy Chairman of the first Commonwealth Repatriation Commission and created a KBE in 1920. His reputation in public life continued to grow, and in 1924 he was appointed an original member of the Commonwealth Bank Board and also a member of the Victorian State Electricity Commission. Shortly afterwards, Gibson became the government representative on the Board of Directors of Commonwealth Oil Refineries. He also served on the governing bodies of many public companies and institutions and was, for example, Chairman of Directors of the Chamber of Manufacturers Insurance Co. and a member of Council of the University of Melbourne. In 1926, on the retirement of J. J. Garvan, he was elected to his most important post—Chairman of the Board of Directors of the Commonwealth Bank. The Chairman’s only specific function was to preside over meetings of the Board; the Governor was the chief executive officer of the Bank. The framers of the 1924 Act envisaged that the Chairman, who would normally

be a person of high national repute, would simply be a figurehead. This was one of the main reasons for providing that the Governor need not necessarily also be Chairman. Gibson, however, interpreted his position in such a way that the Chairman became the chief executive officer of the Bank as well as its figurehead. This was due to the personality differences between Gibson and the Governor, E. C. Riddle. Gibson knew little of the intricacies of banking, and nothing of central banking, but he thrived on his position of power. He towered over the other members of the Board and enjoyed his encounters with the government on the direction of national economic policy. His influence over major policy decisions was complete and it even extended to the detailed running of the Bank. He was feared more than respected by junior and not-so-junior officers, and those sum-

moned to his presence found the occasion an ordeal and conversation one-sided. Riddle, on the other hand, was a highly competent banker

(although he had little knowledge of central banking), but had no Wm. Haughton & Co., a large wool and produce firm, and was also a member of the Central Wool Committee. C. H. Reading had spent his first six years after leaving school with the Union Bank of Australasia, but later joined the British-Australasian Tobacco Co. and eventually became managing director. He was a member of the Commonwealth Board of Trade from 1918.

84

Institutions and Dogmas inclination for high-level politico-financial manoeuvring. He was quite happy to leave this to Gibson. This departure from the intention of the 1924 Act would not have been of significance had Gibson been willing to

accept the advice of those who knew more about banking, finance and economics, but he was deeply suspicious of ‘expert’ advice. He would listen to no view that did not conform to his own narrow orthodoxy and would

brook no compromise with the sacred principles of sound finance. From 1930 until his death in 1934, Gibson suffered several bouts of serious illness which prevented his attendance at the Bank for up to three months

at a time. On one occasion in 1932 he was on the point of death and medical opinion was that only his tremendous courage and will to live enabled him to survive. This ill-health may have contributed to his inflexibility and impatience with new ideas during the depression and early recovery years.

More than any other individual, Gibson determined the course of economic policy during the depression and early recovery period. He was a man of exceptional administrative capacity and business acumen, but, with his limited economic and financial knowledge, it was a tragedy that

he was able to influence policy to such an extent. Gibson’s dominant influence on the Bank was important in 1945 when the Bank Act was amended to restore the Governor’s position as titular head as well as

chief executive.

One of the most important results of the Board’s slavish adherence to

doctrine was its exaggerated emphasis on ‘currency’ rather than the volume of money or the credit base. It was unable to see that more was involved in credit than the size of the note issue, and this fixation con-

tinued until well into recovery when it began to have some second thoughts as a result of the controversy over the role of Treasury bills. It is not unfair to say that the Board’s view was that variations in the note issue were identified with changes in the volume of money; indeed they were not only ‘identified’ with such changes but were identical to them. Even the crude quantity theorists would have shuddered. It is true that this view, or more accurately belief, was never expressed as precisely as this. ‘The Board had never thought seriously about the matter and simply acted in accord with its instincts—which meant in accordance with the doctrines of sound finance—and commonsense, but this is the only possible conclusion to be drawn from the many statements by the Bank that

the only means at its command to further assist the government was through an expansion of the note issue. Time and again Gibson replied as he did to Prime Minister Scullin in September 1931: After carefully reviewing the whole position envisaged in the financial situation to-day, my Board has come to the conclusion that the resources now in sight, in view of the obligations of the Bank, are such as to prevent it from undertaking obligations of the nature indicated without danger of exceeding the limits provided under the present legislation for Note Issue. My Board holds the view that as Trustees for the time being of the monetary system, 1t must administer the affairs of the Bank so as to provide as far as 85

Australia and the Great Depression possible against being forced to exceed the limitations placed upon its actions by Act of Parliament.

The Bank was unable to see that an expansion of advances would be reflected in an increase in deposits (assuming that the position of London funds remained unaltered) thus providing its own corrective. It was anchored to the idea, as were banks in general, that the assistance it could afford on overdraft or by discounting Treasury bills was strictly limited

by the position of their ratios at any one time, and that the only (unacceptable) alternative was note issue expansion. The Commonwealth Bank Board continued to give consideration to extending its central banking powers until the eve of the depression. Con-

sultation with the trading banks and the Bank of England was active between 1926 and 1928, but in the end nothing tangible was accomplished.

The Bank of England sent its Comptroller, Sir Ernest Harvey, for consultation at the beginning of 1927, and discussion principally revolved around the question of trading bank reserve deposits with the Commonwealth Bank. In principle there were few difficulties. The banks were already placing a significant proportion of their cash resources with the Commonwealth Bank. At the end of 1928 these deposits represented as much as 25 per cent of the banks’ Australian cash, and about 5 per cent of

their total deposits.2! But in the negotiations that followed, the banks could not agree on the proportion of their deposits to be placed with the Commonwealth Bank: there was disagreement as to whether interest should be paid on these deposits, and apprehension among some that thev would be used by the government, or in competition against them. And there appeared to be little sign of formal agreement when the negotiations were postponed with the onset of the crisis. The lesson to be learned from these lengthy and fruitless discussions has been neatly summarized by Giblin: Sir Ernest’s efforts on behalf of reserve banking were successful in showing that even under the most favourable conditions and with the most persuasive

advocacy, the trading banks, as a whole, would not commit themselves voluntarily to keeping more reserves with the central bank than suited their immediate financial interests.22

Despite this disagreement a Bank Bill, presumably on the lines suggested by Sir Ernest Harvey,?? was drafted in 1928, and was ready for submission to Parliament in the early months of 1929. But the government, already

locked in dispute on the future of arbitration, was not interested in a measure likely to add to its political troubles and the whole issue was shelved. (The Central Reserve Bank Bill introduced by the Labor Government in early 1930 was probably similar in principle to the 1928 Buill.**)

In these discussions with the trading banks it is significant that no consideration was given to greater central control over, or even informa21 RCMB, Report, Table 5. 22 Central Bank, pp. 45-6.

23 No trace of the draft Bill could be found in Treasury or Reserve Bank files. 24 In January 1930, A. C. Davidson, General Manager of the Bank of New South Wales,

claimed that ‘there is already in existence in the Treasury, drawn up under the 86

Institutions and Dogmas tion about, London funds. If the Commonwealth Bank was to have any effective central banking function it was far more important that it exercise some supervision over the level of London funds than over domestic deposits. It has already been shown that movements in London funds were

responsible for movements in total deposits, and therefore, however effective control over deposits was likely to be, the more important source

of instability remained unguarded. One of the first actions of the Commonwealth Bank after the passing of the 1924 Act had been on this very question. The Associated Banks of Victoria were approached to supply information on their holdings of London funds at various dates in the period 1921-4, and thereafter at regular intervals. Replying in November 1924 the Associated Banks refused in no uncertain terms: I was requested to advise you on behalf of our members that the Associated Banks, having given the matter very full consideration, much regret that they do not see their way to furnish the Returns desired by the Board. Some of the particulars asked for are considered to be of too intimate and confidential a character to be divulged; and, in regard to others, it would be almost impossible to supply any information which would be of any service whatever to the Board.

Presumably the Commonwealth Bank was not prepared to reopen the question during Harvey’s visit for fear of jeopardizing the whole negotiations. The trading banks continued to insist that their London funds were

their own private business through the more critical period of the exchange crisis until August 1930 and the adoption of the Mobilization Agreement, but even then the banks only supplied information on their monthly receipts of funds and refused to disclose their aggregate holdings.

The government had very little idea, therefore, of how near to national default it really was. Government Treasuries and the Loan Council Not a great deal can usefully be said about the role of government in the regulation of the general level of economic activity prior to the depression. Budgets were of course important in influencing economic conditions, but except in the very broadest sense policy was framed without reference to the level of employment, income, investment, or the balance of payments. Regulation of economic conditions was in the hands of the banking system, and any further interference by the government was thought to be both ineffective and undesirable. It should be emphasized that this was a world without the multiplier; any increase in government

expenditure was thought to mean that the expenditure of the private sector was reduced accordingly. Neither employment nor credit could be ‘created’. It was agreed that government expenditure should increase to offset any fall in private expenditure, and conversely; but there was no possibility of increasing national expenditure without resort to inflationary aegis of Earle Page, a draft banking bill on very restrictive lines . . .’ Davidson to E. R. Russell [Inspector for Victoria, Bank of New South Wales], 13 January 1930,

BNSWA.

87

Australia and the Great Depression finance, which could not last for long and would in the end bring complete collapse. But it will be useful briefly to consider some of the Treasury

attitudes, and, in particular, to trace the influence of the Loan Council prior to the depression.

(a) The Commonwealth Treasury Until 1930 the Commonwealth Treasury was little more than the government’s department of account-

ing: it had little influence and did not have the equipment or skill to advise the government of the likely effects of its policies. It supervised but did not direct government revenue collection and expenditure, and

managed loan issues (in laison with the Commonwealth Bank). The limited function of the ‘Treasury is emphasized by the qualification and training of its senior officers, all of whom were accountants by training. J. T. Heathershaw, the Secretary to the Treasury from 1926 until 1932, had transferred from the Victorian State Treasury to the Commonwealth shortly after completing his training. He rose to become Accountant of the Treasury, a position he held until his appointment as Secretary. The added responsibilities which the depression brought were beyond Heathershaw, and, partly because of illness, he did not play a prominent part in this period. Much of the work was therefore left to the younger and more able Assistant Secretary, H. J. Sheehan. Also an accountant by training, Sheehan entered the Accounts Branch of the Treasury in 1903. In many ways the position was also beyond him with his limited training, but he

made full use of the experience he gained, and when he succeeded Heathershaw as Secretary in 1932 he brought a breadth of knowledge to the position which it had not known before. Sheehan had been appointed Assistant Secretary in 1926 and played a prominent part in framing the

Financial Agreement. He was also Secretary to the Loan Council and generally in charge of loan matters. In 1930-1 he was in charge of negotiations with London and the Commonwealth Bank, and indeed played a more prominent part in the framing of policy in the depression than his senior. It is significant that it was considered that his financial wisdom had grown sufficiently for him to succeed Sir Ernest Riddle as Governor of the Commonwealth Bank in 1938. The limited role of the Treasury in the pre-depression period can be further illustrated by reference to the budget speeches of the Bruce-Page Government. These read more like a Chairman’s address to the annual meeting of a large public company than the nation’s principal document on economic policy. They are just as dull, and as effectively skirt the main issues. So much emphasis was placed on facts and figures that policy issues were obscured. ‘The main concern of the government was to reduce the size

of the budget which had been inflated by the exigencies of wartime finance. Thus emphasis was placed on withdrawal from the fields of direct taxation which had been entered during the war, conversion of the wartime debt to lower rates of interest, and reduction as rapidly as possible of

expenditure on such items as soldier settlement and repatriation. The Treasurer rarely refered to current economic conditions, except to explain variations from the estimates of customs and excise receipts. Indeed the failure of the Treasury to consider economic fluctuations is emphasized 88

Institutions and Dogmas by the frequency and the extent to which the estimates of customs and excise receipts proved to be wildly inaccurate. It was of course exceedingly

dificult to predict how these would vary, but in framing the estimates virtually no consideration was given to the previous year’s state of the balance of payments in relation to probable customs receipts. The best summary of the government’s attitude towards trade fluctuations is provided by Earle Page in concluding his Budget Speech for 1929-30, when the early signs of the depression were already visible: National finance is no exception to the general law of ebb and flow. For many years we have been favoured with prosperous seasons and good prices for our wheat and our wool, resulting not only in revenue sufficient for all govern-

mental needs, but enabling many remissions of taxation to be made. That sooner or later we should enter upon a period of some depression was inevitable. This condition is merely a passing phase of our economic life. We

have ample resources awaiting our energies. ... A sure path out of our

difficulties can be found in a combined national effort to obtain industrial peace and increased and more efficient production.?5

(b) State Treasuries The State Treasuries were rather more aware of the relation between their budgetary policies and economic conditions than the Commonwealth Treasury. Although routine matters of supply and appropriation occupied a large part of their time, and the senior positions were held by accountants as in the Commonwealth, their much longer history in the various fields of taxation and overseas borrowing made them more alive to changes in the conditions of trade and in the world’s money markets. The budget speeches of the Colonial Treasurer of New South Wales reveal a far greater involvement in the condition of the economy and a greater willingness to admit the extent of the involvement. To appreciate this difference one has only to compare the very able and forthright summary of the country’s financial plight in B. S. B. Stevens’

Budget Speech for 1929-30 with the evasive and face-saving effort of Page.?6

In particular, State Treasuries were sensitive to the effects of variations in public works expenditure on the level of employment. This may seem surprising as it is usually assumed that governments were indifferent to the unemployment problem prior to the depression, and the persistence of an unemployment rate in excess of 8 per cent throughout the ’twenties would seem to support this. But it was less that governments were in-

different to the problem than that they believed there was little they could do about it, and the electorate did not hold them responsible. Occasionally it was argued that government expenditure should expand in times of depression to take up the slack left by private enterprise, and then recede as recovery got under way. In practice, however, this remained 25 92 August 1929, CPD, Vol. 121, p. 240. 26 Admittedly Stevens had some advantage in that his speech was delivered in December 1929, about three months after Page’s, when the extent of the country’s difficulties was more apparent. But this is of minor importance as an explanation of the marked difference in approach by the two Treasurers. Stevens’ review of the economy at the time was the best that I have read. NSWPD, Vol. 119, pp. 2247-54.

89

Australia and the Great Depression a dead letter as governments were rarely in a strong enough financial position to expand at such times (remembering that credit creation would not have been contemplated) and private enterprise feared that if such expansion did take place there might not be the necessary withdrawal during recovery. ‘Thus as fiscal policy was not a practical reality, considera-

tion turned to unemployment insurance; but even here there were many difficulties and Queensland was the only state to institute such a scheme.**

Although no means of general unemployment prevention, or even relief, had been developed prior to the depression, governments were with-

out question concerned about the problem. Thus B. S. B. Stevens in the budget speech already mentioned emphasized that what matters most to any Government or community is the provision of continuous and useful employment for its employable citizens. The extent to which men and women are unable to find useful employment is probably the most potent index of the economic position.28

If a general policy was premature, governments could at least lessen instability in the demand for labour by preventing unnecessary fluctuations in public works expenditure. Although policy was directed towards this end, there were many difficulties preventing its effective implementation. We have already seen that a large part of works expenditure was financed by overseas borrowing, and the states were frequently confronted with the problem of maintaining expenditure in periods of tight money market conditions when long-term loan flotation was out of the question. On a number of occasions during the financially unstable ’twenties, markets were closed for periods of six to twelve months. In such periods works were not interrupted; rather expenditure was continued on the basis of

bank overdraft, and overdrafts were funded by a new flotation when money market conditions eased. There were, of course, other important reasons for preventing unnecessary interruptions to public works. The cost of projects would have increased alarmingly. States were also conscious of the prestige associated with such works as the Murray River Irrigation Scheme, the Sydney Harbour Bridge, urban railway electrification and immigration settlement schemes, and were keen to ensure that they did not fall behind in the development race. But most important was the desire to maintain a measure of employment stability in so far as the work force under their control was concerned. One consequence was that expenditure was continued on overdraft during the first half of 1929 as the authorities were unaware of any unusual circumstances, and when the 27 The Commonwealth Royal Commission on National Insurance 1923-7 considered the possibility of a scheme of unemployment insurance, but because of the difficulty of estimating the extent of unemployment and of calculating the actuarial risk, nothing further was done. The Royal Commission suggested that the first step should be the establishment of national employment bureaux, and also suggested that a scheme of reserve public works be considered. The problem of Commonwealth-State relations was a barrier to the implementation of a national scheme on these lines. See ‘Second

Progress Report of the Royal Commission on National Insurance (1926)’, CPP,

1926-8, Vol. IV, pp. 1411 ff. 28 NSWPD, Vol. 119, p. 2248.

go

Institutions and Dogmas gravity of the position was finally realized government London finances were already in a parlous state of illiquidity. (Of course the method of overdraft financing, rather than the principle of not interrupting works expenditure, was primarily responsible for this.) Nevertheless it remains true that on the eve of the depression the extent of any government’s supervision over the swings of the trade cycle was negligible. Indeed, it could be forcibly argued that a number of government practices added considerably to the severity of the cycle. One of the principal of these was the habit of financing public works expenditure on overdraft. Any cyclical control that was necessary, it was believed, was best exercised by the banking system, and governments could best assist the banks by not interfering. Governments had neither the techniques, personnel, nor electoral support for any venture irito anti-cyclical policy, but, after the banks lost control at the end of 1929, they found themselves

forced overnight to assume control over a vast area of financial and economic affairs in which they had no real experience or interest. The Commonwealth Treasury in particular, after showing less interest in these matters than state governments, suddenly found itself in the most important and responsible position of all. (c) The Loan Council The institution which became the vehicle of government economic policy during the depression was the Australian Loan Council. The Loan Council was formed as a result of the tremendous wartime increase in Commonwealth borrowing on the local market.

Prior to 1914 the Commonwealth was not a borrower of any size, either locally or abroad, and capital raising was almost entirely in the hands of the states. The states, furthermore, made comparatively little use of the local market, and between two-thirds and three-quarters of their requirements were raised in London. There was some complaint of competition between local state issues, but as the demand for such issues was largely within the state in question it did not reach serious proportions. The question of competition in London did not arise, as all issues were arranged through, and in collaboration with, the underwriting firm of R. Nivison & Co.,?® and they ensured that each state waited its turn, and

floated at a time and price which would not have an adverse effect on other borrowers. With the advent of the Commonwealth as a substantial borrower, however, the problem of competition and clashing became acute.

During the war an arrangement existed whereby the Commonwealth acted as the borrowing authority for the states, but when peace returned this arrangement lapsed. Perhaps because of the contrast between the eficiency of wartime borrowing and the apparently chaotic scramble for funds of seven governments and a host of semi-governmental authorities 29 The firm of Nivison & Co. has had a long association with Australian public borrowing in London. The first public issue underwritten by the firm was a Queensland loan for £1,182,000 made in January 1893. Previously, it had arranged a number of medium-term loans for the states for small amounts, then known as Treasury bills. By the mid-1g00s it was the underwriter for all the states in London, and, in 1916, it also became the Commonwealth’s underwriter. Its connection with Australian public borrowing in London has been continuous to the present day. This information was kindly supplied by the firm to the writer in a letter dated 7 August 1963.

gl Oo

Australia and the Great Depression in the immediate post-war period, the return to the pre-war method was greeted by widespread criticism. The critics were aided by the sharp

increase in interest rates which they attributed to the competition, but which were mainly due to the rapid increase in prices at the time. It was generally agreed that some sort of co-ordinating authority was necessary, but it was not until the Commonwealth government was seriously embar-

rassed by the states’ failure to leave the market clear for a large conversion loan of £38m in 1923 that action was precipitated.2° At the premiers’ conference in May 1923 the Commonwealth called for the establishment of a Loan Council, and as there was no question of executive

power being conferred on the Council, the states agreed to the proposal. At the Council’s first two meetings, held in February and July 1924, progress was made in the fields of co-operation and co-ordination. In the first instance the states agreed not to raise any loan at a rate of interest in excess of 6 per cent, and not to undertake any ‘special propaganda relating to their own issues’ until the Commonwealth had had an opportunity to arrange for the redemption of its War Gratuity Bonds. In addition, tentative steps were taken to encourage State Treasuries to arrange their loan programmes in consultation with the Executive of the Council (which consisted of the Treasurers of the Commonwealth, New South Wales, Victoria and South Australia) , and to consult on the timing and method of placing the loan. At the July meeting an even more important step was taken, when it was agreed to float a loan of £10m locally for the states, for which the Commonwealth would issue its own inscribed stock. At the same time the respective governments resolved not to raise any further new money during 1924-5 apart from this sum, and they decided further to limit their overseas borrowing to a maximum of £28m. This was a formidable record achieved in such a short time, but the stresses and strains of the next few years were to show that it was more difficult to implement objectives than to achieve a formal area of agreement.?! During the next four years the Council operated with moderate success despite the absence of New South Wales between 1925 and 1927.32 A

number of loans were floated in the local market in the name of the

Commonwealth on behalf of the states, and in 1927 a large issue was made

in New York on this basis. It seemed that the principle of a single borrower had satisfactorily passed its preliminary trials. In this period the 39 See the Commonwealth government's memorandum on the ‘Co-ordination of Borrowing’, CPP, 1923-4, Vol. II, pp. 396-7. Action was also delayed until after the formation of the Bruce-Page Government because of state suspicion of the previous Prime Minister, W. M. Hughes, whom they believed was intent on centralizing all government borrowing into Commonwealth hands. This suspicion was not without justification.

31 The functioning of the Loan Council at this time is tentatively discussed by R. S. Gilbert, The Australian Loan Council, 1923-29, unpublished MA thesis, University of Adelaide, 1957.

32 New South Wales, under the Labor Premiership of J. T. Lang, withdrew from the Council in 1925 because it believed that unnecessary restrictions would be placed on state borrowing which would involve sacrifice of the independence of the state. New South Wales rejoined the Council in 1927 with the defeat of the Lang Government. 92

Institutions and Dogmas rate of interest on government issues fell to around 5} per cent, and although the Council was certainly not responsible for this fall it received some of the credit. Despite the progress and the resolution at the second meeting, the Council found increasing difficulty in bringing any pressure to bear to reduce borrowing programmes. Collectively each government

agreed that the rate of borrowing would have to be reduced to avoid serious consequences, but individually none was prepared to reduce its expenditure for fear that others would not do likewise and that it would thereby fall behind in the development race. It was not until the Financial Agreement became effective in 1929 that the Council could impose its will, and control borrowing for Australia as a whole.

It was fortunate that the decisions of the Loan Council were elevated to executive status before the depression. It has been shown that prior to

1929 the country did not possess an agency of central economic policy; the Council was to fill this gap. Although it was only commissioned to concern

itself with the amount and conditions of borrowing, this soon broadened to the whole question of national finance and solvency. ‘The governments and the banks found it the most convenient meeting ground to hammer out their differences, and the decisions that resulted had the appearance of singleness of national purpose. The several plans of national emergency emanated primarily from the Council, as did the important policy decisions of the recovery period. The greatly enhanced status of the Council during the depression tends to obscure, however, the very important development in the process of policy formation that was taking place at the same time. Except in a very general sense the Council was not the originator of policy; rather it was the vehicle for it. Council deliberation took place after the main issues had been resolved, or a compromise effected. It became the figurehead for

a national policy, but had little to do with its inner mechanism. The establishment of the compulsory Loan Council brought with it the beginning of Commonwealth Treasury power and responsibility in the field of national finance. This power was not drawn from the voting strength of the Commonwealth at Council meetings, but from the fact that it had to act as the secretariat of the Council. The detailed and intricate problem of maintaining national solvency was entirely in the hands of the Commonwealth Treasury, as were the negotiations with the banks to provide finance for all budget deficits. ‘The Council, meeting as it did every two

or three months, could not possibly exercise anything more than very general control. In particular, negotiations with London required immediate decisions and of necessity states had very little say. It is to the credit of the Commonwealth that it made every endeavour to consult with State Treasuries by telegram or by telephone whenever possible, but

in the vast majority of cases the states did not know the background details and were therefore not in a position to do anything other than sanction the Commonwealth’s recommendation. And when a state did register a point of disagreement, the Commonwealth was usually able to impose its will on the grounds that most other states saw no objections and it was imperative that a decision be made immediately. ‘Thus it was 93

Australia and the Great Depression the growth in importance of the Commonwealth Treasury in the field of national finance and policy formation that was the most significant feature

of the enhanced prestige of the Loan Council as a national economic

institution. In 1929, however, no such extension of Commonwealth Treasury func-

tion was imagined, and none was sought. Commonwealth and state governments alike remained oblivious to the need for a national economic policy. It was conceded that the rate of borrowing, particularly overseas

borrowing, had exceeded prudence; but in general it was believed that the banks were in the best position to regulate the level of economic activity and that there was no reason for government intrusion in this direction. Indeed it was believed that extension of government activity was far more likely to accentuate instability than help to prevent it. The best defence against boom and slump was strict adherence to the dictates of sound finance. In particular this meant avoidance at all costs of inflation, and of any meddling with the note issue. Sound finance was as much an obsession in the 1920s as full employment is today.

The Labor Movement, the Banks and the Bondholders The Labor movement, no less than the banks and governments, was deeply influenced by shibboleths conditioned by the events of an earlier period. Labor’s mistrust of large financial institutions was mainly a class reaction which had been coloured by the experiences of 1893, the war and post-war years. The banks—and to a lesser extent the insurance companies—were conspicuously large and wealthy. At a time when giant industrial organizations had not emerged, they towered over other forms of business enterprise. They owned the largest and most important city buildings; their branches dominated the commercial centres of suburbs and country towns; they boasted of controlling enormous sums of money; their business was ‘unproductive’, depending on the fruitful work of other

people; and they made handsome profits and paid large dividends. In short, they represented capitalism par excellence. The bank crashes of 1893 had sharpened this reaction. In their pursuit of profit, it seemed that

the banks had acted with crass irresponsibility. They were unworthy, Labor believed, of their position as custodians of the people’s savings. The

principal instrument of their irresponsibility was seen as the note issue, which was a means of exacting tribute from the workers; and in the reconstruction phase the loss of deposits by wage-earners seemed to be of less importance than the bolstering up of the banks by capitalist-controlled governments. In the eyes of the workers, the government’s only real concern was to maintain the banks’ privilege of note issue.33 Thus, state control of the note issue and banking became one of the first objectives of the Labor Party. Private control of banking, stated the Labor Manifesto of 1910, is ‘one of the frauds by which Capitalism bleeds the people’, and it was in response to this belief that the first Labor government imposed the tax on private note issue which effectively abolished the old system 33 See Frank Anstey, Money Power, Melbourne 1921, pp. 68-85.

94

Institutions and Dogmas in favour of a government issue, and established the Commonwealth Bank as the first step towards complete public control of banking.

The method of financing government expenditure during the first world war added to this already firmly entrenched antipathy. The war was financed by a rapid increase in the note issue and by government bor-

rowing. The result, according to the militants of the Labor Party, was wholly in favour of the banks at the expense of the government and the people. The process was as follows: the banks sold their gold to the Treasury in exchange for notes on very favourable terms; this increased the deposits of the government and the cash of the banks, which enabled the former to increase its spending and the latter to increase their subscriptions to bond issues. The note issue expansion continued after the gold had been disposed of, which further swelled bank deposits; and the subscriptions to bond issues were also returned to the banks in the form of deposits. The process of credit creation was continued for several years after the war until the banks had accumulated huge holdings of government stock at high rates of interest, for they were the principal subscribers to bond issues. ‘Out of the war’, argued Frank Anstey, the militant Federal Labor Member for Bourke, ‘will emerge two classes—Bondholders and slaves to Bondholders.’34 The growth of interest-bearing securities must impose, it was claimed, a considerable additional burden on government budgets, which must lead to an increase in taxation and lower wages for the workers. Indeed, it was suggested that war was a capitalist conspiracy:

whenever profits declined and interest rates fell, the capitalist classes engineered an outbreak of war, so that profits and interest could be restored to their previous high levels. The essence of capitalist war was.

again to quote Anstey: | ,

So the nation can levy men—but not Money. Men may die—Money lives. Men come back armless, legless, maimed and shattered—Money comes back fatter than it went, loaded with coupons, buttered with perpetual lien. . . . 35

A part of Australia’s war effort was financed by borrowing in Britain, and the Labor Party also resented the fact that Australian wage-earners were being taxed to fight in a war which had nothing to do with them. Why should Australia fight for Britain, it was argued, and also have to pay for the privilege; if Australia was to enter the war in support of the

Allies (and many Labor men thought she should not), then the cost

should be borne by the Allies. This view is understandable in view of the intense nationalism of the Labor Party; and it is also understandable that during the depression a large section of the party should insist that interest payments be suspended on the overseas war debt in lieu of reducing real wages.

The conflict between the dogmas born of an earlier period and the

exigencies of depression policy, between rival institutions of policy formation, and between the banks and bondholders (regarded by the working man as synonymous) , forms an important theme of subsequent chapters. 34 The Kingdom of Shylock, Melbourne 1916, p. 6. 35 Ibid., p. 4.

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V

Australia and the London Capital Market, 1927-9 The Voracious Borrower The financial year 1927-8 was an auspicious time for Australian government borrowing abroad. In thirteen months, between July 1927 and July 1928, a total capital sum of £63.5m was raised in ten separate cash loans.} In no previous period had this rate of borrowing been exceeded. Furthermore, the Commonwealth established itself, rather belatedly, as a borrower of repute in New York. Because of political pressure preventing a London operation, Queensland had been forced to raise a small and expensive loan in New York in 1921;2 and in 1925 the Commonwealth and New South Wales issued new loans in New York because of the temporary closure of the London market. But it was not until 1927 that New York was consistently considered as an alternative to London, and even then with more than a few misgivings. In two operations in New York during 1927-8 £18m was secured.

The background which made possible this record borrowing has been described in Chapter II. It will be recalled that sterling was under pressure

during most of 1925 as Britain struggled to reduce costs and imports sufficiently to restore pre-war parity. The Coal Strike of 1926 acted as a further depressing influence, so that it was not until the early months of 1927 that sterling began to firm in exchange markets. In April 1927 Bank Rate was reduced from 5 to 44 per cent and for the remainder of the year

sterling continued to improve until it reached gold export point in December. This favourable situation continued during the first half of 1928, New York ceased to be a factor in the gold market and the Bank of

England was able to add appreciably to its gold holdings. The Bank offset any inflationary effects of gold imports by selling securities in the open market which maintained Bank liquidity and kept the open market rate low in anticipation of a further fall in Bank Rate.? 1 Full details of Australian overseas flotations during 1927-9 are set out in Table A-1. 2E. M. Higgins, The Queensland Labour Governments, 1915-1929, unpublished MA thesis, University of Melbourne, 1954, pp. 45-7. 3'W. A. Brown, International Gold Standard, Chs 18-19, and The Economist, 1927-9.

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Australia and the London Capital Market, 1927-9 Pressure on sterling in 1925-6 severely limited the placement of new long-term issues in London and the borrowing programme of the Australian Loan Council fell into arrears. It was customary for the Council at this time to plan on raising £40m annually, of which two-thirds was normally borrowed overseas and the remainder locally. In 1926-7 the pro-

gramme decided on amounted to £44m of which £29m was scheduled for overseas flotation and £15m domestically. As we have seen, this allocation depended mainly on the need to raise overseas about £30m a year to

finance government interest commitments, but the precise allocation depended on the timetable and location of maturing loans. Thus in 1927-8 the local market was faced with a heavy conversion programme (amounting to £55m) and the burden of raising cash loans was shifted abroad to a greater extent than usual. Because of unsettled conditions in London the 1926-7 programme was completed £17m in arrears. This deficiency, all on overseas borrowing, was added to the new overseas programme of £26m making the abnormal amount of £43m to be found outside Australia in 1927-8.

These were the circumstances which led to the exceptional borrowing activity in London and New York in 1927-8. Governments were fortunate

that money conditions eased when they did, for several of them had

accumulated substantial overdrafts with their London bankers and were on the point of reducing public works expenditure. Ultimately, however, no such action was necessary: the programme was completed easily and overdrafts were paid off. In addition a loan of US$50m was raised in New York during May 1928 in anticipation of 1928-9 requirements, and at the end of the financial year the Commonwealth and states had a combined credit in loan account of nearly £gm, held mainly in London. In view of this success a domestic loan of £6m planned for 1927-8 was cancelled to ease pressure on internal conversions. But this spate of loan raising, which meant the filing of a new prospectus almost every month, brought to a head criticism of the scale and method of Australian borrowing in London. Australian issues had been subject to unfavourable comment for some time, but it was not until the excess of 1927-8 that the force of the pundits’ criticism made its full impact on the average broker and investor.

One of the first critics was J. M. Keynes who deplored the extent to which British domestic saving was being channelled towards overseas investment. As early as 1924 he argued that: In my opinion, there are many reasons for thinking that our present rate of foreign investment is excessive and undesirable. We are lending too cheaply

resources which we can ill spare. Our traditional, conventional attitude towards foreign investment demands reconsideration; it is high time to give

it a bad name and call it the flight of capital.... Some foreign investments lead directly to the placing of orders in this country which would not be placed otherwise. Whether or not they are desirable on

general grounds, such investments do no harm to employment. As a rule, however, this is not the case. A foreign loan does not. . . automatically create a corresponding flow of exports. .. . Last week New South Wales borrowed 97

Australia and the Great Depression in the London market £5,500,000 new money “for railways, tramways, harbours, rivers and bridges, water supply, irrigation, sewerage and other purposes”. A part of this may pay for orders placed here arising out of these undertakings. Probably the greater portion will not be used thus, but in paying labour on the spot, and importing supplies from elsewhere.4

The first step to be taken, Keynes suggested, was the repeal of the Colonial

Stock Act of 1900 which conferred trustee status on Dominion stocks. ‘Trustee status placed the Dominions in a privileged borrowing position as there was a ready-made demand for such issues, and they had a distinct

advantage over many domestic borrowers. The Dominions also found little difficulty in having their flotations underwritten at low rates of interest without much preliminary scrutiny. Supporting Keynes, the Jnvestors’ Review claimed that easy borrowing by the Dominions had led to an orgy of extravagance; that the Colonial Stock Act had been passed

for political rather than economic reasons; and that it had led to the piling up of a debt far in excess of the legitimate requirements of the

small populations of Canada and Australia.» The Times pointed out that because of the Colonial Stock Act, Dominions could continue to be ‘perfectly free agents in the matter of raising loans even if a Colony did not balance its budget for several years, and its debt showed an exceptionally high ratio to its population’.6 A more comprehensive attack was made in a pamphlet presented to the

Imperial Conference of 1926. The authors, S. R. Cooke and E. H. Davenport who were connected with a London firm of brokers, claimed that: In the whole British Empire there is no more voracious borrower than the Australian Commonwealth. Loan follows loan with disconcerting frequency. It may be a loan to pay off maturing loans, or a loan to pay the interest on

existing loans, or a loan to repay temporary loans from the bankers. The British public, kept in splendid isolation by the financial advisers of the Commonwealth and States, has no means of judging one loan from another. ... The way is thus made dangerously easy for Colonial borrowers. Without conceding a line of information, or any measure of protection to the lender, they get the money they want when they want it.7

In detail, they objected to the rapid increase in the public debt relative to the growth in national income, to the rate of increase in government expenditure from consolidated revenue, to competition between statecontrolled concerns (such as Commonwealth Oil Refineries) and private commercial interests, and to the failure to provide adequate sinking funds (the Commonwealth and Western Australia excepted) , and, finally, to the

paucity of information contained in prospectuses. The pamphlet was widely circulated and publicized, and although it had little immediate 4 Quoted by R. F. Harrod in The Life of John Maynard Keynes, London 1952, pp. 346-7 from The Nation, 7 June 1924. Also reproduced in AIBR, 1924, p. 855. 5 Investors’ Review, 9 August 1924. 6 The Times, 24 October 1924. 7 Australian Finance, London 1926, p. 3; see also The Economist, 6 October 1926.

98

Australia and the London Capital Market, 1927-9 effect on stock prices it did add to the increasing suspicion and uncertainty surrounding Australian issues.® It is true that some of this criticism was well founded. Prospectuses were written in the vaguest possible terms; sinking fund provisions were totally

inadequate in most states; Australian governments did accept their London borrowing status as a right rather than a privilege; and, as already noted, the cost of servicing the external debt was outstripping capacity to pay. However valid these points—and there was much else in the critique that was misleading and inaccurate®—they do not represent the heart of the matter. Australian practice was no worse than in earlier decades (indeed under the guidance of the underwriting firm of Nivison & Co. it was a good deal better ) and compared with the issues of a number of other large borrowing countries Australian stock represented a secure and attractive investment. The basic reasons for Australian loans being

marked out for special attention were, on the one hand, the growing feeling that British capital exports were being made at the expense of domestic employment, and, on the other hand, the dramatic post-war rise in the relative importance of Australian borrowing. The growth of British disaffection with foreign investment in the 1920s was slow and subtle but nonetheless real. As in so many other matters, Keynes gave expression and intellectual content to a feeling that was only dimly appreciated. Officially, of course, any restriction of capital outflow was anathema, for the core of post-war economic strategy was the restoration of London’s central position in international capital markets. Scepti-

cism with official policy was first expressed at the national level by a committee of the Liberal Party (whose membership included Lloyd George, Keynes and W. T. Layton) which advocated the formation of a Board of National Investment to scrutinize Dominion borrowing and to divert a larger proportion of available capital for home development and employment creation. The Macmillan Report did not go as far as this, but its sentiment was the same when it recognized the urgent need for more extensive capital development at home and pointed out that the organization of the capital market favoured overseas rather than domestic

borrowers.?° ,

In the circumstances it is not surprising that criticism of Australian

borrowing represented concern about foreign investment in general. Australia was easily the largest government borrower in the 1920s. Whereas most other countries were moderating their demands for new capital in

view of unsettled market conditions or were turning their attention to 8 Publication of the pamphlet was considered to be of sufficient gravity to be accorded an important place in a ‘Memorandum on the Position of Australian Borrowing in London’ (for the new Prime Minister, J. H. Scullin) , 15 October 1929, prepared by

J. R. Collins, financial advisor to the Australian High Commissioner in London. Also Sir Hal Colebatch, ‘Australian Credit as Viewed from London’, Economic

, 99 Record, November 1927.

9 London criticism of Australian borrowing is discussed at length by R. C. Mills, ‘Australian Loan Policy’ in Persia Campbell (ed.), Studies in Australian Affairs,

Melbourne 1928, pp. 111-16. 10 Macmillan Report, Ch. IV.

Australia and the Great Depresston

=:

New York, the Commonwealth’s appetite for British capital was insatiable. As shown in Table 15, Australia borrowed more than twice as much in the

period 1925-8 as the combined total for Africa and the Far and Middle East which was the next most important borrowing group. Furthermore, the intensity of her borrowing activity increased sharply during the course of the 1920s. Most other countries were content with a steady inflow of funds, but the Australian requirement mounted continually. If Australia drew the bulk of criticism, it was fully in accord with the weight of her borrowing.

Table 15: GEOGRAPHICAL DISTRIBUTION OF NEW BRITISH OVERSEAS INVESTMENT

IN GOVERNMENT SECURITIES, 1907-13 AND 1922-8

(per cent)

Africa, Far and Middle East 25 21 23 20 Europe : 12 15 New Zealand 3 3175 12 12

India and Ceylon 21 | 1529 5 19 3 South America 5 8 North America | 15 8 — 2 10Oo 100 380 | 100 Note: Includes national and provincial government issues but excludes the Irish Free State and local and municipal issues. Source: Compiled from weekly summaries of new capital issues in The Economist.

Every effort was made at the end of the ’twenties to mollify London opinion. In a widely-publicized lecture Prime Minister Bruce explained that a large part of the public debt was war debt which was being paid off systematically; that the remainder of the debt was represented by tangible assets which were essential for the development of the country; that under the financial provisions which the Commonwealth proposed adequate provision would be made for the repayment of all obligations;

and, finally, that no Australian government had ever defaulted in

meeting interest due.!! This was followed up by the High Commiissioner’s

Office which made every effort to make known the content and significance of the Financial Agreement, but all to no avail.i2 When Australia found herself in difficulties in 1929 and 1930 the market had already turned sour towards her, and was even reluctant to render emergency assistance. 11S. M. Bruce, The Financial and Economic Position of Australia (Joseph Fisher Lecture in Commerce) , Adelaide 1927.

12Eg. J. R. Collins, The Public Debts of Australia, London 1929, reprinted from articles appearing in the London Times in April 1929. 100

Australia and the London Capital Market, 1927-9 The Loan Council Hesitates The Loan Council had every reason to be optimistic as it met for the last time as a voluntary association in June 1928 to consider the borrowing programme for 1928-9. It had just completed a most successful year. The level of borrowing had been a record, and unfavourable comment on its activities from London did not appear to have affected the price of new loans; it had established the Commonwealth as a borrower of standing in New York; it had in sight the formal completion of the Financial Agreement which would strengthen its hand; and most governments held substantial cash balances on loan account in London to commence the new financial year. During 1928-9 a large number of maturing loans fell due for conversion on the domestic market, and the burden of new borrowing had again to be shared by London and New York. The total works programme decided on reached £49m, but new flotations would only be necessary for £35m as counter sales and credits on loan account would make up the difference. A new London loan of £7m was floated in July 1928, and although cash subscriptions were very poor (as much as 87 per cent being

left with the underwriters) , the Council was well on the way to successfully completing its overseas programme of £30m for 1928-9.

The failure of the July loan to attract much attention was an omen of future trouble, but it is not surprising that it caused little concern at the time. It was not uncommon for Australian loans in the later "twenties to receive scanty market support. Indeed, of the eleven London cash loans floated between January 1927 and January 1929, seven were undersubscribed by more than 50 per cent.1® This was due, on the one hand, to the

frequency of Australian loans issued at discounts very close to market prices, and on the other hand, to the demand for such securities being largely in the hands of trustee investors. Thus a new issue often fell to a slight discount during its first weeks of trading while being ‘bedded down’,

and as such a tendency became expected trustees awaited the additional benefits of purchasing their requirements in the open market rather than support the issue while the loan remained open. Furthermore, the underwriter, with his commission of one per cent, was not unduly concerned if his loan was nominally unsuccessful, for he knew he would have little difficulty in unloading at a small discount but still well within his commission.

The world-wide flow of funds to New York which commenced in mid1928 to finance rising speculative activity dramatically changed money market conditions in London. The downward trend in interest rates was

checked, sterling fell to reach gold export point in September, and the Bank of England recorded heavy sterling purchases from the United States and Germany. For a time Bank Rate was not raised; instead open-market purchases were made in an effort to prevent undue deflation. But with the accelerated movement of funds to New York the interest rate disparity widened and the Bank was forced to accept defeat in February 1929: Bank Rate was increased one point to 5$ per cent. 13 See Table A-1. 101

Australia and the Great Depression Following the London loan of July 1928, a new Australian approach to the market would normally have followed in September to replenish the sterling balances of those governments whose half-yearly interest commitments fell due at the end of the third quarter. On this occasion, however,

no definite plans were made for it was anticipated that the next Loan Council meeting would be the first under the fully operational Financial

Agreement. There appeared to be no reason for concern as London current accounts were in a healthy condition. It was also hoped that post-

poning the loan would help to allay recent criticism of Australian borrowing.

The referendum on the Financial Agreement of 1927 became an additional factor influencing the decisions of the Loan Council, particularly in its overseas operations, towards the end of 1928. The Bruce-Page Government’s campaign to amend the financial relations between the Commonwealth and states had been an arduous and delicate task, but the most important and difficult step, the submission of the proposals to the electorate, lay ahead. The Agreement, which had been signed by the premiers in December 1927, was subsequently ratified by each Parliament,

but there remained considerable opposition in Western Australia and the other small states which could still frustrate the government’s plans.!4 The small states argued that they could borrow on more favourable terms in London if they approached the market individually rather than collectively. Western Australia and Tasmanian stock, for example, was usually

priced to yield appreciably less than New South Wales issues, for the small states floated less frequently and there was a greater relative demand

for their securities for portfolio diversification. The argument was of doubtful validity as there was nothing to prevent the Loan Council from floating in the name of an individual state if more attractive terms could be arranged; but it nevertheless resulted in the Council being unusually sensitive to the terms of new issues during the referendum campaign and for some time after the Agreement was finally ratified. The stiffening of interest rates in London after mid-1928 did not appreciably affect the price of Australian securities until September, when news was received of the waterside workers’ strike. Even then the price only fell to 97, and by the end of the month had recovered to around 98! or about 5s per cent below the price which would permit an issue at 98.15 Never-

theless the Loan Council was deterred. It had planned a new loan for October, but was not prepared to accept 5 per cent at 973, which would represent a departure from the pattern which had established 98 as the issue price of Commonwealth securities in London. The eve of a referendum campaign, which would make the Commonwealth government the sole borrowing authority for the Federation, was not the time to sanction 14 See, for example, the criticism of E. A. Mann, a Western Australian Independent Nationalist Member of Commonwealth Parliament, CPD, Vol. 118, pp. 3634-43. 15 The prices mentioned here, and which are used below unless specifically described otherwise, are those of Commonwealth 5 per cent securities, with accrued interest, if any, deducted. Quotations from The Economist. (Average monthly prices of Commonwealth 5 per cent securities for the period 1929-32 are listed in Table A-2.) 102

Australia and the London Capital Market, 1927-9 a weakening of the issue price of Commonwealth securities, however small

the fall might be. The November referendum ratified the Financial Agreement by an overwhelming majority, and there remained only the formality of passing a Validation Bill through the Commonwealth Parliament before it became part of the Constitution. Until this was done, however, it was still im-

portant that the Council should not show any sign of weakness. The Validation Bill had to be passed by 30 June 1929.16 and it was conceivable that a deterioration in the terms of new Commonwealth issues before the Bill became law could cause serious embarrassment in official quarters.!7 The price of Commonwealth securities did not improve during Novem-

ber, and by the end of the month a number of states had exhausted their London credits and were already heavily overdrawn. The issue of a new loan was now urgent, but it seemed that it would have to be deferred until January 1929 as the British government planned a large operation for December and there would be no opening for Australia until then. The Loan Council at its first constitutional meeting on 10 January 1929 was uncertain as to the best course to follow. Cable reports from London and New York were confused and not very helpful. Finally, it decided to reduce its overseas programme for the remainder of the financial year by £4m to £18m and to borrow more in Australia. But this still meant that three overseas loans would have to be floated in three or four months and still leave time to convert a large Queensland loan which matured in June. This would have been an ambitious programme, even

under easy market conditions, but in January conditions deteriorated rather than improved. It was clear, as Nivison pointed out, that a lower issue price would have to be accepted if the loan was to have any chance of success, but the Council was still puzzled by the turn of events. New Zealand, it noticed, had recently issued a loan on improved terms despite an enlarged borrowing programme, while Australia was faced with having to pay more after a cut in its programme. It urged, therefore, that Nivison

arrange a loan on the old terms, for it considered that if the first loan raised by the Loan Council under the Financial Agreement was issued at £97.105 the prestige of the Commonwealth and states would be damaged. Eventually Nivison yielded and agreed to underwrite the loan at 98 even

though they realized that they would be left with a large proportion of

the issue. On the other hand, the Governor of the Bank of England, Montagu Norman, was much less sympathetic to the Loan Council's 16 The Financial Agreement operated on a temporary basis between 1 July 1927 and go June 1929, whereafter, if all the constitutional requirements had been fulfilled, it would become a permanent feature subject only to review after 58 years. If the Validation Bill had not been passed by go June, the government would have had

to go through the rigmarole of extending the temporary provisions, as well as incurring acute political embarrassment at home and in London.

17 The government’s majority at the 1928 elections had been reduced from 27 to 11. While in normal circumstances the 11 majority was perfectly safe, the government parties included a number of malcontents, and if they were supported by a number of Western or South Australians, the government could have been in danger of defeat. 103

Australia and the Great Depression domestic difficulties. He strongly urged the Commonwealth Bank to use its influence to prevent the flotation of a loan which would certainly bring

failure. Norman feared that in the event of an issue at 98 the market would become ‘clogged’ with ‘undigested blocks of the Stock’ which would have a ‘depressing effect on the whole Gilt-edged-market’. ‘The Governor’s

concern was certainly exceptional; only under the most serious circumstances would he have interfered in the affairs of a Dominion government and their financial agents. He probably felt that an unsuccessful Commonwealth loan would have an unfavourable effect on the massive British conversion loan planned for early February and make the Bank’s task of maintaining liquidity more difficult. But Norman’s protest was too late; the loan had already been underwritten. As anticipated, the loan was a complete ‘flop’ in so far as cash subscrip-

tions were concerned, the underwriters being left with 84 per cent, but the gilt-edged market did not become clogged, nor did the price of Australian securities suffer much as a result. The new loan fell immediately to a discount of 10s per cent, but recovered within a few days to within 2s 6d of the issue price, and the underwriters were able to clear their holdings without much trouble.

In the Red The one per cent rise in Bank Rate in February checked the outflow of gold from Britain, and for three months the Bank of England was able to add to its holdings. The rise in the rate did not precipitate a fall in the price of Australian securities. Commonwealth ‘fives’ remained between g7 and 974 during February and March, but the Loan Council was not prepared to accept 97 as an issue price and determined to sit tight until conditions improved. In retrospect it can be said that here the Council blundered. If it had adhered to its schedule and raised one or two cash loans before May, even if it had to increase its interest rate to 51 per cent, economic policy during the next two years would have offered many more alternatives. On the other hand, if such a course had been followed, the loss of financial prestige which would have ensued may have had equally serious consequences. The fundamental problem was, of course, the increasing dependence of the economy on overseas capital, and it is pointless to blame the Council for a situation over which it had no control and for lack of foresight in a thoroughly confused situation. Whatever the assessment of the Council’s decision to defer new issues, it is certain that the accumulation of overdrafts which this involved rendered the economy acutely vulnerable to outside pressure, and when such pressure was exerted in the second half of 1929 the financial authorities found that they had little control over the course of events. Limited use of overdraft facilities to prevent unnecessary interruption to public works programmes has its place among prudent financial methods, but the use of such facilities by a number of state governments was far in excess of

prudence. Rather than loan raising preceding expenditure, the habit developed of running up overdrafts which were funded when conditions were favourable and when they were of sufficient size. New South Wales 104

Australia and the London Capital Market, 1927-9 was by far the worst offender. Her balance at the Westminster Bank in London was continually in debit, save for a few weeks immediately after an issue. The Auditor-General explained thus: The procedure followed in providing funds for loan expenditure has undergone a change. A Loan Act is still passed, under which authority is taken to raise a loan for specific works and services, but so long as cash is available in the Treasurer’s General Banking Account, which is largely kept in credit by the credit balances in the Special Deposit Accounts, the General Loan Account

is allowed to run into overdraft and loans are raised only when cash is necessary to keep the General Banking Account in credit or at times when the prospects of the money market are propitious.

This has led to a position in which loan borrowings are made rather with the object of adjusting the Treasurer’s bank balances than in accordance with the requirements of loan expenditure.18

If the loan account had depended on internal financing the consequences

of this procedure would not have been serious; but in fact the account depended almost entirely on overseas sources, and the result was that New South Wales found herself in more embarrassing circumstances than other States.

It is interesting to contrast the Queensland practice with that of New South Wales. During most of the ‘twenties Queensland retained fairly substantial credits in her loan account, and did not spend in anticipation of new issues. Thus at the end of 1929 she still held a credit balance of over £gm in loan account and was able to assist her less prudent neighbours with short-term accommodation during most of 1930. Her public works programme was in consequence not abruptly curtailed as in other states, her level of unemployment was much lower during the early years of the depression, and in general the weight of necessary readjustment was

less severe. The comparatively mild initial impact of the depression in Queensland was not, of course, entirely due to sound methods of public works financing. Sugar and beef prices held up much better than wheat and wool prices, and hence her loss of overseas income was less severe than

in the southern states. Nevertheless, her financial prudence was an important factor, just as the indiscretions of New South Wales rendered the Federation’s most powerful economy the most vulnerable. It will be appreciated, therefore, that New South Wales was not unduly alarmed when its overdraft rose to £3-4m in March and April.19 These two months witnessed no significant change in the prices of Australian securities. Although the Financial Agreement Validation Bill was assented

to in March, the Council determined to see this lean period through. Criticism of Australian government finances had become fashionable in

the London financial press, and a new issue at a substantial discount would only confirm suspicions of weakness. All thoughts of a new issue were, in any case, postponed at the end of April as the Queensland con-

version became the centre of concern. Fortunately this operation was 18 ‘Auditor-General’s Report, 1929-30’, NSWPP, 1930-2, Vol. II, p. 827. 19 ‘Auditor-General’s Report, 1928-9’, NSWPP, 1929-30, Vol. II, p. 11169.

105

Australia and the Great Depression successfully carried through by converting into Commonwealth five per cents at 97, with only 48 per cent being left in the hands of the underwriters.

While the Council waited for the market to digest the Queensland loan, the outflow of gold to New York and the Continent recommenced, interest rates hardened as a further increase in Bank Rate was expected,

and the chance of fresh long-term borrowing at reasonable rates by a country with her financial reputation already tarnished became remote. The price of Australian stock fell to 964 at the end of May, to 96 in June, and to 95 in July. Until mid-1929 it had appeared as though the preceding twelve months had simply been one of those years when a succession of random factors frustrates even the best laid plan. First, there was the limitation imposed by the referendum campaign for the adoption of the Financial Agreement, and subsequently by the passage of the Validation Bill; there was the delay caused by the priority of the British government

in the market; then the increase in Bank Rate when the way at last seemed clear for a number of operations; and, finally, unfavourable publicity throughout the year. By June it had become clear that it was not simply ‘one of those years’. After the half-yearly payments had been made

in June, the combined government overdraft in London amounted to nearly £10m, and for the first time the gravity of the situation became evident to the Loan Council and the Commonwealth as confused messages continued to arrive from London and prospects for a new loan were postponed ever further into the future. Such was the apprehension in London as the City awaited the outcome of the New York stock market bubble, that the High Commissioner cabled in August that: All gilt-edged stocks in London are depressed on persistent withdrawals of gold to Continent, and no one knows why they are taking place or when likely to cease, or whether they will necessitate rise in bank rate. In addition, Commonwealth and States are still suffering from constant criticism coming to English press from Australia, and these are now seriously disturbing the minds of investors.

The price of Commonwealth stock fell further to 94 in August, and in September any remote possibility of a new loan was dashed by the increase in the Bank Rate to 6} per cent, the defeat of the Bruce-Page Government,

and the collapse of the Hatry group in London. The closure of the London money market to Australian long-term borrowing has been traced in some detail because the rapid accumulation of short-term debt in London which followed in the second half of 1929 and in 1930 was the most important single factor in shaping depression policy to mid-1931. The interaction between the pressure this debt exerted

and the instrumentalities of domestic policy formation is an important theme of subsequent chapters. Australia found herself in a much more embarrassing position on the eve of the world depression than other large debtor countries. New Zealand, for example, was able to borrow in London with relative ease to the end of 1929 and into 1930, and was subject

to none of the early Australian difficulties. It will be argued that the 106

Australia and the London Capital Market, 1927-9 policy ‘experiments’ and ‘innovations’ that have been attributed to this period were imposed on Australia because she was forced to come to terms with the situation sooner than other countries, and that her early ‘experiments’ were evidence of the extent of the problem rather than her willingness to face it.

107

VI

Drift D 1929 ruit intointo Depression, The confusion and uncertainty which sprang from the closure of the London loan market was compounded by events within Australia during 1929. Attention was diverted from growing external deflationary pressure by controversial industrial legislation, political instability and a number of bitter and protracted industries disputes. The year opened with hopes high for an early end to the recession which had afflicted the economy since mid-1927, but when the tide of unemployment continued to rise governments groped hopelessly for a solution to a situation which clearly was out of control. The year closed without any progress having been made towards formulation of a coherent policy, and the only positive step taken was the necessary expedient of abandonment of the gold standard. ‘There is Something Wrong Somewhere’ In May 1929 the Prime Minister, $. M. Bruce, addressed an assembly of Commonwealth and state ministers on the serious economic problems of the country which ‘cannot fail to cause anxiety to every thinking citizen’.' In the past, he added, we have experienced periods of depression, but generally they have been of short duration and have disappeared with the return of normal seasons. But the present position suggests that good

seasons alone will not be sufficient to solve our problems and restore prosperity. Recently, he continued, wool and wheat prices have fallen and manufacturing industry suffers from intense overseas competition. Under these influences unemployment has grown throughout Australia, and ‘this check in the progress of our commerce and production is the clearest indication that there is something wrong somewhere in our national economy, which it is our duty to discover and to remedy’.?

Bruce was not in fact calling for an inquiry into the nature of the economy’s ills. His diagnosis and prescription were already prepared: A critical examination of our present position leads inevitably to the conclusion that the basic cause of all the economic troubles of Australia to-day 1‘Conference of Commonwealth and State Ministers’, May 1929, CPP, 1929, Vol. If, Pp. 1425.

2 Ibid.

108

Drift into Depression, 1929 is the high cost of production, the reduction of which is the first step that we must take to bring about a solution of our problems. A nation-wide reduction in our costs of production would effect such a transformation in our industrial and financial position as would enable us not only to absorb our unemployed in useful occupation, but also to pave the way for a progressive increase in our population.

Granted that costs in Australia were comparatively high, but why? Several factors were listed. One was the growth in loan expenditure, particularly

that portion financed by overseas borrowing. Another was the rise in tariff protection, although for obvious political reasons Bruce did not dwell on this subject. A third was the overlapping and duplication of Commonwealth and state administration in many fields of government. An objective observer unfamiliar with the history of the period could be excused for thinking that this last reason had merely been added for completeness, but to Bruce it carried the greatest weight. Indeed, he considered that one particular field of duplication, industrial legislation, was ‘the most important question that we have to consider in relation to the economic position in Australia’.

To be sure, duplication of arbitration powers was responsible for wastage and unnecessary irritation in the settlement of wage claims and disputes, but one cannot believe that it was a major cause of the country’s economic difficulties. Bruce’s real meaning was clear enough. He believed that arbitration in general, and the Commonwealth Court in particular, had resulted in wages being raised to a level beyond which employers were able to pay and also compete successfully with imports. Wage standards and conditions had been determined during periods of prosperity shortly before and after World War I. The arbitration system had been eficient enough when erecting these standards but was unequal to the task of reducing them when conditions were less prosperous without at the same time causing industrial paralysis. Bruce could add weight to his argument by referring to the two current disputes in the timber and coal industries which were dislocating key sectors of the economy. Thus in an effort to improve industrial relations and, implicitly, as a contribution to wage reduction, the federal government proposed to vacate the field of industrial arbitration (except in the shipping and waterside industries) and hand over its power to the states.>5 This, the Prime Minister concluded, ‘will constitute a very real contribution towards that improvement of the position of Australian industry, as a whole, which is perhaps the most imperative requirement of the present position’.® The significance of the Commonwealth’s extraordinary move is that 3 Ibid., p. 1427. 4Ibid., p. 1429. 5 The proposal was in the form of either the statcs accept individual responsibility for arbitration or the states hand over to the Commonwealth all their powers in this field, but as a referendum as recently as 1926 had rejected full Commonwealth control Bruce knew full well that the premiers could not agree to the second alternative. 6 CPP, Vol. II, 1929, p. 1430.

109

Australia and the Great Depression it reflected the political embarrassment’ and confusion of the Bruce-Page Government on the eve of the depression, a confusion which effectively hamstrung policy formation until late in 1929. Two quite separate issues were involved in the proposed abolition of Commonwealth arbitration. First, there was a genuine desire to improve industrial relations and reduce the frequency of industrial stoppages, however ill-advised were the methods it employed. Since 1925, it had fought the problem by the introduction of increasingly tough industrial legislation (in the form of the Peace Officers’ Act, the Crimes Act, the Transport Workers’ Act and the 1928 Arbitration Act) which was designed to discipline militant unions, but the frequency of major disputes continued to rise. By the end of the decade the government was so obsessed with the problem that economic deterioration was equated with worsening industrial relations, so much

so that the rise in unemployment in the first few months of 1929 was attributed to the coal and timber strikes rather than the enforced curtailment of public works expenditure. Second, the move reflected the conservative view that there should be an immediate and substantial fall in real wages. It was, in short, the first

shot in a long war of attrition with the labour movement over the role of wage movements in anti-cyclical policy. Manufacturers had been fighting a losing battle against import competition since the mid-1920s, and

the only way they now saw of maintaining employment was to reduce costs—an expression which had become a euphemism for wage reduction. However, by the May conference of 1929 these two objectives had become

so intertwined that the government was unable to think its way out of the emotional and policy tangle that it found itself in. Abolition of Commonwealth arbitration was the last desperate act of an administration defeated by the immensely complex task of guiding the development of a new and small industrial economy in a fiercely competitive world without adequate control over, or the tools for making, national economic policy.

The Commonwealth’s proposal to modify arbitration arrangements was influenced by continued economic stagnation in the first half of 1929. The unchanging economic climate was more than usually disconcerting, for there were distinct signs at the end of 1928 that the new year would bring a revival in manufacturing activity and a much needed stimulus in

the demand for labour. Hopes of an early recovery were based on the improved condition of the balance of payments. Imports had fallen from the high level of 1926-7 which meant that the intensity of overseas competition was less at the end of 1928 than it had been for some time.’ The liquidity of the banking system improved, adequate reserves of London funds were accumulated, and for the first time in a number of years the trading banks sought new business.9 Seasonal prospects in the eastern 7 Discussed in D. Carboch’s scholarly study of “The Fall of the Bruce-Page Government’ in A. Wildavsky and D. Carboch, Studies in Australian Politics, Melbourne 1958.

8 National Bank, Monthly Summary, November 1928. 9 ATBR, 1928, p. 744; Sydney Morning Herald, ‘Commercial Supplement’, 14 February 1929.

110

7

go, . 80 \ my 8o Drift into Depression, 1929

3 20 Wool prices ] x15 ~ o ~~ 5 10 -— XL Export prices 100

2 ‘ 1) oO © A 40 a" NUS. ° i. 25 60 SN . & a. 60 Dy ‘ ms|

2 Wheat prices aN S 5 4°

20

MJ S DM jJ S DM Jj Ss D

1928 1929 1930

Fig. 7: WOOL, WHEAT AND EXPORT PRICES, MONTHLY, 1928-30

Note: Wool—Commonwealth averages for greasy allotments; wheat—shippers’ and millers’ quotes, Sydney. Sources: Dalgety’s Annual Wool Review; Official Year Book of New South Wales, W. Phillips, ‘Australian Export Prices, 1880-1935’, Economic Record, December 1935.

states were also encouraging and early forecasts suggested that harvest records would be set. It is true that recent trends in wheat and wool prices allowed less room for optimism, but most believed that commodity markets would improve in the new year. Wool prices had fallen during 1928 from an average of 20d to 17d per pound, but Bradford predicted that this trend would shortly be reversed.t° The one bleak spot was the price of wheat which had fallen from 55 6d to 4s 8d per bushel during the year under the influence of mounting American and Canadian stockpiles. This did not, however, significantly dampen the general optimistic tone which was sufficiently strong to push D. M. Lamberton’s index of commercial and industrial share prices from 72 in November 1928 to 77 in February 1929 (June 1939 = 100) .1!

Hopes for revival in 1929 were soon disappointed. The first adverse turn of events was the renewal of serious industrial trouble. At the beginning of February the Timber Workers’ Union ‘called-out’ its members

in protest against the decision of Mr Justice Lukin to restore the 48 hours working week in the timber industry. Forty-four hours had been the standard working week since December 1920 and the union was 10 The Economist, CVII, pp. 1238-9. 11 ‘Security Prices and Yields’, Table 2, Sydney Stock Exchange Official Gazette, 14 July 1958.

111

Australia and the Great Depression understandably incensed by a decision which restored the industrial conditions of the previous decade. The strike lasted for over six months and at times crippled the building industries of Melbourne and Sydney; but the union and the Trades and Labour Council fought a losing battle throughout, for timber merchants were usually able to fill their labour requirements from volunteer workers drawn, in large part, from the ranks of the unemployed.!* ‘Then on 1 March the great coal strike on the northern collieries began after months of negotiation between coal owners, miners and governments ended in deadlock. The coal strike lasted for the best part of twelve months and ranks with the maritime strike of 1890 as the

most bitter and protracted in Australian industrial history. Heavy industry was little affected because coking coal was available from other areas, but the shortage of town gas handicapped a wide section of light industry.

As noted, the strikes diverted government attention from the cause to the symptom of economic contraction. To be sure, they were responsible for dampening business expectations and for some rise in unemployment,

but more fundamental was the trimming of public loan expenditure. ‘There was as yet no significant fall in the volume of expenditure, for governments were content to allow their London overdrafts to rise and were able to raise additional suiiis in the domestic market; but so dependent had the economy become in the late 1920s on rapid growth in the public works programme that a mild fall in expenditure was sufficient to impart a sizeable deflationary effect. Then in April and May the first serious break in wool prices occurred. In these two months the average price for greasy wool at Sydney auctions fell from around 16d to 13d per pound and there was a further fall in wheat prices (see Fig. 7) . It should be stressed, however, that these trends in primary commodity prices had little impact on farm income prior to mid-1929. The fall in wool prices had come at the very end of the selling season and had little

chance to erode the value of the clip. The wool cheque for 1928-9 amounted in the end to £57.1m, which was substantjally more than the 1920s average of £48.3m and only £3.8m less than the record of the previous year.13 The wheat industry was also comparatively unaffected. A large planting followed by an excellent season produced a yield of 160m bushels so that wheat income was £6.4m higher than in 1927-8.14 It was therefore the outlook rather than the immediate situation that was the source of anxiety, and although the government spoke of grave economic

difficulties this meant little to the average man whose income and job were not yet threatened; and to the working class all the puffing and blowing was a new capitalist device to attack its standard of living. Com-

modity prices had, after all, fallen before and borrowing had become difficult without disastrous consequences. To those in the labour move12 Sydney Morning Herald, 7 and 16 March 1929. 13"Annual Wool Review for Australasia for 1928-29’, Dalgety & Co. Ltd, reported in AIBR, 1929, pp. 751-3. 14 Production Bulletin, No. 25, Tables 18 and 27; Commonwealth Year Book, No. 25, p. 167. 112

Drift into Depression, 1929 ment, and many outside it, the current situation was simply another temporary aberration.

Growth of the External Floating Debt The third quarter of the calendar year was (and to some extent still is) a time of seasonal liquidity strain for the banking system. An adverse balance of trade was normally accompanied by a shortage of sterling bills with the absence of wool sales and wheat exports. London funds were depleted and tight domestic credit conditions followed. The banks were well accustomed to this yearly cycle and made adequate provision for it,

but they were in no way prepared for the turn of events in the third quarter of 1929. Within a few weeks the banking position was transformed from one of slack demand for advances and a relatively high level

of London funds for the time of year to one which threatened the solvency of the banks and nation. This dramatic development is illustrated in Tables 16 and 17. Table 16 sets out approximate quarterly figures of merchandise imports and exports for 1929. The adverse turn in the balance of trade was serious enough, but worse was the deterioration in the local and overseas banking position as shown in Table 17. One reason for the liquidity drain which developed in the September

quarter was the lagged increase in imports following the improvement it economic prospects at the end of 1928. But the rise of £2.7m in the third quarter was less than might have been expected and was only a minor factor in explaining the sharp decline in sterling balances. More important was a further fall in export prices which greatly widened the normal September trade deficit. Quantitatively the trade gap accounted for the bulk of the decline, but of equal significance in the long-run was a third factor—the difficulty experienced by all governments in con-

vincing their London bankers that overdrafts should be allowed to increase.

By July and August it was evident that the chance of raising a new Table 16: MERCHANDISE IMPORTS AND EXPORTS, QUARTERLY, 1929

(£m)

Imports Exports Trade balance

March35.1 35.429.1 45-4 —6.0 + 10.0 June September 36.9 37.8 |20.2 December 29.3—17.5 — 7.7 YEAR 145.2 | 124.0 — 21.2

Note: The figures are merely recorded values of imports and exports and do not contain any of the corrections necessary for accurate estimation of the trade balance. These adjustments are unlikely, however, to affect the main movements of the trade balance. Source: Compiled from monthly returns published in AIBR. 113

Australia and the Great Depression Australian long-term loan in London in the foreseeable future was remote.

Sterling was under heavy pressure as speculation in Wall Street approached its peak and tight credit conditions depressed the prices of all stock. It was equally clear that the chance of liquidating government London overdrafts, which had now grown to substantial proportions, was also remote. It was understandable, therefore, that the Westminster Bank ~——the institution holding the bulk of the overdrafts—should resist any undue addition to its ‘frozen’ advances. The result was that an increasing proportion of government interest commitments were financed from the exchange reserves of the trading banks. Table 17: SELECTED BANKING STATISTICS, QUARTERLY, 1929

| (1) (2) (3) (4)

| Advances to Cash to London Surplus gold | deposits ratio deposits ratio funds holdings

| (per cent) (per cent) (£m) (£m)

March| 92.5 | 89.2| |16.5 19.249.6 53.9 32.5 34.3 June September | 98.8 15.7 29.1 34.6 December | 102.6 16.0 20.5 | 29.6 |

Notes, by column: 1 and 2. Excludes the Commonwealth Bank because of difficulty of separating general banking and note issue departments. In any case banking department's figures are best omitted because of special nature of its business. Advances include government securities.

3. Expressed in terms of Australian currency. Balances are those at the end of the quarter rather than averages. 4. ‘Surplus’ gold is the excess held by banks above the 25 per cent minimum statutory requirement for note issue backing which could be exported under emergency conditions.

Source: Compiled from RCMB, Report, Tables 5, 18 and 19.

The Australian banks could not, however, be expected to carry the full load. In any case there was no obligation for them to do so as no formal arrangement existed to supply governments with London cover. The only immediate solution appeared to be to accept the Westminster Bank’s suggestion that the Loan Council seek to issue sterling Treasury bills. The Westminster, which was taking an increasingly tough line with its Australian debtors, made it clear that the overdraft position was ‘full’ and that it would expect some liquidation of overdrafts in the near future. The Council reluctantly accepted the suggestion and tenders were called at the end of August for £5m of bills with a currency of twelve months. When the average price of the best tenders was struck, however, it was found that the interest yield amounted to £6.115 per cent. When this news was cabled to Australia the first reaction was to reject all tenders and hope that the banks would carry overdrafts until market conditions improved, for it was feared that acceptance of such a high rate of interest 114

, Drift into Depression, 1929 would permanently damage the country’s credit. But after consultation with Lord Glendyne, head of Nivison & Co., whose financial word was respected by all governments, the Loan Council accepted the tenders. This procedure was repeated in November. By then total overdrafts had risen to £13.5m and Commonwealth ‘fives’ were selling down to 93. This further fall was especially disheartening because conditions in the City had eased since the New York stock market crash of October. The outflow ot gold to New York and the Continent had ceased and at the end of October the Bank of England was able to reduce its Rate by half a point to 6 per cent. The further fall was due partly to the defeat of the Bruce-Page Government, partly to the announcement of a £30m British conversion loan at 5 per cent, and partly to the signs of distress which the acceptance of short-term credit at £6.115 per cent represented. The new Prime Minister, J. H. Scullin, hastened to assure investors that the Labor government had no plans for financial experimentation and would pursue a policy of economy and prudence.!® This consoled the market a little but not nearly enough to permit a new long-dated issue.1¢ It did, however,

enable the Commonwealth Bank to place another £m at the end of November for the more respectable interest yield of £5.75 6d per cent.17 Table 18: AUSTRALIAN SHORT-TERM DEBT IN LONDON AS AT 31 DECEMBER 1929

Overdrafts at Overdrafts at Treasury Commonwealth Bank Westminster Bank bills Total

£4,503,000 £8,631,000 £10,000,000 £23,134,000 Source: Commonwealth Treasury records.

Despite these two Treasury bill issues overdrafts were not reduced, and by the end of the year the floating debt in London had risen to £23.1m. The distribution of the debt, which proved to be of special significance, is set out in Table 18. Although the Westminster Bank had not yet dishonoured Australian cheques, it made it quite clear that no further latitude would be granted. There was also a possibility that one or two more Treasury bill issues would be made if Australia’s credit remained intact, but possible relief from this source was strictly limited and was, of course, a very temporary expedient. Limited also was the relief that could be obtained from the disposal of gold reserves. ‘The Commonwealth Bank had already begun to ship sovereigns to the Bank of England, but the amount that could be shipped was barely sufficient to liquidate the existing debt. A new long-term issue was, furthermore, completely out of the 15 The Economist, CIX, p. 828. 16 To strengthen the effect of Scullin’s statement sinking-fund cash was used to support

the market supplemented by £250,000 made available by Nivison. However, the main effect of this was to allow dealers to unload, for the funds available were not sufficient to improve prices significantly. 17 The Commonwealth Bank originally suggested that instead of an issue of a specific amount of bills the Loan Council should agree to a continuous supply being made available for sale to discount houses whenever possible. Collins felt, probably cor-

rectly, that if such a practice became generally known it would further impair Australia’s credit standing and the suggestion was rejected. 115

Australia and the Great Depression question with Commonwealth ‘fives’ standing at g1 in December.!® Yet the

Loan Council had to find an average of £2.5m a month to meet interest payments. ‘Ihe desperate struggle to finance these payments, and also to reduce the floating debt, forms the basis of Chapter VII. The Scullin Government Meanwhile, the Bruce-Page Government pressed on with its plans to demolish federal arbitration machinery. There had been no modification in its basic economic diagnosis and the deteriorating London situation received scant attention; indeed the industrial issue appeared to blot all else from the mind. In July Bruce told the Chamber of Manufactures that ‘nothing was contributing to the high cost of production more than the duplication of industrial regulation’, and he estimated its annual cost at £10m19—a figure evidently plucked from the air in an effort to inject much needed substance into the argument. When Parliament reassembled in August an unmodified version of the proposals was brought forward in the form of the Maritime Industries Bill. A fortnight later a number of dissident Nationalist members voted with Labor to defeat the Bill and the government resigned. Shortly after the defeat of the Nationalists the first serious attempt was made to estimate the effect of reduced wool prices and loan expenditure

on national income. The estimate was by J. B. Brigden, at the time Economist to the Overseas Transport Association and one of Australia’s most creative economists in the inter-war years. In an address to the Constitutional Association of New South Wales, he predicted that in 1929-30 ‘the National Income of Australia will be reduced by at least £30,000,000, and that the indirect loss will be another £30,000,000’.2° As current esti-

mates of national income in 1928-9 were around £650m, Brigden was suggesting an income loss of about 10 per cent. He emphasized, however,

that his calculation did not mean that wages would necessarily fall, for this could be obviated by an improvement in national efficiency and an increase in home production relative to imports. It will be noted that Brigden had formulated some concept of a fall in national income in excess of the initial fall in overseas income. In a paper amplifying his original calculation, the mechanism of the foreign trade multiplier was given some consideration. The repercussions of the initial income fall on domestic production were not at all clear to him, but he thought that: Distributors (trade and transport) would suffer first, and as they gain between one-third and one-half of the overseas price, the loss from this cause in Australia could not be less than £13 millions. This £13 millions is now spent largely on Australian goods and services, and its loss would have cumulative effects throughout Australian industry.?1 18 See Table A-2 for average monthly prices of Commonwealth 1945-75 five per cent stock in London, 1929-32. 19 Sydney Morning Herald, 3 July 1929. 20 Ibid., 17 September 1929. 21‘Notes on the Economic Position of Australia, October 1929’, Brigden Papers, NLA 21/5/163.

116

Drift into Depression, 1929 Brigden was undoubtedly groping for the same concept as the one Giblin

was able to articulate in his inaugural lecture as Ritchie Professor of Economics in the University of Melbourne some six months later.?? It would be reading too much into Brigden’s notes to suggest that he anticipated the Giblin formulation, for he possessed a very imperfect idea both of the mechanism of adjustment and of the possible extent of the loss of income. Yet it is worthy of note that he was thinking along these lines at such an early stage, for it illustrates the fact that Australian economists in general were quick to grasp the nature of the problem confronting the country. :

Brigden concluded his remarks to the Constitutional Association with the warning: “The worst thing that could happen to Australian industry

at the present juncture is that the attention of the people should be diverted from the real problem by a series of political wrangles.’?? This is precisely what did happen. The ‘real problem’ was hopelessly obscured as

the nation divided on the industrial issue. Rarely in Australian history has the atmosphere been more electric, for not only was a matter of basic

political principle involved, but also, by implication, the merits of the bitter coal dispute. The struggle on the northern coalfields was now many months old and it was evident that a climax was near. If the nation decided in favour of Labor and the retention of Commonwealth arbitra-

tion, the miners would interpret the result as a moral victory, for the Deputy Labor Leader, E. G. Theodore, had promised that the mines would be open in a fortnight if his party was successful.?4 As the campaign progressed Labor succeeded in shifting attention from the future of the Commonwealth Court to the Nationalists’ motives in seeking the change. The government’s real intention, they claimed, was the reduction of wages and the demolition of the standard of living of the worker.”5 Against the back-drop of growing unemployment, financial stringency and industrial unrest, the claim appeared much more plausible than the stiff academic argument of Labor’s opponents that millions would be

saved and a large part of the nation’s economic ills remedied by the removal of dual industrial control. The landslide defeat of the National-Country Party coalition on 12 October 1929 brought the Labor Party to power for the first time in nearly thirteen years. The change in the political composition of the House of Representatives was as follows:

Old New

Labor 31 46 National 29 14 Country 13 10 Ind. National 2 4

Parliament Parliament

Country Progressive — I 22 L. F. Giblin, Australia, 1930, Melbourne 1930.

23 ‘Notes on the Economic Position ...’, Brigden Papers. 24 Sydney Morning Herald, 7 October 1929. 25 Ibid., 27 and 28 September 1929. 117

Australia and the Great Depression Labor thus gained 15 seats for an overall majority of 17. But there had been no Senate election and the new government was outnumbered 29 to 7 in the upper house. Such was the optimism within the party, however, that few Labor men believed that the Senate would dare frustrate such an overwhelming mandate and risk double dissolution.?@ In retrospect it is clear that the party leaders erred in not seeking a double dissolution at an early date, but their reluctance is understandable in view of Labor’s long absence from power, the exhaustion of party funds after two recent general elections, and the financial difficulties of trade unions in the face of growing unemployment and protracted strike activity.27 In the coming months the Senate was to hamstring legislation to such an

extent that the effective centre of policy formation shifted from the government to the banking system, and the swift implementation of policy which the depression demanded became nearly impossible. It is unnecessary to consider in detail here the composition of the new ministry,"® but a few of its leading members and those responsible for the economy deserve some mention. As has often been remarked elsewhere,

Cabinet was bereft of administrative experience: none of its members had previous experience of national government and only two—E. G. Theodore and J. A. Lyons—of state government. The creative value of long ministerial experience in a world of vast bureaucratic machines 1s an open question, but its absence in the ever-changing understaffed Canberra of the early 1930s was probably a handicap. The Prime Minister and Minister for External Affairs, James Henry Scullin, was one without

previous executive responsibility although he had spent eleven broken years in the national Parliament. A dedicated idealist and deeply respected by members of his party, Scullin’s background was as a party organizer and journalist rather than as a trade union politician. Basically a kindly man who preferred persuasion to the crude bargaining of backroom Labor politics, he nevertheless was able to hold his own in the rough and tumble of the party room when the need arose. A distinguished

debater and able parliamentarian, he won the admiration of all for his honesty and directness.?9 Scullin succeeded Matt Charlton to the leadership of the party after a tussle with Theodore in 1928. His time as Opposition Leader in 1928-9 was, in the words of Warren Denning: the spring-time of [his] political life. In every way he began to realise the hopes and aspirations of his followers. He made them articulate where they had been dumb. His simple, homely sincerity, and his gifted tongue opened new vistas to the Labor movement.30

It is more than usually difficult to come to any firm judgement about 26 See statement by Theodore, Sydney Morning Herald, 16 October 1929. 27L, F. Crisp, Ben Chifley, London 1961, pp. 43-4.

28 For more detailed discussion of the Labor Cabinet of 1929 see Warren Denning. Caucus Crisis, Parramatta 1937; L. F. Crisp, Ben Chifley, and, for some aspects of the personalities involved, J. T. Lang, The Great Bust, Sydney 1962. 29 I have benefited from discussion with Mr J. Robertson of the Royal Military College of Australia on aspects of Scullin’s background. 30 Caucus Crisis, pp. 21-2. 118

Drift into Depression, 1929 Scullin’s brief term: as Prime Minister. It was, of course, a personal disaster: it destroyed his health and wrecked his political career; but the extent to which the sundering of the Labor Party and the capitulation of the government was due to personal failing in the Prime Minister is problematical. Professor Crisp writes that ‘in the event it was abundantly

shown that this quiet, gentle, sincere and idealistic make-up was not nearly tough enough, physically or emotionally, to cope with the tragedy

of the Depression or with his adversaries in the financial and political worlds’.31 This is probably too harsh. It is true that Scullin was insufhciently decisive on a number of occasions and his health deteriorated rapidly during 1930. But he was, as will be seen, in England when the party tore itself to shreds at the end of 1930. Before then he kept it together reasonably well, while after his return in January 1931 there was little left of his party or his government. In any case, there was precious little room for policy initiative as 1930 progressed, for the government was squeezed relentlessly between conservative financial doctrine on the one hand and the need to maintain national solvency on the other, and

it is unlikely that any Labor Prime Minister could have materially altered the course of events.

Undoubtedly the most gifted man in Cabinet was Scullin’s deputy

and Treasurer, Edward Granville Theodore. When he first entered federal

Parliament in 1927 at the age of 43, Theodore left behind an extraordinary record in Queensland government. Born of Rumanian stock and a native of Port Adelaide, much of his early life was spent in the mining districts of South Australia, Broken Hill, Western Australia, and finally Queensland. He was a founder of the Australian Workers’ Union and its president for several years. Entering Queensland Parliament in 1909, he achieved the deputy Labor leadership within four years and then in 1919 was elected Premier at the remarkably early age of 34. Theodore resigned the premiership to contest the federal] elections of 1925, but a seat was denied him until a by-election in 1927 allowed him to contest and win the Sydney industrial seat of Dalley. Although Theodore’s time in office was short and the scope for creative administration limited, it is probable that he was the most able holder of

the Treasury portfolio in Commonwealth history. This view is based more on his outstanding intellect, his imagination and grasp of the wider

issues than on any assessment of his legislative record. His imprint is everywhere evident in Treasury policy papers. Whereas most inter-war Treasurers were content to ‘approve’ a recommendation or otherwise, Theodore examined every clause in detail and commented extensively on any provision that needed alteration or clarification. His financial proposals of 1931 were drafted in his own hand, as was the bulk of his extensive correspondence with Sir Robert Gibson on monetary policy, for he found himself in the unique position of having a firmer theoretical and

practical grasp of the situation than his senior Treasury officials. His grasp of complex legislation was complete and rapidly attained. An 31 Ben Chifley, p. 42.

119

Australia and the Great Depression instance of this has passed into Treasury legend. In mid-1931, after the adoption of the premiers’ plan, Parliament was faced with a massive legislative programme and nearly all of it was Theodore’s responsibility. Indeed, on one occasion time was so pressing that only about two hours were available to digest and prepare the second reading speech for the Debt Conversion Agreement Bill. It was a complex proposal containing

many legal technicalities, yet within this space of time he had fully

absorbed all its ramifications and delivered one of the clearest and most brilliant speeches of its type on record. Theodore’s bent for finance probably original from his interest in mining speculation. He was a shrewd judge of the mining market and was well rewarded for his skill. Politically, however, his mining and other investments were to cost him dearly, for they eventually brought his downfall. Although he resisted intellectual display, the rank-and-file of the labour movement distrusted his sharpness of mind, dominating personality and penchant for capitalist sport, although they did appreciate his ruthlessness, his drive and his courage. His weakness appears to have been that he failed to understand the instincts of men less able than himself. He took no notice of the dissatisfaction and other warning signals around him and made no attempt to accommodate his position to the changed political environment. Thus he remained supremely confident while his party crumbled and was unable to comprehend its final collapse.*? Two other Cabinet members deserve attention, for they were to preside

over the Labor Caucus and the country at a most critical time at the end of 1930 while Scullin was abroad and Theodore temporarily out of the government. The first, James Edward Fenton, was Minister for Customs and Excise and Acting Prime Minister in Scullin’s absence. One of Labor’s

most experienced parliamentarians, having held a federal seat continuously since 1910, Fenton was completely out of his depth at the head of national government. A kindly and sincere man but without the fibre necessary for leadership, he was one of the party’s moderates and was unable to grasp anything other than the strictly orthodox. Fenton’s lieu-

tenant and Acting Treasurer in this vital period was Joseph Aloysius Lyons, otherwise holding the routine posts of Postmaster-General and Minister for Works and Railways. After a distinguished period as Premier of Tasmania between 1923 and 1928, Lyons had the unique experience of immediate elevation to Cabinet after his success in the 1929 elections. In retrospect it is clear that it would have been preferable for Lyons to have spent some time on the back-benches to accustom himself to the differing temper of federal politics, for as 1930 progressed he found himself increasingly at odds with the industrial wing of his party. Had he done so his dramatic step in leaving the government and party in early 1931, which was an important element in the collapse of both, might have been avoided. Of the leadship of these two, Denning justly observed that: Nothing could have been more distressing, than the spectacle of those two kindly men struggling with a situation which to Mr. Fenton was simply beyond 32 Denning, Caucus Crisis, pp. 23-6. 120

Drift into Depression, 1929 the limit of his capacity, and to Mr. Lyons a nightmare, because of the growing divorce in association and spirit from the party and Cabinet to which he belonged . . . 33

The remainder of Cabinet was largely composed of unexceptional moderates who gave it a decidedly right-wing flavour. The majority of Caucus was, on the other hand, in sympathy with the left, and thus from the outset there was a basic cleavage between the two which widened as the need for a positive economic policy grew. There were two exceptions to the moderate composition of Cabinet. The first was the Minister for Health and Repatriation, Frank Anstey, the influential stormy petrel of Labor politics and its most experienced parliamentarian. The other was the Assistant Minister for Industry, J. A. Beasley, who had only been in

Parliament since 1928 but who had been President of the New South Wales Trades and Labour Council for seven years. These two were to lead the militant faction which demanded drastic monetary and banking reform against the party leadership which resisted radical panaceas. The most pressing problem facing the new ministry was the settlement of the coal dispute. It was Labor’s primary election commitment, and it was expected by the miners and indeed the whole labour movement. It was soon found, however, as the previous government had found, that the path of negotiation was thorny, and that threats and trumpeting would not necessarily bring results. Some members of Caucus demanded that legal proceedings be reopened against colliery owner John Brown for failing to observe federal awards, proceedings which had been withdrawn by the Bruce-Page Government. Others believed that the only effective course was for the Commonwealth to seize and work the mines. But the government hoped to win through by negotiation. Then, at the end of November, the New South Wales’ National government decided to act on its Own initiative and reopen the mines at Rothbury with free labour. Previously, New South Wales had legislated to prevent mass picketing. In mid-December miners defied the no-picket order and attempted to prevent the working of Rothbury by an organized mass picket. The result was a dramatic clash between picketers and police during which one man was killed and many others injured. Immediately Beasley threatened to resign unless charges were brought under the Commonwealth Crimes Act against the New South Wales Minister for Mines, R. W. D. Weaver, for his part 1n the clash.34 Beasley’s threat was not carried out when the government failed to respond to his challenge, but after as little as two months in office it was evident that the Caucus rank-and-file was parting company with Cabinet.®

Departure from Gold

The government’s hesitancy in the coal dispute did not extend to its approach to financial difficulties. It set about immediately reducing 33 Ibid., p. 30. 34 Sydney Morning Herald, 21 December 1929. 35 See also censure of the government for its inaction by the Labor Member for Hunter,

R. James, CPD, Vol. 122, pp. 576-80. 7 121

Australia and the Great Depression expenditure and finding ways of increasing revenue. The previous Treasurer’s budget estimates were found to be unduly optimistic. Instead of a surplus of £360,000, Theodore estimated that the old government would have incurred a deficit of £1.2m.°6 To bridge this gap, and to meet

unavoidable additional expenditure, he proposed a drastic curtailment of defence expenditure, which involved abandonment of compulsory military service, and increases in customs and excise duties and income taxation. Although the new tariff schedule comprised some 300 items, the increases were mainly confined to luxury items.37 It was expected that an additional £1.2m would be raised from this source. Income tax was to be increased by imposing a supertax on incomes above £450 for single persons (with the exemption increasing to £600 for a married man with two

children) , which would raise an additional £885,000 in a full year. By these means the Treasurer hoped to budget for a small surplus in 1929-30. Despite this reassessment of the estimates, Theodore’s budget was still

grossly optimistic even assuming no further fall in export income and loan expenditure. He and his government had not yet come to grips with the fact that a substantial fall in national income was inevitable even if commodity prices and loan markets improved immediately; nor were they

aware of the effect this fall would have on the demand for imports and hence on customs collection. The buoyancy of customs receipts in the latter part of 1929 no doubt helped them to evade the issue. The Treasurer

concluded his budget speech by assuring the nation that although the government inherited an empty treasury, and an impaired credit at home and abroad .. . we do not view the future with alarm or pessimism. Australia has wonderful recuperative powers, and a stout hearted industrious community. If we are blessed with good seasons, our troubles will soon disappear, and we shall commence a new era of progress and prosperity.38

These words were part of the balm of the type included in all budget speeches, but they nevertheless reflected a feeling—perhaps no more than a hope—that economic difficulty would soon be swept away with the ex-

pected return of export prices to profitable levels. This is further illustrated by the fact that no downward adjustment was made in the loan estimates.39 ‘These estimates had been reduced by 20 per cent at the August meeting of the Loan Council, but Sir Granville Ryrie saw no prospect of anything like the 1929-30 London loan programme being raised. Presumably the government was not yet prepared to accept the implication of a long closure of the London new issues market. Among the legislative proposals the new government foreshadowed in the Governor-General’s speech was ‘a bill to make better provision for the control of gold reserves in the Commonwealth’.4° The proposed Bill 36 CPD, Vol. 122, p. 111.

37 Tariff Schedule (No. 2) 1929, CPD, Vol. 122, pp. 120-51. 38 CPD, Vol. 122, p. 119. 39 Ibid., pp. 115-16.

40 Ibid., p. 7. 122

Drift into Depression, 1929 was the outcome of a recommendation of the Chairman of the Commonwealth Bank Board, Sir Robert Gibson. The Bank had for some months

been alarmed at the rapid falling away of its sterling balances and the inability of governments to float new loans. The banks had increased their

exchange rates in an attempt to curb the demands of importers, but without success. The rate had crept up from 15s per cent premium in July to 355 per cent in October. To supplement its funds in London the Bank had increased its gold sales to the Bank of England from a normal monthly rate of about £100,000 to £2m in October; and a further increase in the exchange premium was indicated for the immediate future. But the Bank hesitated to take this step. It realized that if the premium was raised above 355 it would exceed gold export point by a sufficiently-wide margin

to encourage extensive shipments. The Bank therefore determined to hold the rate until it had an opportunity of securing control over the gold reserves of the country, so that they could if necessary be used to meet national obligations.*! What the Bank had in mind at this stage was the introduction of legislation along the lines of the British Gold Standard Act of 19254? and the Currency and Bank Notes Act of 1928,43 which would enable it to obtain particulars of gold holdings and if need be to require holders to exchange their gold for notes. It did not envisage any provision which would prevent the free export of gold. It had been planning such an addition to its central banking functions for some time and this was probably suggested by Sir Ernest Harvey in 1927. That the Bank did not envisage anything more is brought out in Gibson’s letter to the Prime Minister, and is worth quoting at some length because it has been subject to misinterpretation in the past. Gibson began by pointing out that because of the decline in export proceeds and London borrowing, the demand for sterling exchange

had pushed the exchange premium to 355 per cent, a rate which was above gold export point. He continued: In view of the situation which I have just outlined a position arises where those who require London credits, and are unable to obtain them through the usual banking channels, may present notes at the Commonwealth Bank, obtain gold against same, and ship it overseas to obtain outside credit. The position which I am now outlining to you is not merely a possibility, but the

actual state of affairs....

My Board is of the opinion that the last resource which should be adopted

would be any course which meant even temporary departure from the 41 New estimates by the Commonwealth Bank in 1929 indicated that gold export point was as low as g1s 6d per cent for sales to England and 20s per cent to the United States.

42 Among the provisions of this Act was a clause which prevented the Bank of England converting notes into gold coin on demand. The minimum quantity which could be converted was a bar containing 400 ounces of fine gold. This provision was designed to economize on the use of gold as a circulating medium.

43 The Currency and Bank Notes Act of 1928 empowered the Bank of England to require any person who held gold valued at more than £10,000 to furnish particulars of his holdings, and to exchange these for notes (if not required for immediate export or industrial purposes) if the Bank so instructed. 123

Australia and the Great Depression operation of the gold standard on the part of Australia; such a measure would reflect most adversely against Australia in respect of oversea credit, and incidentally have a most serious effect upon our abilities to raise loans abroad. As a measure which would very materially help the position in the meantime . .. my Board definitely recommends your Government to consider immedi-

ately the bringing in of legislation on similar lines to that which now exists

and is operating in England, .... . . . such legislation would place the Commonwealth Bank in immediate control of all gold in Australia by whomsoever held; further, it provides for an inconvertible note issue, with modifications as applied to export, and in this respect gold could only be obtained from the Bank in certain form and above certain amounts for such purpose.

With this legislation no one could demand gold against notes for use in Australia, and whilst in itself it could not prevent exportation of gold from Australia it would place the gold in Australia definitely in the control of the

bank. Once placed in this position there would only be one authority in control of the gold in Australia, and presupposing that it became necessary to definitely restrict export of gold the Board is of the opinion that existing legislation under Customs Acts could be used to place the Treasurer of the day as the only authority from whom a licence to export gold could be obtained, and he in turn could delegate such authority to the Bank Board as his Agent.44

The Commonwealth Bank Bill, introduced at the end of November following Gibson’s letter, contained three main provisions. First, it enabled the Commonwealth Bank, after securing the Treasurer’s approval, to require the trading banks to disclose their gold holdings. Second, it enabled the Bank to require gold to be exchanged for Australian notes, also after receiving the Treasurer’s approval. Third, the Treasurer could

prohibit the export of gold after the issue of a proclamation by the

Governor-General in Council. It is not clear when this third clause was added, for it was not part of the Bank’s original request. Sir Robert correctly believed that the position could be controlled by requiring gold to be exchanged for notes, thus preserving the appearance of maintaining

the gold standard. Most probably the third clause was inserted by Theodore to strengthen the Bank’s hand against further rapid deterioration in the level of London funds, for he apparently saw no point in a back-door abandonment of gold. After an unexpectedly difficult passage, particularly in the Senate, the Bill was passed in mid-December. Much of the confusion and uncertainty associated with the Bill’s passage was the Treasurer’s own fault. Had he stated at the outset that the measure went beyond the one originally contemplated by Sir Robert Gibson, giving reasons for the extension, he would have avoided endless muddle-headed sermons on the value of maintaining the gold standard—supported by irrelevant extracts from Keynes, Hawtrey and even Ricardo—and he would also have scotched Opposition 44 Gibson to Scullin, g November 1929. Reprinted in part in E. O. G. Shann and D. B. Copland, The Crisis in Australian Finance 1929 to 1931, Sydney 1931, document 1, but is incorrectly dated and addressed, and is paraphrased in parts. 124

Drift into Depression, 1929 suspicion that the government intended to accumulate gold in the Commonwealth Bank’s Note Issue Department for legal expansion of the note issue. One important amendment which was accepted related to the authority for initiating the prohibition on gold exports. Originally this was to be at the Treasurer’s sole discretion, but the Opposition insisted that this represented political control of the currency and would set a dangerous precedent.*5 Theodore eventually agreed, therefore, that any initiative should originate from the Commonwealth Bank Board. On 17 December, immediately after the Bill became law, Riddle requested Theodore to invoke the clause relating to information about and requisition of gold holdings. ‘Applications are coming to the Bank’, he said, ‘for gold for export in increasing quantities and amounts, and gold is being exported by some of the trading banks.’ But it was not intended at this stage to requisition gold; only accurate information on holdings would be sought. The Bank found that on 25 November, the trading and savings banks between them held slightly more than £18.5m, and if the amount in the Note Issue Department was added the total value of gold held in the country (excluding a negligible amount in the hands of the public) amounted to £38.5m. It was not long before the Bank sought to exercise more complete control. The introduction of the Bank Bill encouraged those who wished

to export gold to do so without delay, and between 25 November and 10 January 1930 holdings were reduced by £2.65m. Gold in the Note Issue Department fell to £18.3m, which was only about £6m in excess of minimum legal requirements. Furthermore, the sterling reserve of the Note

Issue Department in London had fallen to about £10m and urgently needed reinforcement. ‘There were two available alternatives. The Bank

could implement the provision preventing the export of gold; but this would mean unequivocal abandonment of the gold standard, a policy which it had recently and publicly opposed. Or it could simply requisition

all available gold. This would allow it to retain the facade of the gold standard, while its control would be nearly as effective as complete export

prohibition. It therefore chose the latter, with the qualification that the trading banks would be allowed to retain a proportion of their gold to dispose of as they wished. ‘Of the £16.84m of gold held by the trading banks on 10 January, it was agreed that the Note Issue Department should immediately acquire £12m —one-half to be shipped immediately to London to bolster sterling funds and the other to be held in Australia to increase the reserve in excess of minimum legal requirements to £11m. The remainder was to be held by the trading banks as a gesture to the gold standard. There is little doubt that the gold standard was, in fact, abandoned on 14 January 19930, the day Theodore approved the Commonwealth Bank’s request to implement the provision requiring gold to be exchanged for notes. Thereafter, gold could not be imported or exported without restriction. Yet the Common-

wealth Bank still insisted that there had been no change in Australia’s 45 CPD, Vol. 122, pp. 599 ff. 125

Australia and the Great Depression monetary base, and in a report dated 24 January Gibson stated that his Board ‘could not possibly desire to advise any action which would savour of Australia departing from the gold standard’.*6 It may well be that Gibson’s apparent ostrich-like behaviour reflected Jack of understanding of the gold-standard mechanism or refusal to accept

the facts, but it should not be assumed that preservation of the goldstandard myth was tactically unwise. Indeed, the myth—which remained alive until about mid-1930—was of material assistance in lessening the

rate of decline in Australia’s credit abroad and in the government's standing in the local money market. If the situation had been generally appreciated it would have been more difficult to renew London Treasury bills and persuade the Westminster Bank to continue to carry large overdrafts. In short, the Bank’s action may have prevented earlier and sharper deflationary pressure. Interest Rates The furtive abandcnment of gold was, of course, merely the symptom of the sharp decline in London funds and the near exhaustion of sterling

cover to meet government interest payments due abroad. The fall in sterling balances was matched by a similar decline in domestic bank deposits, so that in the December quarter the advance-deposit ratio of the private trading banks exceeded 100 for the first time since the 18gos (see Table 17). The banks were uncertain about how to meet this situation. In similar circumstances in the past they had relied on direct quantitative control of advances, but the new general manager of the Bank of New South Wales, A. C. Davidson, rejected the traditional tools. Indeed, he believed that the whole government-Commonwealth Bank financial policy

was seriously in error and was appalled at the prospect of cutting the currency’s connection with gold. The only course of action that is likely to be effective now, Davidson argued, is to increase rates of interest: As things are at present there is no inducement offered for the building up of the deposits of the trading banks to assist in the present and coming difficulties, and on the other hand there is no general pressure on individual members of the community to assist in checking the demand for accommodation and expenditure beyond our reduced income. With an adequate increas¢: in the rate of interest a stimulus will be applied both individually and collectively to the community to rectify the present position, and it is hoped that

if the increase is made sufficiently large the corrective will act within a

reasonable period, say 6 or 9 months, by which time the rates may be reduced again.47

This was the classical remedy and flowed from Davidson’s study of the new art of central banking. A man of exceptional ability, enormous capacity for work and sound grasp of prevailing economic theory, Alfred Charles Davidson was to exercise an important influence on the course of events during the depression. The geographical diversity of his banking 46 35th Balance Sheet and Directors’ Report of the Commonwealth Bank of Australia, half-year to 31 December 1929. 47 Davidson to Gibson, 28 November 1929, BNSWA. 126

Drift into Depression, 1929 experience was typical of those destined for high office. Born and educated in Brisbane, he joined the ‘Wales’ in 1901 at the age of 16. From Brisbane

he was transferred to head office in Sydney, then to managerial appointments in New Zealand and Perth. In 1925 he left the ‘Wales’ to accept the general managership of the Western Australian Bank and played a leading part in the amalgamation of the latter institution with the ‘Wales’ in 1927. He returned to Sydney in 1928 as chief inspector for New South Wales, and finally succeeded Oscar Lines as general manager early the following year. The best equipped banker of the 1930s, Davidson was under no delusion as to his ability. He had little time for the bulk of his banking colleagues, and he reserved special contempt for the general managers of the Melbourne banks. Only a handful of men won Davidson's admiration, but those who did such as Edward Shann and L. F. Giblin were able to exercise considerable influence over him. He was an inveterate borrower of ideas but once a view was fixed he remained immovable, and

such was the case on the question of interest rates in late 1929. The arguments against an increase in interest rates were impressive. A rise in advance rates would do little to curb the need for credit by im-

porters whose goods had already arrived; nor would it diminish the needs of farmers near the peak of the export season. A rise in deposit rates was unlikely to attract floating balances from abroad. Hence, if the banks

gained deposits they would do so at the expense of other financial institutions within the country. A general lift in rates would merely depress the bond market, and make more difficult and expensive government loan raising for public works expenditure. Further, as the Melbourne banks

pointed out, the Labor government would be armed politically for an attack on the banking system.*®

None of these points made the slightest impression. Davidson was in the midst of his ‘central banking phase’ and was convinced that free and flexible movement of interest rates was the only satisfactory mechanism of adjustment, for he had yet to appreciate that central banking doctrine of the 1920s emerged from a unique set of factors centred around the City of London. The success of his proposal depended, in Davidson’s view, on swift action. If advances were to be restricted rates would have to rise before the major influx of wheat and wool bills early in the new year.*® But the other banks refused to co-operate,®° the Commonwealth Bank regarded 48 E. R. Russell [Chief Inspector for Victoria, Bank of New South Wales] to Davidson, g January 1930, BNSWA. The Melbourne banks were those with head offices in Melbourne and members of the Associated Banks of Victoria, comprising: Bank of Australasia; Commercial Bank of Australia; English, Scottish and Australian Bank; the National Bank of Australasia; and the Union Bank of Australia. 49 Sydney banks to Associated Banks of Victoria, 11 December 1929, BNSWA. Although Davidson usually spoke for the Sydney banks (meaning the ‘Wales’ and the Commercial Banking Co. of Sydney with support, on most issues, from the Queensland

National Bank and the Bank of Adelaide) he was not supported by his Sydney

colleague on this occasion. Cf. J. R. Dryhurst [General Manager of the Commercial Banking Co. of Sydney] to Davidson, 24 December 1929, BNSWA. 50 Russell to Davidson (telegram), g December 1929, BNSWA. | 127

Australia and the Great Depression the suggestion as a breach of prerogative5! and Theodore, when asked to intervene, replied that the matter was one for the banks to settle between themselves. It was Davidson’s first major campaign and he was infuriated that he had made so little impression. He therefore decided to break the banking agreement on carded rates, and at the end of January 1930 the

Bank of New South Wales announced that deposit rates would be increased by one-half of one per cent. Instructions were also issued to increase

advance rates by an average of 125 6d per cent with a minimum of 7 per cent.°* With the further fall in deposits during December and January the Melbourne banks were in no mood to call Davidson’s bluff, and they immediately adjusted their rates to those announced by the ‘Wales’. The economic consequences of this unfortunate episode were relatively small: additional costs were imposed on primary producers at a difficult time, the bond market weakened, and the cost of short-term government finance increased. Its significance is less in its mild deflationary impact than in the light it throws on the way major issues of monetary policy were handled, for the model established in this instance became a common feature of the depression period.

The dearth of monthly or quarterly indicators restricts the scope of detailed analysis, but in summary three general points can be made about the shape of contraction in 1929: (1) Severe deflationary pressure was confined to the last three or four months of the year. Earlier the economy languished under the weight of import competition as it had done since mid-1927, but the steep fall in employment and in private capital expenditure was delayed until AugustSeptember. Most of the increase in unemployment—which rose during the year by about 80,000 to a total of 300,000 or 13 per cent of the work force—occurred in the spring and early summer months. The decline in

business profitability and expectations is reflected in the sharp fall in stock market prices in the last quarter of 1929. From a high point of 76 in July, Lamberton’s industrial share price index fell slowly until September, then more rapidly until it reached 66 in December. Prices of government issues also weakened and average yields increased from 5} to 57 per cent in the last four months of the year. The tempo of economic activity was conditioned by the knowledge that the new year would bring a much greater fall in income and employment.*? 51 Riddle to Davidson, 5 December 1929, BNSWA. Riddle’s reply gave no reason for the Commonwealth Bank Board's rejection, stating simply that it ‘is not at present, at any rate, in accord with the action suggested’. Davidson was furious that he should have been treated with apparent disdain, and was not appeased when Gibson replied further: ‘I have only to say that my Board did not feel called upon to enter into an official discussion on the matters covered by your letter with your institution as an

individual bank’. The fire kindled by this exchange remained alight for the re-

mainder of the depression. 52 Davidson to Russell, 16 January 1930; and Chief Accountant’s Circular Letter, No. 156, 29 January 1930, BNSWA. 53 In December Brigden was forced to conclude that the fall in national income in 1929-30 was likely to be appreciably larger than the £60m he had predicted several months earlier. Sydney Morning Herald, 7 December 1929. 128

Drift into Depression, 1929 (2) Direct deflationary pressure after August-September worked principally through the private sector. There were three sources of difficulty:

(a) the continued heavy rate of importation which further depressed manufacturing industries and severely restricted expenditure on new plant and equipment; (b) the tight monetary policy adopted by the banks in the face of depleted London funds and deposits; and (c) the decline in purchases by the rural sector, due more to expected than to actual fall in income. At this early stage the first of these was of greatest

importance. As noted, expectations of manufacturers were already seriously impaired and they were among the first to react to the prospect of a major fall in national income. They were in large part responsible, therefore, for accelerating the rate of decline in late 1929 before the direct effects of lower export prices and capital inflow were felt. (3) The public sector played a minor part in the early stages of contraction. Indeed, aspects of government policy were, fortuitously, countercyclical in the short-run. The impact of the cessation of long-term borrowing was delayed by the willingness of governments to maintain public works expenditure on the basis of overdraft and Treasury bill finance in London. Public works programmes were trimmed towards the end of 1929, but the degree of adjustment was minor compared with the change in the London borrowing outlook. Further, governments were slow to adjust current expenditure to the reduced level of receipts, so that sub-

stantial deficits were accumulated in 1929-30. These several actions cushioned the impact of international collapse on Australia until mid1930.

129

Vil

Towards the Mobilization Agreement The acquisition by the Commonwealth Bank of the trading banks’ gold reserves was the first step in the mobilization of internal resources to maintain national solvency. The disposal of gold reserves was not, however, sufficient to counteract the effects of the cessation of overseas bor-

rowing and the fall in export income. There were three aspects of the problem. First, imports, ordered in more prosperous times, continued to greatly exceed exports. In the first quarter of 1930, usually a time of seasonal export surplus, imports exceeded merchandise exports by £7.8m.!

Second, a monthly average of £2.5m sterling had to be found to meet government interest obligations, and in the absence of fresh borrowing this could only be financed from diminished export proceeds (or, for a few months, from accumulated sterling reserves) . Third, it was becoming clear that a proportion of the existing short-term debt in London would soon have to be repaid. Imports would, therefore, have to be reduced drastically if all these commitments were to be met; indeed they would have to fall sufficiently to allow an annual trade surplus of at least £30m for interest payments alone. Based on the value of exports in early 1930, they would have to be reduced from a 1929 level of £145m to about £70m.

The measures employed to curtail imports and encourage exports (considered in Chapter VIII) would take time to become effective. Meanwhile, an emergency plan had to be formulated to maintain government external solvency during 1930. There were only two sources of finance:

the sadly-depleted sterling reserves and the receipts of the Australian trading banks. The banks could not, however, be expected to surrender their incoming sterling funds for government use except in dire circumstances. A large proportion of their business was devoted to the buying and selling of sterling exchange. The sale of gold to the Commonwealth

Bank had in reality been a painless operation, for the substitution of interest-bearing deposits for gold had meant an increase in profitability. On the other hand, the transfer of sterling receipts would mean a sharp 1 AIBR, 1930.

130

Towards the Mobilization Agreement fall in profits. This chapter 1s concerned with the mounting pressure from London to reduce short-term indebtedness, which finally forced the Loan

Council and the trading banks to agree on the use of private sterling receipts for government purposes: it was the second stage of the mobilization of sterling resources following the acquisition and export of trading bank gold reserves.

The Collapse of Credit After the easing of the strain on international liquidity following the collapse of the American stock market boom, it was anticipated that Aus-

tralian credit in London would improve sufficiently to allow another short-term tissue. During January negotiations were in progress for a third Treasury bill issue for £5m, which would afford some relief to the Westminster and Commonwealth Banks and also allow further time to correct the trade imbalance. But the bond market confounded expectations and

continued to move against Australian issues. Any hope of an issue was dashed when the price of Commonwealth ‘fives’ slipped from go to 84} during January. This fall was not shared by other colonial stocks, as Ryrie explained in a long cable to Scullin on 23 January 1930: There is nothing in the general financial position to explain this drop, which is clearly due to the special circumstances of Australia. Fear tendency is for further fall. Several circumstances have contributed to the unsatisfactory position. Notice is being taken of budget deficits, of fall in value of exports, of industrial troubles, of falling off in migration and of unemployment. Moreover, of late it has been seriously questioned in various circles whether Australia will continue to pay her interest bill and this is quite a new thing in

Australian experience. .

Scullin hastened to assure the market that the Loan Council had every intention of meeting all interest obligations promptly, so that prices firmed to around go for a few weeks. Nevertheless, suspicion was aroused and there was now no chance of a new bill issue. It had also become plain that any such issue could not be repaid from current income and that a funding loan was a remote possibility. The shelving of the Treasury bill negotiations brought an immediate

reaction from the Loan Council’s two principal creditors in London. In the absence of any assistance, the Commonwealth Bank feared the rapid exhaustion of all reserves and eventual default. It pointed out that, considering all possible sources of London funds, there would be a shortage in relation to government obligations before 30 June 1930, and that it therefore was only able to finance until 31 March those governments which banked with it.? To bridge the gap the Loan Council would have to raise an additional £10m in London by June, and even so the Bank would still be drained of sterling. As a further source of relief, it suggested

that the British government be approached to postpone the half-yearly 2 The Commonwealth Bank was the London banker for the Commonwealth, South Australian, and Tasmanian governments; the Westminster Bank for New South Wales, Victoria, and Western Australia; and the Bank of England for Queensland. 131

Australia and the Great Depression payment of £2.77m due on 31 March under the War Debt Funding Agreement. The Westminster Bank was also alarmed at having to provide sub-

stantial accommodation in addition to the £9.75m it had reluctantly provided at the beginning of February. It stressed that it could no longer

agree to unrestricted increases in overdrafts. The Bank would not yet place an absolute limit on overdrafts, but in future it would expect to participate in the proceeds of any loan or Treasury bill issues and in gold shipments. A conference between the Commonwealth and the trading banks was

hastily convened early in February to determine the extent to which the latter were prepared to contribute to government requirements. In outlining the gravity of the situation, Theodore pointed out that £13m would be required prior to 30 June. Part of this could be provided by further gold exports but the trading banks were the only other source of sterling funds. The implication was plain: the banks must assist or allow governments to default. Tactically, however, the banks held the upper hand and would not agree to provide such ad hoc assistance or to the establishment of an organized exchange pool. Although no detailed record of the conference was kept, it is reasonably certain that the banks demanded drastic reductions in wages and in government expenditure as a quid pro quo for any large-scale assistance. As the government would contemplate no such bargain, the only sum that the banks were prepared to find was £2.95m for reduction of Westminster Bank overdrafts‘—to be repaid either by the end of October or from the proceeds of the first London loan, whichever occurred first.

In the Hands of the Bank of England As a result of this rebuff, the search for possible sources of relief was extended. The Commonwealth government reluctantly decided to follow Sir Robert Gibson’s suggestion to approach the Chancellor of the Exchequer for temporary deferment of the March war debt payment. The Chancellor referred the whole matter for the consideration and report of the Governor of the Bank of England. Following sound banking principles, the Governor wanted to know much more about the financial condition of the prospective debtor before submitting his recommendation. What would be the total value of the 1929-30 wool and wheat exports? What proportion of these had yet to be sold? What plan was to be implemented to rectify the position in the long-run? If the Bank was satisfied that everything was being done in Australia to meet the emergency, it stated that it would be prepared to help find £25m for the Loan 3A quid pro quo along these lines was discussed in Davidson to C. V. Wren [Chairman of the Associated Banks of Victoria], 11 February 1930, BNSWA. Davidson suggested that the banks urge ‘the appointment of a Committee or Commission under the Chairmanship of Sir Robert Gibson, composed of two or three men who will take into consideration the serious economic position in Australia and fix a new Federal basic wage at say £1 or 30/- per week less than at present’. +The actual sum of £2.95m was arrived at by negotiation after the conference. Cf. memorandum by H. J. Sheehan, ‘Financing Overseas Obligations’, 21 March 1930, BNSWA.

132

Towards the Mobilization Agreement Council (the sum necessary to meet government commitments up to 31 January 1931)5 in addition to recommending postponement of the war debt payment. The question on policy could only be answered in general terms and it was impossible to predict the final value of wool and wheat sales, but the Bank of England was dissatisfied with the Commonwealth’s statement. It felt that the government was not being sufficiently frank: what precisely, it asked the Commonwealth Bank, was the Loan Council’s borrowing policy? Were the foreshadowed tariff increases (see pp. 140-145) of a temporary or permanent character? How was the £25m to be repaid and for how long would it be required?* These supplementary questions were

equally incapable of precise answers, and the vague and inconclusive information that was supplied to the Bank was the best that could be provided. In its attitude the Bank of England appears to have been unduly suspicious and its offer of accommodation appears to have been motivated primarily by a desire to maintain parity in the Anglo-Australian rate of exchange. It was not at ease in dealing with governments, particu-

larly Labor governments, and preferred to negotiate through central banks. Its suspicions were aggravated by the proposed reform of the Commonwealth Bank (see pp. 172-6); details of the Bill were not yet known, but a substantial section of the Labor Party was in favour of ‘political control’ of the note issue. Matters were made more difficult when the Westminster Bank strengthened its demand at the end of March for a reduction in overdrafts; and at the same time the Commonwealth

Bank declared that it could not guarantee to carry London overdrafts up to £15m for the remainder of the year. ‘The Bank of England’s decision was, therefore, cleferred until these matters were cleared up. Meanwhile, the £2.77m war debt payment was made with exchange and credit made available by the Commonwealth Bank. As an immediate decision on Australia’s requirements in London was no longer necessary, the Bank of England renewed its efforts to determine the precise nature of the country’s exchange problem, so that a plan of general assistance could be formulated. The co-operation and support of the Commonwealth Bank was increasingly sought. The Deputy Governor,

Sir Ernest Harvey, set out the Bank’s attitude and requirements in a cable to Gibson on 7 April: We here are genuinely anxious to try and find suitable means whereby Australia may be helped to overcome present difficulties. Full consideration is being given to the matter but at present are seriously handicapped by lack of full authoritative information. It is important we should have before us most complete particulars available both of immediate specific proposals and

of any general plan for righting situation over a period of time... . 5 In estimating that £25m would be needed for the remainder of 1930, it was assumed

that existing overdrafts would be allowed to stand and Treasury bills would be renewed when they fell due. 6It is not entirely clear whether the Bank of England intended to provide the £25m from its own sources or to underwrite an Australian loan for this amount. The latter is more likely. 133

Australia and the Great Depression Sir Ernest continued by suggesting that: Having regard to seriousness and complicated nature of difficulties to be surmounted might it not be well if some person or persons fully informed regarding all aspects of the matter, banking, economic and financial, could come here as soon as possible to consider with us best method of dealing with the situation?

This was an extraordinary proposal, for the governments were already well represented in London. Each had its own establishment experienced in financial negotiation. ‘The Commonwealth and Loan Council representative, J. R. Collins, knew all the facts and was an experienced and tough negotiator. The Commonwealth Bank’s London manager, J. Scott, was also an able representative who was fully abreast of the situation. How, then, could an additional emissary do more than had already been done? In all probability this was not a serious proposal. ‘The Bank may already have been thinking in terms of sending its own representative to Australia,

but was not yet prepared to be so forthright. By proposing a visit to London, the Bank may have been able to secure for one of its number an invitation to Australia without appearing to obtrude into domestic affairs.

The Commonwealth Bank did not, however, rise to the bait. The matter was deferred for a few weeks while Harvey advised on the provisions of the Central Reserve Bank Bill, and while the implications of the drastic tariff increases were absorbed. Then on 7 May the question was reopened in no uncertain terms. After complaining that the Bank had been unable to come to an adequate understanding of the position, and that the government’s intentions seemed inadequate, Harvey continued: One solid fact is that Australia will require to raise overseas very large sums indeed this year and next. We do not see clearly what concerted plan there is for remedying situation and making such operations possible. We sincerely desire to see Australia’s position righted but neither our present authority nor present information enables us to reach any definite conclusions. We should value your personal opinion on what action we could helpfully take. To indicate what is passing in our minds but in no way to exclude any other suggestion which may occur to you we have considered the following alternative(s].

a) We could stand aside altogether and await developments. b) We could confer with a special intermediary sent here privately by Commonwealth Government with complete information on all aspects and a considered picture of the future. c) We could perhaps ourselves send privately an intermediary to Australia if invited to do so and if he would be taken into full confidence.

It seems that the Bank of England was particularly concerned about Australia’s failure to conform to the rules of the gold standard. She had exported a considerable proportion of her gold reserves yet had made no attempt to contract her note issue. Nor did there appear to be any other proposals to tackle the basic problem of relatively high costs of produc-

tion. Until costs were brought into line with those in other countries, 134

Towards the Mobilization Agreement Australia’s balance of payment problem would recur. The tariff measures and the proposed wheat bounty (see pp. 146-54) were considered to be inadequate because they were not addressed to the basic problem. ‘Thus, so it seemed to the Bank, Australia needed guidance from a more experienced

hand. |

In a lengthy cabled reply, Sir Robert Gibson was in no doubt that the best course would be for the Bank of England to send a representative to

Australia. But how best to proceed? The Bank of England wanted to avoid as far as possible any suggestion that it was interfering in Australia’s own affairs, and the Commonwealth Bank also wished to avoid any risk of antagonizing the government by seeming to dictate economic policy. Also, Sir Robert was in a delicate position personally: within a few weeks his

reappointment as a bank director came up for consideration. As he put it: ‘Relations between Board and Government harmonious but no real confidence and co-operation exist.’ He urged Harvey, therefore, to approach the government through the High Commissioner. The Bank of England was not at all happy about doing so, but eventually agreed. ‘The man selected was Sir Otto Niemeyer, a man with extensive financial and banking experience,’ who had joined the British Treasury in 1906 and who had been Controller of Finance for six years, during which time he was a member of the Financial Committee of the League of Nations. Niemeyer transferred to the Bank of England in 1927, concentrating on central banking procedures and problems of national finance. Both Gibson

and Harvey must have been surprised when, within a week, Scullin indicated that he would welcome Sir Otto’s visit, on the conditions of full disclosure and co-operation which the Bank of England had stipulated. Meanwhile, an improvement in security prices in London to around 93 at the end of March encouraged the government to believe that it might be possible to raise a new cash loan in the not too distant future. Before this could be seriously contemplated, however, a small Queensland loan of £3.8m which matured on 1 July had to be dealt with. Nivison & Co. suggested that a short-dated Commonwealth loan for £6m at 6 per cent could be placed about the middle of April, the bulk of the proceeds to be used to redeem the Queensland loan. Conversion applications were also to be invited. In view of the negotiations that were proceeding with the Bank of England, however, Ryrie felt that Montagu Norman should be fully informed. Ryrie was reluctant to involve the Bank of England for he knew that there would be an inevitable delay and that Nivison was anxious to come onto the market the following week. Nevertheless, a week's postponement for consultation was arranged. During this week the Bank urged that, for the time being, Australia refrain from entering the

market for new money and that the proposed issue be limited to the amount of the maturing loan. As the Loan Council had not entered the market for more than a year, the loan was in the nature of an experiment. 7 The only other name mentioned was Sir Bertram Hornsby, Governor of the National

Bank of Egypt. The Bank of England clearly preferred their own man, and there was some doubt about the availability of Sir Bertram. 135

Australia and the Great Depression If the conversion was successful, the Bank argued, there would be a good chance ot a more substantial cash loan later on; but if a loan of £6m was attempted and failure resulted the market could be closed indefinitely tor a net advantage of little more than £2m. The Loan Council agreed, therefore, that the loan be confined to the lesser amount. After wrangling over the terms of the issue, it was decided to float in the name of Queens-

land at 97 for 53 per cent with a currency of 4-6 years. London had strongly pressed that the loan be made in the name of the Commonwealth and at 6 per cent so that success would be assured. The Loan Council objected, however, that acceptance in the name of the Commonwealth at 6 per cent would seriously damage its market prestige, and even acceptance of 54 per cent should be associated with Queensland’s name rather than the Commonwealth’s. Only after a series of strongly-worded cables were the final terms reluctantly agreed to by London. The general expectation in the City that the loan would ‘flop’ proved, however, to be without foundation. When the issue was made at the end of April, only 28 per cent was left with the underwriters which, in the circumstances, was a heartening result. Furthermore, 40 per cent of total subscriptions were in the form of cash applications. Thereafter, however, stock prices fell again to around 85 and the anticipated cash issue could not be made. This episode illustrates further the unfortunate consequences of timid acceptance by the Loan Council of over-cautious financial advice. It cannot, of course, be assumed that a substantial cash loan, even if offered at 6 per cent, would have received the same measure of support as the modest Queensland conversion loan. But if Nivison & Co. were prepared, on their own initiative, to underwrite a loan which included an element of cash the chances must have been moderately good. A new loan would certainly not have solved Australia’s problems but it would have eased the pressure

emanating from London for governments to adopt strict deflationary policies.

The Agreement

Further consideration by the Bank of England of Australia’s credit requirements was postponed pending the Niemeyer visit. Any decision by the Bank to arrange accommodation for the Loan Council would depend

on Niemeyer’s report, which could not be expected for at least three months. Until then Australia would have to fend for herself. The task of maintaining solvency in the interim was formidable. The short-term debt in London had remained reasonably steady since April, but at the end of June £5m of Treasury bills matured and a large half-yearly interest bill had to be met. Further, with Commonwealth stock priced to yield almost 6 per cent renewal of the Treasury bills would be a difficult and expensive task.

The position was aggravated by the tough line taken by the Westminster Bank. ‘The government had hoped that the Westminster would stretch a point and agree to an increase in overdrafts equal to the June-

July interest payments. This hope was based on the expectation that the announcement of the Niemeyer visit would have a salutary effect on 136

Towards the Mobilization Agreement Australia’s credit standing. When approached, however, the Bank would not consider extending any further accommodation; moreover, it expected a ‘substantial reduction’ of overdrafts and stated further that it would view with great dissatisfaction relief to the market without relief to itself. In

other words, if sufficient funds could be found to repay the maturing Treasury bills funds could also be found to reduce overdrafts.

The announcement of the Niemeyer visit on 19 June had no appreciable effect on Australia’s credit standing, and the Commonwealth Bank had no alternative than to provide funds to redeem the maturing Treasury bills. Because of the stand taken by the Westminster Bank, it had

also to provide for interest due at the end of the month amounting to £6.3m. These payments drastically reduced the Commonwealth Bank's liquid assets in London which fell from £15.9m on 26 June to £5.2m on 17 July. Fortunately the Bank was partly able to replenish its funds by rediscounting the bills which were issued to it for redeeming the old bills,®

but it was manifest that the Bank could not repeat the operation. Either complete exchange control or a working arrangement with the trading banks was imperative.

Since the bankers’ conference in February at which Theodore’s proposed voluntary exchange pool was unceremoniously rejected, the government increasingly favoured complete and compulsory exchange control in

the hands of the Commonwealth Bank.® Centralized exchange control was, indeed, favoured by a number of Melbourne banks, for they believed that only complete control would enable parity with sterling to be maintained, an objective which was valued more highly than the preservation of the independence of the banks in the exchange market (see p. 162). The Sydney banks, on the other hand, led by A. C. Davidson, were above all

determined to maintain the independence of the private banks, and to achieve this in the present circumstances would require the sacrifice of principle and a measure of co-operation with the Loan Council. The alternative, they believed, would amount to a step towards the Labor Party’s objective of the nationalization of banking, credit and exchange. In a memorandum submitted to the Commonwealth Bank in June,'® Davidson outlined a scheme for the formation of a voluntary exchange pool, the principles of which were adopted by the Loan Council in August as the Mobilization Agreement. At a bankers’ conference held in mid-July to consider these proposals, Davidson was able to convert the Melbourne banks to his point of view. The scheme was submitted for formal approval to a sub-committee of 8 The rate of rediscount amounted to 33 per cent, a much lower price than it was previously thought Australia could command. As recently as mid-June Sir Ernest Harvey predicted that 6} per cent at least would have to be paid, and it was on this advice that the market was not approached. An issue of £10m in bills would almost certainly have been made if the Loan Council had realized that a rate of 4 per cent or better was a real possibility. 9 A number of banks had in fact relented and sold large parcels of exchange to the

Loan Council below carded rates. 10 A, C. Davidson, ‘Confidential Memorandum re Exchange Position’, 11 June 1990, BNSWA.

137

Australia and the Great Depression the Loan Council (comprising J. H. Scullin, E. J. Hogan and B. S. B. Stevens) and was accepted in principle. ‘The banks did not let the meeting pass, however, without expressing strong views on government financial policy. They were particularly concerned about the volume of loan expenditure, for whenever a new domestic loan was placed on the market

bank deposits shrank appreciably requiring further restriction of advances. Unless loan expenditures were reduced, therefore, they claimed that they would be unable to assist governments in their ordinary overdraft requirements. Further, they argued for a reduction in government revenue expenditure and emphasized that the exchange scheme did not imply automatic bank provision of accommodation to finance the exchange purchases—this would be the subject of separate negotiation. There is no evidence to suggest that the reduction of government revenue and loan expenditure was made a condition of the scheme. There may have been verbal assurances that reductions in expenditure would be made, and in December Davidson claimed that the scheme was accepted by the banks ‘on the distinct understanding that the Loan Council and the Governments represented therein would pursue sound policies in public finance’;11 but there were no conditions incorporated into the scheme made binding on governments. The banks did, however, take full advantage of their strong position to bring pressure to bear on government policy. The Mobilization Agreement was ratified by the Loan Council early in August and commenced operation on 1 September. The banks were to provide £3m per month from their receipts of London exchange.’? Each bank’s quota was to be determined from returns supplied confidentially to the Commonwealth Bank in proportion to its total sterling receipts for the month. The Agreement was not made binding, and any party could withdraw after one month’s notice; but despite the difficulties experienced in the first few months it remained in operation until replaced by wartime exchange control in 1939.13 The rate of exchange to be charged was the carded rate (less a slight discount) in operation at the time of the transaction. In accepting the scheme, the banks’ principal concern was that it would lead to competition for London funds and to the development of an outside market. They urged, therefore, that every means be employed to encourage exporters and other sellers of exchange to deal directly with the banks. In announcing the scheme, the Prime Minister appealed to exchange dealers to co-operate with the banks in the national interest, and the Governor of the Commonwealth Bank asked the large pastoral and wheat exporters to use the established channels. But these appeals were of little avail, and an ‘open’ market developed soon after the Agreement commenced (see p. 160). 11 Davidson to Riddle, 17 December 1930, BNSWA. 12 Despite increases in the exchange rate in December-January 1930-1, the annual requirement of £36m proved to be a slight overestimate. 13 In January 1931 the Australian Bank of Commerce notified that it wished to termnate its participation in the Agreement, but before it finally withdrew it was absorbed by the Bank of New South Wales. 138

Towards the Mobilization Agreement Although the.Agreement provided the means for financing current public obligations in London, it left untouched the problem of the floating debt. By the end of August this debt had risen to £38.4m or 42 per cent of the value of exports in 1930. But the principal worry was the distribution of the debt rather than its size. The Commonwealth Bank had, as shown in Table 19, taken up all the increase in the debt since Table 19: AUSTRALIAN SHORT-TERM DEBT IN LONDON AS AT 3I AUGUST 1930

Overdrafts at Overdrafts at Bills in Bills with Commonwealth Bank = Westminster Bank the market trading banks Total

£20,373,000 £5,030,000 £10,000,000 £2,950,000 £38,353,000 Source: Commonwealth Treasury records.

December 1929 and had also reduced the outstanding overdraft at the Westminster Bank (cf. Table 18). Nevertheless, £15m was outside the control of Australian institutions; but unlike the situation at the end of 1929 no further source of sterling remained to be utilized except for the small amount of gold remaining for note issue backing. If the country wished to remain nominally solvent she would need to throw herself onto the mercy of the London money market. The main troublespot was the £10m in Treasury bills—half of which matured on 2 September and the remainder on 31 December. Renewal depended on the market’s judgement of the condition of Australian finance, so that London implicitly exerted

strong pressure in favour of the adoption of an orthodox deflationary policy. In essence, the events of the next twelve months comprise the story of the squeezing of government economic and financial policy between this pressure from London on one side, and from the Australian

banks on the other, until acceptance of the principles of the premiers’ plan was inevitable.

139

Vill

The Balance of Payments and Devaluation The long Christmas and New Year parliamentary recess of 1929-30 afforded the Scullin Government its first opportunity since assuming office to examine seriously the economic and financial emergency it had inherited. The pre-Christmas session of only fifteen sitting days was of necessity confined to emergency legislation such as the revision of the estimates and the amending Commonwealth Bank Act, and to routine executive matters necessary for the continuation of government during the recess. There had been no time to introduce any of the policy measures foreshadowed in the Governor-General’s speech; the character of Labor's policy had yet to emerge. It did not take long for the administration to appreciate that the heavy

adverse trade balance was the most urgent problem that it had to deal with, for the growing trade deficit was primarily responsible for the deterioration in Australia’s international credit rating and was also giving

rise to speculation that the country would be forced to default on interest payments due abroad. When Parliament reassembled in mid-March, Scullin emphasized that: The position demands that we should take the most stringent measures to rectify the trade balance. Thus, our immediate problem is to bring about a decrease of imports and an increase in the volume of exportable products, for which a demand exists.1

This chapter will examine, first, the measures adopted to reduce the level of imports; second, the policies designed to increase the quantum of ex-

ports; and, third, the effect of the adverse trade balance and the exhaustion of sterling reserves on the Anglo-Australian rate of exchange. Throughout it should be recognized that the government had no previous experience in balance of payments regulation, for as explained in Chapter IV this was the sole prerogative of the banking system before 1930. The Tariff Wall Since the Harvester Award of 1907 the Australian standard of living 1CPD, Vol. 123, p. 27, ministerial statement of 12 March 1930. 140

The Balance of Payments and Devaluation had been closely linked with the principle of tariff protection, and increased protection had for many years been an important plank in the platform of the Labor Party. During the 1920s Labor argued that the Bruce-Page tariff increases were inadequate, a view which was strengthened by the stagnation in manufacturing employment at the end of the decade. It was natural, therefore, that the new government should seize on the tariff as the panacea for the country’s present difficulties. It seemed the most effective way to reduce imports quickly and to minimize further increases in unemployment. The revised tariff schedule which was announced on g April was not, however, regarded as part of Labor’s permanent fiscal programme,’ but

rather as a national emergency measure to be reviewed as soon as the payments deficit had been eliminated. It was not specifically designed to stimulate the demand for labour, although Scullin hoped that it would do so incidentally.2 Combined with increases in customs duties, the government intended to prohibit the importation of some goods and ration others. The various proposals were classified under four general headings: 1. an absolute prohibition on the importation of a selected list of items; 2. a partial import prohibition, with power to ration up to 50 per cent of 1929 Imports;

3. the imposition of heavy surcharge duties on goods which, because of administrative difficulties, did not lend themselves to rationing; 4. a combination of rationing and surcharge duty: the restriction of imports up to 50 per cent of 1929 importation, and the imposition of surcharge on imported articles.4

Despite the severity of these changes they were only expected to cut imports by £10-13m, although the total saving was estimated to amount to £40m after the effects of declining national income and exchange restrictions were added.5 Even if these estimates proved correct and export

prices remained at current levels, the payments deficit would not be bridged. In February-March 1930 imports were arriving at an annual rate of £120m, so that an import reduction of at least £;0m was necessary. These measures effected an important change in popular appreciation of the economic state of the nation. Up to the time of their introduction,

the gravity and nature of the situation were not generally understood. Most people associated the trade depression with the prevalence of industrial disturbances and with the oft-repeated assertion that the country had over-borrowed, but the connection between ‘over-borrowing’ and the balance of payments remained imperfectly understood. Moreover, 2 Introductory statement by F. M. Forde (Acting Minister for Trade and Customs) on the Customs Tariff schedule (No. 2), CPD, Vol. 123, p. 820. 3 Ibid., pp. 826-7.

4Ibid. Some of the items on the prohibited list were cheese, confectionery, soap, luxury textiles, agricultural implements, electrical appliances, wireless receivers, iron and steel beams and Portland cement. Rationed were ale and beer, spirits, cigarettes, matches, and locomotives. 5 CPD, Vol. 123, p. 829. 141

Australia and the Great Depression knowledge of the impending exhaustion of sterling funds was confined to a handful of bankers and experts. A flight of capital may well have been precipitated if the facts had been widely known. The severity of import restrictions and tariff increases highlighted the payments crisis. The word ‘crisis’ itself passed from exceptional to general use. ‘The whole tenor of press and parliamentary comment changed from academic concern about

the trend of events to genuine alarm at the possible outcome. Every person in the community was affected by these measures in one way or another, whereas previously the unemployed and the pastoral industry had borne the brunt of contraction. Through a fall in the consumption of imported goods, the fall in income was to be spread more widely. The word ‘sacrifice’, which was shortly to become a euphemism for a conflicting range of economic policies, became a stock-in-trade in remedies for the depression. The general awareness of the disaster was not, however, matched by an equal awareness of the causes of the depression, and as national anxiety increased the debate on remedial policy was hopelessly confused by a passion which destroyed the early attempt to keep commentary on ‘Australian’ or non-party lines. These emergency measures were given a surprisingly fair public reception. Allowing for sectional criticism by rural interests and importers, the general reaction was that the government had shown courage and determination in facing a very difficult position.6 Moreover, this view was endorsed by those in Britain who recognized that the correction of Australia’s position would mean some sacrifices for British export industries.’ A good deal of potential criticism was scotched by the success of the government in appealing to manufacturers of import replacements not to seize the opportunity and increase prices. An example was an informal arrangement made between the government and manufacturers of agricultural machinery, whereby the former agreed to prohibit competitive

imports in return for an undertaking by manufacturers to reduce list prices by 5 per cent.8 As the main objection of the National Party was

that costs would rise,® the barb of their attack was drawn. Most of the banks regretfully agreed that the government had little alternative. ‘They would have preferred to have been able to control the position by exchange rationing rather than admit that the traditional tools of monetary policy were inadequate, but most tacitly conceded that direct action was now imperative.?° 6 Age, 5 April 1930. 7 Sydney Morning Herald, 7 April 1930. 8 CPD, Vol. 123, p. 826; statement by H. V. McKay Pty Ltd, Age, 5 April 1930.

9H. S. Gullett (Deputy Leader of the Federal Opposition) in opening the case against the tariff and prohibition proposals, CPD, Vol. 123, pp. 831-5. 10 At the February conference between the government and the banks, the latter agreed that special duties on luxuries and non-essentials were necessary. Davidson seems to have been the only one to have disagreed strongly, claiming that he could have effected a sufficient reduction in imports by exchange rationing and devaluation. A. C. Davidson, ‘Memo on Customs Policy’ (sent to E. G. Theodore, J. G. Latham,

B. S. B. Stevens et al.); Theodore to Davidson, 9 April 1930 and Davidson to Theodore, 11 April 1930, BNSWA. 142

The Balance of Payments and Devaluation The April emergency measures were followed by no fewer than six new schedules between June and December 1930, each one building the tariff wall even higher. Some of the new duties were designed to encourage import replacement and the demand for labour rather than to adjust the trade balance. The new schedules were, however, hastily written and ill-

designed to achieve the end desired. With the trade union clamour for all-round protection, there was no time to judge a case on its merits. Only a small proportion of the increases passed through the normal procedure of Tariff Board investigation and recommendation,'! and there appears to have been truth in the Opposition’s claim that the schedules were rewritten using a standard rate of increase.!2 The rapidity and extent of tariff building illustrates the inflexibility of Labor’s economic policy, and also suggests that a state of near panic had been reached. The instincts of many Labor men were isolationist: the depression had been caused by forces beyond Australia’s control and the country must, it was argued, isolate itself from the international economy as far as possible. Moreover, the tariff was the most convenient instrument available to the government. A new schedule simply had to be tabled in Parliament to become effective immediately. To a government which was constantly hamstrung by a hostile Senate, the simplicity of this procedure was a haven. It is not dificult to understand, therefore, the government’s constant resort to the tariff when it was being urged to reduce costs and wages—a course which it found intolerable. The first of the tariff schedules designed mainly for protective purposes, which increased duties on 114 items and sub-items, was announced

on 16 June 1930.13 In support of his schedule Forde argued, rather prematurely, that government tariff policy had already benefited local

industry and employment, and that a number of important overseas manufacturers had been induced to establish branches in Australia.’ In fact, a significant diversion of demand to the local product did not occur until 1931 (see p. 302). Further increased duties were announced

with the 1930-1 budget in mid-July, again at the end of July, and in November and December.!® A primage duty of 2.5 per cent on all imports

was added in July for revenue purposes, and in November the rate was increased to 4 per cent.16 The final tariff revision prior to the adoption of the premiers’ plan took place in March 1931, but the increases on this occasion were moderate.17 None of the schedules introduced between November 1929 and March 1931 was considered in detail by Parliament

until April 1931. The large volume of urgent business was mainly 11‘Annual Report of the Tariff Board for 1929-30’, CPP, 1929-31, Vol. III, pp. 1225-7. 12 CPD, Vol. 125, pp. 4186-7.

13 Tariff Schedule (No. 1) 1930, CPD, Vol. 125, p. 3000. 14 Some of the companies cited were Julius Kaiser & Co., Holeproof Hosiery & Co., Godfrey Phillips Ltd, H. J. Heinz & Co., and Goodyear Tyre and Rubber Co. Ibid., - 3003-4.

15 Tarif Schedule (Nos. 2, 3, 4 and 5) 1930, CPD, Vol. 125, pp. 3906-7; Vol. 126, pp. 4749-51; Vol. 127, pp. 64-9, 912-16. 16 CPD, Vol. 125, pp. 3906-7; Vol. 127, pp. 64-9. 17 Tariff Schedule (No. 1) 1931, CPD, Vol. 128, pp. 682-744.

, 143

Australia and the Great Depression

25° . .

Index: 1919-20 = 100

British Preferential Tariff

200 L-

100 | |

200 /100 tc ! , 150

259 .

General tariff

1928 1930 1932 1934 1936 1938

Fig. 8: LEVEL OF THE AUSTRALIAN TARIFF, 1927-8 to 1938-9

Source: A, YT. Carmody, ‘The Level of the Australian Tariff’, Yorkshire Bulletin, January 1952.

responsible for the delay, but there was also a reluctance to submit the schedules to detailed scrutiny. When they were eventually debated in committee, many anomalies and absurdities were revealed,!® but the length of time that had elapsed since their imposition had already resulted in distortion and the growth of vested interests.

Although the Scullin tariff policy was rough and unselective, it did go a long way towards achieving its desired objectives. According to Carmody’s index, BPT rates increased by 36 per cent in 1929-30 and by another 29 per cent in 1930-1, as indicated in Fig. 8, and if the effect of 18E.g. although 98 per cent of biscuits consumed in Australia were manufactured locally, and the value of imports in 1929-30 only amounted to £37,000, the importation of biscuits was prohibited under the April 1930 schedule, CPD, Vol. 129, pp. 1954-61. Also CPD, Vol. 128, pp. 1397, 1418; Vol. 129, pp. 1900 ff. 144

| The Balance of Payments and Devaluation devaluation is added the average cost of imports from Britain had by mid-1931 more than doubled in two years. This was more than sufficient to eliminate import competition in a wide range of industries. Despite the

fall in national product, therefore, the demand for domestic manufactures tended to stabilize in 1931, and in the following year the mild stimulus provided by an expansion in output of import replacements was sufficient to initiate more general recovery. Moreover, by December 1930 imports had been reduced to an annual rate of £70m, a rate which earlier in the year was expected to achieve balance of payments equili-

brium. In the meantime, however, export prices had slumped even further, and the sharp exchange increases of January 1931 had added appreciably to the government's external interest bill. ‘The achievement of a trade surplus sufficient to finance overseas interest obligations from current income was, therefore, deferred until the first half of 1931 when imports fell to an annual rate of about £55m (see ‘Table 20). Table 20: MERCHANDISE IMPORTS AND EXPORTS, QUARTERLY, 1930 AND I93I

(£m)

Imports Exports Trade balance

March25.4 33.023.6 24.2 —1.8 —8.8 June September 21.5 17.0 —4.5

1930:

December 19.6 26.3 +6.7

YEAR 99.5 QI.1 —8.4

March11.7 15.121.4 24.1 +9.7 +8.0 June September 13.3 16.0 +2.7

1931:

December 14.4 29.9 +15.5

YEAR 55-5 QI.4 +35.9 Note: As for Table 16. All values are expressed in Australian currency. Source: As for Table 16.

Expanding Exports The other side of the Scullin trade policy was designed to increase the volume of exports. Even allowing for the special difficulties of the early 1930s and the low supply elasticities in most of the large export industries, this aspect of policy was poorly conceived and haphazardly executed. Effort was concentrated almost entirely on the wheat industry, although random support was received by such lesser industries as wine-growing and gold-mining. 145

Australia and the Great Depression (a) ‘Grow More Wheat’ One of the great human tragedies of the depression was the plight of wheat-growers throughout Australia: they had to contend with a world parity price well below production costs for most of the 1930s, and were the victims of an inexperienced and naive government and made the plaything of a politically ambitious Commonwealth Bank. Their troubles began with the ‘grow more wheat’ campaign of 1930. Despite high prices in the early and mid-1ggos, few wheat-growers were financially equipped to meet the ravages of the depression. As noted in Chapter III, rapid expansion of production was encouraged by high post-war prices, by easy credit facilities provided by government authorities, and by the use of greatly improved mechanical appliances. Thus, in the period 1920-9, almost 6m acres were added to the area under wheat cultivation. But this new area was won at a high capital cost: high land values, labour costs and expensive machinery involved farmers in heavy mortgage and hire-purchase commitments. In many instances farmers entered into obligations beyond those they could reasonably hope to meet, even if prices had remained profitable; in others, credit was provided on unrealistically stringent terms which most farmers could not fulfil. Well before the price slump of 1930, therefore, many were complaining that they could not meet their obligations and were at the mercy of their creditors. When Federal Cabinet met in the first few weeks of 1930 to consider ways and means of increasing export production, the wheat industry was the obvious candidate to be called on first to serve the national interest. Prices were still comparatively high at around 5s per bushel, for an expected deficiency in the Canadian wheat crop had pushed prices up in the second half of 1929 (sec Fig. 7) . Further, it was the only large industry which could expand production sufficiently rapidly to assist the balance of payments within a year or two.

It was recognized, however, that farmers could not be expected to increase output and undertake additional financial obligations at the behest of the government without some form of guarantee. As Scullin explained to a conference of state Ministers of Agriculture in February, ‘If the wheat-growers of Australia are prepared to increase the area under

cultivation they are entitled to some guarantee in the matter of price’.’ The government proposed to link the payment of a guaranteed price with the formation of a compulsory Commonwealth-wide pool. If the states and the farmers agreed to the scheme, the Commonwealth would guarantee to growers 4s per bushel at country railway sidings for the 1930-1 crop, a guarantee which was equivalent to 4s 8d per bushel. The Commonwealth Wheat Pool would be administered by separate pools in each state under the central control of an Australian Wheat Board. If adopted, the scheme would be binding for three years, but the guaranteed price only stood for one year. Legislation would be necessary in the Com-

monwealth, and also in those states where statutory powers were not 19 ‘Report of a Conference convened by the Hon. Parker Maloney, M.P., Minister for Markets and Transport, and held at Canberra to discuss proposals for a Commonwealth Compulsory Wheat Pool’, 18-19 February 1930, p. 5, unprinted parliamentary paper, NLA. 146

The Balance of Payments and Devaluation already in existence to enable the state boards to be constituted. Final ratification of the scheme would depend on the result of a ballot of wheatgrowers at which a two-thirds majority in each state would be necessary.?°

The February conference strongly endorsed both the proposed price guarantee and the compulsory pool. Wheat-growers’ representatives were particularly pleased that at last some order and co-ordination would be brought to the marketing of Australian wheat. —TThe Commonwealth,

therefore, embarked on the ‘grow more wheat’ campaign with every reason to be confident about its ultimate success. During the FebruaryApril planting season a vigorous campaign was conducted through the rural press, radio, and state extension services, and financial institutions were urged to assist the farmer to break new land. It was made plain that the nation’s financial honour largely depended on the farmers’ successful co-operation, and, as many ‘cockeys’ were ex-servicemen, the appeal to patriotism was especially well directed. The campaign, aided by excellent autumn rainfalls, was a great success: no less than 18m acres were planted, which was gm acres more than the record planting of 1929. Thus, production could be expected to exceed by more than 50 per cent the poor harvest of the previous year if average rainfall followed. The government’s plan to reorganize wheat marketing and to underwrite the ‘grow more wheat’ campaign was embodied in the Wheat Marketing Bill introduced into Parliament early in April. Despite its Senate minority, the government did not expect the Bill to encounter any inordinate difficulties, for at the February conference its plan had been endorsed by both National and Labor state governments. Furthermore, the Commonwealth Bank had agreed to arrange finance, although it did not hesitate to make clear that it disapproved of the payment of a guaranteed price in view of world wheat over-supply and the inability of Australia to have any effect on price.2! With two minor qualifications, the Country Party members of the Opposition also supported the Bill. The first of these related to the distribution between the states of any loss made by

the Board. The Bill provided that any loss would be shared equally

between the Commonwealth and the states, and that between the states the loss would be divided in proportion to gross production. Country Party members for Western and South Australian electorates claimed that, as the main purpose of the guarantee was to ensure increased production to assist the balance of payments in the national interest, any loss should be borne by the whole community: in short, the Commonwealth should bear the whole of any loss.22 In the second place, members 20 Ibid.

21 Gibson to Scullin, 1 April 1930. In this letter the Bank stated that it would seek the co-operation of the trading banks in financing the guarantee. If they agreed, funds would be provided by overdraft accommodation in the ordinary way. If they refused, the Commonwealth Bank would find finance itself, but it would involve the government in an issue of Treasury bills, part of which the Bank would attempt to dispose of to the other banks. It should be noted that at this stage the issue of Treasury bills had not yet become a normal feature of government finance. 22 E.g. second reading speeches of W. M. Nairn, P. G. Stewart, Thomas Paterson and Earle Page, CPD, Vol. 124, pp. 2062 ff., 2201 ff., 1902 ff., and 1991 ff.

147

Australia and the Great Depression for the large wheat-growing states objected to the absolute control which the Australian Wheat Board would have in the regulation of the home price for wheat. If the Board decided to finance losses made on the export trade by raising the home price above export parity, states with a high

proportion of exports to total production, such as Western and South Australia, would suffer as compared to those with a lower proportion. Bearing in mind that because of constitutional limitations the finances of

the state boards would be kept separately, and that there could be no inter-state differences in the home price decided on by the Australian Board, Queensland would be in a very much better position than, say, Western Australia, if this method of finance was to be used. Thus, the Country Party in the states with a high proportion of exports urged that the Bill be amended to prevent the Board from using this method of finance, or even from having the power to fix home price.?8 The Nationalists did not object to the payment of a guaranteed price,

but they strongly opposed the principle of a compulsory pool. They argued that the two matters were entirely separate and should be dealt with separately, and that the present Bill be withdrawn and a Bounty Bill substituted. They saw three main objections to a compulsory pool: it represented part of the Labor Party’s platform of socialization; pools in general were inherently bureaucratic and inefficient; and it abrogated the principle of freedom of action.*4 The first of these arguments was unconvincing because the boards were to be administered by representatives of the wheat-growers, not by the government, and the experience of voluntary pools, which it claimed were inefficient, did not provide a valid standard of comparison. Furthermore, wheat-growers would have an opportunity to reject the scheme if they saw fit. Even so, the government would have been well advised to separate the two elements of the Bill as

the Opposition wanted, for they were indeed distinct. Presumably it gambled on the Nationalists being unwilling to risk the political consequences of defeating the price guarantee; but its gamble misfired, and in the long-run Labor was the one to raise the ire of the wheat-growing community. After a lengthy debate in the Senate, the Bill was eventually defeated in early July at the second reading stage by the narrow majority of 15-12. The Country Party again supported the Bill, but such was the weakness of the government in the Senate that even this support was not sufficient to enable it to out-vote the Nationalists.

With the defeat of the Wheat Marketing Bill, the question of alternative means of support for the industry was temporarily deferred. During July and August the government was preoccupied with budget balancing and with the formidable task of impressing Sir Otto Niemeyer with its financial integrity. It was important to avoid additional commitments for the time being, and as wheat prices had not yet fallen to the levels which made assistance imperative it adopted a ‘wait and see’ policy. It did not have long to wait. The collapse of prices during September 23 CPD, Vol. 124, pp. 1820-1. 24 Second reading speech of J. G. Latham, CPD, Vol. 123, pp. 1420 ff.

148

The Balance of Payments and Devaluation and October placed farmers in an intolerable position. Many of them had strained their resources to the limit to increase their sowing area. Now with prices well below costs of production,*® the greater his area under crop the greater would be the farmer’s loss. At first the government

was inclined to wait and hope that an increase in the exchange rate would provide the farmer with a sufficient bonus, but the increase from £106.25 6d to £108.10s in October in no way compensated for the collapse of prices. Finally, November saw the reconvening of the conference of state Ministers for Agriculture and representatives of the wheat-growers which had formulated the original guaranteed price and compulsory pool scheme.

In considering the nature and extent of assistance to be afforded the industry, the alternatives which the conference could discuss were limited by the deterioration in government finance. Sir Robert Gibson had made

it plain in a letter to Scullin on 15 August that additional commitments could not be financed, even if the recipient was as deserving as the wheat industry.?6 The conference had, therefore, to concern itself mainly with self-nancing proposals. After a lengthy and at times acrimonious debate, three alternatives were suggested. The principal recommendation was that a sales tax of £7.4s per ton be imposed on flour sold for local purposes, which would yield an estimated dividend of 7.2d per bushel for the farmer. If this was unacceptable, the government should guarantee 35 per bushel to the grower, although it was not stated how this was to be financed. Finally, if the previous two were rejected, the government could

fix a price of 4s gd per bushel for wheat sold locally, and distribute the profits in the same way as the proceeds of the flour tax.?7

Cabinet found none of these acceptable.28 The tax on flour was rejected because it was thought that the price of bread would be increased by 1d or 2d a loaf, which would be an unjust burden on the unemployed. Cabinet was determined that the whole community share in the cost of

assisting the farmer. The guaranteed price of 3s per bushel was not feasible because of the refusal of the Commonwealth Bank to support such a scheme. The fixed price for local wheat was not considered because 25 Estimates of average costs of production are notoriously hazardous. Costs varied considerably from one farmer to another, mainly because of differences in efficiency. Other important factors were distance from the rail-head, methods of cultivation, area under crop, soil conditions and interest obligations. Nevertheless, a number of estimates of cost of production have been made in various states. In New South Wales, for example, the director of marketing estimated that the average cost in 1928-9 (including the farmers’ own labour) was 3s 113d per bushel on an average yield of 17.9 bushels per acre. A committee of farmers and producers in May 1931 estimated that the average cost would be 4s o$d per bushel at country sidings for the 1931-2 season (on the basis of a 12-bushel yield, and allowing £250 for the farmers’ own labour). The director of agriculture in New South Wales calculated that the average cost in 1928-9 (excluding the farmers’ own labour) was 35 9d per bushel on unfallowed land, and 3s 2$d on fallowed land. See discussion in New South Wales Year Book, 1930-31, pp. 219-21, and also estimates of Royal Commission

on the Wheat Industry (see pp. 340-1). 26 Reaffirmed in Gibson to Fenton, 23 September 1990. 27 Sydney Morning Herald, 13 November 1990. 28 Cabinet decision announced by F. M. Forde, ibid., 15 November 1930.

149

Australia and the Great Depression the Commonwealth did not have the power to determine prices, and in any case it was open to the same objections as the tax on flour. In the absence of any concrete scheme, the only thing left was an increase in the exchange rate. It believed that if the rate could be increased to 120, the problem would be solved. Thus, the government would use its influence on the banks to achieve this end: The proposal that exchange should be allowed to take its natural course in the interests of our export trade is one which is under the control of the banks, but the Government has had this matter under consideration, and is taking all possible steps to improve the position.?9

Besides pressing the Commonwealth Bank to reconsider its attitude

towards the exchange rate, the government urged it to liberalize its advance policy for the coming wheat season. The banks were accustomed

to lending up to 80 per cent of the value of the harvest to growers and pools pending sale of the grain. As such advances were usually liquidated

within three or four months, the banks could afford to advance a high proportion of value with little risk. In view of the parlous condition of the industry, the government asked the Commonwealth Bank, as representing the banking community, to advance 2s 6d per bushel f.o.b. for the 1930-1 season.3® This would at least enable farmers to carry on: to purchase grain, fertilizer, fuel and other necessities for the following sowing season. It would, however, have meant an advance of 100 per cent

on the current market price, and the Bank refused the request. Gibson claimed that assistance for farmers was a government responsibility, and the banks were not at liberty to endanger the stability of their institutions by agreeing to such a request. They would, however, do everything ‘within

the limits of prudent banking’. Early in December the Bank announced that it was prepared to advance 2s per bushel f.o.b., which was about 80 per cent of market price, which was equivalent to an average of 15 5d at country sidings. The refusal of the Bank to alter its decision so incensed the government that it lost all semblance of judgement and political acumen. Bent on revenge, it attempted to blackmail the Bank into agreeing to its demands; but so clumsy were its tactics that Gibson had no difficulty in parrying the thrust. Instead, the Bank scored freely from the government and weakened still further its ability to resist the conservative economic policy

which was being foisted on it. The government calculated that if a request for assistance was endorsed by all parties, the Bank would not dare to refuse. It also calculated that the Opposition parties would not oppose an assistance Bill in view of the unquestionable needs of the industry. A Bill to guarantee the farmer 3s f.o.b. was, therefore, hastily drafted, and introduced into Parliament in the last days before the Christmas recess. The Bill guaranteed the Bank against any loss incurred under payment of the guarantee, but the Bank’s approval had not yet been 29 Ibid.

30 CPD, Vol. 127, p. 1424.

150

The Balance of Payments and Devaluation secured. The minister in charge of the Bill, F. M. Forde (in the absence abroad of Parker Maloney) explained that: Although the representations made to the Commonwealth Bank . . . to grant additional assistance to the wheat-growers, were not successful, it is felt that if this request is backed by honourable members of all parties . . . the bank will be prepared to make the necessary advances.3!

On 12 December, the day the Bill was introduced, a letter was sent to the Bank asking if it would be willing to finance the guarantee. Gibson replied that the Bank was unable to find the necessary money, but that it would be willing to finance a guarantee price of 25 6d per bushel. This letter was received in sufficient time for the Bank’s decision to be made known during the second reading stage, but its contents were not disclosed. The government was determined to stake everything on its original plan. After an all-night session in the House of Representatives and an extended sitting of the Senate to rush it through before the Christmas recess, the Wheat Advances Bill was passed substantially intact on 18 December. The government was again supported by the Country Party; indeed, every member representing wheat-growing constituencies had become a militant

proponent of an increase in the exchange rate or the granting of direct

assistance, or both. The Nationalists opposed the Bill on technical grounds. In the first place, they argued, the passing of the Bill would mark the first occasion in federal parliamentary history when the expenditure of a certain sum of money would be authorized without the source of finance being known. Moreover, Parliament was committing itself to the expenditure of an unknown sum, which would depend on the future price of wheat.32 But they did not press these arguments in the Senate. Perhaps they were confident—it is possible that they already knew—that

the Bank would not agree to finance the Bill, even if the government received the support of a majority of the Senate. As soon as the Bill was passed, Fenton wrote urgently to Gibson urging the Bank to reconsider its decision to finance a guaranteed price of only 25 6d per bushel. While the industry awaited the decision, marketing was brought to a standstill during the crucial months of December and January when harvesting and storage were in full swing and farmers received

their advances in exchange for storage vouchers. The passage of the Wheat Advances Bill brought a halt to all this, and added more weight to the farmers’ burden of difficulties. In a circular letter to clients, the Lindley Walker Wheat Co. complained that: The Wheat Trade at the present time is enveloped in a maze of mystery and Jost in an environment of wonderment at the Wheat Advances Act, which has caused a suspension of trade throughout Australia .... No one is quite certain of the possibilities or intentions contained in the... Act, since its provisions are very elastic—its objectives somewhat obscure— whilst its application seems impossible of achievement.33 31 Ibid., p. 1425. 32 Ibid., pp. 1488-9. 33 Letter dated 22 December 1930, BNSWA. 151

Australia and the Great Depression The Bank’s final decision was delayed until 17 January, when it declared that it could not depart from its original decision to finance a guaranteed price not exceeding 2s 6d per bushel. Not only did the Bank have insufficient funds, but there were doubts as to the legality of the Act. The Bank’s legal adviser, R. G. Menzies, was of the opinion that the payment of a guaranteed price (less certain expenses which would vary from one state to another depending on the distance of the rail-head from the

nearest port) would infringe the inter-state trade provision of the Con-

stitution (Section 92), as the guarantee could not be construed as a bounty and it did not fulfil the condition that a uniform price be charged throughout the Commonwealth. This second refusal rendered the Act a dead letter and farmers were advised to proceed with marketing in the normal way.** After twelve months nothing tangible had yet been done for the farmer whose condition was now parlous. Despite the increase in the exchange rate during

January, wheat prices had fallen further during the several weeks of suspended marketing, and by the end of the month were down to 2s 2d per bushel. The government had only one alternative—to raise a special wheat industry assistance loan. But it would be several months before such a loan could be floated, and the farmer needed immediate finance to enable him to proceed with planting for the 1931-2 season. An urgent conference was convened on 1g January in an attempt to bridge the shortterm problem, and as a result the Bank agreed to increase its maximum advance to 25 4d per bushel, subject to the right to reduce this advance in accordance with any f.o.b. price fall. In effect the Bank had agreed to increase its rate of advance from 8o to 100 per cent. As negotiations for a wheat industry loan became increasingly involved in the wider question of government finance, consideration of these negotia-

tions is best deferred (see pp. 240-1). Once again, however, the government’s plan came to nothing and the only assistance farmers received in 1930-1 was a number of special grants made by state institutions to relieve

necessitous cases and the benefit of moratorium legislation. ‘The whole episode was a ghastly bungle from start to finish. Although the Commonwealth Bank was sympathetic to the plight of farmers, it was not prepared to sacrifice its principles of orthodox finance and insisted on using the criterion of an ordinary commercial bank; and the government, for its part, was equally doctrinaire in its original marketing proposals and tactically naive in its subsequent handling of policy. The implacable gulf that emerged between the Bank and the ministry was eventually to destroy much more than assistance to wheat-growers.

Despite the failure of the plan to stabilize the wheat industry, the ‘grow more wheat’ campaign was at least partly successful in assisting the

balance of payments. The record planting was followed by excellent autumn and spring rains in practically all the major wheat-growing districts (including large areas of South Australia which had _ suffered drought conditions in the previous three seasons), with the result that 34 Sydney Morning Herald, 20 January 1931. 152

The Balance of Payments and Devaluation the total harvest of 213m bushels easily eclipsed the previous record set in 1915-16.%5 Thus, despite the fall in price, wheat and flour export income rose by £3.3m to £18.3m in 1930-1 compared with the previous year.%6 The increase in gross wheat income was of course accompanied by an even greater increase in costs, but from the viewpoint of external payments the industry did assist to some extent the maintenance of national solvency. (b) Wine Export Bounty The wine industry had been one of the most

important rural activities to come within the ambit of the Commonwealth’s agricultural diversification programme in the 1920s. The industry

had made steady progress prior to the early ’twenties, but its continued growth was hampered by the limitations of the local market. Australians were not large wine consumers and the fortified product was mainly regarded as the quickest and cheapest way to oblivion. Moreover, the export trade to Britain had little chance of real success against the competition of the vastly superior Spanish and Portuguese wines. Although there were large untilled areas in Australia suitable for viticulture, prospects for rapid expansion were bleak. In 1924 an export bounty of 4s per gallon on fortified wines was introduced to foster expansion in the industry. As this was a generous payment, the effect on exports was immediate. Wine exports increased from im gallons in 1923-4 (7 per cent of production) to 3.8m gallons in 1927-8

(22 per cent of production), but subsequently fell to 2.2m gallons in 1927-8 or 14 per cent of output.3? During the late 1920s the bounty was

reduced in stages to 1s per gallon following an increase in the British Preferential Tariff in favour of Australian wine.38

In April 1930 the Scullin Government increased the wine export bounty to 15 gd per gallon to ease difficulties which had developed in the

export trade itself and also to assist the balance of payments.3® The difficulties in the industry were caused by an expansion in exports after 1924 1n excess of the British demand for Australian wine, so that stocks accumulated in Britain which were subsequently disposed of by brokers

at ‘slaughter’ prices.4° This ruined many exporters and growers and severely damaged the name of the Australian product. Following the experience of over-supply in 1927-8, a Wine Overseas Marketing Board was established in 1928 to prevent a repetition of these events. However, it was some time before surplus stocks were disposed of and in the interim

many growers were unable to clear costs. The additional bounty was

intended to prevent any further fall in exports which had declined sharply since 1927-8, and to enable growers at least to cover their costs of production. The extra bounty was to be financed by an increase of 55 per 35 Production Bulletin, No. 25, Table 1532. 36 Commonwealth Year Book, No. 25, pp. 167-8. 37 Ibid., No. 21, pp. 707-8; No. 25, p. 662. 38 CPD, Vol. 123, p. 12532.

39 F. M. Forde in his second reading speech on the Wine Export Bounty Bill, CPD, Vol. 123, pp. 1252-7. Originally it was intended to pay an additional 6d per gallon, but the bounty was eventually increased to 9d as a result of extensive pressure by the industry, Sydney Morning Herald, 22 and 24 March 1930. 40 CPD, Vol. 123, pp. 1254-6, 1351-5.

153

Australia and the Great Depression gallon in excise duty on fortifying spirit. Thus, the export trade was to be subsidized by local consumers in a manner similar to the Paterson

butter scheme. As a new and comparatively untried industry, the wine trade was not expected to contribute significantly to the solution of the balance of pay-

ments problem; but by increasing the bounty the government hoped to stabilize exports during the critical period and encouraged long-run expansion. This was achieved. During the worst years of the depression, exports remained above gm gallons and in the early recovery years increased to 3m gallons. Export income increased from £500,000 in 1930-1

(0.5 per cent of total exports) to £900,000 in 1931-2 (0.8 per cent of total exports) , and remained in the region of £800,000 for the remainder of the early recovery period.*! (c) Gold-Mining Bonus ‘The gold-mining industry was not originally among those selected to assist in the solution of the payments crisis. At first sight this is surprising in view of a reasonably high supply elasticity,

the increase in the real value of gold, the acute shortage of sterling exchange and heavy pressure by the industry to provide direct assistance. But a decision was delayed until late in 1930, by which time the need for balance of payments relief was less urgent. The delay was perhaps due to uncertainty as to the ability of the industry to benefit from assistance in view of the steep decline in production in the 1920s, and also to the reluctance of the Labor Party to encourage an industry in which employment conditions were notoriously unhealthy.*” Nevertheless, a Bounty Bill was eventually introduced in December 1930 to bolster exchange earnings and to relieve unemployment.# A bonus of £1 per fine ounce was to be paid in 1931 on production in excess of the 1928-30 average. However, the exchange depreciation of January 1931 provided, in effect, a bonus slightly in excess of £1 so that the previous legislation was rendered largely superfluous. ‘The bounty was reduced to

10s in the Financial Emergency Act of 1931,44 and subsequent changes were linked to variations in the exchange rate.45 But the continued rise in the price of gold made even the reduced rate of bounty unnecessary and it was effectively abandoned in 1932.*6 The rapid increase in the price of gold led to a boom in the industry in the 1930s. Production and employment expanded rapidly, and the balance of payment benefited in no small way from the increase in gold 41 Commonwealth Year Book, No. 28, p. 740. 42 There is no concrete evidence to indicate that these were the reasons for the delay, but they are strongly suggested by the tenor of the debate of the Gold Bounty Bill, CPD, Vol. 127, pp. 1234-47, 1260-6. 43 Ibid., pp. 1235-8. 44 The full bounty was paid for the first six months of 1931. 45 For every 3 percentage points variation in the exchange rate, the bounty was to be altered by 15 per fine ounce, so that when the rate of exchange fell from 130 to 125 in December 1931 the bounty was increased to 115. 46 The Financial Emergency Act of 1932 provided that no bounty would be paid unless the mint price of fine gold in Australia fell below £5.10s per ounce, whereas in fact the price increased from £7 in 1932 to £9 in 1938.

154

The Balance of Payments and Devaluation

130

120

110

100

1929 1930 1931 Fig. 9: ANGLO-AUSTRALIAN EXCHANGE RATE, 1926-31

Note: Buying rate for telegraphic transfers expressed in Australian currency for £100 sterling.

Source: Finance Bulletin, No. 25, Table 78. , exports and the investment of overseas capital in the industry. Production increased from 470,000 fine ounces in 1930 to 1.6m in 1938, and value of production from £2m to £14m.47 Employment in gold-mining grew from 10,700 in 1930 to 29,400 in 1938.48 The importance of this expansion for the balance of payments can be gauged from the fact that the proportion of exports of current gold production to total exports increased from 2.7 per cent in 1930-1 to 6.7 per cent in 1934-5, and then to 11 per cent in 1938-9.49 Although the gold bounty and the increase in the price of gold did not occur early enough to assist the external payments crisis of 1990,

the increase in gold exports did play a significant part in the later recovery process particularly in view of the continued low prices of other major export commodities. Devaluation

The increase in the Anglo-Australian rate of exchange following the breakdown of the sterling exchange standard is one of the most important and fascinating episodes of the depression. It was, moreover, one of the most important expedients to lessen the impact of the international depression on Australia and permit a comparatively early start to recovery;

and it provided the basis for the redistribution of national income in accordance with the principle of ‘equality of sacrifice’ as enunciated in the premiers’ plan. The increase in the exchange was not, however, part 47 Production Bulletin, No. 34, Pt II, Tables 86 and 87. 48 Commonwealth Year Book, No. 28, p. 636; and No. 33, p. 287. 49 Compiled from Commonwealth Year Books. 155

Australia and the Great Depression of any plan or-policy. Control of the rate was in the hands of the banks and the government had no official influence; and, as we have seen, there was no adequate co-ordination of government and banking policy. Prior to the depression, bank control of the rate worked satisfactorily because all were agreed that the gold standard should be maintained; but in 1930

sharp differences occurred between the government and some of the banks, and between the banks themselves. In the final analysis, devaluation was purely a market reaction to the shortage of sterling exchange.

It will be recalled that the exchange value of the Australian pound first began to slip at the end of 1929 (see Fig. 9). Due to the rapid depletion of London funds, the premium on sterling increased gradually from 15s per cent in October to 32s 6d in mid-December, which was slightly more than gold export point. The premium continued to increase in early 1930 until it amounted to 7os per cent on 10 March. It was generally thought that these increases were of a temporary character, for as soon as the London loan market was reopened for Australian borrowing pressure on exchange would be removed and parity would be restored.5° Not for a moment did the banks consider the departure from parity to be anything more than a temporary expedient, and so they were generally in accord as to the need for the increases. Indeed, the Commonwealth Bank, which a few months later became an intractable opponent of further devaluation, was one of its warmest supporters. At the end of March Davidson complained that: While Sir Robert Gibson and the Board and Executive of the Commonwealth Bank are fully in accord with my policy of getting the rate of exchange in line with the position, it seems impossible to bring them to see that it is just as necessary that the rate of interest should be used in a similar way.*!

During March the seasonal decline in the supply of sterling bills intensified pressure on the exchange rate. For the first time the banks had to contend with competition from an ‘outside’ exchange market, which lifted the unofficial rate as high as £6 per cent.5? Previously the carded rate had been increased in stages of 55 or 105 each, but now a far more substantial increase was warranted. If the rate was increased to £5 per cent, however, it was felt that there would be less chance of returning to

parity in the near future. Already the Melbourne banks had come to realize that a decrease in the rate was unlikely in the foreseeable future, and, therefore, further removal from parity should be resisted at all costs. The Sydney banks, on the other hand, under the leadership of the ‘Wales’ and with the support of the Queensland National Bank and the Bank of 50 E.g. Davidson wrote to his Chief Inspector in Melbourne that: ‘We regard the stringency as temporary and if we pursue the policy of putting the position before our customers quietly and tactfully as opportunity offers, impressing upon them the need of curtailing their importations as far as possible until the position eases, we hope that we shall be able to get through the period of stress without having to call

upon any customer to cut down his genuine requirements from time to time.’ Davidson to Russell, 30 January 1930, BNSWA. 51 Davidson to Shann, 10 March 1930, BNSWA. 52 Davidson to Wren, 17 March 1930, BNSWA. 156

The Balance of Payments and Devaluation Adelaide, believed that the banks must retain control of the exchange market. Without such control their viability would be threatened and independent control difficult to regain. Furthermore, Davidson believed that the holding of an artificial price was inimical to the principal of a free-enterprise economy: the unrestricted interplay of ‘natural economic laws’ was, for him, the only reliable guide policy makers in such economies possessed. ‘The Melbourne reaction was typical of their attitude over the

next nine months. In replying to Davidson’s suggestion to increase the rate, Wren wrote: [We] were opposed to the last increases which we thought would get us nowhere and we are still more opposed to your new suggestion ... .

It is a question of supply and demand and not of rate in our opinion. The general policy of the banks should be to reduce Imports to the level of the difference between the Exports and the paramount requirements of the Government in London to maintain its credit there.53

However, the Sydney banks carried the day with the support of the Commonwealth Bank, and at the end of March the exchange premium was increased to £6.25 6d per cent to bring it in line with the ‘outside’ market rate which had risen still further since the increase was originally suggested.54

The increase in the rate of exchange, although supported by five trading banks and the Commonwealth Bank, was due to the initiative and

determination of A. C. Davidson. One should not underestimate the entire community’s instinctive dislike of any departure from exchange parity. Even Davidson’s closest supporters doubted the ultimate wisdom

of his views: devaluation appeared to be so similar to the dreaded inflation. He was able to convert not only other bankers to his views, but the members of his own Board. Perhaps the latter was the more impressive achievement. The personal views of the Board members are not known, but his success as a young and relatively inexperienced general manager in persuading a tough and knowledgeable Board to adopt a controversial and unorthodox policy was indeed a considerable achievement. Without Davidson’s energy and conviction, there is little doubt that the views of the Melbourne banks would have prevailed. Davidson’s ideas on the function of the exchange rate were an extension of his ideas on interest rate policy, and both rested on the assumption

that the banking system could control economic fluctuations far more effectively than any other instrumentality. It was not that government, or

any other, interference was undesirable per se, although that was true enough; monetary policy was simply more effective. But monetary policy

in Australia had been rendered nugatory by an adherence to a fixed interest and exchange rate policy. Only if these rates were allowed to 53 Wren [Chairman of the Associated Banks of Victoria] to Davidson, 18 March 1930, BNSWA.

54 At the same time the difference between buying and selling rates was reduced trom 10s to 7s 6d per cent, which it was hoped would also help prevent the growth of

the ‘outside’ market, AJBR, 1990, p. 275. 157

Australia and the Great Depression fluctuate as market conditions dictated, he argued, would monetary policy fulfil its traditional role.5> In a more practical sense, Davidson was particularly sensitive to any threat to the autonomy of the private banks. We have already seen that in relation to the Mobilization Agreement he was prepared to co-operate fully with the government, even to the extent of considerable sacrifice of profit, if the alternative was an infringement of banking independence. By his great skill and adaptability he did much to preserve the independence of the banks during the depression. Davidson’s early thinking on the exchange rate—indeed much of his basic economic doctrine—was influenced by Edward Shann, Professor of History and Economics in the University of Western Australia. The two had become close friends during Davidson’s years in the west in the 1920s, and this friendship continued to flourish thereafter. Davidson had little

regard for most academic economists whom he considered to be too theoretically inclined and unable to apply their theory to everyday situations. His high regard for Shann stemmed from the professor’s elemental understanding of the mechanism of the economic system, and his ability to explain complex phenomena simply and clearly. Their basic economic philosophy was also similar, and during 1930 they maintained a regular correspondence on the major economic issues of the time. In February 1930, before Davidson’s own ideas about exchange rate policy had matured, Shann wrote him a long letter about the wisdom of

allowing the rate to find its natural level. It is worth quoting at length because of its influence on Davidson’s thinking: Does credit restriction by raising the overdraft rates and rationing importers’ drafts on London solve our problem? We are where we are—I know you will agree with emphasis—because our policies of wage fixation, tariff-walls and bounties to bolster high-costs have made Australian prices, loaded with indirect taxation, move in a direction that has diverged and 1s still diverging from the price-levels of our competitors and customers... .

But what is the plan of rationing London credit? Prima facie and indeed absolutely it is evidence that the price charged for London money is too low to bring the supply and demand into equilibrium. There are buyers at the price named for more than sellers can provide. To that extent, I submit, the price if it reflects that paid for London money to Australian exporters, is not giving exporters the salutary stimulus of a higher buying rate in London. Such a stimulus would increase their net profits on wool, wheat or anything sold abroad.

. .. I cannot help feeling that the banks could lend great weight to their counsel in favour of free enterprise if they would, at some immediate sacrifice

of tradition and profit, facilitate the establishment of a free market for the exchanges. Not only would the premium on exports give that attraction into sound industries, despite credit restriction, which is the major need at the moment, the constructive way out. The daily fluctuations of that market would for the future provide the impressive barometer of our financial wisdom 55 Davidson was not consistent here. A few months earlier he had strongly advocated the retention of the gold standard, but it is to his credit that he was able to move with events and discard traditional rules of thumb. 158

The Balance of Payments and Devaluation or unwisdom which a country aspiring to and entering, willy-nilly, a status of

self-reliance badly needs. Would it be an exaggeration to say that such a barometer, easily [understood by] the people, is a first necessity to sound finance?56

It should not be inferred that Shann was the father of Davidson’s views, but he did act as a catalyst. Davidson was uncertain of his own ground and was still groping towards his ultimate position. However, this was precisely the kind of stimulus that Davidson responded to. He would have instinctively resisted anything more dogmatic. It is more accurate to say

that the ideas of the two grew together, each benefiting from the other,

as Davidson's reply shows: ,

I am fully in accord with you that the mere fact of rationing either exchange or credit is an admission that our rates are too low and out of line with the

position. I am doing all I can to get the Banks to realise this and am succeeding to a certain extent but it is with great difficulty and in a way only because of the size and power of the Institution I represent... . The policy pursued by the Banks and others in Australia for many decades past of rationing rather than altering rates is now bearing fruit and we have

a large body of opinion who are prepared to blame the Banks for every movement in rates whereas if the Banks had pursued a proper and sound policy in past years there would have been little rationing but movements of rates to show the real position and the public would have had its warning signals up long before they get them nowadays. My opinion is that the interest rates should have commenced to move upwards about two or three years ago and exchange rates probably months before they did but still without breaking

right away ... I certainly think with you that we should have such a barometer always before us.57 !

During the next six months the difference between the market and carded rates of exchange narrowed, and the banks re-established their control over the export bill market. The government’s attack on imports underlined its determination to restore balance of payments equilibrium as quickly as possible, and as this was achieved it was expected that the rate would fall. In anticipation of such a fall, funds were retained in Australia which would normally have been remitted abroad. The accumulation of these balances was the main concern of the banks at this time, and they were even reluctant to accept them except on medium- or long-

term deposit. As explained by W. J. Masson, General Manager of the

Bank of Adelaide:

I view with a certain amount of diffidence the accumulation in Australia of funds held on account of overseas Banks and clients. I, personally, have made it my policy not to accept amounts to any extent and then only definitely fixed for not less than twelve months. I am profiting by the lesson of 1893, and do not intend to be misled by the temptation to utilize these funds, handy though they might be just at the present moment.5§ 66 Shann to Davidson, 10 February 1930, BNSWA. : 57 Davidson to Shann, 10 March 1930, BNSWA. 58 Masson to Davidson, 29 April 1930, BNSWA. 159

Australia and the Great Depression The adoption of the Mobilization Agreement provided the turning point in the process of unpegging the exchange rate. The Agreement was to absorb nearly two-thirds of the banks’ total sterling receipts in its first

year of operation. Previously a policy of rationing had a reasonable chance of success, but now, with such a large proportion of their sterling receipts committed, the banks had little chance of maintaining the rate without driving buyers to the open market. Morcover, it was imperative

that the banks should retain control over the exchange market if they were to avoid government intervention. If the banks lost control, the government would have little alternative than to compulsorily acquire all sterling receipts so that their commitments could be financed. An addition to these already formidable difficulties was that the late winter and early spring was the period of maximum seasonal decline in sterling receipts and in 1930 the fall was greater than usual. It was not long before the expected pressure on the rate of exchange materialized. Outside dealings had been in evidence for some time when Davidson addressed the other general managers early in August. The fact that the Banks are quoting a rate for London cover which they cannot act up to and which involves them in the necessity of rationing importers is in itself prima facie evidence that the rate does not represent the true position. The Banks are thus in a position to raise the rate, and are bound to do so in duty to their customers who have, or will have, London cover to offer as a result of exports. It is from the proceeds of such exports that the Banks must look for a liquidation of advances and a lessening of the present stringency.°9

Davidson had shifted his emphasis. He was now primarily concerned with the salutary effect of an increase in the rate on rural industries, and indirectly on the liquidity of his rural advances. In this he was again supported by the other Sydney banks, and by the Bank of Adelaide and the Queensland National. The last two, with practically all their business in rural areas, were particularly active supporters of an increase. Davidson urged that the rate be increased immediately because of the imminence of the opening of the wool selling season in September. If the banks were to control the exchange market, and also render the maximum assistance to exporters, it was essential that they should do so at the beginning of the seasonal influx of sterling bills.©° The Chairman of the Associated Banks of Victoria, C. H. Tranter, was reasonably sympathetic. ‘I quite

agree’ he wrote, ‘that rates should go up so as to control the outside

market and have so advocated for some time here, but have not been able to convince my fellow Bankers.’6! As an alternative, he suggested that the

banks should appeal to the large pastoral houses and grain factors for their co-operation in prescribing the traditional exchange market.8? Such

an appeal was made by the Commonwealth Bank but without much 59 Davidson to all trading bank general managers, 7 August 1930, BNSWA. 60 Davidson to Tranter [also General Manager of the Commercial Bank of Australia], 6 August 1930, BNSWA. 61 Tranter to Davidson, 8 August 1930, BNSWA. 62 ‘Tranter to Davidson, 12 August 1930, BNSWA. 160

The Balance of Payments and Devaluation success, and as Davidson pointed out, “The American Oil Cos., Motor Cos.

etc., are not likely to concern themselves about any arrangements made among Australian Banks to assist the Australian position’.62 At the end of his letter ‘Tranter added a comment which was to become the standard

Melbourne view: “The difficulty may not be got over by raising the exchange rate, as outside sellers may keep above us seeing that the demand of buyers may be very great’.6¢ The Melbourne banks argued that past increases had not eliminated the outside market (although it had done so for a time following the March increase) , and that outside operators would continue to outbid the banks. Further consideration of the proposed increase was postponed until October, when a conference was to be held in Sydney to discuss the differences between the banks. Despite his insistence that the rate be increased immediately, Davidson observed the agreement on carded rates. In

the meantime he attempted to persuade the Commonwealth Bank to take the lead in the move for an increase. He pointed out that ‘the outside market is running at about £8.75 6d’ and urged an increase to 108.66

But the Commonwealth Bank, now under the influence of Sir Otto Niemeyer, had changed its mind about further departure from parity, and preferred the policy of reduction of internal costs to devaluation as the latter did not tackle the fundamental problem. As Riddle explained to Tranter on 25 September, echoing Niemeyer: My view is that before we can expect a return of prosperous conditions in Australia, costs of production must be brought more into line with export selling prices and that it is better to tackle the question of reduced costs from the angle of bringing down wages and costs of living generally so that overseas

prices can be met rather than to leave wages and costs where they are and meet the position by paying an increased premium on all exports through the medium of exchange rates. The effect so far as the worker is concerned would be much the same in that on reduced wages he would only have to meet reduced costs of living, whereas in the other case though the wages remain higher, the increased cost of living would discount that advantage. The difference would

be that in the latter case, if it were possible to bring the exchange back to normal the country would be still faced with the high cost of production, which is causing the present trouble, whereas in the other case with costs of production down, the country would be in a position to face the outside world in the future as well as in the present.

Moreover, it was important to impress Niemeyer with the financial orthodoxy of both the government and the banks, for assistance from the Bank

of England and the future of Australian credit in London depended on his report. Despite the attitude of the Commonwealth Bank and the presence of 63 Davidson to Tranter, 19 August 1930, BNSWA. 64 Tranter to Davidson, 12 August 1930, BNSWA. 65 Davidson to Riddle, 7 and 28 August 1930; 30 September 1930, BNSWA. 66 At this conference it was decided that the method of quoting Australian currency on London be changed from a percentage premium rate to a rate per £100 sterling. In other words, from £8.10s per cent premium to £108} Aust. to £100 sterling, or more simply still to 1081. 161

Australia and the Great Depression Niemeyer at the October conference, Davidson had his way, and it was agreed to increase the rate from 106} to 108. This did not mean, however, that the views of the Commonwealth Bank and the Melbourne banks were any less securely held. Rather it was an admission that the banks were in fact charging well above carded rates, and that by doing so

they created the impression that they were making excessive profits.® This increase was sufficient to reduce outside operations for a few weeks,

but during November they re-emerged on an even larger scale. On this occasion, however, the Melbourne banks were not prepared to concede defeat so easily and new tactics were adopted. As the conflict within the federal Labor Caucus intensified during November and December on the issue of credit expansion, a mild flight from the currency developed. The fear of rapid inflation and exchange depreciation was reinforced by the support given by academic economists

for an increase in the rate as part of a plan of national economic readjustment which included a measure of credit expansion (see pp. 222f).

The government also made it plain that it favoured an increase in the rate, although it would not interfere with the autonomy of the banks.® Thus, the policy of importers and overseas firms operating in Australia was reversed, and there was a general scramble to repatriate profits and idle balances that had been allowed to accumulate while awaiting a fall in the rate. If sterling exchange could not be procured at ‘black’ market rates, then international commodities such as wool and wheat were purchased directly for sale abroad. In view of this development, the Melbourne banks were convinced that a policy of increasing the rate to outbid the open market was bound to fail: the result would simply be to push open market rates even higher in an endless chase. The alternative was government control of exports, which although objectionable would be preferable to a substantial, and perhaps permanent, departure from parity.6® During the following weeks, therefore, whenever further devaluation appeared likely, this alternative was advocated as a counter. Advocacy of government control of exports reflects the extent of the abhorrence of departure from exchange parity. It is not entirely accurate,

however, to imply that all banks with Australian head offices in Melbourne were of like mind. Broadly, those controlled from London—the Australasia, the E.S. & A. and the Union—were more vigorous opponents of Davidson’s policy than the two locally controlled banks, the National 67 E.g. early in September Masson wrote: ‘Enquiry from the Banks in Adelaide this morning shows that all the Banks are charging above the carded rates, and we are informed that as much as £6.16s. 3d has been charged for sight drafts. We are advised from Sydney that a Bank is offering £7.5s5% for T/T and from Melbourne that outside transactions have been offered at £8.25 64% ... It is certainly most anomalous ... to continue quoting the present pegged rates, and at the same time charge the public quite a different rate. It creates the impression among our clients that we are merely profiteering and exploiting the position.’ Masson to Davidson, 8 September 1930, BNSWA. 68 CPD, Vol. 127, p. 1095.

69 Davidson to M. G. Haymen [General Manager of the Queensland National Bank], 28 January 1931, BNSWA.

162

The Balance of Payments and Devaluation and the Commercial. As the former could command a three to two majo-

rity, their views ysually prevailed.”° The three British banks did not, however, simply reflect the opinion of the City of London; their views were widely shared by the Melbourne business community.” The basis of the opposition to an unpegged exchange was never clearly explained: it seems to have been partly an instinctive dislike of any departure from trusted and traditional policies; partly a conviction that adherence to the gold standard was an indispensable condition of sound economic policy, particularly in times of economic difficulty, and that every increase in the rate was a move away from sound practice; and partly the identification of devaluation with inflation, and the fear that if the rate was allowed to

increase, the necessity for reductions in costs of production could be avoided.72 Also an increase in the rate would add substantially to the Loan Council’s interest bill abroad, which would probably involve an increase in taxation and a delay in the balancing of budgets.™? An argument which was used extensively, and which may have been connected with the ‘increased cost to government’ contention, was that by unpegging the rate and following the ‘outside’ market, the Mobilization Agreement would be in jeopardy.*4 As Giblin observes,” the basis of this argument is obscure. The Melbourne banks may originally have believed that they were obliged to provide their mobilization commitments at the rate in operation at the time of the commencement of the Agreement, instead of at current carded rates; but if they did so, Davidson soon disillusioned them.7® More likely was the belief that the government would not pay the

increased rates, and that it would take control of exchange itself, or commission the Commonwealth Bank to do so, and thereby provide its requirements more cheaply. Even this explanation is unsatisfactory, as the

government had made clear that it favoured an increase in the rate and that it would not interfere with the banks’ control of the exchange market.

Perhaps the Melbourne banks were unduly influenced by Sir Robert Gibson, who may already have been working towards Commonwealth Bank control of exchange; a breakdown in the Agreement would. have

own terms. |

provided the Bank with an opportunity to take control of exchange on its 70 This accounts for some inconsistency in the statements and letters of the Chairman of the Associated Banks, C. H. Tranter of the Commercial: his own Bank was more sympathetic to an unpegged exchange than his official position would allow him to disclose. For example, Tranter’s letter to Davidson of 8 August (cited above) in which he said that personally he was in favour of an increase in the rate, but that he had been unable to convince his fellow bankers. 71 E.g. the critical attitude taken by the Melbourne press, particularly the Argus, to the exchange increases of January 1931. See Argus, 17 and 29 January 1931. 72 As the Melbourne banks were so inarticulate about the reasons for their opposition, this explanation of their attitude is based on a general reading of their correspondence to the Commonwealth Bank and the ‘Wales’ and on their evidence before the Royal Commission on Money and Banking. 73 Argus, 6 and 17 January 193}. 74E.g. Tranter to Davidson, 20 December 1932, BNSWA. 75 Central Bank, p. 76. 76 Ibid.

163

Australia and the Great Depression Two further meetings of the banks in November and December rejected an increase in the exchange rate. The rejection in December was all the more significant because the meeting considered a request from the Acting Treasurer, J. A. Lyons, to increase the rate for the benefit of primary industries. In a letter of g December to Gibson, Lyons submitted that: In the parlous condition in which the Primary Producers find themselves, owing to the largely diminished returns from their exportable surplus productions, I feel that it is highly desirable that they should receive the full benefit of competitive exchange rates.77

The banks, in effect, replied that the regulation of exchange was not the business of the government. But Davidson was undaunted. The introduction of the Wheat Advances Bill, which the government used as a counter to the banks, provided him with ammunition. He claimed that the. Bill was a direct abrogation of the Mobilization Agreement: The banks mobilized London funds to meet the interest requirements of Australian Governments on the distinct understanding that the Loan Council and the Governments represented therein would pursue sound policies in

public finance ....

If this measure [the Wheat Advances Bill] or any such measure involving forced advances becomes law it will be impossible for the banks to provide any further London funds save at the market rate from day to day.

In paying the price in Australian pounds of the sterling earned by wheat growers, gold miners and other export industries, the Commonwealth Government would incidentally subsidize those industries in exact proportion to the degree to which each contributes to the task of meeting the country’s obligations abroad.78

In other words, the correct way to subsidize wheat farmers and other exporters was not by government hand-out, but by increasing the rate of exchange. This was precisely the government’s view, as it was financially unable to help farmers more directly.

At the time Davidson wrote the letter quoted above, he also gave notice that the Bank of New South Wales would break the agreement on

carded rates and increase the exchange rate to 113} in the new year. Tranter pleaded to postpone any action until after the Prime Minister's return from abroad, when the whole position of government finance could be reviewed in the light of his trip at a bankers’ conference set down for mid-January.?® But Davidson was insistent that the rates be increased before the commencement of the Sydney wool sales on 6 January,

so that graziers would have the full benefit of any rise.8° Tranter tried once more to dissuade him: ™ Lyons to Gibson, g December 1990. 78 Davidson to Riddle (and to all other trading bank general managers) , 17 December 1930, BNSWA.

79 ‘Tranter to Davidson, 20 December 1930, BNSWA. 80 Davidson to Tranter, 23 December 1930; Davidson to Riddle, 25 December 1920, BNSWA.

164

The Balance of Payments and Devaluation _ Iam sorry that you ,have taken this course, for I am sure it will do no good. The outside market will immediately be raised to £120 and the demand of the timid ones be increased to get their money out of Australia. I am not too much influenced by the theoretical opinions of economists who, as a rule, take the academic course and have not had practical business experience which sometimes suggests modification of the purely theoretical.8!

Furthermore, Tranter argued that the increase would damage Australia’s credit in London, and jeopardize its chances of obtaining assistance from the Bank of England.®? Davidson insisted, however, that an increase could

only benefit Australia’s external credit as it would be ‘a step towards recognition of the true state of affairs’.®3 On 5 January Davidson broke the agreement on carded rates as he had

promised. To the end the Melbourne banks believed that he was

bluffing and that he would relent when it came to the point. They had not made any plans should he follow his announced course. Therefore, on the morning of the 5th they hastily decided to follow the rates established by the “Wales’.8> Masson records the reaction in Adelaide: The putting into effect of your increased rates caused quite a furore here this

morning. None of the other banks had any instructions varying the old carded rates and, so far as we can ascertain, sat quietly awaiting the decisions

of their Head Offices. Late in the afternoon the National Bank advised us

that they had been instructed to quote T/T Rates at £115 buying and £115.10 selling.86

As the Melbourne banks had predicted, the ‘outside’ market immediately increased in sympathy and still outbid the banks by several points. Tranter informed Gibson that at an informal meeting of the Victorian Association the opinion was expressed that it had become impossible to carry on with the Mobilization Agreement, but a final decision would not be taken until the full bankers’ conference in a few days’ time. On the 13th the rate was advanced another three points to 118. At the full bankers’ conference held on the 16th, the major rupture 81 Tranter to Davidson, 24 December 1930, BNSWA. 82 This argument reflects the influence of Sir Robert Gibson on the thinking of the Melbourne banks. In reporting to Davidson that the opinion was strongly held in

Melbourne that the whole matter should be referred to the January conference, Russell continued: ‘I gather that Sir Robert Gibson takes a similar view. He says the Government will be hard put to it to find the interest of £3,000,000 per month without any increase in Exchange rates to make it worse. He says, though my information is not direct from him, that he will have to use his last available gold in London to retire the £5,000,000 Treasury Bills shortly maturing. As to that obligation I understand that the Bank of England will not assist. Put bluntly, Sir Robert Gibson says that if default is to come it is better for it to happen in Australia than in London, and a higher exchange rate would so aggravate the position that the burden would be too much.’ Russell to Davidson, 22 December 19930, BNSWA.

83 Davidson to Tranter, 23 December 1930, BNSWA.

84 Because of a further rise in the ‘outside’ market rate, Davidson had decided to raise the rate to 115 instead of 1134 as originally decided. 85 Argus, 6 January 1931. &6 Masson to Davidson, January 1931, BNSWA.

165

Australia and the Great Depression which threatened between the two banking groups was, by some miracle, avoided.8? Not only did the banks agree to continue with the Mobilization

Agreement,§§ but they decided to ‘fix a buying rate to meet today’s market’, and also agreed that .. . future rates be subject to alteration and such alteration be fixed by a Committee to be appointed; such rates shall be on a basis which will command the market, and every Bank party to the agreement shall be bound by such rates.89

The Australasia was the only bank to dissent from this decision. It was a remarkable about-face: it can only be supposed that the Melbourne banks, having been forced by Davidson into a policy of competition with the ‘outside’ market, determined to follow him to the limit. The Australasia’s view that the banks should approach the government to take control of exports was rejected at the beginning of the conference.®° The meeting decided to increase the exchange rate to 125 in a determined (and some may have hoped final) bid to command the ‘outside’ market.

The increase to 125 still did not command the market; the ‘outside’ rate immediately rose to between 128 and 132. It appeared to the Melbourne banks that the Australasia had been correct and that the only. solution was government export control. Despite the conference resolution, they were now against any further increases, as Tranter made plain to Riddle on 23 January: I may say confidentially that some of the Banks here are so strongly against [an] increase that they consider that it would be to their advantage to withdraw temporarily from exchange business altogether.

I have doubts on this point but am of the opinion that the time has arrived to seek Government assistance on lines which would retain business with

the Banks, rather than allow matters to drift until the Government is practically forced to come in....

Davidson reacted strongly to the suggestion of export control. Such a move, he said, would be an admission of failure by the banks, and play into the hands of the Labor Party, being an endorsement of their policy of nationalization of banking and exchange.®! Reluctantly the Melbourne banks agreed to a rate of 130, which became effective on 29 January. But, as Wreford explained:

... It is unlikely ... that the Melbourne Banks or the Commonwealth Bank will, under the circumstances, wish to go further, nor do I think the Government would agree to the additional load upon their outgoings for remittance of moneys to London for payment of loan interest. I think that 87‘Memorandum of Bankers’ Conference’, Melbourne, 16 January 1931, BNSWA. Giblin suggests that Riddle was the pacifying influence, Central Bank, p. 77. 88 The Commercial Bank of Australia had, a few days previously, given notice of termination. 89 Memorandum of January bankers conference, BNSWA. The committee comprised: Tranter, Riddle and Davidson. $0 Ibid., Davidson’s MS. notes. 91 Davidson to Haymen, 28 January 1931, BNSWA.

166

The Balance of Payments and Devaluation if we pushed our rates up quickly, in an endeavour to overtake the market, we should have to go up to £150. Such a move or moves would, I consider, at once cause the Government to take control of export exchange without further reference to the Banks.92

Even Davidson now felt that the rate should go no higher, despite the fact that the ‘outside’ market moved to 133. He helped to hold it at 130 by several forward purchases.%? Sir Robert Gibson had made it clear that he would be forced to step in if the rate went any higher.®* Within a few days the gap between the two rates fell, and all banks noted a marked increase in the supply of sterling bills. ‘The Melbourne banks claimed that the improvement was due to the threat of export control—a_ perverse line of reasoning, as the expectation of such control would have accelerated the flight of capital.9° It seems that 130 was about the ‘correct’ rate under the circumstances, as no further pressure from the ‘outside’

market developed and the rate was maintained until the following

December.°6

_ The increases in the rate of exchange which have just been described were an important influence in moderating the effect of international collapse on Australia and in assisting domestic recovery. By redistributing income in favour of export industries, the secondary effects of the fall in wool, wheat and metal prices were to some extent lessened. If export prices expressed in terms of Australian currency had followed gold prices, there is little doubt that many rural producers would have been forced to cease operations altogether. Devaluation not only enabled most farmers and pastoralists to continue on the land, but permitted them (with the aid of favourable seasons) to increase output. While the expansion of rural output during the depression was by no means the mainspring of recovery, it was a significant factor underpinning the recovery process. Furthermore, the exchange movements prevented the banks from incurring heavy losses on their rural advances which may have endangered the whole banking edifice. Finally, recovery was aided indirectly by the increase in the effective price of imports which allowed a more rapid expansion in import replacement than would otherwise have taken place. Australia’s path to devaluation was haphazard and circumstantial. There was nothing even approaching a national policy on the matter; indeed the Commonwealth Bank, which should have taken the initiative as an avowed central bank, acted as an ordinary trading bank. The correct policy was stumbled upon by accident rather than by design, as was much of economic policy during the depression, although rarely with the same 92 Wreford to Davidson, 28 January 1931, BNSWA. 93 Davidson to Healy, 29 January 1931, BNSWA. 94 Wreford to Davidson, go January 1931, BNSWA.

95 Wreford to Davidson, 5 February 1931, BNSWA. Davidson also pointed out that government export control would not stop the development of a ‘black’ market in exchange developing in London or New York. 96 An estimate of the extent of the ‘outside’ market in the period August 1930 to January 1931 is contained in Appendix B. From this it appears that the ‘outside’ market claimed about 50 per cent of sterling receipts in this period, compared with the usual proportion of about 10 per cent. 167

Australia and the Great Depression happy result. The magnitude and timing of the exchange movements were generally fortunate. Had they occurred at any time other than at the height of the export season, the rate may have been forced much higher.®?

The Royal Commission on Money and Banking argued that the movements should have occurred earlier than they did, possibly in mid-1930;%8 but at this time a rate of 140 or more would probably have been necessary,

with a downward adjustment during the export selling season. Apart from the likelihood of this happening, such a double movement would have increased uncertainty and made the restoration of normal exchange dealings difficult. The devaluation of January 1931 was, therefore, a lucky compromise.

To conclude on a counter-factual note, it is perhaps ironic that the comparatively early Australian devaluation was due in large part to the government external liquidity crisis of 1929-30, which in turn was an effect of imprudent government financial policy in the 1920s. If governments had exercised more control over their overseas borrowing and had improved their market status by tightening their methods of loan flota-

tion, and if they had introduced a greater degree of flexibility in their financing of public works projects, then the impact of the overseas depression in Australia would have been more subdued and gradual. It may not have been any less severe in the long-run, but the acute liquidity crisis of 1929-30 would have been avoided. The loan market would not have closed so abruptly and there would have been a much better chance of raising and renewing short-term accommodation on reasonable terms if it were needed. If this had taken place, however, sterling parity would probably have been maintained during 1931, and if deliberate devaluation had occurred during 1932, extensive retaliation would have taken place, particularly through the terms of the Ottawa Agreement.®? Retaliation did not take place in January 1931 because the other nations with whom Australia traded were in a relatively early stage of their own depressions. ‘Thus, although the early impact of the depression in Australia led to a more rapid decline in economic activity in 1929-30, her financial indiscretions of the ’twenties led to a large relative devaluation and so to a more rapid recovery than would otherwise have taken place.

97 Giblin estimated that if the break in the ‘outside’ market had occurred in July— the lowest period of exports—the rate could have been carried to 160. RCMB, Evidence, p. 1345. 98 Report, paras 551-4. 99 It was made clear in 1932, when a number of economists were pressing the Commonwealth Bank for an increase in the exchange rate, that such an increase would seriously impair Australia’s bargaining power at the impending Ottawa Conference (see p. 362). 168

IX

Crisisein Government e in t eFinance At the outset of any discussion of Australian fiscal policy during the 1930s, it is important to emphasize the differences in the structure of Common-

wealth and state public finance, for these led to significant variations in behaviour during the course of the trade cycle. The main difference, on the revenue side, was that the Commonwealth was dependent on customs receipts whereas the states relied on income taxation. Commonwealth receipts from customs in 1929-30, for instance, represented 40 per cent of income and 51 per cent of total Commonwealth taxation. The next most important items (excluding business undertakings) were excise duties (15 and go per cent respectively) and income taxation (14 and 19 per cent) .1 On the other hand, the most important item of states’ revenue was income taxation which, in 1929-30, represented 30 per cent of revenue (excluding business undertakings) and 52 per cent of aggregate state taxation. Next in importance was the Commonwealth grant, which comprised 16 per cent of non-business revenue.? The differences on the expenditure side were equally marked, the Commonwealth possessing a far greater degree of flexibility than the states. No less than 7o per cent of the states’ revenue was committed for servicing public indebtedness, whereas interest charges only absorbed 31 per cent of Commonwealth revenue.? Furthermore, the demands on the states in depression were

greater than on the Commonwealth: at such times states had to find additional funds for unemployment relief, for meeting the increased railway deficit, and perhaps for the assistance of necessitous farmers. The

Commonwealth was not faced with any large additional commitments during depression.

State finances were, then, basically more vulnerable to major contraction, but because of the greater volatility of customs receipts the initial impact on the Commonwealth was frequently more severe. ‘This 1 Finance Bulletin, No. 22, Table 4. 2Ibid., Table 38. 3Ibid., Tables 4, 38 and 60. In 1929-30 in both cases, and again excluding revenue from business undertakings. 169

Australia and the Great Depression was certainly the case at the end of the 1920s. Following the decline in economic activity after mid-1927, imports and customs collections fell swiftly to yield a comparatively large Commonwealth deficit of £2.6m in 1927-8 compared with a surplus of the same amount in the previous year. As a result of tariff increases, the deficit was reduced during the next two years to as little as £1.5m in 1929-30 despite a continued fall in imports and in taxable capacity.4 State revenue, by contrast, reacted slowly to the

decline in the level of activity but was without the Commonwealth’s ability to recover in the early stages of the depression. Thus the combined states’ deficit continued to mount, from a modest £1.3m in 1927-8 to £8.4m in 1929-30 and then to £15.5m in 1930-1.°

In the first half of 1930, therefore, state finances were already in a serious condition, but the Commonwealth was comparatively unaffected; in the second half of the year, on the other hand, the rapid deterioration in Commonwealth finance dominated all else. The chronic condition of the national budget in 1930-1 followed from the success of the policy of

cutting imports. Despite the substantial increase in duties, customs revenue fell by more than £12m in the year which more than accounts for the increase in the deficit. When the Scullin trade policy was formulated, it was fully accepted that the budget would suffer substantial loss; but the rapidity of the fall was not even remotely envisaged, for it was predicted that tax increases would allow the budget to be more or less balanced. The unexpected turn of events in mid-year left the government unprepared and the Commonwealth Bank was able to grasp the initiative in policy formation. The Immediate Problem Although the Commonwealth was not at first faced with a serious budgetary problem, it did have to contend (through the Loan Council) with a particularly onerous internal loan conversion programme. During the year no less than £70m fell due for renewal: £10m on 15 March and £6o0m on 15 December. In addition, if the Loan Council’s cash programme

was to be completed, at least another £g30m would have to be raised.” Thus, the Commonwealth Treasury had the task of arranging for cash and conversion loans totalling about £100m by the end of the year.

Even in a buoyant year this would have been a formidable task, and it became even more so during 1930 as government finances deteriorated

and pressure for repudiation gained ground with the left wing of the Labor Party. On the other hand, prospects were not entirely bleak. First, 4 Ibid., No. 28, Table 8. 5 Ibid., Table 44. 6 Ibid., No. 25, Table 3. 7 At the Loan Council meeting on 7 February 1930 the cash programme for 1929-30

was reduced from £43m to £30m. Only one loan for £:0m had been raised (in November 1929) to meet this target. Thus, another £20m would, theoretically, have

to be raised by go June, and in the second half of the year a proportion of the 1930-1 programme, which had been tentatively fixed at £24m at another meeting late

in February. Thus, as no external loans were possible, the Council must have

envisaged raising about £g0m new cash in 1990. 170

Crisis in Government Finance there were no large overseas loans falling due for conversion until November 1932. The only commitment in London was the small Queensland loan of £.3.8m which matured in July 1930 (see pp. 135-6). The extreme anxiety connected with converting even this sum sufficiently illustrates Australia’s chance good fortune in the timing of her overseas maturities.

One dares not speculate on the outcome had a large loan fallen due in 1930 or 1931. Second, the local loan market continued reasonably firm during most of 1930 and did not follow the trend of events in London. In early 1930 the theoretical yield on long-dated issues was only 55-105 per

cent above the customary terms of 54 per cent, whereas in London the yield was a full point above normal.® As acceptance of a higher rate was far less damaging in the domestic market than in London, the authorities

still had some room to manoeuvre. |

When plans were being made for dealing with the £10m March maturi-

ties, a decision was taken of the utmost importance for the subsequent history of the depression. Together with an offer to holders of maturing stock to convert at par into 6 per cent securities with a currency of 7 years

(and the announcement that cash subscriptions would be accepted), it was decided to invite holders of stock falling due in December to convert

on the same terms. Thereby it was hoped to spread the burden of the December operation. It was of course a sound and sensible decision, but in view of the Loan Council’s hesitancy in the London market it 1s a decision that on the record may well not have been taken. It is true that at the time it was probably not regarded as of great importance, and the Treasury could easily have been persuaded to postpone dealing with the December maturities in the hope of an improved market tone and a lower rate of interest. The decision reflects, in part, a belief by no means gener-

ally accepted at the time that national income and the state of public finance would continue to deteriorate during 1930.9 The importance of the decision will become evident at the end of this chapter (see pp. 201-2) when the struggle to convert the remaining portion of the loan is discussed. Until then it is sufficient to say that it probably prevented internal

default or a more destructive clash between the government and the banking system than actually took place. The new loan was launched at the end of February with an unusually intensive publicity campaign. It was not underwritten by the banks which made success even more essential. The 6 per cent yield—a substantial rise from the £5.14s 4d per cent offered for the previous loan of December 1929—1is probably the key to the fact that the loan was remarkably well received, both in terms of cash and conversion subscriptions. ‘The March

portion of the loan closed with oversubscriptions totalling £3.7m, but even more significant was that nearly £34m of the December maturities were offered for conversion. Surplus cash subscriptions were also used 8 Shorter-dated issues, both in Australia and London, were priced to yield more. In Australia issues maturing within three years of March 1930 showed a yield of 6-6} per cent and up to 64 per cent in London. 8 The decision also reflects the greater influence of the Commonwealth Treasury in domestic as compared with overseas loan market operations. 171

Australia and the Great Depression to redeem part of the outstanding December stock, which meant that (with sinking fund redemptions) only £18m of the latter remained un-

covered.

The domestic loan market continued fully firm during the next three months. Indeed, during May there was a hardening tendency as it was thought that the next loan would be issued at less than 6 per cent.!° The 6 per cent basis was, however, maintained for a £10m loan in June, which was also highly successful and closed with oversubscriptions of £2.4m. Despite the success of these operations, the Loan Council completed 1929-30 with borrowing arrears amounting to £22.5m or about one-half the original programme.

An Essay in Mistrust: the Central Reserve Bank Bill The legislation introduced by the Scullin Government in 1930 to separate the central bank and trading bank functions of the Commonwealth Bank form, in part, a digression from our discussion of the development of general economic policy. The Central Reserve Bank Bill and the still-born Commonwealth Bank Bill of 1930 were not part of the government’s short-term economic or financial policy. They were, like the

Constitutional Alteration Bills!! and the Conciliation and Arbitration Bill}? part of the Labor Party’s predetermined legislative programme. They were expected of the government irrespective of economic conditions; ministerial opportunities for Labor were all too rare to be squan-

dered. However, the introduction of the Central Reserve Bank Bill as one of the first important acts of the new government had important implications for the development of economic policy, and these implhcations will be briefly discussed before returning to the main stream of events.

It was proposed that the Central Reserve Bank would inherit the central banking functions of the Commonwealth Bank (and some of its capital), which would leave the existing Bank to compete freely with the private banks in ordinary banking business. Thus, the restrictions under which the Bank traded would be removed,!* and it would develop into a ‘people’s bank’ in accordance with Labor’s original conception. The new Bank was to be on strictly orthodox lines. Apart from existing central banking functions, it would collect information on the London funds of the private banks (information which had previously been withheld) , and would accept deposits only from governments and other banks. 10 AIBR, 1930, p. 45}.

11 These Bills would have radically altered the procedure for constitutional amendment by replacing the existing referendum system with the simple procedure of obtaining an absolute majority in both Houses of Commonwealth Parliament. Scullin claimed that the additional power was required in view of the gravity of the economic position, although such an alteration had for many years been part of the party’s programme. 12 The main provision of this Bill—which eventually became law—was the removal of the penal clauses from the Bruce-Page Conciliation and Arbitration Act. 13 By an informal understanding with the trading banks, the Commonwealth Bank did not ‘actively’ compete in the field of ordinary business. 172

Crisis in Government Finance It was proposed that the statutory 25 per cent gold backing for the note issue be retained. The administration of the Bank was to be in the hands of a Governor (who would also be Chairman, to avoid the complication that had already arisen with the dominance of Sir Robert Gibson) , not more than two Deputy Governors, the Secretary to the Treasury, and five other Directors drawn from commerce, industry, finance and labour. These would be appointed by the Governor-General in Council, for a period of five years, retirement to be in rotation. The new Commonwealth

Bank was to be an orthodox trading bank, without any written or unwritten restrictions on its powers to compete for business. When the Bill was introduced on 2 April, it was accorded a quiet and reasonably sympathetic reception. There was no evidence of the hostility that was to greet it when it reached the Senate. The trading banks were,

at first, not unduly critical. Their main complaint was that they had not been consulted on the details of the Bill.14 The Commonwealth Bank’s

reaction was lukewarm. Although the Bill had been drafted by the Deputy Governor, H. T. Armitage, with the knowledge of the Board, their formal approval was half-hearted.15 The detailed views of the mem-

bers of the Board are not on record, but it seems probable that they did not acquaint themselves with the details of the Bill until after it had been introduced into the House of Representatives. When the Bill reached the second reading stage at the beginning of July, there was an extraordinary change in the Opposition’s attitude. They now saw no merit in it whatsoever. As the debate progressed, purely

banking considerations were pushed aside and the main issues were political. The attitudes of the trading banks and the Commonwealth Bank were similarly transformed. Criticism centred around two main points. The first was that the present was no time for a radical change in the structure of the banking system. Meeting the financial crisis would be difficult enough without adding to uncertainty in this way. The Bill should, therefore, be deferred until more tranquil times returned.16 The second was that the Bill offended the principle of separation of those in charge of monetary policy from political influence. It was argued that as all the members of the Bank Board would be appointed by the government, the Board would not be free from such influence. The only way freedom from political influence could be guaranteed was by the formation of a semi-private central bank, modelled along the lines of the Bank of England.!7 It did not seem to concern those who held this view that 14 F.g. Davidson to Shann, 31 March 1930, BNSWA. 15 Personal interview with the late Mr E. B. Richardson, formerly Managing Director of the Commonwealth Banking Corporation, 19 April 1962, who, in 1930, was an officer in the Secretary’s Department of the Bank. 16 This was the view which Sir Ernest Harvey expressed when he was consulted on

the details of the Bill and which the Commonwealth Bank then pressed on the

government.

17 Davidson was probably the leading figure which pressed for an amendment to the Bill to permit some of the Bank’s capital to be held privately, and for some of the directors to be elected by private shareholders, e.g. Davidson to Shann, 14 May 1930, BNSWA. Davidson did not agree, however, that the Bill should be delayed if 173

Australia and the Great Depression the Boards appointed under the 1924 Act were nominated entirely by the government, but there had been no complaint of political influence. The clear implication was that a non-Labor government could be relied on not to make political appointments and to leave the Bank free to determine its own policy, whereas a Labor government could not. A much less charitable although more plausible interpretation of the reasons for the delayed opposition to the Bill is possible. In the first place, the creation of a Central Reserve Bank would involve the dissolution of the present Bank and its Board of Directors, and there was no guarantee

that the government would reappoint any of the present directors to either of the two new Boards. It was feared that the government would take the opportunity to appoint directors in sympathy with its own financial policies. ‘This is what the banks really meant when they spoke of the possibility of political influence through the appointment of government nominated directors. As Davidson candidly wrote: There is a large body in the Labour Caucus at Canberra which holds extraordinary theories in regard to money, credit and banking. They wish to make of the Reserve Bank a machine for manufacturing notes and credit, regardless of the consequence. We are pursuing a very careful policy here in Sydney with the hope that we shall be able to give sufficient support to the moderate men in the Caucus headed by Scullin and Theodore to enable them to win the victory for us in Caucus before bringing it into Parliament.18 There was, moreover, no lack of evidence that the rank and file of Caucus

were deeply dissatisfied with the composition of the present Board and with the chairmanship of Sir Robert Gibson. When Sir Samuel Hordern’s term expired at the end of 1929 he was not reappointed despite the fact that Gibson strongly recommended it. Sir Samuel’s replacement was M. B. Duffy who had had a long association with the labour movement. Gibson’s own term expired in September 1930 and many Caucus members fought

against his reappointment. This made him particularly sensitive to the consequences of any general reconstitution of the membership of the Board. After his reappointment had been secured,!® he wrote of his own difficulties:

an amendment along these lines was accepted by the government. Rather than aggravate the depression, he pointed out that the establishment of a proper central bank would increase the liquidity of the trading banks, Davidson to Russell, 12 May 1930, BNSWA. Further, Davidson castigated the Melbourne banks as follows: ‘The most extraordinary and alarming feature of this Central Reserve Bank ques-

tion is not the proposal of the Labour Party but the attitude of the Melbourne Banks. They take up an attitude which is fundamentally unsound, in fact their

position comes, briefly, to this—1. A Central Bank is unnecessary; 2. It might not function in the expected manner; 3. It will take deposits from the trading banks, referring of course to the provision for transfer of cash resources; 4. It will cause rigidity and reduce elasticity; 5. The reduction in deposits will cause contraction in advances. Can you imagine anything more ignorant, or if not ignorant deliberately prejudiced and opposed to the whole of the objects, principles and practice of Central Reserve banking than the above?’, Davidson to Shann, 12 May 1930, BNSWA. 18 Davidson to Haymen, 24 April 1930, BNSWA. 19 Cabinet apparently reappointed Gibson without consulting Caucus, an action which was resented by the left-wing majority. See L. F. Crisp, Ben Chiffey, p. 49, and Allan Fraser in The Nation (Sydney) , 23 September 1961, p. 22.

174

Crisis in Government Finance My ... term of office expires next month, and although I understand it 1s intended to reappoint me, I am given to understand that this has caused the Government considerable embarrassment ..., a position I would not have tolerated but for the present difficult financial position.

Secondly, the trading banks feared competition from the new Commonwealth Bank, which, shorn of its central banking responsibilities, would be free to compete actively for general business. Details of the constitution of the new Bank were not made known until 23 May, when the Commonwealth Bank Bill of 1930 was read for a first time. The Bill did not contain any exceptional provisions, but its introduction underlined the nature of the threat to the private banks. There was a noticeable

increase in opposition to the Central Reserve Bank Bill after its introduction. Even Davidson soured. On 15 May he wrote that: I regret to say that there seems to be a move in. certain quarters to have it [the Central Reserve Bank Bill] rejected altogether. I think this would be unwise, it would be contrary to financial opinion throughout the world and

would probably affect external opinion to our detriment. The correct attitude seems to me to be that we welcome the establishment of an orthodox

Central Reserve Bank... .20 Six weeks later he denounced it as . .. So fundamentally unsound as to be useless or worse than useless. In fact it seems to me that it would be impossible for any Central Reserve Bank of standing throughout the world to recognise such an Institution ... .21

There was no significant change in the government’s attitude towards the Bill to explain this somersault. It seems that the prospect of aggressive competition was too much even for Davidson.?? As a result of strong pressure from the banking community,” the Bill was referred to a Senate Select Committee.?4 The report of the Committee,

in which the government refused to participate, was not received until December 1930. ‘The report was favourable to the principle of a Central Reserve Bank, but considered the moment inopportune and found a number of features of the Bill unacceptable. This line was then adopted by the Senate and the Bill was eventually abandoned late in 1931. The way in which this measure was treated seriously aggravated the already worsening relations between the government and the banks (including the Commonwealth Bank) and the anti-Labor forces in general. It added to mistrust and misunderstanding, and led to resentment which 20 Davidson to Masson, 15 May 1930, BNSWA. 21 Davidson to Shann, 1 July 1930, BNSWA.

“2 There was probably also the thought in the back of the minds of the private banks that the establishment of an aggressive Commonwealth Bank was the first step in bank nationalization. 23 On 12 May, well before the Bill had even reached the Senate, Davidson wrote: ‘we [the Sydney banks] arranged several weeks ago now with the Leader of the Opposition and several other Senators that the Bill would be referred to a select committee if possible in order to have the whole question examined in an endeavour to educate public opinion’, Davidson to Russell, 12 May 1930, BNSWA. 24 CPP, 1929-31, Vol. XI, pp. 465 ff.

175

Australia and the Great Depression made consideration of constructive economic and financial policy on a co-operative basis well-nigh impossible. There is no evidence to suggest that Cabinet in introducing this legislation had any other motive than a genuine desire to improve the banking system, an improvement which was patently necessary. Naturally it deeply resented the way in which. its constructive proposals were abused and distorted. On the other hand one can understand the attitude of the banks. A large section of Caucus was

openly in favour of forcing the government bank to inflate the note issue. The banks considered this to be the ultimate financial folly, and determined to use all their political influence in an endeavour to prevent it. The result was, however, that the extremist element within Caucus and the labour movement generally gained ground, which increased the difhculties of Cabinet in pursuing a moderate policy. The Orthodox Solution The New South Wales government was the first to face seriously the

issue of rapidly declining national income, rising unemployment and shrinking taxable capacity. There were two reasons for this. The first was

that the cessation of overseas borrowing affected it more than other governments. As explained in Chapter IV, this was due to extravagant and slipshod financial methods, especially in relation to the loan account. The second reason was simply that the state was governed by the Nationalists and not by the Labor Party, the implications of which will become evident below.

By the early months of 1930 it was anticipated that the New South Wales deficit for 1929-30 would exceed £3m; the actual deficit amounted

in the end to £4.8m. Most of the shortage was due to losses on railway and tramway services. Of the other states, only South Australia was tn a comparable position, due to a succession of dry years in the wheat belt. In comparative terms, the New South Wales deficit represented 54 per cent of the aggregate states’ deficit of £8.8m in 1929-30, whereas she raised only 42 per cent of aggregate states’ revenue.”° In opening the debate on ‘the Economic Situation’ in April 1930, the

Premier, T. R. Bavin, stressed that the subject before Parliament was

national in character and transcended state boundaries, and should therefore be discussed in the widest possible terms.26 The government's ap-

proach to the problem, he made clear, would be on strictly orthodox lines, and similar to that adopted by S. M. Bruce at the premiers’ conference a year earlier, except that on this occasion the arbitration system was not available as a scapegoat. Bavin began by pointing out that the Australian national income had declined by £70-80m compared with the previous year, a fall which would lead to serious difficulties in government finance and in business in the coming year. “These difficulties’, he continued, ‘cannot be avoided—they are part of the uncomfortable process of reducing our general scale of living to a level that we can afford.’?7 25 Finance Bulletin, No. 25, Tables 36 and 44. 26 NSWPD, Vol. 122, pp. 4530-1. 27 Ibid., p. 4531. 176

Crisis in Government Finance The problem was to reduce the cost of government, and to reduce the cost of primary and secondary production generally: No political or financial juggling can make it possible to pay the same real wages that have hitherto been paid, out of a total national income which is

depleted to the extent of seventy or eighty millions. It is not a political proposition; it is not a statement of policy. It is a plain statement of mathe"matical facts.28

Wages, the largest element in costs, would have to be reduced if the country was to have any chance of permanent recovery; and the sooner this was done the better the chance of rapid restoration of the old standard of living. There was, of course, nothing new in this; Nationalists had been expressing these views for the previous two years, but on this occasion Bavin stated more clearly and rigidly the fundamental ‘logic’, the ‘plain mathematical facts’ of their case. It amounted, in effect, to unqualified acceptance of the wages fund theory. Available funds from which wages were paid had fallen; therefore there was no alternative other than to reduce real wages accordingly. In a theoretical climate in which savings always equalled investment, and credit could not be created, it was difficult not to be impressed by this reasoning. The Nationalists and the general business community genuinely believed it to be completely true, and any ‘artificial’ attempt to prevent the free working of ‘natural economic laws’ would result either in the collapse of the free-enterprice sector under the weight of excessive wages or in spiralling inflation. In response to this challenge, the New South Wales Labor Party resorted to a policy of distortion, confusion and antagonism. Labor claimed that the policy of the Nationalist government was a grand conspiracy of the employers against the employees. ‘For the first time’, argued Lang, ‘the Premier has collected the thoughts and ideas of the employing interests of this State into a comprehensive statement.’?® The government had been attempting, he continued, to force down the standard of living of the worker ever since it assumed office in 1927. It was now attempting to instil a mood of pessimism and alarm, which would make this task easier. ‘These were familiar Lang tactics, which became even more familiar

after the success of the Labor Party at the New South Wales elections in October 1930. Lang’s alternative policy was simply to endorse the action

of the Federal Labor government in increasing tariff protection. By encouraging the expansion of local production, such a policy will, he said, soon permit an increase in the standard of living.8° There was not yet any sign of antagonism towards the Federal Party, nor any mention of repudiation or credit expansion. The policy of reducing costs of production was embodied in the Industrial Arbitration (Eight Hours) Act and the Public Services (Salaries Reduction) Act. The former restored the 48-hours working week to industry, thus reversing the 44-hours legislation introduced by the Lang 28 Ibid., p. 4534. 29 Ibid., p. 4551. 30 Ibid., p. 4553-

177

Australia and the Great Depression administration in 1926. The latter reduced the salaries of public servants by 8} per cent, exempting those who came within the jurisdiction of the Forty-Eight Hours Act.3! These measures supplemented earlier, and much less important, cost reducing provisions: the abolition of rural awards in December 1929, the reversion to the 48-hour week in the railway service and the reduction of parliamentary salaries in March 1930.

During subsequent months, as the chronic condition of New South Wales finance spread to all governments, Nationalist policy did not alter appreciably from that enunciated by Bavin. There were of course differences of opinion about the extent to which costs should be reduced, but there were no changes in principle. Nor was there any relaxation of the strict application of the wages fund concept; if anything, it bound traditional economic thinking more securely than before. Until the discussion of economic policy in recovery is reached, therefore, there 1s little to say about Nationalist or traditionalist anti-depression doctrine. On the other

hand, there is much to be said about the tactics employed. Unlike the Nationalists, the Labor Party did not possess an all-embracing economic

framework to which it could turn. It instinctively rejected the bulk of traditional economics, but it had nothing to put in its place. The cornerstone of its economic theory was tariff protection, but it soon became obvious in 1930 that tariff protection had failed to produce the magic results that were expected of it. The Labor Party had, therefore, to search for an alternative policy which naturally led it towards the camp of the

extremists. The story of this search, and the counter-proposals of the traditionalists, forms an important theme of the following pages. Balancing Budgets and the Melbourne Agreement The import prohibitions and tariff increases imposed by the Commonwealth government in April had an almost immediate effect on customs receipts and the buoyancy of the budget. The yield from customs in the late 1920s had averaged slightly more than £30m a year; this rate was

maintained during the first nine months of 1929-30, but in the final quarter of the year the yield fell sharply to an annual rate of £22m. Furthermore, this was only the beginning of import decline, and a much more drastic fall in customs receipts was to be expected. Thus, the third phase of the depression crisis commenced, a phase which was to last until the adoption of the premiers’ plan twelve months later. The two previous phases were, of course, by no means completed; all three overlapped to some extent. The first—the overseas payments crisis—was not brought under control until August 1930, and even then periodically recurred until mid-1931. The second—the balance of payments crisis— which can be loosely distinguished from the first, was also not completely checked until the final quarter of 1930-1. But, from mid-1930, the attention of the policy-making institutions shifted noticeably from overseas to internal financial problems. With a view to influencing the 1930-1 Commonwealth budget, Sir 31 Married persons whose income did not exceed £300 were exempted from the reduction.

178

Crists in Government Finance Robert Gibson addressed a long letter to the government early in June on its future financial problems. Until then the Bank had been silent on the wider question of government finance. Because of the buoyancy of the domestic loan market and of customs receipts, permanent overdraft finance had not been necessary; but it was evident that large sums would soon be needed unless expenditure was drastically reduced. Gibson commenced with his usual flood of disjointed verbiage by ‘assuring .. . [Theodore] of the utmost desire on the part of the Board to assist you in every possible way in coping with the very difficult task with which you are faced’, but added that ‘my Board feels it is a duty to place before you the serious position which is steadily developing in connection with the Bank's ability to stand behind the needs of Governments’. The point of the letter was reached several pages later. The Board, after the most serious consideration, had been forced to state that: ...1t cannot undertake to continue to accept further obligations unless, and until, it is placed in a position of definite assurance of arrangements whereby considerable relief is obtained overseas to ease the position. The Board is well aware, in the fullest sense of all the difficulties envisaged in this connection, but the point had been reached when the whole position must be faced, if serious consequences are to be avoided, and the Board is

not prepared to proceed upon a course which the dictates governing real responsibility and common sense indicate as absolutely unsound.

And finally and even more pointedly: The Board ... is of the opinion that the position is so serious as to indicate that reductions of expenditure should be made where such can be done without infringement of the Law.

This was not yet an ultimatum, but it was couched in unmistakable terms. Either the government drastically reduced expenditure and _ pursued a policy of ‘sound finance’, or the Bank would be ‘unable’ to provide finance.

Sir Robert’s letter apparently had no influence, for when the 1930-1 budget was brought down by the Prime Minister3? on g July there were no significant reductions in expenditure. The estimated fall in revenue of £14m was to be met almost entirely by increases in taxation.33 Additional 32 On the eve of the introduction of the budget, a Queensland Royal Commission (conducted by Mr Justice Campbell) alleged that Theodore and another former Queensland Premier, W. J. McCormick, were involved in improper practice in relation to the management of the Chillagoe mines and smelters, the Mungana leases and the Fluorspar Mining Co. Theodore immediately resigned from Cabinet although not from Parliament, and invited the Queensland government to bring charges so that he could defend himself. These charges were never brought, and there was a strong suggestion that the whole inquiry, and in particular the timing of the publication of the report, was a political manoeuvre to discredit Theodore and the Labor Party. This it certainly accomplished. If the government had been led by Theodore during Scullin’s absence abroad, it might well have avoided or lessened the destructive clash with Caucus in the final months of 1930. Scullin assumed the Treasurership on Theodore’s resignation. Theodore was reappointed in January 1931 upon Scullin’s return after the failure of the Queensland government to take any legal action in the interim. 33 CPD, Vol. 125, p. 3901.

179

Australia and the Great Depression customs and excise duties would raise £5.7m, and a flat rate sales tax of 24 per cent on all goods?4 would raise £5m.° In addition, postal charges were increased36 and income tax raised,3’ and with the proceeds from the liquidation of ex-enemy property, it was hoped to balance the budget.3§ The estimates of customs and excise receipts seem to have been based on wishful thinking rather than cold fact. The Treasury calculated that, if there were no changes in duties, revenue would fall by £7.8m compared with 1929-30, but that the increased duties would reduce this difference

to about £2.3m.%9 It is easy to ridicule these estimates in the light of events, but even on the results of the period April-June 1930 it is difficult to see how these figures were arrived at. In these three months revenue fell by 30 per cent compared with the average rate during 1929-30, while the budget only allowed for a fall of 19 per cent.*° Moreover, if the estimates are to make any sense it has to be assumed that there would be no further fall in imports in 1930-1 compared with the period April-June 1930, yet a vital part of the government’s policy was the reduction of imports by

about 50 per cent from the April-June figures. The unavoidable conclusion is that the government knew full well that its estimates could not be achieved. It probably considered that it was essential to make a show of balancing the budget at this stage. In the first place, if an honest endeavour was made to balance the budget, public service salaries and social services benefits would have had to be reduced. It was, presumably, not yet prepared to face the political consequences of this, and preferred

to defer the issue. Secondly, if funds were to be found by the Bank of England to relieve the position—assistance which could possibly be used to forestall reductions in salaries and social services—it was important to impress Sir Otto Niemeyer with a show of ‘sound finance’. This is a more likely explanation than simple arithmetical incompetence. On 14 July 1930 Sir Otto Niemeyer arrived in Perth, accompanied by

T. E. Gregory (Professor of Banking in the University of London) and R. N. Kershaw (an Australian on the staff of the Bank of England who had conducted liaison work with the Commonwealth Bank).*! His official 34 The sales tax did not include primary products, but it was imposed on imported goods.

35 CPD, Vol. 125, p. 3902.

36 The ordinary letter rate was increased from 1d to 14d. 37 The tax on company profits was increased from 14.4d to 16d in the £. Individual property tax was increased by 15 per cent when income exceeded £500, while inaividual personal exertion tax was increased by 10 per cent when income exceeded 00. 38 It would seem that this was a highly regressive tax pattern to be imposed by a

Labor government, but it was important that the field of direct taxation be left as free as possible for the states because they depended on it much more than did

the Commonwealth.

39 CPD, Vol. 125, p. 3902. Additional revenue was to be raised principally by the imposition of a 2} per cent primage duty. Duties were increased on petrol, tobacco, cigarettes, cigars, films, newsprint, and wireless valves. 40 Calculated from monthly revenue returns published in AJBR and Finance Bulletin,

No. 25, Tables 3 and 4.

41 Sydney Morning Herald, 15 July 1990. 180

Crisis in Government Finance mission was to confer with the Commonwealth government and financial

institutions ‘with the object of elucidating [a] solution of present and future finance, more especially with regard to its bearing as between Australia and overseas obligations’. It was clear that on the results of Niemeyer’s investigation would depend the chance of obtaining some relief in London. The most pressing problem was the renewal of £5m Treasury bills which fell due in September. Niemeyer was immediately taken under the wing of the Commonwealth Bank and Sir Robert Gibson in particular, and provided with a dossier of Australian financial statistics. Barely three weeks after his arrival, he met the Loan Council to deliver his preliminary verdict. His advice to the Treasurers is not on record, but its purport can be gleaned from the following unanimous resolution: That as the loan policy of the Commonwealth and the States is wrapped up with the balancing of the Budgets, representatives of the Commonwealth

and State Governments should meet in Melbourne on Monday, 18th

August, ... with the object of balancing the Budgets.42

It seems that Niemeyer convinced the Treasurers that the question of

relief from London could not be discussed without reference to the whole question of government financial policy.

In a tactical move to impress the need for the adoption of an unqualified policy of budget balancing and cost reduction, Gibson wrote another lengthy letter on 15 August to Scullin, as Chairman of the Loan Council, on the subject of the serious drift in national finance. The Bank, he said, had stressed the seriousness of the position as early as February, yet there was still no plan envisaged to meet the difficulties. The Bank was, therefore, forced to take a definite stand:

The seriousness of the whole position is such that my Board is compelled to advise you that it has been forced to intimate that unless, and until, matters are so adjusted, as to make the future position clear and definite in a manner which can enable the envisaging of a practical financial scheme, it will go

no further than has been promised in respect of London up to goth December, and Australia up to goth September.

The Bank was genuinely concerned that, unless a ‘clear and definite financial scheme’ was adopted, it would not be able to provide finance. Gibson pointed out that a limited note issue expansion could take place without infringing statutory limitations, but that it was more important to export the surplus gold reserve to strengthen London funds rather than retain it for the purpose of expanding domestic credit. The only alternative was the reduction of the legal backing for the note issue, and it was not the responsibility of the Bank to advise the government on this matter. This is further evidence of the Bank’s conviction that the only way to expand domestic credit was to increase the note issue. Niemeyer had been in Australia barely a month when he made his pronouncement on the state of the economy to the gathering of premiers.*? 42 Sydney Morning Herald, 7 August 1930.

43 Statement of Sir Otto Niemeyer to the Conference of Commonwealth and State Ministers, Melbourne, 18-21 August 1930, unprinted parliamentary paper, NLA, 181

Australia and the Great Depression It was a highly articulate and sophisticated review, but, as is hardly surprising, contained nothing new and could have been prepared by any

one of a number of Australian economists. The elements in the situation were divided into the familiar external and internal factors. The external factors—declining export prices and the closure of capital markets—were outside the country’s control. Internally, there were two basic problems: first, wages and the general standard of living had increased steadily, yet

productivity had lagged behind. Between 1911 and 1927-8 per capita productivity had only increased by one per cent.44 Thus the country was living beyond its means: the standard of living was too high. Second, the Australian price level had not moved with the price level in other parts of the world. While Australian prices had declined slightly, those in other countries, and especially in Britain, had declined sharply. This had led to basic disequilibrium in the balance of payments, which could not be remedied by tariff or exchange expedients: The secondary producer can attempt to meet this price situation by increased tariff protection, but this simply means that his protection is achieved at the cost of primary production.

The primary producer can attempt to meet the situation by a further depreciation in the exchange. Increasing tariffs prejudice the primary producer;

rising exchange rates prejudice the whole fabric of national finance.‘ This is probably the only statement to which Australian economists would

have taken exception. Most of them were convinced that to follow the downward course of gold prices was an even greater threat to the fabric of national finance. Niemeyer continued by detailing the legacy of external and internal disequilibrium; the growth of external unfunded debt, growing internal interest commitments as a result of exchange rate instability, increasing budget deficits, and rapidly declining national income and rising unemployment. He stressed that unless immediate steps were taken to correct the position, it would be extremely difficult to deal with the large external and internal loans which matured in 1932 and thereafter. If Australia was to emerge from a regime of emergency tariffs and rationed exchange, she must depend on the primary producer, and the ability of the primary producer to sell in world markets would depend on his costs of production: I assume that everybody in this room is in agreement that costs must come down ... there seems to me to be little escape from the conclusion that in recent years Australian standards have been pushed too high relatively to Australian productivity and to general world conditions and tendencies. If Australia does not face that issue, she will not be able to keep even those standards which she might hope to carry by taking timely action, and she will see an inevitable increase in unemployment.*é reprinted in E. O. G. Shann and D. B. Copland, The Crisis in Australian Finance, 1929-32, Sydney 1931, d. sa.

44 This was highly coloured selection of dates: 1911 was a year of exceptionally high activity while 1927-8 was well below average. 45 Niemeyer Statement, p. 9. 46 Ibid., p. 10. 182

Crisis in Government Finance Underlying Niemeyer’s prescription was the assumption that Australia would continue to be a predominantly agricultural country: there was no recognition of or sympathy for her industrial aspirations. Accordingly, after considering additional advice from Sir Robert Gibson, the premiers unanimously resolved to: 1. Balance their respective budgets in 1930-31 and to maintain a similar balance in future years. Further, if during any year, there are indications that revenue will fall short of expenditure, immediate steps will be taken to ensure that budgets will balance. 2. The Loan Council will raise no further loan overseas until the shortterm external debt is completely dealt with. 3. Any further loan expenditure which is possible from internal flotation shall be confined to reproductive works. [Reproductive works were defined as those yielding interest and sinking fund payments ‘within a reasonable period’.]

4. In order to ensure that the public debt will be serviced from revenue, a special account will be opened at the Commonwealth Bank solely for the payment of interest. 5. That the Commonwealth and State Treasurers will publish monthly, in Australia and overseas, a brief summary on uniform lines showing revenue

and expenditure, the position of the short-term debt, and the state of the Loan Account.47

A standing committee of Commonwealth and state governments was appointed to supervise the operation of the plan. It comprised the Trea-

surers of the Commonwealth, New South Wales, Victoria and South Australia. One of the first subjects to be investigated by the standing committee was the problem of the duplication of Commonwealth and

State services.

The Melbourne Agreement, as the plan of August 1930 was called, did not, however, explain how budgets were to be balanced. There were no estimates of the fall in revenue in 1930-1, nor even a comprehensive statement of the current financial position. It was implied that expenditure would have to be reduced, and that wages and salaries should be the first to suffer reduction, but there was no indication of the magnitude of the reduction necessary. Each government was left to work out its own solution. These omissions are particularly surprising in view of the fact that a much more rapid deterioration in the condition of government finance was expected to take place in 1930-1. It may be that governments were not yet fully aware of the rate or extent of deterioration, but they knew that conditions would be much more difficult than in the immediate past. Did the premiers genuinely believe that budgets could be balanced in the coming year? Could they have been so palpably ignorant of what strict adherence to the Agreement involved? There is evidence to suggest that they did not take the terms of the Agreement seriously; that in their

show of determination to balance budgets they were playing to the gallery. In the first place, as financial conditions continued to deteriorate 47 Ibid., pp. 5-6. 183

Australia and the Great Depression in the last quarter of 1930, governments made very little attempt to achieve anything approaching a balanced budget. To do so would have involved such a wholesale reduction in expenditure that it would have meant political suicide. In most cases public service and parliamentary salaries were reduced (by about 10 per cent on average) ,*8 but similar reductions were not made in other forms of adjustable expenditure.‘ It seems that the premiers were following the tactics of the Commonwealth government. Their primary consideration was to impress Niemeyer, the Bank of England and the London money market with their financial good intentions. ‘This would improve the chances of obtaining assistance from London. But Niemeyer and Gibson were playing much the same game. They also knew that budgets could not be balanced in such a short time. Their motives were to impress on governments, and the nation in general, the seriousness of the position and urgency of drastic action in the direc-

tion of reducing costs of production. In Gibson’s own words uttered privately to the trading banks in June 1931, ‘neither Niemeyer nor I thought even in August last at the Melbourne Conference that we could

balance budgets, but thought if we took action we could achieve the necessary atmosphere’. In this they were more successful than were the premiers in obtaining assistance from London. The Melbourne Agreement completed the split in the Labor Party, a split which seriously reduced the government’s ability to resist the deflationary policy of the Commonwealth Bank.

The Aftermath of the Melbourne Agreement (a) The London Position ‘The object of Niemeyer’s visit was to confer

with Australian financial authorities on the problem of her external financial position. The main part of this problem, the servicing of the overseas debt, had been brought under control by the adoption of the Mobilization Agreement, which left Niemeyer free to concentrate on the floating debt in London due to the market and the Westminster Bank. In mid-August this debt amounted to £17.9m, of which £10m was represented by Treasury bills (maturing on 2 September and 31 December in parcels of £5m), and the remainder by overdraft at the Westminster 48 The reductions in Commonwealth public service salaries are mentioned below; the reductions in New South Wales have already been dealt with. In Victoria public service salaries (including police and teachers) were reduced by about 8 per cent in November 1930, a reduction which was estimated to be the same as the fall in the cost of living, VPD, Vol. 184, pp. 3836-7. In Queensland the reduction was made in September and ranged from 10 to 15 per cent for salaries in excess of £400 per annum, QPD, Vol. CLVI, pp. 1012-16. In South Australia salaries were reduced by 10 per cent by an Act passed in November, SAPD, 1930, pp. 1700 ff. In Western

Australia the reduction was made by the imposition of a tax on salaries which ranged from 3? to 10 per cent. The W.A. Salaries Tax Bill was introduced in

October, WAPD, 1930-1, pp. 1104-5. Usually parliamentary salarics were reduced at the same time by about the same proportion. 49 These salary reductions were offset by increased demands on governments for unemployment relief, social services and interest payments. Thus aggregate Commonwealth and state expenditure in 1930-1 at £192.6m was almost identical to expenditure of £192.4m in 1929-30, Finance Bulletin, No. 25, Table 56 (b). 184

Crists in Government Finance Bank. It was necessayy to deal with the debt in three stages. The first and

most urgent was to renew the existing bills. The second was to float a medium- or long-term funding loan to enable the existing floating debt to be paid off. ‘The third—a remote possibility—was to raise another longterm cash loan to enable government and Commonwealth Bank sterling funds to be rebuilt. The signing of the Melbourne Agreement allowed the first of these to be accomplished with relative ease. The renewal of the bills falling due

on 2 September had given rise to considerable concern, and was an important factor in influencing the decision of the premiers.5° During July and early August the price of Commonwealth stock languished at 88-89, selling down to 853. News of the Agreement pushed the price up to 914 by the end of August and the discount market was in a better frame of mind to deal with the Australian bills. Tenders for the renewal of the bills for sjx months attracted £11m in applications, the successful tendering to yield a modest £3.15 1d per cent per annum. Also on the basis of the conference resolutions, negotiations were resumed with the Westminster Bank with regard to the overdraft of £7.9m. The Bank had been pressing for a substantial ‘relief’ for some months, and if its co-operation was to be secured in the future some reduction would have to be made. Niemeyer suggested that the overdraft be reduced to £5m and that the Bank be asked to continue this limit to 30 June 1931. To finance this and improve sterling reserves in London another £5m in gold would have to be shipped. The Westminster Bank agreed to these terms, except that they would only carry the reduced overdraft until 31 March 193}.

The next step was to arrange for a funding loan. This could only be successfully negotiated, however, if there was further improvement in Australia’s credit standing. Assuming that this did take place, Niemeyer thought that it would be possible to float a loan for £10m in December 1930, but he thought that Nivison would insist on a 6 per cent basis to underwrite the issue. He also stressed that if the loan was to be successful, it would be necessary to make perfectly clear that the proceeds would be used to redeem existing short-term debt and would not be spent on public

works. All being well, it might then be possible to raise another £10m the following March and to use part of the proceeds for works expenditure. These plans were cancelled, however, by the repudiation resolutions

of the New South Wales Labor Party and by the conflict within the federal Labor Caucus. Instead of hardening, security prices declined throughout the remainder of the year and closed at 794. An even greater fall was prevented only by the assurances of the Prime Minister on his arrival in London that the Commonwealth had no intention of defaulting on interest payments and would meet her commitments as she had always 50 Immediately the Melbourne resolutions were passed, Fenton cabled London informing that the ‘Conference of Premiers and Loan Council have arrived at such con-

clusions as to make it possible to negotiate for meeting immediate maturing

liabilities in London’.

185

Australia and the Great Depression done in the past. As December approached the question was not whether a funding loan could be raised, but whether the bills that matured at the end of the year could be renewed. The advice from London was gloomy. Sir Ernest Harvey’s view was that there was no chance of renewing the bills before the end of the year, and that the only possibility was to tender privately early in the new year. Even then London was sceptical. According to Collins, Harvey’s private view was that there was not a ghost of a chance of placing the bills by tender and that Australia’s position was hopeless following the failure to carry out the Niemeyer reforms and the debacle of the Wheat Marketing Bill. In the event, the bills were renewed by Commonwealth Bank private tender but only after protracted negotiations and an interest yield of 54 per cent compared with the Bank Rate of 3 per cent. It was evident, however, that Harvey was fundamentally

correct and that time was running out for Australia. Unless internal finance was drastically reformed, further renewals would not be possible.

(b) Repudiation and the New South Wales Elections The rank and

file of the labour movement was of course unaware of the reasons for the acceptance of the terms of the Melbourne Agreement by the three Labor

governments. Its reaction is, therefore, understandable. Here was a British financier, who had been in Australia for little more than a month, insisting that the standard of living was too high, and that it should be immediately reduced. ‘The standard of living of the worker, which had been painfully built up over many years, was being jeopardized to satisfy

foreign bondholders. If salaries and wages were to be reduced, why should bondholders escape a similar reduction? Why should the Australian worker have to continue to pay for the privilege of having fought and died for Britain? The Melbourne Agreement electrified politics throughout the Commonwealth, especially in New South Wales where state elections were due

in October. No opportunity was lost to exploit the sympathy of the workers against Niemeyer. Intense nationalism and anti-Semitism were skilfully added to the political cauldron. The result was reflected in the columns of the Labor Daily, the unofficial organ of the New South Wales Branch of the Australian Labor Party: The sublime impertinence of the lately-arrived emissary of Capitalism abroad —Sir Otto Niemeyer—who comes here to tell us that human misery—life, even—is as nothing compared with the necessity of providing the London Jews with their fat rakes-off, passes our understanding.

... our financial straits are wholly due to debts incurred in participation in a war which had nothing to do with us, really. He who would suggest that Big Money should cut some of the profits is labelled a madman—a repudiationist. No! The worker, his wife and his children, must starve.5!

The powerful Secretary of the Labor Council, J. S. Garden, added his weight to the cause by asserting that the people of this country will refuse 5129 August 1930. 186

Crists in Government Finance to submit to a 20 per cent reduction in wages, which he estimated the Niemeyer plan would involve, ‘and that they will not pay any of the Shylocks of London if they will not agree to fund the debt free of interest for five years’.52 The public, he believed, would go to the point of complete repudiation of the war debts. In this mood the Political and Industrial Committee of the party met a few days later to consider the contents of a draft economic and financial policy to be submitted to the Central Executive. The meeting seems to have been dominated by Garden and his followers. Repudiation was at the centre of a five-point plan. ‘The committee recommended that the New South Wales members of Federal Caucus be instructed to work towards the repudiation of the Melbourne Agreement, the cancellation of all war debts, the declaration of a five-year moratorium on other overseas

debt, the mobilization of the credit of the community to provide work and sustenance for the unemployed, and the maintenance of the payment of award wages regardless of the financial position.5%

The Industrial and Political Committee had, however, been too im-

petuous and insufficiently mindful of the imminence of the state elections. The parliamentary wing was alarmed that if the repudiation resolutions were endorsed by the Central Executive, their electoral chances would be seriously jeopardized.54 In several days of intense lobbying which preceded the meeting of the Central Execu.:ve on 29 August, Lang was able to marshal his forces to defeat the adoption of the committee’s recommendations.5> The action of the committee in issuing a repudiation manifesto without sufficiently testing the feelings of the movement was denounced by the executive.5¢ Instead of unqualified repudiation of all war debts, it

pressed the Prime Minister to negotiate for the reduction of payments (interest and sinking fund) on the war debt due to Britain from 7 to 3} per cent,5? the rate paid by Britain to America on her war debt. It also resolved to instruct the New South Wales members of the Federal Labor

Party to reject the Melbourne Agreement and to uphold their election pledge to ‘maintain and improve the standard of living’,58 and urged the government to take steps to dissolve the Loan Council as: . .. this body is merely an instrument in the hands of the loan mongers and

capitalists generally, which can always manipulate to prevent a Labor 52 Ibid.

53 Sydney Morning Herald and Labor Daily, 27 August 1990. 54 Sydney Morning Herald, 28 August 1930. 55 Ibid., 29 August 1990. 56 Labor Daily, 30 August 1930.

57 The aggregate war debt due in London on go June 1930 amounted to £92m on which £4.6m interest was paid, or an average rate of 5 per cent. The sinking fund commitment amounted to £1.1s 8d per annum thus the total payment on the debt was nearer to 6 than 7 per cent. If this payment was reduced to 3} per cent, it would only have saved the government £2.4m sterling a year. Finance Bulletin, No. 25, Tables 58-9; Commonwealth Year Book, No. 26, p. 390. 58 Resolution of the Central Executive of the New South Wales Branch of the Australian Labor Party, 29g August 1930, Sydney Morning Herald, 30 August 1930; also in Shann and Copland, Crisis in Australian Finance, d.x5c. 187

Australia and the Great Depression Government, Federal or State, from carrying out the platform of the Australian Labor Party.59

Thus repudiation was shelved while the party prepared for the election campaign.

Despite the attempt of the Nationalists to capitalize on the repudiation resolution, Lang skilfully avoided the issue during the hectic SeptemberOctober election campaign. In outlining Labor’s policy he stated that: The Australian Labor Movement would not permit for one moment any of its leaders to be associated with a policy of repudiation. The pledge to the people from a Labor man is as binding as his pledge to the bondholder. The Labor Party sets its face against all repudiation whether it is the kind practised by Premier Bavin or that which is preached by Alderman Garden.6?

The election was fought on adherence to the Melbourne Agreement. The

Nationalists sought endorsement of their policy of reducing costs, increasing the length of the working week and doing anything else that was necessary to maintain a balanced budget. Lang campaigned on the maintenance of the standard of living, the rejection of the Melbourne Agreement, a guaranteed price for the wheat farmer and adequate public works expenditure for the relief of unemployment. He promised to restore the 44-hours week and the social service payment cuts that had been made. There was something for everybody. One cannot help being impressed by the contrast between the two programmes. The Nationalist’s was a dull, academic affair, bent on the correction of past misdeeds. Labor’s policy

promised return to the land of milk and honey; the unemploved, and those threatened with dismissal and wage reductions were not interested in the question of whether this was possible—they were willing to grasp at any straw. The result of the poll on 25 October was a landslide victory for Labor: it gained 15 seats for an overall majority of 10. (c) An Economy Session of Parliament? Before the August meeting of premiers had concluded, the Prime Minister, accompanied by J. Parker Maloney and Frank Brennan, left Australia to attend the Imperial Conference in London. Because of the gravity of the financial position he had seriously considered cancelling his trip, but Cabinet decided that Scullin’s presence in London would materially assist Australia.61 Moreover, the long and strenuous session of Parliament which had ended in July had taken toll of his health, and at the time of the premiers’ meeting he was a sick man. This, together with the fact that a further session of Parlia-

ment was not planned until his return, probably swung the decision against cancellation of the trip. It proved an unfortunate decision for the government, which sadly missed his leadership in the five months he was absent, particularly as Theodore was not available to assume command.

The reins of government were handed over to the slow moving and 59 Ibid.

60 Labor Daily, 23 September 1990. 61 CPD, Vol. 127, p. 61. 188

Crisis in Government Finance thinking J. E. Fenton, as Acting Prime Minister, and the inexperienced though energetic J. A. Lyons, as Acting Treasurer.

Shortly after the conclusion of the premiers’ conference, Federal Cabinet met in Melbourne to consider what, if any, additional steps were

necessary to adhere to the terms of the Melbourne Agreement. It was greeted with the news that in July and August revenue had fallen to an extent which indicated a deficit of £9m in a full year if the trend continued.® In view of this, Fenton and Lyons pressed for the summoning of Parliament in October for a special economy session. It was clear to them that the government had no alternative than to reduce salaries and social services, as all other measures to increase revenue and reduce expenditure had been exhausted.® In support of this viewpoint, they had invited Sir Robert Gibson to attend the meeting. The proposed parliamentary session was strenuously resisted by a minority group in Cabinet, of which Anstey and Beasley were the principal spokesmen. Indeed, Beasley had gone as far as to state publicly that he would resign if the Melbourne Agreement was adhered to.*4 For this group a special economy

session would be tantamount to acceptance of the principles of balanced budgets and of reduced salaries and wages; but they did not have the numbers to command a majority, and it was decided to summon Parliament to reduce ministerial, parliamentary and public service salaries, adjust maternity allowances and pension payments, further increase taxation on luxuries and on income, and impose a special tax on interest.®©

The proposed tax on interest was included in the programme at the instigation of the Anstey group.® It was hoped that this would help to pacify the anti-Niemeyer extremists in New South Wales, although of course the tax would only apply to internal bondholders. The Cabinet proposals were, however, of a general nature, and the allimportant details had yet to be worked out. For this purpose a Cabinet sub-committee (comprising Fenton, Lyons and Daly) was appointed to prepare a detailed plan for submission to Cabinet and Caucus. The subcommittee also had the task of ‘moral suasion’—of converting the extremists to a more moderate course.®*? The tax on interest was soon dropped from the list of alternatives.68 As soon as it was known that such a tax was being seriously considered, the price of bonds fell sharply. Yields increased on most issues by about 10s per cent. On longer dated issues the

yield increased to 53-6 per cent and to 63-7 per cent at the short end of the market. It was evident that such a tax would defeat its own purpose: interest rates would rise still further and the chances of converting the December loan maturities on reasonable terms would diminish. Thus the 62 Sydney Morning Herald, 2 September 1930. 63 Labor Daily, 3 September 1930.

64 Sydney Morning Herald, 2 September 1930. | 65 Ibid., 5 September 1930.

66 Labor Daily, 5 September 1930. The Labor Daily considered that acceptance of the

principle of a tax on interest prevented an open split in Cabinet ranks. . 67 Sydney Morning Herald, 5 September 1930. 68 CPD, Vol. 127, p. 60.

189

Australia and the Great Depression only real alternative was the substantial reduction of salaries and social services. ‘Taxation could not be increased further without encroaching on the territory of the states. Sir Robert Gibson was invited to attend sub-committee meetings to discuss the possibility of providing finance for

a limited budget deficit, but he would grant no concession. ‘Only immediate action on the part of the Government of Australia’, he declared, ‘to resolutely meet the situation and take the steps necessary to restore public confidence can, in my opinion, prevent disaster.’ In other words, the Bank would not sanction anything short of unqualified adherence to the Melbourne Agreement. The task of steering a middle course between the Bank and the left-

wing majority in Caucus was not an enviable one. Both had a virtual right of veto, and neither was prepared to compromise. When the subcommittee was due to complete its task and submit its recommendations to the full Cabinet at the end of September, it was unable to agree on a

unanimous recommendation. It had, therefore, to submit a number of alternatives. What these alternatives were is not known, but they probably centred around the reduction of pensions and maternity allowances. It seems generally to have been agreed that some measure of parliamentary and public service salary reduction was inevitable. Consideration of Cabinet’s policy was complicated by the sudden appearance of Lang in Canberra. Lang considered that his electoral chances would be diminished

if the federal government announced a policy of salary reductior.’® It was an unprecedented interference in federal politics and added to the deterioration of relations within the Labor Party. Later in the day Lang held an election meeting in Queanbeyan which was attended by Anstey, Blakeley, Beasley and Daly.?71 The meeting, which carried a particularly

vitriolic denunciation of ‘Niemeyerism’, was undoubtedly designed to influence Caucus against Cabinet’s salary-reduction plans. After a stormy

session, Cabinet decided on a cautious scheme of salary reduction and increased public works expenditure.’? Expenditure was to be reduced by about £4m by reducing ministers’ salaries by 15 per cent, and public service salaries on a graduated scale ranging from 2} to 124 per cent. The proposed tax on interest was to be replaced by increased tax on property income in general. A new works programme of an unspecified amount was to be commenced with the assistance of the Commonwealth Bank for the relief of unemployment. There was no mention of any reduction of social service payments. Notwithstanding these concessions, the scheme

was only carried by a very narrow majority’? and there appeared to be little hope that it would be endorsed by Caucus when Parliament reassembled at the end of the month. 69 Sydney Morning Herald, 29 September 1990.

70 Labor Daily, 2 October 1990. , 71 Ibid. 72 Sydney Morning Herald, 3 October 1930.

73 Sydney Morning Herald, 3 October 1930 reported that it ‘understood’ that the decision was reached by a majority of 1. 190

Crisis in Government Finance ‘Release of Credit’

Cabinet knew full well that it would have a stern fight on its hands if its scheme was to be adopted by Caucus without drastic amendment, but it did not anticipate the extent of the hostility that was to greet it. ‘The unforeseen factor was the result of the New South Wales election. ‘The

left wing, the majority representing New South Wales electorates, returned to Canberra flushed with the success of the campaign against ‘Niemeyerism’. Whereas previously they felt their hands tied by the Senate

and the Commonwealth Bank, they now felt confident that they could successfully challenge both of these repositories of financial orthodoxy. They felt they could threaten the Senate with double dissolution with an excellent chance of success at an election; and they could challenge the Commonwealth Bank Board to carry out government policy or threaten it with dismissal.

The Caucus militants believed that the banks had deliberately intensified the depression for their own ends. Instead of promoting the reabsorption of the unemployed by expanding credit, they argued that the banks preferred to relax and reap their harvest of interest. The events of the war had proved that a great increase in government expenditure could be financed by the ‘manufacture’ of bank credit; what was done for the war effort could also be done now for the unemployed. Yet the banks insisted that the only alternative, to quote Anstey, was to: Cut down all public and private expenditure. Cut wages, cut spendings. Stimulate production by consuming less. Cut old-age pensions, cut soldier pensions. Cut everything and everybody except the bankers and the bondholders.

By these means, we are told, our financial credits and conditions will be improved.74

Bank credit, the argument ran, did not rest on the assets of the individual banks; in the final analysis it had as its basis the total assets of the nation.

Thus, the banks should ‘release’ the credit of the nation, maintain the wages and the spending power of the community, and absorb the unemployed by an increase in public works expenditure. The ‘release’ of the credit resources of the country was therefore the first objective of the left-wing Caucus majority. The September conference of the Australian Council of Trade Unions had given Caucus a lead when it recommended that the federal government should find £20m for the provision of work as a first step in the ‘freeing of the credit resources of the country’.’® The first few days of the Caucus meeting were occupied by a consideration of Cabinet’s scheme. Caucus was prepared to

accept the proposals for increases in taxation, but rejected the salary reductions.76 Then the long-awaited thunderbolt, which was irrevocably to divide the party, struck. As an alternative policy, the Member for Clare (N.S.W.), G. A. Gibbons, moved: 74 Facts and Theories of Finance, Melbourne C.1930, p. 9.

75 Resolutions of the Melbourne Conference of the Australian Council of Trade Unions, 15 September 1930, Minutes, Mitchell Library; also in Shann and Copland, Crisis in Australian Finance, d.8. 76 Labor Daily, 29-30 October 1930. 191

Australia and the Great Depression That the Commonwealth Bank be required to create sufficient credit as and when required for the following purposes:— (a) Finance the requirements of the Commonwealth Government in connection with all services covered by Parliamentary appropriations.

(b) Meet that portion of the internal loans maturing during the financial year which has not been otherwise provided for. (c) Provide for financing State and Commonwealth loan works programme up to a limit of £20,000,000. (d) Provide financial accommodation through the Commonwealth Bank, trading banks, State financial institutions, and, if necessary, through

insurance companies, to be used for productive purposes in primary and secondary industries. The ultimate amount of credit to be issued under this head to be determined by the effect upon the commodity price level.77

Such credit was to be available at a rate of interest not exceeding 5 per cent. The motion, carried after one of the most momentous debates in Labor history, destroyed the government’s chances of pursuing a moderately expansionist policy. There was now no hope of coming to terms with Sir Robert Gibson, for the Bank would fight the government to the

bitter end. |

The government’s immediate problems were further increased when Caucus agreed to a further motion, proposed by Frank Anstey, to defer for one year conversion of £28m which would fall due in the following December.’8 ‘This was an unnecessary and foolish move, unworthy of Anstey’s political ability. ‘The Gibbons resolution was at least based on commonsense and was directed towards the solution of the unemployment problem. If it had been proposed a few years later, its economic statesmanship would have been applauded. Anstey’s motion was unnecessary because it was extremely doubtful if it would have been of any assistance. ‘There was no assurance that the situation would materially improve within twelve months. Even if a conversion loan was not completely successful, it is unlikely that the banks would have allowed the government to default, for they stood to lose too much by failing to assist in such a situation. It was foolish because it immediately drew the charge of repudiation. It destroyed any chance Scullin had of arranging assistance in London;’® and delivered the government into the hands of Sir Robert Gibson even more than did the Gibbons resolution. Despite these resolutions, Lyons was eventually able to gain sufficient support for some measure of parliamentary and public service salary adjustment; but a simple reduction was not the method used. This would have savoured too much of acceptance of the principle of a reduction in 77 an Oa.1 November 1930; also in Shann and Copland, Crisis in Australian Finance, 78 Resolution on the loan falling due in December 1930, proposed by Frank Anstey, 4 November 1930; in Shann and Copland, Crisis in Australian Finance, d.gb. The £28m comprised the £18.6m which was still outstanding after the March conversion loan and a number of state loans to a total value of £9.4m which fell due around December. 79 Scullin to Lyons (cablegram) , 8 November 1930 in Shann and Copland, Crisis in Australian Finance, d.gc. 192

Crisis in Government Finance the standard of living. Instead, a special supertax on incomes was to be levied, which would include all those in receipt of a Commonwealth government salary in excess of a certain sum. The tax was at the rate of 10 per cent on incomes between £750 and £1,000, and 15 per cent on incomes in excess of £1,000.89 The advantage of a tax, compared with a reduction, was that it maintained the fiction of existing wage standards and appeared a less permanent measure. Moreover, it appealed on the grounds of taxing the higher income groups most. The majority of public servants whose incomes were below £750 were exempted altogether. If the Prime Minister had not been abroad, it is almost certain that Lyons would have tendered his resignation as a result of the Gibbons and Anstey resolutions. He decided, however, to wait until Scullin’s return in January®! and ignore the Anstey resolution. At the Loan Council meeting held on 11 November, he submitted plans for the issue of a loan to cover the £28m that fell due in December. The Council agreed to the issue on terms recommended by the Commonwealth Bank: 53 per cent for 20 year stock, 53 per cent for 10 year stock and 6 per cent for two years (each series to be issued at par). Even with these attractive terms it was doubtful if the loan would be successful, and Lyons immediately threw himself

into an appeal to the people for the success of the loan. His political future depended on it. The government’s revised budget estimates, submitted to Parliament on 5 November, must be one of the most extraordinary documents in Australian financial history. It was tacitly admitted that it was impossible to balance the budget within the current financial year; yet the fiction of

budget balance was maintained by the use of a heroic assumption and by a clever piece of arithmetical double-talk. The latest revenue returns had shown a further turn for the worse. The deficit in the quarter ended 30 September amounted to £6.7m. Lyons estimated that, if conditions did not improve, a deficit of £12-15m in the full year was indicated®2—ample testimony to the absurdity of the original estimates. This shortage was to

be met by further departmental savings and economies (£1.2m); by elimination of surplus sinking fund payments®? (£2m) ; by increases in customs and excise (£2m); and by increases in income tax on property, personal exertion and salaries§* (£1.7m) .85 This amounted to a total 80 Sydney Morning Herald, 31 October 1930. 81 Sydney Morning Herald, 7 November 1930, reported that Lyons would not resign until Scullin’s return. 82 CPD, Vol. 127, pp. 57, 61.

83 In addition to statutory sinking fund payments, the Commonwealth had made a practice of paying to the National Debt Commission a sum to redeem the debt in a shorter period than that laid down. It was this additional payment that was being eliminated. Minimum statutory payments were continued throughout the depression. 84 The details of the salary tax were slightly different from those reported to have been agreed to by Caucus. For salaries in the range £725-1,000, the tax was to be to per cent (salary not to be reduced below £725); in the range £1,000-1,500, 12} per cent

(not to be reduced below £900); and in excess of £1,500, 15 per cent (not to be reduced below £1,312.105) . 85 CPD, Vol. 127, pp. 61-3.

193

Australia and the Great Depression benefit to the budget of £6.9m. Paper budget balance was accomplished in the following way. ‘The above proposals for the balancing of the budget

were assumed to bring about a ‘restoration of confidence and a revival of trade’. This would reduce the estimated deficit, under the existing budget provisions, from £12-15m to £8-10m. No details were given of how

any of these figures were arrived at. The new budget proposals were expected to improve the position by £6.9m in 1930-1, but in a full year they would yield £8m. This figure was equated to the lowest possible deficit under a revival of trade and confidence to bring about a budget balance. The revised budget proved a happy hunting ground for the Opposition for the remainder of the session. Its details were torn to shreds by Latham.8¢ No one was deceived by it, particularly not the Commonwealth Bank.

The budget compromise did nothing, however, to pacify Caucus. It had been betrayed by Lyons in the matter of the conversion loan; it was now determined to force the issue on the Gibbons resolution. During November the proceedings of Caucus became more important than those of Parliament. Indeed, more space was devoted in the press to the latest turn of events, the latest clash and uproar in Caucus, than to the com parative tranquility of the House of Representatives. There were few secrets in those hectic weeks; protagonists could be heard throughout Parliament House. As Denning, a journalist who witnessed these events, wrote: So terrific became the tumult at times that all Parliament House was aware of it, although there were double and padded doors separating the party room from the lobbies. . . . Journalists, far from attempting to listen in to forbidden places, were embarrassed in their efforts to get far enough away from the disturbance to be able to proclaim that they were making no effort to overhear it.87

And if any detail had been missed, there was no need to speculate: When the party doors opened after another of the innumerable truces had been called, most members of the various factions were only too willing to meet newspaper correspondents ..., and pour into listening ears their tale of woe.88

By the end of November there were two distinct parties, which held separate meetings to plan tactics against the other. The most militant of the left wing eventually became the New South Wales Labor Party, which

withdrew completely from the main party and sat on the Opposition benches.

Towards the end of November Cabinet submitted to the demands of Caucus and placed the Gibbons resolution before the Commonwealth Bank. At a special meeting between Bank Board representatives and Cabinet on 1 December, the proposal that the Bank should ‘release’ credit 86 Ibid., pp. 181-91. 87 W. Denning, Caucus Crists, p. 66. 88 Ibid.

194

Crisis in Government Finance by continuing to finance budget deficits and in addition make available £20m for public works expenditure was, as Cabinet expected, completely rejected. But there emerged an important change in the Bank’s tactics: for

the first time it relented in insisting that budgets should be balanced within the current financial year. The Bank Board’s formal reply to Cabinet’s request was conveyed in Gibson’s letter of 16 December.®® He

first of all denied that ‘the Bank Board was attempting to dictate the policy of the Government, ... or that the release of real credit has been in any way curtailed’. That the latter was untrue was obvious to him from a cursory glance at banking ratios and from the aggregate amount of assistance made available to governments, which it was expected would reach £53m by the end of 1930. He continued by reiterating the ‘law’ of

prudent central banking: In matters of this kind political exigencies must not govern those charged with the responsibility of maintaining a sound financial and monetary system and experience has proved, in the resultant disasters which have taken place, the effect of permitting political exigencies to displace the principles of sound finance and currency.

The Bank would continue to consider from month to month the provision of finance to meet budget shortages, but it was an entirely different matter to find an additional £20m for public works expenditure: To deal with a transaction of this nature as a straight out loan to the Govern-

ment of Australia, without any reliable prospect of liquidation by public subscription, would have the effect of converting the funds of this Bank into frozen assets, and therefore debar the Bank from using funds to this extent for the proper functions of banking.

. .. If the Board believed that even by an action of definite inflation to the extent of £20,000,000 it could successfully help to tide over the very difficult

situation now confronting the country, it might be justified in spite of criticism from certain quarters in taking such action. As, however, the Board is of the opinion that inflation of the character contemplated will not only fail to improve the situation but will definitely contribute towards plunging the country into more serious difficulties, and, if proceeded with, into final disaster, it must definitely announce that it is not prepared to subscribe to any such policy. The Board is fully seized with the responsibilities which have been placed upon its shoulders by Act of Parliament to administer and control

authority.

the currency of this country in the interests of the people, and this is a responsibility which the Board has not the power to transfer to any other

These extracts illustrate two fallacies to which the Commonwealth Bank clung throughout the depression. The first was that the financial and economic systems should always be administered separately, the former by the Bank as the central bank and the latter by the government; 89 This was the longest of many long Bank-government letters of the depression period and ran to no less than 4,000 words. 195

Australia and the Great Depression with no interference from either side, the economy as a whole would have the best possible chance of being governed ‘soundly’. In practice, however, this was a one-way principle: the government, it was implied, must not

interfere with banking, but it was the responsibility of the banks to ensure that governments conformed to the dictates of ‘sound finance’. But it was not the banks’—nor even the central bank’s—responsibility to ex-

tricate governments from crises into which their imprudence had led them. They would have to find their own salvation by reverting to strict orthodoxy. The Bank’s first responsibility was to the monetary system, and the proper administration of this system was incompatible, at least in this case, with the underwriting of unsound policies by providing emergency assistance. ‘The second fallacy was that the provision of an additional £20m was a once-for-all transaction, and that the expenditure of this sum would not be reflected in a proportional increase in deposits. Thus, the only other method of finance available was the inflation of the note issue—a completely unacceptable alternative. Finally, Sir Robert Gibson tacitly admitted that budgets could not be

balanced in the current financial year, that the Melbourne Agreement had failed, and that some measure of banking assistance for the budget would be necessary. It is now even more important, he continued, that a new plan be formulated: . .. the only practical course open to Australia is to evolve and bring into operation a constructive scheme covering some definite period of time which would have for its objective the re-establishment of the country. It is not for the Board, at this juncture, to enlarge upon this aspect of the matter, but the Board is prepared to give definite assurances of its assistance, compatible with

its responsibilities to the administration of the Bank and would be glad to co-operate in endeavouring to evolve a solution of the position.

Gibson now calculated that the moment was opportune to press for the adoption of a workable plan. The Melbourne Agreement had more than fulfilled his expectations: it had effectively split the Labor Party, destroyed the government’s self-confidence and its ability to effectively oppose the Bank. The seeds for a realistic national plan were ready to be sown. The germination could not take place, however, until Scullin’s return in January. Deficit Finance and the Loan Council

Except during World War I, the Treasury bill had not been an important part of domestic public finance until 1930. Bills were issued occasionally to cover budget deficits of a seasonal character and unexpected short-falls in loan raising, but they were usually retired quickly or funded into long-term securities. One of the main impediments to the development of this cheap and convenient financial tool was the absence of rediscount facilities which would make bills as good as cash. Probably as a result of the visit of Sir Ernest Harvey, the Commonwealth Bank announced in 1927 that it would provide such facilities. Sir Ernest pointed out that idle bankers’ balances could be profitably invested in Treasury 196

Crisis in Government Finance 60

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o

aw

1930 1932 1934 1936 1938

Fig. 1ob: TRADING BANKS: TREASURY BILL-LIQUID ASSET RATIO

Note: Liquid assets included in panel 2 are Australian assets only. Sources: Finance Bulletins; RCMB, Report, Tables 5 and 60; Commonwealth Bank, Statistical Bulletin, ‘Banking Supplement’, May 1954. 197

Australia and the Great Depression bills, which would obviate the need for the high cash ratios maintained by Australian banks. Although the rediscount facilities were used from time to time, there was no increase in the supply of bills prior to the depression.

The problem of financing budget deficits did not arise until the latter part of 1930. Up to September most governments were able to offset their credits on loan account against shortages in their revenue funds, so that overdraft requirements were kept to a minimum. At the end of September Treasury bills outstanding amounted to £2.6m, much the same total as at the end of 1929 (see Fig. 10) and combined government overdrafts were of minor proportions. The question of the future of deficit financial arrangements was raised for the first time in October 1930 when the State Treasury of New South Wales approached the Commonwealth for assistance to the extent of £gm which it expected to need during the next month or six weeks. The state

was informed that it should arrange its own requirements through its bankers, but that the Commonwealth would help with negotiations as far as possible. Subsequently Treasury bills for £1.5m were discounted by the state government's two bankers, but it was made plain that this sum was only provided by placing considerable strain on the banks’ resources. Towards the end of the month the Commonwealth was again approached for assistance to meet interest payments in London amounting to £660,000 due on 1 November. The Commonwealth was informed that no provision had been made to pay this amount and that ‘it will be most difficult for

the State to carry on its ordinary services to the end of [October] on the accommodation already provided by the two Banks’. Another £1m was then arranged, but this simply delayed a full discussion of the question of individual or central deficit finance. In the face of the banks’ increasing reluctance to provide finance, New South Wales found herself at the end of Novernber with the problem of

arranging for the immediate renewal of Treasury bills to the value of £3.45m. Moreover, a substantial amount of additional assistance would be required to allow the state to carry on during December and January. The banks’ reluctance was understandable enough. They felt that they were being asked to carry more than their fair share of the burden of financing national obligations, as New South Wales was in a more serious financial position than other states. Lang, therefore, proposed the following solution: . .. that the Commonwealth Government should take some immediate steps to endeavour to meet the position by approaching, through the Chairman of

the Commonwealth Bank, the various Associated Banks with a view to obtaining temporary accommodation to meet the requirements of the Commonwealth and the various States during the next two or three months. The two contracting Banks to this Government state that they are unable to do this, and it has occurred to me that if the remaining Banks were appealed to they might be able to assist to a material extent and thus relieve the drain on the resources of the particular Banks which this State and other States 198

Crisis in Government Finance rely upon. By this means the financing of Governments would be spread over a wider field.90

This was a sensible suggestion, and it was endorsed by Lyons for the consideration of the Commonwealth Bank. The bankers’ conference held on 10 December adopted, however, a much more comprehensive arrange-

ment than Lang had envisaged. In future, all government financial re-

quirements would be negotiated through the Loan Council, as the representative of governments, and the Commonwealth Bank, as the representative of the banks. In communicating the decision of the conference, Sir Robert Gibson explained that: the Banks can in future only consider the total amount of assistance which can

be made available to all the Governments in the light of the ability of the Banks, for the time being, to make available such total assistance. It will, therefore, become the obligation of the Loan Council to determine the amount of finance which shall be provided to each Government in proportion to the

total amount of Treasury Bills which all the Banks can see their way to discount at any given period.91

This decision was of considerable importance in the evolution of economic policy during the depression. Responsibility for the formation of policy was placed more securely than before in the hands of the Commonwealth government and the Commonwealth Bank. The final authority was nominally the Loan Council, but in practice decisions were taken by the government and subsequently endorsed by the Council. The Loan Council was too cumbersome a body to make the quick decisions that were necessary. Meeting as it did once every two or three months at the most, it was unable to keep abreast of rapidly moving events. A limited

amount of consultation could and did take place, but in most cases it simply endorsed a decision already made. ‘The Council could lay down a general policy, such as the balancing of budgets within a given period, but the framework of such a policy usually originated with or depended on the decision of the Commonwealth government; or, in the case of the premiers’ plan, as will be shown, it was forced on the Commonwealth government and not on the Loan Council as such. The decision of the bankers’ conference also increased the status of the Commonwealth Bank. In earlier negotiations with the government it had already assumed the

role of financial spokesman, but in this role it did not speak with the authority of a representative of the banking system as a whole. It could now claim to represent all the banks, and more nearly fulfil the function of a central bank. It was thus given additional authority to proceed with

its deflationary policy. |

It is ironical that all this was precipitated by J. ‘T. Lang, the implacable opponent of the Loan Council and of increased Commonwealth power. At the November Loan Council meeting he had moved, without 90 Lang to Lyons, 27 November 1930 in Shann and Copland, Crisis in Australian Finance, d.izb. 91 Gibson to Lyons, 13 December 1930 in ibid., d.12b. 199

Australia and the Great Depression success of course, that as adequate loan funds had not been provided for New South Wales, the independent borrowing powers of the state should be restored. Yet his tactics had led to precisely the opposite result. His

subsequent withdrawal from the Council and refusal to meet interest commitments may have been partly inspired by the frustration caused by this unforeseen turn of events. It was possibly an element in his vindictive campaign against the Commonwealth government during 1931. The Loan Council also agreed to finance authorized budget deficits by the issue of ‘Treasury bills. A continuous supply of bills was to be made available, within the prescribed limit, and as soon as an overdraft reached a convenient amount it would be liquidated by discounting a parcel of bills. At this stage the bills were treated by the banks as virtually the same as overdrafts: they were discounted at 6 per cent (the government overdraft rate) and were not regarded as liquid assets. This was due mainly to the unfamiliarity of the banks with this type of paper; but it was also

due to the reluctance of the Commonwealth Bank to extend full re-

discount facilities. In March 1930 the Bank altered its offer of rediscount, and decided that the amount of bills to be rediscounted should not exceed 50 per cent of the average balance of the bank concerned at credit of its

Exchange Settlement Account for the three months prior to the date of rediscount. This was changed again in June 1931 when unconditional facilities were offered. Although the amounts in the banks’ Exchange Settlement Accounts were usually large enough to allow any bank to rediscount all its bills at any time in this period,®? the Commonwealth Bank appears to have discouraged use of the facilities; and the larger the number of bills, the greater the Bank’s reluctance. In response to a request in December 1930 for clarification on the question of rediscount, Riddle

wrote that:

it is... against the policy of this Bank to give any undertaking that [we] will [re]discount the whole of the Treasury Bills taken up by any Bank ... at the same time this Bank has never yet refused to [re]discount Bills or to make advances to any Bank which has requested same, and I trust at no time will we have to refuse any reasonable request.

In May 1931, however, the Commonwealth Bank asked the other banks to refrain from presenting bills for rediscount as far as possible for the time being.®? Although this was reversed a month later, it was well into 1932

before the trading banks felt able to rediscount without restriction; and later still before ‘Treasury bills were generally regarded as more than over-

drafts in a disguised form. Even as late as 1936, a number of general managers in evidence before the Royal Commission on Money and Banking insisted that the replacement of overdrafts by Treasury bills had no 82 In the quarter ended March 1930, Treasury bill holdings were only one-sixth of the average balance in the Exchange Settlement Account; in June 1930 the proportion was one-quarter. 93 The Reserve Bank file on this subject is missing, but there is evidence that a letter

dated 18 May 1931 was sent by the Commonwealth Bank to the other banks requesting them ‘not to rediscount Treasury Bills’. 200

Crisis in Government Finance effect on their cash positions and thus on lending policy.°* The reluctance to provide rediscount facilities and the confusion and misunderstanding on the nature of bills had an important effect on the course of depression

policy, particularly in the first half of 1931. Had bills been accepted as part of the cash reserve of the banking system, it is possible that the authorities could have agreed on a moderate policy of credit expansion. ‘Buy a Bond of Honour’ From a market standpoint, the £28m conversion loan launched by the

Acting Treasurer in mid-November had little chance of success. ‘he terms offered—s} per cent for long-term stock and 6 per cent for shortterm securities—were less attractive than current market yields. Prices of all issues were depressed, particularly at the short end of the market where yields available were in excess of 7 per cent. Nevertheless, it was imperative that the loan be successful. The government, which was now in effect being led by Lyons, had gambled everything on a good market response. If the loan failed and some form of postponement of repayment became necessary, the advocates of inflation and repudiation would gain considerable strength. London creditors may well have forced external default and precipitated an internal rush for liquidity. The Loan Council would, therefore, have to make a desperate emotional appeal—to patriotism, honour, integrity—to anything that would help to avoid the

appearance of default. a The conversion campaign soon became the preoccupation of the

nation. No one was able to avoid the high-pressure and skilful publicity. All the old wartime techniques were resurrected and new ones improvised. The voice of Joe Lyons became as well known as those of radio announcers. Those that sought brief refuge from the agony of depression in a cinema were to be disappointed. Lyons was there to remind his fellowAustralians that: it has always been our pride as a people to honour every national obligation and to guard the good name of Australia as zealously as our own. Therefore I

do not hesitate to call upon you all to render service to Australia in her present great need... . In every crisis in your history you have shown grit and determination and a willingness to rally round the Government to maintain the nation’s integrity and honour. We are passing through another crisis today, and this loan calls for a display of those same high qualities.

In publicity prepared by the Commonwealth Bank, the task was likened to a Test match ‘the greatest of all—to be won.’ In the press, frequently

used copy read: ‘As a matter of honour—as a matter of sane, sound 94 Questioned on the effect of bills on the monetary system, Ernest O’Sullivan, Joint General Manager of the English, Scottish and Australian Bank, replied: ‘I hold the

view that treasury-bills merely displace Government overdrafts. [ can trace no

effect.’ In cross examination Professor R. C. Mills asked: ‘You would not subscribe to the view that treasury-bills tend to extend the credit of the system?’ Reply: ‘I cannot see where they would’, Evidence, pp. 258-9. 201

Australia and the Great Depression business—buy a bond of honour.’®5 The banks and large business houses co-operated to the call with zeal. Apart from providing free space in their

own newspaper advertisements, they initiated instalment schemes for their employees. If an employee wished to buy a £10 bond, the company would finance the purchase to be paid off at 4s or 55 a week. In some cases companies were prepared to contribute a portion of the purchase price. Most of the banks offered liberal advances to those who wished to subscribe. Some were prepared to offer as much as go per cent. The climax

was reached on ‘All for Australia Day’, Friday, 12 December. A large section of businessmen had agreed to subscribe the whole of their day’s takings to the loan. In a final appeal, Lyons urged everyone to do his Christmas shopping on Friday the 12th: I appeal to the people to make Friday a red-letter day in our post-war history

and to realise the supreme patriotic duty that all men owe to their country

and to themselves.

Never since the dark days of the war has Australia been faced with such a critical position, never has there been more urgent need for a spontaneous outburst of patriotism. ... Let the world know that the heart of Australia is sound, that her people possess the same fighting spirit in peace as they showed in war, and that they will not repudiate their obligations.96

When subscriptions were finally tallied, it was found that the loan was

oversubscribed by nearly £2m. It was a remarkable achievement in a number of ways. Throughout the campaign, the yield in the market remained well above the rates offered on the new loan. Indeed, market prices showed a weakening tendency during the campaign, and did not improve after it was clear that the loan would be successfully converted. The emotional appeal to patriotism was, then, the reason for success; a success which was due as much to the many small contributions of £100 or less as to the large institutional subscribers. Outwardly the campaign was similar to many that had been conducted during the war. The same propaganda paraphernalia was in evidence, but the achievement was far greater than any wartime success. It was comparatively simple during war

to appeal to patriotism. The threat to the nation was real; the enemy could be easily identified. In addition, conditions of wartime finance with profits comparatively high and restraint on consumption made loan sub-

scription easy. In 1930, on the other hand, conditions were precisely reversed: the enemy was some vague concept of national dishonour and was impossible for the average man to identify. Few understood what was happening, what the outcome would be or how a full subscription could

help. Profits were of course virtually non-existent and wages for many insufficient to buy food and clothing. Only savings remained. That these were used so lavishly is a reflection not only of the skill of the campaign organization but also of the extent of the psychological impact the depression had already made. 95 E.g. Sydney Morning Herald, 25 November 1930. The quote was capitalized in the original. 96 Ibid., 12 December 1930. 202

Crisis in Government Finance Contraction and the Stock of Money One of the outstanding characteristics of the 1930s is the extent to which monetary factors dominated economic thought and policy formation. Australia no less than elsewhere abounded in antediluvian monetary theory at both the administrative and popular level. A widely-held belief

was that the financial mechanism had been an important factor contributing to the decline in income and employment, and that it could be used mutatis mutandis to stimulate rapid recovery. For these reasons and also for its own intrinsic significance it is important to consider the relationship between changes in the stock of money and the Australian contraction. As already noted, the centre of domestic policy dispute had shifted by the end of 1930 away from the general desirability of reducing real wages to the specific question of the capacity of the banking system to finance

current levels of government expenditure and the additional burdens of unemployment relief and assistance to wheat farmers. The shift in emphasis did not imply a change in principle; the orthodox claim that costs were too high was still at the heart of the controversy. ‘The shift merely added new elements of confusion to an already tangled debate.

First, the banks argued that they were unable to continue to finance budget deficits at current levels because their available funds were already fully committed. This followed from their firm belief that deposits could

not be created. As shown in Table 21, the aggregate internal banking position showed no improvement during 1930. ‘The advance-deposit ratio

remained at an abnormally high level and cash reserves continued to shrink. The rise in liquidity in the December quarter was more apparent than real, for it was primarily due to seasonal factors and to an increase in ‘Treasury bill holdings which were then regarded as frozen assets. Ex-

ternally, the value of assets available to meet overseas payments fell sharply. If London funds and untied gold holdings are taken together, Table 21: SELECTED BANKING STATISTICS, QUARTERLY, 1930

(1) (2) (3) (4)

Advances to Cash to London Surplus gold

deposits ratio | deposits ratio funds holdings

(per cent) (per cent) (Afm) (Afm)

March102.5 102.314.8 16.331.0 20.0 13.5 25.7 June September 102.7 , 14.6 27.6 9.8 December 101.6 17.2 26.0 4.9 Notes, by column: 1, 3 and 4: As for Table 17. 2. ‘Cash’ includes holdings of Treasury bills. Source: As for Table 17. 203

Australia and the Great Depression external reserves fell by £14.8m or one-third. In view of the current state of thought, it is not surprising that the banks strongly resisted a further increase in advances to governments which they believed could turn 1931 into another 1893. Second, the banks and the community in general had no idea of how to measure changes in the stock of liquid assets, so that argument about whether the depression had been accompanied by monetary deflation or inflation always ended in terminological confusion. The labour move-

ment was convinced that the banks had engineered the depression for their own ends by somehow tinkering with the monetary system. When pressed to support this charge, it was claimed that there had been a substantial fall in the total note issue since the mid-1g920s and that this was self-evidently responsible for deflation. The banks had little difficulty in parrying this thrust, for they pointed out that the fall—which amount to £10m in the period 1925-30—was entirely due to a change in the method

of settling inter-bank clearings which had been initiated by the 1924 Commonwealth Bank Act. Instead of exchanging £1,000 notes, settlement was made by book-entry transfer of balances held at the Commonwealth Bank. The £1,000 notes were, therefore, gradually withdrawn from circu-

lation. The volume of notes and coin in the hands of the public had, in fact, increased steadily. In essence, however, the monetary authorities were as ignorant as anyone else, for they too viewed ‘money’ as the sum total of notes and coin

in circulation. Thus, inflation in banking terminology simply meant an increase in the supply of currency irrespective of movements in deposits. This is the basic reason why the banks resisted so strenuously Theodore’s Fiduciary Note Bill of 1931 (see pp. 240-1). This concept of the money stock appears to have been shared by all banks, including the Commonwealth Bank, until the end of 1930. Early the following year Sir Robert Gibson attempted a slight sophistication: the volume of money, he said, was the total note issue plus other banks’ balances at the Commonwealth Bank. In an attempt to ‘clearly show that there has been no deflation’, Sir Robert in a letter to Scullin on 14 January pointed out that this aggregate increased from £61m in 1921 to £70m at the end of 1930. These figures, he added, ‘are conclusive proof to the contrary’. There is no evidence that oficial thought on the money stock progressed beyond this point during the remainder of the depression period. Fortunately, the banking system exhibited a far greater degree of technical competence in handling the money changes associated with depres-

sion than these remarks suggest. This is clear from an analysis of the behaviour of the money stock during the four years of downswing from 1928-9 to 1931-2. ‘The tools of analysis employed are those developed by Friedman and Schwartz in their Monetary History of the United States. This method distinguishes three proximate determinants of the stock of

money: high-powered money (the sum of currency in the hands of the public and bank reserves), the reserve ratio (the ratio of bank reserves to deposits) , and the currency ratio (the ratio of currency in the hands

of the public to deposits). High-powered money is represented by 204

ae ON 8s , : ; Crists in Government Finance

= 900Money income E 5) 700 =

2)

E

~S 300

2 cs

S

3 80 Industrial production, 1910-11 prices

££ A. 60

a= s

3*

= aan 5

3

fe) 800 ~.- 600 Stock of money 3S 400 vo co

200 .

BB ia “~~ 6 08 Ratio scale o

5 Velocity of money EO 1.6

£E ©

> 1911 1914 1918 1922 1926 1930 1934 #1938 Fig. 11: MONEY INCOME, INDUSTRIAL PRODUCTION, MONEY STOCK AND VELOCITY, 1911-38

Sources: Money income (net national product in market prices) and industrial production (real manufacturing product in 1910-11 prices), N. G. Butlin, Australian Domestic Product, Tables 1 and 269; stock of money, as for Table C-1; velocity of

money, as for Table C-4.

observed money values whereas the reserve and currency ratios are pure numbers. High-powered money is positively correlated with the money stock and has been mainly responsible for the long-term*growth of the money supply in the United States. Its name has been well chosen for it is the base for a multiple increase in bank deposits. The reserve ratio by contrast is negatively correlated with the money stock. A rise in the reserve ratio implies a fall in the willingness of banks to lend and hence a decline in their ability to create deposits. ‘The currency ratio is also negatively correlated with the money stock and reflects the preferred

choice of holding liquid wealth in the form of cash or bank deposits. Given the reserve ratio, a transfer from deposits to currency reduces the ability of banks to create deposits. In the long-run, the reserve ratio has been a minor and the currency ratio a negligible factor in the growth of the money stock in the United States. In the short-run, however, both

205

o|

-SR ne 500 = 200 .| 20 : Australia and the Great Depression

Oo

E

150 High-powered money

100 Ratio scale | 30 |

\, Reserve-deposit ratio

“& ||

© joe

10

Currency-deposit ratio

o LI jy ,

1926 1927 1928 1929 1930 193! 1932

Fig. 12: STOCK OF MONEY AND THREE DETERMINANTS, QUARTERLY, 1926-32

Source: As for Tables C-1, C-2, and C-3s.

ratios—particularly the reserve ratio—have played important parts in determining fluctuations in the money stock during trade cycles.97 For our present purpose a continuous quarterly series of the stock of money in Australia has been compiled for the period 1911-38. Series of the three determinants are confined to the years 1926-38. Details together with necessary qualifications are set out in Appendix C, while the main features are more readily visible in Figs 11 and 12. The principal characteristic of the Australian stock of money in the quarter-century covered by the present series is its relatively stable growth.

Despite major swings in the trade cycle and sharp movements in the 87 For a full discussion of the definition and derivation of the three determinants see Friedman and Schwartz, Monetary History, Appendix B, and Phillip Cagan, Determinants and Effects of Changes in the Stock of Money, 1875-1960, New York 196s, Chs 1-2.

206

Crisis in Government Finance balance of payments, the only significant departure from trend occurred in the early 1930s. Even then the divergence was less than might have been expected. Compared with a peak to trough fall of 32 per cent in money income and 30 per cent in industria] production, contraction in the money stock amounted to 10.5 per cent® or at an annual rate of 3.4 per cent. Furthermore, on a quarterly basis the rate of decline was reasonably steady throughout the downswing, so that for no extended period was there major monetary disturbance. The one possible exception was in the March 1930 quarter when the annual rate of decline reached 11.8 per cent following the heavy fall in London funds at the end of 1929. But this was an isolated occurrence. More notable is the fact that the fall in the money stock was halted as early as mid-1931 even though income and employment continued to decline for another twelve months (see Table 22). Clearly, therefore, Australia did not share with the United States the experience of near monetary collapse (cf. pp. 19-20). Table 22: RATES OF CHANGE IN MONEY AND REAL MAGNITUDES,

ANNUALLY, 1928-9 to 1931-2

Rate of change (per cent per year)

1928-9 | 1929-30 | 1930-1 1931-2

Stock of money — 3.5 | 0.8 —6.4 1.7

Velocity of money 2.5 — 10.6 — 13.6 —8.4 Wholesale prices —0.4 —5.5 —I1.1 —6.4 Money income —0.7 — 10.2 — 19.5 — 5.0

Real income | —1.9 —5.8 Real income per —0.9 capita — 2.5 —3.1 —6.7—2.7 — 3.6 Industrial production 2.6 | —6.7 — 22.0 —2.3

Note: Stock of money, from averages of quarterly series. Sources: Stock of money, as for Table C-1; Velocity of money, as for Table C-3; Wholesale prices (Melbourne), Labour Reports; Money income, real income and in. dustrial production, N. G. Butlin, Australian Domestic Product, Tables 1 and 269.

It is instructive to relate the behaviour of the money stock to changes in the three proximate determinants during the contraction. To start with

the least important, it is clear from Fig. 12 that the currency ratio had no bearing on the money stock. Unlike the United States where there was a massive shift from deposits to currency, Australians were content to hold a small and almost unchanging proportion of their liquid assets in immediate cash—evidence of the fact that there was no sustained suspicion of the viability of banking institutions. Indeed, during the early stages of the depression the currency ratio fell slightly, which probably 98 Calculated on an average annual basis for comparability with the estimates of money

income and industrial production. The peak (March 1928) to trough (June 1931) fall on a quarterly basis amounted to 13.6 per cent. 207

Australia and the Great Depression suggests that a smaller stock of currency was required in view of rapidly falling prices. In the main period of money stock decline,®® which extended from March 1929 to June 1931, two distinct phases can be distinguished. The first—March 1929 to September 1930—was dominated by a rapid rate of decline in high-powered money due to the erosion of London funds and

the depletion of trading and savings bank cash reserves. If the other determinants had remained unchanged and high-powered money alone had altered during this phase, the stock of money would have fallen at an annual rate of about 20 per cent (Table 23). That the actual rate of contraction was substantially less was due to compensating movements in the reserve ratio. Banks were prepared to absorb most of the decline in high-powered money by allowing their reserve ratios to fall from around 28 to 17 per cent, so that the annual rate of decline in the money

stock amounted to a moderate 3.9 per cent.

Table 23: CHANGE IN MONEY STOCK THAT WOULD HAVE BEEN PRODUCED BY ONE DETERMINANT UNDER ceteris paribus ASSUMPTION, MARCH 1929 tO JUNE 1931

| Rate of change per year (per cent) March 1929-September 1930 | September 1930-June 1931

High-powered money | — 20.4 24.0

Deposit ratio 15.8 —27.2 Currency ratio 1.1 3.0 Money stock — 3.9— —6.4

Note: The effect of interaction between the currency and deposit ratios has been omitted because it was found to be of no statistical significance. Slight statistical discrepancy due to rounding. Source: From data in Appendix C using formulae in Friedman and Schwartz, Monetary Flistory, pp. 794-6.

In the short second phase—September 1930 to June 1931—the direction of change in high-powered money and the reserve ratio was reversed. The fall in high-powered money ceased as the external payments deficit was eliminated and as the demand for bank accommodation fell allowing cash reserves to be rebuilt. On the other hand, the reserve ratio rose more than proportionally, which was sufficient—together with a slight rise in

the currency ratio—to bring about a fall in the money stock at the increased rate of 6.4 per cent per year. ‘The most impressive feature of the two phases, indeed of the years 1926-38 as a whole, is the high positive correlation between changes in 99 As mentioned in the previous footnote, the pre-depression money stock peak was recorded in March 1928. This calculation is confined to the period after March 1929 because the fluctuations of 1928 were related to a quite separate cycle in the balance of payments. 208

Crisis in Government Finance high-powered money and in the reserve ratio. It could be objected that this is an entirely unexceptional observation; that as these two factors in the money stock are in large part determined by the same ingredients, one

would expect nothing less than close correlation. But this would mean the imposition of a restrictive set of assumptions about the behaviour of the banking system. In the present situation it would imply that highpowered money was always the active, and the reserve ratio always the passive, factor in changes in the money stock. It is true that in Australia during the early 1930s the two determinants reacted largely in this way, but that they need not have done so is clear from the experience of the United States in the same period. The dramatic fall in the American money stock was due to quite different factors to those that operated in Australia. First, high-powered money did not decline; indeed, during most of the contraction period it continued to grow steadily. Second, the reserve

ratio increased sharply—from around 8 to 12 per cent—as individual banks attempted to forestall a run on their institutions. This rise was responsible for about one-half of the decline in the stock of money. Third, and most important, there occurred a fear-induced shift from deposits to currency of a magnitude which increased the currency ratio from 8.6 per cent in October 1929 to 22.5 per cent in March 1933. This alone would have been more than sufficient to account for the entire fall in the money stock of the United States.10 _ The important point as far as Australia is concerned is that the banks

allowed their reserve ratios to respond to the decline in high-powered money without taking strong corrective action, and hence a precipitant fall in the stock of money was prevented. In short, the banks as a group acted in the same direction, if not with the same strength, as a wellschooled central bank would have done. This followed from two important characteristics of the Australian banking system. First, as noted in Chapter IV banks were accustomed to allowing their reserve ratios to move within wide limits. Several generations of predominantly rural lending had instilled a high degree of tolerance to established seasonal and cyclical patterns. Within these limits, therefore, the gearing between a change in reserves and a change in the rate of lending was comparatively low. To enable this system to work effectively, reserve ratios were kept at a high level. The standard was around 20 per cent, compared with 8-9 per cent in the United States in the late 1920s. Second, the system was oligopolistic in structure. There were only nine trading banks (excluding the Commonwealth Bank) of any size in the early 1930s, and after amalgamations in 1931 only three large savings banks remained.!©1 This prevented a large number of potentially weak banks from casting suspicion on the whole system and encouraged general acceptance of the 20 per cent reserve ratio standard. To conclude, despite the contemporary emphasis placed on monetary 100'The preceding sentences are based on Friedman and Schwartz, Monetary History,

: 2-50.

101 The small Hobart Savings Bank and the Launceston Bank for Savings made five savings banks in all. 209

Australia and the Great Depresston factors, the foregoing analysis does not suggest any significant relationship

between contraction of the money stock and the fall in income and employment. The initial decline in high-powered money was generated by the external payments crisis of 1929, and had nothing to do with the inner workings of the monetary system. Further, the rate of decline in the stock of money was comparatively slow. Even if an adverse effect of monetary changes on the level of aggregate expenditure could be established, this would be swamped by the effect of falling loan expenditure, export income, industrial investment and the rest. Conversely, it is clear that the well-disciplined action of the banks helped to isolate the economy from the worst effects of international collapse. If the decline in high-powered money had been fully reflected in the money stock, it is likely that this would have added substantially to deflationary pressure. To be sure, a great deal more could have been done by the monetary authorities to maintain government expenditure and create employment opportunities, but the positive contribution of the banks should not be overlooked. 1930: A Summary

The central objective of economic policy in 1930 was in essence extremely simple—the preservation of external and internal national solvency. It is symptomatic of the state of mind of policy makers that this was

accorded a higher order of priority than the prevention of mass unemployment. It was, of course, thought by all except those branded extremist that any action along these lines was impossible until after solvency and

financial respectability had been secured. The year may be divided roughly into two halves: the first was preoccupied with the problem of external solvency, and the second with internal solvency. In the first half,

the sterling payments crisis reached its high point, and there followed desperate measures to reduce imports and secure a regular supply of sterling exchange for government purposes. By the third quarter of the year the problem was on the way to solution, but there remained the vexing question of the outstanding floating debt in London held by nonAustralian institutions. In the second half of the year, the effect of falling imports and national product was transferred to government budgets. The question of how to deal with huge deficits was, however, politically and

economically more complex than external adjustment, and there was little real progress towards a solution by the end of 1930. The year can also be divided on the basis of sharply differing rates of decline in the major economic indicators. ‘The full impact of the fall in export prices and the cessation of external borrowing was not felt until the latter part of 1930. In the early part of the year the economy had not adjusted to the fact that it was faced with more than a periodic balance of payments crisis which would be corrected, as others had been in the past, by a revival of prices and borrowing. Government expenditure was, therefore, reasonably well maintained; and the multiplier effect of the fall in wool income was still in its early stages. After July-August 1930, the full range of deflationary factors was let loose in quick succession. Taxation was rapidly increased; loan expenditure was reduced to one-third of its 210

Crisis in Government Finance pre-depression rate; wages were cut; rural incomes fell heavily as wheat prices joined the downward spiral of wool prices; and private fixed capital

expenditure was cut to a fraction of its pre-depression level. This is reflected in the fact that the rate of decline in money income increased from 10.2 per cent in 1929-30 to 19.5 per cent in 1930-1, and real income from

1.5 per cent to 5.3 per cent (Table 22). More detailed analysis of the shape of the contraction is hampered by the paucity of statistical data. Nothing is reliably known, for instance, about the trend in new capital raisings, movements in the value of stocks, the share of wages in national product, or the incidence of part-time work; and there is a general lack of monthly and quarterly series. Nevertheless it 1s clear, as one would expect, that the greatest rate of decline occurred in the building, construction and heavy manufacturing industries. The following figures of rates of change in total employment and in selected employment groups (Table 24) help to supplement the aggregate data in Table 22. The heavy fall in building and construction not only reflects the almost complete cessation of mew investment in residential and commercial structures, but also the heavy fall in public works expenditure. Between them the construction and manufacturing industries

ee Table 24: RATES OF CHANGE IN EMPLOYMENT, SELECTED

ANNUAL SERIES, 1928-9 to 1931-2

Rate of change (per cent per year)

1928-9 1929-30 1930-1 1931~2

Total —0.4 —3.7 —7.3 —1.7

Building and construction — 7.0 —21,1 — 28.0 1.4

Manufacturing 0.3 —6.6 — 18.3 —0.9

Selected manuf. inds :

_ Metals and machines 2.0 —10.3 — 23.4 — 7.6

Textiles 6.0 4.6 — —11.8 10.8 16.5 Chemicals 3.1 —5.1 2.4 Paper 2.7 — 2.2 —I11 —1.2

Source: M. Keating, ‘Australian Work Force’, Table 4; Production Bulletins.

account for the bulk of the recorded rise in unemployment between 1928-9 and 1930-1. Unemployment rose by 261,000 to a total of 420,000

in these three years. The share of this rise nominally attributable to the decline in manufacturing employment amounted to 45 per cent, while the construction industries accounted for almost one-half of the rise.1°2 Most of the service industries, with the exception of transport, were only mildly affected in terms of employment, and rural employment was well maintained throughout the depression. However, these figures 102 M. Keating, ‘Australian Work Force’, Tables 4, 5, and 6. 211

Australia and the Great Depression make no allowance for disguised rural unemployment which must have amounted to a substantial proportion of the total; nor is it possible to make satisfactory allowance for work rationing. Rationing was a widespread technique used by employers to reduce wage costs and was particularly prevalent in the service industries. In the 1933 Census 8 per cent of the work force were recorded as being employed part-time, although this is probably an underestimate. Work rationing had not developed as far in 1930 as in 1933, but if 5 per cent were being rationed in this way a total of 128,000 would have been semi-unemployed at the end of 1930. One interesting feature of Table 24 is the comparatively mild fall and early recovery in textiles. As early as 1931-2 employment in the industry was 8 per cent above the immediate pre-depression level, whereas all other manufacturing industries had shown little or no signs of recovery. This reflected the unique sensitivity of the industry to changes in the intensity of import competition. Although aggregate demand for textiles fell as rapidly as for most consumer goods, textile imports under the weight of the tariff and devaluation fell much more rapidly, so that the scale and speed of import replacement was sufficient to initiate early recovery in the industry. This was the first stage of general recovery which

will be considered in detail in Chapter XII. The end of 1930 and the first weeks of 1931 was not only the period of

maximum rate of decline in all economic indicators but also the community’s psychological low point. By mid-1931, although the trough was

still a year away, there appeared to be some purpose in the running of national affairs, something on which to hold. But at the end of 1930 the economy appeared to be drifting helplessly with the government divided and powerless to prevent imminent collapse. During the year commercial and industrial share prices slumped by 34 per cent,?®4 and, as is usual in times of great uncertainty and stress, the number of suicides rose—from 785 In 1929 to 943 1n 1930.94

103 D. M. Lamberton, ‘Security Prices and Yields’, p. 258.

104 It is often said, contrary to supposition, that the suicide rate declines during depression, presumably because most are preoccupied with the struggle for economic survival. This is true for Australia after 1930. In 1931 the number of suicides declined to 827 and in 1932 to 754. But the sharp increase in 1930, particularly in the commercial and industrial occupation classes, is prima facie evidence of the exceptionally confused and psychologically disturbing influence of the depression in this year. Suicide figures from Commonwealth Year Books. 212

X

The Formation of the Premiers’ Plan Pending the return of the Prime Minister to Australia early in January 1931, there was a lull in activity within the Federal Labor Party. The Caucus protagonists had agreed to call a truce until Scullin resumed his position at the head of government. Each side was confident of receiving Scullin’s support. Fenton and Lyons were convinced that he would endorse the stand they had taken, for he had unequivocally supported them

from England and denounced the policy of the militants as dangerous and foolhardy. ‘They were sure that his influence for sanity and sound finance would swing a sufficient number of Caucus members to enable them to command a majority. ‘The militants were equally confident that they would be able to sway the Prime Minister to their view, by strength of numbers if not by power of reasoning. Scullin, first and foremost a good ‘party man’, would, they thought, abide by the decision of the majority

whatever his personal feelings. , The Return of Scullin and the Parkes By-election

The Prime Minister’s return was awaited with anxiety for an additional reason. The elevation of E. A. McTiernan to the High Court Bench made necessary a by-election in the constituency of Parkes, which was to be held at the end of January. Parkes, a middle-class area in the western suburbs of Sydney, had been a safe Nationalist seat until won by Labor in the 1929 landslide. It was, therefore, expected to be a very close

contest and an accurate reflection of the mood of the electorate. The

Labor campaign was to be opened by Scullin who would, it was anticipated, declare his Government’s future economic policy. Scullin landed in Fremantle on 7 January, but before he could meet Cabinet the first shot 1n a new contest was fired. Unexpectedly it was fired by the New South Wales executive of the party, and not by either of the Caucus dissidents. A special executive meeting on the gth decided to instruct all federal members representing New South Wales constituencies to work for the unqualified adoption of the Gibbons resolution as the 213

Australia and the Great Depression guiding policy of the government.! This was followed by a meeting of the New South Wales section of the Federal Party which decided to send a directive to Scullin to adopt the policy of ‘release of credits’ or not take

the stand at the Parkes by-election.2, This latter meeting was under Theodore’s undisguised control, and it became evident that he had been responsible for the drafting of the so-called ‘Gibbons plan’. At the time when the plan was originally brought before Caucus, it was important that Theodore remain in the background, for he did not want to antagonize the Prime Minister or appear to be active in policy-making until the Mungana dust had settled. With Scullin’s arrival, however, he was forced to declare his hand or allow Fenton and Lyons to assume the initiative. When the Labor by-election campaign was opened on the 14th, it was evident that Theodore’s pressure tactics had been substantially successful. Although Scullin attempted to appease the Fenton-Lyons group by denouncing the indiscriminate use of the printing press and by emphasizing that he did ‘not want to deceive the workers that there is an easy road to millions that will lead them to emancipation’, it was a meagre concession, for he continued that the demand for £20m could be justified as a temporary expedient and implied that it could be partly financed by a carefully controlled expansion of the note issue. He also pointed out that, as the Loan Council had already agreed to a works programme of £15m,? the government only envisaged increasing loan expenditure by £5m. The

next day Scullin stated that he did not mean to imply that any of the £20m loan works expenditure would be financed by note issue expansion, but instead it would all be provided by loans from the banks and on the

open market. For the remainder of the campaign the federal and state parties beth adopted the Theodore plan as their basic policy. There was a minor difference towards the end of the campaign when the state executive thought that a federal Cabinet meeting should be postponed to allow

ministers to attend election meetings,® but this was quietly resolved

without incident.” Shortly before polling day, Scullin announced Theodore’s reinstatement as Treasurer and Deputy Leader. The Queensland government had failed to bring the expected charges, and Scullin reasoned that Theodore’s ability would be needed in the struggles that lay ahead. Moréover, he had obviously been impressed by Theodore’s arguments for a limited expansion of credit. In addition to the doubtful ethics of the matter there were many in the party who interpreted Theodore’s reinstatement as an act of

betrayal. Fenton and Lyons had faithfully served the Prime Minister during his absence; the principles they had fought for were now being 1 Sydney Morning Herald and Labor Daily, 10 January 1931. 2 Sydney Morning Herald, 13 January 1931. 3 Ibid., 15 January 1931.

4 The loan works programme for 1930-1 was reduced from £24.6m to £15m at the Loan Council meeting of 21 August 1930. 5 Sydney Morning Herald, 16 January 1931. 8 Labor Daily, 21 January 1931. 7Ibid., 22 January 1931.

214

The Formation of the Premiers’ Plan rejected. They were left with no alternative than to tender their resignations which they did without delay. — This further disintegration of the party and government, evidenced by the resignation of Fenton and Lyons, had a serious effect on the out-

come of the Parkes by-election. The Nationalist candidate, C. W. C. Marr (who had previously represented the electorate) , was returned with

a majority of nearly 9,000, representing a 20 per cent swing against Labor.® In the circumstances of early 1931, nothing Labor could have done would have prevented defeat; but the result might not have been as bad had Theodore’s reinstatement been postponed for a week. As it was, the result cast a dark shadow of gloom on the government, and their opponents, both on the right and the left, moved forward with renewed confidence.

‘Sharing the Burden’ (a) The Federal Wage Judgment The Federal Labor Party suffered yet

another blow during those eventful days of January 1931, with the

announcement of the Commonwealth Arbitration Court’s decision in the matter of the application of the Railway Commissioners of Victoria and New South Wales for a reduction in the basic wage. The Full Court had

been hearing the case since August 1930. In November, after all the evidence was in on the particular question of railway wages, it extended the scope of its inquiry to deal with ‘the one and only issue which, in its opinion, is raised in this hearing, namely, that the decline in national income, and the decline in spending power due to cessation of loans, makes necessary a reduction of the basic wage’.1° The judgment handed down on 22 January ordered that the basic wage in terms of the Harvester ‘equivalent’ be reduced by 10 per cent for a period of 12 months, and that the ‘Powers 3s’ be eliminated. It stressed that its decision was in no way to be construed as a permanent alteration of the Harvester ‘equivalent’ which would be restored as soon as economic conditions improved. The Court’s judgment is a surprisingly sophisticated document. Reading through it today, one is impressed by its marshalling of the pertinent facts and arguments, its grasp of economic doctrine, and its competent winnowing of the mass of nonsense presented to it. It contains, of course, substantial errors and contradictions; but its errors were those of traditional economic doctrine; its contradictions reflected the growth of recent Australian economic thought which was beginning to question established

doctrine.

Their Honours commenced by stressing that ‘wage reduction, with consequent diminution of the power of the majority to purchase consumer goods, should be the last resort in any scheme of economic readjustment forced by extraordinary circumstances’.11 The question was 8 Sydney Morning Herald, 30 January 1931. 9Ibid., 2 February 1931. 10 30 CAR, p. 7; reprinted in Shann and Copland, Crisis in Australian Finance, d.i3b. 11 Ibid., p. 8.

215

Australia and the Great Depression whether present economic circumstances were sufficiently serious to warrant a downward adjustment in the real wage level. ‘To answer this the

extent of the fall in purchasing power had first to be determined. The magnitude of the primary loss of purchasing power was calculated to be £70m (£40m from the decline in the value of exports and £gom from the cessation of overseas borrowing) . Calculation of the secondary loss was

more difficult. Some witnesses thought that the ratio of primary to secondary loss was as high as 1.0, but most placed it in the region of 0.5 and the Court decided to employ the lower figure. The loss of purchasing power was, then, upwards of £100m, or from 15 to 20 per cent compared with 1928-9.!? This loss affected every phase of economic life, but the most serious effect was on government finance. There can be no recovery, the Court stated, until the Governments are able to meet their expenditure out of revenue. The

importance of this phase of the question is increased by the fact that the floating debts of the various Governments of Australia already amount to £45,000,000, mainly representing deficiencies in revenues. Payment of these deficiencies out of future revenue is practically impossible, and ultimately the whole of the amount with its consequent increase of interest charges must be covered by long-dated Government securities. It is obvious that this method of paying deficiencies, in other words, of paying costs of Government out of loan money cannot continue.13

The theory was that when the floating debt came to be funded, such a large proportion of available savings would be required that there would be insufficient for investment in the private sector, and the longer the budget disequilibrium continued, the greater would be the future depression in private investment. So great was the anathema of an unbalanced budget under any circumstances that the effect of such deficits on income and employment were ignored. Granted that a substantial fall in purchasing power had occurred,

the Court next had to decide if any advantage would accrue from a redistribution of available purchasing power. Would there, in other words, be any advantage in a transfer from wages to profits? The Court

agreed with union representatives that such a transfer would have a detrimental effect on consumption and economic activity in the short-run.

But in the long-run the transfer would stimulate industrial activity and so increase employment, and thus the detrimental short-run effects would

be more than counterbalanced. The Court’s conclusion was, therefore, that a reduction in wages was essential to provide the basis for recovery and to restore a ‘proper economic balance’.'4 12 Although the Court did not give reasons for choosing the coraparatively small multiplier of 0.5, this seems to have been substantially correct as at the end of 1930. The Court does not seem to have taken into account that the secondary loss in purchas-

ing power was in a comparatively early stage, and would grow to a much larger amount by the time the trough was reached. Moreover, in considering movements

in purchasing power, no allowance was made for price movements. 13 30 CAR, p. 14. 14 Ibid., pp. 19 ff. 216

The Formation of the Premiers’ Plan Extending this argument, the Court endorsed the view—expressed by a number of economists—that all classes of income receivers should share

in the burden of the loss of purchasing power. The bulk of the burden had fallen on the rural sector, the unemployed and unsheltered industry. The main class that had made no contribution, except through increased taxation, were those in receipt of fixed interest payments, and the Court recommended (though this was outside its jurisdiction) that some reduction be made in interest rates.15 The failure of the Court to mention the other substantial group of fixed income receivers—old-age and war pensioners, and other social service benefactors—illustrates the political sensitivity in favour of interest rate and against social services adjustment. This represents strict adherence to orthodox economic thought. The fall in income and demand for goods and services, it was implicitly argued, was caused by external factors and had to be accepted. As income could

not be stimulated by ‘artificial’ means, the weight of adjustment was thrown onto the supply side. Costs of labour and capital had to be reduced to restore the profitability of private enterprise. Yet, in a different context, the Court endorsed the view that parts of the downward adjustment could be relieved by resort to monetary expedients. It believed that deflation had proceeded far enough, and that some expansion of the note issue to stabilize the price level was permissible and even desirable. The Court was particularly impressed by the evidence of R. F. Irvine, who had

been Professor of Economics at the University of Sydney until 1922. Irvine emphasized that the first step towards the reabsorption of the unemployed was to extend credit to government and industry. This could be done by a carefully controlled expansion of the note issue, but, he pointed out: It is not necessary ... that the whole of the issue should come directly into circulation. All but a small amount required for cash payment would be used to strengthen cash reservations, thus enabling the banks to lend more freely. . . . A £10,000,000 issue can go a tremendous distance. A £20,000,000 issue will enable them to build an enormous amount of credit quite successfully.16

Again, this was outside the direct concern of the Court, but it clearly believed that some change in banking policy was desirable. The Court was not aware, however, of the implications of this for its basic argument;

integration of ‘monetary’ and ‘real’ theory was too difficult for it to attempt without a great deal more help from professional economists than was forthcoming.

Announcement of the basic wage reduction precipitated near panic in federal Labor circles. Ever since it had been in office the government had been fighting against such a reduction. Its political survival depended on the maintenance of the sacred standard of living, and it had gone to extraordinary lengths to avoid facing the issue. Even though the reduction was not the government’s doing, it would suffer the full political 15 Ibid., p. 29. 16 Ibid., p. 26.

217

Australia and the Great Depression repercussions. The Attorney-General, Frank Brennan, immediately applied to the Court to postpone the operation of its order for three months. The government was in the middle of ‘the formulation of a scheme to ensure that the burden of the loss arising from the decline in national

income and spending power shall be equitably distributed over all sections of the community’, he said, and ‘the immediate enforcement of the Court’s order would embarrass the Government in completing its proposals’.17 But their Honours were not impressed by these stalling tactics and rejected the application. (b) The Economists The Commonwealth Arbitration Court’s basic wage hearing was the first opportunity Australian economists had to influence directly economic policy. The Court’s judgment was heavily influenced by the evidence of professional economists, and provides a good synthesis of the state of academic economic opinion at the time. As the deadlock between the government and the banking system intensified during 1931, economists were to play an increasingly important part in the formulation of policy details. However, the extent of this importance has been exaggerated. They were obliged to steer a very narrow course between what was acceptable to the government and to the banks. Their real function was to embellish the government-bank compromise with a veneer of impartiality. So great was the suspicion and hostility between the government and the banks, that the only scheme of reconstruction which would have been acceptable to both parties was one nominally emanating from an independent source. The teaching of economics as a separate university discipline was still in its infancy in 1930. There were only five full Chairs of Economics in Australian universities and a sixth was linked with history. Relative to the number of professors, sub-professorial staff members were even fewer. Small numbers did, however, make for ease of contact and for familiarity with one another’s views, and this made unanimity comparatively easy to achieve when policy measures were under discussion during 1930-1. But

this unanimity was by no means basic. It was decided at an early stage that if the economists were to have any chance of influencing policy, they

would have to speak with one voice; and this appearance of complete agreement was successfully maintained despite wide differences of conviction.

The intellectual leader and politically most influential of the group of seven which comprised ‘the Australian economists of 1930-1’ was

L. F. Giblin. Although the young Giblin achieved distinction as an undergraduate at King’s College, Cambridge, he did not enter academic life until many years later.18 For a few years before World War I he was a Labor member in the Tasmanian House of Assembly, following a strong Giblin family tradition. After the war he became Government Statistician in Tasmania, and then, in 1929, at the age of 56, he was appointed to 17 Ibid., p. 74.

18 See Douglas Copland (ed.), Giblin—The Scholar and the Man, Melbourne 1960, Part I.

218

The Formation of the Premiers’ Plan the newly-created Ritchie Research Chair of Economics at the University

of Melbourne. Giblin’s association with the Tasmanian Labor Party brought him into close contact with Lyons, and the friendship and respect

that developed between them continued after they both moved to the mainland. Through Lyons, Giblin also won the respect of government leaders at Canberra, and his advice on technical financial matters was frequently sought. His analysis of the foreign trade multiplier provided, as will be shown, the basic theoretical framework for the formulation of the economists’ policy recommendations during depression. Giblin’s colleague at Melbourne University, D. B. Copland, who was Professor of Commerce, was a leader in a different way.!® Copland believed that academic economists should take an active part in the discussion of public affairs, and also make their skills available to public authorities. ‘This was

particularly important between the wars when there were few qualified economists in the public services. Copland became, therefore, the spokes-

man of the economists, a role for which he was particularly well suited

with his flair for publicity and his position as Dean of Melbourne’s Faculty of Commerce. Another influential member of the group was E. C. Dyason, a prominent Melbourne stock broker and active member of the Economic Society of Australia and New Zealand. Dyason became

the leading exponent of note issue expansion and in September 1930 persuaded both Giblin and Copland to endorse a scheme of credit expansion which was, in essence, the same as Theodore’s. But Giblin and Copland soon became aware of the political obstacles in the way of such a course, and considerably diluted their subsequent advocacy of ‘inflation’. Two members of the group were to transfer in 1931 from academic positions to pioneer economic research outside the universities. E. O. G. Shann became the first Economist at the Bank of New South Wales, and L. G. Melville, who had been South Australian Government Actuary and

Professor of Economics at the University of Adelaide, established the Research Department at the Commonwealth Bank. Both Shann and Melville held strictly orthodox views, with Melville the more uncompromising of the two. They were the most consistent critics of the Dyason ‘inflationary’ line. The remaining two economists were J. B. Brigden and

T. Hytten, the latter being Professor of Economics at the University of Tasmania. They both tended towards orthodoxy, but were less inclined to dogmatism in their opposition to ‘inflation’ than Shann and Melville. The differences within the group have been neatly summarized by Giblin himself. In explaining the views of the economists in the early ‘thirties he wrote: There never was agreement with Niemeyer, except with Melville. I remember

fights with both Niemeyer and Gregory from the day they landed in Melbourne. The talk in Brisbane [at the Australian Association for the Advancement of Science meeting in May 1930] was a good deal directed by a wish to bait Copland, to which we were all subject. But there were movements in opinion. Dyason was the one firm and consistent inflationist. Copland 19 See ‘Essays in honour of Sir Douglas Copland’, Economic Record, March 1960.

219

Australia and the Great Depresston went that way in waves, with strong back-eddies. I was inclined to sit on a fence, not sure of my ground, and oppose whichever argument was put forward too confidently. Brigden I think was the same, and Hytten. Melville of course was strong deflationist, . . . Melville gradually and reluctantly has moved [since 1930] a very long way, but with always a hankering backwards, ... Shann, more fitfully, has moved even further the same way, and with his regret.20

Giblin characteristically understates his own importance. It was through his influence, with the important assistance of Brigden, that these considerable differences of opinion were compromised, which permitted the extent of outward uniformity that was achieved. The labours of the economists during the early months of the depression were directed towards estimating the extent of the fall in national

income that would follow the initial fall in export proceeds and loan expenditure. The first of these, made by J]. B. Brigden, had already been noted, but his and other early estimates were hampered by the lack of an analytical framework to deal with the likely magnitude of the secondary fall. It was Giblin who came to their assistance in his Inaugural Lecture, Australia, 1930. He identified the foreign trade multiplier as the recip-

rocal of the marginal propensity to import, and outlined the sort of policy that logically followed from his formulation. He calculated that the primary loss of income in 1929-30 would be £70m and, rather optimistically, that in future years (under circumstances existing in April 1930) the loss would be about £50m. He assumed that the marginal propensity to import was one-third, and, therefore, the total loss of income in future years would be £150m.*! He then turned to consider whether anything could be done to prevent the full working of the multiplier mechanism. ‘If the loss is evenly spread through the community’, he contended, ‘it may be very nearly confined to the first direct loss of £50m, and there need be no serious addition to unemployment.’*? From this it followed that real wages should be promptly reduced by at least 5 per cent, and that similar reductions should be made in all other forms of income.?? Thus

the fall in rural incomes could be minimized and local manufacturers encouraged to expand production of goods formerly imported.?4 Two things may be said about the basic argument. In the first place, it

is surprising that Giblin made no allowance for the interaction of the domestic and the foreign trade multiplier, for he first came to the multiplier mechanism through an analysis for the Development and Migration Commission of the effect on national income of the building of a railway to open up new wheat lands in the Victorian mallee. He was then aware, even if imperfectly, of the domestic employment multiplier. Why did he 20 Giblin to Walker, 19 April 1934, Giblin Papers, NLA, 49 ALS. 21 Australia, 1930, pp. 9-11. 22 Ibid., p. 11. 23 Ibid., pp. 12-16.

24It is easy to see, following through and amplifying Giblin’s argument, how the doctrine of ‘Sharing the Burden’ or, in its highest political form ‘Equality of Sacrifice’ developed as an intellectually acceptable doctrine. See P. H. Karmel, ‘Giblin and the Multiplier’ in Copland (ed.) , Giblin. 220

The Formation of the Premiers’ Plan ignore it in 1930? This cannot be answered simply. It seems to have been due mainly to the conviction that a reduction in wages was necessary for

the benefit of unsheltered industries and that substantial devaluation, which would necessarily have accompanied expansion of credit for the absorption of the unemployed, was undesirable in the long-run. (He was,

however, to modify his attitude to devaluation.) In short, he believed that Australia could not shape her policies independently of trends in the rest of the world. Giblin was also keenly aware of political realities. Referring to the period prior to the adoption of the premiers’ plan, he explained that: One difficulty ... was the responsibility of being semi-official advisers. Everything was coloured by practical politics, e.g. the need for getting some cut in

_ wages, etc., which I still think was imperative in our circumstances. But I admit in the “John Smith” period [mid-1930], I had not realised the stagnation

of investment,—or how deep and abiding the feeling behind it was, and should in the circumstances have been expected to be. But I feel sure, even apart from [the] effect on general confidence, that neither exporters nor manufacturers would have so successfully decreased real costs and improved

competitive power against the world without the stimulus, material and psychological, of a cut in wages.25

In ignoring the domestic multiplier, Giblin was then avoiding complicated analysis which he was not confident he could manage, and conclusions which he did not think were justified in the circumstances.

In the second place, Giblin dealt only with the decline in export income; he did not mention the multiplier effects of the fall in loan expenditure. This was possibly due to an underestimate of the extent of the disturbance to the international capital market. Giblin was one of those who believed very strongly that government loan expenditure during the 1920s had been excessive and wasteful, and that some reduction was warranted. He had formed this view as a result of first-hand knowledge of the practices of the ‘Tasmanian government. At the time of the Inaugural Lecture, in April 1930, he argued that the stoppage that occurred in 1929 was desirable in so far as it had limited, and would continue to limit, the rate of loan expenditure to a more rational level. He did not know then, of course, that the raising of new public capital abroad would not be resumed for nearly a decade. It was not until the latter part of 1930 that Giblin and the other economists realized that Australia would have to do without overseas capital for a number of years, and, as a result of this reassessment, considered more sympathetically the argument in favour of some measure of credit expansion. The shift in the views of economists 1s evident by comparison of the joint statements issued in May and September 1930. The May statement reflects the uncertainty of the time. The economists were sure of only one point: that the loss in income was ‘too severe to encourage the hope that it can be borne by one class alone’,26 and therefore that real wages, 25 Giblin to Walker, 19 April 1934, Giblin Papers, NLA, 49 ALS. 26 Shann and Copland, Crists in Australian Finance, d.4, p. 16. 221

Australia and the Great Depression salaries and profits would have to fall. They also suggested that the exchange rate be allowed to find its natural level, but were definite on the point that the ‘remedy for our troubles is not to be found in exploitation of the note issue’.*7 Moreover, they thought that the reduction in overseas

borrowing had proceeded too rapidly: ‘Overseas borrowing has been excessive, but if it is reduced too rapidly the dislocation involved will be serious. Steady reduction is, in our opinion, the most desirable course.’** In a memorandum of ‘A Plan for Economic Re-adjustment’, prepared for the government by Copland, Dyason and Giblin in September, the earlier caution and uncertainty was removed. It was now clear that longterm overseas borrowing would not be possible for some years to come, and, with the more recent fall in wheat prices, the fall in income would be much greater than was previously thought. They estimated that the fall would be as much as £140m after secondary effects were taken into consideration. The argument about the need for equitable distribution of the loss was restated and a significant new point was made: “The present drift towards a deflation of the Australian price level will unduly lengthen the process of readjustment and delay recovery.’°® Previously the economists had welcomed the decline in prices as a step towards reducing costs

of production and improving the competitive position of Australian industry. Instead of reduced costs of production, the three economists recommended a bold increase in the exchange rate to a premium of 20 per cent and the maintenance of prices at their 1929 level, to be achieved by Commonwealth Bank open market operations and note issue expansion. This was to be accompanied by a reduction in wages and salaries by 10 per cent and the imposition of a graduated super tax on income from property averaging 2s in the £. This policy, it was agreed, would bring about the equitable distribution of the loss that was desired, and at the same time promote a more rapid recovery than would be possible under deflation. Furthermore, with a stable price level and a super tax on pro-

perty income, the difficulties associated with the reduction of fixed

incomes would be avoided. The government memorandum was followed by extensive newspaper

publicity by Copland and Dyason for the stabilization plan, as it was called.3° The ‘managed inflation’ argument drew stern rebukes from the

banking community and Davidson in particular. In complaining to Copland about what he believed to be a poorly conceived and irrational policy, Davidson wrote: I am rather troubled about what you and others are issuing from Melbourne University. Are you not allowing pure theory to turn your thought away from its practical application and the examination of outside influences which may 27 Ibid., p. 17. 28 Ibid., pp. 17-18. 29 D. B. Copland, E. C. Dyason and L. F. Giblin, ‘A Plan for Economic Readjustment’,

18 September 1930, unprinted parliamentary paper, NLA. The details of this plan

were subsequently expanded and published as an article ‘The Restoration of Economic Equilibrium’, Economic Record, November 1930. 30 E.g. The Argus, 22 September, 20 and 27 October 1930.

222

The Formation of the Premiers’ Plan have had or may have effects greater than the principles you are enunciating[?]31

The other economists, and Melville in particular, had not travelled nearly as far as those in Melbourne, and tended to emphasize the practical difhculties. One such difficulty was clearly expressed by Shann: Though I am dubious of their [Copland’s and Dyason’s] plan, my doubts of its inherent soundness are not so great as my fears of the competence of the

Commonwealth Bank Board (a) to comprehend it, and (b) to carry it through with the courage and independence that would be needed for its success.32

And it must be conceded that however justified such a policy may seem today, it would have been defeated by the Commonwealth Bank, as were the government’s very similar proposals. It was not long before practical politics began to weigh heavily on the

originators of the stabilization plan. The joint statement (of all the economists) issued at the Australian Association for the Advancement of Science Conference in January 1931 illustrates the extent to which the proposals which were so boldly advanced in September were compromised to accommodate political reality on the one hand and their colleagues on the other. The statement excludes all reference to measures for increasing prices to the 1929 level, except by allowing foreign exchange to find its

‘natural’ price. Instead, the statement took the government to task for failing to reduce expenditure. This, it said, had led to the increase in the floating debt and the diversion of the ‘credit resources of the community from use for productive enterprise to the maintenance of an extravagant scale of public expenditure. A continuance of this practice would lead to inflation.’3 When government budgets are balanced, the statement concluded, and no longer absorb the credit resources of the banks, ‘ample credit will be available for productive enterprise and banks would pro-

ceed with confidence to reduce interest rates’.24 In other words, the

31 Davidson to Copland, 28 October 1930, BNSWA. In one of his more vicious moods,

Davidson contended that the ‘inflationary’ plan was invented by Dyason for the benefit of his speculator clients. ‘It is a thing that one does not like even to think but I am afraid the inspiration behind the writings of the Melbourne economists is a certain section of business men, promoters and share brokers in Melbourne, who have been engaged for a number of years in the flotation of various mining, news-

paper and other concerns. I am told that they are badly pinched by the deflation and apparently with all their knowledge and experience did not prepare for it. Now they are seeking a temporary inflation ... in order that they might be able to unload on to the unsuspecting. It is most disquieting to find that a body of men such as they are in Melbourne have been drawn into such influences’, Davidson to Melville, 30 October 1930, BNSWA. There is no evidence at all to support this, and it is only mentioned because it throws an interesting sidelight on Davidson’s character: that he did not entertain for a moment the notion that he could be wrong, and therefore had to invent fantastic motives for those whom, in normal circumstances, he regarded quite highly. 32 Shann to Davidson, 19 September 1930, BNSWA. 33 Sydney Morning Herald, 19 January 1931; reprinted in Shann and Copland, Crists in Australian Finance, d.11b. 34 Ibid.

223

Australia and the Great Depression economists were rejecting without qualification the theoretical basis of the stabilization plan, and were returning to advocacy of strict deflation and aligning themselves with the banks. This second change in the views of the economists was, however, more

apparent than real. To understand the reasons for the somersault, it is necessary to refer to a private conference of the group held at the end of November to seek agreement on major issues of economic policy. A state-

ment on the results of the conference was not published, but a draft memorandum prepared by Brigden has fortunately been preserved.** The overriding concern of the group was that there still had been no attempt to distribute the loss. Indeed, because of the delay in cutting wages and government expenditure, the unequal distribution of the loss had been aggravated. The fall in the national income, the memorandum continued, has made the balancing of budgets very difficult: but the continued failure of the Commonwealth Government (and to a less extent of some State Governments) to make drastic cuts in expenditure has greatly increased the difficulty. We regard such reduction of expenditure as a first condition of the restoration of confidence in Australia, both here and abroad.36

Turning to monetary policy, it was agreed that a price stabilization plan was a desirable objective. But the difficulty was to make any statement which would not be misused ‘to support demands for extravagant inflationary action, and the avoidance of essential economies’. In addition, it would be difficult to stabilize prices at the 1929 level without overshooting the mark, and the economists doubted whether Australia could succeed where other countries had failed. Credit expansion via government deficit spending was already taking place at a dangerous rate, and they believed that ‘the safest thing would be to expand credit only to buy bonds (not to finance current Government expenditures) and then only so far as the credit is really required by productive industry’. But it was clear that in terms of practical politics the economists could not endorse a policy of even limited credit expansion without jeopardizing achievement of the ‘equitable distribution of the loss’. They decided, therefore, to delete from future recommendations any mention of the expansion of credit and concentrate on support for the reduction of wages, interest

and government expenditure. The decision was faithfully adhered to during 1931, when the economists were increasingly called on to act as semi-official advisers. Unanimity

was maintained and advocacy of the stabilization plan was no longer

heard. Both at the official and unofficial level, the economists threw their weight against ‘Theodore’s monetary policy and in support of ‘equality of sacrifice’ by deflationary adjustment; and when the disintegration of the government was finally completed, the economists were used by the conservative forces for the preparation of a comprehensive deflationary plan. 35‘Economic Policy in the Crisis’, confidential memorandum prepared by J. B.

Brigden, 5 December 1930, Brigden Papers, NLA, 21/5/163. 36 Ibid., para. 4. — 224

The Formation of the Premiers’ Plan Although the Australian economists failed to find a theme around which to build a positive anti-depression policy and were unduly preoccupied with short-term political considerations, their failure was no greater than their counterparts in the United States and Great Britain during the early stage of the depression.?* More reprehensible, however, was their failure to work towards the building of a positive policy in the later depression years, when this task was the preoccupation of overseas economists. When they should have been questioning traditional modes of thought, they clung to the myth of the efhicacy of the premiers’ plan

and implicitly condoned the inept policy of the Lyons Government. There was nothing remotely comparable in Australia to the vigour of the New Deal or the Cambridge intellectual revolution. Planning for National Emergency It was in December 1930, it will be recalled, that the Commonwealth Bank admitted that it was impossible for governments to adhere to the

terms of the Melbourne Agreement, and suggested that an attempt be made to construct a workable plan covering a definite period. The suggestion was welcomed by the Commonwealth government, for it meant that the Bank was prepared to sanction some measure of deficit finance. At the Loan Council meeting held in mid-January, which was attended by Sir Robert Gibson, it was resolved to call a premiers’ conference at an

early date ‘with the object of laying down a three-year plan aiming at the adjustment within that period of public finance and general monetary

conditions’. In the meantime an expert committee consisting of a representative of each government, under the chairmanship of Sir Robert, was to investigate the position and prepare information for the conference.

When the premiers assembled in Canberra on 6 February, however, the Commonwealth did not have a definite plan or even a number of alternatives to place before the meeting. ‘The idea of holding the conference, Scullin argued, was to evolve a plan, for ‘no one government, could be expected to prepare a plan in which all governments are to share’.38 There was not even an agenda paper to guide the meeting, and the only definite subject to be considered was assistance to the wheatgrowing industry. The report of the committee of experts, which in any case was not required to make recommendations, had not even been completed in time for the commencement of the meeting. Apart from illustrating the effect of dissension within Labor ranks, this underlines

the basic reluctance of the Commonwealth government to provide leadership in the economic field. Despite the tremendous increase in 37In his study of the origins of the New Deal, Fusfeld has made the point that American economists had failed to build a coherent anti-depression policy prior to Roosevelt’s election, and that in 1933 ‘Roosevelt and the brain trust found themselves trying to do in a few short months what the economics profession should have been doing for decades’, Daniel R. Fusfeld, The Economic Thought of Franklin D. Roosevelt and the Origins of the New Deal, New York 1956, p. 222. 38 ‘Proceedings and Decisions of the Conference of Commonwealth and State Ministers’, February 1931, CPP, 1929-31, Vol. II, p. 87. 225

Australia and the Great Depression responsibility which had been occasioned by the combination of the Financial Agreement and the onset of depression, the Commonwealth was loath to exercise the kind of leadership which this responsibility required. It still preferred to think in terms of the era of the 1920s, when most of the important economic decisions were made by the states.

In the absence of a comprehensive plan, the conference turned to consider the question of assistance to the wheat-growing industry. The premiers frankly admitted that the industry was in a parlous condition and that generous assistance was urgently required to enable farmers to proceed with their plantings for the 1931-2 season. The matter to be decided was the extent of assistance, the method of payment and the source of finance. As doubts had been cast on the legality of the payment of a production bounty (see p. 152), the Commonwealth suggested an export bounty of 6d per bushel for the 1930-1 season. In this way the government hoped to restore some of the prestige lost by it as a result of the debacle which followed the ‘grow more wheat’ campaign. But, as the States emphasized, while such a bounty was desirable the real need was for funds to assist destitute farmers. It was eventually decided to raise a loan of £6m for the wheat industry—£3.5m for the payment of the 6d per bushel export bounty, and £2.5m for distribution by the states to necessitous farmers.?® As had so often occurred. in the past, however, the discussion took place independently of any assessment of the likelihood of raising such a loan. There was no possibility of raising a loan in the open market, for the internal long-term bond yield stood at more than 8 per cent at the beginning of February. Thus, assistance would have to come from the Commonwealth Bank, but the Bank had not been con-

sulted. Governments once again left themselves open to a curt Bank

refusal. Discussion of general financial policy and the proposed three-year plan

was opened the following day by Theodore, who in a brilliant speech advocated the abandonment of traditional thinking and the adoption of a new and expansionary monetary policy which would stimulate production, reduce unemployment and restore prices to their 1929 level. It was a moderate and sophisticated performance, and was conspicuous for its quality and grasp of fundamental banking procedure; but it clearly was not understood by most of the premiers. It was basically the same policy that had been enunciated by Theodore for some time past and which had

caused the defection of Fenton and Lyons and had been labelled ‘inflationist’. But on this occasion it was not accompanied by any specific policy proposals. If the conference agreed in principle with the policy,

these could be worked out later. ,

Theodore shrewdly based his argument on the need to achieve ‘equality of sacrifice’. National income had fallen and all would have to share in the loss. How was this to be achieved? It could not be achieved, he argued,

by cutting wages, interest, pensions and other forms of government expenditure, because all these reductions could not be accomplished at the 39 Ibid., pp. 117-18.

226

The Formation of the Premiers’ Plan same time. One man would, then, be bearing his burden before the other.*° Theodore was obviously referring to the difficulty of reducing interest rates at the same time as wages and pensions. ‘The banks had made it clear that interest rates could only be reduced after wages and other government costs had been reduced and ‘confidence’ had been restored. After everyone else had made their sacrifice, the banks would make

theirs. On the other hand Labor militants insisted that interest be re-

duced so that wages could be maintained. In 1931 ‘equality of sacrifice’ had come to mean that the other party make the sacrifice first. To circumvent this impasse, Theodore suggested that the 1929 price level be restored which would obviate the necessity for reductions in interest payments and other fixed obligations (which included pensions and other social

services). The restoration of the price level would be achieved by an active banking policy: purchase by the central bank of bonds in the open market to reduce the yield on such securities from 8 to 5 per cent, and the

extension of credit to governments to finance budget deficits and new loan issues.41 (This latter aspect of expansionary policy was implied rather than stated.) By these means it was anticipated that the national income would be increased by £100m, or only £25m less than the estimated original loss.

Although this was by and large a desirable and constructive plan, Theodore’s claim that it achieved ‘equality of sacrifice’ had a hollow ring.

It was admitted that the plan could not restore the primary loss of income, yet there was no discussion of how the unavoidable loss was to be distributed. By restoring the 1929 price level, the burden would not be shifted from the primary producers and the remaining unemployed. Indeed, the burden of these two groups would be increased. The employed wage-earner, the interest receiver*? and the pensioner would suffer none of the loss. Furthermore, the plan was vague and uncertain. Insufficient information was provided to enable the premiers to decide whether there

was a reasonable chance that budget equilibrium would be restored within three years. It was reasonable that the detailed provisions of the

plan be reserved until the attitude of the Commonwealth Bank was known, but Theodore left too much to the imaginations of the premiers.

He made the mistake of assuming that others could understand the mechanism of credit expansion and the associated rise in economic activity

as well as he could. The result was that the Nationalist premiers did not

even try to understand Theodore and branded his proposals as ‘inflationist’.

The conference adjourned on Saturday the 7th to digest the plan. If, after the interval, the premiers were generally favourable, it would be placed before the Commonwealth Bank for approval. When the conference reassembled on Monday morning, the premiers 40 Ibid., pp. 108-10. 41 Ibid., pp. 112-14.

42 Although the Theodore plan as it was finally constructed, did provide for the reduction of interest rates on future contracts, this does not appear to have been

part of the original plan. | 227

Australia and the Great Depression were completely unprepared for what was to follow. In a pithy statement, Lang unfolded his plan of suspension of external interest payments and the drastic reduction of internal rates of interest. The conference, he said,

had been in session for two full days, but a concrete plan had not yet been placed before the meeting. The time had simply been spent in ‘shilly-shallying’. It fell to him, therefore, to offer a bold scheme which would strike at the heart of the nation’s present affliction: the crushing burden of the interest commitment. His ‘comprehensive’ scheme comprised three elements: 1. That the Governments of Australia decide to pay no further interest to British bond-holders until Britain has dealt with the Australian overseas debt as Britain settled her own foreign debt with America. 2. That, in Australia, interest on all government borrowing be reduced to 3 per cent. 3. That immediate steps be taken by the Commonwealth Government to abandon the gold standard of currency, and set up in its place a currency based upon the wealth of Australia, to be termed ‘the goods standard’ .43

If the conference was able to arrive at another plan which would enable interest commitments to be met in full, Lang would readily fall in with it.

But if no such plan could be found, he urged the adoption of his proposals; and, in this case, whatever the decision of the conference, the government of New South Wales had decided to proceed with the im-

plementation of the Lang plan.** The origin of the Lang plan will perhaps never be satisfactorily ex-

plained. It was not brought before state Caucus and Cabinet before the premiers’ conference, and the majority of the party heard of it for the first time from the press.45 Lang gave nothing away during the first two days of the conference, and appeared to favour Theodore’s proposals. This has led to the suggestion that his plan was formulated during the recess on Sunday the 8th. Lang’s decision to go ahead with the plan was probably made at the last minute, but he seems to have been turning something of the sort over in his mind during the first part of the conference. In commenting on the Theodore plan, for example, Lang suggested ‘that the federal authorities draw up an effective scheme, providing

for a reduction of interest, and including suggestions regarding a new form of currency. ... Neither the present system, nor the other proposals put forward will ever enable us to balance our budgets.’46 This does seem to suggest that the bare bones of his scheme had already occurred to him.

The Sydney Morning Herald reported some time after the event*? that Frank Anstey had spent a good deal of time with Lang on the Sunday, and that he may have been responsible for Lang’s about-face. Such a policy was in line with Anstey’s thinking, but if he did play such a role, 43 CPP, 1929-31, Vol. II, p. 121; reprinted in Shann and Copland, Crisis in Australian Finance, d..4c. 44 Ibid., pp. 121, 195. 45 L. F. Crisp, Ben Chifley, p. 70. 46 CPP, 1929-31, Vol. IT, p. 111. 47249 February 1931.

228

The Formation of the Premiers’ Plan it is hard to reconcile his subsequent failure to support the break-away Beasley group in Parliament. Whatever the origins of the Lang plan, there can be little doubt about

its purpose. It was patently clear that the plan—however desirable its basic objectives—could not be carried through without at the same time bringing the collapse of the financial system of the state, and perhaps the Commonwealth. No financial institution in or outside Australia would honour the bills of the New South Wales government. It was one thing for a government to enter into negotiations for the reduction of interest rates (negotiations which the Scullin Government had already initiated and which were shortly to prove partly successful) ,48 and entirely another

for it to declare interest payments suspended or reduced. As Theodore told the conference: Mr. Lang could, it is true, take the first step; but how could he continue to finance his governmental arrangements thereafter? Where could he get the money to enable him to do so? If he could rid himself of the obligation to pay the Commonwealth his proportion of the interest he would certainly have that amount to play with. ... What other funds could he get? In the circumstances . .., would the banks provide overdrafts for New South Wales, not backed by Commonwealth Government treasury-bills? It is as clear as a pikestaff that we shall get a practicable policy only by acting together.*®

Lang’s purpose was to destroy the Theodore plan. He saw in Theodore and his plan a challenge to his own dominant position within the New South Wales party. During the period 1926-9, Lang successfully contrived to place himself in an impregnable position within the party. As a result

of his successful first premiership, he won many loyal supporters who were now in all the key positions. In Theodore’s entry into the New South Wales political arena in 1926, Lang saw a potential threat to his leadership, for Theodore had the ability, experience and ambition to rival

the state leader. Theodore’s presence was in itself a catalyst in the

erection of the Lang machine.®® Therefore, if the Theodore plan became the basis of economic policy throughout the Commonwealth, as appeared likely, Lang would feel that his own position had been reduced, that his

long-standing opponent would become too powerful within the movement. That he reacted in this way is consistent with his character. Essentially a lonely and aloof man, Lang found it impossible to trust anyone. He viewed politics primarily in terms of personality conflict and power rather than issues and objectives. This is not unusual, but what distinguished Lang was his craving for power and the extent of his contempt 48 During his period in England at the end of 1930, Scullin requested the British government to reduce the rate of interest due on the Australian war debt to Britain, to extend the period for repayment, and to fund the half-yearly payment of £2,774,000 due on 31 March 1931. The British government refused these requests, but agreed to postpone four half-yearly sinking fund payments of £814,000 each, CPD, Vol. 128, pp. 918-19. 49 CPP, 1929-31, Vol. II, p. 124. 50 See I. E. Young, Conflict within the N.S.W. Labor Party, 1919-32, unpublished M.A. thesis, University of Sydney 1961.

229

Australia and the Great Depression for his opponents. Denning describes how, at premiers’ conferences, this vain figure stood apart from all the others, even from his fellow Labor premiers: With his secretary as his sole companion, he flitted to Melbourne [where the conferences were usually held], walked stolidly into conference; went back as stolidly to his hotel; . . . and returned to Sydney sometimes without even saying farewell. He displayed as much contempt for the others as they did dislike towards him.5!

In addition, Lang was a shrewd and capable politician. Having decided on his objective, he knew how to achieve it. The Lang plan was cleverly devised to divert the masses: it provided them with ‘economic rainbows’®? to chase—and it is not difficult to appreciate how appealing these rainbows must have appeared to the army of unemployed and those threatened with unemployment in the bleak and confused days of 1931. The conference completely rejected Lang’s motion, and commissioned Theodore to approach the Commonwealth Bank with his plan of financial reconstruction. It then adjourned until the 13th to await the outcome

of the negotiations. The Bank did not understand the purport of Theodore’s proposals, and considered them to be nothing less than inflation, designed to prevent the reduction of wages, salaries and government expenditure. A scheme of expansionary finance could not be considered for one moment because they simply did not have the funds. In the Bank’s view, the premiers had simply been wasting their time by entertaining impossible proposals and by failing to come to grips with the real task before them: to devise a workable scheme within a specific period for the restoration of budget equilibrium by reducing costs of production and of government. In formally rejecting the Theodore proposals, Sir Robert Gibson indicated the matters which the premiers should discuss if the Bank’s co-operation was to be secured: Subject to adequate and equitable reductions in all wages, salaries and allowances, pensions, social benefits of all kinds, interest and other factors which affect the cost of living, the Commonwealth Bank Board will actively co-

operate with the trading banks, and the Government of Australia in sustaining industry and restoring employment.53

Further, Gibson urged that a conference of trading banks be called to help devise means of effecting the terms of this resolution, and that a subcommittee be formed of representatives of the governments and the banks to advise on the construction of a plan for the rehabilitation of industry. In the face of this flat refusal, the conference had little alternative but

to adjourn to allow time for the position to be reconsidered, and to 51 Caucus Crisis, p. 94.

52°Mr. Lang spent his time tickling the ears of the unfortunate sections of the people who were themselves so distracted by their position that they were prepared to chase any economic rainbow—and Mr. Lang provided a number of those rainbows.’ —J. B. Chifley, quoted by L. F. Crisp, Ben Chifley, p. 66. 53 Gibson to Theodore, 12 February 1931, CPP, 1929-31, Vol. II, p. 76 and Shann and Copland, Crisis in Australian Finance, d.14d. 230

The Formation of the Premiers’ Plan attempt to reopen negotiations with the banks. Before doing so, however, a series of face-saving resolutions was passed,5# which reaffirmed the

determination of governments ‘to adopt a three-year plan to meet the national emergency and bring about an adjustment of burdens’. But there was no specific mention of the Theodore plan, only a nebulous proposal that governments and banks co-operate ‘to make adequate provision for

the rehabilitation of industry and the restoration of employment’. The most definite proposals made related to the reduction of interest rates. In addition to the ‘substantial’ reduction of rates on deposits and advances, a flat rate Commonwealth income tax of 3s 6d in the £ on interest

on all Commonwealth and state loans and those of local government bodies (to replace the existing super tax of 15 6d in the £) was recommended. Public service salaries and wages were, however, only to be re-

duced ‘so as to bring about a total reduction commensurate with the percentage reduction in the cost of living’. The question of reduction in social service benefits was not mentioned. During the adjournment a meeting of all the banks was arranged with Scullin and Theodore to reconsider the federal government’s proposals. But the action of the Commonwealth Bank in refusing ‘to continue financing Government deficits by means of inflation’ was fully endorsed by the trading banks.®5 “The first essential’, the chairman of the bankers’ conference, C. H. Tranter, informed the Treasurer, ‘is the restoration of

confidence, and this can only commence by the Governments placing their finances in order by a definite and determined effort to balance their budgets within a given period. The incomes of the Governments cannot be increased sufficiently to meet the present expenditure, which, therefore, must be reduced.’> Once government finance was placed on a sound footing, the banks believed that ‘some reduction’ in interest rates could then be made. They were, however, particularly concerned about the effect of the special tax on interest, which would increase the difficulty of negotiating future loan issues. Thus forced into a corner by the banks, Theodore decided on drastic action. Supply by means of Treasury bills having been refused, the only alternative open to him if his scheme was to be financed was to amend the Commonwealth Bank Act to permit an increase in the fiduciary issue. When the premiers reassembled in Melbourne on the 25th, therefore, he submitted for consideration proposals which would increase the fiduciary currency by £18m of which £12m (or £1m per month) was to be made available to provide employment on reproductive works and £6m for assistance to the wheat-growing industry.5” After what must have been 54 CPP, 1929-31, Vol. IT, p. 156.

55 Memorandum of the Bankers’ Conference, Melbourne, 23 February 1931, BNSWA.

56 Ibid.

57 CPP. 1929-31, Vol. II, p. 157. Although Theodore included the full £6m for assistance

to the wheat-growing industry in his scheme, the Commonwealth Bank had previously agreed to provide £2.,5m—the amount allocated for the relief of distressed farmers—by discounting Treasury bills. It rejected, however, the proposal to raise

a loan for the payment of the bounty, for the market would not support a new flotation even at prohibitive rates particularly after the Lang outburst. 231

Australia and the Great Depression a momentous debate, the meeting was deadlocked with the Labor govern-

ments voting for and the Nationalists against the proposal (New South Wales was not represented). Moreover, two of the state Labor governments approved the resolution only on condition that Commonwealth government expenditure be reduced, that the fiduciary issue would not be used to finance deficits, and that the control of the issue would be in the hands of the Commonwealth Bank. Thus, the conference had completely failed to formulate a common plan, and the differences between the Commonwealth government and the banks on the one hand, and between the governments themselves on the other, were even greater than before. But, although the conference appeared to delay the possibility of achieving a comprehensive national plan, it actually brought it closer to

fruition. In the first place the banks had, in effect, delivered an ultimatum. The only question that remained was when they would enforce their decision to refuse finance if governments failed to jump through the hoop. It was plain that if governments did not respond within a month or two, the ultimatum would be effected. In the second place, the Lang plan destroyed the last vestige of the federal government’s self-respect. As we shall see, it caused the defection of a second group from the party, and the Scullin Government only remained in power at their pleasure. The conference marks, therefore, an important turning point in the history of the depression. Prior to February the government was still regarded as having some control over the course of events; after the conference it was clear that it was a lifeless shell awaiting inevitable extinction. The only question was: how long would it last? The East Sydney By-election and Default An opportunity to put his plan to the electorate and publicly to challenge Theodore’s policy was immediately available to Lang during the East Sydney by-election campaign. The by-election, to be held on 7 March, was made necessary by the death of J. E. West, who had held the seat for Labor for twenty years. The New South Wales Cabinet, Caucus and state executive had endorsed Lang’s policy as if repudiation had been in the Labor platform for decades—not a single murmur of protest was heard. The state executive also decided that the Labor candidate, Alderman E. J. Ward, would campaign on the Lang plan. A number of hastily convened meetings between the federal and state executives were held in an attempt to heal the differences, but each ended in deadlock.58 At the last of these conferences, the state executive unequivocally resolved that: This executive, being of the opinion that the issues depending upon the result

of the East Sydney by-election are of an importance equalled only by the great conscription issue of 1916, hereby calls upon every Labour member of Parliament (Federal and State) owing allegiance to the Australian Labour Party, State of N.S.W., to take the platform during the by-election campaign,

to advocate the Lang plan... 59 |

58 Sydney Morning Herald, 16, 18 and 21 February 1931. 59 Ibid., 21 February 1931.

232

The Formation of the Premiers’ Plan Meanwhile, the New South Wales members of federal Caucus decided that they would participate in the by-election campaign but would speak only in support of the federal policy.®° As the state executive had refused to capitulate, it was widely felt that the Federal Party should enter its own

candidate. It was an intolerable position for those speaking for federal

Labor not to have a candidate to represent their views. But Scullin refused to consummate the split in the party by entering a second Labor candidate and federal policy remained unrepresented. The campaign was notable for distortion, personal abuse and recrimination. At the Paddington Town Hall on 23 February, for example, Lang stated that ‘the £36,000,000 annual [interest] payment was an unfair burden imposed upon the Australian people because of its participation in the war to help Brtiain’.© In fact, only 16 per cent of the overseas interest commitment was contracted for war purposes.6? Six members of the Federal Party—Beasley, Eldridge, Lazzarini, James, and Senators Dunn and Rae—supported the Lang platform, and these six, with Ward, were to form a separate group when Parliament resumed. The result of the by-election was a victory for Ward, and was interpreted by Lang supporters as a vindication of their policy. But there was scant justification for this interpretation on the basis of the voting results. Although Ward’s majority was a reasonably comfortable 3,600, the Labor vote had declined drastically from 70 per cent in 1929 to 54 per cent, an even greater swing than had occurred at the Parkes by-election.®

Supplementing his tactics on the political front, Lang cleverly manoeuvred to further embarrass the federal government by increasing his demands for extraordinary financial assistance. He knew, of course, that all requests for assistance were to be addressed to the Loan Council, but during February the New South Wales Treasury submitted claims for assistance to the Commonwealth Treasury totalling £738,800. All of these related to interest commitments or capital repayments. When asked whether it was the intention of the state to submit this as a request to

the Loan Council, Lang bluntly replied that as the banks would not provide advances without the issue of Commonwealth securities, it was up to the Commonwealth to determine the course to be followed to obtain funds. When the matter was brought before the Loan Council, it was decided to refuse further accommodation to New South Wales until the state was prepared to honour all its interest obligations. This was the challenge that Lang wanted. All he now needed to throw down the gauntlet was the support of the East Sydney electors, and this, he believed, he had received in Ward’s victory. Accordingly, on 15 March, he defaulted on interest due to the Commonwealth amounting to £221,000 in respect of advances made for closer settlement. Alarmed at the avowed New South Wales policy with regard to overseas interest payments, the 60 Ibid., 20 February 1931. 61 Labor Daily, 24 February 1931. See also counter statement issued by the premiers conference, CPP, 1929-31, Vol. II, pp. 157-8. 62 Finance Bulletin, No. 25, Table 59. 63 Sydney Morning Herald, g March 1931.

233

Australia and the Great Depression Westminster Bank sought assurances that the interest due on 1 April would be met. In seeking the state’s confirmation that this would be paid, Scullin sent a telegram to Lang on 23 March to ask if it was ‘desired that [the] Commonwealth Government shall negotiate with [the] Commonwealth Bank for financial accommodation for this purpose be initiated?’

This was not an offer of assistance but represented the hope that Lang would accept Loan Council help in exchange for a guarantee that the state would not default. Lang did not, however, accept the bait and indicated that he did not intend to meet interest payments due on 1 April. ‘If, as your telegram indicates’, he added, ‘you are able to arrange for accommodation with [the] Commonwealth Bank for this State, we would readily apply the money for relief of dire distress existing here because of unemployment.’ After some hesitation, the Commonwealth decided that it was obliged under the Financial Agreement to meet the interest

due, amounting to £729,000 sterling, and thus formal default was avoided.§ The state’s advantage was, however, short-lived, as Lang must

have known. Legal proceedings were initiated against it, and certain regular payments to New South Wales (including the contribution towards interest under the Financial Agreement and the grant under the Federal Aid Roads Agreement) were withdrawn. Lang continued to default in London (and also in New York as from 1 May) which enabled him to carry on for several months without bank accommodation. Up to 30 June 1931, interest paid by the Commonwealth for New South Wales

amounted to nearly £5m (of which £1m had been recouped by withholding money due to the state) . However, Lang was forced to seek Loan Council assistance during July to meet his wages and salaries bill, and as

a condition of receiving this assistance he agreed to resume external interest payments, reduce expenditure as laid down in the premiers’ plan and rejoin the Council (see p. 270) .% Although Lang’s tactics resulted in the removal of Theodore and the Commonwealth government with him, they were also to lead to his own political demise. ‘The public disaffection with Langism, already evident at the time of the East Sydney by-election, accelerated after the act of default. Many people, particularly those outside New South Wales, felt that their national pride had been offended; those separated by distance from the rough and tumble of New South Wales politics had not taken the threat of default very seriously, and were deeply shocked and alarmed when it occurred. To the conservative Victorians, for instance, the ranting

and raging from across the Murray was the voice of a lunatic—they could not believe that the threat would be carried out. Within New 64 The near exhaustion of London funds increased the Commonwealth’s embarrassment in meeting this interest payment. The government appealed to the Bank of England for assistance in the exceptional circumstances, but the latter could not see its way to depart from its ‘established policy of not making advances to Dominion Governments’. The Commonwealth Bank was forced to eat further into its rapidly dwindling reserves. Interest due in New York on the same day was, however, duly

aid. 65 CPD Vol. 130, p. 3739.

234

The Formation of the Premiers’ Plan South Wales, antagonism towards Lang greatly increased following the closure of the Government Savings Bank on 23 April. ‘The Bank was the largest of its kind in the Commonwealth, and many small depositors, who had been relying on their savings to see them through the critical period, were allowed only limited recourse to their funds until amalgamation

with the Commonwealth Savings Bank was completed at the end of 1931.86 It is not entirely fair to infer that the closure of the Bank was due

to Lang’s policy. There is some truth in his allegation that the Nationalists were partly responsible®? by their claim made during the October election campaign that the safety of deposits would be in jeopardy under a Lang administration.68 There was a sharp fall in deposits during the election campaign, and an even greater fall during the December conversion loan operation. But the closure was precipitated by Lang’s failure to pay interest and principal due to the Bank during February and March, and by his default on overseas obligations. Lang’s control of the party

machine continued, however, and during March and April warfare between the federal and state executives increased in intensity. On 15 March the Sydney Metropolitan Labor Conference expelled Theodore from the party by the unanimous vote of 125 delegates, and declared that other federal members who had opposed the Lang plan at the East

Sydney by-election had lost the confidence of the party;®® on 27 March a special federal conference expelled the state executive from the federal Labor movement by 25 votes to 4;7° and on 3 April the Easter conference of the state party endorsed the Lang plan by 122-1.74 And so the political decimation continued. But, as 1931 progressed, Lang found himself sup-

ported by a declining proportion of the rank and file as his promises failed to materialize and there was no apparent end to the rising tide of 66 The ambition of the Commonwealth Bank was partly responsible for the closing of the Bank and the delay in reopening it. The Commonwealth Bank held the view that there should be only one savings bank for all Australian needs, and, if amalgamation with the GSB could be arranged, it would be well on the way to achieving this objective. Because of loss of deposits, the Commissioners of the GSB had, early in April, become convinced that amalgamation with the Commonwealth Bank was the only solution. Under ordinary circumstances they could have relied on cash assistance, but the dependence of the Bank on the New South Wales Treasury made this impossible. The immediate cause of the ‘run’ on 22 April was a published statement that the Commissioners were considering amalgamation with the Common-

wealth Bank. Although the Commonwealth Bank was favourably considering amalgamation, it refused to allow its name to be associated with any statement on the proposed amalgamation; an association which the Commissioners considered could have prevented the closure. ‘It is difficult to escape the conclusion’, Giblin

wrote ‘that the Chairman and the majority of the Board [of the Commonwealth Bank] did not want to see the Government Savings Bank survive.’ (Central Bank, p. 199.) The delay in completing the amalgamation was also partly due to the

unnecessarily stiff terms imposed by the Commonwealth Bank. See RCMB, Evidence, pp. 661-99. 67 J. T. Lang, The Great Bust, Sydney 1962, Ch. 40. 68 RCMB, Evidence, pp. 698-9. 69 Labor Daily, 16 March 1931. 70 Sydney Morning Herald, 28 March 1931. 71 Ibid., 4 April 1931.

235

Australia and the Great Depression the unemployed. There even emerged a few cracks in his iron control of his underlings. At the end of April, for instance, a young Labor backbencher, C. A. Kelly, was audacious enough to rebuke the premier on the floor of the Legislative Assembly for the government’s withdrawal from

the Loan Council and maintenance of an extravagant scale of expenditure.7? A more important manifestation of unrest was precipitated by the decision of the state executive a few weeks later that every member of state Parliament sign a pledge binding them to the terms of the Lang plan. A large proportion of Labor members of the Legislative Council, principally those representing Australian Workers’ Union interests, refused to sign the pledge.*3 Lang’s moment of triumph was brief. The London Floating Debt Again At the beginning of the February conference it was generally believed that unless the financial system received drastic surgical treatment ‘the final smash’ was only weeks away. This fear was heightened by the problem of how to deal with the £5m Treasury bills which matured in London on 2 March. There was no chance at all of renewing them. Prior to the announcement of the Lang plan Australia’s credit rating had been bad enough, with Commonwealth ‘fives’ changing hands for 76; but prices then plummeted to the low 60s. Ryrie cabled on 14 February that unless

the Commonwealth Bank can redeem the bills ‘we must apparently appeal to the Bank of England and Chancellor of the Exchequer to save us from serious position’. Earlier in February the London Office of the

Commonwealth Bank reported that the January bills issued at 5 per cent were being rediscounted at 7 per cent, and that the March bills were unsaleable. Thus, the Commonwealth Bank had no alternative than to pay off the bills to avoid default; but in doing so it virtually exhausted

its remaining London funds. After the bills were met, it retained only £5.5m in liquid assets in London, and, after Lang’s and other interest was met on 1 April, this sum was reduced to £3m. Moreover, there was little relief to be had from exporting surplus gold, for at the end of March the amount retained in excess of minimum legal reserve requirement for the note issue was only £3.8m.74 With £10m in floating debt still outstanding

in London (£5m due to the Westminster Bank and £5m in bills which matured in June) partial default seemed only a matter of time. To make matters even more difficult, the special arrangement with the Westminster Bank, which allowed an overdraft of £5m to stand for six months, expired on 31 March. As early as mid-February, the Bank approached the government to ask if it had any plans for handling the overdraft, and made it clear that a reduction was desired. This, together with the expected difficulty in issuing bills to replace those which matured

in June, prompted simultaneous action by the Treasurer and the 72 NSWPD, Vol. 126, pp. 2388-92. 73 Sydney Morning Herald, 18, 20 and 21 May 1931. 74 RCMB, Report, Tables 18-19.

236

The Formation of the Premiers’ Plan Commonwealth Bank. The following 'phone message was received by the

Bank from Theodore on 4 March: The Treasurer is very apprehensive that a serious jamb [sic] may occur in London at any time. The Commonwealth must be ready to meet such a situation, and therefore must be in a position to dispose of the gold held in reserve. The Treasurer suggests that the Board gives its approval to an amendment of the law to enable the gold reserve to be disposed of.

Before this message was received, the Bank had drafted a letter to inform the government of the gravity of the position. It concluded that: the Bank is no longer in possession of funds in London which might be required either to meet the claims of the Westminster Bank . . . [or] the Treasury Bills falling due on goth June and which might not be again

renewed.

... the gold reserve now held by the Bank is not more than sufficient to maintain the Statutory Reserve required under the Commonwealth Bank Act and allow for a bare margin for fluctuations of note issue. The Board therefore deems it its duty to point out the position to your Government so that

it may give consideration to the question and take such steps as it deems necessary to meet the position. My board desires me to say that it is possible that a position may arise in London in the near future which the Bank would be powerless to meet.75

A reasonable interpretation of this letter would seem to suggest that the Bank was advising the government to amend the Act to permit the disposal of the gold reserve, as ‘Theodore had suggested. But, in reply to Theodore’s ‘phone message, Gibson advised that: The Board is unable to see its way to subscribe to this suggestion [the disposal of the gold reserve], and I am requested to advise you that . . . [my previous letter], dealing with the London situation, is to be taken as answering your telephonic message.78

This was probably the most ambiguous exchange during the depression period, and illustrates the extent to which communication between the two policy-making bodies had deteriorated. The Bank’s intention in its first letter of 6 March was to put additional pressure on the government to adopt a workable plan for the balancing of budgets, so that Australia’s

credit rating would improve sufficiently to permit the renewal of the Westminster Bank overdraft and the June bills. In the proposed disposal of the gold reserve, the Bank saw an attempt by the government to further

postpone the reduction of expenditure and the adoption of a budgetbalancing plan.

Disregarding the Bank’s opposition, Theodore pressed on with the preparation of a Bill for the abolition of the statutory gold reserve. In doing so, he unwisely ignored the suggestion of H. T. Armitage—the 75 Gibson to Theodore, 6 March 1931 (first letter); reprinted in Shann and Copland, Crisis in Australian Finance, d.16. 76 Gibson to Theodore, 6 March 1931 (second letter). 237

Australia and the Great Depression Deputy Governor of the Bank, whose advice he had sought in an unofficial capacity—that the Bill, being of an emergency nature, should provide for the restoration of the reserve over a given period.”? Such a provision might have saved the Bill. But Theodore, roused to fury by the Bank’s negative tactics, refused to compromise. The reserve was a luxury that the country could ill-afford, and he was determined that everyone else should also see that this was the case. The Commonwealth Bank Bill

(No. 2) of 1931, which was introduced on 24 March, had three main provisions. First, it enabled the Treasurer to dispose of the gold reserve to the amount necessary for the discharge of Commonwealth indebtedness in London. Second, the note issue, which would become entirely fiduciary,

was limited to £60m.78 Third, Australian notes were made legal tender, and the promise to redeem in gold was eliminated. After taking evidence from Sir Robert Gibson,”® the Senate overwhelmingly rejected the Bill on 13 May. The attitude of the Opposition was that the Bill, together with the Fiduciary Notes Bill and the Bank Interest Bill (see pp. 240-1), ‘are

really one measure designed to put Australia completely off the gold standard, set up a purely paper currency, and insure that bank interest, and therefore banking, shall, in future, be under political control’.8° Meanwhile, the government was relieved of some of the pressure from London by successfully renewing the Westminster Bank overdraft. It was only able to do so, however, after protracted and often humiliating work by the High Commissioner’s Office. The Bank’s condition was that Com-

monwealth Treasury bills with a currency of six months (to mature on 30 September) be issued in lieu of the overdraft. After lengthy deliberation, the Loan Council agreed on the understanding that the bills would not be rediscounted.*! No sooner had the Senate rejected the Commonwealth Bank Bill than Theodore returned to the attack. He addressed a vitriolic letter to the Bank, asking Gibson if he could advise the government whether it was possible to provide for the renewal of the June Treasury bills by the 77 As Armitage was the one top Bank official who had the confidence of the Labor Party, his informal advice on technical banking matters was frequently sought by the government. 78 The limit of £60m was independent of any provision of the Fiduciary Notes Bill. In other words, had the Fiduciary Notes Bill become law, the maximum note issue limit would have increased to £78m. See CPD, Vol. 128, p. 519. 79 Gibson’s evidence before the Senate reveals, perhaps better than anything else, the contradictions and political overtones in Bank policy despite his over-conscious effort to remain impartial. See CPD, Vol. 129, pp. 1615-32, esp. pp. 1618, 1624. 80 Earle Page, second reading speech, CPD, Vol. 128, p. 1243. 81There were two important reasons for hesitation in the issue of these Treasury bills.

The first was that the bills might be hawked around the short-term market to the disparagement of Australian credit. However, the Westminster Bank was as good as its word in promising not to rediscount. Secondly, the Loan Council was unsure of its legal rights under the Financial Agreement in issuing Commonwealth bills in place of state overdrafts. Its main concern was that New South Wales would not recognize its liability to pay portion of the interest on such bills, but, on the assurance of Lang that the state would accept its portion of responsibility, the Council was prepared to take the risk. 238

The Formation of the Premiers’ Plan alternative suggested by the Leader of the Opposition in the Senate, Sir George Pearce:®? namely, the government’s abandonment of its financial policy as embodied in the Fiduciary Notes Bill and the Bank Interest Reduction Bill. In evidence before the Senate, Gibson had declined to state what alternative, if any, the government had other than default or the shipment of gold. But, after being pressed on the point, he claimed that there was an alternative, although he would not specify what it was.8° Pearce then claimed that the alternative Gibson referred to was the abandonment of the government’s present financial policy. In view of Gibson’s evidence before the Senate, Theodore also asked on 15 May for appropriate advice ‘as to the course of action which the Commonwealth Bank Board considers should now be taken by the Government to cover the Treasury Bills in question’. In a flood of verbiage, Gibson made a poor attempt at avoiding an embarrassing situation. He was finally forced to concede in a letter to Theodore on 18 May that: my Board is unable to see any solution of this immediate problem through the mediums suggested in your communication. Assuming, therefore, that Parliament decides that £5,000,000 gold be shipped to meet this obligation, my Board is in a position to say that acting with the authority of Parliament, the Bank Board could arrange for the necessary assistance in London to meet the Bills pending the arrival of the gold in London; ....

This letter was written precisely 12 days after Gibson’s evidence to the Senate, and there were no new circumstances to explain the volte-face. This was Theodore’s only victory in a long succession of defeats at the hand of Sir Robert. Theodore’s victory was, however, only partial. The Commonwealth Bank Bill (No. 3) of 1931, which was introduced and passed all stages in both Houses on 17 June, was different in two important respects from the earlier Bill. First, it provided for the disposal of only sufficient gold to meet the Treasury bills maturing on 30 June, and therefore for the reduction of the statutory reserve to 15 per cent. The rest of the reserve was to remain intact. Second, by an Opposition amendment which was cheerfully accepted by the Treasurer,’* the former minimum reserve of 2% per cent was to be gradually restored over a period of four years.*°

Gold was immediately shipped to retire the bills, an advance being secured from the Bank of England pending the arrival of the shipment in London. The Atrophy of the Scullin Government Despite the opposition of the banks, the inconclusive nature of the February conference and the almost certain hostility of the Senate, the

government determined to press on with the Theodore plan. At the 82 CPD, Vol. 129, pp. 1798-1801. 83 Ibid., p. 1624.

84 CPD, Vol. 130, pp. 2702 ff. 85 The reserve was to be increased to 18 per cent by go June 1933; to 21} per cent by 30 June 1934; and to the former 25 per cent by go June 1935.

239

Australia and the Great Depression Federal Labor Party meeting held shortly before Parliament reassembled early in March, it received enthusiastic support. All elements of the policy were endorsed without amendment, and as a first step it was decided to

introduce a Bill for the purpose of creating a fiduciary notes issue of £18m.8* To carry out this policy it was obviously necessary to purge Cabinet of its dissident elements. Accordingly, all ministerial positions were declared vacant, and as a result of the ensuing ballot, Anstey, Beasley

and Senator Daly were dropped.8? The five new ministers elected to replace these three and Fenton and Lyons were J. B. Chifley (Defence) ,

John McNeill (Health and Repatriation), and E. J. Holloway, C. E. Culley and Senator J. B. Dooley (Assistant Ministers) . It soon became evident that the reconstructed ministry had even less chance of implementing its policy than its predecessor. During the debate on the Opposition’s want of confidence motion, Lyons and a number of

other former Labor supporters indicated their intention to vote against the government. This reduced the ministry’s absolute majority to five, which meant that it depended for survival on the vote of the Beasley group. The government must have known that its economic policy would not be passed by the Senate. The Senate now had nothing to fear from the threat of double dissolution; indeed it would have welcomed the opportunity of an election. Nevertheless, the government decided to proceed with its policy whatever the outcome. By retaining the ministerial

benches, it would at least postpone the attack on the standard of living which it anticipated under a Nationalist administration. If it could not govern, it could prevent, for a time, its enemies from governing. Discussion of the doomed financial policy, which was embodied in three Bills, the Fiduciary Notes Bill, the Wheat Bill and the Bank Interest

Bill, occupied most of March and April. The Fiduciary Notes Bill was the basic Bill; the other two were enabling bills. Its main provisions were simple: 1t authorized the printing of up to £18m of Treasury Notes, of which £12m were to be used for public works expenditure for the relief of unemployment and £6m for assistance to the wheat industry. The Treasury Notes were to be paid to a special account at the Commonwealth

Bank and were to be used for the purchase of Commonwealth government securities. The Wheat Bill provided for the distribution of the £6m assistance to the wheat industry. In accordance with the decisions at the February conference, £3.5m was to be distributed by way of an export bounty and £2.5m by the states in the form of loans to necessitous farmers

at low rates of interest. The £3.5m would enable a bounty of 6d per bushel to be paid, but, as such a payment would only benefit those farmers who exported wheat, it was intended to distribute the bounty on 86 For the Caucus meeting, Theodore circulated a detailed explanation of the provisions of his policy which, when read today, is a persuasive, constructive and forward-thinking document. See E. O. G. Shann and D. B. Copland (eds), The Battle of the Plans, Sydney 1931, d.1a. 87 The surprise in the ballot was the dropping of Senator Daly, who had not associated himself with Lang to the extent of Beasley and Anstey. Daly was succeeded as Leader of the Government in the Senate by John Barnes. 240

The Formation of the Premiers’ Plan the basis of ‘marketable’ production.§§ Distribution on the latter basis was estimated to yield farmers 44d or 5d per bushel.8® The Bank Interest

Bill empowered the Treasurer with absolute authority to vary rates of bank interest and discount.8®° The Bill also provided for the creation of a Bank Interest Board to advise the Treasurer with respect to maximum rates of bank interest and discount payable within the Commonwealth. The Treasurer was not, however, obliged to accept the Board’s advice. The Bill was not to apply to existing contracts. The formal collapse of government policy occurred in mid-April, with the rejection by the Senate of the Fiduciary Notes Bill. The Wheat Bill was immediately withdrawn and the Bank Interest Bill was discontinued

on 23 April. In reply to Opposition demands for an election, Scullin replied that a double dissolution would take place if the Senate again rejected the Bill after the elapse of three months as laid down in the Constitution (Sec. 57).®! In this way the government hoped to buy a

little more time. These tactics were, however, cut short by the Commonwealth Bank. On 11 March Theodore had written to the Bank accusing it of providing

the State Bank of South Australia with £400,000 and the Agricultural Bank of Western Australia with £500,000 for the relief of necessitous farmers, and he understood that applications for assistance from other state banks would be considered. He pointed out that the Loan Council had already approved a loan of £6m for the relief of the wheat industry in general which the Bank had rejected as impossible to raise. ‘Theodore agreed that ‘assistance to wheat-growers is a matter of extreme urgency, but I would submit that it is not any more urgent than relief to the large body of unemployed’. He demanded, therefore, that the Commonwealth Bank . . . make advances to the Commonwealth Government as and when required, up to a total of £3,500,000 to enable the whole scheme of relief to wheatgrowers to operate at once. I have to request further that an advance of £1,000,000 be made at once to the Commonwealth Government for the relief of unemployment. Any money so advanced will be repaid from the proceeds of a loan to be raised at the earliest possible date.

Theodore did not seriously believe that this letter would be treated any differently than the numerous other requests for assistance. It was simply an act of frustration and rancour. The Bank replied in kind. It not only refused the assistance applied for,9? but served an ultimatum on the Loan

Council that the Bank would shortly be forced to refuse finance for government deficits. Since it was implied that governments had failed to 88 By distributing the bounty on a ‘marketable’ rather than an acreage basis, the constitutional difficulty associated with the Wheat Advances Act of 1930 was avoided. 89 CPD, Vol. 128, p. 3309.

90 The proposed tax of 3s 6d in the £ on interest was abandoned, apparently for the same reason as a similar proposal had been in October 1930. Giblin seems to have played an important part in persuading the government to abandon the tax. See Giblin to Theodore, 17 February 1931, Giblin Papers, NLA, 49 ALS. 91 CPD, Vol. 128, p. 1021.

92 Gibson to Theodore, 2 April 1931 (first letter) . 241

Australia and the Great Depression check the drift in their finances, Gibson advised ‘the Loan Council that a point is being reached beyond which it would be impossible for the Bank to provide further financial assistance for the Government in the future’.98

He also advised that the Bank had decided on a limit of £25m of Treasury bill and overdraft finance within Australia. Finance already provided by the Bank amounted to £18m, which meant that another £6.8m would be all the Bank could find, or only enough for about two months deficit service under existing rates of expenditure. Theodore responded to this, as Commonwealth Treasurer rather than as Chairman of the Loan Council, in a letter famous for its cogent and bitter attack on the policy of the Bank. He contended that the recent policy of the Bank, and its most recent letter in particular, could only be regarded, as an attempt on the part of the Bank to arrogate to itself a supremacy over the Government in the determination of the financial policy of the Common-

wealth, a supremacy which, I am sure, was never contemplated by the framers of the Australian Constitution, and has never been sanctioned by the Australian people.94

There was no possibility, he continued, of governments reducing their expenditure sufficiently rapidly to enable budgets to be balanced before the Bank’s limit was reached. Therefore, persistence of the Bank in its

intention will force all governments to default in their contractural obligations. Theodore proceeded to a violent, although well-reasoned, attack on the banks. They were, he conceded, not responsible for the decline in income and prices, but in blindly following the overseas banks in a policy of contraction, they had greatly aggravated the position. It was not the government’s policy only to expand credit; reduction in costs, in view of the reduced income, was inevitable. But a campaign of economy alone, however drastic, could not restore budget equilibrium or commercial prosperity. In addition to economies in industry, a fundamental change in monetary policy was required which would restore internal prices and commercial activity. Finally, as a final barb he claimed

that although the Bank had adopted a firm attitude in its dealings with governments, it has signally failed to distinguish itself by a display of similar attributes when dealing with the private trading banks. It has lately become painfully obvious that the leadership in banking policy had been indisputably assumed by the private banks. It is known that the trading banks have been the final arbiters

in determining interest and exchange rates from time to time, .. .

He urged the Bank to reconsider its stand, but stressed that the government ‘cannot be deflected from its definite policy by the unwarranted action of the Bank Board’, and would proceed with its parliamentary programme.

Although it was the Commonwealth’s intention to ignore the Bank’s 93 Gibson to Theodore, 2 April 1931 (second letter); reprinted in CPP, 1929-31, Vol. IV, pp. 2425 ff. and Shann and Copland, Battle of the Plans, d.za. 94 Theodore to Gibson, 15 April 1931; reprinted in CPP, 1929-31, Vol. IV, pp. 2425 ff. and Shann and Copland, Battie of the Plans, d.zb. 242

The Formation of the Premiers’ Plan ultimatum, the Loan Council’s reaction was quite different. At a Council

meeting at the end of April, the state premiers (New South Wales not attending) were not prepared to support the Commonwealth’s stand. Instead, they were impressed with the need to attempt once again to formulate a comprehensive plan which would receive general support, and in this, no doubt, they were encouraged by Sir Robert Gibson, who attended the meeting on one of its sitting days. The premiers resolved, therefore, that a premiers’ conference be held at once and that the leaders of the principal parties in Parliament be invited to attend ‘for the purpose of taking steps for the restoration of financial stability and of providing

employment for the people’. The Commonwealth dissented from this decision. For the assistance of the conference, a sub-committee was appointed, consisting of J. P. Jones (Victorian Labor Minister for Public Works) who acted as Chairman, Sir James Mitchell (Nationalist Premier of Western Australia) and L. L. Hill (Labor Premier of South Australia), whose task it was ‘to determine the result of economies effected and to be

effected, and to report . . . [on] what further action must be taken’ to achieve budget equilibrium by the end of June 1934. It is noteworthy that the Commonwealth, which would normally have nominated a representative to such a committee, preferred to stand aloof. The subcommittee was empowered to co-opt the services of economists and other advisers. With the collapse of the Theodore plan to restore the 1929 price level, the most pressing question which the sub-committee was commis-

sioned to investigate was the problem of devising ways and means for reducing the burden of the interest commitment. Interest receivers was the only income group which had not been called on to share in the loss of income; indeed they had benefited by the fall in prices. The reduction of interest became, therefore, the pivot of the sub-committee’s investigation. Any plan it proposed would stand or fall on the acceptability of its interest reduction recommendations.%¢

At the April Loan Council meeting, ‘Theodore did manage to gain support for a much diluted version of his plan. But it was in addition to, rather than as a substitute for, the proposed three-year plan for budget

equilibrium. ‘The Council approved the issue of an internal loan for £12m, of which half was to be used for assistance to the wheat industry

and the other half for the relief of unemployment. With the price of stock so low, the success of the loan depended on the willingness of the banks to underwrite it, for it was clear that they would be required to provide the bulk of the funds. Sir Robert Gibson stalled in his underwriting negotiations with the trading banks. In mid-May he advised that some progress had been made but that £6m was all the government could hope for. A little more stalling on the part of the banks,®7 and this pro-

posal also collapsed. It was rendered obsolete by the decision of the premiers’ conference to convert the whole of the internal debt. 95 CPP, 1929-31, Vol. II, p. 355. 96 See opening remarks of J. P. Jones to premiers’ conference, ibid., pp. 181-3.

87On 15 May Theodore wrote to Gibson urging that the banks come to a decision about the loan, but this letter was ignored. 243

Australia and the Great Depression Reducing the Patient’s Diet The sub-committee of the Loan Council threw itself energetically into the task of preparing recommendations for the premiers’ conference

with the object of restoring budget equilibrium within three years. It invited Professors Copland, Giblin (at the time Acting Commonwealth Statistician), Shann and Melville (who had taken up their respective positions with the Bank of New South Wales and the Commonwealth Bank) , to sit as a separate committee and prepare a report for the consideration of the sub-committee. The economists were able to arrive at a fair degree of unanimity on most matters other than the future of the exchange rate.®8 Several of them believed that the rate should be substantially increased to bolster sagging export income. However correct this judgement may have been, they were brought around to the view that

further devaluation would have had a depressing psychological impact and might have precipitated another flight from the currency. The most important object of the plan was to restore confidence, and for this reason —-and for the sake of unanimity—the question of further devaluation was dropped, and the committee concentrated on more direct ways and means of bridging the budget deficits. To assist it in this, the Under-Treasurers were invited to join the committee, and all states responded except New South Wales. The presence of the Under-Treasurers was extremely important for the committee’s deliberations. As it was important that recommendations be confined to what was politically feasible, the advice of the

Under-Treasurers was invaluable. They were, after all, the principal advisers of their ministers, and, therefore, recommendations bearing their signature had the best chance of serious consideration by the premiers.

The committee’s report, which was submitted to the Loan Council sub-committee on 23 May, fastidiously avoided recommendations for the promotion of recovery in general, and confined its attention to budgetary matters.®® It estimated that the combined deficits in the current financial year would reach £31m (the actual figure was £26m) , and would increase to about £41m in 1931-2 if economic conditions and policies remained unaltered. In considering that economies were possible—bearing in mind the political axiom of equality of sacrifice—the economists adopted as their standard the fall in the Commonwealth basic wage since 1928. This had fallen by precisely 20 per cent, 10 per cent through Court order and

10 per cent through cost of living adjustment. The standard reduction of 20 per cent was then applied to all adjustable government expenditure in 1929-30. The main items under ‘adjustable’ expenditure were wages, salaries and pensions. If all governments which had not already done so

were to reduce their expenditure by this standard, the saving would 98 Interview with Sir Leslie Melville, Canberra, 21 June 1962. 99 ‘Report of the Under-Treasurers and Economists upon the Possibilities of Reaching Budget Equilibrium in Australia’, Appendix II of the ‘Report of the Conference of Commonwealth and State Ministers’, 25 May to 11 June 1931, CPP, 1929-31, Vol. Hy, pp. 355-68; reprinted in Shann and Copland, Battle of the Plans, d.gd. 100 If 1929 had been used as the base year, the reduction would have been 23 per cent. 1928 was chosen, it seems, because 20 per cent was a more convenient figure.

244

The Formation of the Premiers’ Plan amount to about £13m. It was thought, however, that another £g3m would probably be needed in 1931-2 to supplement the inadequate sum of £12m

already being spent on unemployment relief. On the receipts side, the committee found it exceedingly difficult to devise any means for increased taxation which would not become an intolerable burden. In the circumstances of national emergency, therefore, the committee contended that ‘recourse must be had to some form of taxation which falls on everybody’s

consumption without directly increasing the cost of production to any considerable extent’.1°! It was recommended that sales tax be increased from 24 to 6 per cent, and that primage duty be increased from 4 to 10 per cent. ‘These increases would raise £8m in 1931-2. It was thought that an additional £2m could also be raised by increasing the rate of income tax on incomes in the higher ranges, by reducing the minimum income exempt from tax, by increasing land tax, or by increasing entertainment tax. The details were left open for the premiers’ decision. Furthermore, there was scope for an increase in income tax of £1 per head in Victoria and Western Australia which would yield £2.2m. The most important contribution of the committee was its suggestion for the reduction of interest rates. This had become an urgent need with

the continued fall in prices and the increasing burden of fixed money claims. Three alternatives were considered. First, the price level could be

increased by the issue of additional currency or the creation of bank credit, but this would ‘destroy confidence in the currency’ and cause ex-

change and interest rates to rise. (More accurately, this reflected the economists’ judgement that such a policy would be politically unacceptable.) Second, taxation of income from property could be increased, but this, 1t was thought, would increase public and private interest rates. A third possibility was the immediate conversion of government securities at a low rate of interest, and the simultaneous reduction of private interest rates. If this course was to be adopted, a reduction of 15 per cent was suggested. With the present Commonwealth super tax on property of 74 per cent, this would amount to a total reduction of 223 per cent. Such an operation would result in the saving of £3m.1° The committee’s recommendations may be summarized as follows:

£m £m Estimated deficits, 1931-219 41 Reduction in adjustable expenditure by 20 per cent 13

Additional Savings intaxation interest123 Total economy measures 28

Gap to be bridged by borrowing 13 101 CPP, 1929-31, Vol. II, p. 361. _ 102 This figure was an underestimate. The actual saving to be achieved by this means was about £5.5m, the figure adopted at the premiers’ plan conference. 103 The basic figure for estimated deficits in 1931-2 used by the committee was £39m. The higher figure has been used here, as the lower figure, the committee considered,

was probably an underestimate. 7 245

Australia and the Great Depression The committee assumed that after 1931-2 deficits would be gradually reduced by an improvement in confidence, in export prices and in the general level of economic activity. This still left, however, the problem of deficit finance, to which little attention was given. It was simply stated that finance Should come from current savings rather than from new bank credits. Such borrowing .. . will be over and above the funding of the existing short-term

indebtedness both in Australia and London which is necessary for the

restoration of Australian credit.104

Taken at face value, this was nothing less than pure deflation, for current

deficits and the existing short-term debt (both internal and external) were to be funded in as short a time as possible. It would have meant a sharp fall in bank liquidity which would have exerted severe downward pressure on the money stock. It is unlikely, however, that the economists seriously believed that such an abrupt change in financial policy could

have been effected, and at least some of their number thought it undesirable. But all the experts were, as mentioned above, acutely sensitive

to political reality and their recommendations were cast in a way that would be acceptable to the banks and the Senate majority. Few if any expected future deficits to be financed from current savings, and it was accepted that credit expansion to the government sector would continue, albeit at a reduced rate. The sub-committee of the Loan Council did not have sufficient time to consider in detail the experts’ report before the premiers’ conference began, and merely indicated that something along the lines proposed was necessary.!°5 The two reports were then passed on by the Loan Council

for the consideration of the premiers’ conference, although Theodore

unsuccessfully attempted to frustrate this move by ruling ‘out of order’ the motion that the reports be accepted and transmitted to the conference.

The Commonwealh government approached the conference, which began on 25 May, with a good deal of scepticism and with some hostility.

The conference had, after all, been forced on it by the Commonwealth Bank, and it had no hand in formulating the proposals to be discussed. But its hostility thawed after the Nationalist premiers declared that they were prepared to support the experts’ proposals in their entirety, including the reduction of all forms of fixed money claims. In fact, after the initial tensions had been dispelled, the Commonwealth, through the able

and restrained chairmanship of the Prime Minister, took the lead in pushing the plan through. He was helped by the determination of the premiers to sink their political differences, to forget past antagonisms and to work together for a comprehensive plan. Even Lang was in a conciliatory mood. Scullin was also helped by the vast amount of work 104 CPP, 1929-31, Vol. II, p. 364.

105 ‘Report of the Sub-Committee of the Australian Loan Council’, 23 May 1931, CPP, 1929-31, Vol. II, p. 355; reprinted in Shann and Copland, Battle of the Plans, d.gc. 246

The Formation of the Premiers’ Plan that had gone into the preparation of the conference, and which continued throughout the two and a half weeks that it was in session. In addition to the extensive work of the two Loan Council committees, the Commonwealth and every state (except New South Wales) had prepared,

within a few weeks and well before the usual time, complete budget estimates for 1931-2. During the conference, committees of banks, insurance companies, stock exchanges and legal men were constantly in session

to advise and provide information on technical questions that arose. Every possible effort was made to hear and consider all points of view, so

that the final result would be a truly national plan. The pivot of the whole conference was the proposal for the reduction of internal interest rates (implying reduction of external rates at a later date). Previous plans had failed because the trading banks had insisted that interest rates could only come down after budget equilibrium had been achieved, and governments had insisted that the reduction in in-

terest was a prerequisite for the restoration of equilibrium. For the first time, simultaneous, and not conditional, action was proposed; and in response Labor governments agreed to reduce their adjustable expenditure by 20 per cent compared with 1929-30 if the banks would fall into

line by supporting the conversion loan and by reducing interest on deposits and advances. However, the banks were still reluctant to meet governments halfway: they were not convinced that the Commonwealth and New South Wales would honour any commitment to reduce wages, salaries and pensions. It was only as a result of strenuous effort by Gibson that the trading and saving banks agreed to reduce their rates by one per

cent ‘concurrently with the carrying into effect of the whole plan of reconstruction of national finance’. In agreeing to co-operate with the premiers, the banks were not unmindful of the point stressed by Davidson, that if we force the Scullin, Theodore [sic] and Lang Governments to adopt this

plan it means that those factors that might normally be turbulent in the community will lead this movement. They will pass the necessary legislation which will naturally be unsavoury to their extreme supporters with the probable result that a Nationalist Government will follow and obtain the credit for ‘pulling Australia out of the mud’.

Having received the assurance of co-operation from the banks, the conference turned to consider the details of the proposed conversion loan. It was here that the greatest difficulty was encountered. ‘The economists

and Under-Treasurers had recommended that the conversion should be on a voluntary basis. This recommendation was based on the assumption that the banks would underwrite the loan and pay off the unconverted portion. But the banks, not unnaturally, found it impossible to agree to this request, and the problem emerged of how to deal with any unconverted portion. It was generally agreed that no bondholder should be allowed to gain at the expense of other sections of the community by refusing to convert, and that some form of penalty should be imposed. Lang declared flatly that the conversion should be compulsory and on a 247

Australia and the Great Depression 3 per cent basis (the conference had agreed on 4 per cent), but he was gradually weaned from his extreme position. The penalty decided on was

a 25 per cent Commonwealth property tax, to be imposed upon both ordinary and tax-free securities. Publicity for the proposed penalty produced a furore in Melbourne financial circles. Conversion in association with the tax was denounced as repudiation, a thinly-disguised version of the Lang plan.1% The federal Opposition was pressured into action, and a letter from Lyons (who had recently been elected federal Opposition Leader) and Latham (now Deputy Leader) was sent to every member of the conference, claiming that the proposed departure from the original recommendation represented ‘repudiation and default’ and urged

that nothing less than a purely voluntary conversion should be considered.1°7 However, the conference remained steadfast and reafirmed its determination to impose the tax.1°8 The matter was reopened when Lyons, Latham and Sir George Pearce were invited to join the conference during its closing stages. In a long political speech, which was completely un-

necessary under the circumstances, Lyons antagonized the rest of the conference by going over the whole of the ground since the Melbourne Agreement, claiming that he had acted consistently but that the Scullin Government had not.!° Until then the proceedings had been admirably free of recrimination, but Lyons’ blustering tactics very nearly wrecked the whole plan. Lang immediately seized the opportunity so far adroitly denied him by the other premiers and insisted that he would refuse to sign the conference plan unless the conversion was conducted on a straight-out compulsory basis. ‘I am not going back to New South Wales’, he declared, ‘to ask the people there to make a further sacrifice which will

mean a further burden of extreme hardship on the gamble that at some time there may be a conversion loan. [And] if that fails’, he continued, ‘other people will have to be pushed down and made to suffer, and the

wealthier section of Australia will be able to stand by and laugh at them.’11° Tt took all Scullin’s great tact and persuasive power to save the conference from collapse. Eventually Lang agreed to sign the plan on the condition that ‘the Government of New South Wales shall not be obliged to take the necessary steps towards “‘the reduction of 20 per cent in adjust-

able Government expenditure ... ”, unless and until the conversion 106 See J. B. Were & Son, Weekly Letter, No. 395 (special issue) , 28 May 1931.

107 Letter dated 30 May 1931; reprinted in conference report CPP, 1929-31, Vol. I, p. 241 and in Shann and Copland, Battle of the Plans, d.4biii. 108 Ibid., p. 277. The determination of the conference to impose a penalty tax convinced Melville that the whole plan would fail. He wrote to Gibson (3 June): ‘I think that the situation is developing in such a way that a breakdown is inevitable. The holders of Government securities are urging that the plan [for the conversion] should be entirely voluntary; that tax free securities should be left untouched and that no penal tax should be imposed on those not prepared to convert. Actually, however, I think the difficulty is rather due to a distrust of the Governments of the Commonwealth and of New South Wales than to opposition to some measure of compulsion. The fear that the Commonwealth and New South Wales Governments will not carry out the whole plan, I find, is widespread.’ 109 Ibid., pp. 309-13. 110 Jbid., p. 324.

248

The Formation of the Premiers’ Plan loan shall have been successfully and effectively carried out’.111_ The question of how the unconverted portion of the loan was to be dealt with was not satisfactorily settled. ‘The resolution to impose a 25 per cent tax was not rescinded, although it did not form part of the final conference resolution. It was generally agreed that the conversion appeal would be on a voluntary basis, but there was little doubt in anybody’s mind that, if a substantial portion of the loan remained unconverted, some form of penalty would have to be imposed if Labor governments were to fulfil their undertakings. Comparatively little attention was given to the other important item of the plan: the reduction of 20 per cent in adjustable government expenditure. During the short discussion on this item,!!2 however, it emerged that Labor and Nationalist governments’ interpretation of the meaning of ‘equality of sacrifice’ differed considerably. ‘To Labor governments, it meant that the total wages and salaries bill was to be reduced by 20 per cent, but that the contribution of the higher income groups should be greater and the lower income groups less than 20 per cent. The Nationalists, on the other hand, considered that all groups should suffer a proportionately equal reduction. Fortunately, this disagreement did not impede the progress of the conference, and it was decided that each government should reduce its expenditure by the required amount in its OWN way.

The final conference resolution, signed by all governments on 10 June, stressed that the plan was an indivisible whole, the carrying out of any one part being dependent on the carrying out of the entirety; it urged that every section of the community recognize the imminence of national default and be willing therefore to accept its share of the sacrifice following the lead of governments. The plan comprised three main elements: 1. The reduction of 20 per cent of adjustable government expenditure (with the exception that old-age pensions were only to be reduced by 12} per cent). The total saving under this heading was expected to be £12m. 2. Increases in Commonwealth income and sales tax, and primage duties. These increases were estimated to yield £7.5m. In addition, increased state income tax was suggested, although this did not form a specific part of the plan. An extra £2m could, it was thought, be raised under this heading. 3. The reduction of public and private interest rates. The conversion loan, which would involve reduction at the rate of 223 per cent, would involve a saving of £5.5m. Bank interest was to be reduced by voluntary action, mortgage rates by state legislation, and also rents (although these were not referred to specifically in the plan) . The reduction in private interest rates was to conform to the 20 per cent standard.113

The total saving anticipated amounted to £25m (or £27m if state income tax was also increased). Thus, the deficit for 1931-2 would amount to £14-16m. The conference did not arrive at any decision about the way 111 Ibid., p. 336. 112 See ibid., pp. 253-60, esp. 254-5. 113 Ibid., pp. 351-3.

249

Australia and the Great Depression these deficits were to be financed, and the matter was left for negotiation between the-Loan Council and the Commonwealth Bank (see pp. 268-74).

A criticism which Theodore levelled against the report of the expert committee was that it failed to provide for any direct stimulus to in-

dustrial activity; in particular, that it failed to take into adequate consideration the need for an expansion in financial provision for unemployment relief and assistance to necessitous farmers. ‘This was not the committee’s task, but the need for some such assistance was recognized by the conference. Therefore, it was agreed that as soon as possible after

the conversion loan, a cash loan of £8.5m should be raised, of which £6m was to be used for unemployment relief works and the remainder for assistance to the wheat industry.!!4 This decision did not form part of the formal plan, for it might have jeopardized the success of the conversion loan and savoured of acceptance of the Theodore policy, but it was a definite part of the plan of ‘general rehabilitation’ and should be added to the three elements mentioned above. The Plan: Summary of Origins and Assessment

In describing the evolution of economic policy during contraction, one of our objectives has been to trace the complex of factors which led to the adoption of the premiers’ plan in June 1931. The following summary attempts to bring these various strands together and provide an assessment of it in view of widely differing claims made about its significance.

By far the most important factor was the pressure to deflate forced on the Commonwealth government and the Loan Council by the Common-

wealth Bank since the end of 1929, culminating in the ultimatum of 2 April 1931. Other factors to be mentioned later, which superficially appeared to be independent, were largely influenced by the policy of the Bank. None of the many alternative names given the plan—the premiers’ plan, the Copland plan, the Australian plan or the national emergency plan—accurately reflects its origin.

The reason given by the Bank for its policy was simple enough. Finance for meeting deficits could not be provided, in its opinion, without endangering the stability of the currency; and, as it was fond of reminding the government, it was the Bank’s statutory responsibility to administer the Bank in such a way as to prevent any threat to stability. This meant external as well as internal stability. Under normal pre-depression con-

ditions of the operation of the sterling exchange standard, internal and external stability (in a rough and ready way) were maintained concurrently by the credit policy of the trading banks, and the Commonwealth Bank’s task was the simple and passive one of regulating the volume of currency per sé. However, with the breakdown of the sterling exchange standard, the near exhaustion of London funds, and the export of all available gold reserves, the Bank suddenly found itself in full control of the maintenance of external and internal stability, but without the 114 Ibid., p. 343.

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The Formation of the Premiers’ Plan traditional tools at its command. The Bank had, therefore, to resume where the sterling exchange standard left off, and continue deflationary pressure for the sake of external solvency. But government pressure was,

it judged, thwarting this policy. A mild dose of ‘inflation’, as it was wrongly termed, could have been countenanced if the external position had not been so grave. The problem of how the Treasury bills maturing

in London at the end of June were to be repaid had not been solved when the premiers assembled, and there were also the bills held by the

Westminster Bank, portion of which would have to be redeemed in September. But this short-run problem was only part of the difficulty; of even greater concern was the task of improving Australia’s international credit rating sufficiently to be able to convert on satisfactory terms a long succession of large overseas loans, the first of which fell due in October 1932. The Bank reasoned that if Labor’s policy to restore the 1929 price level was allowed, the country would have no chance of rebuilding its reserves of London funds sufficiently to have any chance of refunding successfully. Deflation appeared, therefore, to be the only real alternative. Whether the Bank would have gone as far as to allow internal default to enforce its policy is open to speculation. There is reason to believe, however, that it considered the position so grave that it may well have allowed internal default in preference to continued deficit spending and the real threat of external default.115

The prevention of external default was, then, the basic if unstated premise of the premiers’ plan; and the existence of a sizeable floating debt in London was the most strategically placed weapon in the hands of the

proponents of conservative doctrine. However important the reduction of wages and interest may have appeared from an internal standpoint, this was regarded as vital for long-run external solvency. The Commonwealth Bank was determined that Australia would not suffer the same fate as Germany and central Europe generally. The contemporary disintegration of the financial system in these countries as a result of so-called

political control of the currency was foremost in the Bank’s mind in serving its ultimatum and also in the Loan Council obeying it. Three other factors helped to create the conditions for the adoption

of the plan. (1) The large Opposition majority in the Senate which thwarted government measures on every possible occasion. As it was unable to implement its own policy and unwilling to face a general election, the government had little alternative than to acquiesce in a compromise which was heavily weighted in favour of its political opponents. Indeed,

on financial matters the Senate followed the Bank’s line to an extent which suggests that it acted as Sir Robert Gibson’s political arm. (2) The 115 At the time of the premiers’ plan conference, Melville thought that ‘In the absence of these economies, Australia will default in July or August if the Commonwealth Bank Board refuses to finance deficits any longer by means of inflation, and this it is almost certain to do. Default might perhaps be preferable to compulsory conversion if it were confined to the internal debt. What I fear, however, is that unless Governments have some definite plan before them they will default on both our internal and external obligations.’ Melville to Niemeyer, 6 June 1931.

251 ,

Australia and the Great Depression

disintegration of the Labor Party and with it the government. The government knew full well that fragmentation meant political annihilation and that an approach to the electorate on its economic policy could not be considered seriously. Knowing the government’s political weakness, the Bank and Senate could increase pressure on it without fear of reprisal. (3) The influence of the economists. Their report made compromise possible because it had the appearance of expertise and objec-

tivity. In fact, however, the report was carefully framed so as to be acceptable to both parties: one side was offered wage cuts and the other a reduction in interest rates. ‘The economists of their own volition had little influence on the broad principles of the plan; these were determined for them by political exigencies. Nevertheless, the important part they played

in providing the framework for a workable compromise should not be underestimated. None of these factors can, however, compare with the influence of the Commonwealth Bank; indeed two of the three were largely conditioned by Bank policy. It remains, therefore, that the premiers’ plan was in conception and design, if not in execution, the Bank’s plan.

In post-Keynesian terms the premiers’ plan was unambiguously deflationary, for it involved a sharp fall in government expenditure and hence in aggregate demand. In so far as such a policy was expected and welcomed by the business community, it probably did help to improve confidence as was the contemporary claim; but in other respects (the fall in interest rates excepted) it tended to hinder recovery.1!6 In the 1930s, however, the plan was widely applauded as an example of creative economic planning and an advanced approach to the building of effective recovery policy. More precisely, it was held that the plan embodied the principle as enunciated by Australian economists of ‘the middle course’, ‘a judicious mixture of inflation and deflation’.1!7 How are these conflicting views reconciled? Aside from Sir Douglas Copland’s relentless propaganda in support of

the institutional and theoretical novelty of the plan,!!8 the conflict turns on differences in meaning attached to ‘inflation’ and ‘deflation’ in preand post-Keynesian terminology. One difficulty in identifying the preKeynesian view is the loose and widely differing meanings given the words. In essence, however, inflation meant an increase in the volume of currency

on issue. This included deficit spending because it was thought that this would ultimately involve printing more notes. Although not expressed as frequently or explicitly, deflation meant a decrease in the note issue or accumulation of budget surpluses. Copland adopted a more generalized definition. ‘Inflationary action’, he declared, ‘is that which helps to sustain

money incomes above the level they would tend to reach under the operation of a policy of adherence to an international gold standard’, and 116 The effect of the plan on recovery is amplified in Chapter XII. 117 D. B. Copland, Australia in the World Crisis, pp. 65, ff. 118 See Bibliography for the many books and articles from Copland’s pen elaborating aspects of Australian policy in depression and recovery; also ‘A List of Writings by Sir Douglas Copland’, Economic Record, March 1960, pp. 173-8. 252

The Formation of the Premiers’ Plan deflation as ‘action which reduces money incomes below the level in operation before the depression’.1!9 The irony is that on Copland’s definition every western country with the exception of France and South Africa adopted a mixed policy of inflation and deflation qua Australia.

It followed that there were two main ‘inflationary’ elements in Australian policy of 1930-1: (1) exchange devaluation against gold; and (2) planned deficit spending for three years after 1930-1. Although the first was a market reaction and not part of official policy, Copland could claim that it was included in the economists’ submission of September 1930 (see pp. 223-3) ; but that it was not part of an ordered plan is patent. ‘The

important point about the second is not, of course, that deficits were allowed to continue, but that the net injection was sharply reduced at a time when unemployment was high and still mounting. That the Australian measures were as near as politically possible to strict orthodoxy is clear from the comparative review of recovery policy in Chapter XVI. Finally, it is necessary to look more closely at the basic policy assump-

tion that external interest commitments were inviolable. In terms of the politics of the 1930s, there were only two alternatives: payment of con-

tractual obligations in full or repudiation. Although all forms of ‘repudiation’ were equally damned, at least five degrees of possible action can be distinguished: (1) cancellation of capital and interest contracts;

(2) cancellation of interest alone, capital to be repaid; (3) indefinite suspension of interest payments without accrual; (4) deferment of interest payments with accrual; (5) reduction of interest payments. As far as can be determined, Lang’s policy falls under alternative (3). What would have been the consequences of unilateral Australian action of this type?

The answers are of course speculative. If Australia could have avoided sanctions, there is no doubt that suspension of interest payments abroad would have substantially reduced deflationary pressure, both directly and indirectly. Directly, it would have released about £36m a year which could have been used for unemployment relief; indirectly, it would have eased pressure on governments to reduce current expenditure. As a guess, it may have been possible to absorb one-half of the unemployed by this means. But the key question is the likely extent and form of reprisal, for in view of Britain’s own economic difficulties it is inconceivable that she would have turned a blind eye. Three categories of economic retaliation would have been open to the British government: (1) restrictions on capital movements to Australia; (2) freezing Australian-owned assets held in London; and (3) erection

of barriers against imports from Australia. The closure of the London

capital market to Australia for an indefinite period was the type of action most feared by contemporaries. They were not to know, of course, that public overseas borrowing would not be resumed before 1936 and 119 Australia in the World Crisis, p. 116.

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Australia and. the Great Depression

that any sanction under this heading would have been of small significance. Would Britain have taken stronger measures against a Dominion and an important trading partner? She may have placed restrictions on the use of London funds, and would almost certainly have demanded tougher terms at the Ottawa trade conference in 1932; but it is doubtful if she would have gone as far as to impose a heavy tariff or restrictive quota on, say, wool imports. Australia would not, after all, have been alone if she had defaulted. The bulk of primary producing countries in South America and central and eastern Europe suspended or scaled down their debt payments in the 1930s;!2° and Germany, which was in a roughly similar position to Australia, declared a partial moratorium in 1933 which

was made complete in 1934.!*! In view of the acknowledged and widespread problem of international indebtedness, Britain is unlikely to have singled out Australia for strong retaliatory action; and the benefit-cost calculus of suspension may well have been in Australia’s favour. This does not mean that a blunt, unheralded declaration of suspension would have been of much if any advantage, and Lang’s pronouncements of this type were seriously damaging in the absence of uniform action through the Loan Council. To minimize the possibility of reprisal, careful planning supported by intense diplomatic pressure at the highest level would have been necessary. By 1931 a large section of world opinion was broadly in sympathy with the problems of large debtor countries. President Hoover’s proposed moratorium on all inter-governmental debts was followed by intense financial negotiations for the liquidation and settlement of the foreign debts of central European countries, culminating in the Lausanne Conference of June 1932 which virtually cancelled Germany’s reparations obligations. Australia’s transfer problem was as great as in any of these countries, but there was no attempt to take advantage of the developing mood; and one of the most surprising features of the

Scullin Government’s term of office is its hesitancy in an area which allowed the City of London to dictate the rules of the game. It is more instructive and historically valid to consider the reasons for Australia’s slavish adherence to the principle of sanctity of international contracts in view of the high price paid in terms of unemployment. Heavy

pressure was of course applied by internal and external commercial interests as has been amply documented in the preceding pages, but taken by itself this is not an adequate explanation. More fundamental was the emotional reaction to the isolation wrought by the depression. Many of the traditional ties with the outside world and with Britain in particular were severed during the early 1930s. There were many technical changes, such as the reduction of trade, the inability to borrow in

London and the breaking of the Anglo-Australian exchange parity;

but more important was the feeling that the rest of the world had turned

its back on Australia and her difficulties. For a country forced into 120 World Economic Survey, 1934-35, Geneva 1935, pp. 202 ff.

121 H. W. Arndt, The Economic Lessons of the Nineteen-Thirties, London 1944, pp. 184-5.

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The Formation of the Premiers’ Plan isolationism without knowing how to chart her future destiny, maintenance of national solvency appeared to be the last remaining anchor. It did, therefore, meet the needs of a country uncertain of its own identity and helped to bolster its flagging self-confidence.

255

XI

Modus Operand: of the Plan

‘The Commonwealth and most of the state governments belied the fears of

the financial community and pushed ahead energetically with the 1mplementation of the premiers’ plan. The conversion loan was promptly launched and budgets were introduced incorporating the premiers’ decisions. After some hesitation, the banks also fell into line and reduced interest rates. Only the Lang Government remained obstinate, but it failed to upset significantly the willingness to achieve corporate action. The detailed working of the plan during 1931-2 1s considered in this chapter.

Reduction of Interest Rates

(a) Bank Interest Despite the length and exhaustive nature of the premiers’ conference, a number of important matters were left open for detailed settlement between the Loan Council and the banks. Soon after the conference, therefore, Scullin called on Sir Robert Gibson to summon a meeting of the banks to consider four outstanding questions: 1. How the finance necessary for effectively carrying out the plans [can] best be arranged? 2. Support to be given by the banks in connection with [the] conversion of their holdings [of] Commonwealth and State securities and [the] general

conversion plan?

3. Finalising the question of the reduction of rates of interest on Bank and Savings Bank advances and deposits. 4. Financial assistance to necessitous wheatgrowers [and] advances to Government and industries for creating employment?

The bankers’ conference of 18-22 June 1931 was broadly in sympathy with the aims of the plan and cautiously optimistic that it would prove successful. Most agreed with Gibson's opening remark that ‘the resolution

passed by the Governments of Australia, . . . [is] a long step towards financial rehabilitation provided that it is carried into effect and, gentlemen, I do not think they dare side-step’. Gibson stressed, however, that the banks could not wait to establish the bona fides of governments; they should lead the way by making immediate reductions in rates on deposits 256

Modus Operandi of the Plan and advances. But the private banks did not at first share Gibson’s political sensitivity, and events were to show that they were only prepared to participate in the plan to the extent and in the way that suited them. This was manifest in their attitude to interest rate adjustment, and the squabble over this quite small point was to exacerbate the already sour

relations between the banks and the labour movement out of all proportion to its significance. There was no question that an immediate reduction should be made in deposit rates. There was a minor difference of opinion on how rapidly

the reduction should be made. The Sydney banks thought that an immediate reduction of one-half of one per cent should be followed by another reduction of the same amount ‘as the plan progressed to full operation’. The other banks on the other hand pressed for a cut of one per cent, which was the undertaking given to the premiers’ conference. They correctly argued that the lesser cut would invite the criticism that the banks were attempting to avoid their responsibilities, which could result in the renewal of the attempt to control rates by Act of Parliament. It was agreed, therefore, that a full one per cent reduction would be made as from 1 July; but the reduction would only apply to new deposits and renewals and not to existing contracts. However, as nearly 80 per cent of deposits on 30 June 1931 were fixed for 12 months or more (and 55 per cent for 24 months or more) ,! the total cost of bank liabilities would fall very gradually.

The reduction of advance rates was more contentious. Understandably, private banks were only prepared to reduce advance rates as the cost of deposits fell. They believed that Scullin and Theodore fully under-

stood the position and would accept their assurance that they would do the best they could. While accepting this attitude, Gibson urged that a full one per cent reduction be made at once, for he feared the strength of the demand in country districts for a substantial fall in interest costs. He told the bankers’ conference:

I am... concerned about the impression on the minds of country clients. There is dangerous propaganda at work in the country and it is surprising the class that is affected. The idea is “Jet us have a bit of inflation, get rid of our liabilities and enhance our values’. This is a very dangerous element and may affect any election result if they are swayed by self-interest [into the Labor camp] although they would not openly express themselves.

The private banks were unimpressed. They had 7o per cent of their assets in advances whereas the Commonwealth Bank’s proportion was only 40 per cent.? Profits had fallen drastically, and any further fall caused by a

narrowing of borrowing and lending rates would, it was claimed, endanger the stability of the banking system. The conference resolution was, therefore, to reduce rates on advances ‘progressively as the reduction in Fixed Deposit rates become effective’. Reduction in all rates was made

1 RCMB, Report, Table 13. |

2 Ibid., Tables 1 and 5.

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Australia and, the Great Depression conditional ‘on there being no legislative interference with Bank interest rates’.

Despite the conference decision, the Commonwealth Bank announced

that it would reduce rates on both deposits and advances from 1 July, for it did not dare face the political consequences of capitulation. The private banks strongly resented the breakaway which seriously weakened their position. Davidson complained: Whether deliberately or through lack of reflection on banking practice he [Gibson] is forcing a situation to the disadvantage of the trading banks. . .. As he can hardly be grossly ignorant of banking principle and practice he must have made that statement [about reducing advance rates] knowing full well that the Banks can only make a similar reduction in the rates of interest on advances at a cost which would involve sacrifices out of all comparison with those being asked of other sections of the community.3

He conceded, however, that political pressure would probably force the banks to accept a one per cent reduction on advances whether they liked it or not. The government’s reaction was as the banks were warned it would be.

A great deal of political capital could be made out of the more rapid reduction in deposit rates, which could be made to appear as if the banks were helping themselves to extra profits at the expense of the rest of the

community. In reply to Gibson’s report that the banks would reduce advance rates ‘progressively’, Scullin retaliated with a strongly-worded

letter on 6 July claiming that it appeared as if the banks had acted in

bad faith in their earlier statements that interest rates would fall as soon as a plan for the restoration of budget equilibrium was adopted: The position of the Banks is difficult to understand. In discussions of February

last, . . . [they] were prepared to support proposals for an equitable spread of the loss of national income over all sections of the community, and expressed their willingness to co-operate with the Governments for the rehabilitation of

industry. They said, also, that if the steps they suggested were taken, joint action might be possible for some reduction in rates of interest.

Scullin concluded by threatening legislative action to bring interest rates within the ambit of the general plan of rehabilitation. This was followed by another stiff but inconclusive exchange,‘ and it was now clear that the banks would be forced to yield. An amendment to the South Australian

Financial Emergency Bill ordered banks to reduce interest on private mortgages by 223 per cent.5 Sensing the growing hostility, Davidson wrote to the other general managers: 3 Davidson to Haymen, 13 July 1931, BNSWA.

#In correspondence between the banks (including Davidson to Theodore, 16 July 1931, BNSWA) the valid point was made that a flat one per cent reduction on all accounts would render less assistance to industry generally than a selective reduction policy. ‘Thus, the Bank of New South Wales had singled out those accounts, mainly rural, for immediate and substantial reduction. In many cases interest was reduced by more than one per cent and in a few instances it was waived altogether. 5 SAPD, 1931, Vol. 1, pp. 823-8.

258

Modus Operandi of the Plan Evidence accumulates daily and from all parts of Australia that there is, among those most disposed to support the banks as institutions essential to a system of private enterprise, general dismay at the reluctance of banks to announce their participation in all-round deflation.®

The Melbourne banks had arrived at the same conclusion, but were not prepared to cut by a full one per cent immediately. Instead, they announced on go July that a one-half per cent reduction would be made from 1 July and another of the same. amount not later than 1 January 1932.7 This still did not satisfy the government. Apart from the slogan about ‘equality of sacrifice’, it was argued that failure to announce an allround reduction would jeopardize prospects for the conversion loan. Additional pressure was therefore applied through the Victorian government, with the result the banks agreed to a full one per cent cut as from 1 October.8 The South Australian Financial Emergency Act was subsequently amended to exclude overdrafts from the statutory reduction ‘until a date to be proclaimed’, a proclamation which was never issued.® This unfortunate episode was due in part to failure at the premiers’ conference to explore fully the technical difficulty of simultaneous reduction of deposit and advance rates, a failure whch led to yet another basic misunderstanding between the banks and government; and also to unwillingness on the part of the banks to enter into the plan as full partners except on their own terms. It was agreed at the conference that the banks were to be left free to bring about reductions in their own way, but only

in so far as the spirit of the plan was adhered to. In interpreting the conference decision as a licence to bring about reductions without sacrifice to profits, the banks seriously misjudged the temper of the government and the general community. Whether a further fall in bank profits was justified or not was irrelevant. Not unreasonably, the government expected the banks to accept the additional sacrifice irrespective of any fine balancing of ‘equality of sacrifice’ in view of the forced abandonment of Labor’s sacred principles.

The episode also illustrates the change that had taken place in the meaning of ‘equality of sacrifice’ since it was first used by Giblin as a means of lessening the effect of the fall in export income. It was now the

facade behind which the government-bank quid pro quo was not very effectively disguised. It was, in other words, the device used by the principal parties to the plan to bring pressure on the other to comply with its terms. The pressure applied by the government on the banks to reduce advance rates is a good example. Further, although elaborate pains were taken to ensure that everything was cut by 20 or 224 per cent, the problem of bank interest illustrates the difficulty of extracting any sensible mean-

ing from the word ‘equality’. There was a good deal of confusion about whether the banks or depositors were to make the sacrifice. In the 6 Davidson to all general managers of trading banks, 27 July 1931, BNSWA. 7 Argus, 30 July 1931. 8 Ibid., 6 August 1931. 9See debate on Financial Emergency Act Extension Bill, SAPD, 1931, Vol. 2, pp. 1791-2.

259

Australia and, the Great Depression embittered state of Labor opinion, no real distinction was drawn between the two. But the earning rate of banks on shareholders’ funds had already fallen from 7.2 per cent in 1929 to 4.2 per cent in 1931 (a reduction of 42

per cent); and the earning rate was to fall further to 2.7 per cent in 1932.19 On the other hand, the average interest rate on deposits tended to

rise during the same period.!! The government would have been well advised to have concentrated on ways of reducing deposit rates more rapidly than by imposing additional penalties on bank profits. There is no reason why an appeal to depositors to accept lower rates could not have been linked with the conversion loan. Such a move, if successful, would have led to a more rapid reduction in advance rates, to greater assistance for struggling primary producers, and eventually to more rapid expansion

in lending during recovery. In the event, however, the average cut in deposit rates in 1932 was only 11 per cent, and it was not until the mid-

1930s that a substantial fall in deposit and hence advance rates was achieved—too late to provide any real stimulus for recovery. The spring of 1931 brought the Australian economy its first patch of blue sky since the depression began. Following Britain’s abandonment of gold in September 1931 and thus further devaluation of the Australian pound against gold, export prices rose 16 per cent in October and another 7 per cent in November.!? This led to the long-awaited rise in London funds, an increase in deposits and a general easing of pressure on bank ratios as shown in Table 25 (see also Fig. 12). Advances, on the other hand,

continued to fall, a change in the pattern of monetary experience which Table 25: SELECTED BANKING STATISTICS, QUARTERLY, 1931

| Advances to Cash to London deposits ratio deposits ratio funds

per cent per cent (Am)

Marchg6.1 97.823.1 21.2 26.8 27.3 June September 97-4 23.1 24.3

December gI.0 23.7 41.4 Source: As for Table 21.

signalled the introduction of a long period of insufficient demand for funds. Davidson was the first to appreciate that the years ahead were likely to be dominated by high liquidity and low profitability in the absence of general economic recovery. In October he sent the other general managers a Memorandum on a Policy to Assist the Revival of Enterprise’3 in which he proposed a two-point plan to stimulate the 10 RCMB, Report, Table 48. 11 Ibid., Table 9. 12 Export price index in Commonwealth Bank of Australia Statistical Bulletin, November 1937 (see also Fig. 14). 13 Dated 7 October 1931, BNSWA.

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Modus Operandi of the Plan

6 \ 3.

Per cent

7 \ Long-term bond yield ‘

5

4

;|

6 Treasury bills M)

4 3 2

J Trading bank deposits (2 years)

4

3 2

3 Savings bank deposits 4 3 2

1929 1931 1933 1935 1937 Fig. 13: INTEREST RATES, 1929-38

Note: Stock quotations not available for period June to August 1931.

Sources: Long-term bond yield with redemption (currency of ten years or more), Official Record of the Stock Exchange of Melbourne, 1929-38; Treasury bills and savings bank deposits, Commonwealth Bank, ‘Banking Supplement’, May 1954; trading bank deposits, Finance Bulletins.

demand for advances. He suggested, first, a further reduction in deposit rates to discourage the holding of idle balances (and to keep down the banks’ own costs) ; and, second, support by the banks for the long-term bond market which would increase ‘the circulation of money’, reduce the bond yield and encourage ‘those at present holding off from enterprise’. Behind this was the hope that if the securities market was strengthened sufficiently, it would no longer be necessary for banks to provide funds for unemployment relief works; and it was also a policy which could help to curb mounting Labor hostility towards the banking system. Despite the political overtones, the proposals should have received serious con-

sideration, but the other banks summarily rejected what appeared to them to amount to appeasement. Tranter’s reaction was typical. “The 261

Australia and the Great Depression Banks’, he declared, ‘are showing too much timidity with regard to the propaganda emanating from the Labour Party’, and added that trading bank support for the bond market was unthinkable.'4 While Davidson was obliged to shelve his proposal to support the bond market, the continued rise in liquidity and the persistent high ratio of time to demand deposits!® strengthened the case for a further reduction

in deposit rates. Political considerations aside, the Melbourne banks’ reluctance to lower rates sprang from their belief that they could lose deposits to the savings banks if the interest differential between the two was narrowed. While this fear was not removed, the threat to profits from the continued decline in advances during November (normally a time of seasonal rise) assumed greater proportions, and at a bankers’ conference

on 25 November it was agreed to reduce deposit rates by an average of one-half of one per cent,!® which broadly reduced rates to the predepression level (see Fig. 13). For much the same reasons and again on Davidson’s initiative, deposit rates were further reduced in March and June 1932, the combined reduction amounting to one-half of one per cent. In 1931-2, therefore, interest rates on new bank deposits fell by a total of 13 per cent (except in the three months series where the fall was 2 per cent) ,!7 while the average advance rate fell one per cent.18 (b) The Conversion Loan On the night of 16 August 1931, in the midst of the momentous campaign for the conversion of the entire Australian

internal public debt of £558m, Sir Robert Gibson told the nation in a radio broadcast that: [the premiers’ plan] has for its objective the first step towards the reestablishment of national financial stability, the achievement of which is the only method by which our material salvation can be accomplished. I cannot pretend that the plan provides a complete solution of the difficulties which

confront us, nor do I fully subscribe to the claim made by some that it embraces equality of sacrifice on the part of the people. I can, however, say that, having regard to all the obstacles confronting the acceptance of any plan and the need for action, too long delayed, it can be aceepted by all of us as a compromise. I now take the opportunity of joining issue with those in the community who

are indulging in destructive criticism of the plan... . The time has long passed when we can stop to haggle over this, that, and the other. Australia is in imminent financial danger, and we cannot delay further in grappling with the situation and fighting our way back to sound finance and stability .... I cannot see my way to adopt an attitude of appealing to you. Such a course would, I think, be unbecoming on my part, and I have no reason to believe 14 Tranter to Davidson, 16 October 1931, BNSWA. 15 The time deposit ratio in the second half of 1931 reached 68-70 per cent compared with a ratio in the 1920s of around 60 per cent. 16 Conference details in Davidson to Riddle, 17 December 1931, BNSWA. 17 As noted, however, the average rate paid on deposits fell by only 0.36 per cent. 18 During the year the average advance rate fell from 6.72 to 5.77 per cent, RCMB, Report, Table 9. 262

Modus Operandi of the Plan that it is required. I am prepared to accept the view that you will stand up to what you feel is your duty to your country in her time of need... .19

Gibson spoke on behalf of his colleagues, Scullin and Lyons, on the National Appeal Executive, which had been appointed at the premiers’ conference to conduct the conversion campaign. The propaganda machinery assembled by the executive was even more elaborate than was employed the previous December. An appeal to patriotic duty was, of course, the basis of the campaign; and as much publicity as possible was given to large bondholders who signified their willingness to convert. In addition to the usual broadcasts and films, an innovation was the formation of a committee of leading journalists, under the direction of Keith Murdoch, to prepare advertisements, propaganda copy, and to generally co-ordinate the press campaign of the appeal executive. In their support for the appeal,

the press were magnanimous. In addition to a great amount of space given to the publication of progress results, eloquent editorials were written on the need to share in national sacrifice. Most of the space devoted to publicizing the loan was either donated or charged for at a nominal] rate, and this was one of the main reasons for the remarkably low cost of the operation which only amounted to £50,000. By mid-August, when Gibson’s broadcast was made, the conversion was on the way to successful completion. But it was not launched in the same

optimistic atmosphere. Many thought that the task was insuperable, particularly as such a large proportion of the debt matured within the following two years. Of the aggregate internal debt, £172m matured before the end of 1932-3,2° and it was anticipated that a large proportion of the holders of these early maturing bonds would be unwilling to convert into stock with maturing dates ranging from 7 to 30 years. Some felt that the implicit threat of penal taxation on those who did not convert had destroyed any chance of success, and that the failure of New South

Wales to present adequate plans for the reduction in expenditure did not entirely relieve bondholders from the fear of inflation. The reluc-

tance of the banks to announce all-round reductions in interest rates made

matters worse. This applied not only to bank interest, but also to the Treasury bill rate. It had been agreed by Riddle, Healy and Davidson during the premiers’ conference that the Treasury bill rate should be reduced from 6 to 4 per cent, and it was on this understanding that the reduction was incorporated in the Debt Conversion Agreement Bill. At the June bankers’ conference, however, an immediate reduction of 2 per cent was rejected, and alternatively it was proposed that a gradual reduction of one-half of one per cent at a time be made. The reason for this decision was, in Gibson’s words: ‘We can hardly be expected to carry these Bills at a rate which involves a loss in view of the cost of deposits.’ ‘Thus,

Treasury bills were still being regarded as equivalent to advances, and the reduction of the bill rate was opposed on the same ground as the reduction in advance rates. In setting forth these views, Gibson told 19 AIBR, 1931, pp. 649-50.

20 Finance Bulletin, No. 22, Table 61.

263

Australia and. the Great Depression Theodore on 29 June that ‘the Bankers would not agree to discount Treasury bills at an arbitrary rate fixed by an Act of Parliament, although they might eventually agree voluntarily to a rate of 4 per cent’. The banks were, however, in a poor tactical position. The Debt Conversion Agreement Bill had already been passed by federal Parliament and the state bills were well advanced. Amendment would, therefore, have been a complicated, time-consuming process, which would have advertised the unwillingness of the banks to share in the general sacrifice. Furthermore,

it would have been an intolerable position for Treasury bills to have carried a higher rate than long-term government securities, which would have had a damaging effect on the conversion loan. But in a letter of 14

July, Gibson reaffirmed the decision of the banks not to agree to the reduction. As a result of desperate last-minute negotiations, however, the banks were persuaded to change their minds and when £22m of Treasury bills fell due on 31 July they were renewed at 4 per cent.

As the 31 August drew near—the final day for the notification of dissent from conversion—progress reports indicated that the final result would exceed the most sanguine expectations. In view of the assurance of success, a final appeal was made to those who had notified their dissent to change their minds. This resulted in 2,740 notices of dissent, involving £2.6m, being withdrawn.*! The final figures were as follows:?? £m

Dissents notified 16.7 Conversion applications notified 510.3 Conversions effected automatically (in absence of notification

of either conversion or dissent) 31.0 558.0

Although the proportion of dissents represented only 3 per cent of the total value of the debt, this represented 29,000 individual bondholders, the majority of whom held securities at the short end of the market and of a value of £1,000 or less.23 The number of large dissenters was small, and in most instances there was a very good reason as in the case of the Government Savings Bank of New South Wales. In a speech of exceptional clarity, Theodore set forth the alternatives available to the government for dealing with the dissenters.?‘ First, it could take no action and allow the unconverted debt to stand. This would mean, however, that a small section of the community would escape its share of the general sacrifice; its income would remain unaltered and the market value of its securities would rise proportionately. The whole principle of ‘equality of sacrifice’ would thus be placed in jeopardy and the entire plan could collapse. In particular, New South Wales would 21 CPD, Vol. 132, p. 651. 22 Ibid., p. 643. 23 Ibid., p. 650. 24 Ibid., pp. 647-9.

264

Modus Operandi of the Plan probably refuse to make any cuts in expenditure. Of even greater importance was the practical consideration that a large proportion of the securities of dissenters matured at the end of 1931 and in 1932. Even if the market improved sufficiently to allow a cash and conversion loan to be successfully floated on reasonable terms, there would probably be insufficient cash available for the flotation of another loan for unemployment relief. Second, the government could impose additional taxation on dissenters which would equalize the return from securities. But returns would be equalized only until the securities matured, after which conversion would have to be effected at market rates which might or might

not approach a 20 per cent cut. Furthermore, there was again the objection of draining the market of funds for conversion rather than unemployment relief. Third, the holdings of dissenters could be compulsorily converted, and this was what the government intended.” AIthough open to the objection of repudiation, this course offered the fewest problems.

The Opposition attempted to dissuade the government from a course which it considered to be repudiation, arguing that it would undo all the

benefit to Australian credit that had resulted from the success of the conversion loan.26 It was finally forced to concede, however, that the

available alternatives were even more distasteful, and only token opposition to the Debt Conversion Agreement (No. 2) Bill was offered. The Bill did not have a happy passage through some state parliaments. In Tasmania, for instance, it was rejected on its first submission, and was only passed after protracted debate on its second submission late in the year. The Commonwealth Act could not be proclaimed until all state parliaments had ratified it, which meant that it did not come into force until January 1932. The delay caused the Commonwealth considerable embarrassment. It could not pay interest on the holdings of dissenters, and its scheme for assistance to necessitous cases could not begin. Further-

more, the stock market had no way of assessing the value of the bonds and dealings were at a standstill. A large parcel of bonds matured under existing contracts in December 1931, but there was no legal machinery to deal with them, and, technically, the government defaulted. Two schemes of special consideration and assistance were associated with the debt conversion operation. The first related to those persons who held securities which matured in a comparatively short time and who would have been seriously inconvenienced by accepting new bonds with maturity dates ranging up to 1961. Special consideration was granted to

institutions who could show, for example, that the maturity dates of their old bonds was timed to coincide with plans for building development. Concessions were also given to pensioners and trustees. The form of the concession was that the entire holdings of those granted special consideration could be converted into stock maturing in 1938. Thus, if 25 The decision compulsorily to convert the holdings of dissenters was made at the premiers’ conference in September, CPP, Vol. II, 1929-31, p. 389. 26 Second reading speech of Lyons, CPD, Vol. 132, pp. 822-7.

265

Australia and the Great Depression cash was needed before 1938, sale could be effected on the most advantageous terms. Those granted this concession were principally hospitals,

religious bodies, schools, libraries and provident funds. ‘The second scheme provided for the relief of hardship among those who had dissented. In this case cash assistance was to be provided from sinking fund money made available by the National Debt Commission, and was to be operated in conjunction with the Commonwealth Savings Bank. In approved cases, the Bank would take over the securities owned by the people

seeking relief and would credit the amount to a special savings bank deposit in the name of the claimant. Periodical withdrawals for maintenance, living expenses and pressing obligations would be permitted, with a limit of £4 per fortnight. Relief would not be available, however, until the maturing date of the old security. This scheme was also extensively

used and did much to remove antagonism as a result of compulsory conversion.

(c) Mortgage Interest and Rent In all states legislation was passed to reduce the rate of interest payable under private mortgage contracts by 224 per cent or 45 6d in the £, so long as the rate was not reduced below

5 per cent. In most cases the reduction was to apply automatically, although the Queensland and South Australian Acts required that debtors show cause why a reduction should be made. There was however little recourse to court action and debtor and creditor were usually able to come to some mutually satisfactory arrangement.??7 Mortgage interest reduction acts were frequently reinforced by moratorium legislation (i.e. the Western Australian Mortgagees Rights Restriction Act 1931, and the New South Wales Moratorium Act 1930) , which prevented mortgagees from demanding repayment of whole or part of the principal, from exercising the power of sale of the mortgage, or from taking any steps for obtaining foreclosure. Provisions for the reductions of rent may be mentioned at this stage. Although not specifically part of the premiers’ plan, rent reduction acts were passed in New South Wales and Victoria. The New South Wales Act reduced existing rents by 223 per cent and provided that the reduction apply to future leases for the life of the Act. Lessors could apply to the court for reductions made since 30 June 1930 to be taken into consideration, but the terms of the Act were weighted in lessees’ favour.?8 The more moderate Victorian Act readily made allowance for reductions made since 30 June 1929 in applying the 224 per cent cut. Moreover, no reduction was to be made which lowered the rate of return on the property below 5 per cent (valuation to be agreed upon by lessor and lessee, or by a court-appointed valuer failing agreement) . The result of the two Acts was that rents fell more rapidly in these two states, but only slightly. In New South Wales and Victoria, rents were on average 18 per cent less in 1932 than in 1930; in Queensland 13 per cent less; in South Australia 27W. R. Maclaurin, Economic Planning in Australia, 1929-36, London 1937, pp. 88-9.

28F. A. Bland, “The Financial and Economic Policy of the Stevens Government’, Economic Record, June 1933.

266

Modus Operandi of the Plan 21 per cent; in Western Australia 17 per cent; and in Tasmania 12} per

cent.?9

Budgets and Deficit Finance Federal Caucus was not expected to challenge seriously the decisions of the premiers’ conference when they were submitted to the party meet-

ing in mid-June. Reductions in salaries and pensions were, of course, anathema to all, but there was no real alternative. The bitter experience of the previous eighteen months had proved that the government was no longer its own master. If the Fiduciary Notes Bill was resubmitted, it would again be defeated by the Senate, double dissolution would follow, and the Labor Party was certain to be defeated at the ensuing election. Some influential party members, such as John Curtin and Norman Makin,

argued that the ministry should resign and face the electors on the Fiduciary Notes Bill. No Labor government should, they insisted, be associated with the compromise of the basic Labor platform.3° The ministry countered by claiming that an election could not take place, at the earliest, until 1 August, and by that time finance from the Commonwealth Bank would have been cut off.31 In fact, this was a doubtful sup-

position. It is almost certain that the Bank would not have refused finance with an early election pending, which was likely to sweep from power a party it thought to be financially irresponsible. ‘The ministry clung to office because it believed that a token Labor government would administer the premiers’ plan in a way less detrimental to the interests of the workers and the unemployed than an anti-Labor government. The premiers’ plan was, therefore, endorsed in Caucus by the comfortable majority of 26-13.32 Two relatively unimportant Ministers, E. J. Holloway and C. E. Culley, tendered their resignations, but the fact that there was no great upheaval indicated the extent of the demoralization that gripped the government and party. As was to be expected, a more uncompromising stand was taken by the organizational and industrial wings of the labour movement in response to four Labor governments’ acceptance of reductions in wages and

pensions. They were deeply disappointed by the abject failure of the parliamentarians, and could not excuse such complete submission whatever the reason. Scullin made every effort to make clear the dilemma that faced all governments at the premiers’ conference, and his efforts were

partly successful. The federal executive was persuaded to take no

action other than to allow Labor members a free vote on the economy measures.°3 More drastic action was taken by the South Australian and Victorian state executives. In South Australia, Hill and 21 other Labor members were expelled for supporting the plan. In Victoria, when the 28 Compiled from Labour Report, No. 24, p. 19. The figures are of rents in the capital cities only. 30 Sydney Morning Herald, 13 June 1931. 31 Ibid. 32 Ibid.

33 Ibid., 22 June 1931.

267

Australia and the Great Depression Financial Emergency Act came up for renewal in 1932, the state executive

threatened to expel any member who voted for the continuation of the cut in wages and salaries, and this resulted in the expulsion of Hogan who denounced the stand taken.34 In New South Wales, Lang’s control of the party machine and his avoidance of the essence of the plan saved him from similar reprisals. But the divisions in Labor ranks did not impede the progress of the plan. The efforts of Labor ministries to implement economies received the full support of the anti-Labor parties, and their combined strength was more than sufficient to defeat the small groups of militants. An important matter left open by the premiers’ conference for the consideration of the June bankers’ conference was how budget deficits of £14-16m were to be financed in 1931-2. The committee of economists and Under-Treasurers, it will be recalled, assumed that sufficient funds could be secured by the issue of long-term loans, and all that the banks would have to provide would be temporary finance between loan issues (see p. 246). Ihe bankers also assumed that long-term borrowing would be the principal source of finance, and that it might also be possible, after the external floating debt had been funded, to approach London for a cash loan to assist the position. But the prospect of a cash issue, either in London or locally, was remote, and for the time being deficits would

have to be carried by the old method of Treasury bill finance. It was

resolved, therefore, as follows:

The Banks believe that their resources, at present available or in view, will

not enable them to finance the whole of the deficits anticipated at the Premiers’ Conference. If, however, the effect of the plan on Australian credit overseas makes possible the funding of the present floating debt of the Governments in London, the Banks believe that they could give reasonable temporary assistance. Their ability to do this will depend upon the Governments intro-

ducing legislation at an early date and taking action necessary to reduce deficits to the amounts stated .. . [at] the Premiers’ Conference ....

Here is further evidence of the importance attached by the banks, and the Commonwealth Bank in particular, to the effect of carrying out a successful deflationary policy on the revival of Australian credit in London. With credit restored, borrowing on a moderate scale could be resumed, which would ease the banks’ burden in Australia, permit the funding of the external and internal debt, and generally release funds for the expansion of credit on orthodox lines. What the banks failed to assess was the likelihood of raising new cash in London, even assuming that the deflationary policy had the desired effect. They ignored the mounting

pressure on sterling from Europe and the United States, the fact that nearly £40m had first to be funded, and that a succession of large loans fell due for conversion in the period 1932-5. ‘The June bankers’ conference also decided the procedure to be followed for financing future deficits. The decision of the previous December

that finance would be provided to individual governments only on the 34 Maclaurin, Economic Planning, pp. 113-15.

268

Modus Operandi of the Plan approval of the Loan Council was reafirmed. The Commonwealth Bank agreed that any Treasury bills discounted by the trading banks would be rediscountable at any time. Thus, for the first time, the trading banks had a clear and unambiguous statement as to the availability of rediscount

facilities. The rate of rediscount was not to vary by more than onequarter of one per cent above or below the original discount rate. It was to be the Commonwealth Bank’s task to decide the amount of bills offered to the trading banks month by month, which would be determined in

accordance with the amount carried by the Bank. Finally, the Bank undertook to pay any bills held by the trading banks at the maturity date if so desired. Henceforth the banks were justified in regarding the whole of their holdings of bills as cash, instead of an undefined proportion as was previously the case. It was some time, however, before the banks adjusted to the changed composition of their cash resources, and in several cases as late as the mid-1g930s, bills were still not regarded as cash (see pp. 200-1). Compliance with the decisions of the premiers’ conference involved

the Commonwealth and states in an enormous quantity of legislation which occupied most parliaments for the remainder of 1931. The usual procedure was the introduction of a Financial Emergency Bill which provided for the reduction of expenditure by the basic 20 per cent; then the budget was brought down which embodied the necessary increases in taxation; and finally the host of amending and enabling legislation was considered. There were large variations in the way the saving of 20 per cent in expenditure was made. Broadly, Labor governments reduced salaries and wages on a sliding scale, whereas non-Labor governments tended towards a flat reduction of 20 per cent. The reductions made by the Commonwealth, for example, ranged from 3 to 24 per cent, whereas in Queensland an all-round 20 per cent was made. In all public services work ‘rationing’ or ‘rotation’ was freely employed. There was also frequent amendment of the details of the premiers’ plan. For instance, it was a decision of the May-June premiers’ conference that all war pensions

should be reduced by 20 per cent, but the Commonwealth found that a full 20 per cent cut could not be made in all cases without causing undue hardship. War orphans, widows and disabled soldiers were, therefore, exempted from the reduction, which meant that the average cut in war pensions fell from 20 to 15 per cent.2> The Commonwealth budget was provided with a windfall towards the end of June by the Hoover moratorium, under which payment of interest and principal on inter-governmental war debts as well as the payment of reparations was postponed for one year. The British government agreed to participate-in the scheme and thus Australia saved £4m in 1931-2. As a result, the estimated Commonwealth budget deficit was reduced to a little more than £1m. A further difficult problem not solved at the premiers’ conference was the continued failure of New South Wales to meet its interest commitments. In estimating that the state’s deficit for 1931-2 would amount to 35 CPD, Vol. 130, p. 3407.

269

Australia and the Great Depression £5.4m, the conference cheerfully assumed that it would honour all its interest obligations. But there was no indication that Lang intended to change his stand, and the Loan Council’s financial embargo still stood. Despite his continued failure to pay interest, Lang found himself in serious financial difficulties towards the end of June 1931. Unless the state was able to raise additional funds, public service salaries and wages could not be paid after mid-July. An Emergency Income Tax Bill was therefore introduced which proposed savage increases in tax rates. The rate on incomes of £5 per week or less was to be 15 in the £, increasing rapidly to 55 in the £ on incomes of £10 per week or more.®6 The existing

tax rate for those with incomes of £5 per week was 74d in the £, and for those who received £10 per week, only 8d in the £.37 Thus, the scale of the increase ranged from 60 to 750 per cent. Higher-income groups were of course outraged and the Bill was defeated in the Upper House with seven Labor nominees voting against it. Lang now had no alternative

than to seek Loan Council assistance. Unless he received £0.5m im-

mediately, he explained to Theodore on 15 July, he would be unable to pay wages and salaries, and another £3m would be needed during August and September. Evidently, Lang was prepared to submit to the Loan Council’s terms, for he knew that he would not receive assistance unless he gave the stipulated assurances. When questioned as to whether he was prepared to reverse his policy, he agreed to bring the matter before his Cabinet and Caucus. This was, however, a mere formality, and at the Loan Council meeting early in August Lang agreed to resume responsibility for payment of interest on the state’s debt, to rejoin the Council, and to introduce legislation giving effect to the decisions of the premiers’ conference; and for its part the Council agreed to provide the necessary funds. This decision was not arrived at, however, without strong exception being taken by some of the states. Those who opposed it argued that Lang would first have to prove his bona fides; once legislation had been introduced would be time enough to consider providing assistance. For-

tunately, wiser counsel prevailed. Had the Loan Council as a whole adopted this attitude, Lang would have had to default on wages and salaries as well as on interest, and the Council would have been responsible for worsening the financial chaos in New South Wales for the sake of political reprisal. In any case, assistance could easily be withdrawn in future if the conditions were not complied with.

Lang’s submission to the Loan Council and to the terms of the

premiers’ plan was, however, far from complete. The May-June premiers’

conference decided, it will be recalled, to allow each state to work out in its own way how the 20 per cent saving in expenditure was to be effected. Lang decided, therefore, that the contribution would be made entirely by those with salaries in excess of £500 per year. The Public Service Salaries Bill, introduced at the end of July, provided that all salaries in excess of £500 per year would be reduced, for one year, to a 36 NSWPD, Vol. 127, p. 3663. 37 N.S.W. Year Book, 1930-1, p. 637.

270

Modus Operandi of the Plan common figure of £500 per year; and that salaries less than £500 would not be touched.38 Moreover, the 84 per cent tax imposed by the Bavin Government would be repealed on salaries of £250 per year or less. Lang gave no information on how much the Bill would save, but it was not dificult for the Opposition to show its absurdity.2® Of a total salaries and wages bill of about £7m, the reduction of all high salaries to £500 was estimated to save £170,000, from which it was necessary to subtract the cost of the repeal of the 84 per cent tax on low salaries and wages, which would amount to £140,000. Thus, the net effect of the Bill would be to save the government less than one-half of one per cent of its total wages and salaries bill. This raises the question of Lang’s motives in bringing

down such a blatantly ludicrous proposal. In the first place, it was obviously designed to win more plaudits from the workers. As the sole defender of the basic wage, Lang saw himself as the martyr of the labour movement. While this is clear enough, the discussion of further and probably more important motives involves an element of speculation. It seems that Lang deliberately invited rejection of the Bill by the Legislative Council so that he could then claim that his efforts to honour the decisions of the premiers’ conference had been frustrated. By delaying in this way, he may have been hoping that the premiers’ plan would be jeopardized. If this was his objective, it was not realized. The Council, as expected, rejected the Bill; and, probably as a result of pressure from within Cabinet,*° a new bill was introduced which imposed graduated reductions on orthodox lines ranging from 84 to 373 per cent designed to achieve a genuine overall reduction of 20 per cent.*! Shortly afterwards, at the end of August, Lang introduced the state’s budget for 1931-2, which was also an attempt to comply with the decisions

of the premiers’ conference. The Colonial Treasurer estimated that the year would yield a deficit of £8.3m, which was some £2.9m above the conference figure.4? However, the deficit included repayment of £1.7m to the Commonwealth for interest paid on behalf of the state in 1930-1. As the liability was incurred in 1930-1, the expenditure of this sum should not properly be attributed to the budget estimates for the following year. Furthermore, the saving in interest payments as a result of the conversion

loan would be £0.7m less than that estimated by the May-June conference.*? ‘These various adjustments brought the anticipated New South Wales deficits to within £0.5m of the conference figure, and Lang stated that the Treasury officials were working on ways of reducing the differ-

ence. Thereafter, Lang continued more or less in compliance with the 38 J. IT. Lang, second reading speech, NSWPD, Vol. 128, pp. 4825-8. 39 Ibid., pp. 4832-3.

40In denying that moderate pressure from within Caucus was responsible for the change in policy, C. C. Lazzarini, a Labor back-bencher, claimed that ‘If any moderate forces have been at work to induce the Premier to do anything he was disinclined to do, those forces have been in Cabinet’. NSWPD, Vol. 128, p. 5142. 41 See second reading debate on Public Service Salaries Bill (No. 2) of 1931, NSWPD, Vol. 128, pp. 5137 ff. 42 Ibid., Vol. 129, p. 5776. 43 Caused by delay in the conversion of the internal debt. 271

Australia and the Great Depression terms of the premiers’ plan. Although the state’s deficit finally amounted to a mammoth £14.2m, this was not primarily due to failure to effect the stipulated economies (see pp. 273-4) . Having imposed the premiers’ plan on governments, the Commonwealth Bank was determined in so far as budgets and finance were concerned that it would be adhered to. Its tactics in dealing with the Loan Council were to apply maximum pressure until budget equilibrium was

achieved. If pressure was relaxed at all, the Bank was convinced that governments would recommence their spendthrift course. The Council's monthly request for revenue accommodation was, therefore, rigorously scrutinized before bills were discounted. If in the opinion of the Bank any request was not considered to be excessive, bearing in mind the objective of the plan, it was returned to the Council for reconsideration. The Bank made its attitude on deficit finance quite clear from the outset. When the Loan Council’s request for revenue finance during August was received, the Bank intimated in the strongest possible terms that, in its opinion, the request did not conform to the spirit or the terms of the plan. It was the decision of the conference, Gibson stressed in a letter to Scullin on 14 August, that budget deficits for 1931-2 should be restricted to £14.65m, yet the total requests for finance submitted during July and August amounted to £8.166m—more than half the year’s quota. He continued by insisting that: The [trading] Banks . . . willingness to strain their resources to meet deficits during the financial year is definitely based upon the fulfilment of the complete plan, and the Commonwealth Bank has undertaken to safeguard the position as far as possible by a careful and continuous scrutiny of the position from time to time to see that the requests for financial assistance from the Loan Council are in accordance with the plan in its entirety or as has been expressed ‘the one and indivisible plan’.

The Bank was particularly concerned that the information accompanying the Loan Council’s request was inadequate: The position is so serious that ... to proceed with finance upon information available would constitute a breach of faith, and would be a leap in the dark on the part of the Board. ... Candidly, on the information submitted it does not feel itself justified in providing the amount submitted by the Loan Council for August, but it realises that it must afford an opportunity to the Governments of Australia to complete their arrangements to carry out the Conference Plan... .

There were good reasons why the July-August requests were much greater than usual. The bulk of taxation receipts were not collected until the second half of the financial year which meant that there was a normal seasonal excess of expenditure over receipts in the early part of the year; and there had not been sufficient time for all governments to reduce their expenditure by the agreed amount. In addition to the size of the requests, the Bank complained about the absence of information on requirements for the remaining part of the year. Without such information, it had no means of knowing whether the July-August requests were excessive or not. 272

Modus Operandi of the Plan But the Loan Council was not being evasive, as the Bank implied; it simply had not had sufficient time to prepare detailed monthly estimates of its requirements. The Bank was well aware of all these facts, but it could not afford to let pass without some protest requests which were prima facie well in excess of the planned objective. The Bank issued further warnings in October 1931 and to the Lyons Government in January 1932. It was agreed that the planned deficits for the year be reduced to slightly more than £12m as a result of the following adjustments: an increase of about £1.5m to allow for the lag in receiving the benefit of the reduction in interest on the public debt, and a reduction of £4m as a result of the Hoover moratorium.*t Despite the Bank’s constant vigil, however, the final deficit for the year exceeded that envisaged at the premiers’ conference by about £5m, or by about £7m above the adjusted planned deficit. The various estimates and the results for 1931-2 are set out in Table 26. Table 26: ESTIMATED AND ACTUAL BUDGET RESULTS, 1931-2

(£m)

Deficit estimated Estimated deficit after

at May-June adjustments made during Final

conference year result

Commonwealth 4.4 1.0 +1.3 New South Wales 5.4 6.0 14.2 Victoria 1.3 1.3 1.6

Queensland South Australia0.8 1.50.8 1.52.1 1.0

Western Australia 1.6 Tasmania 0.11.2 0.21.60.3

Totals 14.7 12.4 19.5

Sources: CPP, 1929-31, Vol. II, p. 353; Finance Bulletin, No. 25, Tables 8 and 44; information supplied by Commonwealth Treasury.

The failure of the aggregate budget deficit to be reduced to the premiers’ plan target figure was due mainly to New South Wales, whose deficit, instead of falling, increased from a planned £5.4m to £14.2m. It has been usual to explain this entirely in terms of Lang’s failure to carry out the specified economies, but the full explanation 1s much more complex. It is true that introduction of the economy measures was deliberately delayed, and that they were not sufficiently drastic; but due consideration should be given to two other factors. First, during the last months of the

Lang ministry, there was little attempt to collect taxation due to the 44 There were also a number of minor adjustments between the states. New South Wales, Western Australia and Tasmania were granted slightly increased deficits (see

Table 26). 273

Australia and the Great Depression state. The government was not only lax in collection, but also payments were deliberately withheld, particularly by the larger institutions, in an endeavour to embarrass the government.*® When the Stevens Government

assumed office in May 1932, the rate of revenue collection accelerated owing to an increase in voluntary payment and to greater enthusiasm on the part of taxation officials. Thus, the reduction of the New South Wales deficit by £10.6m during 1932-3 was not as spectacular as it appears. Second, the sharp increase in expenditure on unemployment relief during the year was greater than in all other states except Western Australia.*® The increase in this expenditure—from £4.4m in 1930-1 to £6.1m in 1931-2—of which none could reasonably have been avoided, was inadequately allowed for at the premiers’ conference. ‘Thus, about £1m of this additional unemployment relief expenditure was outside the control of the New South Wales government and, therefore, the excess of the actual over the planned deficit was exaggerated by up to £6m. Nevertheless, it remains true that the larger part of the excess in the state’s deficit was due to the efforts of the Lang ministry to impede the progress of the plan. Given the prevailing assumption in favour of all-round deflation, the

budget results were commendable despite the failure to reach target figures in view of the difficult circumstances of 1931-2. Aggregate deficits

were reduced from £26.3m to £19.5m in a year in which export prices remained low, internal economic activity continued to contract and unemployment to rise. If New South Wales is excluded, the remaining governments more than fulfilled their collective undertaking. The substantial improvement in Commonwealth finance, despite a further heavy fall in the value of imports, was due mainly to the reduction in both external and internal interest payments and additional revenue raised by increases in sales tax. Apart from New South Wales, Queensland was the only state which noticeably exceeded its planned deficit. This was due to an overstatement of the estimated revenue submitted to the premiers’ conference,*7 and a relatively greater decline in economic activity during

1931-2 than in other states. Queensland was, however, able to finance

most of the increased deficit from its own resources.

Unemployment and Wheat Industry Relief It was recognized at the time by most of those at the May-June conference that the premiers’ plan was a very incomplete solution to Australia’s economic difficulties. It was essentially regarded as a long-range plan which would help reduce costs of production, particularly in the traditional export industries, and re-establish the Loan Council’s credit in London and in the local money market. But it would do nothing to alleviate the immediate unemployment problem or the shocking plight of the wheat industry. To investigate ways and means of lessening these immediate problems, the conference during its August meeting appointed 45 This point was mentioned to me by Sir Bertram Stevens in an interview. 46 Labour Report, No. 25, pp. 112-13. 47 Economic News, Brisbane 1932, from chronological chart facing p. 178. 274

Modus Operandi of the Plan a secretariat committee under the Chairmanship of John Gunn,’® a former Commissioner of the Development and Migration Commission, to report to the next meeting of premiers. In its report on Employment and Production of 3 September 1931, the committee recognized that the immediate effect [of the premiers’ plan] must be further loss of purchasing power and decrease of employment unless the bank credits which last year were used for revenue purposes are maintained at their former volume and diverted partly to public works and other extraordinary expenditure.

Unless an expansion of loan expenditure was associated with reduction in costs, the committee argued, the benefits accruing from the premiers’ plan would be destroyed. It was suggested, therefore, that ‘in this emergency the banking resources of the country must be used to the limit’ for the following purposes: 1. to maintain the wheat-grower in production and to prevent the possible collapse of the industry; 2. to maintain the existing volume of employment on public works; and 3. to provide or stimulate enough additional employment to set moving the gradual revival in business and enterprise for which the conditions appear to be nearly ripe.

At the meeting of premiers in September, the substance of the secretariat Committee’s report received whole-hearted support. It was decided,

therefore, to raise a sum of £8m, of which £3m would be spent in the December half-year by the states on new public works for the relief of unemployment, and £3m for the payment of a bounty of 6d per bushel on wheat exported during the 1931-2 season on condition that the f.o.b. price of f.a.q. wheat did not exceed 3s per bushel.49 There was, of course, nothing new in this proposal. In substance, it was the same as the Theo-

dore plan enunciated at the February premiers’ conference, a modified version of which was endorsed as a supplement to the premiers’ plan. There was also nothing new in the problem that now faced the conference of financing this expenditure. As a cash issue would not be possible for some time, the Loan Council decided to recommence counter sales;*° but significant sales could not be expected with short-dated Commonwealth 4 per cent securities selling at 80-84. If these proposals were to be carried out, therefore, they would have to be financed by the banks. But it was the old story: adoption of the plan had made little difference 48 The other members of the committee were: Giblin, Brigden, Hytten, H. W. Gepp [Commonwealth Consultant on Development], E. J. Mulvaney [Secretary, Commonwealth Department of Markets] and J. F. Murphy [Assistant Director of Development in the Prime Minister’s Department}. 49 ‘Record of the Proceedings of the Conference of Commonwealth and State Ministers’, Melbourne, August-September 1931, CPP, 1929-31, Vol. II, pp. 392-3. 50 The sale of securities by State Treasuries ‘over-the-counter’ was standard practice

in pre-depression days and is a device which is still used. It enabled purchases of bonds to be made between loan issues, and assisted the financing of public works expenditure by providing a regular in-flow of cash. Sales were usually made on the same terms as the previous loan issue. Hence, it was an important factor in the inflexibility of interest rates during the 1920s.

| 275

Australia and the Great Depression to Gibson’s views on credit expansion. It was bad enough, he complained, to have to finance budget deficits by discounting Treasury bills; financing new public works expenditure by the same means would be worse. ‘The Commonwealth Bank had previously agreed to provide a limited amount of credit for the completion of existing works projects,®! but financing new works on a large scale was another matter entirely. Gibson’s tortuous, cliché-ridden rejection of the premiers’ request on 8 September may reflect

in part the serious deterioration that had occurred in his health during the previous twelve months. He wrote in part: After carefully reviewing the whole position envisaged in the financial situation today, my Board has come to the conclusion that the resource now in

sight, in view of the obligations of the Bank, are such as prevent it from undertaking obligations of the nature indicated without danger of exceeding the limits provided under present legislation for Note Issue. My Board holds the view that as Trustees for the time being of the monetary system, it must administer the affairs of the Bank so as to provide as far as possible against being forced to exceed the limitations placed upon its actions by Act of Parliament ....

The premiers were understandably irritated by Gibson’s off-handed refusal and his failure to consult the trading banks. The Commonwealth

Bank and the trading banks were therefore summoned to attend the conference to have the position fully aired. Relations at the meeting appear to have been thoroughly strained, with the premiers accusing the banks of not fulfilling their obligations under the premiers’ plan (mainly in relation to interest rates) , and the banks insisting that they had faithfully honoured all their undertakings. In addition to the original request for £8m, governments also stated that they would require £8.5m for the remainder of 1931-2 to finance works-in-progress. But the banks would not consider finding anything like £16.5m, most of which would be needed before the end of 1931. On the other hand, they could not, for political reasons, completely reject the premiers’ request. In particular, they could not refuse assistance to the wheat industry, for they had already incurred the hostility of a large section of non-Labor rural interests. It was agreed,

therefore, that they would provide £3m for the payment of a 6d per bushel export bounty (on condition that total proceeds did not exceed gs per bushel), but they refused any finance for new public works and would find only about £2.25m for reproductive works-in-progress up to 31 December. The proceeds of counter sales would be deducted from the Treasury bill finance provided. The question of further finance for unemployment relief works was raised early in 1932 when the Lyons ministry assumed office and is discussed in Chapter XIV.

Shortly before the wheat export bounty was agreed to the Scullin Government had written another chapter of failure in its attempt to assist the unfortunate wheat industry. Its Wheat Marketing Bill (No. 2) intro-

duced in mid-July contained two main provisions. First, the idea of a 51 Finance for public works in progress was provided by the Commonwealth Bank to the extent of £2.2m in the period July-September 1931. 276

Modus Operandi of the Plan Commonwealth-wide compulsory pool was resurrected. As in the case of the 1930 Bill, it was necessary for Parliaments and wheat-growers in at least three states to ratify the proposal. The second provision marked the point of departure from the 1930 Bill. Instead of a guaranteed price for marketable production, it was intended to fix a domestic price of 45 per bushel. As the export price was still as low as 2s 2d per bushel, it was

estimated that distribution of the pool surplus would yield farmers an additional 6d per bushel.52 By this method it was hoped to avoid the necessity of having to approach the banks for direct assistance. The Country Party again supported the Bill, but it was rejected by the Senate for broadly the same reasons as advanced in 1990. The seemingly simple proposal for the payment of an export bounty of 6d per bushel, decided on at the premiers’ conference in September, became an excessively complicated task after allowance had been made

for all the interests involved. A straight export bounty offended those states which exported a low proportion of their production, and to accom-

modate this objection it was decided to pay the bounty on total output with a refund of the amount of the bounty for wheat used for local consumption. The effect of this would have been to raise local price above export parity by the amount of the bounty. A second interest group to be reconciled were the banks, who would not agree to provide funds for the payment of a bounty irrespective of price. Total returns were, therefore, to be limited to 3s per bushel. As price was only 2s 2d when this decision was taken, it was generally believed that a full bounty would be paid. Only when the scheme (which was formulated by the Commonwealth Bank) was submitted to Parliament—in the form of the Wheat Bounty Bill and the Wheat Charges Bill—were all the technical complications revealed. It seemed as though it would invite fraudulent practices and be well-nigh impossible to administer efficiently. ‘The first and main problem

was the payment of a diminishing bounty, which assumed increasing importance as the price of wheat rose to 2s 7d in October. ‘The machinery for the payment of the bounty was to be as follows. Upon delivery of the wheat to a pool or merchant, a certificate was to be issued to the farmer, stating quantity and price. The certificate could then be presented to the

Commonwealth Bank and the farmer would be paid his bounty. But, if the price was above 2s 6d, there would be a strong temptation for the

merchant and the farmer to come to an understanding whereby the

merchant would state on the certificate a lower price than was actually paid so that an increased bounty could be received, the additional proceeds to be shared between the two parties. Second, repayment of the bounty paid on wheat eventually used for local consumption would require an intricate administrative machine. Pools and merchants would have to submit statements at the end of the season, accounting for every bushel of wheat they had handled. For all wheat not shipped at the end of the season, repayment would have to be made to the Commonwealth 52 CPD, Vol. 131, pp. 3919-25.

277

Australia and the Great Depression Bank of the amount originally paid in bounty. Apart from administrative difficulties, there was the problem of carryover. If the season was a good one, as appeared likely, there would normally be a fairly large carryover

in addition to requirements for seed and local consumption. But the scheme would encourage merchants to sell abroad as much as possible, with a probable sacrifice of price, so that they would not have to repay the bounty on unsold wheat which had not been received by them in the first place. It was even conceivable that before the 1932-3 crop was harvested, stocks held for local consumption would be exhausted.®3

With the rise in the price of wheat to around 2s 7d per bushel, the government sought to avoid the problem of paying a reduced bounty by raising the price limit below which a bounty would be paid to 3s 6d per bushel. The Commonwealth Bank suggested, however, that the whole scheme should be scrapped. All the banks had been subject to pressure from wheat merchants to have it abandoned, and the Commonwealth Bank was only too happy to yield rather than antagonize important trading bank clients. The government was also content to withdraw the Bills, for they had resulted in embarrassment not of its own making. In lieu thereof, the Bank suggested that a straight bounty be paid on marketed production. The government agreed, the two existing Bills were withdrawn, and a new Bill—the Wheat Bounty Bill (No. 2) —was introduced, which provided for the payment of a bounty of 43d per bushel on all wheat marketed during the 1931-2 season.5+ The reduction in the amount of the bounty was necessary because of the increase in estimated output and so that the total payment would not exceed the £3m which the banks had agreed to find.55 The Bill was duly passed and the bounty paid: the first occasion in seven legislative attempts within eighteen months that the wheat industry received a modicum of Commonwealth assistance. London Credit and Exchange Contrary to expectations, the short-term effect of the premiers’ plan

was to further depress the price of Australian securities in London. Before the conference, price had languished in the region of 67-68. The market firmed to 79 on the announcement of the plan, but then declined steadily to an all-time low point of 61 early in October. The reason for this further sharp drop was the fear that Australia would deal with her external debt in the same way as she was dealing with her internal debt; and the news that the holdings of dissenters would be compulsorily converted tended to confirm the suspicion. To allay apprehension Scullin in a publicity statement explained the details of the premiers’ plan an stressed that it provided for the meeting of overseas obligations in full. Within a fortnight the market rose by thirteen points to 84—but the rise was not 53 See second reading debate on Wheat Bounty Bill, CPD, Vol. 132, pp. 977-9, 9991017, 1039-71. The debate was particularly well informed because of the number of wheat-growers in Parliament. 54 Ibid., Vol. 132, pp. 1934-6.

55 The limit of £3m was not specifically described in the Bill, but the banks were assured, on the basis of crop forecasts, that it would not be exceeded. 278

Modus Operandi of the Plan sustained, and for the remainder of the year Commonwealth ‘fives’ fluctuated between 75 and 80, which was, nevertheless, a marked improvement

on pre-plan prices.

The decline in the price of Australian securities in London during August and September, and the fall of London funds to a new low point in the September quarter, caused the government acute embarrassment once again when the Treasury bills held by the Westminster Bank fell due for renewal on 30 September. The Westminster Bank expected a significant proportion of the £5m in bills to be paid off, and Ryrie recommended that this wish be complied with. But the Commonwealth Bank’s sterling reserves had virtually disappeared and it could not even afford to part with a token £250,000. Like all other British banks, the Westminster was experiencing a period of extreme difficulty prior to the Bank of England’s abandonment of the gold standard, and badly needed relief. The Bank even went as far as to suggest a gold shipment if sterling funds could not be found. However, the Commonwealth Bank stood firm and on 25 September the Westminster Bank through the High Commissioner cabled its willingness to renew for another three months: Bank deeply regrets [that the] Commonwealth feels itself unable to retire any portion of its sterling Treasury bills, as they had hoped that in the abnormal circumstances at present current in this market their Australian friends would have been able to help by some contribution in the nature of reduction. Bank

prepared to renew Bills in full ... upon the understood condition that the Bank will not be asked to renew in totality .. . on 31st December.

It is perhaps unfortunate that the Commonwealth Bank did not reconsider its position and agree to find, say, £250,000 for the Westminster Bank. It is true that the Commonwealth Bank could ill afford even this small sum, but it would have been a token of appreciation of the tolerance shown by the Westminster Bank over the previous two years, and would

have helped Australia retain its goodwill in the future. Subsequently, as the bills fell due, they were reduced by £250,000 at a time. Eventually, after the bills outstanding had been reduced to £3.5m,

they were redeemed in total by the Commonwealth Bank and the National Debt Commission in September 1934. Great Britain abandoned the gold standard on 21 September 1931. The price of sterling fell irregularly to US$3.40 (g0 per cent devaluation) in

December. It fluctuated widely in 1932, with the rate of devaluation varying broadly within the range 25-30 per cent. The question immedately arose as to what course Australia should follow. Should she revalue to the extent of re-establishing her relation with sterling? Should she revalue in part? Or should the existing sterling-Australian exchange rate be maintained? For the time being the answer was simple. The sterling funds of the banks were still so low as to rule out any consideration of revaluation. During October and November, however, a substantial improvement

in holdings of London funds reopened the question of the future of the exchange rate. The improvement was due partly to a seasonal influx of 279

Australia and the Great Depression sterling payments, reinforced by modest increases in wheat and wool prices; partly to the continued decline in the level of imports; and partly to short-term capital inflow in anticipation of revaluation. Improvement in the trade balance was such that for the first time since the restrictive measures on imports were introduced, the credit balance on current account was sufficiently large for there to be a surplus after external interest commitments had been met (see Table 20). However, short-term capital inflow appears to have been just as important as the positive trade balance in the improvement of the banks’ holdings of sterling funds. The surplus on current account in the December quarter amounted to £15.5m, of which interest payments absorbed £7.5m. At the end of December,

sterling balances stood at £33.2m an increase of £14.5m during the quarter.5® It is not suggested that these figures demonstrate that shortterm capital inflow amounted to precisely £6.5m; there are a number of important qualifications (such as the lag between the recording of and payments for imports and exports) which preclude any degree of statistical certainty. But they do suggest that capital inflow was of significant proportions. It is not intended to deal at length with the complex inter-bank nego-

tiations which led to the reduction in the exchange rate to 125 on 3 December 1931 and which have been adequately described by Giblin.5* In outlining the main facts, however, a number of observations may be pertinent. All the Australian banks, especially the Commonwealth Bank, firmly believed that parity should eventually be re-established in the sterling-

Australian exchange rate. They had not, however, considered how or when parity should be restored. The Commonwealth Bank appears to have been strongly influenced by the Bank of England, which was hoping

for a general revaluation among sterling area countries following the abandonment of gold. This would have eased the strain on sterling, a point which was on Niemeyer’s mind when he urged Sir Robert Gibson on 21 September to consider a move towards parity: I imagine that it would be difficult for you to forego at once the extra protection given by your depreciation on sterling. On the other hand that depreciation 1s a seriously disturbing burden on your budgets owing to the cost of Government remittances. Should you not therefore be considering whether this is the opportunity to establish a new rate on sterling somewhere between par and present £130[?] The next few weeks will show you how prices move and whether you will be justified in further gradual appreciation of Australian currency. Relief to budgets would be considerable and might liberate some of your funds now earmarked to meet budget deficits.

The Sydney banks, under Davidson’s leadership, were convinced that

maintenance of the existing exchange rate was vital for economic recovery. Appreciation at the present stage would be premature: it would 56 RCMB, Report, Table 10. 57 Central Bank, pp. 126-9.

280

Modus Operandi of the Plan further depress rural income, freeze rural advances to an even greater extent, reduce bank liquidity, and encourage imports at a time when the economy as a whole could least afford them. It would be time enough to consider a downward adjustment in the exchange rate, they believed, after a sustained improvement in the terms of trade, but this had not yet come about.58 ‘The Melbourne banks were less certain. They recognized that maintenance of the existing rate would benefit their rural accounts, but they were subject to heavy pressure from powerful Melbourne commercial interests who maintained that the ‘artificially’ high rate was needlessly adding to costs.59 On the evidence of supply and demand, however, they were of the opinion that the rate was likely to fall.

Sterling funds were offered to the banks in such quantities during November that an outside market developed once again, with business being transacted at a discount on the carded rate. The existence of the outside market was evidence of the fact that the banks were not buying freely at 130. Davidson claimed that his Bank was the only one buying all exchange offered it at the carded rate, and that the others—the Melbourne banks in particular—were trading at a discount. He urged the Commonwealth Bank to take control of the exchange market by offering to buy and sell freely at 130, and also to purchase surplus trading bank holdings. If it was a central bank, as it claimed to be, Davidson contended

that this was a proper function for it. A meeting of all the banks was summoned for 24 November to discuss the possibility of compromise between complete Commonwealth Bank responsibility as proposed by Davidson and the relatively loose arrangement then in existence. The following tentative solution was accepted: that the exchange rate would be administered jointly by the Commonwealth Bank and the trading banks, that it only be altered after consultation, and that for the moment it remain at 130. The trading banks were agreeable on one condition: that the Commonwealth Bank undertake to buy and sell freely from the other banks. The Bank could not possibly agree to this, for if it did so it would be placed in the impossible position of being obliged to purchase

surplus funds without having control of the rate. At this point the meeting disbanded so that the position could be considered further. Before doing so, however, it was not made clear whether the matters which had been settled were to remain in force until the next meeting. Some of the banks, particularly the ‘Wales’, thought that the preliminary agreement still stood, subject to decision at a later stage on the matter of

Commonwealth Bank purchase of surplus trading bank funds, and in particular that the rate would be maintained for the time being. On the other hand, the Commonwealth Bank believed that the preliminary agreement had been shelved and that the matter was to be approached from a new standpoint.® Accordingly, when the Bank Board met a few 58 Davidson to Gibson, 5 November 1931; Davidson to Riddle, 12 November 1931; and Davidson to Haymen, 16 November 1931, BNSWA. 59 Melbourne Herald, 12 November 1931. 60 Details from subsequent correspondence between Davidson and Riddle, 17 and 18 December 1931, BNSWA. 281

Australia and the Great Depression days later it decided to offer to purchase London funds in excess of those held by the banks on 30 November, which in effect meant that it accepted

formal responsibility for control of the level of London funds.® It assumed sole responsibility for the determination of the rate of exchange,

and decided that as from 3 December it would be reduced to 125. Davidson was furious. He welcomed the assumption of responsibility by the Bank, but charged it with repudiating its undertaking to maintain the rate for the time being. An angry exchange took place through the press, with each side presenting its version of the meeting on the 24th. The Bank countered Davidson’s charges by claiming that the trading banks had threatened to cease buying exchange altogether unless the Commonwealth Bank assumed full responsibility and also all the loss involved in any appreciation. “The Board . . . was then faced with the

alternative’, Riddle explained, ‘of seeing a complete collapse of the Exchange Rates, or of assuming the full responsibility and fixing a rate at which it might hope to hold the exchange. In the National interests (which includes the interests of the primary producers) it chose the latter course.’64

It can now be seen that the decision to reduce the exchange rate was unfortunate and untimely. Apart from the genuine misunderstanding that occurred, the Bank appears to have been prompted by an unwarranted nervousness that London funds were accumulating at an excessive rate, and that it would have to sell at a loss if the trend persisted. The feeling that parity should eventually be re-established was also a factor. The Bank did not adequately consider, however, whether the terms of trade had improved sufficiently to justify appreciation, whether adequate reserves of London funds were likely to accumulate in the near future, and the effect of appreciation on prospects for economic recovery. Allowance should also have been made for the fact that a large proportion of the increase in London funds during November was due to speculative activity. Indeed, it is probable that the activity of speculators was largely responsible for the Bank rushing its decision. There was, therefore, a good deal of truth in Davidson’s allegation that, although the Commonwealth Bank had assumed the garb of a central bank, its instincts were still those of a trading bank.®

61 Full particulars of the London balances of the trading banks (aggregate holdings as well as weekly receipts) were supplied to the Bank for the first time. 62 Statement by Gibson on Bank’s exchange proposals, 2 December 1931, in E. O. G. Shann and D. B. Copland, The Australian Price Structure, 1932, Sydney 1933. 63 Sydney Morning Herald, 18 December 1931. 64 Press statement issued by Riddle, ibid., 18 December 1931. 65 Davidson to Haymen, 2 December 1931, BNSWA. 282

XII

Economics of Recovery

International Recovery By most available measures and in the majority of industrial countries

in Europe and North America, the depression reached its nadir during the northern summer of 1932 and before the end of the year weak but distinct signs of recovery were in evidence. There were of course variations from the norm. In the gold bloc countries (Italy excepted) recovery

was generally delayed, and in the case of France there was no marked revival until 1936. In the agricultural countries of eastern Europe the continued fall in primary commodity prices delayed the beginning of recovery until 1933; and in North America revival was similarly delayed but in this instance by the severe United States banking crisis of January 1933. The trough in Britain was recorded slightly earlier than elsewhere;

but in a large number of countries recovery began in the September quarter of 1932. The contraction was arrested by means of exhaustion rather than by

an upturn in international trade or by government measures designed to stimulate revival. By mid-1932 net investment had fallen to very low levels and in some cases was zero or even negative; in most countries the theoretical ‘floor’ had been reached. It was therefore to be expected that there would be some upturn in activity around the end of 1932.

The slow rise in income and employment that followed the initial upturn was sustained more by the diversion of resources to the production of goods formerly imported than to widespread recovery in international trade. By a combination of tariffs, quotas, exchange controls and bilateral trade agreements, most countries attempted to insulate themselves from the effects of high unemployment elsewhere. ‘Thus, those industries which

depended least on imports of capital equipment and raw materials received greatest encouragement. In Nazi Germany, for instance, large numbers of unemployed were absorbed in agriculture, the public service,

construction industries and, at a later stage, into military service.t In 1H. W. Arndt, Economic Lessons, Ch. 6. 283

Australia and the Great Depression Britain and Sweden the main stimulus was provided by the building industry;? in eastern Europe there was a concerted effort to replace those imports of basic manufactures formerly imported from the west; and in all countries capable of rural development the trend towards agricultural self-sufficiency started in the 1920s was extended in the 1930s. There were many reasons for the slow and frequently incomplete re-

covery during the 1930s, but of fundamental importance was the persistent low level of international trade. It was argued in Chapter II that the intensity and international character of the depression was closely linked to the structural imbalance that developed during and after World War I between the exchange of primary and manufactured goods, and also to the restrictions imposed on the intra-trade of industrial countries. Together with the almost complete cessation of capital exports from the advanced countries, these factors continued to restrict trade during recovery. As shown in Table 27 (see also Fig. 1), the quantum of trade in each of the three commodity groups recovered markedly more slowly than production. The central problem was the low demand for imports of both manufactures and primary commodities by the industrialized countries. Until unemployment was reduced to a tolerable level in these countries, they found it politically impossible to ease import and exchange restrictions and allow the resumption of capital exports; but until such restrictions were lifted international recovery would inevitably be a long and tedious process. The difficulty was compounded by continued

ee overproduction in food-producing countries. The efforts of these countries

to increase food output to help maintain national solvency (such as the Australian ‘grow more wheat’ campaign of 1930) simply accelerated the fall in prices, made the clearance of surplus stocks more difficult, and restricted further the international demand for manufactures. Table 27: INDICES OF WORLD PRODUCTION AND TRADE IN MANUFACTURES AND PRIMARY PRODUCTS, 1932-7

Manufactures Foodstuffs Raw materials

Production Trade | Production Trade | Production Trade

1932 10083 8979 74 87.5 81.5 1933 63.5 71.859-5 60 10!

1934 77.869.5 66.5 8292 85Q1.5 88 1935 86.8 10199 85.5 1936 97-3 75 101 88 103 95-5 1937 104.2 87 106 93-5 | 116 108

Indices: 1929 = roo. Note: Indices of manufactures exclude U.S.S.R.

Sources: World Production and Prices, 1938-39, p. 66; Review of World Trade, 1938, p. 61.

2H. W. Richardson, Economic Recovery in Britain, 1932-9, London 1967, Ch. 7; H. W. Arndt, Economic Lessons, Ch. 8; World Production and Prices, 1938-39, Pp. 29.

284

Economics of Recovery In the short-run this vicious circle could only be broken by concerted international effort, but in the event the chaos of depression fashioned ‘a more systematic economic nationalism than the mercantilists of the seventeenth and eighteenth centuries had ever been able to achieve’. To be sure, some attempt was made to salvage the wreckage of the international economy. At the Lausanne meeting on German reparations it was decided to call a world Monetary and Economic Conference to be held in London, and in November 1932 and January 1933 meetings of experts were arranged to prepare an annotated agenda. Before the conference could be held, however, steps were taken which destroyed further

the fabric of multilateral trade and payments. The reintroduction of imperial preference at the Ottawa Conference in July-August 1932 encouraged other countries to seek protection in the form of bilateral trading and clearing arrangements; and the abandonment of gold parity by the United States in April 1933, only a few weeks before the London conference assembled, effectively negated the possibility of restoring international monetary order. Thus, the conference held in June 1933 was largely an academic exercise and failed to achieve any of its objectives.

But the blame for failure should not be attributed to any single sequence

of events, for underlying the unhappy timing was the fact that no government felt itself sufficiently secure to make the necessary tariff and

monetary adjustments to help rebuild the framework for international co-operation; and it was not until the lengthy debate on post-war reconstruction during the 1940s, culminating in the Bretton Woods Agreement of 1944 and the General Agreement on Tariffs and Trade of 1947, that there was a genuine return to multilateral consideration of international economic relationships. Nevertheless, it is easy to underrate the speed of recovery by concen-

trating attention on the deterioration of economic relations between states and on the persistence of high unemployment. In an aggregate sense the term ‘recovery’ can have a great many meanings depending on the indicators used. The judgement that recovery was unusually slow in

the 1930s has been based on the continuation of abnormally high unemployment throughout the decade; but the rate of re-employment does not necessarily reflect the speed of recovery if measured in terms of the rise in national product. Moreover, high unemployment rates in the late 1930s were due as much to structural and technical changes as to a deficiency in aggregate demand. In Australia, for instance, the depression brought a significant shift from construction industries to the manufacturing sector with its requirement of a higher proportion of skilled labour,

so that at least some of the heavy unemployment on the eve of World

War II should be attributed to this change. There was even greater difficulty in the shift from agriculture to manufacturing in eastern

Europe; and in highly-industrialized countries structural unemployment was associated with the shift from export industries to production for the home market. 3 J. B. Condliffe, Commerce of Nations, p. 497.

285

Australia and the Great Depression It is clearly impossible in a short space to provide an adequate appraisal of recovery performance in a range of countries, and all that can be attempted here is a brief summary in an effort to place the Australian

recovery in some perspective. As one would expect, there were wide differences in recovery rates between individual countries if measured in terms of gross national product. There were also marked differences in some instances between the extent of recovery in national product and in expenditure. Because of the persistence of unfavourable terms of trade

for exporters of primary products and the severe restrictions on longterm international lending, recovery in national product was more rapid than in expenditure in primary producing countries (Table 28). Although

the nine selected countries in Table 28 have been ranked in terms of Table 28: EXTENT AND RATE OF RECOVERY IN NINE COUNTRIES

Y = real national product E = real national expenditure P = industrial production

Product and expenditure | Rate of recovery

| Y E, Y P

In 1937 as percentage From To (annual per cent

of pre-depression peak increase)

Germany 128 119 1932 1937 8.8 15.6 United Kingdom 12} 124 1932 1937 4.9 8.9

Sweden 117 na 1932 1937 6.3 10.8

Australia || IIT 104 1931-2 1936-7] 5.1 10.5 Hungary 108 na 1931-2 1936-7] 5.0 9.6 United States | 106 106 1933 1937 9.7 13.0

Canada 97na 891933 1933 1937 1937 |4.7 8.4 11.6 13.4 Poland |go France 85 na no recovery before 1936

Note: For Australia and Hungary, year ended go June 1987. Sources: As for Tables 2a and b with the addition of A. Maddison, Economic Growth in the West, London 1964, Appendix A, and F. Zweig, Poland Between Two Wars, London 1944, pp. 87-9.

total product in 1937 as a percentage of the pre-depression peak, it is probable that national expenditure provides a more reliable guide to recovery performance. ‘The reason for ranking in terms of national product is because of the incomplete coverage of expenditure details. The table also includes rates of change in national product and industrial production from the trough year to 1937, but these should be interpreted with caution because high rates of increase are more a reflection of the extent of the previous contraction than a strong recovery performance.

Thus, in the United States and Canada very high rates of increase in national product and industrial output were recorded, but the extent of recovery in the United States was moderate and in Canada poor. 286

Economics of Recovery Conversely, rates of increase in Britain were comparatively low, but in view of the mild contraction in this country they were sufficient to allow early and extensive recovery. It is virtually impossible to explain differing recovery performance in terms of a manageable number of variables. The only generalization which has any significance is that the industrial and capital exporting countries possessed greater scope for swift restoration of income levels than the primary producers and capital importers. Even here there are major. exceptions. On a priort grounds the United States was more advantageously placed than any country to achieve rapid recovery, but this was negated by the extent of overinvestment in the 1920s and the demoralizing effect of monetary collapse in the early 1930s. In France the traditionalist monetary policy of adherence to the gold standard at any price was mainly responsible for the long period of deflation which stood in the way of recovery until 1936. Sweden is another exception. One would

have expected that recovery would have been slow in view of Sweden's dependence on trade and her limited scope for industrial self-sufficiency, but a combination of favourable circumstances worked in the opposite direction. First, because of the rapid growth in world demand for paper, timber products were comparatively unaffected by the depression and largely escaped the trade restrictions imposed on other primary products. Second, from 1933 the Swedish government embarked on an expansive monetary and fiscal policy which greatly speeded the reduction of unemployment. Britain, Germany, Canada, and Poland fit the model reasonably closely. Both Britain and Germany were able to build recovery by diverting resources to home development and by taking advantage of cheap imports of food and raw materials. They also benefited by being able to take advantage of the weakness of primary producers to obtain secure even if limited markets for their manufactured exports. Similarly, Canada and Poland, and to a lesser extent Hungary and Australia, were restricted by their dependence on primary exports and capital imports. Australia is, however, an intermediate case, and it is necessary to turn now to the source and structure of her recovery. Course of Recovery

The beginning of general recovery in Australia, which can be dated from mid-1932, broadly coincided with the timing in Western Europe, although it was of course distinctly earlier than in North America and eastern Europe. It may have commenced a month or two earlier, but no special significance should be attached to this, for the long European summer recess of July-August—frequently extended by compulsion during the depression—delayed the upturn in most industrial indices until September or October. Indeed, it is a little surprising to find that recovery was delayed for so

long. Contraction in Australia had been in evidence since 1927-8— appreciably longer than elsewhere—and it would have been reasonable to expect some anticipation of international recovery. Moreover, during most of 1931-2 there were frequent signs that recovery was imminent. ‘The 287

Australia and the Great Depression rate of decline in all major indices slowed markedly during the year, particularly in the manufacturing sector. While total manufacturing output and employment continued to fall, it is significant that in textiles—the most sensitive import-competing industry—employment rose by 16.5 per cent (see Table 24). There was also some rise in clothing, chemicals and construction industries. As early as December 1931 the National Bank in its Monthly Summary sounded a note of cautious optimism: Although it is still doubtful whether the tide of depression has been stemmed and a definite upward movement in trade and commerce has commenced, the indications available . . . give room for hope that the lowest levels have been passed.

That it was another six months before the ‘lowest levels’ were passed

was due in large part to the deflationary impact of the premiers’ plan. As will be seen shortly, the net effect of the plan was to cut the sum of government deficit and loan expenditure by 31 per cent during 1931-2. As the necessary legislation to reduce wages and salaries was not completed until the end of 1931, the bulk of the fall in expenditure was concentrated in the first half of 1932. It is true that there were other unfavourable changes. Export incomes were adversely affected by the exchange appreciation of December 1931 and by the downward drift in export prices between February and June 1932;° and it is probable that the fall in private investment extended into the early part of 1932, albeit at a much reduced rate. However, the effect of these was minor compared with the weight of the fall in government expenditure. Although the revival in demand for domestically-produced manufactures was lessened, it was not extinguished. The rise in employment in textiles and chemicals was joined, early in 1932, by a strong upturn in output of iron and steel; and at about the same time there was an increase in the value of building approvals. The business index constructed by the Queensland Bureau of Economics and Statistics dates general recovery from the three months ending July 1932,° and this is supported by literary evidence. In August the National Bank commented: ‘Definite improvement is recorded in business conditions generally. . . . Unemployment has declined, trade turnovers have steadily increased since June, and are now clearly ahead of last year’s figures.’? In September, the Inspector for the Sydney area of the Bank of New South Wales reported that in manufacturing industry ‘there has been an improvement in the outlook generally and a more optimistic tone prevails, and more hands are employed’.8 By the end of 1932, the signs of recovery were unmistakable and a number

of the more advantageously placed firms were reporting a moderate increase in profits. The Australian Knitting Mills, for example, stated: “This 4 Monthly Summary, p. 2.

5 This relapse in prices virtually cancelled the promising rise in the last quarter of 1931. Fortunately, however, it occurred after the main wool and wheat selling season. 6 Economic News, Brisbane, monthly issues for 1932. 7 Monthly Summary, p. 3. 8 Report of the City of Sydney Inspector for the half-year ended go September 1932, BNSWA.

288 ,

Economics of Recovery company’s plant has been working to full capacity, while additional plant has been installed and the mill 1s making a profit.’® The building industry was not as fortunate, but the improvement there was sufficient for Jolins

and Waygood Ltd, hydraulic and general engineers, to comment that ‘there has been a definite improvement in the building trade’ since June 1932.9

After an initial jump in expenditure and output during 1932-3, the rate of increase in national product steadied to around 4 per cent per annum for the remainder of the recovery period (Table 29). While this was an unexceptional rate by international standards, it was sufhciently rapid to allow the pre-depression peak in total output (recorded in 1926-7) to be restored by 1934-5. Recovery in expenditure was longer delayed and was not restored until 1936-7. Removal of excessive unemployment proved to be much more difficult, and on the eve of World War II the unemployment rate was still well above the average level of the 1920s. Table 29: RECOVERY IN NATIONAL EXPENDITURE AND PRODUCT,

TOTAL AND PER CAPITA, 1931-2 to 1936-7 (percentage of pre-depression peak, 1926-7)

Expenditure Product

Total ‘Per capita Total Per capita

. 1931-2 76 71 go 84 1932-3 84 78 g6 89 1933-4 87 BI 99 gI 1934-5 95 87 101 93

, 1935-6 99 go 106 96 1936-7 104 94 | III 100

Source: As for Table 2b.

The contribution of the main industry groups to the risé in output is contained in Table 30. While this provides a rough outline of the shape of recovery, the figures should be interpreted with caution. In particular, they should not be equated with the relative importance of a particular industry in promoting recovery, for the table necessarily excludes the effect of changes in relative prices. Thus, it would appear that the rural sector, after playing an important part in the substantial lift in output during 1932-3, failed to take any further part in the recovery process. Because rural output and export prices tended to be inversely correlated, this exaggerates the significance of the rural sector in the early recovery stages and understates it in the later stages. Similarly, the importance of the rise in gold output and prices is not adequately reflected in the table, while the large share of the tertiary sector in the increase in output does not mean that the principal stimulus to recovery is to be found here. 9 Jobson’s Investment Digest, 1932, p. 427. 10 Ibid., p. 321.

289

Australia and the Great Depression

| Period

Table 30: SHARE OF INCREASE IN REAL NATIONAL PRODUCT, MAIN INDUSTRY GROUPS, 1932-3 to 1936-7

(per cent of total increase in real product)

| 1932-3 | 1933-4 | 1934-5 | 1935-6 | 1936-7 | total

Rural 22.8 | —17.3 —9.5 — 23.4 19.9 2.9

Mining 4.0 | 6.5 3.2 5.5 9.4 5.3

Manufacturing 18.9 44.0 36.2 52.2 31.4 33.2

Building OWS 19.4 48.0 —21.3 7.3 9.9 Trade | 6.29.8 22.6 32.8 60.5 24.0 33.4 Other | 24.1 : 25.0 — 10.6 26.5 8.0 15.2 Note: Statistical discrepancy due to rounding. Source: Based on industrial subdivisions of GNP in N. G. Butlin, Australian Domestic Product, Table 2, deflated by implicit price indices (1938-9 weights) kindly made available to me by Mr D. B. Haig of the Australian National University.

Thus, to obtain a more balanced view of the structure of recovery, it is necessary to check the output data against the distribution of the increase

in employment and money income (Table 31). The final column of Table go is comparable with Table 31, and from these sets of figures the following five points emerge: (1) Although the size of the rural sector remained comparatively unchanged during recovery and there was little increase in output or employment, it did play a useful part in the recovery process. But it was a passive rather than an active part. Its main achievement, with the assist-

ance of a succession of favourable seasons, was to maintain for the remainder of the 1930s the massive lift in output recorded during the

contraction. Thus, with the rise in commodity prices after 1932, money Table 31: SHARE OF INCREASE IN EMPLOYMENT AND MONEY INCOME, MAIN INDUSTRY GROUPS, 1932-3 to 1936-7

(per cent of whole period increase)

Employment Money income

Rural 4.6 31.3 Mining 3.0 5.1 Manufacturing 41.8 18.4 Building 25.8 7.0 Trade 24.0 Other 18.6 6.1 14.2 Note: Money income, gross national product at current prices. Statistical] discrepancy due to rounding.

Sources: As for Table go and M. Keating, ‘Australian Work Force and Employment’, Table 4. 290

Economics of Recovery income increased fairly rapidly. However, for reasons to be discussed Shortly, this was of little direct assistance to general recovery until the mid-1930s.

(2) Under the stimulus of a substantial rise in the price of gold, there was some revival in auriferous mining in the 1930s. The main impact of this was, however, at the end of the decade, and mining played a negligible part in the early stages of recovery.

(3) The dominant structural feature of recovery was the growth in size and importance of the manufacturing sector. Just as manufacturing appears to have been the initiating factor in the upturn of 1932, it was the driving force in expansion for the remainder of the decade. It absorbed a high proportion of the increase in employment and underpinned recovery in the tertiary sector. (4) Conversely, the building industry lagged well behind recovery in the rest of the economy. Mainly because of the strictures on public loan

expenditure, the fall in population growth and the marriage rate, the industry failed to respond to the stimulus of high liquidity and cheap money. Thus, despite a fairly early upturn in activity, output in 1936-7 was only 69 per cent of the 1926-7 figure.

(5) ‘Phe tertiary sector, which suffered less than most during the con-

traction, maintained its advantage in the recovery period. While the proportion in tertiary employment fell slightly, the sector’s share of money income was fully maintained and output per worker rose more rapidly than elsewhere in the economy. This unusual reversal of the norm was probably due to greater pricing strength of tertiary industries in the context of severe competition. By shifting income in favour of the generally higher paid tertiary work force and by adding to the distribution and service costs of producing industries, this may have acted as a slight drag on the speed of recovery. The main sources of recovery can now be considered in more detail. External Factors in Recovery Part of the established doctrine of the early 1930s, and also an essential

element in the philosophy of the premiers’ plan, was that recovery in Australia would originate externally. As the depression had been largely imported, it seemed reasonable to assume that recovery depended on a prior upturn in commodity prices and a reopening of overseas capital markets. Only extreme protectionists within the Labor Party seriously believed that the economy could be pulled up by its bootstraps. Thus, the task of domestic policy was to prepare the ground ahead: to reduce costs

as far as possible so as to be able to take early advantage of eventual revival in world demand for primary commodities, and also to repair the damage as rapidly as possible to the country’s international credit rating. It is useful, therefore, to start with the effect of external changes on the course of the Australian recovery.

(a) Export Prices It is unnecessary to dwell on the evidence to indicate that recovery received little or no assistance from movements in export prices before the beginning of 1933-4. Although the average price 291

v 4| ai Australia and the Great Depression

wa td

© 100

a= | 80 . .price index 7 , Export

=

|

ow

= Go

uf \ A nh 20 ' (h ; Aj ™ Ay E es | \A J ‘o 8

Q 15 N WW \ i \ 50 3 be ¢ S ‘ A. \ iv : \ sf w 10 ed = = A a i \ 2. = \ ( ¥ \ ‘iy J \ a5VW? . \ of '7/ Vf ‘J 30 70

A

a= \ ; 1 Wheat prices Wool prices wy] 5

1928 1930 1932 1934 1936 1938 Fig. 14: EXPORT, WOOL AND WHEAT PRICES, MONTHLY, 1928-38

Note: Wheat and prices, as for Fig. 7. Sources: Wheat and wool prices, as for Fig. 7; export prices, from January 1928 to August 1935, as for Fig. 7; from September 1936 to December 1938, Commonwealth Bank, Statistical Bulletins.

for greasy wool in 1932-3 at 8.7d per pound was a fractional improvement on the previous year, it was still only one-half of the average price for the late 1920s. The trend in wheat prices was even less encouraging. After a

hopeful rise at the end of 1931, the price of wheat remained virtually stationary at around gs per bushel for the next four years. It was not until 1935-6 that there was a sustained recovery in price, but even at the end of the decade farmers were still struggling to cover costs and few were able to avoid the use of moratorium legislation. Similarly, recovery in base metal prices was slow, uneven and far from complete. The late and erratic rise in export prices (shown in Fig. 14) is reflected

in the sluggish improvement in the value of exports prior to 1933-4 (Table 32). Even this mild improvement is an overstatement, for, as already noted, it was achieved by a substantial lift in farm output. Price per unit of production continued to decline—by 4 per cent in 1931-2 and by another 5 per cent in 1932-3.1! There was, therefore, little increase in 11 Production Bulletin, No. 30, Table 168. ‘Farm’ is used here to include both agricultural and pastoral industries. 2Q2

Economics of Recovery

i:

Table 32: BALANCE OF PAYMENTS ON CURRENT ACCOUNT, 1928-9 to 1936-7 (A£m)

Exports Imports invisibles Balance

1928-9 136.9 — 133.5 — 48.4 — 45.0 1929-30 96.1 — 123.4 — 52.8 —8o.1

1930-1! 89.9 — 61.8 —— 46.9 —18.9 1931-2 96.9 — 50.6 36.7 9.6 1932-3 98.7 — 64.5 — 37.8 — 3.6 1933-4 114.2 —67.5 — 37.8 8.9 1934-5 103.4 — 82.3 — 36.8 —15.7 1935-6 124.1 —94.9 — 39.1 1936-7 148.2 — 103.0 —35.1—9.9 10.1 Source: The Australian Balance of Payments, 1928-29 to 1948-49, Canberra 1950, p. 30.

net farm income and it is probable that farm indebtedness continued to rise rapidly.!2 It seems clear, therefore, that movements in export prices played no part in the process of domestic recovery before 1934. Around 1934 and after the connection between domestic and international recovery is much stronger. Following a strong rise in European and Japanese woollen textile production and the depletion of exporters’ stocks,!8 greasy wool prices rose in the second half of 1933 to reach an average of 15.8d per pound in 1933-4. This was responsible for the first major lift in export income since the depression began. Unfortunately, this price rise was not sustained and a slump of similar magnitude followed in 1934-5. From mid-1935, however, price increases over a wider front were recorded. Another strong rise in wool was accompanied by the start of a three-year climb in the price of wheat; expansion in gold mining gathered momentum under the stimulus of a continuous rise in price; and in frozen meat, where price had fallen less than elsewhere, the value of exports grew steadily. Even in butter and base metals, where there was little price encouragement before World War II, growth in the volume of exports helped recovery in its later stages. ‘There was, in short, a trend towards rural diversification in the mid-1930s of the type—if on a much

smaller scale—that played a prominent part in the recovery from the depression of the 18gos. Even if export prices had risen earlier and more rapidly, it is unlikely

that there would have been a significant transmission of income to the rest of the economy. Most farmers and many pastoralists were so heavily 12 Although comprehensive statistics were not collected, all the indirect evidence suggests that farm indebtedness rose sharply until the mid-1g930s. Between 1931 and 1935, for example, trading bank advances to the rural sector rose more than twice as rapidly as advances to the rest of the economy. See RCMB, Report, Table 10. 13 World Economic Survey, 1933-34, Geneva 1934, pp. 27, 33; World Production and Prices, 1938-39, pp. 53-4, 58.

293

Australia and the Great Depression in debt by 1932 that any margin over costs of production was committed to financial institutions for some years ahead. The bulk of any initial rise in income would, therefore, have been caught in a liquidity trap; in other words, it would have added to the liquidity of the financial system without increasing effective demand. It is safe to assume, therefore, that the multiplier effect of the moderate rise in export income in the first half of recovery was very weak indeed; and even in the years 1935-7 its normal strength had not been restored.

a

(b) Capital Movements In assessing the role of capital movements in recovery, the problem of measurement immediately arises. Official figures based on direct estimation were not compiled before World War II, and it is necessary to rely on the residual method. While this method is adequate enough for long-period analysis, it is not a reliable guide to changes in magnitude from one year to another. Some of the error can be eliminated by making allowance for changes in international reserves, as in Table 33. Figures of apparent capital movements thus obtained will still include errors and omissions in the trade returns, while the timing of the actual transfer of funds may not correspond to the changes in magnitude shown in the table. The greatest room for error occurs in the volume of private capital inflow or outflow. Public capital movements can be estimated reasonably accurately from the change in external government indebtedness, but for the private sector it is necessary to rely on the simple difference between total and public capital movements. Thus, private capital inflow contains all the errors and omissions from the trade returns. Further, there is no means of estimating the division between shortand long-term private overseas investment. Some knowledge of the nature of the investment is necessary, however, to assess its impact on recovery, Table 33: PROXIMATE PUBLIC AND PRIVATE OVERSEAS CAPITAL

MOVEMENTS, 1930-1 to 1936-7

(A£m)

GQ)Change |G)in(3) (4) Private (5) Current Total Public :

account international capital capital capital

balance reserves inflow inflow inflow

—(1~2) (3 - 4)

1930-1 1931-2—19 10 | |3—5 —714—334—19 —3

1932-3 —4 | 814 12 —9 —4 23 16 1933-4 9 | 23 1934-5 —16 —3I —15 —I —14 1935-6 —10 | —3 7 —6 13

1936-7 10 | 34 24 1 25

Sources: Col. 1, from Table 32; Cols 2 and 4, The Australian Balance of Payments, 192829 to 1948-49, pp. 77-8, 88.

294

Economics of Recovery for it is unlikely that short-term inflow would have any direct effect on income or employment. On the general evidence of bank correspondence, both amongst themselves and with their clients, it is reasonably clear that the bulk of private capital movements between 1930 and 1933 were of a short-term nature. In 1930-1 it is known that there was a flight from the currency in anticipation of exchange depreciation; and again in mid1932 speculation against the pound occurred as the Commonwealth Bank was being urged by primary producers and economists to devalue further. Similarly, an influx of balances normally coincided with the build up of sterling reserves at the peak of the export selling season. As noted, such an influx was partly responsible for the exchange appreciation of December 1931; and in anticipation of similar gains speculators repeated the operation at the end of 1932 and 1933. But the chance of speculative gain was by no means the only reason for the short-term inflow in 1932-3 and after. Many subsidiaries of overseas companies had accelerated re-

mission of profits and repatriated idle balances during the period of currency uncertainty, and were therefore short of liquid balances by 1932. During the early part of recovery, some inflow was necessary merely

to restore working capital. If this argument is correct, private overseas investment did not play a significant part in the initiation of recovery. As in the case of the revival of export prices, it tended to increase liquidity rather than demand. To be sure, there was some direct investment from an early date in recovery. The rise in the tariff and exchange rate encouraged the establishment of Australian subsidiaries of overseas companies, but this did not gather momentum until the upturn in activity had been firmly established. It cannot be doubted, however, that private overseas investment played an

important part in reinforcing recovery from 1933 onwards (with the exception of 1934-5 when a large trade deficit precipitated another flight from the currency) .

Impact of Fiscal Policy , Next, let us consider the effect on recovery of the fiscal changes associated with the premiers’ plan. It has been argued in previous chapters that the plan was heavily deflationary, and in broad quantitative terms this is comparatively easy to verify. By aggregating Commonwealth and state budget deficits and state net loan expenditure (Table 34), it is clear that the plan brought about a sharp fall in the apparent stimulus provided by the government sector. Prior to mid-1931 the level of revenue

expenditure was well maintained and the growth of budget deficits tended to compensate for the fall in loan expenditure. During most of the contraction, therefore, it would appear that fiscal policy tended to counteract to some extent the fall in national product. On the other hand, by substantially eliminating deficits and by further reducing loan expenditure, it seems that the effect of the plan was to hinder recovery. It will be noted that the greatest fall in deficits occurred in 1932-3, just at the time when recovery was gathering momentum. It would be neat to be able to offer an unambiguous judgement on the 295

Australia and the Great Depression Table 34: COMMONWEALTH AND STATE BUDGET DEFICITS AND

STATE NET LOAN EXPENDITURE 1927-8 to 1936-7

(A£m)

State net loan |

Deficits expenditure Summation

1927-8 3-9| 36.1 40.0 1928-9 5-4 31-9 37-3 1929-30 9.8 24.7 34.5 1930-1 26.2 12.4 38.6 1931-2 19.4 6.3 25.7 1932-3 5-7 4:514.6 9-9 14.4 1933-4 20.3 1934-5 2.7 18.5 21.2 1935-6 1936-7 +1.0 +0.9 18.8 15.6 17.8 14.7

Note: A positive sign indicated a budget surplus. Net loan expenditure consists of gross expenditure from loan fund less sinking fund contributions and floating expenses. No account is taken of Commonwealth loan expenditure (which was negligible) or

local and semi-governmental expenditure. The latter is omitted because of the difficulty in obtaining a comparable net figure and in separating loans raised by the states and expended by local authorities. From the point of view of the change in

loan expenditure, the omission is not of great importance as the capital works programmes of state and local bodies tended to move together. Source: Finance Bulletin, No. 28, Tables 8, 44 and 50.

basis of Table 34, but the many necessary qualifications cannot be ignored. The first of these is the question of internal consistency and comparability of budget results. Due to differences between states in their treatment of business undertakings and their handling of trust accounts, a given deficit

can mean different things in different states.‘ From a macro point of view this problem need not be serious so long as budgets are internally consistent over the relevant period. ‘There does not appear to have been a great change in budgetary methods during the early part of contraction, but after the adoption of the premiers’ plan governments continually tinkered with their accounts so as to reduce the size of their nominal deficits to coincide as near as possible to target figures and thereby receive

the blessing of the Commonwealth Bank. One method of concealing larger deficits was to divert to consolidated revenue funds normally appropriated to special purpose or trust accounts, while at the same time

allowing credit balances in these accounts to dwindle. Although it is certain that actual deficits were larger than the official figures, this is unlikely to alter significantly the magnitude of change in the size of aggregate deficits after mid-1931. More important were shifts in the composition of revenue and expenditure, particularly during the contraction. On the revenue side, the main 14See ‘The Determination of Standards and the Problem of Comparison’, Second Report of the Commonwealth Grants Commission, Ch. 5. 296

Economics of Recovery Table 35: COMPOSITION OF GOVERNMENT CURRENT EXPENDITURE,

ALTERNATE YEARS, 1928-9 to 1936-7

(per cent of total selected expenditure)

1.Internal External debt charges 18 2. debt charges 21 21 20 19 19 g. Services and administration 30 25 25 28 30 4. payments 22525527528 5.Transfer Miscellaneous 5 26 7 Notes, by line: General: Excludes business undertakings and Commonwealth grants to the states. 1. Adjusted for changes in the rate of exchange. 2. Includes total payments into sinking funds.

3. Includes Commonwealth and state administration expenditure, state education, public health, hospital, law and order, and lands and survey expenditure. 4. Includes Commonwealth payments for aged, invalid, war and service pensions, maternity allowances and relief to primary producers; and state expenditure on

unemployment relief and general charity. |

5. Mainly Commonwealth and state works expenditure from consolidated revenue, and state agriculture and forestry payments. Source: Finance Bulletins, Nos 20-9.

change was a rise in the proportion of income taxation in its various forms. In response to a decline in receipts from customs, excise, sales tax and business undertakings, most states increased the rates and progression of income taxation. This was usually in the form of a special additional tax on wages and salaries for the relief of unemployment, which had the

effect of increasing the proportion of direct taxation on income to total state taxation from 48 per cent in 1928-9 to 58 per cent in 1931-2.1° Although unemployment relief taxes were not normally progressive (except that very low incomes were exempt) ,16 they did have a mild redistributive effect which helped in a small way to lessen the fall in aggregate

demand. However, the bulk of the change in the tax structure occurred in 1930-1 and 1931-2, and during recovery, as other forms of revenue increased, the proportion of income taxation gradually fell. Thus, there were no significant revenue changes during the early years of recovery to counteract the impact of the fall in deficits. During contraction, there were three changes of note within the broad categories of public expenditure as summarized in Table 35: (1) a rise in the proportion of expenditure required to service the external debt; (2) a rise in the relative importance of transfer payments; and (3) a fall in the share of expenditure on the provision of public services and adminis-

tration. In so far as the propensity to consume of those in receipt of transfer payments was greater than public servants, teachers, members of 15 Finance Bulletin, No. 29, Table 4o. 16 See summaries of special unemployment taxation in Labour Report, Nos 21-3.

297

Australia and the Great Depression the police forces and others on the government payroll, the shift from the latter to pensioners, the unemployed and needy primary producers was of some assistance in lessening the rate of decline in aggregate expen-

diture. But the advantage of any rise in expenditure thus induced was almost certainly lost by the relative (and absolute) rise in the cost of servicing the external debt (a rise brought about by devaluation and the growth of the floating debt). Although the shift to transfer payments was greater, the additional amount spent on overseas interest payments was entirely lost to the economy. Hence, the net effect of the change in the structure of expenditure during contraction was to isolate some of the benefit of the growth of deficits.

During recovery the reverse tended to hold. The most important change was an easing of the burden of external debt charges, which allowed a greater proportion to be diverted to domestic expenditure. Although the bulk of resources released in this way were absorbed by government administration and services rather than by transfer payments,

the change lessened to some extent the deflationary impact of the premiers’ plan. Turning for a moment from changes in the size of deficits and in the

composition of revenue and expenditure, one point that emerges with force is the high proportion of current expenditure swallowed by external capital charges. As these payments represented a large leakage from the system, the question is posed of the overall impact of the large deficits of 1930-1 and 1931-2. As noted in Chapter III, new overseas borrowing by the end of the 1920s was approximately equal to external debt charges, so that even before the depression the effect of public finance was broadly neutral in an aggregate sense. In 1929-30 the reaction to a cessation of long-

term borrowing in London was a growth in the short-term external debt; and in 1930-1, when short-term borrowing was no longer possible, governments responded by allowing budget deficits to rise steeply. But this does

not mean that the public sector was thrown into forward gear. Even in 1930-1, when the combined deficit rose to a massive £26m or 5 per cent of money income, it cannot be said that budgets were expansionary, for deficits were more than counterbalanced by external interest payments of £33m. Indeed, in no one year during depression and recovery did government budgets inject more into the economy than they took out; and what

we are really discussing are changes in the magnitude of budgetary deflation.

Granted that budgets were generally restrictive, it is still possible that recovery may have been assisted by an easing of deflationary pressure at the right time. But no amount of adjustment to the nominal size of deficits can alter the fact that the premiers’ plan brought about a heavy increase in the restrictive nature of fiscal policy. It is true that there was a fall in the cost of overseas indebtedness during and after 1932-3 as a result of refinancing in London, and that domestic demand was assisted by the shift to transfer payments; but these changes were not nearly sufficient to offset the reduction in the size of deficits and in loan expenditure. After subtracting external payments, the surplus shown on domestic budgetary 298

Economics of Recovery 600

Money stock 500 S

QR 150 ae ae := 200

Fr High-powered money

100 Ratio scale 30

Reserve-deposit ratio

© eo

A.

IO

Sarreneyrdeposit ratio NN NN

oO1932 { 1933 1934 1935 1936 1937 1938 Fig. 15: STOCK OF MONEY AND THREE DETERMINANTS, QUARTERLY, 19328

Source: As for Tables C-1, C-2, C-3. |

operations increased from £7m in 1930-1 to £25m in 1932-3; and for the

remainder of the 1930s the surplus fluctuated narrowly in the range £20-5m. Thus, even allowing for the improvement in ‘confidence’ which contemporaries associated with the adoption of the plan, it remains that fiscal policy was strongly inimical to recovery. ‘The only positive stimulus was provided by the gradual rise in loan expenditure in the mid-recovery phase.

Monetary Changes In Chapter 1X an attempt was made to assess the significance of changes in the money stock in relation to movements in real variables during the

contraction. Contrary to the widely-held contemporary belief, it was found that changes in the stock of money played a minor part in the downswing. Rather, it was argued that the high degree of tolerance in 299

Australia and the Great Depression the Australian banking mechanism helped to moderate external deflationary pressure by allowing high-powered money to fall heavily without strong defensive action being deemed necessary.

The same broad pattern of monetary behaviour recurred during recovery. Although not as pronounced as in 1926-31, the close correlation between high-powered money and the reserve ratio is again clearly visible (Fig. 15). So too is the consequence of this well-conditioned mechanism —-a high degree of stability in the money stock. Despite sharp movements

in London funds and in other components of high-powered money, the

stock of money barely deviated from trend in the period under consideration. Despite the appearance of uniformity, there were two differing phases

in the monetary history of recovery. The first, from 1932 to the end of

en

1935, 1s characterized by a stagnant demand for new funds, declining rates of interest and a slow rise in the money stock. In the second phase, 1936-8, an accelerated demand for funds was reflected in a hardening of interest rates and a lift in the rate of increase in the stock of money.

—---Table 36: CHANGE IN MONEY STOCK THAT WOULD HAVE BEEN PRODUCED BY ONE DETERMINANT UNDER

ceteris paribus ASSUMPTION, 1932-8

| Rate of change per year (per cent)

1932-5 | 1936-8 High-powered money | 7.3 Deposit ratio 3.2| —0.7 — 2.3

Currency ratio | 0.0 Money stock 2.4—0.6 4.5

Note and Source: As for Table 23.

In terms of the components of the money stock, the dominant feature of the period to 1935 is the failure of high-powered money to sustain the rise recorded at the end of 1931. Indeed, the overall tendency of the period was for high-powered money to contract slightly; and the modest rise in the money stock that did take place was achieved by lowering reserve

ratios (Table 36). The main factor in the behaviour of high-powered money was the repeated relapse in sterling reserves. While recovery in export prices lagged well behind revival in domestic demand, it was found

impossible to rebuild London funds to an adequate level. In the September quarter of 1934 and again in 1935 trading bank holdings of sterling exchange fell to a point which was only fractionally above the crisis figure of December 1929;17 and it was not until 1937-8 that external reserve holdings resembled the pre-depression norm. Domestic financial 17 See Appendix Table C-2. Total London assets—including long-term securities and Commonwealth Bank holdings—did not fall as sharply.

300

Economics of Recovery policy also limited the scope for expansion in high-powered money. During 1931 and 1932 the issue of Treasury bills had been a major factor in preventing a drastic decline in reserve ratios. So important had these bills become that by the end of 1932 they represented 31 per cent of bank reserves. But the monetary authorities believed that this large store of liquidity could lead to a loss of control over credit policy as recovery proceeded, and it was therefore decided to fund portion of them as money

market opportunities arose.18 Thus, in the three years 1933-5 the combination of substantially lower deficits and funding operations reduced bills outstanding by about one-third. This was reflected not only in highpowered money but also in lower deposits. Did these restrictions on high-powered money and in the rate of increase in the money stock have any influence on the speed of recovery? Taken from almost every viewpoint, the short answer is in the negative. The slow growth in the stock of money, particularly in 1932-3, was as much a reflection of the lack of demand for funds as stagnation in highpowered money. The banks were well aware in 1932 and 1933 that the high level of reserve ratios was having a detrimental effect on profitability,

and they would have welcomed an increase in lending opportunities to the private sector. They were, however, prepared to sacrifice profits to prevent large additional lending to governments. Even in 1934 and 1935, when reserve ratios fell under the weight of the decline in high-powered money, there is no evidence of a shortage of funds to finance recovery. Interest rates continued on their downward course until the end of 1935, and it was not until 1936 that there were signs that the long drought in the demand for new money had broken. Conversely, there appears to be no significant connection between high

liquidity, cheap money and the rate of recovery. If cheap money had played a part in the process, it should have been reflected in housing investment; but as noted earlier housing and other forms of construction

lagged a long way behind recovery in other sectors. To be sure, low interest rates did assist in reducing costs, particularly in rural industries. They may also have been responsible for some additional investment in housing by a small section of wealthy people. But in general the effect of lower costs from this source was swamped by reductions in wage rates and raw material prices. Monetary factors contributed little, therefore, to the timing, speed or shape of recovery, and apart from cheap money the only

positive contribution was the ability of the monetary mechanism to maintain steady expansion in the money stock which largely isolated domestic recovery from short-term external fluctuations.

Industrial Expansion Just as the growth of the manufacturing sector was the dominant influence in the economic development of the 1920s, it was also the driving force in the recovery of the 1930s. By all available tests recovery in manufacturing started earlier and proceeded more rapidly than in the rest of 18 See pp. 330-7 for a discussion of Treasury bill funding policy. 301

Australia and the Great Depression the economy. As noted earlier, there were distinct signs of revival in a number of light industries as early as 1931-2, and in the following year the

recovery impulse extended with greater force to heavy manufacturing. The strategic importance of manufacturing in the recovery process is emphasized by the strength of its forward and backward linkages. ‘The rise in employment after 1931-2 was largely connected with industrial expansion, either directly or indirectly. Directly, manufacturing was responsible for more than 40 per cent of the increase in the employed work force to 1936-7 (Table 31) ; indirectly, it underpinned recovery and hence re-employment in tertiary industries. Growth in the metals group of industries assisted ferrous and carboniferous mining. Commercial and residential construction also benefited in some regions. For instance, the development of Port Kembla as a major iron and steel producing centre

was responsible for a boom in residential building in the Illawarra district. In South Australia the extension of motor vehicle body-building helped to counteract the effect of persistent low wheat prices. In short, manufacturing was not only the leading sector in recovery; it was also thrust decisively by the depression to the centre of the economy as the major source of economic growth. The growth of the manufacturing sector during recovery was based on a radical transformation in the ability of local products to compete with imports. There were three elements in the situation: (1) a rise in direct

protection through an increase in the tariff by about 80 per cent (as shown in Fig. 8) and through devaluation; (2) an increase in indirect protection as a result of the inability of importers to obtain sterling exchange; and (3) a steep fall in domestic costs of production. As a result domestic manufacturers were largely sheltered from the great price

fall in manufactured goods entering international trade. Whereas the average price (in gold) of manufactured trade goods fell by 397 per cent between 1929 and 1932,/° the Commonwealth Bank’s price index for manufactured imports rose by 6 per cent between 1928-9 and 1931-2;?° and in the important metals and machinery group the import price rise was as high as 12 per cent. On the other hand, internal prices for raw materials fell by around 20 per cent and nominal wage rates by a similar amount (the actual fall was significantly greater), so that the additional protection created by the depression amounted to at least one-quarter, and in the case of the metals group about one-third. Combined with the import barriers associated with the near exhaustion of sterling exchange, these changes produced a substantial shift in demand from imported manufactures to the local product. This is illustrated by the fact that while national expenditure on goods and services declined

in real terms by one-quarter in the three years 1928-9 to 1931-2, the quantum of imports was reduced by 60 per cent. Similarly, imports as a proportion of national product, which averaged 18 per cent in the late 19208, fell to 12 per cent in the early 1930s. Manufacturers were unable to 19 W. A. Lewis, ‘World Production, Prices and Trade’, p. 118.

20 Commonwealth Bank import price index reproduced in Australian Balance of Payments, 1928-29 to 1948-49.

302

Economics of Recovery exploit their competitive advantages in the years of heavy demand contraction, but during 1932 they responded strongly to their new-found opportunities. The manufacturing expansion of the 1930s and the Australian recovery process in general was, therefore, founded on a boom in import replacement. _ The textiles industry was the first to respond to the opportunity of increasing its share of the local market. Despite the growth of the industry

during the 1920s, local industry supplied only about one-third of the market on the eve of the depression. With the large amount of cheap

female labour clamouring for work, the existence of surplus plant capacity created during the overexpansion of the 1920s and the local availability of cheap raw materials, there was therefore ample scope for capturing a much larger share of the market. As early as 1930-1 import replacement had proceeded sufficiently rapidly to justify some increase in employment in the woollen and knitting trades, and in the following year, when total manufacturing employment was still falling, the number employed in textile mills increased by 16 per cent (Table 37). Expansion Table 37: RATE OF CHANGE IN MANUFACTURING EMPLOYMENT, TOTAL AND SELECTED INDUSTRIES, 1931-2 to 1936-7

(per cent)

1931-2 | 1932-3 | 1933-4 | 1934-5 | 1935-6 1936-7

Metals and machines —7.6 | 14.4 13.5 17.0 15.8 11.0

Chemicals 2.314.5 5.0 5.2 11.5 Q.2 3.2 8.6 Textiles 16.4 5.2 3.4 10.5 Clothing 3.0 8.8 7.4 | 8.0 4.3 0.9 Paper and printing —1.3 3.1 6.6 6.5 5-7 3.8

Total manufacturing | —0.5 10.4 9.6 10.9 9-7 6.5 Note: ‘Total manufacturing’ excludes the heat, light and power group. Source: Production Bulletins, Nos 26-31.

in the industry was sufficiently rapid for the Sydney City Inspector of the

Bank of New South Wales to single it out for special mention in his report on the emergence of general recovery. In September 1932 he remarked: “The textiles manufacturers show marked activity—during the

last three months they increased the number of their employees by 3,000.21 Some six months later it was noted that ‘Output has increased requiring re-employment of additional labour and good orders continue

to come to hand, particularly for the cheaper lines of textiles.’?* In Victoria, where the bulk of mills were located, the rise in activity was even more pronounced. By 1933 mills were reporting record profits and production and, as shown in Fig. 16, the industry had increased to almost 21 Half-year report dated 30 September 1932, BNSWA. 22 Ibid., 3 April 1933, BNSWA.

303

i

80 | 20 | Australia and the Great Depression

Clothing a | -—7~ ; ee Metals and machines :

Go gett et Chemicals

lf VvSo ! 40 Paper

esesceccseescss*#* - -— ~ yi : f So NNé74 ae Textiles

1926-7 1928-9 1930-1 1932-3 1934-5 1936-7

Fig. 16: TRENDS IN IMPORT REPLACEMENT IN SELECTED AUSTRALIAN MANUFACTURING

INDUSTRIES, 1926-7 to 1936-7

(domestic production as per cent of market supply) Source: As for Fig. 4.

two-thirds its share of the domestic market. Thereafter, however, the rate

of expansion in the industry slowed appreciably as BPT rates were lowered, quantitative restrictions on sterling exchange were eased and domestic wage rates rose. Although its share of the market was approxi-

mately retained in the years 1934-7, the rate of growth in textiles fell below manufacturing as a whole. Despite the early prominence of the textiles industry, only in a limited sense can it be regarded as a leading industry in the recovery process; and even then for a brief period only. It was a comparatively small component of the manufacturing sector. In 1931-2 it contributed only 6 per cent to

manufacturing product and absorbed g per cent of the employed work force. Its productivity per worker was fairly low and its linkages with other industries weak. The large initial lift in output and employment did not, therefore, set off a major chain reaction throughout the economy.

But the industry’s importance should not be too heavily discounted. Between 1930-1 and 1932-3 it accounted for more than one-quarter of the

rise in manufacturing employment, and although wage rates were low this provided a small but nonetheless significant lift in demand. During 1932-3 the centre of industrial expansion shifted decisively to the metals group of industries, and this position was maintained for the 394

Economics of Recovery

Index Index: 1931-2 = [00 250 Metals and machinery 200 |

, Total manufacturing Chemicals

, Textiles

150

Clothing

Printing and paper

| Ratio scale

gp

100

1Q31-2 1936-7

Fig. 17: TRENDS IN MANUFACTURING OUTPUT IN SELECTED AUSTRALIAN INDUSTRIES, 1931-2 to 1936-7

Note: Value of output figures from Production Bulletins have been adjusted for price changes by deflating with individually-constructed prices indexes for each of the industry groups, The indexes have been compiled from the Melbourne wholesale price index (new series) and the wage rate index published in Labour Reports, the two components weighted in relation to the materials/wages proportion as shown in Production Bulletins. As no wholesale price index exists for the printing and paper group, the all items index has been used in this case. The clothing component of the ‘C’ series retail price index has been used for both the clothing and textiles groups. Sources: Production Bulletins and Labour Reports.

remainder of the decade. While textiles were on the periphery, the metals

industries were at the heart of Australian manufacturing. In the early 1930s they employed about one-quarter of the industrial work force and contributed a similar proportion to manufacturing product. But more important than sheer size was the strength and diversity of their linkages with the rest of the economy—backwards to mining, transportation, the labour market and other manufacturing industries; forward to residential

building, commercial and public works construction, transportation again, and the rural industries. The group itself was also an important market for and supplier of its own products. Thus, the rapidity of its growth after 1931-2, as shown in Table 37 and Fig. 17, was the foundation on which general recovery was built. 305

Australia and the Great Depression As with textiles, growth sprang from the creation of a captive market during the depression; but, unlike textiles, the increase in scale and eficiency which accompanied expansion allowed local industry to improve permanently its competitive ability vts-d-vis imports. In the three worst years of contraction the share of the admittedly greatly diminished domestic market supplied from local sources rose from under 60 to over

80 per cent; more significant is the fact that this enlarged share was eroded only slightly during the remainder of the decade. The greatest advance was in the iron and steel industry. Even in the 1920s imports of pig iron and steel ingots were negligible, but large quantities of plate and

sheet, bars and rods, tinplate and some structural steel were obtained overseas. In the 1930s imports of all standard lines except tinplate were largely eliminated. Steel capacity and production expanded rapidly as the Port Kembla works of Australian Iron and Steel Ltd were completed and additions made at Newcastle. Output exceeded the peak of the 1920s

as early as 1934, and by the end of the decade it reached 1.2m tons annually or nearly three times the 1929 figure. A major stimulant was the fall in domestic steel prices made possible by the combination of economies of scale, cheap raw materials, low transport costs and the fall in wage rates. Despite the increase in import shelter, prices fell as much as 40 per cent and in most cases more rapidly than the general level of wholesale

prices. It was during the 1930s that Australian steel earned the reputation of being amongst the cheapest in the world which made occasional exports possible.

Although on a less spectacular scale, there were also important advances in engineering and the metal-using industries generally. The centre of engineering activity shifted in the 1930s from railway workshops to the

manufacture of a fairly wide range of industrial machinery and equipment and domestic appliances. Part of this was linked with primary production, so that there was a rise in the manufacture of mining and excavating equipment, wire netting, machinery for sugar refining and, to a lesser extent, agricultural implements; but equally important were developments in the manufacture of such capital goods as steam boilers and engines, steel containers, industrial refrigeration and light machine tools. Although the sale of motor vehicles was comparatively slow to regain the level of the late 1920s, there was a substantial increase in the Australian component of many vehicles and a fall in the proportion of fully imported models. Relatively more vehicles were assembled locally than in the 1920s, and there was a concomitant rise in the production of accessories such as axles, springs, spark plugs, shock absorbers and gears. Pronounced also

was the rise in output of galvanized sheet, and this provided the steel industry with one of its main stimulants. Large quantities of sheet were imported in the 1920s to supply Australia’s high consumption of galvanized iron, but with the expansion in capacity of the flat products division in the mid-1930s most of this was supplied from Port Kembla. The demand for galvanized sheet recovered comparatively quickly as a 23 H. Hughes, The Australian Iron and Steel Industry, pp. 129-90.

306

a Economics of Recovery

Table 38: GRoss INVESTMENT IN SELECTED MANUFACTURING

INDUSTRIES, 1931-2 to 1936-7 (AL’000)

: 1931-2 | 1932-3 | 1933-4 | 1934-5 | 1935-6 | 1936-7

1. Iron, steel and

engineering 1,875 1,598 1,071 1,870 1,787 | 2,347

2. Vehicles — 920 751 1,040 1,076 1,836 3. Light metals 4 234 536 508 1,078 1,257 4. Chemicals 469 384 424 | 926 808 889 5. Textiles 190 847 660 670 1,032 1,139

6. Clothing — — 346 705 445 691

7. Paper and printing — 380 720 689 1,524 1,104 Notes, by line: General. Calculated from changes in book valuation of plant, machinery and buildings as recorded in Production Bulletins with the addition of separately calculated

depreciation rates noted below. Following N. G. Butlin, Australian Domestic Product, pp. 333-4, the value of buildings only in the ‘land and buildings’ component is taken as 70 per cent. 1. Includes smelting and converting iron and steel, engineering, extracting and refining other metals, electrical installations and ships. Depreciation rates: 9 per cent plant and machinery, 2.5 per cent buildings.

2. Includes railway workshops, motor vehicles and cycles, motor accessories and

aeroplanes. Depreciation: 8 and 1.5 per cent. 3. Includes agricultural implements, galvanizing, wireworking, light machines, wireless apparatus and miscellaneous metal processing. Depreciation: 8 and 2 per cent. 4. Group III in total. Depreciation: 8 and 2 per cent. 5. Group VI in total. Depreciation: 8.5 and 2.5 per cent. 6. Group VIII in total. Depreciation: 8 and 1 per cent. 4. Group XII less government printing. Depreciation: 8 and 1.5 per cent. Source: Production Bulletins, Nos 25-33. Depreciation rates are broadly based on ‘depreciation allowed during year’ published from 1936-7 onwards with some upward revision when these are obviously too low.

result of the construction of new factories and the shift to cheaper forms of housing.

The weight of the metals group of industries in the growth of manufacturing during recovery is further indicated in Table 38 which shows gross investment at current prices in selected industries. The metals group

is divided into its three main components: iron, steel and heavy engineering; vehicles (which includes railway workshops) ; and the lighter metal-processing industries. The figures should be treated with some caution, for they are based on changes in book valuation with the addition of approximate depreciation rates. Using such figures it is impossible to 397

Australia and the Great Depression guard against asset revaluation, and in the early 1990s it is clear that in some instances assets were written down to accord with current market values. There may also have been some upward adjustment of values around 1936-7. Nevertheless, the estimates are a reasonable guide to the

relative importance of the main components of industrial growth and conform fairly well with the scale of import replacement (Fig. 16) and the rate of increase in employment and output (Table 37 and Fig. 17). The surprisingly high figures for iron, steel and engineering in 1931-3 deserve a word of explanation. Although the source of the apparent abnormality cannot be precisely identified, it was probably due to expen-

diture on the completion of the Port Kembla steel works. When the depression struck, Australian Iron and Steel Ltd was in the midst of the transfer of its works from Lithgow to Port Kembla so that further expenditure was necessary during the early 1930s to bring the plant to a satisfactory operational level. If this is the explanation, the high investment of these years can be classified as autonomous. The growth of heavy industry was also partly responsible for a gradual transformation in the structure of the chemicals industry during the 1930s.

Prior to the depression the industry was closely linked to the primary sector, supplying it with chemical fertilizers, explosives and processing for

it animal and vegetable materials. Although still important, these links were loosened in the 1930s and the bulk of the growth in the industry occurred in industrial chemicals, mineral oils, paints and pharmaceuticals. The size of the chemical fertilizers division declined, in terms of value, from one-quarter on the eve of the depression to 12 per cent in 1936-7, while in the same period the share of industrial chemicals, etc., rose from one-third to one-half. The highest rate of growth occurred in mineral oils, industrial gases, alkalis and pharmaceuticals. The formation of the Aus-

tralian division of Imperial Chemical Industries in 1928 added to the range of locally-manufactured products, as did the establishment of Drug Houses of Australia in 1930. However, the extent of growth and change in the industry at this time should not be exaggerated. The scale of import replacement was moderate compared with metals and textiles, and the rate of increase in employment was comparatively slow during the early preliminary phase of the dramatic transformation in the chemicals industry during World War II and in the 1950s. Further, as the industry’s growth was closely connected to heavy manufacturing, its contribution to recovery was similarly derived. The contribution to recovery of the other two industries singled out for special consideration—paper and printing, and clothing—was also relatively modest. In both cases the rate of increase in output and employment was below the average for total manufacturing. As with textiles,

clothing responded comparatively early and rapidly to the additional import shelter, but in this case there was little scope for further import replacement. In 1936-7 employment in the clothing trades was virtually the same as it had been in 1928-9. Replacement was greater in paper and printing, but in view of the very slow recovery in demand for these products this was more apparent than real. The rate of expansion in both 308

Economics of Recovery employment and output in this group was well below the average for manufacturing as a’ whole.

Rapid growth of heavy manufacturing industry was, then, the main source of recovery in Australia and import replacement reinforced by improvements in efficiency its means. But the healthy rise in productivity in iron and steel and some engineering industries was far removed from

the common experience of the 1930s. Indeed, for a period of major industrial expansion the decade is exceptional for its absence of productivity gains, and for most of the recovery period output per worker tended to decline. By application of M. Keating’s manufacturing employment series to N. G. Butlin’s estimates of industrial production, it appears that labour productivity in manufacturing remained below the pre-depression level throughout the 1930s.24 While Butlin’s estimates may underestimate the rise in manufacturing product during recovery, revision of the series is unlikely to alter the overall impression. Much the same story is told in the Edwards and Drane ‘corrected’ index of technical progress.?5 All this is hardly surprising. As the basis of expansion was a massive increase in protection, conditions were anything but conducive to a rise in efficiency. New investment was low until the end of the decade and the existing capital stock was made to bear the brunt of the rise in output. From a short-run view, however, the important point is that manufacturing was

able to absorb a large proportion of the unemployed, many of them entering the factory for the first time. If industrial efficiency was impaired, it mattered little to those who were able to find regular work for the first time in years.

It has been claimed frequently that recovery from the depression of the 1930s in Australia was exceptionally slow and still incomplete at the outbreak of World War II, a view which is based on the persistence of high unemployment (in post-1945 terms), the undoubted difficulties of most primary industries throughout the decade, and the weakness of government policy. It is difficult to challenge such a view because of the inherent obstacles to intertemporal and international comparison of recovery rates. It is probable, however, that this view is unduly weighted by the unemployment problem. The rate of increase in national income and product

was more rapid in all countries where the depression had been serious than the rate of reduction of unemployment, and by the end of the 1930s the question of absorbing the remaining unemployed was as much a social

as an economic problem. It has been shown earlier in this chapter that the rate of recovery in Australia, measured in terms of national product, was broadly in line with the international average. But argument about whether recovery was slow or otherwise is less profitable than a recognition of the circumstances in which it was achieved. The contraction had seen the removal of two of the major props of Australian living standards: 24M. Keating, ‘Australian Work Force’, Table 4, and N. G. Butlin, Australian Domestic Product, Table 269. 25 H. R. Edwards and N. T. Drane, ‘Notes on Technical Change in Australian Manu-

facturing’, Economic Record, June 1964. | 309

Australia and the Great Depression a high rate of capital inflow and reasonably profitable export prices. Yet

per capita real income was restored by 1936-7 without either of these playing a significant part in the process, and without the assistance of a constructive economic policy. In view of this, Australia’s recovery performance was highly respectable. It was achieved by a major shift in the structure of the economy towards the manufacturing sector, so that the 1930s, far from being a period of stagnation, form an important phase in the country’s economic development.

310

XIII

Recovery Policy: The Canons of Sound Finance With the defeat of the Scullin ministry on a minor issue in the House of

Representatives at the end of November 1931 and the success of the United Australia Party led by J. A. Lyons at the general elections which followed, the history of economic policy loses much of its drama and eventfulness. ‘To be sure, a difficult period still lay ahead. National income

and total employment were still falling and there was as yet no clear indication that recovery was imminent; but the crises in external and internal finance, which had forced a succession of hastily-devised expedients, had been negotiated. With its command of both Houses of Parliament and the support of the Commonwealth Bank Board, the Lyons Government was able to plan its economic policy with a reasonable

assurance that it could be implemented. Furthermore, the economic principles of the new government were those of trusted orthodoxy—there

was to be unqualified adherence to the canons of sound finance. This simplifies our discussion of policy formation in the recovery period which will be considered in detail to 1935. The basis of the Lyons Government’s economic policy was strict observance of the principles of the premiers’ plan. It believed that prosperity

in Australia could only be restored after world prices of primary commodities had risen sufficiently to allow the reappearance of profit in export production, and there was nothing Australia could do to hasten a rise in these prices. She could, however, assist the primary producer by further reducing costs of production. If all forms of costs were reduced in primary and secondary industry (and also those of government) , a comparatively modest increase in export prices would be sufficient to reestablish profitable production and lead to the rapid reabsorption of the unemployed; whereas if costs were not further reduced, recovery would be seriously delayed.

The government conceded that an expansionary monetary policy would have a sanguine short-run effect on employment, but it believed that such a policy would seriously damage the health of the economy in the long-run. Apart from the possibility of monetary expansion leading 311

Australia and the Great Depression to uncontrolled inflation, it was thought that a substantial rise in internal costs would follow, which would destroy the chance of permanent recovery based on the restoration of profitable export production. Devaluation was regarded as a palliative only, for after a time this would also lead to an increase in costs. The Lyons Government therefore rejected the desirability of an extensive public works programme. Sustenance and some relief works would, it was conceded, have to be provided until a rise in export prices stimulated revival, but the cost of this relief was to be kept as low as possible.

The inadequacy of this policy requires no elaboration: but its two basic assumptions deserve brief comment. First, the Lyons Government, like the Bruce-Page Government in the 1920s, failed to appreciate the significance of the structural shift in the economy towards the manufacturing sector. The future growth of the economy, no less than in the past,

was considered to depend on expansion of primary production; and it was assumed that manufacturing growth would continue to be derived from the rural sector. It follows from this that manufacturing was not thought to have an autonomous unemployment-absorbing capacity in the absence of a rise in export prices; there was no recognition of the scope for extensive import replacement. The ‘artificial’ stimulation of manufacturing by monetary expansion was adjudged, therefore, to be detrimental to the long-term interests of the economy. Second, the Lyons Government shared the Commonwealth Bank’s view that credit expansion could only be accomplished by currency inflation. Despite the existence of chronic surplus capacity of men and machines, proposals for a large increase in public works expenditure were rejected on the grounds that inflation would be the inevitable result. Before turning to the details of national recovery policy, it is as well to record the final demise of the Scullin ministry. The Defeat of the Scullin Government and the General Elections of 1931 In the latter part of November 1931, the break-away Beasley group in

federal Parliament let it be known in the lobbies that it intended to launch a damning attack on the government. Since its formation at the beginning of 1931, this group had supported the government on issues which divided the two major parties, support which enabled the Scullin ministry to retain control of the House. It was generally expected, therefore, that if the attack contained sufficient substance to form the basis of an election campaign, the Opposition would co-operate with the Beasley group to defeat the ministry. If he had hoped for a clear-cut election-winning issue, Lyons must have been sadly disappointed. When Beasley moved the formal motion for the adjournment of the House on the 25th to discuss ‘the method adopted by the Government in the selection of men to be employed in connection

with the recent federal grant for the relief of unemployment’, it was evident that this was not a matter of national significance. And when the 1CPD, Vol. 132, p. 1888. 312

Recovery Policy: The Canons of Sound Finance debate ended some three hours later, the shadowy substance of the allegations made it even plainer that a solid case could not be built on them. The charges related to the administration in the Sydney area of a Commonwealth grant of £250,000 to provide work for the unemployed for a week or two just prior to Christmas. A special grant for ‘Christmas relief’ had been provided by the Commonwealth since 1929, and the securing of work at award wages under this grant was highly prized. As the money was to be spent specifically on Commonwealth works and property, it was under the control of the Commonwealth Works Director in each state. As soon as details of how the money was to be spent were announced, those in charge of the particular works were to open lists for the registration of those seeking work. In most cases, the number of registrants greatly exceeded the number of jobs available, and selection of those to be employed was a very difficult task. Beasley alleged that in the

selection of men to be employed at the Cockatoo Island Dockyard, Theodore had used his influence to have supporters of the Federal Labor

Party employed in preference to supporters of the Lang Labor Party. Beasley claimed that the Federal Treasurer had collected lists of men willing to support the Federal Party at the next elections if they were provided with work at the dockyard, and had directed the manager of the dockyard to give preference to those on his list. ‘The manager was allegedly told that the list consisted of ex-employees of the dockyard as this seemed to be the fairest way of deciding those to be hired.? Although Beasley declared that he would prove the truth of his charges

conclusively, he found it difficult even to present a prima facte case. Several statements were read (without the source being declared), but there was no evidence submitted which could be verified. Theodore categorically denied all the charges. It was true that he had interviewed the manager of the dockyard, but only in an official capacity to approve the list of works on which the relief grant was to be spent.? Scullin strongly supported Theodore in an impassioned speech, and refused Beasley’s request for the appointment of an all-party committee of inquiry.*

It was a measure of the Opposition’s confidence in their electoral prospects that they supported this flimsy motion despite its obvious paucity of substance. Lyons and Latham evidently reasoned that they could not afford to bypass an opportunity to defeat the government however miserable the particular issue, for economic recovery might restore some of the lost fortunes of the Labor Party. The ministry was, therefore, subjected to an ignominious defeat by 37 votes to 32, and Parliament was dissolved forthwith. Of the 46 Labor members elected in October 1929, only 36 remained loyal—s had defected to non-Labor ranks and 5 formed the Labor Party of New South Wales. The issue on which the ministry was defeated was probably merely a pretext, and very little was heard of it during the ensuing election campaign. The attack seems to have been launched because there were signs 2Ibid., pp. 1888-92. - 8Ibid., pp. 1892-4. 4Ibid., pp. 1898-1g00.

313

Australia and the Great Depression that the Scullin-Theodore group was making headway in Sydney against the Lang group. In particular, the announcement earlier in November of the amalgamation of the Government Savings Bank with the Commonwealth Savings Bank, which resulted in the ‘freeing’ of a large proportion of the deposits of the former, was regarded as a triumph for Theodore who had played a prominent part in the negotiations. Scullin retaliated by choosing 19 December as polling day, which left barely three weeks for the campaign and insufficient time for Lang to resign the premiership of New South Wales to lead his forces at the elections. The campaign was too short for the election issues to be clearly defined. The Prime Minister went to the electorate on his record, and promised,

if returned, to reintroduce the Central Reserve Bank Bill and to make

fundamental changes in the monetary system.® He also promised to main-

tain the existing rate of exchange and to refrain from drastic tariff reform. But Scullin’s speech and the entire Labor campaign savoured strongly of defeatism. He knew that a political miracle would be needed to return the government, and the real battle was between the ScullinTheodore and Lang forces within the labour movement. The state party nominated candidates in most New South Wales electorates and also a few in other states, and campaigned on the Lang plan. So bitter was the feud that the Federal Party directed its preferences in some electorates to the United Austrakta Party rather than to the Lang candidate. The policy of the United Australia Party—a hastily-contrived alliance of the old National Party and the five ex-Labor supporters—was even less clearly defined. Lyons made no promises in his policy speech; all he would guarantee was that the nation would receive sound, sensible government under an administration led by himself, and that the return of confidence

which had followed the adoption of the premiers’ plan would be nurtured.? The first objective of a UAP government would be to balance its budget and reduce taxation as government revenue improved. The basis of his policy was sound administration of the financial system and avoidance of any tinkering with money and banking: We cannot by any action in Australia alter the prices which our exporters have to accept. Nor can we alter the general monetary system of the leading countries of the world. Experiments in the political manipulation of credit or currency in Australia are obviously very dangerous to our permanent interests.®

Lyons held out no immediate hope for the re-absorption of the unemployed. All he would say was that the gradual strengthening of confidence would result is a revival of enterprise and an expansion in the demand for

labour, but he argued that full recovery would depend on a substantial

and lasting rise in export prices. Although the Country Party urged drastic lowering of the tariff, Lyons avoided as far as possible reference to tariff reform as there was widespread fear of the effect on employment of a downward revision. 5 Round Table, March 1932, pp. 407-20. 6 Scullin’s policy speech, Sydney Morning Herald, 2 December 1931. 7Ibid., 3 December 1931. 8 Ibid.

314

Recovery Policy: The Canons of Sound Finance Although the Labor Party expected defeat, not in its darkest moments did it anticipate the annihilation of 19 December. ‘Two-thirds of Scullin’s

supporters were defeated, which left Federal Labor with 14 seats in the

new Parliament. Six ministers lost their seats—Theodore, Brennan, Chifley, Parker Maloney, McNeill, and Cunningham. The debacle was worst in New South Wales. Of the original 46 members of the Scullin party, 20 had been from that state; but in the new Parliament there would only be three N.S.W. Federal Labor members. The strength of the state Labor Party had, however, only been reduced from five to four, and Lang acclaimed this as a victory for his policy. The extent of the defeat in New South Wales was due in large part to the conflict between the two Labor parties and their refusal in many cases to exchange preferences. Only in Queensland did Labor gain ground. Here the depression had been less severe because of the buoyancy of the sugar industry and the relatively high level of public works expenditure. Also the non-Labor government was extremely unpopular. The change in party strength was as follows: Seats held in the House of Representatives at the end of the igth and at the commencement of the 13th Parliaments

End of Commencement of

Federal Labor 35514 State Labor 4

12th Parliament 13th Parliament

Country II 16I I Independent (non-Labor)

United Australia 23 40

Among the prominent additions to the ranks of the UAP were the former Prime Minister, S. M. Bruce; the former Australian Liaison Officer at the Cabinet Office in London, Major R. G. Casey; and the former Labor and Nationalist Premier of New South Wales, W. A. Holman.

In the formation of the new Cabinet, Lyons was unable to come to satisfactory terms with the Country Party. He offered them three positions, but they insisted that their leader should hold the portfolio of Trade and Customs. As the UAP could command an absolute majority in the House,

it rejected this demand and excluded the Country Party from Cabinet. Lyons was fortunate in that he could call on several experienced Cabinet members of the Bruce-Page Government, but there was no outstanding contender for the Treasurership. He therefore accepted the Treasury himself and appointed S. M. Bruce as Assistant Minister in charge of detailed

Treasury work. The other main portfolios were taken by Latham, Attorney-General, External Affairs and Industry; H. S. Gullett, Trade and

Defence. |

Customs; J. E. Fenton, Postmaster-General; and Sir George Pearce, The new Prime Minister had travelled a great distance in his two years at Canberra. After more than twenty years in the labour movement, he suddenly found himself leader of his life-long political opponents. Despite

his undoubtedly conservative inclination it must have been a difficult translation, and the ease with which it was accomplished emphasizes not 315

Australia and the Great Depression only Lyons’ bland form of socialism but also his qualities of moderation, diplomacy and pragmatism. Lyons was not a leader in the dynamic and

ruthless mould, but rather the tactful and restrained chairman of the committee. This type of leadership was exactly suited to the management

of a Cabinet containing so many experienced men; a more dominating personality would have found it difficult to hold together the uneasy coalition which comprised the UAP. Lyons was an unexceptionable Treasurer. He possessed what in polite circles was described as a ‘good grasp’ of financial matters and an ability to present a difficult argument cogently, but he lacked ‘Theodore’s incisive clarity. His thinking on financial and economic matters was barren of originality and there is almost nothing one can point to in the Lyons period in the form of new or improved organization for the administration of the economy.®

Holding the two most important portfolios, Lyons was unable to attend to detailed Treasury work, which fell to a succession of Assistant Treasurers. Bruce was the first of these, but after leading the Australian delegation to the Ottawa Conference, he became Minister without Portfolio resident in London to negotiate the refunding of Australia’s overseas debt. Bruce was succeeded as Assistant Minister by Walter Massy Greene in October 1932, who in turn was succeeded by Casey in September 1933. Of the three Assistant Ministers, Massy Greene appears to have most clearly understood the requirements of Treasury work and played an important part in broadening the scope of the Loan Council. Casey was energetic but uninspired in his several Treasury capacities. ‘Balanced Budgets and More Employment’ The first act of the new government was to summon a premiers’ con-

ference in January 1932 to consider the progress that had been made under the premiers’ plan and to outline its policy. Lyons stressed that his government stood firmly behind the plan and was determined to see that it was faithfully carried out.!° The plan, he said, had two principal aims: first, the balancing of all budgets within a reasonably short time so that confidence in public credit would be restored; second, reduction of costs of production to such an extent that enterprise would revive, which would

lead to absorption of the unemployed. He declared that ‘these aims— balanced budgets and more employment—remain and must remain the

dominant aims in sound finance’.1! Although a great deal had already been accomplished under the plan, Lyons insisted that much more had still to be done. The guiding principle in reducing salaries, wages, pensions and interest had been ‘equality of sacrifice’, but there were glaring instances of failure to apply this principle. Awards registered with the Commonwealth Court, public service salaries, pensions and interest rates had all been reduced on an ‘equitable’ 8 An exception was the appointment of the Commonwealth Grants Commission in

1:

10 Record of the Conference of Commonwealth and State Ministers’, Melbourne, 28 January to 5 February 1932, CPP, 1932-4, Vol. IV, p. 508.

11 Ibid.

316

Recovery Policy: The Canons of Sound Finance basis, but awards under the control of some state tribunals had not been

reduced. Thus, in New South Wales the Commonwealth basic wage amounted to £3.10s 8d per week, whereas the comparable state award was £4.25 6d per week. Lyons claimed that workers under New South Wales awards far from sharing in the common sacrifice had benefited by a rise in their real wages by some 8 per cent.12 Some of the other states— principally Queensland and Western Australia—had also failed to follow the decision of the Commonwealth Court, but the discrepancy was greatest

in the case of New South Wales.13 Lyons urged, therefore, that the premiers use their influence to have the wage-fixing authorities impose the 10 per cent reduction in real wages in those states where this had not already been done, for he argued that high wages were one of the main causes of high unemployment. The argument in favour of reductions in costs of production in general, and in wage rates in particular, followed principally from Australia’s dependence on export production. ‘Only by full restoration of our exporting industries’, Lyons claimed, ‘can internal purchasing power be re-established, leading to the employment of the workless and to renewed progress.’!4 In framing its policy, he pointed out, Australia had to accept two essential facts: (1) Australia leans heavily on great exporting industries the well-being of which rises and falls with the prices obtained for their products overseas.

(2) Nothing we can do in Australia can raise the overseas prices of these

export commodities.15 |

This argument appeared logical and convincing at the time, but it ignored the important fact that an even greater cause of unemployment than the fall in export prices was the virtual cessation of public works expenditure. The government had made it clear that it would not sanction borrowing on the scale of the 1920s, which had been an important cause of the crisis. But upwards of 100,000 men had been employed on public works in the ’twenties, and many more were indirectly dependent on this expenditure. The government had no clear idea of the possible employment alternatives. It simply assumed that all would be well following a rise in export prices; it ignored the fact that the return of rural prosperity would not be sufficient per se even to restore the unsatisfactory employment conditions of the ’twenties. Therefore, the importance of assisting 12 Ibid., p. 511.

13 Lyons made no reference to the fact that even among those who were employed, very few were in receipt of full award wages. Such was the demand for work during the worst depression years that even militant trade unionists were prepared to accept below-award wages, and usually some form of rationing as well. The story is frequently told of employment in some large concerns that a condition of hiring was that workers would return to the company some of their wages. So as to comply with the terms of awards, pay envelopes contained full award wages, but on receipt the worker was obliged to hand back as much as 7s 6d or 10s. Smaller companies, however, did not bother about complying with the letter of the law. 14 CPP, 1932-4, Vol. IV, p. 510. 15 Ibid.

317

Australia and the Great Depression the expansion of the manufacturing industries to provide an alternative means of employment was overlooked. The discussion at this conference was of a preliminary nature, and the

formulation of a detailed unemployment policy was deferred until the following April when a further conference was to be held. To assist the conference in its deliberations, the Commonwealth appointed a committee of businessmen and economists, under the chairmanship of the prominent Adelaide businessman, Sir Wallace Bruce, to prepare a preliminary report on the unemployment problem.1® The committee accepted unreservedly the fundamentals of the Prime

Minister’s policy statement to the January premiers’ conference. It endorsed the view that the only way of permanently eliminating mass unemployment was to bring about a better relationship between costs and prices, and it also agreed that as export prices were beyond Australia’s control, the main burden of adjustment must fall on domestic costs. But the committee realized that the fall in commodity prices had been so great that it would be impossible to re-establish equilibrium between costs and prices solely by reducing the former. It therefore recommended that the Commonwealth Bank be authorized to manage the rate of exchange so that the whole burden of adjustment would not fall on costs (see p. 360). In effect, it suggested that the Bank raise the Anglo-Australian rate of exchange so that the strains and tensions associated with bridging the cost-price gap would be minimized. This, the committee claimed, would be a safe ‘middle course’ between deflation and inflation. Little attention was paid to the short-term unemployment problem, despite the fact that Lyons had asked the committee to also deal with the question of how best Governments can assist immediately in alleviating the present situation. . . . [It should] advise generally whether a useful initial impetus towards a general revival would be given by any form of Government action, either directly or in co-operation with private enterprise. . . . [The committee should] consider such questions as what are the latent financial resources which might be utilized for the immediate provision of avenues of employment; whether it is preferable to use them by the means of short- or long-term borrowings; in what proportion such borrowing should

be allocated to the meeting of budgetary deficits, and to the creation of avenues of employment.17

The committee's reply to these questions was generally negative: it saw no prospect of governments assisting effectively the reabsorption of the unemployed until costs of production had been reduced. It advised that public works expenditure should not be embarked upon until it had been shown that such works were capable of earning service charges, and it did not think that there were many works in this category while current 16 The other members of the committee were G. §. Colman (a prominent Melbourne businessman) , R. C. Mills (Professor of Economics in the University of Sydney) , Giblin, Melville and Shann. 17 Lyons to all state premiers (telegram) , 12 March 1932, in ‘Peport of the Committee Appointed by the Government .. . to make a Preliminary Survey of the Economic Problem’ (unprinted parliamentary papers, NLA), p. g.

318

Recovery Policy: The Canons of Sound Finance wage rates persisted.!8 Even for such works, finance would be difficult, as

it was not yet possible to float long-term loans on the local market, and Treasury bill finance was rapidly reaching its limit. In two years the internal floating debt had grown to £42m, and to increase this much more was considered to be highly inadvisable. Further issues of ‘Treasury

bills, it was considered, should be confined to the financing of budget deficits and to a strictly limited amount of self-financing public works

expenditure. The committee concluded, therefore, that there were no ‘latent’ financial resources available which the governments could tap.!9

The committee’s one constructive suggestion for immediate unemployment relief was that each state should appoint an Employment Council for the detailed planning of sustenance and relief expenditure,

with a Commonwealth Council to co-ordinate the work of State Councils. Unemployment relief was administered by the states in a wide variety of ways. Prior to the depression, relief work was very largely in the hands of charitable organizations subsidized by state governments, but after 1929

these organizations were no longer able to cope with the task, and the bulk of the work was thrust onto government departments. As there was no administrative machinery to control the various types of relief, it was split up between several departments with the result that co-ordination and planning were seriously impaired. In New South Wales, for example, relief work was shared between the Department of Labour and Industry, which administered the distribution of food relief in the metropolitan area; the Chief Secretary’s and the Police Departments, which administered food relief in the country districts; the Department of Public Works and shire and municipal councils, which controlled emergency relief works expenditure; and such charitable organizations as continued their ad hoc relief work. The function of the Employment Council would be to supervise and co-ordinate these various activities in an unofficial way, and to eliminate where possible works projects for relief purposes. The committee suggested that reproductive works would best be found in rural areas. Works such as clearing, ring-barking, burning, the destruction of noxious weeds, and the construction of fences and dams, would lead to closer settlement, pasture improvement and an increase in rural productivity.2° This claim was undoubtedly true, but it was a reflection of the

belief prevalent in the inter-war years that the best opportunities for profitable employment lay in rural industries (despite the fact that most

of these industries were operating at below costs of production), and that urban employment tended to be dispensable and unproductive. At the April 1932 conference of premiers, the committee’s report was endorsed enthusiastically by the Commonwealth but less so by the states. The Commonwealth was prepared to accept all the committee’s recommendations, and if the support of the states was received, it was willing 18 Ibid., pp. 18-20. _ 19 Ibid., p. 21. 20 Ibid., pp. 19-20.

319

Australia and the Great Depression to negotiate for a loan of £10m for unemployment relief works expenditure.?! The states, with the exception of New South Wales and Victoria,

were willing to reafirm their determination to adhere to the premiers’ plan, but they were generally disinclined to agree with the committee that legisiation should be introduced into state parliaments for the purpose of

directing industrial tribunals to extend the 10 per cent cut which had been made in Commonwealth awards to all state awards. Most of the states realized that serious consequences could follow from the precedent

of political interference with the deliberations of the industrial tribunals.2? The states were in accord with the suggestion for the establishment

of Employment Councils, however, and welcomed the Commonwealth offer to negotiate a relief works loan of £10m. But once again the conference came to few firm decisions, and there was truth in Lang’s barb that premiers’ conferences were extremely inefhcient instruments for the formulation of national economic policy.*? ‘The most important matters —the size of the planned revenue deficits and loan expenditure for 1932-3 —were deferred for the consideration of another conference to be held in June. Budget Finance and the Premiers’ Plan, 1932-5 The main purpose of the June premiers’ conference was to decide on

the next step to be taken towards budget equilibrium. At the April conference, it had been estimated that the combined deficit for 1932-3 would probably reach £12m. This was, however, about the same as had originally been set down for 1931-2, and if budget balance was to be achieved by 1933-4, governments would have to effect further substantial econo-

mies in 1932-3. Gibson reminded the Loan Council of this fact before the premiers met at the end of June. The Bank, he said, had been called on to provide much more finance than had been anticipated in June 1931 and on 13 June 1932 he warned Lyons that ‘the bank’s ability to continue to finance [deficits] is fast approaching a point which the Board is unable to envisage without serious embarrassment, and which might easily be disastrous’. Gibson concluded that the Bank would be unable to finance deficits in excess of £6-7m for the year 1932-3.

Gibson's insistence on such a substantial reduction in the planned deficit was plainly a tactical move which was recognized easily by the premiers. ‘The continual claim by the Bank that disaster was pending was beginning to lose its impact, and the newly-elected premiers of New South Wales and Queensland—B. S. B. Stevens and W. Forgan Smith— spoke strongly of the futility of a policy which relied solely on reductions 21 Ibid.

22 Lang, of course, again demanded repudiation of external interest obligations and wholesale currency inflation as alternatives to the premiers’ plan. While not supporting the extremities of Lang’s proposals, the Acting Premier of Victoria, T. Tunnecliffe, called for the reduction of overseas interest obligations in much the same way as internal rates had been reduced. He also stated that the Victorian government would not be a party to further cuts in wage rates. Ibid., pp. 12-14, 23 Ibid, pp. 12-14.

320

Recovery Policy: The Canons of Sound Finance in costs.2# On this occasion, Treasury officers estimated that, on the basis of 1931-2 budget provisions, the combined deficit in 1932-3 would amount to £21m.% The conference then succeeded in reducing this to £10m, and,

after a lengthy meeting between Gibson and the Loan Council, compromise was reached at £gm, which became the official figure for 1932-3.

The Commonwealth decided not to participate in the allocation of the £9m despite its estimate that, if its budget provisions remained unchanged, it would have a deficit of £2.8m in 1932-3. It sensibly took the view that the states’ budgets would be under greater strain than its own

in the coming year and thus left the finance available to be divided between the states. ‘The Commonwealth had concluded the year 1931-2 with a small surplus of £1.3m, and this would be used to meet part of the deficit. The other part was to be found principally by reducing old-age and invalid pensions from 175 6d to 155 per week, and by the reduction of public service salaries and wages in accordance with the fall in the cost of living.?6 Lyons justified the reduction in pensions simply by claiming that the government could not afford the rapid growth that had taken

place in this form of expenditure. The growth in the number of pensioners had accelerated during the depression, and he was alarmed at the increasing burden on taxpayers.?7 Lyons could have made out a more compelling case by pointing out that under the premiers’ plan pensions had been reduced by 12} per cent (well short of the standard rate), and

that the real income of pensioners had risen slightly because of the greater fall in retail prices. ‘This further cut in pensions made the combined reduction 5s or 25 per cent, whereas the retail price index of food, groceries and house rents (‘B’ series) fell by 24 per cent between 1929 and 1932.78

The 1932-3 budget was deliberately framed conservatively. Lyons argued that the Hoover moratorium might not be renewed and that Australia might have to resume her war debt payments to Britain. Further, it was considered that the international financial and economic position was so uncertain that utmost caution was required. Lyons promised, how-

ever, that if prospects improved during the year, taxpayers would be afforded relief immediately.28 Some Labor members claimed that revenue estimates had been deliberately understated so that the government could

justify its reduction in pension rates.*° |

The prediction that the revenue estimates were unduly cautious proved correct. Imports and customs collections improved to such an extent in the first few months of the financial year that in November the Prime 24 ‘Conference of Commonwealth and State Ministers’, Canberra and Sydney, 28 June to 8 July 1932 (unprinted parliamentary papers, NLA) , pp. 8-13. In the Queensland state elections of June 1932, the Nationalist ministry of A. E. Moore was defeated and replaced by the Forgan Smith Labor government. 25 Ibid., Appendix A. 26 CPD, Vol. 135, pp. 86-106. 27 Ibid., pp. 103-4, 599-603.

28 Labour Report, No. 24, p. 24. 29 CPD, Vol. 135, p. 96.

30 E.g. ibid., pp. 1087-8. , 321

Australia and the Great Depression Minister considered that if the present trend continued the year would end with a surplus of £3.5m.3! In accordance with his earlier promise Lyons announced that the government would provide additional assistance to the wheat-growing industry and that taxation would be reduced where it bore most heavily. A sum of £2m was to be made available to the states for assistance to wheat-growers, and it was suggested that this sum be used to assist those farmers who were suffering the greatest hardship. Lyons believed, probably correctly, that this was a better method of

allocation than a flat production bounty, for under the bounty system those who harvested the largest crops received the greatest benefit, whereas

those most in need of assistance were those whose crops had been relatively unsuccessful.%? In addition, the government proposed granting a subsidy of 155 per ton on fertilizer used in all rural industries other than the wheat industry. ‘The other principal form of relief was also designed to assist rural industries. The government proposed to reduce by one-third

the rate of land tax, and also to empower the Hardship Board to grant relief from the payment of the tax in cases where, by reason of the low prices of primary products, the farmer could not pay his tax out of current earnings.®3 ‘The final provision of note was the raising of the exemption limit on the special tax of 10 per cent on property income. The exemption limit was raised from £200 to £250, a concession which was estimated to cost £600,000 to £700,000.34 These various forms of relief were expected to absorb the bulk of the previously-estimated 1932-3 budget surplus. Before these budget amendments received parliamentary approval, Sir Robert Gibson, with unparalleled effrontery, complained on 13 December 1932 that the Bank had not been consulted in the framing of the measures: My Board, whilst fully recognising that Budget proposals are a matter for determination by Governments, has a very special interest in budget results by

reason of the financial assistance it has provided during the last few years and the heavy strain that has thereby been imposed on the resources of the Bank. In these circumstances, the Board feels that as budget deficits have been financed by temporary accommodation from the Bank, it is not unreasonable to expect that budget surpluses should be applied in reduction of such accommodation or, alternatively, that the Board should be consulted by the Governments concerned before surplus moneys are applied to other purposes. Failure to recognise this principle, it seems to my Board, must eventually lead to controversy and an undesirable position which my Board feels should not develop.

This thinly-veiled challenge to government independence could not possibly be tolerated, even by the pro-Bank Lyons ministry. Clearly, if the Bank was granted a voice in the allocation of budget surpluses, it would be able to influence the whole of the government’s budgetary policy. Lyons, in a restrained but direct reply, pointed out that the Bank 31 ‘Financial Statement’ presented by Lyons, 10 November 1932, ibid., Vol. 136, pp. 2197-2201.

32 Ibid., Vol. 137, pp. 2696-7. 33 Ibid., p. 2693. 34 Ibid., pp. 2693-4. These various relief measures were incorporated in the Financial Relief Act of 1932.

322

Recovery Policy: The Canons of Sound Finance already had considerable influence on government policy through its supervision of the premiers’ plan. But here the Bank’s influence should end: ‘though the Commonwealth and State Governments are indebted to the Bank in a large amount, it would be dangerous for the Bank to use this indebtedness to influence the policy of the several Governments beyond seeking due fulfilment of the undertakings so given’. Lyons concluded that the surest way of rehabilitating financial conditions was to reduce taxation, and gave notice that the government intended to apply future budget surpluses to the reduction of taxation; reduction of the short-term debt would have to await the flotation of a funding loan. Gibson thought that the government had misunderstood his letter, for he could not see that granting the Bank a voice in the allocation of budget

surpluses would extend its function undesirably. In a manner unlikely to foster a spirit of co-operation, he wrote to Lyons on 20 January 1933 that his letter did not help to clarify the issues raised by the Bank. ‘There had been no attempt by the Bank, he declared, to influence the govern-

ment’s taxation policy; all it had sought was an assurance from the government that it would be consulted on the allocation of any surpluses that might occur after fiscal policy had been determined. Gibson had now, however, shifted his ground. His original letter had by implication ob-

jected to the reduction of taxation and to the granting of other relief measures in lieu of a reduction in the floating debt. But in his second letter he sought no voice in budgetary policy, only in the allocation of surpluses that might accrue. This change was probably due to the flat refusal of the government to agree to the Bank’s request, and the modified proposal was in the nature of a face-saver for Gibson. There is also evi-

dence to suggest that some of the other Board members were unhappy with the stand that had been taken, and that they may have been influential in persuading Gibson to change his position.2> But this modified proposal was also dismissed in no uncertain terms: the Government is of opinion that any acknowledgement by it of a definite right of the Board to be consulted would be a surrender by the Government of its responsibilities and might be construed as placing the Bank in a position to determine policy.

Gibson did not raise the subject again.

Despite the concessions granted in the supplementary budget of November 1932, Commonwealth revenue, mainly from customs and excise

duties, continued to improve beyond expectations for the remainder of 1932-3 with the result that the year closed with a surplus of 3.5m. The states also improved on their estimates and concluded the year with a combined deficit of £8m, or £1m less than had originally been contemplated.36 The net government deficit therefore amounted to £4.5m instead of the planned deficit of £gm.

The unexpected rise in imports during 1932-3, for which the Commonwealth had made no allowance in its revenue estimates, was due to 35 The tone of the letter as it was finally sent was much milder than Gibson’s original draft. 36 Finance Bulletin, No. on, Tables 8 and 44. 323

Australia and the Great Depression the recovery in manufacturing production and employment. The government mistakenly believed that the recovery in manufacturing industries had been derived from a revival in confidence following the adoption of the premiers’ plan, and by the restoration of government credit. It decided, therefore, that further recovery could best be prompted by further reducing taxation and this policy became the basis of planning for the 1933-4 budget.

In view of the continued depression in export prices, the rate of recovery in the budgetary position was not expected to continue. If substantial reductions in taxation were to be made, as Lyons had repeatedly promised, it was therefore unlikely that budget balance could be achieved in 1933-4 despite the surplus achieved the previous year. Moreover, while the Commonwealth’s finances had responded comparatively quickly to the initial recovery, improvement in state finance had been much slower, and it would be impossible for the states to balance their budgets in the

coming year. Budget equilibrium would not, therefore, be achieved in 1933-4, as had been the objective of the premiers’ plan. In submitting a request for revenue finance amounting to £gm, Massy Greene in a letter to Gibson on 8 June 1933 pointed out that the plan had been based on the assumption that budgets would receive substantial assistance from a rise in export prices. This assumed rise had not eventuated, which was the main reason why governments had not been able to adhere to the plan. The Bank reluctantly conceded that full budget equilibrium could not be achieved as had been planned, but it was disturbed by the fact that the Loan Council was asking for the same amount of finance as the Bank had agreed to provide in 1932-3. ‘My Board is of opinion’, Riddle reported in Gibson’s absence through serious illness, ‘that any material departure from progressive reductions in deficits would have a disturbing effect on

the financial position, and a definitely detrimental psychological effect both here and overseas.’ ‘The most that the Bank could consider providing, he declared, would be £7m.

If the Bank insisted on a reduction in planned deficits by £2m, however, the Commonwealth would need to modify substantially its plans for the reduction of taxation. ‘As you are aware’, Lyons reminded Riddle on 10 June, ‘I am pledged up to the hilt to give definite relief in taxation this year, and the Government feels that it cannot and must not repudiate this pledge.’ Lyons predicted that if the Bank forced the governments to reduce their deficits by £2m, the states would insist that the Commonwealth hand over to them its budget surpluses of the previous two years which would ‘destroy our capacity to deal with taxation in the way we desire’. Furthermore, he felt very strongly that if the Bank insists on setting the States a task which I regard as quite impossible in existing circumstances the efforts of my Government will be thwarted in such a way that no one will benefit whilst much harm may be done.

The states, Lyons concluded, might ‘throw in the towel’ if this further task was imposed on them.

In the face of this strong pressure, the Bank capitulated. The Loan 324

Recovery Policy: The Canons of Sound Finance Council accepted a token reduction of £0.5m in the amount of its planned deficits, and it also agreed to apply £1.5m from the proceeds of the next internal loan for the reduction of outstanding Treasury bills. ‘The Commonwealth could, therefore, proceed with its taxation policy. Accordingly, the Commonwealth’s budget for 1933-4 removed a large proportion of the emergency taxation provisions imposed during 1930-1, and partly restored the reductions that had been made in public service salaries and wages, and in old-age and war pensions. ‘The total concessions were estimated to cost £9m in a full year, and £6.7m in 1933-4; and the estimated deficit for 1933-4 was expected to be £1.2m. These various relief measures are summarized as follows:37 Cost to the budget

in full year (£m) Reductions in Taxation

Reduction of company rate from 1s 4.8d to 1s in£ 0.6

Adjustment of life assurance company tax 0.7 Reduction of ‘Personal Exertion’ rate by 15% 0.2 Reduction of special tax on property income from 10 to 5% 1.1

instead of by 334% 0.4

Reduction of land tax to 50% of the former rate

Total reductions in direct tax 3.0

Adjustment of customs duties in accordance with Tariff

Board’s recommendation on exchange?® 0.3

Reduction of primage from 10 to 4% on most goods 0.45 Reduction of customs and excise on beer, spirits _ 0.35 Reductions of customs and excise on sundry items 0.65

Reduction of sales tax from 6 to 5% 1.35 Extension of sales tax exemptions (mainly on necessary items

and those of primary production) 1.2

_ Evacuation from the field of entertainment taxation 0.1

| Total reductions in direct and indirect taxation 7.4 Increases in Expenditure

Increases in old-age pensions from 155 to 175 6d per week®? 0.6 Restoration of war pensions to within 10% of pre-reduction rates 0.25 Restoration of public service salaries and wages by 24 percentage points of original reduction, and restoration of government’s

-Assistance superannuation contribution 0.65 to fresh fruit exporters O.1 Total cost to budget in full year 9.0 37 CPD, Vol. 141, pp. 3201-23. Most of these measures were incorporated in the Financial Relief Act of 1933. ~ 38 See p. 369.

39 As well as partially restoring pensions, the government proposed to alter the pension rate in accordance with changes in the price of food and groceries, with the qualification that the minimum pension would be 17s 6d and the maximum pension £1 per week.

325

Australia and the Great Depression The government intended that the small deficit of £1.2m would be financed from surpluses of £4.8m accumulated during the previous two years.

It did not, however, become necessary to use these accumulated surpluses during 1933-4, for once again the estimates of customs, excise and

sales tax were exceeded as recovery proceeded more rapidly than the government estimated, and the year ended with a small surplus of £1.3m. The states also improved their position on the estimated result: instead of a combined deficit of £8.5m, they managed with £7m. Negotiations with the Commonwealth Bank for revenue finance for 1934-5 assumed much the same pattern as in previous years. The Loan Council sought £6.75m, the Bank offered £5.qgm.4° On this occasion, as the difference between these amounts was so small, the Council did not bother to raise an issue on the matter and it agreed to the latter figure. But there was one important noteworthy difference in the terms of the Bank’s undertaking to provide finance. As internal monetary conditions had improved to a point which made it no longer necessary to finance deficits by means of Treasury bills, the Bank felt that deficits should be financed entirely by borrowing in the open market. The Bank would, of course, finance deficits by the issue of bills between funding operations. After some hesitation, the Council agreed to this proposal and thence-

forth bills were used only to finance lags in revenue and the periods between the flotation of funding loans. The £5.9m was, therefore, the maximum amount of ‘lag’ revenue which the Bank agreed to provide in 1934-5.

Further concessions were contained in the Commonwealth’s 1934-5 budget, but on this occasion these were of minor consequence. The most important alterations were further exemptions from sales tax and primage duties, further partial restoration of public service salaries and wages, an additional special grant to the states, and renewal of the special fertilizer subsidy which had been paid previously in 1932-3. The total cost of these concessions amounted to £1.gm.*! By 1935, therefore, many of the emergency impositions of the crisis period had been removed, and although public service salaries and pensions were still 15 and 124 per cent respectively below pre-depression rates, the real income of these groups had been approximately restored because of the fall in retail prices. A number of the emergency impositions were not removed completely, however, with the result that the proportion of national product absorbed by government remained above its pre-depression level. In 1927-8, the 20 per cent of national product was absorbed by government revenue. In 1930-1, the proportion rose sharply to 26 per cent, and then fell to 24 per cent in 1934-5. By 1936-7, when recovery was virtually complete, the proportion

was still 22 per cent.* 40 Lyons to Sir Claude Reading [Chairman of the Commonwealth Bank Board in succession to Gibson who died on 1 January 1934], 19 June 1934, and Reading to

Lyons, 20 June 1934. 41 CPD, Vol. 144, pp. 594-612.

42 Calculated from N. G. Butlin, Australian Domestic Product, Table 1, and Finance Bulletins.

326

Recovery Policy: The Canons of Sound Finance Unlike the Commonwealth, the states were unable to afford the luxury

of substantial taxation concessions in the period under review. The gradual improvement in states’ revenue was devoted primarily to the

ee

reduction of deficits. The main concession which the states were able to grant was the abolition or substantial reduction of the special unemployment tax which most governments had imposed. There were also some marginal reductions in the rates of income taxation, but these were of minor consequence. Table 39: COMMONWEALTH AND STATE GOVERNMENT

BUDGET RESULTS, 1931-2 to 1934-5

(£m)

1931-2 1932-3 1933-4 1934-5

Commonwealth +1.3 +3.5 +1.3 +0.7 New South Wales —14.2 — 3.7 — 3.4 —2.4 Victoria —1.6 —0.8 —o.8 —O.1 Queensland —2.1 —1.6 —I1.1 —0.6 South Australia —I.1 — 1.0 —o0.8 — Western Australia —1.5 — 0.9 —o.8 —0.2 Tasmania —0.3 —O.1 —O.1 —O.!

Total — 19.5 —4.6 —5.7 —2.7 Sources: Finance Bulletins, No. 28, Tables 8 and 44.

By 1934-5, budget ‘equilibrium’ had for all intents and purposes been achieved. The combined deficit amounted to a mere £2.7m, while sinking fund contributions exceeded £7m. The progressive reductions that were made in the deficits are summarized in Table 39. Thus, the primary objective of the premiers’ plan was achieved in four years—only one year more

than the minimum period which was thought possible in 193148 and without the benefit of a significant increase in export prices. This was accomplished not through any extraordinary diligence of governments in affecting economies (although this did play a part), but because of the

internally generated recovery in the economy in the absence of a substantial increase in export prices. In each of the four years between 1931-2 and 1934-5, the Commonwealth’s revenue was substantially in excess of its budget estimates. Part of this underestimation was due to its deliberately cautious policy; but a

more important reason was the government’s failure to appreciate the nature of the recovery process. It assumed that recovery depended upon 43 It is important to remember that the premiers’ plan was not specifically a three-year plan. It was hoped that budget equilibrium could be achieved in three years, but it

was not definitely laid down that this was to be accomplished. The plan merely stipulated that progressive reductions were to be made in deficits, and it was conceded that this might take three, four or five years. 327

Australia and the Great Depression a revival in export prices, and as these continued at their depressing low levels during the early recovery phase, no significant improvement in the

budgetary position was anticipated. The failure to appreciate that recovery was initiated by a diversion of demand from imports to domestic manufactures did not, however, lead to major distortion in taxation and general budgetary policy. Although the details of taxation revision left something to be desired, it was still of some assistance in lifting national expenditure. On the other hand, the government’s misconceptions about the recovery process resulted in a heavy restraint being imposed on the level of unemployment relief and public works expenditure.

328

XIV

Domestic Recovery Policy: Public Works, Relief and Wages Nothing illustrates more clearly the inadequacy of Australian recovery policy than the attempt to formulate means for the relief of unemployment in the years between 1932 and 1935. The conviction that government was unable to affect directly the pace of recovery was only part of the problem. Important also was the continued multiple conflict between the Loan Council, the Commonwealth Bank and the private banks, a conflict which had been inherited from the Scullin period. The result was that at the highest level the centre of the stage was occupied by a debate on the means rather than the end of financing relief works, and the urgent task of reducing unemployment was pushed into the background. Finance of Public Works The approach of the Lyons Government to the question of capital expenditure for unemployment relief was fully in line with its entrenched conservative economic philosophy. As a counterpart of its emphasis on the need to reduce costs, it argued that an essential ingredient in recovery policy was the lowering of public claims on the credit resources of the country so that these could be released for use by the private sector. At the premiers’ conference of June-July 1932, when the question of placing a new loan on the market was raised for the first time, this doctrine won

widespread acceptance, and only two of the new premiers—B. S. B. Stevens and Forgan Smith—were prepared to question it in any way. Bertram Stevens, who replaced Lang and was warmly welcomed by the conference, agreed that costs needed to be reduced, but he rejected the idea that it was sufficient to lower costs and then sit tight and wait for something to turn up such as a rise in export prices. He argued that a rise

in the internal price level was also necessary, and suggested that this should be accomplished by devaluation (accompanied by a pari passu fall

in the tariff) and a judicious expansion in public works expenditure.! The second new-blood, Forgan Smith of Queensland, forthrightly told the 1 ‘Conference of Commonwealth and State Ministers’, Canberra and Sydney, 28 June to 8 July 1932 (unprinted parliamentary paper, NLA), pp. 7-11.

329

Australia and the Great Depression conference that the premiers’ plan was simply an economy plan which did nothing to restore employment, and he strongly challenged the statement that ‘any attempt made by governments to obtain funds from the banks inevitably reduces the ability of those institutions to assist industry generally’.2, He pointed to the fact, consistently ignored by the Lyons ministry, that banks were actively discouraging fixed deposits and were embarrassed by the lack of demand for advances, and were placing large quantities of excess cash in government securities. Forgan Smith urged that a vigorous public works policy be adopted for the absorption of the unemployed. The pleas of Stevens and Forgan Smith were not entirely ignored. The conference decided to issue a national recovery loan of £15m, to be floated

over a period of three years, of which the 1932-3 instalment was to be i7m. The proceeds were to be used exclusively for the relief of unemployment with expenditure under the control of State Employment Councils which would ensure, as far as possible, that men were employed on permanent and reproductive works.’ This special loan was in addition to the normal loan programme for the year which had been set at £6m and which would be financed by the issue of Treasury bills. Thus, the total planned programme of £13m for the forthcoming year compares with an actual programme of about £6m in 1931-2. In agreeing to provide finance for the ordinary loan programme in 1932-3, Gibson stated that the Bank could no longer sanction continued increases in the floating debt. He insisted that the rapid growth in the size of the debt was a danger to the stability of the currency, and he therefore expected that a substantial reduction would soon be made. He stated: ... the Board is of the opinion that, favourable opportunity offering, a public loan of the greatest amount obtainable should be floated, the proceeds of which will be used for the purpose of relieving the Bank’s position in respect

of the total finance now undertaken, such relief to be effected by the cancellation of Treasury Bills.

A favourable opportunity soon presented itself. During the second half of 1932, the prices of all 4 per cent issues strengthened appreciably. In June the yield on the 1938 series was still above 5 per cent; by August it

had fallen to 41 per cent, and by September to 4} per cent. By midOctober, the yield had fallen to slightly below 4 per cent, and for the first time in three years an internal cash loan became a feasible propostion. To consider the issue of a loan, which would be the first of the national

recovery loans, a premiers’ conference was called towards the end of October.* Gibson and the representatives of the trading banks were also invited to attend, for it was hoped that the banks would agree to underwrite the loan. Sir Robert wasted no time in telling the conference that a funding loan should take precedence over a national recovery loan, as 2Ibid., p. 12. 3 Ibid., p. 27. 4 ‘Conference of Commonwealth and State Ministers, October 1932’, Melbourne (unprinted parliamentary paper, NLA). 330

Domestic Recovery Policy: Public Works, Relief and Wages the former would release funds for the stimulation of private enterprise. Some premiers and bankers were, however, not convinced. Davidson was the most outspoken of the bankers against Gibson’s proposal. He told Lyons that a funding loan would have a decidedly deflationary effect. Furthermore, as most of the banks were holding their idle funds in bills,

he pointed out that the earning capacity of the banks would fall as a result of a reduction in the supply of bills, which would, in turn, prevent the banks from making further reductions in interest rates. Gibson was, therefore, obliged to compromise. He suggested instead a large loan of £20m at 4 per cent, two-fifths to be used for funding and the remainder for unemployment relief works. This, however, was unacceptable to the conference for two main reasons. First, it was considered that

such a large loan should not be attempted while the strength of the market was untested. Second, the rate of interest proposed was too high. Although the market yield was still only a fraction below 4 per cent, the Commonwealth had hoped that the banks would co-operate with it in its policy of expediting the lowering of interest rates and agree to underwrite a loan of £8m at 3} per cent. In an attempt to sabotage Gibson’s funding plans, Davidson offered, on behalf of the ‘Wales’ and the Commercial Banking Company of Sydney, to subscribe £3m to a 3} per cent loan on condition that the whole of the loan would be used for unemployment relief. Davidson failed, however, to swing the Melbourne banks to his viewpoint and at a subsequent meeting of the banks he agreed to accept the compromise proposal of a loan for £8m at 33 per cent, one-half of which was to be devoted to funding and the other half to unemployment relief. On the recommendation of the premiers’ conference, the Loan Council agreed to these terms, and the issue was made early in November. After remaining open for almost a month, the loan closed with subscriptions amounting to a mere £2.986m with 63 per cent left in the hands

of the underwriters. The government and the banks each blamed the other for the loan’s failure. The government thought that the Commonwealth Bank had ruined any chance of a successful flotation by selling government securities while the loan was still open. The Bank denied the charge, and there is no evidence to support the government’s claim. On the other hand, the banks blamed the government for insisting on terms which were not sufficiently attractive, and this was probably the main

reason for the failure. But it is also true that the banks did nothing to assist the loan apart from accepting the underwriting liability, and there is little doubt that the Commonwealth Bank and the ‘Wales’ were gratified by the miserable performance, although for different reasons. ‘This

episode is another distressing example of the petty wrangling which bedevilled the making of important policy decisions during the depression, and which prevented the exercise of decisive leadership in policy formation. The failure of the November loan upset the government’s unemploy-

ment relief programme and the Commonwealth Bank’s hopes of a substantial reduction in the floating debt in the immediate future. It seemed doubtful whether the 1932-3 loan programme could be successfully 33}

Australia and the Great Depression completed, for the Loan Council could not offer a rate of interest in excess of 33 per cent. To have done so would have been interpreted as a sign of

weakness.

When the Loan Council considered the problem of financing the works programme for the remainder of the year in February 1933, it suggested

to the Bank that the most practicable way of dealing with the matter would be to issue Treasury bills for the required amount. Massy Greene suggested to Gibson on 2 February that an approach to the market for a long-dated loan would be unwise and, although a short-dated issue might be successful at around 3} per cent, the Council preferred a Treasury bill issue as the safest course. As the Council must have anticipated, Gibson vigorously rejected the proposal to discount more bills, and suggested instead a comprehensive plan for the solution of the problem. The plan comprised three main parts. First, to meet the immediate requirements of public works, the Bank would provide £2m in exchange for funded stock on the same terms as the November loan on condition that the Council agree to raise a new loan as soon as the Bank thought the time appropriate. Second, the Bank suggested that the proceeds of any such loan be applied in equal proportion to public works and funding. Third, it proposed that for a period of twelve months the Council agree to bind itself to the previous two conditions ‘so as to provide an opportunity of carrying into effect a definite policy for a period which would . . . prove the practicability of such [a] policy’. Clearly, the Loan Council could not hand over to the Bank the absolute discretion in the matter of loan raising implied in these conditions, and it had no hesitation in rejecting Sir Robert’s proposals. However, it considered that an issue of funded stock in lieu of Treasury bills would prove a useful innovation pending the flotation of a new loan. It therefore proposed that the Bank make available £4m (instead of £2m) by this method, the sum necessary to finance public works expenditure which had already been committed for the remainder of the financial year. On the question of the Bank’s request for the allocation of the proceeds of future loan issues equally between public works and funding, the Council was convinced that works should have priority and would not agree to any such allocation. It did, however, sympathize with the Bank’s desire to reduce the floating debt, and therefore suggested the following compromise: during the forthcoming financial year (1933-4) the first call on any money raised in the market would be for works up to £12m; should it be thought practicable to raise any sums in excess of this amount, such excess would be used for funding purposes. With two minor qualifications,® the Bank agreed to these proposals. In doing so, however, it urged that the Loan Council 5 The Bank agreed to provide £4m by means of the issue of funded stock, but the second £2m would only be provided on condition that it was redeemed as a first charge on the next loan. The second qualification was that the priority limit was reduced to £10m. However, the Bank considered that the Council's request for a priority of £12m remained intact—comprising the £10m market priority now agreed to plus the unconditional £2m to be provided by means of the issue of funded stock. 332

Domestic Recovery Policy: Public Works, Relief and Wages co-operate with the Bank to place upon the market for the purpose of funding such Loan or Loans in excess of the amount provided in the priority as may be recommended by the Bank up to goth June 1934.

The Council was willing to co-operate in the manner suggested so long as the Bank did not recommend a rate of flotation which might damage loan prospects for 1934-5. The Loan Council’s fears that a second loan operation in 1932-3 would be impracticable proved unfounded. Because of the continuous fall in the

bond yield in the first half of 1933, the Council decided in May to approach the market for a loan of £3m which would not be underwritten by the banks. To ensure the success of the loan, attractive terms were offered: 33 per cent at par for nine years—an advantage for the loan subscribed over the market of one-quarter of one per cent. The loan attracted subscriptions of £8.46m, all of which was accepted.

In agreeing to limit its 1933-4 loan programme to £12m, the Loan Council foolishly failed to calculate accurately its full requirements for the year. When the negotiations were taking place in February 1933, it assumed that its needs for 1933-4 would be the same as for 1932-3, but this assumption ignored the fact that the 1932-3 programme—which included

the unemployment relief works initiated under the three-year national recovery loan plan—did not fully commence until the financial year was well advanced. The Council found, therefore, when detailed estimates were prepared for 1933-4, that £17.3m would be required simply to main-

tain the existing rate of expenditure. As there were some funds in hand because of the oversubscribed May loan, it would only be necessary to raise about £15.7m during the forthcoming year, but if this sum could not be obtained it would be necessary to discontinue works already in progress. The Council therefore asked the Bank to agree to raise the public works priority limit to this figure. The Bank deferred a decision until October, when Gibson replied that his Board was prepared to meet the Council’s request in part. The Bank was, however, only willing to alter the terms of the February agreement on condition that a loan of £15m be floated in the near future, of which about 60 per cent would be used for funding. The remainder would be available for public works which, together with the proceeds of the May loan, would give the Council slightly less than £15m for this purpose. ‘The

Council considered it inadvisable to approach the market for such a large amount, which would possibly reverse the downward trend in interest rates and suggest that governments were beginning another spendthrift phase. It therefore suggested a loan of £10m, of which £4m would be used for funding. The Bank agreed to the reduced size of the loan, but insisted on £5m for funding. On this basis a successful loan was floated in November 1933 with an interest rate of 34 per cent at gg. The demands of the Commonwealth Bank for a substantial reduction in the floating debt by means of public funding operations precipitated a major controversy in financial circles. Since the first partial funding loan

, 333

of November 1932, Davidson had conducted a strenuous campaign

Australia and the Great Depression against the Bank’s policy, and during 1933 he succeeded in attracting widespread support. One of his most active supporters was the Premier of New South Wales, who carried the campaign with some measure of success into the Loan Council. Davidson argued that funding was deflationary and would hinder recovery. As Treasury bills were the equivalent of cash reserves, the effect of substituting long-term stock for bills was to reduce the cash reserves of the banks; moreover, subscriptions to loans

for the purpose of funding would reduce the ability of banks to expand advances to assist the revival of enterprise. In addition, funding would place an additional burden on government finance, for the bond rate was appreciably above the bill rate. This point was given more prominence than its importance warranted because Davidson correctly judged that it would weigh heavily with the Loan Council. The third reason for opposing funding was the most important from the trading banks’ point of view. With the rise in the reserve ratio and the fall in the demand for advances, the trading banks found that Treasury bills were a profitable and convenient way in which to hold idle balances. The bills were as good as cash because of the Commonwealth Bank’s rediscount offer, and they earned a rate of interest which was about the same as the average time deposit rate. Davidson shrewdly argued, therefore, that if bills were withdrawn in large amounts, the earning capacity of the banks would fall and

their ability to reduce deposit and advance rates further would be seriously impaired. The second and third arguments against funding were directed to the areas where governments were most sensitive politically. Governments were loath to pursue any course which would increase the cost of the public debt or halt the decline in the rate of interest. Thus, Davidson’s campaign received much more political support than would otherwise have been the case. The Commonwealth Bank insisted on a reduction in the size of the floating debt because it feared that the trading banks’ large holding of bills inflated reserve ratios to a dangerous degree. Unless the volume of bills and hence bank liquidity were reduced, it thought that in the later Stages of recovery when profitable forms of investment became more

plentiful the banks would expand advances too rapidly, and that this

would lead to inflation outside the Bank’s control. As soon as investment

opportunities emerged which were more attractive than Treasury bills, the banks would, it reasoned, rediscount their bills to replenish their cash resources. In the absence of an open bill market, however, Treasury bills were not liquid assets for the Commonwealth Bank, and hence if an undesirable expansion of bank credit did threaten, the Bank would have no Satisfactory way of replenishing its own cash reserves. Thus, in addition to funding part of the floating debt, it urged the establishment of an open market in Treasury bills which, it said, would give it greater control

over monetary policy. |

6 E.g. Davidson to Haymen, 2 November 1933, BNSWA; ‘The Deflationary Effects of Funding Treasury Bills’, Bank of New South Wales Circular, Vol. V, No. 4, August 1935;

334

Domestic Recovery Policy: Public Works, Relief and Wages The Bank denied that the funding operations of 1932-3 were deflationary, for it pointed out that the quantity of bills retired approximately equalled new bills issued to finance revenue deficits. Moreover, it claimed that even if the total volume of bills had been reduced under the prevailing conditions of relatively low demand for accommodation, the banks’ willingness to expand advances would not have been impaired. Prior to 1935, this claim was probably justified. In addition, it was argued that the cheap money conditions of 1933-4 presented an ideal opportunity for funding; if the Loan Council delayed, money could not be raised on such favourable terms. The points raised by Davidson against funding— the increased cost to governments and the inability of the banks to afford further interest rate reductions—were correctly dismissed as being irrelevant to the main issues. The controversy was restricted, however, to the effect of funding on the technical banking position, and did not embrace the more important question of the effect of the general loan policy on national recovery. Had

the controversy been extended in this way, the opponents of funding would have found a more substantial argument with which to confront the Commonwealth Bank. The effect of funding on banking ratios was unimportant compared with the effect on the supply of money available for unemployment relief. There were still 480,000 unemployed in 1933, of which about 70,000 may have been employed on a full-time basis under

the relief works programme.’ It is difficult to understand today how a policy of so-called ‘prudent finance’ could be preferred to a vigorous public works policy for the relief of mass distress, but it should be emphasized that the government and the banks alike believed that there was a definite limit to the amount of assistance that could be given, and that this limit was determined by the supply of savings. Any attempt to exceed this limit, it was believed, would result in uncontrollable inflation. This does not, however, exonerate the Loan Council for failing to insist that public works take precedence over funding, at least until unemployment

had been reduced to the pre-depression norm. Clearly, there was no danger to the stability of the currency until the economy approached full productive capacity. Partly because of the death of Sir Robert Gibson in January 1934, and partly because of increased Loan Council resistance, the Commonwealth

Bank during 1934 modified its demand for a large proportion of cash loans to be devoted to funding. The two large loans floated in 1934 raised £27m, of which only £6m (or 23 per cent) was used to retire Treasury bills. This enabled the Council to increase its planned expenditure on public works from £15m in 1933 to £23m in 1934.8 An even smaller proportion of the 1935 programme was used for funding: only 7 The unemployment figure is that of the 1933 Census. The figure of the number employed on relief works is a guess based on the unemployment relief works expenditure of about £12m per annum and an average basic wage of £175 per year. 8 The planned loan programmes were usually slightly larger than the public loan raisings because the latter were supplemented by over-the-counter sales of bonds. These sales usually raised £1m-£2m annually. 335

Australia and the Great Depression £1.7m (g per cent) of the £20m raised. Details of the seven internal cash loans raised in the period 1932-5 are shown in Table 4o. Of the £76m raised in the four years, £17m was used for funding. If this latter sum had been used instead for public works expenditure, it could have given employment to about 30,000 over the period. Table 40: INTERNAL CASH LOANS RAISED, 1932-5

Date of | Amount] Rate of | Issue} Maturity | Yield to Purposes Total public

(per cent) £sd (£m)

prospectus] (£m) | interest |price| date | investor subscriptions

Nov. 1932 8.0 | 33 100 1942 | 3 15 0 | Works: £m 2.986

| | , Funding: £4m

| ||Fo| | a| !||:||

May 1933 5.0 33 | 100 | 1942 3 15 0 | Works: £5m 8.46 Nov. 1933} 10.0 34 | 99 | 1943 3 12 g | Works: £5m 10.316

| | | | Funding: £5m June 1934, | 3} | 988 61948 | 3 7 8 £3.4m | Works: £8.6m 12.235 | |12.0| Funding:

i

Nov. 08 15.0 | 3 : 994 1948 | 3 05 | Works: £12.25m 15.046

| | | | | | Funding: £2.75m

June 035! 12.5 | 3% | gg3i 1949 | 3 8 5 | Works: £9.7m 12.509

|| || || || Funding: £1.7m Deficits: £1m ae | Nov. 1035 | 75 | 33 99%} 1949 | 3.15 6 | Works: £6.5m | 7.8 | | Deficits: £1m |

Note: Excess subscriptions were usually allotted between works and funding on the basis of the original allocation. Source: Compiled from Commonwealth Treasury records and AIBR, 1934-5.

The fall in the proportion of loan proceeds devoted to funding led the Commonwealth Bank, in June 1934, to modify the terms on which it was prepared to rediscount Treasury bills. In the absence of a substantial reduction in the volume of bills, the Bank argued that it would have to safeguard its position by other means. It advised the trading banks, there-

fore, as follows: (a) its guarantee to repay bills at maturity would be withdrawn for all bills issued after 30 June 1934; (b) the understanding given by the Bank to the trading banks to rediscount bills at a fixed rate would be withdrawn after 30 June 1934; and (c) in respect of bills issued after 30 June 1934, the Bank would continue to rediscount at a rate to be quoted upon application from time to time. It was hoped that these changes would help the Bank check any sudden increase in the demand for cash which might cause embarrassment. It was stressed that those changes did not impair the liquidity of the bills, and their attractiveness from the point of view of the trading banks was not reduced. In the event, 336

Domestic Recovery Policy: Public Works, Relief and Wages there was no substantial increase in the demand for cash in lieu of bills prior to the end of 1935, and the Bank did not need to invoke its new tool of control.

The Bank was still of the opinion, however, that the floating debt should be reduced well below the 1934 figure of £50m, but it recognized

that there now appeared to be no prospect of winning Loan Council approval for this to be accomplished by means of public funding. It suggested in October 1934, therefore, that the Council agree to a private funding operation of £5m. Private funding simply involved a paper substitution of funded stock for bills. The Bank proposed that stock with a currency of five years bearing interest at 3 per cent be issued in place of Treasury bills that would be retired. It claimed that private funding was

not deflationary, for there would be no loss of deposits and thus no reason for the banks to restrict advances. This was in part true, but the Bank overlooked the fact that the substitution of funded stock for bills would reduce the banks’ holdings of liquid assets and hence the willingness of banks to create deposits would tend to be less than otherwise would be the case.® ‘The Loan Council rejected the Bank’s suggestion and

referred the whole question to a committee of Treasury officers. The committee reported in May 1935 that public funding on a large scale was undesirable in the present circumstances, but that the present volume of bills of about £50m should not be allowed to increase. However, it thought that private funding was a feasible proposition and that the matter should

be taken up with the Bank. Despite this recommendation and another long letter from Reading on the desirability of private funding, the Loan Council at its meeting in May 1935 deferred indefinitely the question of both public and private funding; and with the reversal of the downward trend in interest rates during 1935, nothing further was attempted in the period under review.

Despite the funding of Treasury bills to the extent of £17m in the period 1932-5, government finance as a whole had a neutral effect on the volume of bills outstanding. New bills issued to finance deficits approximately equalled bills retired by funding, and hence the volume of bills fluctuated within narrow limits around £50m. There was not, therefore, any deflationary impact flowing from monetary action as a result of funding. More important was the fact that funding reduced unemployment relief expenditure below what it would otherwise have been and thus to some extent slowed the rate of recovery. Unemployment Relief Policy

The Employment Councils, appointed in 1932 to recommend works projects for the relief of unemployment, were instructed to consider only projects of a so-called reproductive or self-liquidating character. Works

which provided the greatest amount of employment for the money § This is assuming that bills in the hands of the trading banks were retired, and not only those held by the Commonwealth Bank. This is a reasonable assumption, for the Bank was particularly anxious to reduce the bills of the trading banks as these constituted the main danger to currency stability.

! 337

Australia and the Great Depression expended were to be given preference. Works which required the expenditure of large sums on materials were to be discouraged, and the purchase of expensive machinery was forbidden. A reproductive work was defined as one capable of earning the current long-term rate of interest plus the

statutory sinking fund contribution. The government insisted on confining its loan expenditure to such works because it believed that the use of rigid market criteria was the only way to guard against a repetition of the ‘excessive’ borrowing of the 1920s. To ensure that Employment Councils used the Commonwealth relief funds according to the rules the government erected an elaborate system of checks to examine works before they received final approval. At the premiers’ conference of April 1932, it was decided to spend £g3m by means of Treasury bill finance as a first step in the national recovery programme

pending the issue of a long-term loan. The first step in allocating expenditure under this scheme was the collection by the Employment Councils of proposed works submitted by local and municipal councils. After these had been thoroughly examined, the Employment Councils sent their re-

commendations for approval to the respective State Treasurers, to the Commonwealth Treasurer, and to the Commonwealth Bank. If the recommendations were endorsed by each of these three authorities, the project could then commence. This cumbersome system of control led to long delays in the commencement of works. The Employment Councils and state governments were frequently irritated by objections raised by

the Bank and the length of time it took to give approval. The Bank objected mainly on the grounds that works were not sufficiently reproductive and that they involved the purchase of machinery. As a result of the delays little money was spent under the scheme before the end of 1932, and even at the end of 1934 some money remained unspent.!°

One of the Employment Councils’ main difficulties was to find genuinely reproductive works in the sense defined. Many works would clearly add to national wealth in the long-run, but there were few that could earn interest and sinking fund within a year or so in the depressed conditions of 1932. Reafforestation, for example, was an ideal avenue of unemployment relief which would contribute substantially to national product in about 20 years but would earn little before then. Fortunately, a liberal definition was adopted in this case and reafforestation became one of the main forms of unemployment relief; but in other cases the definition was applied more rigidly. For example, the South Australian Council recommended that £12,000 be spent for the erection of a new chemistry building at the University of Adelaide, but the Commonwealth Bank decided that such expenditure would not be sufficiently reproductive and the recommendation was not endorsed. There was also an embargo on loans to private enterprise although an exception was made in the case of mining companies. Thus, a sum of £15,000 was made available

to assist the development of the Wallaroo and Moonta mining field in

South Australia.

10 For procedural details, second reading speech of Lyons on the Loan (Unemployment Relief) Bills, Nos 1 and 2, CPD, Vol. 134, pp. 401-5, 1281-2.

338

Domestic Recovery Policy: Public Works, Relief and Wages It soon became evident that if the reproductive criterion was applied rigidly, only a small proportion of available funds would be used. The criterion was, therefore, applied less flexibly as time passed and funds became more readily available. By 1935 the government was prepared to sanction expenditure on such projects as developmental roads and railways, and the construction of dams, hospitals and public buildings; and it also relaxed its insistence that projects have a high labour/materials ratio. The works undertaken in the period 1932-5 can be classified under three main headings: water supply and sewerage, road construction and rural development. Water supply and sewerage was the most reproductive of the three and hence received preferential treatment. Sewerage in par-

ticular was suited to unemployment relief, for little skill was required and it began to pay for itself as soon as pipe lines were connected. In all the capital cities sewerage services were extended rapidly in this period, although not, of course, as rapidly as in the 1920s. Water services were also extended rapidly. In Western Australia, for example, a large amount was spent on extending water supply to the Coolgardie-Kalgoorlie goldfields, and there was also much work done on improving catchment areas. Road construction also absorbed large quantities of unskilled labour, but it was only indirectly reproductive. Road gangs were easily organized and no great quantity of equipment was required. The improvement of the Hume Highway between Sydney and Goulburn is a well-known example of unemployment relief road works. Rural development was the form of relief which governments would have preferred to use most extensively, not because it was productive in the short-run but because in the long-run it was expected to assist the expansion of export industries. But detailed consideration of proposals for rural development raised many practical difiiculties. Most unemployed were unsuited to direct land settlement, and the few projects of this character ended in failure. It also proved difficult to come to satisfactory terms with farmers and graziers for the employment of men on properties, even when the Employment Councils offered most attractive terms, for few were in a position to spend any additional money on development projects. Some men were, however, employed on scrub cutting, fencing, ring-barking and dam construction, but mostly on public rather than private land. More successful were projects for the improvement of facilities for the handling of rural production. In New South Wales and Queensland, for instance, large sums were spent on the construction of grain-handling facilities and these made a permanent contribution to marketing efhciency. Also, as previously mentioned, reafforestation was a popular and useful form of relief. The main criticism of unemployment relief policy was, however, that the scale of expenditure was completely inadequate. As a rough estimate, it would have required about £50m to provide full-time work for one-half the unemployed at award wages in 1932-3, yet only £5.8m was actually

spent from loan fund. Thus, work under the relief programme was 11 Farmers and graziers were offered loans at low rates of interest and on easy repayment terms so that they could offer work to the unemployed.

339

Australia and the Great Depression severely rationed during the early recovery years, and men were usually employed for only one or two days a week, barely sufficient to provide them with sustenance. However, the payment of award wages was scrupulously adhered to, for the labour movement zealously guarded the principle of the basic wage. Up to 1935, therefore, most of the unemployed remained on the dole, and the government failed in its plan to transfer the majority to relief works. Government expenditure on unemployment relief during depression and recovery is shown in Table 41. Broadly, relief expenditure from revenue fund was in the form of sustenance payments, and expenditure from loan fund in the form of relief works. As the rate of sustenance payments was appreciably less than the wage rate on relief works, it can be seen that there were still many more receiving the dole in the mid-1930s than were employed on relief works. Moreover, despite the increase in unemployment relief expenditure and the decline in the

level of unemployment, expenditure was still grossly inadequate in 1935-6, when relief expenditure provided full-time employment for about 55,000 of the 300,000 unemployed. Table 41: GOVERNMENT EXPENDITURE ON UNEMPLOYMENT RELIEF,

nn nn 1929-30 to 1936-7 (£m)

| From Revenue Fund From Loan Fund Total

1929-3011.8 | 5.30.3 0.412.1 5-7 1930-1 1931-2 | 11.7 14.3 0.2 | 17.5 14.5 1932-3 5.8 1933-4 9.4 8.0 17.4 |

1934-5 8.7 7-7 16.4 1935-6 9.5 9.6 19.1 1936-7 | 9-5 4.7 | 14.2 Note: The figures are approximate. Money was spent on unemployment relief by a number of state departments, and not all was recorded as such. Moreover, expenditure from loan fund includes loans to local authorities. The bulk of this was for unemployment relief, but the figures under this heading might be overstated. However, expenditure from revenue fund is probably understated, so that the aggregate figure is probably reasonably accurate. Source: Finance Bulletins Nos 21-8.

Wheat Industry Assistance, 1932-5

Wheat-growing was the one major industry which did not participate in the recovery of 1932-5. During these four years, the price of wheat averaged 2s 104d per bushel, and the average cost of production, according

to the Royal Commission appointed in 1934, was about 3s per bushel.!? 12‘Royal Commission on the Wheat, Flour and Bread Industries’, First Report, CPP, 1932-4, Vol. IV, pp. 2445-51. This estimate of production costs made no allowance for a return on capital invested.

340

Domestic Recovery Policy: Public Works, Relief and Wages More than one-half the number of wheat farmers were unable to recover

current costs in these years. This was in no small measure due to the debacle of 1930-1 when farmers incurred a great deal of additional debt to

assist the ‘grow more wheat’ campaign, only to find that the guarantee that had been promised was not paid and average returns plumeted to 25 44d per bushel. On the other hand, the wool-growing industry was in a comparatively better position. Although graziers had passed through an exceptionally difficult period and many were in straitened circumstances, the majority were in less financial difficulty than were farmers. In the four years 1932-5, wool prices averaged 12d per lb compared with the low

of 8.4d per lb in the 1930-1 season. The Wool Inquiry Committee, appointed by the Lyons Government in 1932, estimated that average costs (excluding capital charges) were 93d per Ib. If allowance was made for a return of 5 per cent on capital invested, the committee estimated that average costs would rise to 14d per 1b.!3 Thus, although wool growing was

certainly not profitable in this period, the average grazier, unlike his farming colleague, was at least able to show some return on capital. Most wheat-growers could not, therefore, continue production without direct cash assistance from the government. But even more important than cash assistance was the need for some scaling-down of farmers’ debts;

this was the only permanent solution to their difficulties in the absence of a substantial rise in world wheat prices, and a Commonwealth-wide scheme of debt adjustment was initiated in 1935. These two forms of assistance will be considered separately.

(a) Direct Assistance As already mentioned, the Lyons Government considered that the provision of assistance to wheat-growers by means of a flat bounty (the method adopted by the Scullin ministry in 1931), did not give the maximum assistance to the industry as it was paid irrespective of need. In 1932, therefore, it abandoned the bounty system, and instead paid £2m out of revenue to be distributed by the states to those farmers in greatest need.!4 But this was an interim arrangement only pending the adoption of a specific policy. The government could not, it

felt, continue to pay large sums out of revenue, fulfil its taxationreduction commitments and also move towards a balanced budget. Some scheme involving self-finance needed to be devised. The Labor government had objected to the imposition of a flour tax to help finance wheat industry assistance because it thought that such a

tax would raise the price of bread. This supposition was, however, of doubtful validity, for with the onset of depression competition within the bread industry intensified and price-cutting was common. In the Sydney area in 1932-3, for example, the official bread price for a 2lb loaf was 13 ‘Report by the Wool Inquiry Committee’, October 1932, CPP, 1932-4, Vol. IV, pp. -800.

14 ren state adopted its own method of distribution, but generally the New South Wales system of distribution based on acreage was used. Payments were madc on a sliding scale: for areas sown of less than 250 acres, 4s per acre, declining to 3s per acre for areas of 550 acres or more. This system was found to be the one which coincided with the actual needs of the farmer most closely. 341

Australia and the Great Depression 53d but price-cutting reduced the average to 4.99d.15 Thus, the Lyons Government had little hesitation in imposing a flour tax to help finance its wheat industry assistance policy. For the 1933-4 season, it proposed to make available £3m to the industry and also to impose a tax on flour sald for local consumption of £4.55 per ton for the period December 1933 to May 1934.16 The tax was expected to yield barely £1m so that general revenue was required to bear the major burden. The assistance was distributed in the same way as in 1932-3: by the states on an acreage basis, with special consideration given to those in exceptionally necessitous circumstances.

The Royal Commission on the wheat industry endorsed the principle of the flour tax in its first report released in July 1934. It emphasized, how-

ever, that the plight of the industry was so critical that assistance should be raised to £4m a year, and recommended that instead of a flat rate tax a variable tax should be imposed which would vary inversely with the price of wheat.17 In a supplement to its first report it explained its homeconsumption price scheme. At a price of 3s per bushel the proposed tax would be about £4 per ton, which would decline as the price of wheat rose, until at a price of 4s 74d per bushel there would be no tax. In this supplementary report it also suggested that the £4m should be spent (a) on a bounty of 3d per bushel on marketable wheat for the 1934-5 season (estimated cost £1.5m); (b) on an acreage grant of 3s per acre (£1.gm) ; and (c) the remaining sum to be spent on special assistance for necessitous farmers.18 The government accepted the commission’s recommendations relating to the expenditure of £4m but not its home-consumption price scheme. Instead, it imposed a flat rate flour tax of £2.125 6d per ton to operate for a full year rather than six months as previously. In 1934-5, however, the tax provided only £760,000 towards the cost of the assistance

scheme, and the remainder had to be found from revenue. The flour tax of £2.125 6d per ton was renewed for 1935-6, but because of a rise in the price of wheat towards the end of 1935, the assistance programme was reduced to £1.gm. Prices continued to improve in the 1935-6

export season reaching 45 per bushel in February 1936 after which the flour tax was discontinued. (b) Debt Adjustment Based on an examination of the accounts of 452 farms, the wheat commission found that in 1934 the average farmer paid 4.6d in interest on every bushel produced. There was, however, a wide range around the average, which it classified into four groups as follows: (1) 45.5 per cent of farmers paid an interest charge of 6d or less per bushel.

(2) 29 per cent of farmers paid an interest charge of between 7d and 15 per bushel. 15 N.S.W. Year Book, 1937-38, pp. 937-8.

16 These measures were embodied in the Wheat Growers Relief Act of 1933, and three Flour Tax Acts also of 1933. 17 First Report, pp. 2460-1. 18 Royal Commission on Wheat, etc., ‘Supplement to the First Report of the Commission’, CPP, 1934-7, Vol. IV, pp. 3-8. 342

Domestic Recovery Policy: Public Works, Relief and Wages (3) 15 per cent of farmers paid an interest charge of between 15 1d and 15 6d per bushel.

(4) 9.5 per cent of farmers paid an interest charge of 1s 7d or more per bushel.9 It was the 25 per cent of farmers whose interest obligations absorbed between one-third and one-quarter of their gross proceeds, without any provision for capital repayment, that desperately required assistance by means of debt adjustment. These were usually the farmers who had expanded production into marginal land during the period of high prices, or whose farms were too small for efficient management. To these farmers

direct cash assistance was of no lasting benefit. If they were to become permanent and productive members of the industry substantial recapitalization was necessary.

By 1931 all states had enacted general moratoria legislation to protect

farmers and others from creditors. As a rule these general moratoria enabled debtors to secure ‘stay’ orders from the courts which prevented creditors foreclosing without sufficient reason. It was soon evident, however, that farmers required a more comprehensive scheme of protection and during 1932-3 all the major wheat-growing states passed special farmers’ debt adjustment acts.

As the state acts were substantially similar, it will be sufficient to describe the New South Wales Farmers’ Relief Act of 1933. This legislation established a Farmers’ Relief Board empowered to grant stay orders for the financial protection and rehabilitation of farmers. Emphasis was placed on rehabilitation, and the Board could refuse assistance if it considered that the farmer’s position was hopeless. Following the granting of a stay order, the Board appointed a supervisor who controlled both financial and cropping aspects of the farm’s administration. The liabilities of the farmer were classified by the Board into two categories. Secured liabilities not represented by assets and unsecured debts were placed in suspense account and no interest accrued on such debts during the period of the stay order. On secured liabilities which were not classified in this way, the maximum rate of interest was fixed by the Act at 5 per cent per

annum. The stay order usually operated for a period of three years, subject to renewal if necessary. If the farmer earned a surplus after meeting living expenses, this was applied to the writing-down of unclassified debt. In instances where the farmer required an advance to meet living expenses, this could be arranged by the Board.?°

The various state acts were reasonably successful as temporary expedients, but they were less so in securing debt adjustment on a scale sufficiently drastic to enable farmers to continue in the industry on a permanent basis. Creditors were invited to agree to a scheme of composition, but few would do so without the incentive of a substantial cash payment. The result was that many slipped even further into debt, as the wheat commission noted in February 1935: 19 First Report, pp. 2450-1. 20 For details of the Act see N.S.W. Year Book, 1934-35, pp. 587-90.

343

Australia and the Great Depression . .. under present conditions of costs and prices, a large number of wheat farmers are becoming more and more involved financially, and more and more desperate as to the future.?!

The only way of checking this trend, it concluded, was for the government to take drastic action. It recommended that the Commonwealth take over

from the states the administration of debt adjustment, and empower a Commonwealth Court to require creditors to conform to a scheme of composition in cases where it had not been possible to reach mutual agreement.?? The government, however, rejected these recommendations and adhered to its own scheme. At a premiers’ conference on agriculture and marketing in December 1934, it offered to provide £12m over a period of up to seven years to be administered by state authorities to enable them to make payments on behalf of, or advances to, farmers so that they could make payments to their creditors on a composition basis. The money was to be provided free of interest and financed by means of Treasury bills, the first instalment to be £1.5m for the period up to 30 June 1935. The states were not required to repay the money to the Commonwealth, and were empowered to re-advance it for further composition adjustment after the initial repayment had been made by the farmer. The Commonwealth insisted that the money be used in the form of loans rather than grants, for, as Lyons explained in his 1934 policy speech: ‘We cannot accept the principle that a man who gets into a debt . . . is entitled to have his debts

reduced by a Government.’ The government also stipulated that the funds were only to be used in cases where there was a real chance of ultimate rehabilitation and a reasonable prospect of maintaining production. The states accepted these conditions, and the scheme came into operation towards the end of 1935 when the Commonwealth Parliament passed the Loan (Farmers’ Debt Adjustment) Act and the states amended legislation where necessary.

Although it was estimated by the Treasury that £40m would be required to fully adjust farmers’ debts on a satisfactory basis, the scheme was reasonably generous and gave farmers their first real chance of coming to

terms with their creditors. ‘Those who received loans would be able to offer their creditors a reasonable cash payment in exchange for cancellation of portion of the debt. But the scheme which promised so much in fact provided very little, and proved to be a bitter disappointment to the wheat-growing states. The scheme was formulated in late 1934 and early 1935 when loan-raising prospects were excellent and money was cheap. Towards the end of 1935 and during 1936, however, money market conditions tightened as a result of internal recovery, interest rates rose and loan-raising prospects appeared less encouraging. The Commonwealth decided, therefore, to reduce its commitment under the scheme. In 1935-6 it provided a mere £317,000, and in the following year £1.,5m. Thus states were unable to finance loans that had been approved. ‘The Country Party conducted a strong campaign against the reduced allocations, as did the 21 Second Report, CPP, 1934-7, Vol. IV, p. 250. 22 Ibid., pp. 249-54.

344

Domestic Recovery Policy: Public Works, Relief and Wages press in Western Australia, but both without avail. By the end of the seven years in June 1942, the Commonwealth had provided only £7.8m or 65 per cent of its promise. Nevertheless, in so far as finance permitted, progress was made towards rehabilitation of some farmers; but, as in the case of unemployment relief, it was an instance of too little too late. Wages Policy, 1932-5

National wages policy during the early years of recovery was dominated by two basic questions: (a) the extent to which the real basic wage should be restored to its pre-depression level; and (b) the best means to eliminate or reduce a number of serious anomalies which had arisen (particularly during the depression) in the method of wage determination. In its basic wage judgments of 1933 and 1934, the Commonwealth Court decided to deal with these problems simultaneously. This complicates discussion of changes in the real wage and masks the precise intent of the Court’s decisions. The most glaring anomaly in the wage structure had been brought about by the failure of state industrial tribunals to follow the Commonwealth Court’s lead in reducing real wages by 10 per cent, and some were even tardy in adjusting wages in relation to the fall in retail prices. Whatever one’s judgement about the merits of the 10 per cent cut, the failure

of the state tribunals to follow suit resulted in large disparities in wage rates which probably had a detrimental effect on recovery in those states where wages remained comparatively high. In mid-1932, for example, state basic wages in Sydney and Brisbane were 20 and 26 per cent respectively above the Commonwealth award.”3 Although the Sydney wage was reduced in August 1932, wide differences in nominal wage rates persisted in three states and in May 1933 Mr Justice Beeby of the Commonwealth Court tabulated the differences as follows:?4

Federal Wage State Wage

£Losd £osd Sydney 34 7 3 83 60 . Adelaide 2 14 10 3 Brisbane 2 14710 Perth 216 3 314 12 00

In Melbourne and Hobart the state Wages Boards generally followed the Commonwealth award and there was therefore no significant difference in these cities. As the result of the absence of substantial reductions in three states, Mr Justice Beeby estimated that only about one-half of the wage-earners in the Commonwealth had been subject to the full 10 per

cent cut in real wages although he made no allowance for short-time working or below award payments.?®

The Commonwealth Court could do nothing about what it regarded 23 N.S.W. Year Book, 1931-32, pp. 767-8. 24 32 CAR, p. 104. 25 Ibid., pp. 104-6.

345

Australia and the Great Depression as the lack of national responsibility by the state tribunals, but it proposed to deal with the second anomaly which had been accentuated by the depression: the inadequacy of the price index used to adjust the Commonwealth wage in relation to changes in retail prices. Since 1913, the Commonwealth wage had been adjusted in accordance with changes in retail prices as measured by the ‘All Houses’ (‘A’ series) index which was based on the cost of food, groceries and rent. During the depression this index fell more rapidly than another index—known as the ‘All Items’ table or ‘C’ series—which measured clothing and miscellaneous household expenditure as well as food, groceries and rent, and was a more accurate reflection of changes in retail prices in relation to the actual pattern of

expenditure. Between the first quarter of 1929 and the first quarter of 1931, for instance, the ‘A’ series index fell by 15 per cent and ‘C’ series by 12 per cent. Thus, by the use of the ‘A’ series index during the depression, the Commonwealth Court in effect reduced real wages by slightly more than the prescribed 10 per cent. In 1933, therefore, the Court decided to reject the unions’ application for the restoration of the 10 per cent cut in the basic wage, but it ordered that a different price index be used for making cost of living adjustments. It did not order, however, a simple change from the ‘A’ to the ‘C’ series; instead it directed that a new index be compiled—the ‘D’ series—which

was an amalgamation of the two main indexes. In addition, the Court ordered the restoration of the ‘Powers’ 3s’ in real terms, which had been

removed by the 1931 judgment.26 The effect of these changes was to increase the average wage for the six capital cities by 25 6d to £3.45 2d per

week compared with what it would have been under the old method of adjustment—an increase of 4 per cent.?? A third anomaly which had concerned the Court for a number of years was the basis of the ‘Harvester’ wage. When Mr Justice Higgins delivered his famous judgment in 1907, he declared that the appropriate standard for the determination of a basic wage was ‘the normal needs of the average

employee regarded as a human being living in a civilized community’. On rather shaky evidence, Higgins assumed that the ‘average’ family unit comprised five persons and he fixed his wage accordingly. The basic wage was, however, paid to married as well as single persons. Higgins’ assumption of a family unit of five was probably too high even for married persons, and was certainly too high per average male employee. The 1933

Census found that there had been an appreciable fall in the size of the average family, and that the average married man had approximately two dependent children, and the average per male worker was about one. 26 The partial restoration of the ‘Powers’ 3s’ was made necessary by a High Court decision in April 1933 which declared that the ‘basic’ wage was not only the ‘Harvester’ equivalent—the definitive wage declared by Mr Justice Higgins in 1908 adjusted for price movements—but also any ‘loadings’ forming part of the primary wage of the unskilled labourer. The ‘Powers’ 3s’ was such a loading, and therefore its restoration (in real terms) was incumbent on the Court. 27 32 CAR, pp. 100-3.

346

Domestic Recovery Policy: Public Works, Reltef and Wages There was, therefore, a logical case for altering the Harvester wage in relation to the reduced size of the average family. In 1934, therefore, the Court decided to restore the 10 per cent cut in

real wages, but it abandoned the Harvester wage and substituted one based on a family unit of four.?8 This was still above the average per male

employee, but it probably considered that a reduction to a unit of three would have involved too sharp a departure from the old standard and would have borne heavily on those with large families in the absence of.a Commonwealth child endowment scheme. It would also have meant a reduction in the actual basic wage rate despite the restoration of the 10

per cent cut. The Court may have chosen this time to abandon the Harvester standard because it was not satisfied that the 10 per cent cut should be restored in full. The Court declared that: The position may be summed up by saying that there is now an increase in confidence among the community resulting in freer expenditure and some increase of investment in industry, but that former prosperity is far from being restored. Unemployment though decreasing is still very great.?9

The Court probably believed that some restoration was justified as a result of the improvement in economic conditions, but not to the extent of 10 per cent.3° Therefore, if it combined an alteration to the basic wage

standard with cancellation of the 10 per cent emergency reduction, it could remove a long-standing anomaly and at the same time announce that the 1931 cut had been restored; and this could be accomplished with only a minor adjustment to the wage actually paid. This would have the additional advantage of not imposing any significant additional burden on industry, and hence, in the Court’s mind, on the pace of recovery. The Court also decided to abandon the ‘D’ series price index and transfer

entirely to the ‘C’ series. The effect on the wage rate of these three changes was small: the average wage for six capital cities rose by 15 3d to £3.55 per week, or an increase of 2.3 per cent. These two series of adyjustments meant that the average Commonwealth basic wage was increased

to 96 per cent of the rate that would have been paid if the method of determination had remained unchanged.®! It was not until 1937, when the Court awarded a ‘prosperity loading’ to the so-called ‘needs’ basic wage of 1934, that the old Harvester equivalent was in effect fully restored

in real terms. Despite confusion and ambiguity in the five basic wage judgments of 28 In deciding on a family unit of four, the Court followed the 1925 judgment of Mr Justice Heydon of the New South Wales Industrial Court. Heydon’s wage standard of £4.4s per week, with slight modifications and adjusted for price changes, was also adopted by the Commonwealth Court. See 33 CAR, pp. 148-53. 29 Ibid., pp. 147-8.

347

30 Parts of the rural sector, such as the pastoral and fruit-growing industries, were excluded from the ‘10 per cent restoration’ because of continued low commodity rices.

31 Ealeulated from Labour Report, No. 24, p. 74. The degree of restoration varied considerably between capital cities. In Sydney, for example, only three percentage points of the 1931 cut was restored, whereas in Perth and Adelaide it was more than fully made good.

Australia and the Great Depression the 1930s, there is little doubt that the primary concern of the Commonwealth Court was to adjust real wages in accordance with changes in the capacity of industry to pay. This is clearest in 1931 and 1937, but is also at the heart of the complex manoeuvres in 1933 and 1934. The ‘needs’ principle was certainly not abandoned but it did assume a less prominent

role. .

Because of the willingness of the Court to move towards the ‘productivity’ principle, economists have generally viewed the national wages

decisions of the 1930s in a favourable light. Writing in 1938, W. B. Reddaway concluded that ‘the policy adopted by the Federal Court was substantially correct and made a big contribution to recovery’.?? This assessment

was based on the urgent need to bring about internal adjustment for the purpose of preserving Australia’s international solvency. Lower wage rates in relation to those patd abroad were needed to help maintain the volume

of output in export industries; they were also required to assist the process of import replacement. Because exporters did maintain a high volume of output and because import replacement proceeded rapidly, it is argued that national wages policy must have played a vital part in the restoration of external viability and in the general process of recovery.

The argument assumes (1) that Australian wages fell more rapidly than in other major trading countries; and (2) that the decisions of the Federal Court were primarily responsible for the fall in money wages. In the absence of supporting evidence and analysis, both of these assump-

:3

tions require investigation. Broad movements in nominal money wages in six selected countries

are indicated in Table 42. The figures are presented with the usual reservations about international comparison. Wherever possible average weekly wages for semi-skilled male industrial workers have been chosen, Table 42: INDICES OF MONEY WAGES, SELECTED COUNTRIES, 1929-37

Australia | Britain United States 1929 100 100 100 100 100 100

1931 go 96 | 9892 9882 9695 92 59 78 1932 |84

1933 81 95 go 79 96 61 1934 82 95 gi 79 94 69 1935 83 96 93 79 92 76 193688 84101 98 104 96 79 1937 79 || gl 94 85 94

Index: 1929 = 100. Note: The wage indexes shown are generally average weekly earnings for male semiskilled industrial workers. Source: Year-Book of Labour Statistics, 1938, Geneva 1939, pp. 100-7. $2 ‘Australian Wage Policy, 1929-37’, International Labour Review, Vol. XX XVII, p. 332.

348

Domestic Recovery Policy: Public Works, Relief and Wages but in a number of cases it has been necessary to rely on averages composed of both skilled and unskilled categories. The indices show that the extent of wage decline in Australia was indeed more extensive than in Britain (where the bilateral wage relationship was of greatest significance) , and also in Canada and Japan; but that it fell short of the decline

in Germany and the United States. Because of the sharp divergence between British and Australian wages, it is probable that on balance Australia did improve her wage-cost relationship with the rest of the world in the 1930s. But the improvement is unlikely to have been substantial, a judgement which is supported by the fact that import prices in 1936-7 (expressed as a percentage of prices in 1928-9) stood at 91 whereas internal wholesale prices (calculated on the same basis) were only slightly lower at 88. It should be noted, further, that wages in most primary producing countries fell more rapidly than in highlyindustrialized countries (the United States and Germany excepted) , and that Australia simply conformed to the general experience of the former. In New Zealand, Hungary, Poland and Yugoslavia (and elsewhere in eastern Europe), the decline in money wages was as great or greater than in Australia, but these countries have not claimed an especially wellregulated wages policy during depression and recovery. This raises the second question: to what extent were the national wages decisions responsible for the mild degree of wage-cost adjustment that did occur? The decision to reduce the basic wage in 1931 coupled with the policy of wage restraint in 1933-4 did, of course, play a part. In particular, the 1931 decision by a tribunal which by tradition was thought to favour the highest possible wage rates created an atmosphere which eased the industrial difficulties associated with wage reduction. Nevertheless, in the circumstances of rapidly falling demand for labour in the years 1929-31, the formal decisions of arbitration courts on wage rates (outside government employment) were of minor relevance. The situation can be described as one of wages drift in a reverse direction. And when formal wage agreements were retained (as was often the case) , the cost of labour was lowered by a system of work rationing. In short, the factor primarily responsible for the heavy decline in money wages was the steep decline in demand and the creation of a large army of unemployed. To be sure, the machinery which had been devised by the Court to adjust wage rates automatically to price changes played a prominent part in the speed of the downward revison; but this institution was of course established to deal with an entirely different situation. It is not unreasonable to suggest that the Court’s decisions amounted to an ex post recognition of the changes that had been brought about by market forces. Unfortunately it is not possible to test this proposition empirically.

The extent of downward wages drift and the magnitude of disguised unemployment in the form of compulsory short-time work cannot be gauged from any of the available statistical series. A rough approximation

of the divergence between nominal and actual average real wages in manufacturing is, however, possible and is shown in Table 43. Despite the formal 10 per cent reduction in the real basic wage in 1931, it is 349

Australia and the Great Depression Table 43: INDICES OF REAL WAGES IN MANUFACTURING, 1927-8 to 1936-7

Adjustment for

employment unemployment

1927-8 100 100 1928-9 98 95 1929-30 99 GI 1930-1 100 82 1931-2 98 76 1932-3 99 78 1933-4 98 1934-5 | 98 82 88

1935-6 : 99 93 1936-7 | 99 97

Index: 1927-8 = 100. Note: Col. 1 calculated by applying ‘C’ series retail price index to

wages and salaries paid per employee for period worked. Col. 2 allows for unemployment by adding unemployment in

manufacturing as reported by trade unions to recorded employment, dividing by wages and salaries paid, and adjusting for price changes. Sources: Labour Reports, Nos 18-29; Production Bulletins, Nos 29, 33-

apparent that there was no significant downward trend in average real earnings in manufacturing on the assumption of full-time employment. In other words, the average real wage rate remained almost constant during the decade of contraction and recovery. On the other hand, the average real earnings of the hypothetical total manufacturing work force (calculated by adding the estimated unemployed to recorded employment) fell by one-quarter during contraction. This merely emphasizes that the weight of downward adjustment in prices and wages was carried by the unemployed and that national wages policy was of minor significance in the process. As in the case of the exchange rate, balance of payments adjustment, interest rates and most of the other ingredients of so-called economic planning in the 1930s, market forces largely determined policy decisions.

350

| XV Recovery Policy: External Australia’s external economic policy during recovery revolved around one

central issue: the extent to which the country should retreat from its policy of self-containment by lowering the level of protection against the outside world. This involved both the exchange rate and the tariff. But of more pressing political significance was the burden of external debt charges. Conservative economic doctrine during the depression had been built on the assumed need to maintain the country’s international solvency. During recovery, therefore, it was deemed necessary to justify this policy by voluntary conversion to lower interest rates of as much as possible of the overseas debt. If Lyons believed that this could be achieved without complications, he failed to include J. T. Lang in his calculation.

Lang’s Second Default

On 29 January 1932, Lang bluntly informed members of the Loan Council that New South Wales would be unable to meet in full its interest

commitments amounting to £0.959m due in London and New York between 1 and 4 February. He said that the state would be able to find £0.459m of this sum, but that the Loan Council would have to provide the remaining £0.5m. The Council was not prepared to do this, for it claimed that Lang had not honoured his undertaking to reduce expenditure in accordance with the premiers’ plan and that the latest available estimate showed that the state would exceed its planned deficit by £3.5m. It was also of the opinion in the light of experience, that Lang would continue to dishonour his obligations so long as the Commonwealth was prepared to shoulder the responsibility. Therefore, the issue should be faced now and Lang be allowed to default. Accordingly, the Commonwealth did not meet the state’s interest bill as it had done in April 1931, and allowed New South Wales to default. The Commonwealth waited for two weeks and then on 17 February paid the outstanding interest. It was criticized in some quarters for the delay, but this was infinitesimal compared with the abuse heaped on Lang from all parts of the world. 351

Australia and the Great Depression Although it involved the Commonwealth in technical default, it was a shrewd move and succeeded in destroying the Lang Government. Lang’s motive in defaulting on this second occasion was probably, as the Commonwealth suspected, an attempt to foist his government’s interest commitments onto the Loan Council, which would save him from making further unpopular cuts in expenditure. He probably thought that

the Lyons Government would follow the precedent set by the Scullin Government in 1931 and immediately pay the due liability on behalf of the state. But Lyons was determined not to grant Lang another financial reprieve. In his second reading speech on the Financial Agreement Enforcement Bill, Lyons explained his government’s attitude: We had carefully to consider the steps to be taken in order to ensure that New South Wales would, in future, meet all its obligations to the Commonwealth, and pay its interest regularly. We could not remain inactive while Mr. Lang cheerfully allowed his obligations to fall due without making any provision whatever to meet them. On previous occasions, when the Commonwealth Government paid the amounts due by New South Wales immediately, the full effect of the default by New South Wales was not realised either in Australia or abroad. So long as the Commonwealth was prepared to step in and shoulder the burden no one worried... . But for the sake of Australia’s future credit, and to protect the holders of New South Wales bonds, the position had to be faced definitely, and final action taken to obviate similar happenings in the future.}

Knowing that his tactics had failed, Lang reacted savagely and irrationally. When the Commonwealth requested payment of the portion of the interest commitment which he told the Loan Council he could find, he

replied that his offer was conditional on the Council finding the remaining £0.5m and that he would not pay any portion of the commitment. A heated and undignified exchange of telegrams followed, in which Lyons insisted that no conditions were attached to Lang’s offer, a claim which Lang refuted. Lyons concluded his part in the exchange with the remark: “Words usually applicable to such actions [repeated default and

deceit] are not suitable for embodiment in a communication between governments.’ Lang retorted in kind: “These are communications between

Governments and not a backyard squabble—“You did”, “I didn’t’, in cres. ad lib.’ Soon after this episode, New South Wales began to default on internal interest payments which the Commonwealth was obliged to meet, and in an attempt to recoup the large and growing sum of money due to it by New South Wales, the Commonwealth was forced to take drastic action. The Financial Agreements Enforcement Bill, introduced into Federal

Parliament on 18 February, contained two main provisions. The first empowered the Commonwealth to exercise its rights under the Financial Agreement to require states to make payments to the Federal Treasury to meet their respective interest obligations. If a state failed to make these

payments, the Commonwealth was permitted to recover the money 1CPD, Vol. 133, pp. 113-14.

352

Recovery Policy: External directly from the state’s revenue. The second part of the Bull? eliminated any legal doubt that there may have been with respect to the Common-

wealth’s liability for the debts of the states. In the case of default by a state government, it became the Commonwealth’s clearly defined responsibility to meet the interest obligations as they fell due. Immediately the Bill was passed in mid-March, Lang contested its constitutional validity in the High Court, and until the Court’s decision was handed down the Commonwealth did not enforce the Act. On 6 April the Court held that the enforcement legislation was valid, and dismissed an application by New South Wales for leave to appeal to the Privy Council. By this time

the amount owed by the state to the Commonwealth was £2m, and a proclamation was issued directing that state income tax payments be made to the Commonwealth Treasury. This was extended a few days later to include other forms of state revenue, including betting, racecourse admission, totalizator and entertainment taxation. The banks were also

directed to pay funds standing to the credit of the state government to the Commonwealth Bank.

There followed one of the most unedifying inter-governmental struggles in Australian history, which could be likened to a comic opera if its implications were less serious. Lang retaliated to the proclamations made under the Enforcement Act by impounding the documents relating

to state income-tax assessment so that the Commonwealth could not deliver assessment notices. The Commonwealth replied with a second Enforcement Act® which further broadened the scope for its collection of

the state’s revenue, and prevented the state from taking legal action against any person who paid money to the Commonwealth in compliance

with the Enforcement Act. Two more Enforcement Acts followed in quick succession to block loopholes in the re-direction of the state’s revenue,‘ and then, on 11 and 12 May the notorious Mortgages Taxation Bill was rushed through the New South Wales Parliament.5 This imposed a 10 per cent tax—more accurately a capital levy—on all mortgages, to

be paid within 14 days of the commencement of the Act. If the tax was not paid within the prescribed period, the Act provided that an additional tax at the rate of 10 per cent per annum be paid on the amount of the original tax. It was estimated that, had the tax been paid in full, it would have raised about £14m.® Lang knew that such a tax could not possibly be enforced. With defeat near, it was his last act of bravado. No sooner had 2 During the committee stage, this part of the Bill was withdrawn and made the subject of a separate measure—the Financial Agreements (Commonwealth Liability)

3 See ‘debate on Financial Agreements Enforcement Bill (No. 2), CPD, Vol. 134, pp. 10 ff.

4 The Financial Agreements Enforcement Act (No. 3) empowered the Commonwealth

to appropriate the revenue of the state’s railway in excess of that necessary to cover working expenses, so that the surplus could be used to pay interest on the railway debt. The No. 4 Act was mainly a machinery measure: CPD, Vol. 134, pp. 335ff., 528ff.

5 NSWPD, Vol. 132, pp. 9264ff. 6 CPD, Vol. 134, p. 727.

353

Australia and the Great Depression this Act become law than the Commonwealth Parliament rushed through

the Financial Emergency (State Legislation) Bill, which nullified the Mortgages Taxation Act on the grounds that such a step was necessary to preserve the peace, order and good government of Australia.?7 This legislation was of doubtful constitutional legality, but the Lang Government did not have an opportunity to pursue the matter further. On the same day as the Act was passed (13 May), the Governor of New South Wales (Sir Philip Game) dismissed Lang from office because of his repeated transgression of Commonwealth law and called on B. S. B. Stevens as the Leader of the State Opposition to form a government. At the ensuing New South Wales state elections held in June, Labor was swept from office as dramatically as it had been in the Federal sphere six months earlier. In a House of go, the strength of Lang’s party was reduced from 55 to 24. The means which had been deployed against his enemies had now rebounded completely. Refunding the Overseas Debt, 1932-5 Of major political importance to the newly-formed Lyons Government was the conversion of the overseas debt to a lower interest basis. Following the successful conversion of the internal debt in 1931, it was incum-

bent on the government to deal similarly with the overseas debt. The demand of the extreme section of the Labor Party for the compulsory conversion of this debt had received a considerable amount of public support, and the conservative parties had pledged themselves to deal with

the debt by voluntary means as soon as the improvement in internal finance was reflected in an enhanced credit rating in London. The political importance of this task was indicated by the government’s decision to appoint a senior minister to reside in London to negotiate the con-

version of the debt. The man appointed was the Assistant Treasurer, S. M. Bruce, who was to begin his duties at the completion of the Ottawa

Conference.

The immediate task facing the government was the conversion of a New South Wales loan for £12.4m which matured on 1 November 1932. It was important that this loan be successful, for it would be the first time that Australia had entered the London market since May 1930. Moreover, it was essential that the conversion be effected at a substantial saving in interest, for political as well as financial reasons. The government was hoping for a conversion of the 52 per cent New South Wales stock into Commonwealth securities on terms to yield no more than 4 per cent. Despite improvement in the prices of Australian securities during 1932, however, the chances of achieving a 4 per cent basis (even at a discount) appeared remote. In August Commonwealth 5 per cent stock stood at 100 and in September at 101. Even though this represented a marked rise since the early part of the year when prices were in the mid-80s, it was still insufficient to allow an issue on the terms the government wanted. In mid-September, Bruce advised that the best the underwriters could 7Ibid., pp. 737-42.

354

Recovery Policy: External manage was 4} per cent at 96 for a long-dated issue. This news caused bitter disappointment within the Cabinet and Lyons expressed its dissatisfaction in the strongest possible terms: We feel very strongly that there will undoubtedly be grave and widespread disappointment even in responsible circles if loan cannot be negotiated on substantially better terms ... we think that the loan is being negotiated on the basis of the bare terms that the market provides, without any special effort on the part of those who are in a position to do so to make the conversion a success on favourable terms. It appears to us, in view of Australia’s successful effort to restore her credit and keep faith with the bondholder, despite great difficulties, that it is to the advantage of all who are interested in Australian finance to do their utmost to extend the best possible terms to Australia. We have not defaulted, which many of Britain’s debtors have. We think that you should stress to those concerned that there is [an] impression in public mind of willingness on the part of Great Britain to extend special consideration and help to European and other countries in financial difficulties, even though some of them have defaulted in their obligations, whilst at the same time Australia, though a Dominion, is expected to rely entirely on her own standing in the market and is not extended any material sympathy or recognition of her special efforts for rehabilitation. You will appreciate that the political and psychological effect of terms which seem to be hard will be used by the reactionary [sic] forces in Australia to misrepresent the position.

Lyons concluded by pointing out that the conversion would be regarded as a test of the government’s policy of restoring Australia’s credit by sound

financial methods and the payment of all obligations in full. He suggested that if better terms could not be obtained, this would be freely used as evidence of the failure of these methods.

Sir Robert Gibson was also concerned about the prospect of a conversion loan on unsatisfactory terms, but for a different reason. ‘The Bank was hopeful that the Loan Council would be able to float a new internal cash loan before the end of 1932 because this would relieve it of having to

finance unemployment relief works by the issue of Treasury bills, and might also enable it to fund some of the floating debt. The domestic market price of stock had improved to such an extent that it appeared as though an issue at 4 per cent, which was the maximum rate which could be offered if the spirit of the premiers’ plan was to be adhered to, would soon be possible. By mid-September, the price of 4 per cent stock maturing in 1938 had risen to 993. However, if the Commonwealth announced that

it intended to issue a London loan on terms which would yield in excess of 44 per cent, the Bank expected that there would be a sharp reaction in bond prices on Australian stock markets. ‘To prevent this, Gibson offered

the support of the Bank in the hope that this would help improve the terms of the issue. ‘Supposing the Commonwealth Bank undertook to underwrite a quarter of the loan’, he cabled to Riddle in London, ‘would not this help you with Nivisons to obtain [improved] terms[?].’ He added: ‘If this was agreeable to Nivisons the Bank might also undertake to subscribe up to £2,000,000 if required.’ But Nivison & Co. were not impressed

by this offer, which, they said, would not improve the terms on which they were willing to underwrite. 355

Australia and the Great Depression Lyons’ urgent plea for a reconsideration of the terms of the conversion issue produced little response in London. Bruce reported that the government’s difficulties had received full and sympathetic consideration but, short of a guarantee by the British government—which was unlikely to be given and which would involve a fall in the prestige of the Commonwealth—the Bank of England and Nivison could not see how the terms of the issue could be improved. Bruce suggested, therefore, that there were

three alternatives open to the government. It could accept the underwriter’s terms of 44 per cent at 96 which were based on the current market price of Commonwealth stock; it could attempt to float the loan without underwriting at a lower rate of interest and accept the risk of failure;

or it could pay off the loan in full without attempting a conversion operation. The second and third alternatives appeared to Bruce to be out of the question, and therefore the government could do little else than accept the Nivison terms. None of these alternatives appealed to Lyons, and he sent another long cable reiterating his fears that ‘Langism’ would reassert itself if the terms proposed were accepted. If the cry of repudiation was again raised, he added, Australia’s credit would suffer and it would perhaps ruin all prospects of success on this occasion and make impossible any chance of proceeding with the larger conversion operations contemplated in the future. As a last desperate step, therefore, he suggested that Bruce consider the advisability of an approach to the British government to seek their assistance to pay off the loan. This second cable indicated that the government was prepared to go to practically any lengths to establish a 4 per cent basis in London, and Bruce was able to persuade the Bank of England to support the issue of a short-dated 4 per cent loan at 97 for five years. But Lyons was still not satisfied. He pointed out that the redemption yield of such a loan would be almost 42 per cent; however, if

the yield could be reduced to 4} per cent he would raise no further objection. A yield of 4} per cent would mean that the interest rate on this loan had been reduced by 14 percentage points from 53 per cent— a fall of so close to 22} per cent that it made no difference, and Lyons could then announce to Australia that the government had been successful in applying the terms of the premiers’ plan to its overseas obligations. As a result of a telephone conversation with Bruce on 28 September 1932, Lyons succeeded in raising the price of the proposed five-year 4 per cent loan by one point to 98. He also agreed to make the issue on these terms under prospectus dated 3 October. Lyons must have been reasonably well satisfied, for he had succeeded in reducing the interest yield of the new loan from above 5 to 43 per cent, so that the conversion would

result in a saving in interest of almost 22} per cent. Then on 30 September, Bruce cabled urgently to say that the position had changed dramatically for the better. Montagu Norman had advised him that after a re-examination of the condition of the market it seemed possible that a forthcoming South African loan would be finalized at a rate under 4 per

cent. ‘As my recommendations had been based on the advice that this was impossible’, he explained to Lyons, ‘I have had to completely recast 356

Recovery Policy: External my proposals.’ He was now confident that an issue could be made on the

basis of a 34 per- cent five-year loan at 973, for a redemption yield of slightly more than 4 per cent. The cause of this sudden improvement in the estimate of market conditions is unclear. The price of Commonwealth stock had improved slightly while the negotiations were proceeding, but not sufficiently to lead to such a swift improvement in market status. It seems as though the government’s advisers had been over-cautious in their assessinent of the position. They quite rightly stressed the need for this first post-crisis loan to be completely successful, for they realized that failure would have seriously damaged future conversion prospects; and they were understandably more concerned with Australia’s market reputation than with the government’s immediate political problems. The loan was a complete success. Within 45 minutes it closed with over-subscriptions totalling nearly £35m, and only 12 per cent of total cash subscriptions were accepted. The new stock immediately went to a premium of £2.10s and continued to improve throughout 1933. A large part of this success appears to have been due to the support given the loan by the English financial press which praised highly Australia’s reconstruction efforts. The government could now confidently plan ahead for further conversion operations. The negotiations for subsequent conversion loans were straight-forward compared with the extremely delicate situation of September 1932. Lyons usually pressed for slightly better terms than were first offered, but the continued fall in mterest rates in the period 1932-5 enabled agreement

to be achieved swittly. Entry onto the London market in this period required the approval of the Chancellor of the Exchequer who usually acted on the advice of the Bank of England. In January 1933, the British government had placed an embargo on foreign government loans for

cash, which also applied to conversion issues made well before the maturity dates and which invited cash as well as conversion subscriptions,

but it did not apply to issues made to convert maturing stock. The embargo was imposed to prevent a mass exodus of capital and to preserve the cheap money conditions considered essential for recovery in Britain. The embargo was not, however, inflexibly applied. After the issue of two loans in the first half of 1933 for the conversion of maturing stock,

the Chancellor of the Exchequer lifted the embargo to enable the Loan Council to convert loans with optional maturity dates to lower rates of interest. Cash subscriptions were invited on these occasions, but subscriptions were not accepted in excess of the amount of the retiring loan. Of the ten loans issued in the period 1932-5, only two were less than completely successful. A large part of the loan of February 1933 was left in the hands of the underwriters because of uncertainty prevalent immedi-

ately prior to the dollar crisis, and because the Commonwealth had pressed for rather too high an issue price, and the loan of January 1935 was also incompletely subscribed because of temporary financial stringency. But Australia’s credit was not damaged by these partial failures, and the redemption yields of the loans were progressively reduced. The terms and results of these refunding loans are shown in Table 44. It will 357

Australia and the Great Depression be noticed that these loans were frequently over-subscribed by considerable amounts, but this does not mean that the terms of these issues were unduly attractive. Because of the loan embargo and the plethora of idle balances caused by the depression, there developed a shortage of first-class

securities in the London money market. Investors found it necessary, therefore, to apply for many times the amount of stock they hoped to be allotted; and as those issued usually went immediately to a premium of two or three points, investors had to compete with speculators for their requirements. Thus, a large proportion of these subscriptions were ‘stag’ and the over-subscriptions by ‘firm’ investors not nearly as large as these figures suggest. Table 44: AUSTRALIAN CONVERSION LOANS ISSUED IN LONDON, 1932-5

$$$} } $$ | Old | New | Price

Date of Amount | interest | interest of Yield to | Date of Total

issue rate rate issue | investor | maturity | subscriptions

(£m) (%) | (%) (Z sd) (£m)

Oct. 32| 12.4 5t | 3h 974 | 4 1 2) 1936-7 47-0 Feb. 33 9.6 4 | 4 100 4. 0 O| 1955-70 6.2 May 33| 11-4 | 64 | 34 | 99 [314 5| 1937-8 na July 33 17.2 | 6 | 4 99 4 1 10|{ 1943-8 18.4 Sep. 33 21.0 6-5} 33 98 317 11 | 1948-53 68.8

Dec. 33} 16.6 5 33 99 3 16 g| 1946-9 44.2

Feb. 34) 5h5| 3t | 3h| 99 9713 | 313 1954-9 43-7 Nov. 34}21.6 14.6| 53 6 4]8]1964-74 50.1 Jan. 35 22.4 5 | 34 100 3 5 oO} 1956-61 13.7 July 35 | 135 | 5-3 | 3 100 «=| 3 0 O| 1939-41 na Source: Compiled from Commonwealth Treasury records and AIBR.

The total debt converted in these four years amounted to £160m, or more than one-quarter of the outstanding overseas debt. ‘The average rate of interest paid on the debt was reduced from £4.145 10d per cent in 1932 to £4.35 1d per cent in 19358 for a saving of nearly £3m.° This saving was a welcome relief to government budgets, but even more welcome was the political significance of the fall in the overseas interest rate. Labor found

it difficult to refute the government’s claim that the success of its refunding operations was a vindication of its deflationary policy. The one criticism that can be made of the refunding programme is that it did not

include any of the short-term debt. The London short-term debt

amounted to £33.6m, nearly all of which was held by the Commonwealth Bank. If a portion of this debt had been funded, the Bank’s hand would have been strengthened considerably in its management of the exchange rate. The government may have unsuccessfully sought the permission of 8 Finance Bulletin, No. 28, Table 64. 9 AIBR, 1935, p. 96.

358

Recovery Policy: External the Bank of England to float a funding loan, but there is no evidence to suggest that it did so. It probably deferred such a loan because of the additional cost that would have been involved; it did not wish to spoil its record as a cost-reducing administration. Exchange Rate, 1932-5

The Commonwealth Bank emerged from the depression with greatly enlarged powers. It found itself in sole control of the Anglo-Australian exchange rate; 1t exercised a profound influence on internal credit policy through its centralized control over the governments’ purse-strings; and bank liquidity and interest rates were determined by its rediscount and funding policy. The Bank found it extremely difficult, however, to decide how to use these new tools of control. It believed that the fundamental principle which should guide its policy formulation was perfectly clear. This was the same as it had always been: to preserve the stability of the monetary system free from political influence. However, it found that reference to ‘purely banking considerations’ was usually too imprecise to lead it to a firm policy decision, with the result that a number of important monetary questions remained unresolved during recovery. The Bank’s policy dilemmas did not carry it to the conclusion that an integration of government economic policy and central bank monetary policy was essential; the pressure of total war was required to bring this about. Possibly the most difficult policy dilemma facing the Bank at this time was the determination of the exchange rate. It had undertaken in December 1931 to buy and sell exchange freely at a rate to be announced each

week, but it had no clear idea of what factors should guide its delibera-

tions, except that Sir Robert Gibson was convinced that parity with sterling should be re-established as soon as practicable. The Bank’s difficulty was increased by the wide and unpredictable fluctuations in export prices throughout this period, and the instability of the sterlingdollar exchange rate leading to the dollar crisis of March 1933. In passing judgement on the Bank’s policy, due allowance should be made for the extremely uncertain circumstances with which it had to deal. Contrary to expectations, the rapid seasonal build up of London funds in October-November 1931, which precipitated the exchange appreciation

of December, did not continue during the second half of the summer. The customary accumulation of sterling exchange during the peak export selling period early in the year did not materialize in 1932. At the end of December 1931, the banks’ exchange holdings stood at £37.5m but three months later were only £5m higher. (By contrast, the first quarter’s rise in 1931 was nearly £20m.) Thus, expectation of a further move towards sterling parity was replaced by speculation on the possibility of devaluation in mid-year. ‘The failure of London funds to show the expected rise early in 1932 was most likely connected with the speculative inflow of

funds in anticipation of a move towards parity at the end of 1931. In addition to capital inflow at this time, importers postponed external payment in the hope of a fall in the rate. When prospects for a more 359

Australia and the Great Depression substantial move towards parity than actually occurred evaporated during

January, the demand for sterling cover increased well above normal requirements to meet the back-log of payments, and this, together with the repatriation of hot money, prevented the accustomed seasonal build up.10

The discussion which commenced during March of the possibility of a rise in the exchange rate was reinforced by the reversal of the upward trend in export prices. After rising to 9.7d per lb in November, the price of wool slipped back to 7.8d in March. In the same period, wheat fell from 3s 4d to 3s per bushel. More disturbing were expectations of a continued decline in commodity prices: demand at the London wool sales was extremely weak and total clearances of small account; and the good rainfalls in North America indicated excellent wheat harvests and the continued growth of surplus stocks.11 Then in mid-April the Wallace Bruce Committee recommended that the Commonwealth Bank be authorized to manage the exchange rate so as to assist the ‘restoration of equilibrium between costs and prices’.1? The committee did not specifically recommend devaluation, but it clearly favoured an increase in the rate to about 135 or 140. The government accepted the recommendation in principle, and Lyons appears to have been satisfied with Gibson’s assurance that exchange would be managed accordingly.13 A more specific direction by the govern-

ment was out of the question, for one of the most important principles on which it had been elected was freedom for the Bank from political influence. Lyons told the premiers’ conference on the unemployment problem in April that the government very strongly holds the view that the rate of exchange should not be a matter controlled by Governments, nor should Governments be entitled to dictate to those who are controlling the exchange what the rate should be.14

Speculation on the future course of the rate increased to such an extent following publication of the committee’s recommendations that Gibson was forced to issue a strong disclaimer that any movement was contemplated: There appears to be a good deal of speculation in the public mind as to the exchange position. This has no doubt arisen through utterances in certain quarters as to the proper function of exchange in relation to the economic life of Australia. The Bank Board has given careful consideration to this matter at its sittings which have just closed. The Board realizes fully the responsibility placed upon 10 This at least was the interpretation given in Melville to Bruce, 2g February 1932. 11 National Bank, Monthly Summary of Australian Conditions, April 1932, pp. 8-9.

12*Report of the Committee Appointed ... to make a Preliminary Survey of the

Economic Problem’, p. 6. 13 Giblin, Central Bank, p. 140. 14‘Conference of Commonwealth and State Ministers, Melbourne, 14th April to 21st

April, 1932’ (unprinted parliamentary paper, NLA). Reprinted in Shann and Copland, Australian Price Structure, d.ge. 360

Recovery Policy: External it, and it will not be swayed by any sectional interests in connection with this question.

The Board has no announcement to make of any change in the exchange

rate... .15

The decision of the Bank Board was probably not unanimous, but Gibson predominated as usual. He was convinced that the correct policy was to re-establish parity with sterling gradually and that every upward move in the rate was a move in the wrong direction. Those who pressed for an increase in the rate he chose to regard as sectional agitators who should

be resisted in the national interest.

Speculation on the future of the rate eased temporarily after Gibson’s

statement, but pressure for further devaluation did not. Export prices continued to decline until June, and Sir Robert was inundated with deputations from graziers and wheat-growers who stressed the parlous condition of both industries, and ventured that if relief was not forthcoming soon they would be unable to continue operations which would lead to a serious decline in production. It was claimed that some graziers in western districts were already planning to allow their flocks to ‘run bush’ and that no effort would be made to shear. The large pastoral firm of Dalgety and Co. Ltd estimated that the ability of its clients to meet

interest commitments could be classified as follows: |

North Q’ land N.S.W. W.A. (per cent)

liabilities in full 25 50 60

(a) Those who are able to meet their

liabilities 60 40 35

(b) Those able to meet half their

liabilities 15 10 5

(c) Those unable to meet any of their

The position of the clients of another large pastoral firm, Australian Mercantile Land and Finance Co. Ltd, was even more serious. Of 71 representative accounts examined for the year ended go June 1931, the firm found that 28 earned interest in full, 27 earned interest in part, and 16 were unable to make any contribution towards capital charges. Gibson ignored these facts, and parried deputations by claiming that the Commonwealth Bank was hastening reductions in overdraft rates which would afford considerable relief. Deputations were usually dismissed with the assertion that the present difficult exchange position had been caused by the ‘indiscreet statements of economists and others’.

Although Gibson would entertain no thought of an upward move in the exchange rate, he became concerned in mid-1932 that the sharp fall in London funds would cause the re-emergence of an outside market which the Bank would be unable to control. Because of the seasonal decline in sterling receipts and the drop in export prices, the Bank’s hold-

ings of London funds fell from £19m in April to £6.7m in July, and 15 Shann and Copland, Australian Price Structure, d.3f. 361

Australia and the Great Depression in the same period the holdings of all banks fell from £40m to £20.8m. Gibson expressed his fears to Montagu Norman in a long cable on 19 July.

Sir Robert explained that there was considerable pressure from the Country Party and some economists to have the rate moved up to 135 or 140, and that if the Bank’s funds fell below £4m it would have extreme difficulty in resisting these pressures. He continued: It has occurred to me that pending the resumption of [the] export season at the end of August when funds will again become available a move to increase the published balances in London might be effected by temporary borrowing from the Bank of England if you concurred with such a course. I suggest that an arrangement might be considered by you under which we borrowed say 3 million pounds. We would deposit the amount so borrowed with you and show it in our London balances in weekly publication.

Norman agreed to this proposal, but in the event the window-dressing was not required. The Bank was able to dispose of some of its long-term assets, and its funds did not fall below £5.4m. If Gibson required an additional reason for resisting pressure for clevaluation, it was provided by the pending Ottawa Conference on Empire

trade. Even before the conference began, it was evident that several countries were concerned about the advantage which accrued to Australia because of her comparatively high exchange rate, and any further upward move in the rate before or during the conference would destroy Australia’s chance of negotiating satisfactory trade arrangements. ‘The Bank had sent Riddle to the conference as an adviser to the government, and on 28 July 1932 he explained the delicate position which faced Bruce (the government’s chief representative) : Mr. Bruce was very pleased to know that you hope to be able to keep control of the Exchange position until the Wool Sales, at the end of August, set money flowing towards England [sic] once more. He advised me that Delegates from practically all of the Dominions are continually coming back to the advantage that Australian producers are already receiving from Exchange and endeavour-

ing to offset it against the preferential duties the Australian Delegation is asking for. So far he has been able to side-track discussion . . . but an increase at this

juncture would raise a red-hot controversy .... In view of the sensitivity of the negotiations at Ottawa and the assurance from the Bank of England of assistance if necessary, the Bank reaffirmed

its determination to maintain the rate. On 5 August it issued a public announcement stating that it saw ‘no justification for any alteration in the rate at present’.1é

The beginning of the 1932-3 export selling season in September saw Gibson more determined than ever to reduce the exchange rate. Prospects for a rise in export prices appeared good following reports from Ottawa of general acceptance of a reflationary policy; the volume of export production appeared once again to be well maintained; the bulk of deferred

remittances had probably been cleared; and there was a possibility of 16 Sydney Morning Herald, 5 August 1932.

362

Recovery Policy: External some resumption of capital inflow. Gibson considered, therefore, that the

time was opportune for a reduction in the rate. He cabled this view to Riddle, who was then in London: I am of the opinion exchange rates should be reduced as soon as possible and matter is now receiving careful consideration of the Board. Owing to improved oversea prices Australian exports feeling of the Board at present is that downward movement might be made about the middle of October. My own opinion

is that a downward movement would reflect itself in our oversea credit and help conversion operations in London.

Gibson outlined his reasons in support of a downward adjustment in a long memorandum submitted to the Board in September. He argued that parity with sterling would have to be re-established eventually, for the Bank could not seriously consider a policy which would sanction permanent depreciation of the currency. Devaluation could be tolerated as a temporary expedient in times of crisis, but he thought that any attempt to bolster the internal price level by this means after the crisis had passed was fundamentally unsound. He continued: surely the only possible way of eventually emancipating [sic] the position is

by adjustment of internal costs to external prices, and not by increasing internal costs through exchange and the debasing of our currency.

Sir Robert suggested that the first step towards sterling parity be taken as soon as possible, for the longer the delay the more difficult it would become to reduce the rate because of the consolidation of vested interest in a high rate. Hence, he proposed that the rate be reduced the following month to 120, to be followed by a similar reduction at the end of the year.

Gibson’s memorandum is unlikely to have been received with much enthusiasm by some members of the Board, and Riddle advised him to postpone the question until the end of the year because the ‘recent improvement in commodity prices and prospect of further increase [are] not yet regarded [as] secure’. Nivison & Co. also urged that no alteration be made for the present as it would unsettle negotiations for the conversion of a large loan maturing in November. Then another cable was received which conveyed Montagu Norman’s view that the Bank of England saw no objection to the Australian exchange rate fluctuating in accordance with internal conditions. This advice must have stunned Gibson, for he had always taken counsel from London opinion which had previously stressed the desirability of a return to parity at the earliest possible opportunity. At the Board meeting in October, Riddle’s advice was accepted and a decision on the proposed reduction was deferred for the time being. Not until October 1933 could Sir Robert reopen his case, for the 1932-3

export season proved to be less favourable than had been anticipated. Export prices slumped for the third time since 1931 after showing signs of revival, and London funds were approximately £10m less than during the 1931-2 export season. Furthermore, international exchanges were deranged during the early part of 1933 prior to the departure of the United States from gold, and the Bank quite properly refrained from

| 363

making an important decision on the future of the rate at such a time. The

Australia and the Great Depression beginning of the 1933-4 export season was, therefore, the first favourable

opportunity afforded Sir Robert to press for his much sought-after appreciation.

Although Gibson was still convinced that the exchange rate should be reduced, he now generously acknowledged that the maintenance of a high and stable exchange premium since December 1931 had done much to assist internal and external financial rehabilitation. In a second memorandum circulated among the Board members in October 1933, he stressed that the Bank’s exchange policy had had the effect of: (1) creating an atmosphere of confidence in commercial and banking circles, both in Australia and abroad;

(2) materially aiding in the financial rehabilitation of those engaged in primary production.

As the task of financial rehabilitation had been completed, however, he argued that ‘the necessity for a stable rate of exchange no longer exists’. Therefore, he declared, it was the duty of the Board at this time to determine its immediate and future policy: The question must of necessity be considered by the Board primarily as custodians of the currency. It is surely evident in the present unsettled state of world affairs, and with important changes in monctary policy pending, that Australia’s obvious course, if her credit is to be maintained, and also if she is to obtain the fullest benefit of any further rise in commodity prices, is to plan a course of action which will bring her currency closer to parity with sterling.

Only by such action, and with circumstances warranting it, can costs be brought into better relationship with prices.

It is not surprising that the Board failed to be convinced by this argument, and once again decided not to alter the rate for the present. More-

over, technical opinion within the Bank was moving away from Sir Robert’s inflexible orthodoxy. While overseas in 1932, Melville collected the views of a number of English economists—including Keynes, Hawtrey,

and Strakosch—on what they considered Australia’s exchange policy should be. The consensus of opinion was that Australia should not attempt

to return to parity until internal economic conditions had improved sufficiently, and certainly not until there was a sustained increase in export prices. On the question of a stable or flexible rate there was less agreement, but most were in favour of some degree of flexibility in accord-

ance with movements in the internal price level and the position of London funds.1*

These views appear to have influenced Melville in favour of a reason-

ably flexible rate. In a memorandum prepared at the beginning of the 1933-4 export season, he expressed the opinion that the rate should rise or fall in accordance with internal conditions, and therefore as prosperity was gradually restored, the rate should fall towards (although not necessarily to) parity. He doubted, however, whether the time had yet arrived for a downward adjustment in the rate. Such were the uncertainties of 17 These views have been summarized in more detail by Giblin, Central Bank, p. 150.

364

Recovery Policy: External the moment that the Bank might reduce the rate only to find it necessary to increase it a few months later. Export prices had risen almost 40 per cent compared with 1932-3, but even so most rural industries were barely

covering production costs (with the exception that the majority in the wheat industry were still operating well below costs). There was, moreover, no certainty that the price rise would be maintained. Therefore, the purport of Melville’s advice to the Board—which appears to have been

more influential than Gibson’s on this occasion—was that the Bank should not rush into an exchange appreciation and should wait for a

further rise in commodity prices. It was as well that Melville’s advice was followed, for at the beginning of 1934 export prices began yet another severe decline which by the end of the year carried them to within 20 per cent of the lowest level recorded in 1931. This led to a minor balance of payments crisis in 1935 because

imports had risen substantially in response to the improved economic conditions in 1933-4, and of course all thoughts of a fall in the exchange rate disappeared. In summary, the Bank maintained the rate at 125 during recovery in default of, rather than because of, a deliberate policy decision. ‘The outworn dogma of the strict separation of banking and government economic

policy caused it to vacillate in choosing between purely banking considerations and the general requirements of the economy. The fact that it was unable to arrive at a satisfactory integration of these two criteria illustrates the strength of the resistance to ‘political contamination’ of the banking system.

The Note Issue Reserve During February 1932, the question of the gradual restoration of the 25 per cent gold backing for the note issue—which had been reduced to 15 per cent in 1931—was the subject of discussion between the Commonwealth Bank and the government. It is not clear how the discussion was initiated, but it appears that the abandonment of the gold standard by Britain and the subsequent rise in the price of gold led both the government and the Bank to call into question the advisability of attempting to restore the old 25 per cent rule. Since the 1931 Act was passed, the Australian price of gold had risen from £5.95 to £7.85 per fine ounce. ‘Thus,

it would require much more of the Bank’s sterling exchange to purchase gold for the restoration of the note issue backing (assuming that the gold so purchased was valued at the gold standard price) than when the 1931 Act was framed, exchange which the Bank could ill-afford. On the other hand, the gold which the Bank retained was worth much more than appeared in its books. If the gold held by the Bank in February 1932 was valued at its current market price, it was more than sufficient to provide a .2% per cent cover for the note issue. Attracted by the prospect of making a handsome profit on the sale of

the Bank’s remaining gold and by the conversion of a sterile to a productive asset, Gibson agreed to an amendment to the Bank Act to enable the note issue reserve to be held in either first-class short-dated sterling 365

Australia and the Great Depression securities or gold. This was a radical change of heart by both the govern-

ment and the Bank. When Theodore had introduced a very similar measure in May 1931, it was decried in extravagant language by the United Australia Party which claimed that it would lead to the disintegration of the financial fabric of the nation; and at the bar of the Senate Gibson had declared that such a measure was unwise and unnecessary (see pp. 237-9). Sir Robert’s about-turn was evidently due to the excellent

business proposition which the rise in the price of gold presented (and also no doubt to the change in the political colour of the government) . The government’s ready acceptance of the amendment was probably due, as Giblin suggests,!® to the fact that it was urged by Bruce who was not in Parliament when Theodore’s Bill was under discussion and would not

therefore be subject to Opposition ridicule to the same extent as would other members of the government. Because of a fear that the price of gold would fall, Gibson urged the government in March 1932 to introduce the legislation without delay. The early stages of the new parliamentary session were preoccupied, however, with the Financial Agreement Enforcement Bills, and the measure could not be introduced until May. In supporting the second reading of the Bill, Scullin made a great deal of the ministry’s volte-face,!® but apart from a few red faces on government benches, particularly in the Senate, it passed without incident.?° The Bank deferred disposing of its gold until 1933,7! but by the end of that year the entire note issue reserve was held

in sterling assets. | Tariff Revision, 1932-5

It is not proposed to undertake a full-scale review of trade and tariff policy during recovery. Io do so adequately would involve a detailed account of the Ottawa Conference and its outcome. It would include a discussion of the bilateral trade negotiations of the mid- and late-1930s (including the treaties with Belgium, Canada, Czechoslovakia, France, New Zealand, South Africa, and others) as well as an assessment of Australia’s trade diversion policy and the disputes that arose therefrom. All this would take us well beyond the scope of the present study, for trade policy (with the possible exception of the Ottawa Agreement) had little impact on the pace or shape of recovery. It is intended therefore to concentrate on tariff revision as in this area the Lyons Government’s decisions were of major significance. Few except extreme protectionists in the labour movement and chambers of manufactures could seriously have doubted that some downward revision of the tariff was warranted during recovery. The Scullin tariff had been imposed, above all, to reduce imports as quickly as possible, and 18 Central Bank, pp. 1932-3. 19 CPD, Vol. 134, pp. 679-85.

20 An incidental provision of the legislation was that the promise to redeem in gold was eliminated from Australian notes. 21 For the reasons for the postponement of the sale of the gold reserve see Giblin, Central Bank, pp. 134-6. 366

Recovery Policy: External in this it had been reasonably successful. It had also, as already noted, stimulated import replacement from 1931 onwards and thus laid the eroundwork for recovery through rapid expansion of the manufacturing sector. Nevertheless, a gradual tariff reduction and removal of prohibitions could take place without damage to the bulk of manufacturing industry for, with BPT rates in 1931-2 some 80 per cent above 1929 and exchange at a substantial premium, most industries enjoyed far more protection than they needed to retain (and indeed increase) their share of the market. The Lyons Government did not, however, propose a drastic reduction in tariff rates. The banks were virtually without overseas reserves, and it accepted that any general revision would need to await a sustained improvement in the terms of trade. In outlining the government’s tariff policy when opening Parliament in February 1932, the Governor-General emphasized that: with industry generally in its present depressed condition, changes in duties should be made with caution and only after full inquiry and consideration. In preparing proposals for tariff revision, my Ministers will give close attention to recommendations made by the Tariff Board. Subject to certain alterations which will be proposed, steps will be taken to ensure the continuance of the

tariff schedules now in force, pending inquiry by the Tariff Board into a number of important items in the schedules. My Ministers will . . . bear closely

in mind the importance of preserving a satisfactory balance of trade, but, subject to that consideration, will review the existing special schedules of surcharges and prohibitions of imports.?2

Further policy details were announced when H. S. Gullett (Minister for Customs) introduced his first schedule shortly after the new Parliament assembled. “Ihe Government stands, first’, he declared, ‘for an adequate measure of protection for the maintenance or establishment of industries for which Australia offers reasonable economic opportunity.’?3 It would look with disfavour, however, on duties of a prohibitive nature which could lead to the formation of local monopolies and provoke retaliation from other countries. Further, Gullett stressed that tariff policy would play an important part in the government’s overall policy of effecting the maximum possible reduction in costs of production to assist the rehabilitation of primary industry. Every effort would be made to reduce the tariff on items essential in export production for (as the government so often repeated) ‘the first condition of our national prosperity, and the Capacity to employ our people, is the building and the preserving of the largest and most profitable export trade that is attainable’.*4 This emphasis on the need for tariff reduction to assist export industries was no doubt sincere, but it seems to have been made primarily with an eye to pacifying those members of the Country Party who insisted on

wholesale dismemberment of the Scullin Tariff. Certainly, six tariff 22 CPD, Vol. 133, p. 8. 23 Ibid., p. 356. 24 Ibid., p. 357.

367

Australia and the Great Depression schedules were introduced in 1932 which removed a number of the excessive duties and most of the prohibitions. Special consideration was also given to reducing rates on essential farm equipment and machinery. Nevertheless, no general downward revision occurred and at the end of 1932 the average tariff level was slightly higher than when the government assumed office. This had been brought about by the introduction of an amended schedule to give effect to the Ottawa Agreement. It had been

widely assumed (particularly within the Country Party) that the additional protection on British goods agreed at Ottawa would lead to a reduction in BPT rates with no alteration in the general tariff. In the event, the government opted for a rise in the general tariff by the margin

of the agreed preference while BPT rates remained unchanged. Thus, duties on 440 items were increased from 15 to 20 per cent.25 The margins of preference established at Ottawa were as follows:

British Preferential Margin of Preference

Duty (per cent) Up to 19 per cent 15 Above 19 and to 29 per cent 174 go per cent and over 20

The decision to increase general tariff rates rather than reduce BPT rates sprang from a combination of reasons, both economic and _ procedural. First, a substantial reduction in duties on some items (particularly textile goods) could have had a serious effect on the pace of recovery. The post-1931 rise in employment in such industries as textiles, chemicals

and paper had been made possible only by the enormous increase in protection induced by the depression, and even a modest fall in BPT rates could have checked recovery in these industries. The Lyons Govern-

ment was also subject to unusually heavy pressure from chambers of manufacturers to maintain the Scullin Tariff. Second, many items were admitted free of duty (or subject to a low rate of general duty), so that the only way of achieving the desired margin of preference was to increase

the general tariff. Although in the bulk of cases the general tariff was sufficiently high to obviate the need for a further rise in rates, Lyons claimed?® that a standard formula needed to be applied because the Ottawa Agreement required immediate implementation. There was therefore no time for examination of individual cases by the Tariff Board.??

Earle Page epitomized the Country Party’s disappointment when he stated, extravagantly, that the decision not to lower British preferential rates expressed a ‘meanness and sordidness . . . [which] almost passes belief’.28 Despite the assurance to export industries that the greatest 25 See H. S. Gullett, second reading speech on United Kingdom and Australia Trade Agreement Bill, CPD, Vol. 135, pp. 1139-66. 26 Speech by J. A. Lyons, 14 July 1933 in D. B. Copland and C. V. Janes, Australian Trade Policy, Sydney 1937, 4.28. 27 The Ottawa Agreement need not have borne this interpretation. The Agreement was primarily concerned with altering preference margins within the existing tariff structure and not with expanding the range of the tariff. 28 CPD, Vol. 136, p. 2052.

368

Recovery Policy: External possible tariff reduction would take place, the government clearly intended to retain the essence of the Scullin Tariff—at least during the early recovery stage. Nevertheless, it was agreed that existing tariff rates, combined with an

exchange premium of 25 per cent, provided most manufacturers with more protection than they needed. Prior to 1933 the Tariff Board had ignored the exchange premium in making its recommendations, for it thought that the premium would eventually be eliminated.?9 By the end of 1932, however, the possibility of further exchange appreciation appeared remote and it became necessary for the Board to consider the protective effect of the premium when recommending rates of duty. In December 1932, the Board was commissioned to conduct a public inquiry on the question of the best means of adjustment of tariff rates in relation

to movements in exchange. In doing so it confirmed the view that the protection available to industry was now more than adequate: The protection afforded by the cumulative effect of duty and charges [exchange and primage] is far in excess of requirements of efficient industry. In fact, some of the more natural Australian industries can now function under cover ‘of the protection afforded by the exchange alone.%°

It suggested, therefore, that the rate of duty vary inversely with the Anglo-

Australian exchange rate, allowance to be made for fluctuations in the sterling rate of exchange with other countries.3! The basic recommendation was adopted and incorporated in the Customs Tariff (Exchange Adjustment) Act of 1933. In the first instance, however, the Act applied only to goods subject to British preferential rates, and hence it had the effect of further widening the margin of British preference. In 1934 the Act was extended to include goods covered by the general tariff. There were still a large number of exclusions, however, and the margin of British preference remained well above what it otherwise would have been.

Among the provisions of the Ottawa Agreement was an undertaking

by the Australian government to submit its tariff to systematic reexamination through the Tariff Board using the criterion of ‘economic efficiency’ (Article 9). In theory this means an overhaul of the Scullin Tariff and a return to the policy of the 1920s. If this was the intention, only one-half of it was carried into effect. Although BPT rates were progressively reduced during the mid-1ggos, there was little alteration in

the general tariff. As in the case of the implementation of the main 29 Report and recommendations of Tariff Board on ‘Adjustment of Protective Duties to Compensate for the Effects of Exchange and Primage’, CPP, 1932-4, Vol. III, pp.

30 Ibid., p. 730. 728-9.

31 The method employed to calculate the adjustment was as follows: (a) when the exchange premium was above 1634 per cent, the deduction would be one-quarter the amount of the duty, or one-eighth the value for duty, whichever the lower; (b) when the exchange premium was between 111% and 163 per cent, the deduction to be made was one-eighth the amount of the duty or 64% per cent of the value for duty, whichever the lower. 369

Australia and the Great Depression provisions of the Ottawa Agreement and exchange adjustment, tariff policy was employed to bring about trade diversion in favour of Britain (and the Empire generally). Thus, by 1936-7 BPT rates were brought within 11 per cent of those prevailing in 1928-9, whereas the general tariff was still 56 per cent higher than it had been on the eve of the depression (see Fig. 8). The reluctance of the Lyons Government to depart swiftly and sharply

from the level of the Scullin Tariff marked one of its few positive contributions to recovéry. In particular, the maintenance of very high rates in 1932 and 1933 ensured that import replacement proceeded sufficiently rapidly to stimulate recovery in most sectors of the economy. In the allimportant iron and steel industry it allowed economies of scale to be achieved which in no small measure formed the basis of continuing industrial growth during the 1930s. Further, it encouraged the establishment in Australia of branches of large overseas companies ( and associated private capital inflow) , and also a general widening of the industrial base.

To be sure, this judgement is based on a limited assumption: that the primary requirement of the day was for the greatest rate of re-employment

that could be achieved, and that forced industrial expansion by the use of beggar-my-neighbour policies was one of the more effective ways of achieving this. It was of course far from an ideal solution and helped in a small way to restrict world trade and the pace of international recovery. But in view of the inability of any large country (or group of countries) to come to grips with the problem of restrictions on world trade, Australia could do little else. In normal circumstances one would not consider the use of tariffs to achieve short-term objectives. In retrospect, it may well

have been preferable to use the exchange rate as the principal means of demand diversion, for this would have had the additional advantage of shifting income in favour of export industries.*? In practice, however, the exchange rate was not under direct government control and a blanket rise

in the price of all imports would have restricted the growth of those industries dependent on imported raw materials and semi-finished manufactures.3 In the absence of detailed analysis, it is much more difficult to judge the effect on recovery of widening the margin of British preference and

all that can be attempted here is a balance of probability. In the first place it should be noted that labour costs in Britain fell far less than in other important industrial countries such as the United States and Germany, and hence the advantage to Britain was less than at first sight appears. In those areas where Britain had lost her comparative advantage to non-British countries (as in iron and steel, chemicals and in a wide range of engineering and metal products), higher preferences were of some advantage to her. On the other hand, Australian manufacturers 32. On the other hand, a significant shift in income from urban to rural areas may well have restricted the growth of domestic expenditure during recovery as much of the additional rural income would have been required for debt repayment. 33 Many would also have been affected by the need to import capital equipment as full plant capacity was approached.

§79

Recovery Policy: External were to some extent sheltered by Britain’s comparative disadvantage. Conversely, lowering BPT rates (and not the general tariff) on such items as

textiles resulted in little trade diversion, but it did expose Australian industry to more intense competition. It is notable in this connection that the domestic textiles industry was the first to run into difficulties largely due to the lowering of BPT rates. In general, however, increased British preferences are unlikely to have had an important impact on industrial recovery. Even the sensitive tex-

tiles industry was only affected temporarily and rapid expansion continued after 1935-6. The matter is entirely different if a longer period of time is considered. By effectively restricting the available range of imported plant and equipment, it is probable that the preferential system has had an unfavourable long-run effect on industrial efficiency. But during most of the recovery period net additions to the capital stock in manufacturing were of minor proportions: the main legacy of enlarged preferences in the 1930s was deferred until after World War II. On the side of exports, the short-run effect of the Ottawa Agreement was again minimal. In return for greater preferences, Australia obtained higher prices and an assured market in Britain (usually accompanied by a quantity limitation) for some of her lesser exports such as meat, butter, cheese and fruit. On a second group of commodities—wheat, copper, lead and zinc—preferential entry to the market was agreed upon but at prices not exceeding world parity. Of Australia’s major exports, wool was alone

in being excluded from Ottawa. But the introversion embodied in the principle of strengthening Imperial preference made wool particularly vulnerable to retaliatory action by non-British countries. Large quantities were normally purchased by gold bloc countries such as France, Italy and Belgium, and as these three struggled with balance of payments difficul-

ties in the mid-1930s they found it expedient to limit imports from British countries. It is impossible to determine the effect of this action on wool prices, but it must have negated part at least of the small addition to export prices obtained in 1932. Whatever the precise result of the various arrangements springing from the Ottawa Conference, there can be little doubt that they had a minor impact on the pace and shape of Australia’s recovery.

371

XVI

Conclusion

The central point that emerges from the foregoing discussion is that deliberate policy measures were comparatively unimportant in influencing the nature of the contraction or the speed of recovery. Contrary to the widely-held belief about the high degree of control exercised by policy-forming instrumentalities during the depression, it appears that policy merely followed the market in most instances. In addition to the disintegration of international trade at the end of the 1920s, the dominant influence on the character of Australia’s depression experience was the

strain imposed on domestic capital resources by the rapid industrial-

urban growth in the decade after World War I. The early stage of industrialization in any country inevitably imposes a heavy demand for new capital formation, but in Australia’s case the problem was augmented by the parallel demand for social asset creation by a high income and geographically dispersed community. Because of the reliance on external capital resources that was thus made necessary (and also because of the difficulty of increasing the value of exports in the face of growing impediments to international trade in the 1920s), the Australian economy was rendered acutely vulnerable to international disturbance by the end of the decade. It was this vulnerability which explains in large measure the sharpness of the early contraction, the severity of the balance of payments crisis and the exceptional difficulty in avoiding default on external interest obligations. It also accounts for the succession of hastily-devised expedients which were subsequently described as policy innovations. Combined with the growth in manufacturing capacity in the 1920s, the massive withdrawal from the international economy that was forced during the early 1930s predicated the nature of the recovery process. Because imports fell much more heavily than did national expenditure, the depression encouraged the shift of resources to the manufacturing sector; and it was on the basis of import replacement of manufactures that recovery was forged. ‘To be sure, a number of policy expedients assisted the transfer of resources towards manufacturing. The combination of substantially increased tariff protection, devaluation and the fairly heavy 372

Conclusion

fall in money wages provided the additional protection necessary to ensure a rapid rise in manufacturing output after 1932. But none of these measures was consciously planned to induce recovery through industrial expansion, and all were more or less forced by the external disequilibrium

inherited from the growth characteristics of the 1920s. ,

Granted that a number of policy expedients helped, almost accidentally, to moderate the decline in income and employment, it remains true that my overall judgement is that economic policy played little part in shaping the course of the depression in Australia. What was gained by exchange devaluation and by deficit financing in 1930-1, for instance, was almost certainly lost in 1931-2 following the fall in public expenditure

after the adoption of the premiers’ plan. Further, it can be said with reasonable certainty that between mid-1931 and 1935 most aspects of policy retarded the process of recovery. Not only was current public expenditure kept on a very tight rein (with progressive reduction in the size of deficits), but the authorities refused to exploit favourable money market conditions for the relief of unemployment. The modicum of unemployment relief expenditure that was sanctioned was not only totally inadequate but was also distorted by an unrealistic insistence that expenditure be confined to ‘reproductive’ works. The fear of inflation and of a new balance of payments crisis, the belief that a repetition of the heavy

expenditure of the ig20s should be avoided, and a serious underestimation of the economy’s capacity for import replacement were the strands in official doctrine primarily responsible for the parsimonious attitude towards works expenditure. It cannot of course be denied that an expansionary programme might have been frustrated (at least in part) by exhaustion of international reserves. In view of the persistent low level of export prices and of London funds through the 1930s, it would have required exceptional skill in economic management to guide the economy towards full employment without precipitating a major payments crisis. Even assuming that an expansionary programme had been politically acceptable and there existed scope for additional import replacement, there is no reason to believe that the monetary and fiscal authorities possessed sufficient skill to handle such a delicate operation. When considered in international context, there 1s no reason to believe

that Australian depression policy was notably less successful than the policies pursued in most of the advanced countries of the western world.

Only in a handful of countries is there evidence to suggest that policy played a prominent part in the recovery process. In Britain the combination of balanced budgets and cheap money was, at best, neutral.1 In those countries under the leadership of France which maintained gold payments by deflationary action, the effect of policy was positively destructive.2 In the United States expansionary monetary and fiscal policy was only partly successful despite the vigour of the New Deal. It is true that incomplete American recovery was due to much besides policy 1H. W. Richardson, Economic Recovery in Britain, Chs 8-9. 2H. W. Arndt, Economic Lessons, Ch. 5.

373

Australia and the Great Depression inadequacy. ‘The extent of overinvestment in the 1920s, the severity of the collapse, the hostility of the business community to the New Deal, the

adoption of restrictive trade policies and reductions in the expenditure of the states were all factors which inhibited the effectiveness of central government policies. Nevertheless, the fact is that the New Deal failed to

achieve its main objectives by a wide margin. Only three countries achieved notable success in effecting rapid and complete recovery, due at

least in part to policy measures: Germany, Japan and Sweden. In Germany and Japan success was built on large rearmament programmes and, in the Japanese case, on import replacement and manufacturing diversification.’ In Sweden, where tradition has accorded policy a prominent role in promoting recovery, there still exists real doubt about the importance of the creation of easy monetary conditions and deficit financing. Certainly, these measures were an advantage, but it appears that the rapid growth in demand for Sweden’s exports, particularly forest products, was the main reason for the strength of recovery.*

More surprising than the ineffectiveness of recovery policy is the absence in Australia of any significant intellectual or official dissatisfaction with established policy doctrine. There is nothing one can point to in the period of the Lyons Governments which savours in any way of policy experimentation to hasten the process of recovery. It is true that there were a few economists and others on the wings who lamented the rigid orthodoxy of post-1931 policy. In particular, E. R. Walker in a

succession of publications® urged the adoption of the substance of Keynesian economics through a greatly enlarged public works programme. There were murmurings of dissatisfaction with the premiers’ plan in the report of the Wallace Bruce Committee in 1932, and from time to time L. F. Giblin urged a more vigorous approach to economic management. But there is nothing in Australia which even approximates the widespread intellectual reconsideration of traditional doctrine which occurred overseas. There is no need here to recount the content or extent of the intellectual revolution. It is sufficient to say that in the bulk of western countries there occurred at least partial rejection of classical anticyclical policy, and in many countries elements of the new policy were tried before 1939. Even in France, where rigid orthodoxy was held more

firmly and lasted longer than elsewhere, the Blum experiment of 1936 represented a substantive break with tradition.® There is no simple explanation of why there was so little discontent with official recovery policy in Australia. Part of the answer is that many 3 E. B. Schumpeter (ed.), The Industrialisation of Japan and Manchukuo, 1930-1940, New York 1940. 4See discussion in symposium on Sweden in Annals of the American Academy of Political and Social Science, May 1938. 5 Notably Australia in the World Depression, Unemployment Policy with Special Reference to Australia, Sydney 1936, and ‘Public Works as a Recovery Measure’, _ ‘Economic Record, December 1935. 6 See R. Margolin, ‘Reflections on the Blum Experiment’, Economica NS 5 (May 1938) , and M. Kalecki, “The Lessons of the Blum Experiment’, Economic Journal, XLVIII (March 1938).

374

Conclusion

believed that the success of any experimentation would inevitably be frustrated by a recurrence of balance of payments difficulties. It was believed further that recovery depended on a revival in export prices and that Australia could not accelerate the process. Another factor was the labour movement’s obsession with reform of the banking system. As most Labor men believed that the depression had in some way been caused by banking malpractice, most of their energy was devoted to securing bank nationalization. Also important was the tradition in Australian economics of empiricism and pragmatism, a tradition which found little room for theoretical innovation. But the main explanation is probably to be found in the nature of the premiers’ plan itself. At the time of its adoption and during most of the 1930s, the plan was publicized as the means of Australia’s salvation. It was difficult at the time to deny Copland’s repeated claim that the plan incorporated unorthodox and expansionary elements. Most international authorities accepted Copland’s interpretation without qualification, and there were few in Australia competent to offer a contrary opinion. Further, the political veracity of the Lyons Government depended on strict adherence to the plan, and as recovery proceeded fairly rapidly there occurred a general identification of the plan with recovery. Finally, there were very few professional economists in Australia in the 1930s and most of the leaders in the field were associated with the formation of the plan. It is hardly surprising, therefore, that these men found it so difficult to question the foundation on which their policy prescriptions had been built. The absence of policy innovation does not mean that there were no important changes in the conduct of economic management during the 1930s. Indeed, there is a striking difference in the situation before and after the depression. In the 1920s there were few coherent policies and even fewer tools of management. The central government exercised little effective economic control. Its most powerful tool was the tariff, and this

it administered without criteria except a vague desire to increase total production. The Commonwealth Treasury was no more than the govern-

ment’s book-keeping department and it exercised little influence on policy. Most of the important economic decisions were taken by the states, and the states were primarily interested in competing amongst themselves for labour and capital and in promoting as much visible ‘development’ as possible. The Commonwealth Bank accepted responsibility for the note issue, and the Commonwealth Arbitration Court for maintaining a traditional standard of living. The depression was responsible for three notable changes in economic administration. First, the role of the Commonwealth Treasury was greatly enlarged, and there occurred a corresponding diminution in the importance of State Treasuries. This chance did not spring from any formal increase in Commonwealth power. Rather, it came through the rapid growth in importance of the Loan Council. As detailed above, the Loan Council became the formal instrument through which many of the major decisions on

external and internal finance were taken. But the Council was an 375

Australia and the Great Depression extremely cumbersome body and was ill-suited for the swift formulation and implementation of policy that was necessary during the depression. Meeting as it did three or four times a year, it could do little else than

frame policy in terms of vague generalities and it became the responsibility of the Commonwealth Treasury to work out the details and improvise whenever necessary. Parallel to this growth in responsibility occurred a slow but distinct improvement in the quality of administration and in the ability of leading officials. Even in the late 1930s the Treasury was still dominated by men with little more than accounting qualifications, but the depression forced a wider appreciation of the implications of national economic management and a number of the top officials responded to the challenge. Second, there was an even greater change in the power and influence

of the Commonwealth Bank. Reluctantly and with many hankerings backward, the Bank was forced to accept wide responsibility for monetary management. Even more reluctantly, it was required to acknowledge the fact that monetary and fiscal management were not two separate departments which had no relationship to each other.

Before 1929 control of the note issue was the only formal central banking function performed by the Commonwealth Bank. During the early 1930s, under Sir Robert Gibson’s rigid and legalistic influence, the note issue continued to be the Bank Board’s main preoccupation. Nevertheless, the Bank’s central banking functions accumulated steadily. In late 1929 it acquired control over the country’s gold reserves, and in August 1930 it broadened its influence over international reserves in general. In late 1930 it accepted qualified responsibility (with the Loan Council) for regulating the provision of deficit finance and generally during 1930-1 toyed with the idea of providing rediscount facilities. In 1931 control of the exchange rate was added to its functions, and it also sought to influence domestic interest rates. In a formal sense the Bank was thus transformed and was close to becoming a fully-fledged central bank. However, its performance lagged well behind. At least until after Gibson’s death its main concern continued to be with the note issue and it resisted

becoming involved in wider issues. Decisions tended to be based on narrow banking criteria and it refused or was unable to recognize the implications of its actions outside the monetary system. Frequently it also failed to understand the effect of its decisions on the monetary system itself. Despite all this, the Bank was gradually drawn within the general framework of national policy formulation. Regular meetings between the Commonwealth Bank, the Loan Council, governments and the trading banks were a feature of the depression years, and although the Bank would have preferred to stand aloof, it could not altogether avoid the consequences of its greatly increased power. Third, the depression brought together the several agencies of economic policy more closely than they had ever been before. The depression did not of course remove all the contradictions in policy, but at least there

was an attempt to consider common economic criteria. Whatever the judgement about the decisions of the Commonwealth Arbitration Court 376

Conclusion in the 1930s, it is clear that for the first time the capacity of the economy to pay was accorded a high order of priority in determining wages. The trading banks were no longer entirely independent agents, for they were now tied loosely to the Commonwealth Bank and, through the Bank, to

the Loan Council. Similarly, state governments were required to subordinate some of their activities to Loan Council and premiers’ conference decisions. And, although in a rather different category, the Tariff Board was of necessity entirely subordinated to government policy, at least

in the period 1930-3. Unlike the depression of the 1890s, the 1930s spawned very few new institutions. The significance of the latter period lies rather in the way it moulded existing institutions in favour of broad acceptance of a national purpose. The emergency arrangements of World War II consolidated rather than initiated this trend.

No less striking is the effect of the depression on the Australian economy. A brief comparison of the situation in 1928 and 1937 will serve

to illustrate the point. Although real income per head in the two years was approximately the same, there had occurred a major shift in the way this income was derived. The uneven prosperity of 1928 depended heavily

on the international economy. About one-quarter of domestic capital formation was financed by external borrowing, and the employment of a large proportion of the unskilled work force depended on the continuation of a high and rising rate of public capital inflow. Both exports and imports represented 18 per cent of national product. Despite a decline in the relative importance of the rural sector in the 1910s and 1920s, the economy still relied heavily on exports of primary products, and on wool and wheat exports in particular. Industrial growth had proceeded with moderate speed during the 1920s, but manufacturing industry was acutely sensitive to changes in import prices relative to domestic prices. From around the mid-1gg0s Australian costs had not moved in sympathy with the downward trend in import prices and by 1928, despite continual upward revision of the tariff, manufacturers were

subject to intense import competition which appreciably slowed the rate of industrial growth. No recourse to hindsight is necessary to suggest that in these circumstances the economy was due for some readjustment. By 1937 there had occurred a substantial withdrawal from the inter-

national economy. Governments had learned to live without overseas capital, and total investment—which had recovered to a respectable 16 per cent of national product—was almost entirely financed internally, for in the years around 1937 apparent capital inflow represented a mere 6 per cent of domestic capital formation and all of this was on private account.

The economy had also learnt to live on a substantially reduced diet of imported supplies: as a proportion of national product, imports were reduced to around 13 per cent in 1937. The proportion of exports was, however, much the same as in 1928. The place vacated by imports had been more than fully occupied by manufacturing. Due to the presence of

much idle capacity and the near elimination of import competition, manufacturing was able to expand rapidly during recovery without heavy investment in new plant and equipment. Some men formerly employed 377

Australia and the Great Depression . on public works were thus able to find work in factories, but most of the unemployed were absorbed—as an indirect consequence of industrial

growth—by the tertiary sector. Aiding the growth in the size of the manufacturing sector was the relatively heavy fall in prices and money wages, so that by 1937 some of the competitive disadvantage of local manufacturers that existed in 1928 had been eliminated. The depression thus provided a powerful stimulus to Australian industrialization, and by removing the excessive dependence on overseas capital that developed in the 1920s it helped to lay the foundation for comparatively stable longterm growth in the post-war period. The depression also assisted, fortuitously, the transition to a wartime economy, for the massive withdrawal from the international economy that occurred between 1939 and 1945 would have been much more difficult and painful without the preparation of the 1930s.

There are many other economic, political, institutional and social changes that flowed, directly or indirectly, from the searing experience of mass unemployment, widespread bankruptcy, disastrous commodity prices, political turmoil and social upheaval. The 1945 White Paper on Full Employment and subsequent employment policies owes much to the experience of the 1930s. The attempt of the Chifley Government to nationalize the banks? clearly owes much to the confrontation between the banks

and the Labor government in 1930 and 1931, although it may also owe something to the banking debacle of 1893. The post-war subordination of monetary policy to the Treasury—both in Australia and abroad— springs in large part from the disillusionment with monetary policy in

the 1930s. ‘Through the Ottawa Agreement and the bilateral trading arrangements of the mid-1930s, the depression has had a long-term effect

on the pattern of overseas trade. And the enforced isolationism of the 1930s affected many Australian attitudes and policies in the post-war years, particularly within the ranks of the Labor Party. Such examples could be multiplied, but a full examination of them would occupy a separate volume.

TA. L. May, The Battle for the Banks, Sydney 1968, Ch. 1.

378

APPENDIXES

APPENDIX A

LOAN RAISING AND STOCK PRICES, 1927-32 Table A-1: EXTERNAL COMMONWEALTH AND STATE LOAN FLOTATIONS AND RESULTS, 1927-30

Date of Issue | Rate of | Percentage

prospectus | Borrower Place Amount price | interest left with

(per cent) | u/writers 1927:

Jan. 29 | S. Aust. London £2,500,000 | 98 5 nil

Feb. 2 N.S.W. N.Y. $25,000,000 96} 5 nil Apl 11 N.S.W. N.Y. $25,000,000 g6} 5 nil Apl 1 W. Aust. London £1,500,000 97+ 5 | 56

Apl 9 C’wealth | London | £11,711,000*| 98 5 30 May 10 | N.S.W. London | £10,995,100*| 99 | 5+ | nil July 5 C’wealth | London £7,000,000 98 | 5 : 89 (for states) Aug. 24 | C’wealth | N.Y. $40,000,000 98 5 nil Oct. 21 | Victoria London £4,000,000 973 5 nil Nov. 22 | C’weaith | London £7,000,000 | 97} | 5 75 Dec. 14 | N.S.W. London £7,000,000 994 | 53 62

1928: | |

Jan. 26 | S. Aust. London £2,500,000 | 994 5 47 Mar. 3 | C’wealth | London £8,000,000 98 5 84 ‘for states) | Apl 2 W. Aust. London £3,000,000 98 5 nil

May 8 C’wealth | N.Y. $50,000,000 g2$ 4% nil July 13 | C’wealth | London £7,000,000 98 5 87 Jan. 16 | C’wealth London £8,000,000 98 5 84

1929: | (and states)

May 11 | C’wealth | London | £12,403,734*| 97 5 48 (for Q’land)

(Treasury (dis- | bills) count) (Treasury (disbills) count)

Aug. 30 | C’wealth London £5,000,000 | £6.35; £6.115 — Nov. 26 | C’wealth | London £5,000,000 | £5/7/6| £5.135 8d —-

1930:

Apl 24 Q’land London £3,800,000* | 97 54 28

Note: * indicates conversion loan. Source: Compiled from Commonwealth Treasury records.

380

Appendixes

Table A-2: AVERAGE MONTHLY NET PRICES OF COMMONWEALTH (1945-75) 5 PER CENT STOCK IN LONDON, 1929-32

Month 1929 1930 1931 1932

Jan. 974 884 73% 804 Feb. 97% 894 693 79 Mar. 97 gos 72 86} Apl 97883 git 67% 72 854 May 97 874 June 96} 86} 71 g2+ July 96} 88} 78 1002 Aug. 95% got 738 99 Sept. 943 863 69 102 Oct. 92} 834724 662 104 Nov. g2 80} 102 Dec. | gi 81; 763 1032 Note: Average prices to nearest one-quarter. Source: The Economist, 1929-32.

Table A-3: AVERAGE MONTHLY NET PRICES OF COMMONWEALTH (1933) 5} PER CENT STOCK IN MELBOURNE, JANUARY 1929 tO AUGUST 1931

Month 1929 1930 1931

Jan. 100. 972 g2 Feb. 100 98} gI Mar. 100 963 g2 Apl 99% 97 834 92 May 100 974 June 100963 97t77% 80} July gg Aug. 99496 964 78 Sept. 984 Oct. 98 984 96 Nov. ~ g6} Dec. 974 96

|

Note: As for Table A-2. Source: Official Record of the Stock Exchange of Melbourne, 1929-32.

381

Appendixes Table A-4: AVERAGE MONTHLY NET PRICES OF COMMONWEALTH (1938) 4, PER CENT STOCK IN MELBOURNE, SEPTEMBER 1931 tO DECEMBER 1932

IQ3I: 1932: Sept. 83 May 93 Oct. 884 June 93

Nov. QI | July 98 Dec. Q2 : Aug. gg} 1932: | Jan. 100 Feb. 94 933| |Sept. Oct. 1004 Mar. 94. | Nov. 101 Apl 94 | Dec. 994 Note and Source: As for Table A-3.

382

APPENDIX B

ESTIMATES OF THE SIZE OF THE ‘OUTSIDE’ EXCHANGE MARKET IN THE HALF-YEAR AUGUST 1930 TO JANUARY 1931 Table B-1: MERCHANDISE EXPORTS AND TRADING BANK

| (£m) ,

STERLING RECEIPTS, 1930-1 to 1934-5

Exports Trading bank

sterling receipts

1930-1 89.9 58.5 1931-2 96.9 81.5 1932-3 98.7 87.4 1933-4 114.2 109.0 1934-5 103.4 84.1

Note: Exports include invisible earning. For the purpose of the calculation 1930-1 refers to the year August 1930 to July 1931. Source: The Australian Balance of Payments, 1928-29 to 1947-48,

Bank. |

p. 30; London exchange statistics supplied by the Reserve

Normally one should include capital inflow with exports to calculate aggregate sterling receipts, but in this period it is best excluded. First, in 1930-1, apparent capital inflow was represented principally by the accumulation of short-term government debt in London without exchange transactions. Second, in the following four years, net capital export took place. Only in 1934-5 is there any significant inaccuracy caused by the elimination of capital movements. During the years 1931-2 to 1934-5, the banks received 88 per cent of export credits, compared with 65 per cent in 1930-1. But the ‘outside’ market was only a substantial factor in the exchange market for one-half of 1930-1, in the period August to January. If we assume that the banks obtained their normal 88 per cent in the other half of the year, then they received only 57 per cent in the period August to January. (A seasonal correction is unnecessary because the volume of business is about the same in these two half-yearly periods.)

This estimate is a rough approximation, but there is no doubt about the broad magnitude of the growth of the ‘outside’ market. During December 1930 and January 1931 the proportion of ‘outside’ transactions must have been greater than 43 per cent, and thus the extent of the banks’ concern can be readily appreciated.

383

(£m) APPENDIX C

STOCK OF MONEY, PROXIMATE DETERMINANTS

OF MONEY AND VELOCITY |

Table C-1: COMPONENTS OF THE STOCK OF MONEY, QUARTERLY, 1911-38

(1) (2) | (3) (4) (5) (6)

Currency | Trading bank deposits| Savings Cols Money stock

_| the public adjusted

held by | (Demand)| (Time) deposits 1-4 seasonally

1911 M 9.9 61.8 77-5 57-5 206.7 206.6

JS10.2 62.2 81.2 59-4 213.0 217.2 210.9 10.3 62.2 82.0 61.3 215.7 D 10.4 64.3 80.7 63.2 218.6 219.4

1912 M 1I.1 67.3 83.6 65.1 227.1 227.0

JS II. 65.4 84.4 11.1 61.9 85.167.0 68.8227.9 227.0225.6 228.6

D 11.2 63.1 85.4 70.5 230.3 231.2 1913 M 11.4 65.2 87.1 73.0 236.7 236.6 enS| 11.4 62.0 87.8 75.5 236.7 234.3 11.5 60.1 88.7 77-7 238.1 239.8 D 11.6 64.1 90.4 80.3 246.4 247.3

1914 M 11.7 70.8 Q2.1 81.6 256.2 256.1

JS11.9 70.2 93-7 83.5 259.3 2560.7 11.9 68.5 94.2 85.4 260.0 261.8 D 12.0 67.8 94.8 86.7 261.2 262.2 1915 M|__ 12.0 72.3 96.7 87.9 268.9 | 268.8 JS 12.1 75.4 gg.6 g1.2 278.3 275.5 12.1 76.7 100.4 90.3 279.5 281.5 D 12.2 81.3 98.6 90.9 282.9 284.0 1916 M 12.4 87.4 97.6 92.6 290.1 289.9 JS12.9 92.8 100.1 96.3 302.1 299.1 13.7. 92.6 IOI.5 97-5 305.3 307.4 D 15.9 95.6 IOI.! 98.9 311.4 312.6 1917 M 16.1 97.3 101.8 100.2 315.4 315.2

J 16.0 105.5 103.8 106.7 331.9 328.6 S 16.7 101.0 107.6 109.8 335.0 337.3 D 18.6 95-8 108.8 ITI.5 334.7 336.0

i918 M 18.1 98.5 111.6 112.7 340.9 340.7 J 18.2 112.3 112.5 116.3 359-3 355-7 S 19.1 116.7 120.3 118.1 374.1 376.8 D 18.9 121.2 123.3 116.8 380.2 381.6 384

Appendixes

Table C-1 (continued) (£m)

(1) (2) | (3) (4) (5) (6)

Currency | Trading bank deposits} Savings Cols Money stock

the public adjusted

held by | (Demand)| (Time) deposits 1-4 seasonally

1919 M 19.3 118.4 126.3 121.1 385.1 384.9

J 20.4 119.0 130.1 128.4 397.8 393.9 S 20.4 115.7 128.5 129.1 393.7 396.5 D 20.3 121.4 126.0 129.6 397.3 398.8

1920 M 22.0 130.0 128.4 130.2 410.5 410.3

J 22.1 133.9 131.7 136.7 424.4 420.2 S 22.8 126.3 136.5 139.5 452.1 428.1 D 22.6 123.1 143.4 143.3 432.4 434.0

1921 M 25.1 124.2 156.4 146.5 452.3 452.0

J 23.6 127.8 | 154.8 153.1 459-3 454-7 S 22.9 118.4 161.8 152.9 456.0 459.2 D 24.2 116.2 157.6 154.4 452.4 454.1

1922 M 22.8 121.4 157.7 155.9 457.8 457.6

J 23.3 124.0 164.9 162.3 474.4 469.7 S 22.8 120.1 167.3 163.2 473.4 476.7 D 22.8 120.4 170.3 163.5 477.0 478.8

1923 M 23.4 124.3 176.7 164.1 488.5 488.3 J 23.2 126.7 184.7 171.5 506.0 500.9 S 22.5 122.0 185.0 170.0 .| 499.5 503.0

D 24.6 123.4 182.8 169.5 500.3 502.2

1924 M 24.1 129.5 186.2 167.9 507.8 507.6

J 22.4. 129.4 178.4 176.9 507.1 502.0 S 23.7 117.8 180.3 176.0 497.8 499-7

D 23.9 — 123.2 181.3 172.9 501.3 503.1 1925 M 23.6 133.7 186.9 174.1 518.3 518.1

J 22.9 131.9 189.7 182.1 526.6 521.3 S 23.9 125.7 193.4 182.5 525.6 529.3 D 28.9 134.4 192.7 185.0 540.9 542.9

1926 M 24.9 133.8 199.0 186.7 544.3 544.1

J 23.6 134.8 203.5 196.0 558.0 552.4 S 24.9 122.1 208.9 196.0 551-9 555-8 D 31.4 123.2 211.1 194.4 560.1 562.2

1927 M 25.6 129.0 Q11.7 196.1 562.4 562.1

J 24.9 130.5 212.5 204.2 572.1 566.4 5 25.9 120.1 219.4 205.3 570.7 574-7 D 31.3 123.2 227.1 204.9 586.5 588.7 385

i Appendixes

Table C-1 (continued)

(£m)

(1) (2) | (3) (4) (5) (6)

Currency | Trading bank deposits | Savings Cols Money stock

the public | adjusted held by | (Demand) | (Time) deposits 1-4 seasonally

1928 M 26.0 132.8 231.2 206.3 596.3 596.0

J 24.9 126.6 233.0 215.2 599.7 593-7 S 25.8 125.8 186.9 214.7 553-2 557-1 D 28.0 125.2 192.8 215.8 561.9 563.9

1929 M 26.1 132.5 199.6 216.3 574.6 574.3

J 24.5 127.7 202.5 225.5 580.1 574.3 S 25.0 119.2 204.2 226.0 574-4 578.4 D 27.1 114.9 208.3 220.0 570.2 572.3

1930 M 23.8 113.2 205.3 213.3 555-7 555-4

J 22.6 104.0 206.6 217.5 550.6 545-1 S 22.6 96.2 208.7 209.9 537-4 541.2 D 25.4 96.0 209.0 196.8 527.1 520.1

1931 M 23.5 : 95-5 209.1 192.9 521.0 520.7

J 25-4 | 9QI.0 210.6 193.4 520.4 515.2 S) 26.2 88.5 211.2 193.6 519.5 523.1 D 28.6 97.8 213.8 194.5 534.7 536.7

1932 M 28.8 102.0 222.1 193.5 546.4 546.2

J 24.8 | 96.4 222.8 198.0 542.0 536.6 S 24.9 197.8 541.2 534.6 543-2 538.3 D 28.4 || 93-6 93.8 218.3 221.8 197.1 1933 M 24.8 96.7 223.2 198.2 542.8 542.6 J 24.2 95.8 224.0 202.3 546.3 540.8 S 24.9 92.5 220.1 202.6 540.2 544.0

D 29.1 102.0 221.9 203.3 556.3 5598.3 1934 M 25.6 112.4 222.4 205.5 565.9 565.6 J 25.0 | 114.2 229.8 210.1 579-2 573-4 S 26.4 108.3 229.2 212.6 576.5 580.5 D 28.3 113.9 227.9 212.9 583.1 585.2 1935 M 26.6 116.5 226.3 213.5 582.9 582.6 J 26.8 119.1 224.3 218.0 588.2 582.3 S 27.7 113.7 218.1 220.0 579-5 583.6 D 30.4 122.0 216.5 220.5 589.4 591.6 1936 M 28.6 126.9 215.4 221.6 592.5 592.2 J 28.8 122.6 221.2 225.0 597-5 591.6 S 28.7 118.4 219.5 225.0 591.7 595.8 D 34.8 128.1 220.7 224.2 607.9 610.1 386

Appendixes Table C-1 (continued) (£m)

(1) (2) | (3) (4) (5) (6)

Currency | Trading bank deposits | Savings Cols Money stock

the public adjusted

held by | (Demand)| (Time) deposits 1-4 seasonally

1937 M 33.4 136.7 226.5 225.0 621.7 621.3

J 29.5 137.9 236.8 230.9 635.1 628.7 S 30.8 131.8 240.1 232.8 635.5 640.0 D 38.4 140.0 239.6 233.5 651.5 654.0

1938 M 32.1 143.6 244.2 235.4 655-3 655-0

J 31.4 140.9 250.5 240.4 663.3 656.6 S 32.8 132.9 248.2 242.0 656.0 660.6 D 39.1 141.4 247.3 | 243-7 671.5 673.9

Note: It has been necessary partly to estimate the stock of currency in the hands of the public from March 1911 to September 1915. This has been done by extrapolation from a trend fitted to the currency series of the 1920s, adjusted for the rate of change in deposits between quarters. Col. 1 excludes coin in the hands of the public because

of the absence of reliable estimates. The omission is only of minor significance however as it appears that coin represented about 1 per cent of money stock in the period covered by the series. The index of seasonal variation used to adjust Col. 5 is as follows:

Quarter1.0005 Index March June 1.0101

September 0.9930 December 0.9963

Sources: Quarterly Summary of Australian Statistics and quarterly banking returns published in Commonwealth of Australia Gazette. Table C-2: COMPONENTS OF HIGH-POWERED MONEY, QUARTERLY, 1926-38

(£m)

(1) (2) (3) (4) (5) (6) Currency Trading bank reserves Savings Highheld by bank powered the (Cash) | (Treasury | (London | reserves money

public bills) funds) Cols 1-5 1926 M 24.9 25.7 41.0 143.9 J 24.7 48.952.4 25.8 42.9 | 142.4

S D 24.4 20.1 50.0 49.9 13.6 10.2 42.9 42.6 130.8 128.7

1927 M 25.1 53.1 16.3AI! 41.8133.7 136.2 J5 26.0 48.5 18.0 14.1 41.3 137.5 130.5 D25.3 26.549-7 52.30.1 17.5 | 41.2 387

Appendixes Table C-2 (continued)

(£m)

(1) (2) (3) (4) (5) (6) Currency Trading bank reserves Savings Highheld by bank powered the (Cash) | (Treasury | (London | reserves money public bills) funds) Cols 1-5

1928 M 25.8 55:5 30.4 42.9 41.5 154.9 153.4 JS25.8 51.7 0.3 34.2 25.1 49-4 0.4 22.2 42.7 139.7

D | 25.0 52.9 22.3 43.0 143.2

1929 M!—47-0 27.1 55-2 43.1144.2 154.4 J 25.5 26.229.0 45.5

S 43-51.5 13.3 D 23.3 25.6 42.5 8.045.6 42.0 125.8 119.6

1930 M 24.2 42.3 2.1 13.8 38.0 120.3

J5 23.7 37.2 2.0 18.1 36.8 117.8 22.4 35.4 2.4 14.9 32.0 D 23.6 39.5 5.3 13.2 28.0 107.2 109.5 1931 M 23.2 48.7 6.5 17.126.7 27.0127.1 122.4 JS 24.9 52.9 6.8 15.9 25.7 45.0 13.9 14.2 27.0 125.8

D 26.5 42.7 20.7 26.2 27.3 143-3 1932 M 26.0 52.9 26.9 21.5 27.2 154.5 JS25.8 49-5 30.6 16.6 28.8 138.5 151.3 24.6 40.7 34.6 9.8 28.8 D 25.5 41.4 38.0 14.2 28.8 147.9 1933 M 24.9 43-7 35.5 17.7 30.0 151.8 JS 24.9 41.0 33.0 14.8 33.5 147.2 | 24.4 40.0 29.2 10.6 35.5 139.8 D 25.5 42.6 27.6 17.7 37.0 150.4 1934 M 25.2 47.6 29.5 20.1 39.0 161.4 JS25.5 53-0 29.3 13.3 41.4 152.4 162.5 25.6 51.5 25.5 8.4 41.4 D 27.4 46.9 23.8 11.4 41.0 150.4 1935 M 26.6 41.7 24.2 15.0 40.7 148.1 JS27.4 38.4 24.0 11.2 40.4 133.3 141.4 27.3 34.4 22.5 8.4 40.8 D 28.9 33.5 24.4 12.0 40.8 139.6 |

388

Appendixes Table C-2 (continued) (£m)

(1) (2) (3) (4) (5) (6) Currency Trading bank reserves Savings Highheld by bank powered the (Cash) | (Treasury | (London | reserves money

public bills) funds) Cols. 1-5 1936 M 28.2 33.4 25.1 18.3 40.8 145.8 JS 28.5 28.2 30.8 29.9 24.9 23.7 22.2 15.3 42.3 42.2 148.7 139.2 D 29.9 31.1 23.2 20.8 42.1 14.7.2

1937 M 30.4 37.4 26.0 33.5 42.8 170.1

JS 29.6 38.4 25.1 36.0 47.6 176.7 30.5 36.9 22.5 26.9 48.6 D 34.1 38.4 20.9 25.0 49.0 165.4 167.4 1938 M 31.6 39.7 20.1 31.1 50.0 172.5 JS 31.8 33-5 19.4 34-9 52-9 172.5 32.3 32.7 17.0 | 30.7 53.8 166.5 D 35.3 35.1 18.7 28.6 54.8 172.5

Notes, by column: 1. This series differs slightly from Col. 1 of Table C-1 because it is based on quarterly averages of weekly figures as compared with currency holdings at the end of the quarter.

2. Includes coin, bullion, notes and deposits with the Commonwealth Bank. Quarterly averages of weekly figures.

3. Holdings at the end of the quarter. 4. Includes only assets at short call in London and not the more usual definition of London funds—excess of assets over liabilities. Generally, balances at the end of the quarter. 5. As savings banks were only required to submit annual balance sheets, only reserves on 30 June are available. No completely satisfactory method of estimating quarterly figures was arrived at to cover the entire period. For 1926-9 and 1932-8, the annual

rate of change in reserves has been adjusted by the quarterly rate of change in deposits, and for these years it is believed that the estimates are reasonably accurate. For 1930-1, however, the method broke down because of the erratic and rapid depletion of deposits, so that a number of observations in these two years are little more than crude approximations. 6. Cols 2-4 exclude the Commonwealth Bank as this institution was an inextricable

mixture of commercial and central banking functions, and also because the relative importance of the two functions changed substantially during the 1930s. The absolute level of high-powered money would, of course, be much greater by adding the Commonwealth Bank, but relative changes—which is the main interest of our analysis—would be little affected. Sources, by column: 1. 1926-36, RCMB, Report, Table 18; 1937-8 Commonwealth Bank, Banking Supplement, May 1954, p. 2.

2. & 3. 1926-36, RCMB, Report, Table 5; 1937-8, Banking Supplement, p. 8.

389

Appendixes 4. 1926-36, RCMB, Report, Table 7; 1937-8, Banking Supplement, pp. 2, 25. Sterling values converted by applying prevailing rates of exchange. 5. 1926-36, RCMB, Report, Table 23; 1937-8, Finance Bulletin, No. 28, Tables 92 and 96; No. 29, Tables 100 and 104.

Table C-3: CURRENCY AND RESERVE RATIOS, QUARTERLY, 1926-38

(per cent)

Currency Reserve Currency Reserve

ratio ratio ratio ratio 1926 M 4.822.0 22.9 1932 M | 5.0 24.8 JS 4.6 J 5.0 24.3 S 4.8 D 4.6 4.9 20.2 | 19.4| D 5.0 22.3 23.9 1927 M 4.7 | 20.7 1933 M | 4.8 24.5 J5 4.8 | 19.7SJ4.7 4.7 22.4 23.4 4.7019.3

D 4.8 20.0 D 4.8 23.7 1928 M 4.522.5 | 22.4 1934 M 4.7 25.2 JS 4.5 J 4.6 24.7 21.7 D S 5.0 4.7 23.1 D 4.8 4.7 |22.1 22.2 |

1929 M 4.921.4 23.2 1935 M 4.8 21.8 J 4.6 J 4.9 20.3

5D4.3 4.9 19.8 19.2 4.718.6 17.3NS) D 5-2

1930 M 4.517.8 18.1 1936 M 5.0 20.9 J 4.5 J 5-0 21.1

S 4.4 S 5.0 D 4.7 16.5 17.1 D 5.2 19.7 20.5 1931 M 4.720.7 20.0 1937 M 5-7 23.7 JS 5-0 J 4-9 24.3 D 5.2 5-2 20.3 23.1 S D 5.1 6.3 22.3 21.7 1938 M 5.222.3 22.6 1938 S 5-3 21.5 J 5.0 D 6.2 21.7

Sources: Currency ratio, currency held by the public (Table C-2, Col. 1) divided by bank deposits (Table C-1, Cols 2, 3 and 4). Reserve ratio, bank reserves (Table C-2, Cols 2, 3, 4 and 5) divided by bank deposits (Table C-1, Cols 2, 3 and 4). 390

Appendixes Table C-4: VELOCITY OF MONEY, 1911-12 to 1937-8 (Ratio)

Velocity Velocity

IQII-12 1.41 1925-6 1.28 1912-13 1.47 1926-7 1.25 IQI3-14 1.50 1927-8 1.20 1914-15 1.28 1.241929-30 1928-9 1.23 1915-16 1.10 1916-17 1.35 1930-1 0.95 1917-18 1918-19 1.28 1.23 1931-2 1932-3 0.87 0.9! 1919-20 1.27 1933-4 0.95 1920-1! 1.381935-6 1934-5 1.06 0.97 IQ2I-2 1.28 1922-3 1.29 1936-7 1.13 1923-4 1.29 1937-8 1.15 1924-5 1.45

Source: Money income (net national product in market prices, N. G. Butlin, Australian Domestic Product, Table 1) divided by money stock (figures in Col. 6 of Table C-1 averaged annually to centre on December quarter) .

391

BIBLIOGRAPHY

BIBLIOGRAPHY This is not an exhaustive bibliography and only those works which have been of more direct use are included. The list is divided as follows

I International and Overseas II Archives and Manuscripts

III Official

IV __ Statistical

V Newspapers and Periodicals VI __—s Theses

VII Books and Pamphlets VIII Articles

I. INTERNATIONAL AND OVERSEAS A. Primarily Interpretative ARNDT, H. W., The Economic Lessons of the Nineteen- Thirties, Oxford University Press for RITA, London 1944. BENNETT, E. W., Germany and the Diplomacy of the Financial Crisis, 1931, Harvard

University Press, Cambridge, Mass. 1962. Brown, W. A. 7R., The International Gold Standard Reinterpreted, National Bureau of Economic Research, New York 1940. CHANDLER, L. V., Benjamin Strong, Brookings Institution, Washington 1958. Cray, H., Lord Norman, Macmillan, London 1957. ConpurFFE, J. B., The Commerce of Nations, Allen and Unwin, London 1951. FRIEDMAN, M. and Scuwartz, A. J., 4 Monetary History of the United States, 18671960, Princeton University Press for NBER, Princeton 1963. GALBRAITH, J. K., The Great Crash, 1929, Houghton Mifflin, Boston 1955. Hancock, W. K., Survey of British Commonwealth Affairs, Vol. I1 Problems of Economic Policy, 1918-39, Oxford University Press, London 1940-2. Heaton, H., The British Way to Recovery, Minnesota University Press, Minneapolis 1934-

{HitcerpT, F.], Industrialization and Foreign Trade, League of Nations, Geneva 1945. Hopson, H. V., Slump and Recovery, 1929-37, Oxford University Press for RIIA, London 1938. Hocsom, I., ‘Development of World Production of Raw Materials’ in Report of the Committee for the Study of the Problems of Raw Materials, League of Nations, Geneva 1937. KINDLEBERGER, C. P., The Terms of Trade: A European Case Study, Wiley, New York 1956. League of Nations, Commercial Policy in the Inter-war period, Geneva 1942.

League of Nations, Economic Stability in the Post-war World (delegation on depressions), Geneva 1945.

League of Nations, annual World Economic Surveys, 1931-2 to 1936-7, Geneva 1932-7.

Lewis, W. A., Economic Survey, 1919-39, Unwin, London 1949. Lewis, W. A., “World Production, Prices and Trade, 1870-1960’, Manchester School, Vol. 20, No. 2, 1952.

Mazes, A., Industrial Growth and World Trade, Cambridge at the University Press for NIESR, 1965. 394

Bibliography

Princeton 1944.

{NurksE, R. and Brown, W. A.], International Currency Experience, League of Nations, [OHLIN, B.], The Course and Phases of the World Economic Depression, League of Nations,

Geneva 1931. The Problem of International Investment, Oxford University Press for RITA, London 1937. Report of the Committee on Finance and Industry, [Macmillan Report], HMSO, London 1931.

RicHARDSON, H. W., Economic Recovery in Britain, 1992-9, Weidenfeld and Nicolson, London 1967. SVENNILSON, I., Growth and Stagnation in the European Economy, United Nations, Geneva

1954-

Tsz Cuun CHANG, C'yclical Movements in the Balance of Payments, Cambridge University

Press, London 1951. ,

Wixuiams, D., ‘London and the 1931 Financial Crisis’, Economic History Review, Vol. XV (April 1963). World Agriculture: an economic survey, Oxford University Press for RITA, London 1932. YEAGER, L. B., International Monetary Relations, Harper, New York 1966. B. Primarily Statistical

GALENSON, W. and ZELLNER, A., ‘International Comparison of Unemployment Rates’ in Universities—National Bureau Committee for Economic Research, The Measurement and Behavior of Unemployment, Princeton University Press, 1957. International Labour Office, Year-Book of Labour Statistics, 1938, Geneva 1939. League of Nations, Furope’s Trade, Geneva 1941. League of Nations, Memorandum on Production and Trade, 1925 to 1929/30, Geneva 193}. League of Nations, The Network of World Trade, Geneva 1942.

League of Nations, annual Reviews of World Trade 1930 to 1938, Geneva 1931-9. League of Nations, annual World Production and Prices 1925 to 1938, Geneva 1932-8. MirTcHELL, R. B. and Deane, P., Abstract of British Historical Statistics, Cambridge at the University Press, 1962. Paice, D. C. et al., ‘Economic Growth: The Last Hundred Years’, National Institute Economic Review, No. 16 (July 1961). UNITED STATES BUREAU OF THE CENsus, Historical Statistics of the United States, Colonial

Times to 1957, Washington, D.C. 1960.

UrgunHart, M. C. and Bucxuey, K. A. H. (eds), Historical Statistics of Canada, Cambridge at the University Press, 1965. YaTEs, P. LAMARTINE, Forty Years of Foreign Trade, Allen and Unwin, London 1959.

II. ARCHIVES AND MANUSCRIPTS Archives of the Bank of New South Wales (Head Office, Sydney)

This is an extensive collection which proved to be of particular value in tracing the views of the trading banks. The letter-books of A. C. Davidson were used extensively as were the records of conferences between the trading and savings banks and with governments. The collection also includes a wide range of inletters from government members, economists and other trading bank general managers. The records of the Economic Department were also used, but most of this material was of general value only.

395

Bibliography Archives of the Reserve Bank of Australia (Head Office, Sydney)

The Reserve Bank of Australia now holds the central banking records of the Commonwealth Bank of Australia. These are a full and well-ordered collection which provide a detailed picture of the operations of the Bank. Several series were used, particularly the central policy files, London letter-books and the submissions of the Economic Advisor. Because of the overlap between these Archives and Commonwealth Treasury files, it was possible to fill many of the gaps in the latter. Documentation has not, however, been permitted. Brigden Papers (National Library of Australia, Canberra) While the bulk of these papers consist of printed official documents, there are a few MS. notes and memoranda of value. Colebatch Papers (Library Board of Western Australia, Perth)

Includes some correspondence of interest on the important public issues of depression and recovery, principally with E. O. G. Shann. Commonwealth Treasury papers 1927-36 (Commonwealth Archives Office, Canberra) These vast records, which have not yet been adequately catalogued classified or,

sorted, have been of major importance in the preparation of this book. Although there are gaps, most of the important policy files have been made available. The main series used was A571 and also the minutes of the Australian Loan Council 1923-35 by courtesy of Sir Richard Randall. As with the Reserve Bank, the Treasury has declined permission to document in the customary fashion. It has also required some deletion and amendment of direct quotations from a few files. Giblin Papers (National Library of Australia, Canberra) The bulk of these consist of personal family correspondence, but there is some useful material which touches on the depression period. Shann Papers (various)

At the time of writing these have not been consolidated. Some are held by the Bank of New South Wales, others by Professor J. A. La Nauze of the Australian National University and more by the National Library of Australia. Correspondence between Shann and Davidson (Bank of New South Wales) has been particularly useful.

III. OFFICIAL A. Printed Printed Parliamentary Papers are a wilderness and it is of little use listing these without reference to the more important documents. The Commonwealth Parliamentary Papers of greatest value are as follows: Report of the Development and Migration Commission

on ‘Unemployment and Business Stability’ (1928); ‘Annual Report’ of the Development and Migration Commission (1927-9) ; ‘Report of the British Economic Mission to Australia’ (1929) ; ‘Conference of Commonwealth and State Ministers’ (May 1929, Feb-

ruary 1931, May-June 1931, September-October 1931 and February 1932); ‘Annual Report’ of the Tariff Board (1929-35); Report of the Committee Appointed to make a ‘Preliminary Survey of the Economic Problem’ (1932) ; ‘Report of the Wool Inquiry Committee’ (1932); Tariff Board Report on ‘Adjustment of Protective Duties to Compensate for the Effects of Exchange and Primage’ (1933) ; ‘Annual Report’ of the Commonwealth Grants Commission (1933-5); ‘Royal Commission on the Wheat, Flour and Bread Industries’, First Report (1934), Supplement to the First Report (1934), Second Report (1935), Fifth Report (1936) ; ‘Royal Commission on Money and Banking’, Report (1937) and Evidence (1937). 396

Bibliography Commonwealth Parliamentary Debates are also a wilderness. Those found most useful

were second reading speeches of the ministers in charge of the Bills mentioned in the book and the opening second reading speeches of the Opposition. In addition, special attention has been given to the budget, censure motions, adjournment motions, the Governor-General’s speech and addresses in reply. State Parliamentary Papers and Debates have also been used although less extensively. Some of the more useful State Papers are as follows: ‘Royal Commission on

the Disabilities Affecting the Agricultural Industry of Western Australia’ (WAPP 1931); Reports of the Employment (or Unemployment) Councils in each State (1932-7); ‘Annual Report’ of the Operations of the Farmers’ Relief Board (most states 1932-7); “Report of the Committee to Investigate the Question of Debt Adjustment in respect of the Agricultural and Pastoral Industries’ (SAPP 1933) ; ‘Operations in Victoria under the Premiers’ Plan’ (VPP 1933) ; ‘Report of the Land Administration Board on Reproductive Works of Unemployment Relief Initiated by the Department of Public Lands. . . (QPP 1933). Commonwealth Arbitration Reports, 1931-7.

B. Unprinted

A number of important documents were tabled in Commonwealth Parliament but were not ordered to be printed. These are available at the National Library of Australia.

The most significant are as follows: ‘Report of Conference Convened by the Hon. Parker Maloney, M.P., Minister for Markets and Transport, and held in Canberra to discuss prospects for a proposal for a Commonwealth Compulsory Wheat Pool’ (1930); “Conference of Commonwealth and State Ministers’ (August 1930, April 1932, June-July 1932, October 1932); ‘A Plan for Economic Adjustment’ by D. B.

Copland, E. C. Dyason and L. F. Giblin (1930); ‘Memorandum prepared in consultation with Professors D. B. Copland and L. F. Giblin, Messrs. E. C. Dyason

and H. W. Gepp’ (1930); “The National Income’ by L. F. Giblin (1931); ‘The Correspondence between the Government and the Commonwealth Bank re Guaranteed Price of three shillings for Wheat’ (1931).

IV. STATISTICAL A. Official

The following state publications have also been used: N.S.W. Year Books, Statistical have been used extensively: Demography Bulletins, Finance Bulletins, Labour Reports, Overseas Trade Bulletins, Production Bulletins, Quarterly Summaries of Australian Statistics,

The Australian Balance of Payments 1928-29 to 1948-49 (1950). Also, Commonwealth of Australia Gazette and Commonwealth Year Books.

The following state publications have also been used: N.S.W. Year Books, Statistical Registers of New South Wales, Statistical Registers of South Australia, Statistical Registers of Western Australta.

B. Other

Bamsrick, S., ‘Indexes of Australian Import Prices, 1900 to 1927-28’, Australian Economic History Review, Vol. VITL (March 1968).

BuTiin, N. G., Australian Domestic Product, Investment and Foreign Borrowing, 18611938/39, Gambridge at the University Press, 1962.

Carmopy, A. T., “The Level of the Australian Tariff: A Study in Method’, Yorkshire Bulletin of Economic and Social Research, January 1952.

Ciark, C. and CRAWFORD, J. G., The National Income of Australia, Angus and Robertson, Sydney 1938.

397

Bibliography Commonwealth Bank, Statistical Bulletins, 1937-9; ‘Banking Supplement’, May 1954.

Da.cety & Co. Lip, ‘Annual Wool Review for Australasia’, 1928-9 to 1938-9.

Epwarps, H. R. and Drang, N. T., ‘Notes on Technical Change in Australian Manufacturing’, Economic Record, June 1964.

Forster, C., ‘Australian Unemployment, 1900-1940’, Economic Record, September 1965.

GARLAND, J. M. and GoxpsmitH, R. W., “The National Wealth of Australia’, in Income and Wealth Series VIII, The Measurement of National Wealth, Bowes and Bowes, London 1959.

Heatu, E. K. and Poiciaze, J., ‘A Business Index for Australia’, Economic Record, December 1933.

HeatH, E. K. and Poucraze, J., ‘Australian Business Index’, Economic Record, December 1935.

Keatinc, M., ‘Australian Work Force and Employment, 1910/11 to 1960/61’, Australian Economic History Review, Vol. VII (September 1967). LAMBERTON, D. McL., ‘Security Prices and Yields’, Sydney Stock Exchange Official Gazette, 14 July 1958. LAMBERTON, D. McL., ‘Some Statistics of Security Prices and Yields in the Sydney Market, 1875-1955’, Economic Record, August 1958. Official Record of the Stock Exchange of Melbourne, 1929-37.

Puiturres, W., ‘Australian Export Prices, 1880-1935’, Economie Record, December 1935. Wickens, GC. H., ‘Some Statistical Aspects of Australian Industry’, Economic Record, May 1929. Witson, R., Capital Imports and the Terms of Trade Examined in the Light of Sixty Years of Australian Borrowing, Melbourne University Press, 1931.

V. NEWSPAPERS AND PERIODICALS The Sydney Morning Herald has been the main newspaper used for factual reporting. For supplementary comment the following have been consulted: the Argus, the Age, the Labor Daily and the Australian Worker.

In addition to newspapers, a number of specialist periodicals have been of great value. The Australasian Insurance and Banking Record is useful for financial information, and the Circulars of the Bank of New South Wales onwards from 1930 provide a higher

level of financial comment. The National Bank’s Monthly Summaries of Australian Conditions from 1926 also provide useful financial and general economic comment, although they are excessively weighted against Labor. The London Economist has proved of greatest use for the overseas reaction to the depression in Australia, and also for details of Australian stock prices in London. Economic News, published from 1931 by the Queensland Bureau of Economics and Statistics, is of limited use. Jobson’s Investment Digest is the most accessible source of Australian company reports. First-class political comment on a quarterly basis is contained in Round Table.

VI. THESES CAMERON, B., Public Finance and National Income: Australia—1926-38, M.Ec., University

of Sydney, 1949. Dean, R. H., Import Replacement in the Australian Economy, M.A., University of Western Australia, 1960. GILBERT, R., The Australian Loan Council, 1923/29, M.A., University of Adelaide, 1957.

398

Bibliography Hicerins, E. M., The Queensland Labour Governments, 1915-1929, M.A., University of Melbourne, 1954. McMaatin, S. T. A., Government Policy in the Trade Cycle, 1928-1938, M.Ec., University of Sydney, 1947. PETER, Phyllis, Social Aspects of the Depression in New South Wales, 1930-34, Ph.D., Australian National University, 1964. Snooks, G. D., The Effect of the Depression on Western Australian Economic Development, 1929-39, M.Ec., University of Western Australia, 1968. Youne, I. E., Conflict within the N.S.W. Labour Party, 1919-32, M.A., University of Sydney, 1961.

VII. BOOKS AND PAMPHLETS ALFORD, F.S., The Great Illuston : a critical review of Australia’s fiscal policy, Sydney 1934.

Autson, C. A. and Gunn, J. A. L., Is the Crisis Avoidable?, Sydney 1931. ANSTEY, F., Facts and Theories of Finance, Melbourne c.1930. ANSTEY, F., The Kingdom of Shylock, Melbourne 1916. ANSTEY, F., Money Power, c.1921.

Barnes, G. C., Banking Buccaneering No. 2 or Australia’s Curse, 1932.

BENHAM, F. C., The Prosperity of Australia, P. S. King and Son, London 1928. BRADDON, Sir Henry, Australian Finance, Sydney 19930.

BRIGDEN, J. B. et al., The Australian Tariff: an economic enquiry, Melbourne University Press, 1929. BriGDEN, J. B., Escape to Prosperity, Macmillan, Melbourne 1930. BRIGDEN, J. B., Credit: a description and critical account of what is, what is proposed, what had been done and what might be done in Australia, 1932.

BRIGDEN, J. B., P.P. on Purchasing Power and the Pound Australian, Queensland Bureau of Economics and Statistics, Brisbane 1931. Bruce, S. M., The Financtal and Economic Position of Australia (The Joseph Fisher Lecture

in Commerce), Adelaide 1927. Burcman, E. H., Justice for All and the Case for the Unemployed, 1933.

Bursron, H., The Road Back to Prosperity: an analysis of 15 years of reckless government jinance, Melbourne 1930. BuTLin, N. G., Investment in Australian Economic Development 1861-1900, Cambridge at the University Press, 1964. Buti, S. J., Australia and New Lealand Bank, Longmans, Melbourne 1961. Butters, Sir John H., The Development of Australia: commercial and national, 1931.

B——, H. V., The Financial Whirlpool, c.1930. | Carsocu, Dagmar, ‘The Fall of the Bruce-Page Government’ in Studies in Australian Politics, F. W. Cheshire, Melbourne 1958. Couns, J. R., The Public Debts of Australia, London 1929. Cooxg, S. R. and DAvEnport, E. H., Australian Finance, London 1926. Cop.anp, D. B. and Woop, G. L., Australia and the Gold Standard, Robertson and Mullens, Melbourne 1931. Copianp, D. B., Australia in the World Crisis, 1929-33, Gambridge University Press, London 1934. Cop.anp, D. B., Credit and Currency Control, Melbourne University Press, 1932. 399

Bibliography Cop.anp, D. B. (ed.), Giblin: the scholar and the man, F. W. Cheshire, Melbourne 1960. Cop.anp, D. B.and Janes, C. V., Australian Marketing Problems, Angus and Robertson, Sydney 1938.

Coptanpb, D. B. and Janes, C. V., Australian Trade Policy, Angus and Robertson, Sydney 1937.

Cop.anp, D. B. and Janes, C. V., Cross Currents in Australian Finance, Angus and Robertson, Sydney 1936. Cop.anp, D. B., What Have the Banks Done?, Angus and Robertson, Sydney 1931. Crisp, L. F., Ben Chifley, Longmans, Melbourne 1961. Curtin, J., Australia’s Economic Crisis and the £55m. Interest Bill, Perth 1930. Da.ton, R. W., Economic and Trade Conditions in Australia to December 1933, HMSO, London 1934. Darton, R. W., Report on the Economic and Trade Conditions in Australia to August 1930, HMSO, London 1990. Davipson, A. C., Australia’s Share in International Recovery (The Joseph Fisher Lecture in Commerce), Adelaide 1932. Davipson, A. C., Central Reserve Banking, Angus and Robertson, Sydney 1929. DeELsRiIDGE, W. B. M., The Great Banking Conspiracy: an expose of the obstructive iactics of

the banks against the Australian Central Reserve Bank Bill, Sydney 1930. DENNING, W., Caucus Crisis: the rise and fall of the Scullin Government, Parramatta 1937. Dituine, J. G., This Depression: its cause and remedy, Sydney 1933.

Duncan, W. G. K. (ed.), National Economic Planning, Angus and Robertson, Sydney 1934-

Dyason, E. C., The Australian Economic Outlook (a paper prepared for the Victorian Branch, The Economic Society of Australia and New Zealand), Melbourne 1930. Epwarps, C., Bruce of Melbourne, Heinemann, London 1965. Emery, G. E., Sound Finance, Melbourne 1934. Estuus, R. A., From Enmity to Alliance, Melbourne University Press, 1965.

Forster, C., Industrial Development in Australia 1920-1930, Australian National University Press, Canberra 1964. Fry, A. E., The Economic Restoration of Australia, 1931.

Grain, L. F., Australia 1930, Melbourne University Press, 1930. Gisuin, L. F., The Growth of a Central Bank, Melbourne University Press, 1951. Grecory, T. E. G., Currency Problems in International Finance (The Joseph Fisher Lecture

in Commerce), Adelaide 1930. .

HamL_etT, J., Australia: in the devil’s own mess, Sydney 1932. HaMLET, J., Joyriding to Bankruptcy, 1930.

Homan, W. A., A National Stocktaking: some factors in the present crisis, 1930. Hucues, Helen, The Australian Iron and Steel Industry, Melbourne University Press, 1964. Hucues, W. M., Sir Otto Niemeyer’s Report, Sydney 1930. Hucues, W. M., This Depression . . . Its Cause and Cure .. ., 1932. Irvine, R. F., The Midas Delusion, Sydney 1933. Jauncey, L. C., Australia’s Government Bank, Cranley and Day, London 1933.

Louis, L. J. and Turner, I. (eds), The Depression of the 1930s, Cassell Australia, Melbourne 1968. LanG, J. T., The Great Bust, Angus and Robertson, Sydney 1962. Lanc, J. T., Why I Fight, Sydney 1934. McFar.aneE, B., Professor [rvine’s Economics in Australian Labour History, Labour History

Society, Canberra 1966.

400

Bibliography MacKay, A. L. G., Australian Financial Crisis, 1931.

Mackenzig, W. H. and Hape, M., The Premiers’ Plan in Action, Relief Works Into Industry, Smashing of Award Wages and Conditions, 1931.

Mac.aurin, W. R., Economic Planning in Australia, 1929-36, P. S. King and Son, London 1937. Mautpon, F. R. E., Economic Trends in Tasmania, 1931/32 to 1935/36, the Cause of Recovery, Government Printer, Hobart 1936. Mayrton, J., Australian Public Finance, U.S. Department of Commerce (Trade Promotion Series 67), Washington 1928. MELvILLE, L. F., Gold Standard or Goods Standard (The Joseph Fisher Lecture in Commerce), Adelaide 1934. Mitts, R. C., ‘Australian Loan Policy’ in CAMPBELL, P., Miizs, R. C., and Portus, G. V. (eds), Studies in Australian Affairs, Melbourne 1928. Pappison, A. C., The Lang Plan: the case for Australia, Sydney 1931. PARTRIDGE, P. H., ‘Depression and War’ in GREENWOOD, G. (ed.), Australia: A Social and Political History, Angus and Robertson, Sydney 1955. PERN, N., Australia’s Crisis: the right road to recovery, 1931.

Price, A. Grenfell, The Menace of Inflation, Adelaide 1931. Rusins, L., Depression and Its Cure, Melbourne, n.d. RussE.1, F. A. A., History of the Gold Standard, Sydney 1931. RussEuL, F. A. A., Monetary Policy and the Slump of 1930, Sydney 1930. SAWER, G., Australian Federal Politics and Law, 1901-1929, Melbourne University Press, 1956. SAWER, G., Australian Federal Politics and Law, 1929-1949, Melbourne University Press, 1963. Suann, E. O. G. and Copianp, D. B., The Australian Price Structure, 1932, Angus and Robertson, Sydney 1933. SHANN, E. O. G. and Cop.anp, D. B., The Battle of the Plans, Angus and Robertson, Sydney 1931. SHANN, E. O. G., “The Boom of 1890 and Now’ in Bond or Free?, Angus and Robertson,

Sydney 1930.

SHANN, E. O. G. and Copianp, D. B., The Crisis in Australian Finance, 1929-31, Angus and Robertson, Sydney 1931.

Sinctair, W. A., “The Depression of the 1890s and the 1930s in Australia: A Comparison’ in Dronan, N. T. and Day, J. H. (eds), Readings in Australian Economics, Cassell Australia, Melbourne 1965. SKITcH, C. E., The Experts’ Plan: what it means to Australia, 1931. SmiTH, N. S., Economic Control: Australian experiments in ‘rationalising’ and ‘safeguarding’,

P. S. King and Son, London 1929. SmiTH, N. S., Thirty Years: The Commonwealth of Australia, 1901-1931, Brown, Prior, Melbourne 1933. SmyTH, A., Economic Revolution, Brown, Prior, Melbourne 1931. TuHeEopor_E, E. G., The Commonwealth Government’s Plan of Financial Rehabilitation . . .,

Sydney 1931. WALKER, A., Coaltown, A Social Survey of Cessnock, N.S.W., Melbourne Univeristy Press, 1945. Wa ker, E. R., Australia in the World Depression, P. S. King and Son, London 1933. Wa ker, E. R., Unemployment Policy with Special Reference to Australia, Angus and Robertson, Sydney 1936. WinpetTt, Nancy, Australia as Producer and Trader, 1920-32, Oxford University Press,

London 1933. |

Woon, G. L., Borrowing and Business in Australia, Oxford University Press, London 1930.

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, VIII. ARTICLES , Aarons, F., ‘Rural Employment for Boys’, Australian Quarterly, December 1934.

Assotr, J. P., ‘Wool, an Australian Standard of Value’, Australian Quarterly, December 1930.

AssotTT, J. P., ‘Exchange and the Commonwealth Bank’, Australian Quarterly, September 1932. ANDERSON, G., ‘Wage Reductions in Australia—National Emergency’, Economic Record,

May 1931. BennaM, F. C., ‘The Australian Tariff and the Standard of Living’, Economic Record, May 1926. BENHAM, F. C., “The Australian Tariff and the Standard of Living—A Restatement’, Economic Record, November 1927. BENHAM, F. C., ‘Economic Position of Australia’, Nineteenth Century and After, March 1931.

Benuam, F. C., ‘The Efficiency of Australian Manufacturing’, Economic Record, November 1926. Bianp, F. A., “The Financial and Economic Policy of the Stevens Government’, Economic Record, June 1933.

BLanp, F. A. and Mitts, R. C., ‘Financial Reconstruction—An Examination of the Plan Adopted at the Premiers’ Conference 1931’, Economic Record, November 1931. Buanp, F. A., “A Note on Unemployment Reliefin N.S.W.’, Economic Record, May 1932. Buanp, F. A., ‘Rural Debt Adjustment’, Economic Record, June 1935.

Bianp, F. A., “Unemployment Relief in Australia’, International Labour Review, July 1934-

BrIGpDEN, J. B., “The Australian Tariff and the Standard of Living’, Economic Record, November 1925.

Bricpen, J. B., “The Australian Tariff and the Standard of Living—A Rejoinder’, Economic Record, May 1927.

Bricpen, J. B., ‘Comment on Mr. Benham’s Restatement’, Economic Record, November 1927.

“Business Conditions in Victoria’ (series of articles), Economic Record, May 1926, November 1927, November 1929, November 1930, November 1931. Burton, H., ‘The “Trade Diversion” Episode of the Thirties’, Australian Outlook, Vol. 22 (April 1968). But iin, N. G., ‘Long-run Trends in Australian Per Capita Consumption’, in HANCocK, K. (ed.), The National Income and Social Welfare, F. W. Cheshire for ACSS, Melbourne 1965. But in, N. G., ‘Some Structural Features of Australian Capital Formation, 1861 to 1938/39’, Economic Record, December 1959. ‘BYSTANDER’, “Che Funding of Treasury Bills’, Australian Quarterly, March 1934. CAMPBELL, D. A. S., ‘Melbourne Conference and Currency Depreciation’, Australian Quarterly, December 1931. CamMPBELL, K. O., ‘Australian Agricultural Production in the Depression’, Economic

Record, June 1944.

Casey, R. G., “Treasury Bills—And All That’, Australian Quarterly, March 1933.

CoLesatcu, Hat, ‘Australian Credit as Viewed from London’, Economic Record, November 1927. CoLespatcH, Hat, ‘Inflation, Deflation or Common Sense’, Australian Quarterly, December 19930. Cop.anp, D. B., ‘Australian Banking and Exchange’, Economic Record, November 1925. Copan, D. B., ‘Australian Banking Policy’, Economic Journal, December 1932. Coptanp, D. B., “The Australian Problem’, Economic Journal, December 1931.

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Bibliography Cop.Lanp, D. B., ‘Economic Adjustment in Australia’, Economic Record, May 1932.

Copianpb, D. B. (ed.j, ‘An Economic Survey of Australia’, Annals of the American Academy of Political and Social Science, November 1931.

Cop.anpb, D. B., ‘The Premiers’ Plan in Australia: An Experiment in Economic Adjustment’, International Affairs, January 1934. Cop.tanp, D. B., ‘Readjustment in Australia’, Economic Journal, December 1932.

Copianp, D. B., ‘The Respective Merits of Internal and External Borrowing’,

Economic Record, May 1926.

Cop.tanD, D. B. e al., ‘The Restoration of Economic Equilibrium’, Economic Record, November 1930. Davipson, A. C., “The Gold Standard in Australia’, Australian Quarterly, December 1929.

Drxson, Miriam, ‘The Timber Strike of 1929’, Historical Studies, May 1963. DouGALt, W. R., ‘Exchange Rates and Australian Prices’, Economic Record, May 1931.

Duncan, R., ‘Imperial Preference: The Case of Australian Beef in the 1930s’, Economic Record, June 1963. Dyason, E. C., ‘The Australian Public Debt’, Economic Record, November 1927. Ex.ey, H. J., ‘Australian Loan Council’, Economic Record, May 1926. FisHer, A. G. B., ‘Crisis and Readjustment in Australia’, Journal of Political Economy, December 1934. Forster, C., ‘Australian Manufacturing and the War of 1914-18’, Economic Record, November 1953. GiBLin, L. F., ‘Australia Agonistes’, Australian Quarterly, December 1930. Gisin, L. F., ‘Australia in the Shadows’, Australian Quarterly, December 1933. Gisuin, L. F., ‘Farm Production and the Depression’, Economic Record Supplement, March 1935.

GirrorD, J. L. K., ‘Currency Devaluation, with Special Reference to Australia’, Economic Record Supplement, March 1935.

Giynn, S., ‘Government Policy and Agricultural Development: Western Australia, 1900-1930’, Australian Economic History Review, Vol. VII (September 1967).

Hatt, N. F., ‘Trade Diversion—An Australian Interlude’, Economica, Vol. 5 N.S. (February 1938). HawtTrey, R. G., ‘Australian Policy in the Depression’, Economic Record, June 1934.

Hucues, W. S. K., ‘Unemployment Relief Administration in Victoria’, Australian Rhodes Review, 1936.

Hytren, T., ‘Australian Public Finance Since 1930’, Economic Record Supplement, March 1935. Hyrtren, T., ‘Effects of Government Borrowing on Investment’, Economic Record, November 1925. Istes, K. S., ‘Australian Monetary Policy’, Economic Record, May 1931. Istes, K. S., ‘Australian Monetary Policy Reconsidered’, Economic Record, December 1932.

Lemmon, R. D., ‘Farmers’ Relief and Debts Adjustment’, Economic Record, June 1937. Lyons, J. A., ‘National Plan—And After’, Australian Quarterly, September 1931. McCacuum, J. A., ‘The Australian Labour Party’, Australian Quarterly, March 1936. McCa.vuM, J. A., ‘Public Control of Banking’, Australian Quarterly, June 1934. Matcoutm, D. O., ‘Australian Loan Policy’, Australian Quarterly, September 1929.

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404

INDEX

INDEX

Acts see Legislation statistics of, 73, 113, 145, 293; and credit Adelaide, 165, 345, 347n policy, 77; crisis in, 140-5, 159, 178, 210,

Africa, 100 372, 373; and wine industry, 153-4; and

Agricultural Bank of Western Australia, gold-mining, 154-5; and money stock,

241 206-7; and high-powered money, 210;

Agricultural implements, 141 improvement in, 280; and recovery, 293;

Agriculture, Conference of Ministers of, as constraint on recovery policy, 375:

146, 149 crisis of 1935, 365

See also Rural industry See also Exports, Imports All for Australia Day, 202 Bank for International Settlements, 40 Amsterdam, 37, 38 Bank notes see Commonwealth Bank: Anstey, Frank, 95, 121, 189, 190-3, 240; Note Issue Dept and Lang plan, 228-9 Bank of Adelaide, 127n, 156-7, 159-60,

Arbitration Court, Commonwealth, 86, 162n ,

375; proposed abolition of, 108-10, 116, Bank of Australasia, 78, 127n, 162-3, 166

117; 1931 inquiry, 215-18; and diver- Bank of England, financial assistance gence in award rates, 316-17, 320; 1933 from, 7, 132-6, 161, 165, 165n, 180-1,

inquiry, 346; 1934 inquiry, 347; 1937 184, 192, 234n, 236, 239; and gold

inquiry, 347; and wages policy in re- standard, 35-6, 38-9, 40, 101, 134, 279; covery, 347-50; and depression, 376-7 loan to Austria, 40; and Bank Rate,

Argentina, 27, 75 36-7, 40, 41-2n, 96, 101, 104, 106,

Argus, 163n 115, 186; and central banking, 82; Armitage, H. T., 173, 237-8, 238n consultation with C’wealth Bank, 86; Associated Banks of Victoria, 79n, 80, 87, and Aust. borrowing. 103-4; and pur127, 127n, 174n, 259, 261; and exchange chase of Aust. sovereigns, 115; and

control, 137; and exchange rate, 156, Currency and Bank Notes Act, 123n; 157, 160-7, 281-2; and unemployment as banker for Q’land, 131n; and Central

relief finance, 331 Reserve Bank Bill, 173; and Anglo-

See also Banks and banking, Trading Aust. exchange rate, 280, 363; and re-

banks funding Aust. debt, 356; and assistance

Australian Association for the Advance- to C’wealth Bank, 362

ment of Science, 219, 223 Bank of France (and franc), 35-6, 39-41

Australian Bank of Commerce, 138n Bank of New South Wales, and interest

Australian Council of Trade Unions, 191 rates, 79n, 126-8, 258n; A. C. Davidson as

Australian Iron and Steel Ltd, 306, 308 General Manager, 126-7; absorption of Australian Knitting Mills Ltd, 59, 288-9 Australian Bank of Commerce, 138n; Australian Mercantile Land and Finance and exchange rate, 156-7; 160, 164-5;

Co. Ltd, 361 E, O. G. Shann as Economist of, 219,

Australian Workers’ Union, 119, 236 244; loan subscriptions of, 331; report

Austral Manufacturing Co., 84 of Inspector on recovery, 288, 303

Austria, 25, 35, 42 See also Banks and banking, A. C.

Austrian National Bank, 40 Davidson, and Trading banks Austro-Hungarian Empire, 13, 25 Bank of North Queensland, 83n

Bank of Queensland, 83n Balance of payments, 8, 54, 110, 135, 208n; Banks and banking, and government

and external indebtedness, 51, 72-5; finance, 81, 171, 218, 2931-2, 268-9, 406

Index Banks and banking—continued 226, 241, 243, 250; conversion, 170-2, 275-6 and government, 82, 162, 753 192-3, 201-2, 235, 247-50, 262-6; and and labour movement, 94-5, 204, 378; sinking fund, 193, 266, 327; as overconferences, 1§2, 137-8, 142n, 161-2, drafts, 198, 200; and floating debt, 216; 164, 165-6, 199, 231, 256-8, 262, 263, funding of, 216, 246, 323, 324-6, 330-7;

268, 331; concentration of, 209 and open market operations, 222, 224;

See also Associated Banks of Victoria, and taxation, 231; for unemployed, 241,

entra mmonwealth 243, 250,underwriting 320; and Fiduciary Notes ank,banking, Tradingke banks, an avings 240; of, 243, 247;Bill, and

banks National Appeal Executive, 263; for

Barnes, John, 240n deficit finance, 268-9; counter sales of,

Bavin Government, 271 275, 275M, 335n; for recovery, 275-6, Bavin, T. R., 176-7, 178 330-1, 333; C’wealth private subscrip-

Beasley, J. A., 121, 189, 229, 233, 240, tions to, 332-3; and debt adjustment,

312-13 344; and external refunding, 355; inter-

Beeby, Mr Justice, 345 national loans: 40, 41

Belgium, 21, 42, 366, 371 See also Commonwealth Bank, Debts,

Bern, 37, 3% 39 Finance, Interest, Treasury bills, and akeley, Arthur, 190 Securities Board of National Investment (British), Bounties, general, 158; wine export, 64,

99 153-4;64; meat export, 64; canned154-5; fruit, Borrowing cotton, 64; gold-mining, external government: role in depres- wheat, 226, 240-1, 275-8, 322, 341 sion, 2, 372; cessation of, 2, 6, 106, 108, Bradford, 111 109, 122, 129; and balance of payments, Bread, 1 49, 341-2

3, 7» 72-5: and industrialization, 5> Brennan, Frank, 188, 218, 315 technique of, 6, 91; resumption of Bretton Woods Agreement, 285 (1925), 59; and prices, 60-1; and taxa- Brigden, J. B., 116-17, 128n, 219-20, 224,

tion, 71-2; scale of, 74, 94, obs and 27rn works expenditure, 90; an oan Brisbane, 127, 219, 34%

Council, giff., 101-4; and Colonial — British-Australasian Tobacco Co., 84n

Stock Act, 98; Aust. borrowing com- piopen Hill 58, 119 pared, 100; and Financial Agreement, pion John, 121 101-5; Of Qiland, 105-6; and devalua- Bruce-Page Government, 71, 88, 92n, 102 tion, 168; ‘and Melbourne Agreement, ee? ,, ; ; 1ogn, 106, 110, 115-16, 121, 141, 312,

183; effect of cessation in, 210, 216; and ;

economists, 221-2; effect of default on, B 35 Sir Wallace: C . 9-4: d Lvons Govt. 916-17: and ruce, Sir Wallace: Committee of, 318,

253-4, anincome, y - 310-17; 360, 374 loans: B , SM 8 6 . national 377; external by overdraft, 5, 90-1, 103, 104-5, 112-15 Puce, Se Nie 100, LOU, TNO, 178, 31D) "0? ,136-7, o. a: , in185, Lyons238; Govt,funding, 316; as resident Minister 129, 131, 6, . ;external . ; in London, 354; and refunding 185-6; for Empire settlement, 63; man- debt ‘at Ottawa Conference

agement of, 88; cash, 92, 96-7, 101-6, 362-5 35577) erence,

131, 135-6; prospectuses for, 99; and .

sinking funds, 99, 115n, 172, 187n, 229n; pacers a Finance ‘n World War I subscriptions to, 101; conversion, 105-6, ul deli epression in ' orid War , 135-6, 251, 268, 298, 354-8; under- om ecline in, a employment in, 211;

subscriptions to, 101, 356; from Bank Buti; NG 200-9: 290-8 ted

of England, 132-4, 133n; and gold for utlin, N. G., 49, 70, 74, 309; (cited) , 5n reserve, 237; approval needed, 356; Butter, 64, 293, 371

over-subscriptions to, 358; statistics,

380; external private: scale of, 74; and Cabinet, Scullin, 118-19, 120-1, 146,

exchange rate, 280-2, 294; and recovery, 174n, 176, 188-9, 214, 240; and Caucus, 294-5; and tariff, 370; internal govern- 189-95; Lyons, 315, 316, 355

ment: and taxation, 71-2; and interest Camelon Iron Co., 84 rates, 79; by C’wealth, 91; during Campbell, Mr Justice, 179n

World War I, 91; restriction on, 92; and Canada, 21, 27, 43-6, 98, 146, 286-7, 348-9,

loans, 97; internal loans: post-war com- 366 _ petition for, 91-2; wheat assistance, 152, Canberra, 118, 219, 225

407

Index Capital inflow see Borrowing as govt banker, 131n; E. C. Riddle as

Capital, international, effect of World Governor, 84-5; H. J. Sheehan as GovWar I on, 25; short-term movements ernor, 88; J. Scott as London manager, in, 35, 37, 39, 40-1; pre-war role of 134; L. G. Melville as Economist of, Britain, 36-7; and London, 40; changes 219, 244; Research Dept estd, 219; and in direction and composition, 40-1n London floating debt, 115, 132-6, 139,

Carmody, A. T. (cited), 144 279; London funds of, 131-2; 137, 234n,

Casey, R. G., 315, 316 236, 237, 279, 361-2; and interest rates,

Census (1933) , 346 127-8, 128n, 258; and exchange rate,

Central banking, early ideas about, 82; 137, 156-7, 160-3, 165n, 166-7, 168n, Bank of England advice on, 86; and 280-2, 359-65; accepts responsibility for A. C, Davidson, 127; and Central Re- exchange rate, 281-2; and wheat finance, serve Bank Bill, 172-6; and bank opera- 146-7, 147M, 149-52, 277-8; and renewal

tions, 209; and C’wealth Bank, 282; of Treasury bills, 186; rediscount facilislow development of, 359, 376 ties, 196, 198, 200-1, 269, 336; and fund-

Central Coal Board, 84 ing, 330-7; and open market for

Ceylon, 100 Treasury bills, 334; and private fund-

Chamber of Manufacturers Insurance Co., ing, 337; and loans, 193; private loan

84 subscriptions of, 332-3; and loan under-

Charlton, Matt, 118 writing, 355; views on money, 85-6; and

Cheese, 371 money stock, 204; and savings banking,

Chemicals, in 1920s, 55-8; employment in, 235n; and unemployment relief finance,

211, 368; and recovery, 288, 303-5, 330-7; and unemployment relief works,

307-8; and tariff, 370 338-9; and external refunding, 355;

Chifley Government, 378 development of, 359, 376; CommonChifley, J. B., 78, 240, 315 wealth Bank Board: membership of, Chile, 8 83n; experience of, 83; position of Chillagoe mines, 179n Chairman, 84-5; Sir Robert Gibson as

Clothing, in 1920s, 55-7; and recovery, Chairman of, 84-6, 323; relations with

288, 303-5, 307-9 govt, 135; political appointment of,

Coal, 28, 111-12, 121 173-5; and Lyons Govt, 311; and exCockatoo Island Dockyard, 313 change rate, 361, 363-5; Note Issue De-

Coin, 76 partment (and note issue): and Collins, J. R., 115n, 134, 186 inflation, 80, 95, 125, 181, 214, 252-3; Coiman, G. S., 318n and Notes Board, 83; reserve of, 139,

Commercial Banking Co. of Sydney, 127n, 173, 237-9, 365-6; notes as legal tender,

331 124, 238, 366n; for inter-bank clearing,

See also Banks and banking, and Trad- 204; Statistics, 384-9

N.S.W., and Trading banks See also Banks and banking, CommonCommercial Bank of Australia, 127n, wealth Savings Bank, Finance, Sir

162-3, 166n Robert Gibson, and Trading banks

See also Banks and banking, and Trad- Commonwealth Board of Trade, 84n

ing banks Commonwealth Grants Commission, 316n

Commonwealth Bank of Australia, estab- Commonwealth Notes Board, 58, 82-3

lishment of, 94-5; and govt finance, 7, See also Commonwealth Bank: Note 170, 178-9, 181, 184, 190, 191-6, 199, Issue Dept 223, 225, 230-2, 236-9, 241-3, 250-2, 267, Commonwealth Oil Refineries, 84, 98 272-3, 320-1, 322-4, 326; relations with Commonwealth Repatriation Commis-

govt, 150-1, 175-6; and gold mobiliza- sion, 84 tion, 7, 123-5, 130; and gold export, Commonwealth Savings Bank, relief of 122, 125; and trading banks, 79, 242; small bondholders, 266; absorption of and deposits of trading banks, 83, 86; Govt Savings Bank of N.S.W., 235, and Exchange Settlement Account, 200; 23mn, 314 as clearing house, 204; as bankers’ rep., Commonwealth Wheat Pool, 146 199; competition with trading banks, Commonwealth Works Director, 313 172; and central banking, 82-3, 86-7, Condliffe, J. B. (cited), 35, 40 282; and Central Reserve Bank Bill, Conscription, 232 172-3, 175-6; and Bank of England, 86, Constitutional Association of New South 103-4, 132-6; as manager of loans, 88; Wales, 116-17 408

Index Constitution, Commonwealth, 152, 172n, Dooley, J. B., 240

241, 242 Drane, N. T. (cited) , 309

Cooke, S. R. (cited) , 98 Drug Houses of Australia, 308

Coolgardie, 339 Drummond, R. S., 83n Copland, D. B., 106, 219-23, 244, 252-3, Duffey, M. B., 83n, 174

299, 375; (cited), 1-2n Dunn, J. P. D., 233

Copper, 371 Dyason, E. C., 219, 222-3; (cited) , 72n

Cotton, 29, 33n, 64 Dvestuffs. £8 Country Party, 117, 147-8, 151, 277, yestulls, 5

Codie ase ee 307-8 Economic growth, in 1920s, 4, 47-50, 61n; Crisp, L. F. (cited) , 119 and productivity, 4; post-war in Europe, Culley C. E., 240, 267 31; decennial rates of, 48; and _ interCunliffe Committee, 3h national trade, 50 Cunningham, L. L., 315 Economic Society of Aust. and N.Z., 219 Curtin, John, 267 Economists, Australian, influence on Czechoslovakia, 8, 25, 366 policy, 9-10, 218-25; on national income, 116-17; on exchange rate, 162,

Dairying, 66 168n, 361; stabilization plan of, 162, Dalgety and Co. Ltd, 361 222-4; and wages policy, 217, 348; con-

Daly, F. M., 189-90, 240 ferences of, 219, 223-4; and premiers’

Danat Bank, 41 plan, 244-6, 252-3; and recovery policy, Davenport, E. H. (cited), 98 225, 374-5

Davidson, A. C., background, 126-7; on Edwards, H. R. (cited) , 309 interest rates, 126-8, 258-9, 261-3; and = Eldridge, J. C., 233 wage reduction, 132n; and exchange Elections, general, 251; federal of 1929, rate, 137-8, 142n, 156-61, 163-7, 280-2; 117-18; N.S.W. of 1930, 177, 186-8, and E. O. G. Shann, 158-9; and Central 191, 235; Parkes by-election, 213-14, Reserve Bank Bill, 86-7n, 173-4n, 174-5; 233, Q’land of 1932, 321n; East Sydney on inflation, 222-3, 223n; and premiers’ by-election, 232-3, 234, 235; federal of plan, 247, 258-9; om recovery policy, 1931, 311, 314-15; N.S.W. of 1932, 354

260-2; on funding, 331, 333-5 Electricity, 56, 57, 90 See also Bank on South Wales Electricity Authority, Sydney, 70

Donan ancy a pa 7 4 Employment, general, 128; and budgets, external: and industrialization, 3, 51, oT ne Ot manutacturin ava Be

70°2, 75: floating, 6, tae” a 288; in rural industry, 61; and _ state 130-7, 139, 184-53 and de ation, yy an govt finance, 89-90; and tariff, 141, 1493;

balance of payments, 12°5: and govt in gold-mining, 154-5; and hours of borrowing, 74, 97 criticism of in work, 111-12 177-8 188; in building Britain, 98-9; and war de Dt, 132-3, 187N, 211; in chemicals 211; in metals and

233; War Debt Funding Agreement, machines oh: a fs r 911: and 132; and devaluation, 163; and labour money etock * s10: an e mployment

mov ement, 186-8; and Hoover mora multiplier, 220-1; recovery in, 288, 290-1, torium, 254, 269, 273, 321; refunding of, 302-5; and work rationing, 317n; inter-

354-8; general: and labour movement, var ‘chan es in, 377-8: "1045 White g5; and govt finance, 169-70; and bud- Paver on 6 3 377-% gets, 296-7; internal: of wheat farmers, See also oem lovment

68, 146, 293-4, 293n, 341-5; Conversion Emol . C P eile ; 20 0

of, 262-6; of pastoralists, 361 337-0 ouncils, 319, 320, 330, Denning, Warren. (cited) , 118, 120-1, 194, See also Unemployment

230. :English, Seorsh and Australian f 1800s and 0, 127n, 162-3, 2o1n Bank,

eos, 3 gh at 50, 204, 298: ae 1890s, See also Banks and banking, and Trad4, 51, 77, 80-1, 94; of 1921-2, 52, 58 _ ing banks

Devaluation see Exchange Estonia, 25

Development and Migration Commission, Europe, 24, 27, 30, 36, 40-1, 100, 251,

63-4, 220, 274 254, 268, 283-4 passim 409

Index Exchange, foreign, depreciation of, 8, refunding external debt, 358; budgets: 152, 154, 155-68; 212, 221, 253, 260; in 1920s, 87-8; deficits and deficit finrationing of, 8; instability of in Europe, ance, 93, 122, 131, 176, 189-96, 1098, 34-6, 40-1; finance of, 72, 131-2; and 200, 203, 210, 225, 232, 244-6, 253, indebtedness, 74-5; and gold standard, 268ff., 318-19, 320ff.; revised of 1929, 76-7; and gold points, 77n, 123n, 156; 121-2; Of 1930-1, 143, 178-9; proposed rates of, 76n, 123, 149-50, 155-6, 157, revision of, 18off.; revised of 1930-1, 158, 161-2, 164-8, 280-2; and Bank of 193-5; Of 1932-3, 320-2; Of 1933-4, England, 133; and Mobilization Agree- 323-6; of 1934-5, 326-7; speeches, 88-9,

ment, 137-9; control of, 137; ‘outside’ 122; structure of, 169-70, 296-8; and market in, 156-7, 159, 160-2, 165-7, Melbourne Agreement, 178-80, 181-4; 168n, 383; method of quotation, 161n; and premiers’ plan, 247-50; and Hoover instability of, 182; and economists, 222, moratorium, 269; and recovery, 295-9;

244; and sterling-exchange standard, equilibrium in, 327; deficits and de250-1; and sterling devaluation, 279; pression, 373; taxation: in 1920s, 71, appreciation of, 280-2; and _ capital 88; increases in, 122, 163, 179-80, 210, movements, 280-2, 294; as election issue, 249; of flour, 149-50, 341-2; C’wealth 314; and recovery, 318; and unemploy- dependence on, 169; of interest, 189,

ment relief, 329; and _ sterling-dollar 231, 241n, 265; limitation on, 190; of rate, 359; future of in recovery, 359 income, 193; of property, 222, 248-9; ff.; and rural indebtedness, 361; and and premiers’ plan, 245; in N.S.W., note issue reserve, 365-6; and tariff, 270-1, 273-4; structure of, 296; reduc369; and rural income, 370, 370n; de- tion of, 321-3, 324-8, 341; of mortgages,

preciation and depression, 373 353; diversion of N.S.W. receipts to

Exports, and external interest payments, C’wealth, 353 3, 72-3; of gold, 115, 123, 125, 130, 132, See also Borrowing, Commonwealth 154-5; and public investment, 5; prices Bank, and Treasury bills of, 111, 113, 210, 260, 292, 365; statistics Financial Agreement, 6, 88, 100ff., 226,

of, 73, 113, 145, 293; seasonal, 130; 234, 238n, 352-3

expansion of, 145-55; of wheat, 153; of Finland, 25 wine, 153-4; govt control of, 162, 166-7; Fisher, A. G. B. (cited), 2n and national income, 116, 216, 221, Flour, 149-50, 341-2 377; and recovery, 288, 291-4; prices of | Fluorspar Mining Co., 179n and budgets, 324, 327; production of Food, processing, 56, 57 and wages, 348, 359-60; prices of and Foodstuffs, world trade in, 24-6, 29; pro-

exchange rate, 359-60; and BPT, 371 duction of, 26; stocks of, 27-8, 33; prices of, 27-8; production and con-

Farmers’ Relief Board (N.S.W.), 343 sumption of, 27-8; demand for, 33; Federal Aid Roads Agreement, 234 production and trade, 284 Fenton, J. E., 120-1, 151, 185n, 188-9, Forde, F. M., 141n, 143, 151, 159n

213-15, 226, 240, 315 Forgan Smith, W., 320-1, 321n, 329-30

Finance, government, of states, 5, 9, 169- France, 21, 35, 38, 44, 253, 283, 286-7, 70, 327; Of N.S.W., 5-6, 176-8, 198-9, 366, 371, 373, 374 233-4; effect of, 71ff.; and trading banks, Fremantle, 213 81, 138, 171, 218; and trade cycle, 91; Friedman, M. (cited), 17, 204 short-term methods of, 91, 104-5, 196- Fruit, 64, 371 200; and scale of borrowing, 96-7; and = Fusfield, D. R. (cited), 225n works expenditure, 129; and external floating debt, 139; structure of, 169-70; Galbraith, J. K. (cited), 18 and Commonwealth Bank, 178-9, 181, Game, Sir Philip, 354 184, 225-7, 230-2, 236-9, 250-2, 267, Garden, J. S., 186-7, 188

272-3, 320-1, 3922-4, 326; and ‘release of Gas, 112 credit’, 189-96; and Loan Council, 199- General Agreement on Tariffs and Trade,

200; Arbitration Court on, 216; and 285

deficit finance, 225-31, 240ff.; and re- Genoa, 35 covery, 274-6, 288; and Lyons Govt, Gepp, H. W., 275n 316ff.; and national income, 326; end Germany, borrowing in U.S.A., 3; reducof Treasury bill finance, 326; and un- tion of imports, 8; industrial produc-

employment relief works, 337ff.; and tion of, 12; and world trade, 21; as 410

Index

Germany—continued in, 27; and international money, 34ff.,

international debtor, 25, 38-9, 254; de- 96; and Sterling Area, 42; contraction

cline in population growth, 27; post- in, 44-5; unemployment in, 46; and war industrial recovery in, 30; inflation Empire migration, 63; prices in, 76;

in, 35-6, 80; financial crisis in, 41; ex- Coal Strike in, 96; Aust. borrowing in, tent of depression in, 43-6; reparations, 74-5, Q6ff., 119ff., 191ff., 171-2, 355-6; and

285; recovery in, 283-4, 286-7; wages in, Aust. war debt, 95, 229n; legislation, 348-9, 370; recovery policy in, 374 g8, 123; Aust. wine in, 153; Chancellor Gibbons, and Gibbons resolution, 191-2, of Exchequer, 132, 236, 356; war debt

194, 213-14 of, 187; recovery in, 283-4, 286-7; and

Giblin, L. F., and multiplier, 117, 220-1; Aust. default, 253-4; wages in, 348-9, and A. C, Davidson, 127; as leader of 370-1; recovery policy in, 356, 373; and economists, 218-19; and _ taxation of Aust, tariff, 370-1 interest, 241n; as member of govt. com- See also London mittees, 244, 275n, 318n; and recovery Gregory, T. E., 180, 219 policy, 374; (cited), 2n, 86, 163, 166n, cultett, S., 315, 367

235n unn, John, 275

See also Economists

Gibson, Sir Robert, as Chairman of Harvey, Sir Ernest, 86, 123, 133-5, 137n, C’wealth Bank Board, 83n, 84-6, 173; 173n, 186, 196, 198 career of, 84; and E. G. Theodore, 119; See also Bank of England and note issue reserve, 123-4, 126, 237-9, Hatry group, 106 365-6; and Bank of England, 132, 135; Haughton, Wm. & Co., 84n

reappointed as Director of C’wealth Hawtrey, R. G., 124, 364 Bank, 135, 174-5, 174n; and wheat Healy, G. D., 78, 263 finance, 150-1; and exchange rate, 156, Heathershaw, J. T., 83n, 88 163, 165n, 167, 280, 359-65; and govt Heinz, H. J. & Co., 143n finance, 178-9, 181, 183, 184, 189, 190, Heydon, Mr Justice, 347n 192-6, 199, 225, 230-1, 242-3, 272, 275-6, Higgins, Mr Justice, 346, 346n

320-1, 322-3, 323m; and Sir Otto Nie- fish Court of Australia, 213, 346n, 353 meyer, 181; and money, 204, 376; and Hill, L. L., 243, 267 premiers’ plan, 243, 247; and Senate, Hobart, 345

2515 and interest rates, 256-8; On Hobart Savings Bank, 209n

National Appeal Executive, 262-3; 4y E 8 968 death of, 326n, 335; and funding, 330-5; ogan, E. J., 138, 2

, , i: ’ ’ Holeproof Hosiery & Co., 143n

and external refunding, 355

. Holloway, See also Commonweazlth Bank, Finance, | E. J., 240, 267 Holman, W. A., 315

and Exchange . Gl Hordern, Sir Samuel, endyne, Lord, 115 . 174 see -_ Hornsby, Sir Bertram, 135n also Nivison & Co. Godfrey Phillips Ltd, 143n Hughes, W. M., gen

Gold, mobilization and disposal of mone- Hume Highway, 339 tary reserve, 7, 114-15, 123, 125, 130, Hungary, 8, 25, 35, 43-4, 286-7, 349 192, 165n, 181, 203, 236-9, 239, 250, Hunter River District Water Board, 70

365-6; price of,43, 291,145, 365-6 . Hytten, T.,339 219,oo, 220,, 275n Gold-mining, 154-5, 289,

Gold standard: and Great Britain, 5, 35, [mmigration, 59, 62-4, go 41-2, 96, 134; and United States, 20, Imperial Chemical Industries Ltd, 308 96, 285, 363; in 1920s, 34-42; and Bank Imperial Conferences (1920), 63; (1926),

of France, 39, 41-2; and gold bloc, 42, 98

283, 371; and Australia, 76-7, 108, 124-6, Imports, reduction of, 8, 130, 170, 178,

158n, 238, 252 210, 280, 302, 372; prices of, 50, 53,

See also Exchange, Commonwealth Bank 59-61, 302, 349; competition with, 52-3,

Goodyear Tyre and Rubber Co., 143n 56, 58, 110, 145, 212; composition of, Government Savings Bank of N.S.W., 235, 62; ves and cr 73: l atic > 35 a3g Great Britain, as international creditor, tariffs, 141; and devaluation, 167; re-

, All

235n, 204, 314 in, 73-4; ‘Ys 77-9

5; industrial production of, 12, 30; and covery in, 323-4; and national product, world trade, 13, 21; population growth 377

Index Imports, replacement of, 3, 5, 51, 53-5; plan, 245, 247-9; and recovery, 260, 142-3, 220, 372*3; and recovery, 10-11, 300-1; On mortgages, 266; in moratoria go2ff.; in primary producing countries, legislation, 343 24; and wages, 348; and tariffs, 370 Investment, govt, 4-5, 50-1, 67-71; in Income (Gross National Product), varia- manufacturing, 50, 53, 59, 307-8, 309; tion in, 43-5, 47ff., 116, 122, 128n, 155, decline in, 128, 211, 221, 288; rural, 167-8, 176, 210, 216, 218, 220-2, 226-%, 67-8, 146; and recovery, 283 242, 286, 289, 326; and national expen- /nvestors’ Review, 98 diture, 43-5, 286, 289; real income per [Iron and steel see Metals capita, 48, 207; income per capita, 289, Irvine, R. F. (cited), 217. 310, real income, 211, 377; money in- Italy, 42, 283, 371 come, 205, 207, 211, 252-8, 290-1; rural

income, 66, 112, 221, 227, 290; and James, R., 121n, 233 money stock, 210; distribution of loss Japan, 13, 24, 29, 30; extent of depresin, 217, 222, 224, 226-7, 243, 249, 259-60; sion in, 44, 46, 293; wages in, 348-9; and foreign trade multiplier, 116-17, recovery policy in, 374 219, 220-1; share in recovery of, 290; Johns and Waygood Ltd, 289

and liquidity trap, 294; changes in Jones, J. P., 243 source Of, 377

India, 75, 100 Kaiser, Julius & Co., 143m Industrial disputes, 50, 102, 108-10, 111-12, Kalgoorlie, 339 116-17, 121, 131 Keating, M., 309

Inflation, in Germany, 25, 35; in Europe, Kelly, C. A., 236 31, 35; fear of, 79-80, 162, 263, 312, Kershaw, R. N., 180 373; C’wealth Bank views on, 83, 195-6, Keynes, J. M., 34, 97, 98, 99, 124, 252, 231; and devaluation, 157, 163; contem- 364; (cited) , 97-8 porary meaning of, 204, 251-3; and

economists, 219, 222-4; and Theodore .

plan, 226-7, 230-1; and Treasury bill rapor Party 186, 189n

ranmance, 334°5 general: Manifesto, 94; and Bank of and dividend paymenis (external and arn 7 armitage, agin; Peder internal) : and labour movement, 76, influences on, 94-5; and 1929 elections, 94-5; and dividend payments (external): 116-18; Cabinet of, 118-19; 120-1; split and balance of payments, 3, 73-4; and in, 119, 184, 190-2, 194, 196, 213-15, 225, government borrowing, 6, 7, 72, 102; 232, 233, 240, 252, 312-15; and Caucus, and default, 7-9, 233-4, 236, 251, 251n, 120-1, 162, 174, 176, 179n, 185, 189, 278, 351-4, 372; and Mobilization Agree- 190-4, 213-14, 233, 240, 267; and tariffs, ment, 8, 136-9; and London funds, 126, 141, 143, 291; and wheat industry, 148;

130, 136-7, 198, 234n; repudiation of, and repudiation, 170; legislative pro185-8, 200, 228-9, 232-3, 253-5, 320n, gramme of, 172; economic policy of, 356; reduction of, 22gn; and Hoover 178; and wages, 217-18, 227; federal moratorium, 269, 273, 321; and dividend conference, 235; and interest rates, 257,

paymenis (internal): taxation of, 189; 259-60; and banks, 137, 166, 175nN, and default, 191 233-4, 235, 251, 251M, 259-61; federal executive of, 267; and 265, 269-70; repudiation of, 248, 265; premiers’ plan, 259-60, 267-8; and 1931

rates (external): in New York, 5; in elections, 312-15; of New South Wales London, 6; in Germany, 41; on loans, (and Lang Labor): 146-7, 185-9, 194. 101-2, 171n, 185, 187n, 358, 380; on 213-14, 228-30, 232, 235-6, 270, 312-15, Treasury bills, 114-15, 136, 137n, 236; 354; of South Australia: 267; of Tasreduction of, 254-8; rates (internal): on mania: 218-19; of Victoria: 267-8 loans, 79, 92, 171, 171n, 189, 192-3, Labour movement, and _ interest pay201, 226-7, 261, 330-3, 336-7; inflexi- ments, 76, 94-5; and Arbitration Court, bility of, 79, 275n; and Loan Council, 110; and economic crisis, 112-13; and 92-3; Increase in, 126-8; and devalua- E. G. Theodore, 120; and J. A. Lyons, tion, 157; reduction of, 217, 224, 226-7, 120-1; and coal strike, 121; and Mel228-9, 231, 252, 256ff., 263-4; on Trea- bourne Agreement, 186; and banks, 204, sury bills, 200, 261, 263-4, 269; and 257, 259-60, 375, 378; and interest rates, Bank Interest Bill, 241; and premiers’ 257; and premiers’ plan, 267-8 Alg

Index Lamberton, D. M. (cited) , 111, 128 Maritime Industries Bill (1929), 116; Lang Government, 177-8, 256, 351-2, 354 moratoria, 266, 292, 343; Peace Officers’ Lang, J. T., and Loan Council, gan, 198- Act, 110; Transport Workers’ Act, 110;

200, 270; and wage reduction, 177, 190; Wheat Marketing Act (1930), 186; and 1930 elections, 186-8; and repudia- Wheat Advances Act (1930) , 151-2, 164,

tion and default, 187-8, 233-5, 238n, 241n; Wheat Marketing Bill (1930), 253-5, 269-70, 320N, 351-4; and Treasury 147-8; Wheat Bill (1931) » 240-1, Wheat

bill finance, 198-200; and E. G. Theo- Marketing Bill (No. 2, 1931), 276-7; dore, 228-30, 234; and Lang plan, 228- Wheat Charges Bill (1931), 277-8;

30, 232-3; and Govt Savings Bank, 235; Wheat Bounty Bill (1931), 277-8; Act and Labor Party, 235-6; and premiers’ (1931), 278; Wine Export Bounty Act plan, 246-9, 268-72, 273-4; and 10931 (1930), 153n; Great Britain: Colonial elections, 314-15; and premiers’ con- Stock Act (1900), 98; Currency and

ferences, 320; effect of on external Bank Notes Act (1928), 123, 123n;

refunding, 356 Empire Settlement Act, 63; Gold StanSee also Labor Party, Interest, and dard Act (1925), 123, 123n; New South

Finance (iggi), ayo: Farmers’ 343; , ; Relief ers iefAct, Act,

latvia 20 194, 248, 313, 315 Industrial Arbitration (Eight Hours)

Launceston Bank for Savings, 2o0gn ae Wii Moratorium at (1.980) , Lausanne Conference, 254, 285 200) ortgages Taxation c t (1932),

yton, W. T., 99 : ; . . . Lazzarine, H. P., 2 ; . .

Layton. W. T 353-4; Public Service (Salaries Reduc-

Lazzarine, C. C., 271n tion) Act, 177-8; Public Service 271N; Salaries . , Bill (1931), 270-1; Act (1931),

» TR hy371 233 South Australia: Financial Emergenc Lead, ous . ePBENCY L € Nati Act (1931), 258-9; Victoria: Financial Cagle O1 NAMMONS, 34, 135 Emergency Act (1931), 268; Western

Legislation oo, Australia: Mortgagees Rights RestricCommonwealth: duplication of indus- tion Act (1931), 266 trial, 109; Bank Interest Bill (1931), Lewis, W. A., 42; (cited), 22, 32, 42n 238-41; Central Reserve Bank Bill | jbera) Party, British, 99

(1930), 86, 133-4, 172-6, 314; C’wealth Lindley Walker Wheat Co., 151 Bank Act (1924), 82-5, 83n, 173-4, 204, Lines, Oscar, 127

237; C’wealth Bank Bill (1928), 86, Lithgow, 308

86-7n; C’wealth Bank Act (1929) , 124-6, Lithuania, an

140; C’wealth Bank Bill (1930) , 172, Lloyd George, D., 99 175; (No. 2, 1931), 237-8; C’wealth Bank Loan Council, Australian, voluntary, 6, Act (1931), 239; (No. 3, 1931), 365; 91-§,, 101; and default, 9, 270, 351-2; (1945) , 85; Conciliation and Arbitration H. J. Sheehan as Secretary, 88; execuAct (1928), 110; (1930), 172; Constitu- tive of, 92; and interest rates, 92-3;

tional Alteration Bill (1930), 172; enhanced status of, 93-4; and N.S.W., Crimes Act, 110; Customs Tariff (Ex- 92-3, 236, 238n; loan programme of,

change Adjustment) Act (1933), 369; g7, 101ff., 115n, 122, 170, 172, 183, 193, Debt Conversion Agreement Act, 120; 214; unemployment relief programme,

Bill (No. 1, 1931), 263; Act (1931), 330-1, 332-7; and govt finance, 114-15, 265; Development and Migration Act, 131, 133, 135-6, 181, 199, 201, 233-4, 63; Fiduciary Notes Bill (1931), 204, 238, 241-2, 250-1, 269, 272-3, 320-1, 238n, 238-41, 267; Financial Agreement 324-6; J. R. Collins as London rep., Validation Act, 103, 103n, 105-6; Finan- 134; and Mobilization Agreement, cial Emergency Act (1931), 154; (1932), 137-8; proposed dissolution of, 187-8; 154n; Financial Emergency (State Legis- and premiers’ plan, 225, 243; and Fin-

lation) Act (1932), 354; Financial ancial Agreement, 238n; expert com-

Agreement Enforcement Act (1932), mittees of, 225, 243-6, 250; resumption 352-3; (Nos 2, 3 and 4, 1932), 353, of finance for N.S.W., 270; recommences 353n; Financial Agreements (C’wealth counter sales, 275, 275n; and private

Liability) Act (1932), 353, 3530; funding, 337; as policy intermediary, Gold Bounty Act (1930), 154; Loan 375-6 (Unemployment Relief) Act (Nos See also Borrowing, Commonwealth 1 and 2), 338n; Loan (Farmers’ Bank, Finance, Financial Agreement, Debt Adjustment) Act (1935), 344-5; and Treasury bills 413

Index London, Aust. borrowing in, 3, 5, 71, 90, Mann, E. A., 1o2n o6ff., 114-16, 122, 268, 354; Aust. credit Manufactures, Chamber of, 116 in, g6ff., 113ff., 192ff., 161, 165, 184ff., Manufacturing, development of, 4, 51;

236ff., 278ff., 354, 356; as financial productivity in, 4, 50, 52, 304, 309, 371;

centre, 36-7, 38, 42 passim role in recovery, 11, 286, 290-1, 301ff.;

See also Bank of England, Borrowing, output of, 50, 52, 56, 205, 207, 220; and

and Great Britain World War I, 51-2; post-war expansion,

London funds, decline in, 7, 113-14, 124, 53-9; import replacement of, 53-5, 126, 279, 359-60, 361-3; and _ sterling- goiff.; investment in, 53, 307; prices exchange standard, 77-8; and monetary of, 59-61, 142; stagnation in, 59-62; empolicy, 81, 129, 251; information about, ployment in, 61, 141, 211; and govern86-7, 188, 172; rise in, 110, 280-2; statis- ment policy, 68-70; finance of, 71-2;

tics, 114, 260, 387-9; and gold reserve, Import competition in, 110, 145, In12x, 181; of C’wealth Bank, 137; and dustrial disputes in, 112; decline in, Mobilization Agreement, 138-9; and de- 129, 211; and tariff, 143, 367, 371; revaluation, 156, 158, 160, 162, 164; of covery in and government finance, 324; trading banks, 203; and money stock, Wages im, 350; and depression, 372; 208, 300; and external interest payments, Men CW changes in, 377-8 234n; and default, 253-4; C’wealth Bank arr, C. W. G., 215

accepts responsibility for, 281-2; Masson, W. J., 159, 162n, 165

Pts P Y fom 20h8, as Massy Greene, Walter, 316, 324, 332

constraint on recovery policy, 373 Meat. 64. 10 , ° 7 , ,

ealth Bank, and Exchan , , , ,

See ae Banks and banking, Common- Melbourne °° 83. 230 248, 345

Lukin, My Justice, e enange 0b. aes ee (1930), 183-90, ne Foundry, 84 . Melbourne banks see Associated Banks yons Government, and govt finance, 273, of Victoria 327-8; economic p olicy of, g11-12; and Melbourne Trades Hall Council, 83n unemployment relief, 329-30; appt of Melville, L. G., 223, 244, 244n, 251n, 318n

Wool Inquiry C’tee, 341; wheat assist- 64- 0 EEE , ance policy, 341-2; and default, 352-4; Moncice R. G., 152 and refunding external debt, 354-9; and Metals (iron, steel, machinery), role in

tariff policy, 366-71; recovery policy recovery, 11, 302, 304-9, 370; role in

assessed, 374 industrialization, 51-2, 55-7; output, 56,

Lyons, J.