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The Recent History of the Australian Loan Council1

Published online by Cambridge University Press:  07 November 2014

J. A. Maxwell
J. A. Maxwell*
Affiliation:
Clark University
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Extract

The Australian Loan Council is a unique body. Established in 1928-9 as a part of the Financial Agreement, after the opinion had become widespread that the credit of the whole of Australia, under existing conditions, could never be much higher than that of its weakest state, the Loan Council was given full legislative and constitutional status as the body which was to handle all borrowing by Commonwealth and state governments, except borrowing for temporary purposes or by the Commonwealth for purposes of defence. Against its decisions there is no appeal because the Council is not directly responsible to any one Parliament or electorate. “If,” as Mr. Forgan Smith of Queensland has complained, “any Premier agrees [at a meeting of the Loan Council] to a line of policy from which his State Parliament dissents, all that this Parliament can do is, by means of a vote of no confidence, to remove him from office. Nevertheless the decision of the Loan Council would stand.” It is more than probable that nobody foresaw the extent to which, in the depression, the Loan Council might “be made the instrument of forcing upon the Commonwealth and the States a common policy involving the very details of their internal administration.”

Reduction of deficits. The first evidence of the powers of the Loan Council came in April, 1931, when Australia was fumbling for a proper policy to stem depression. On the initiative of the Council the so-called Copland Committee was appointed and on the basis of the report of this Committee the “Premiers' plan” was drawn up, which aimed, through a variety of measures, at a prompt balancing of budgets. These were long steps forward, but the question as to what could be done to keep governments in line still had to be answered, and here again the Loan Council had an important role. Early in 1932 New South Wales defaulted on its debt, and then approached the Loan Council for additional authority to borrow.

Type
Articles
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 6 , Issue 1 , February 1940 , pp. 22 - 38
Copyright
Copyright © Canadian Political Science Association 1940

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Footnotes

1

The material for this article was collected while I was Research Fellow at the University of Melbourne, a position I was able to take because of a grant from the Carnegie Corporation.

References

2 See Exley, H. J., “Australian Loan Council” (Economic Record, May, 1926)Google Scholar; Hebert, C. H., “A Loan Council for Canada: The Australian Experience” (Canadian Journal of Economics and Political Science, Aug., 1936).Google Scholar

3 Quoted by Copland, D. B. and Janes, C. V., Cross Currents of Australian Finance: A Book of Documents (Sydney, 1936), pp. 9–10.Google Scholar

4 It should be realized that a meeting of the Loan Council and a conference of Commonwealth and state ministers are often indistinguishable, except that in the former rules about membership and voting are precise.

5 Budget Speech, 1934-35 (Canberra, 1934), p. 10.Google Scholar

6 There was some discussion of distribution according to the amount of the current deficits, but this did not prove acceptable.

7 See Copland, and Janes, , Cross Currents of Australian Finance, pp. 32-4.Google Scholar Comment by Premier Ogilvie of Tasmania on “The Nature of Budget Deficits.”

8 “Treasury bills are three-month promissory notes issued through the Commonwealth Bank by the Commonwealth Government on account of itself and State Governments” (Report of the Royal Commission to Inquire into the Monetary and Banking Systems in Australia, Canberra, 1937, p. 54).Google Scholar

9 Ibid., p. 57.

10 Ibid., p. 232.

11 Unless this was done through so-called “private” funding by which the Commonwealth Bank itself took the whole issue.

12 Ibid., p. 233. In March, 1936, the Commonwealth Bank tried an experiment. It had been accustomed to use its discretion as to the amount of an issue of Treasury bills it held for itself, and the portion it sold to the trading banks. There had, however, been talk about broadening the market for Treasury bills, and now the Commonwealth Bank decided to issue to the public £1,000,000 of the £25,000.000 which it held. But the Bank of New South Wales, the largest of the trading banks, promptly raised the interest rate which it paid on deposits, bringing the rate for three-months deposits above the rate at which the Treasury bills were being offered. The effect was to make the purchase of Treasury bills unattractive to those institutions which might have purchased, and only a small portion of the offering was taken up. This in itself was of slight consequence. But the other trading banks raised their interest rates and at once a commotion was raised by those who held as an article of faith that maintenance of low rates was essential for full recovery in Australia. It was charged that the Commonwealth Bank, unable to induce the Loan Council to retire Treasury bills, had taken a deflationary step. This was an exaggeration. Undoubtedly the Commonwealth Bank was not averse to some contraction, but the only conclusion worth drawing is that the largest trading bank showed no disposition to co-operate with the Commonwealth Bank (Ibid., p. 213).

13 For the provisions see Pitt, H. A., Sinking Funds and Depreciation Funds of Governments and Public Bodies (Melbourne, 1935).Google Scholar

14 Financial Agreement, part I, section 3 (i) (ii).

15 Premier Ogilvie of Tasmania once levelled the accusation as follows: “The Loan Council is purely a farce. This is what happens. State Ministers are dragged from the corners of Australia with our officers. For two days we talk together and put our genuine requirements into shape. It is time and trouble wasted. At the end of all our moulding and adjusting the Commonwealth Treasurer (Mr. Casey) telephones the chairman of the Bank Board. Telephones, mind you!

“We move a resolution that Mr. Casey should at least write to the Bank Board that we might see its reasons in black and white. This is defeated on the casting vote of Mr. Casey” (reported in the Melbourne Herald, Jan. 5, 1937).

16 Premier Butler of South Australia declared: “We will never delegate to the Loan Council the right to say how our loan money shall be spent. Each State submits not the details of its loan expenditure, but the gross and net loan expenditure” (South Australia, Parliamentary Debates, 1937, p. 588).

17 The Development and Migration Commission, set up in 1926 and later discontinued, investigated public works projects with some success.

18 General Theory of Employment, Interest and Money (New York, 1936), p. 322.Google Scholar

19 See Assisted Migration: Correspondence relating to between the Prime Minister of the Commonwealth of Australia and the Premier of New South Wales (Sydney, 1936), p. 16.Google Scholar

20 The recent defence programme of the Commonwealth is of an extraordinary nature and some overseas borrowing to finance it seems inevitable and expedient.

21 South Australia, Parliamentary Debates, speech of July 22, 1938.

22 New South Wales has aroused suspicion that it intends to circumvent Loan Council control in another way. The state government, especially during the depression, made loans to local governments. Recently it has begun to induce them to pay these back by offering attractive terms. This might, on its face, be simply a move to encourage local bodies to reassume responsibilities which they had dropped during the depression. But the effect was also to give the state government extra funds and to increase local borrowing.

23 See Copland, and Janes, , Cross Currents of Australian Finance, pp. 18–20.Google Scholar

24 The share of loan money to which the Commonwealth is entitled does not, however, vary according to its past borrowing.

25 The objection sometimes raised that the Loan Council makes necessary hand-to-mouth loan programmes (see statement of Premier Forgan Smith, Melbourne Herald, April 20, 1938), might also be met by use of a secretariat. If a project was examined and endorsed by the secretariat and the Loan Council it would be as a long-run scheme.

26 Report, p. 235.