BORROWING AND BUSINESS IN AUSTRALIA BORROWING AND BUSINESS IN AUSTRALIA A STUDY OF THE CORRELATION BETWEEN IMPORTS OF CAPITAL AND CHANGES IN NATIONAL PROSPERITY pF GORDON Ww OOD, M.A, D.Lrrr. University of Melbourne, Fellow of the Rockefeller Foundation OXFORD UNIVERSITY PRESS LONDON: HUMPHREY MILFORD 1930 OXFORD UNIVERSITY PRESS AMEN HOUSE, E.C. 4 LONDON EDINBURGH GLASGOW LEIPZIG NEW YORK TORONTO MELBOURNE CAPETOWN BOMBAY JALCUTTA MADRAS SHANGHAI HUMPHREY MILFORD PUBLISHER TO THE TNIVERSITY Printed in Great Britain ACKNOWLEDGEMENTS INFLUENCED by the researches of Professor Wesley Mitchell into the American situation, this study was commenced nine years ago as a statistical investigation of business cycles in Australia. The violent disturbances of the post-war period, however, presented very considerable difficulties in the way of economic analysis; and it became evident that the area of investigation would have to be extended beyond the Australian field. The impact of world conditions upon the economic organization of the Commonwealth necessitated a parallel inquiry into the over-Seas credit position ; and the research took definite shape on the lines made familiar by the work of Professor Jacob Viner. Meanwhile, the great impetus given to studies of this character by the organization of the Economic Society of Australia and New Zealand, and the publication of The Economic Record, served to crystallize many of the issues involved in business fluctuations in Australia. The contributions made by Professor D. B. Copland in many publications and in the Development and Migration Commission’s Report on Unemployment took the study forward many stages; and it then became obvious that the isolation of the main controls could be conducted more effectively in London than in Melbourne. The award of a Fellowship of the Rockefeller Foundation, the considerate treatment accorded me by the Council of the University of Melbourne, and the good nature of my chief and colleagues enabled the change of base to be made. As a result of that opportunity the accompanying research is presented in the hope that some light may be thrown into the dark places of our business situation, To Dr. T. E. Gregory, Cassel Professor of Finance at the London School of Economics, who undertook the direction of my work there; to the officials of Australia House and the Bureau of Census and Statistics, who never wearied in the welldoing involved in reference to papers ; to many economists in Britain and America who became interested in the work ; to the librarians, bank officers, and business executives who gave vi ACKNOWLEDGEMENTS willingly of their valuable hours ; and to the Delegates and staff of the Oxford Press, I would here tender my grateful thanks. My debt to Professors F. W. Taussig and Viner will be sufficiently obvious in the text. I owe a special tribute to Professor D. B. Copland, whose interest and criticism were my greatest stimulus; to Mr. C. H. Wickens, Commonwealth Statistician, who was always ready to produce and interpret statistics; and. to Mr. Keith Isles, whose criticism and help in reading proofs were invaluable. G.L. W. UNIVERSITY OF MELBOURNE, January, 1930. CONTENTS INTRODUCTION » PARTI CHARACTERISTIC FEATURES OF AUSTRALIAN BUSINESS AND AN ACCOUNT OF THE EARLY YEARS CHAPTER I. CHARACTERISTIC FEATURES OF AUSTRALIAN ECO-NOMIC HISTORY . 1 Features of Australian business cycles—community organization and the importance of overseas trade—the connexion between international trade and imports of capital —chief factors influencing national productivity—connexion between borrowing and speculation in land. CHAPTER II. THE EARLY YEARS AND THE CRISIS OF 1840-3. 9 Imports of capital prior to 1840—the Australian Agricultural Company and the land boom in New South Wales—effects of the introduction of capital upon banking and overseas trade—the crisis of 1840-3 in New South Wales—South Australia and the crisis. PART II PROSPERITY AND CRISIS AFTER THE GOLD DISCOVERIES CHAPTER III. THE GOLD DISCOVERIES AND THE CRISIS OF 1853 22 Review of the decade following the discovery of gold—the course of trade—prices and credit—the onset of the crisis of 1853—statistical examination of the crisis— sconomic consequences of the gold discoveries in Australia. CHAPTER IV. THE QUEENSLAND INCIDENT OF 1866, AND THE CRISIS OF 1878 . . . . . : Development and progress after 1860-—Melbourne’s leadership in finance—Queensland and the Overend Gurney crisis of 1866—the mining boom after 1870—the first railway loans—the crisis of 1878 in relation to world credit conditions. a9 PART III THE BOOM OF 1890 AND ITS ECONOMIC CONSEQUENCES CHAPTER V. THE PRELUDE TO THE COLLAPSE OF 1893 . . 49 General survey of the period 1880-90—financial organization in Australia— British investments in relation to the land boom—trade and credit—the wonderful year of 1888—the course of events in New South Wales and Victoria compared—the economic situation in Queensland and South Australia. CHAPTER VI. THE COURSE OF THE CRISIS OF 1893 . = . . 62 The halt in capital investment—the position of the land banks—government deficits and industrial unrest—the Baring Crisis and its effect on the Australian situation—weaknesses in Australian bank policy and organization—the collapse and the period of reconstructions—government action during the crisis. CHAPTER VII. IMPORTATION OF CAPITAL INTO AUSTRALIA . PRIOR TO 1893 . . . 2 72 Misapplication of capital owing to over-supply—review of the situation in New Zealand between 1872 and 1892—public and private investments in Australin—the balance of trade and movements of prices—the burden of indebtedness examined— population and public debt compared—national productivity in relation to the annual interest burden—national wealth and indebtedness. viii CONTENTS CHAPTER VIII. AUSTRALIA'S RELATIVE DISADVANTAGE IN OVERSEAS TRADE AFTER 1890 . . 86 Preliminary examination of the terms of trade—the distinction between gross and net barter terms of trade—the meaning to be attached to ‘favourable’ and ‘un. favourable balance of trade’—vphases of the borrowing cycle—the theory of the borrowing cycle in its application to Australia between 1880 and 1896—the statistics of banking and borrowing—effects of borrowing upon sectional price levels and wages—measurement of the community effort needed for recovery. PART IV THE COMMONWEALTH. 1900-14. CHAPTER IX. THE COURSE OF BUSINESS FROM 1900 TO 1914 . 104 Economic effects of Federation—characteristic features of the period—depression after 1900—rationing of loan issues in London—minor crisis of 1903—rapid recovery after 1905—Australia in relation to the world crisis of 1907—credit reactions and price movements—the Commonwealth Government and banking policy—the threat of crisis in 1913. CHAPTER X. ANGLO-AUSTRALIAN EXCHANGE IN RELATION TO CAPITAL MOVEMENTS AND TRADE, 1800 TO 1913 . : . 116 Financial relations between Australia and Great Britain—gold movements and their causes—effects of credit contraction in London—credit dislocation in Australia consequent upon capital importation—effects upon group prices—seasonal exchange disturbances—control of capital movements—the mechanism of adjustment in Australia and Britain—the relations between borrowing and banking under the gold standard. CHAPTER XI. AUSTRALIA'S FLUCTUATING ADVANTAGE IN TRADE FROM 1900 TO 1913 : 3 . 126 Connexion between stoppage of loan issues and restriction of bank credit in Australia—domination of bank policy by capital loans—the parallels to be noted between U.S.A. after 1870 and Australia after 1890—correlation between new loans and excess of imports—the banking situation after 1900-—changes in sectional price levels and in wages—the terms of trade over the period. CHAPTER XII. THE AUSTRALIAN BALANCE OF INTERNATIONAL INDEBTEDNESS FROM 1900 TO 1913 . 3 . . 141 The balance of indebtedness examined—the commodity balance of trade—the ‘service’ balance—the problem of freight charges—capital investments and interest payments—capital movements connected with migration—comparison of net indebtedness with imports of capital. PART V AUSTRALIA DURING AND AFTER THE GREAT WAR CHAPTER XIII. BANKING AND BORROWING POLICIES IN AUS-TRALIA DURING THE WAR . . . 183 The great inflation—price movements—developments in Commonwealth banking policy—the new borrowing cycle—British and Australian price levels compared— the widening margin between interest payable overseas and disposable income. CHAPTER XIV. THE BOOM OF 1919 AND THE SUBSEQUENT DE. PRESSION IN RELATION TO PUBLIC BORROWING . . 172 The relative effects of inflation and borrowing upon the price level—effects of the capital shortage after 1919—the course of events outlined-—causes of crisis— differential effects of borrowing upon the rewards to the factors of production. CONTENTS CHAPTER XV. ANALYSIS OF THE TERMS OF TRADE BETWEEN 1914 AND 1928 . . v . . ’ 7 . 183 Mechanism of trade during and after the war—gold movements extraordinary— new trends to be discerned in Australian overseas trade~mechanism of war-time inflation—the effects of deflation. CHAPTER XVI. THE BALANCE OF INDEBTEDNESS, 1918 TO 1928 193 Changes in overseas trade further examined—the commodity balance—effect of borrowing upon imports and exports respectively—the function of imports in maintaining equilibrium—restrictive effect of borrowing upon exports—changes in direction of trade—effect of borrowing upon proportions of capital and consumption imports—freight, insurance and tourist expenditures—overseas interest payments—capital imports compared with the difference between international debits and credits. CHAPTER XVII. ECONOMIC EFFECTS OF THE RETURN TO GOLD IN 1925 ’ . . . 214 The situation at the moment of the decision to return to gold—reactions upon business in Australia—the steps in the return—deflation disguised—untoward factors in the Australian situation—tests of adverse reactions applied—the rationing of loans in Britain and the Australian response. CHAPTER XVIII. ECONOMIC EFFECTS OF CONTINUOUS BORROW-ING * . . . . 225 Arguments in justification of extensive governmental borrowing programmes—the real tests of effective application of capital—the effects of unrestricted loans upon living standards and national ways of thought—the essential weakness of the loan situation found in credit control—measurement of effectiveness in capital investment. CHAPTER XIX. THE IMMEDIATE FUTURE IN RELATION TO CAPITAL REQUIREMENTS ” . . 241 Shortage of capital supplies after the war—probable economic effects of a stoppage of loans—the impact on living standards—necessity for expanding exports—the position of primary and secondary industries when capital imports cease—reversal of all the functions of the borrowing cycle—Britain’s diminished capacity to lend— possible amelioration through increase of population—disharmony between tariff and borrowing policies—the financial policy of the future—the inevitable necessity for repayment—need for scientific control of borrowing—conclusion. APPENDIX 7 . . BIBLIOGRAPHY INDEX . 3710 INTRODUCTION IN these days when economic opinion is divided between an unwavering allegiance to some theory of the business cycle and a sceptical refusal to acknowledge any cyclical movement in the fluctuations of prosperity, any attempt to find an adequate explanation of the instability that has manifested itself from time to time in Australian economic affairs is bound to meet with formidable criticism. Under these circumstances it will tend to avoid argument that would merely cloud the main issue if it is declared at the outset that the use of the term business cycle in these pages depends rather upon the welcome convenience of a label that can be applied to these fluctuations, than upon the acceptance by the writer of any particular theory which professes to explain this instability. It may, indeed, be objected that this somewhat naive attempt to disarm criticism is invalid in that the whole trend of the thesis merely constitutes one more interpretation of the causes lying behind business cycles in Australia. The objection may or may not be tenable, since it is contended that the present argument postulates one efficient cause that is external to Australian business, rather than the operation of a number of inter-related factors forming a complex whole within the economic structure itself. The dominant control of Australian business has, in fact, usually been sought in conditions that are external to Australia; and, apart from the meteorological tactor, the contraction of world credit has most frequently been regarded as the chief cause of our economic indispositions. A marked consilience can, indeed, be traced between credit contraction in London and commercial crises in Australia, a close connexion that tempts explanations of the post koe ergo proper hoc order. For example, the crisis of 1843 followed the British crisis caused by the multiplication of banks and credit facilities, that of 1866 was apparently consequent upon the Qverend-Gurney trouble in England, while the Baring crisis of 1890 and the post-war depression of 1921-2 were closely followed by financial malaise in Australia. What more natural than to find a causal sequence in these events ? But it becomes abundantly apparent upon investigation that these events overseas were not responsible for the sudden xii INTRODUCTION injection of disease into the Australian financial organism; and that the accumulation of infection was more than the work of a moment. The prime cause of crisis, at least in Australia, is to be found in conditions antecedent, often by a decade, to the actual onset of the trouble. The object of this inquiry, therefore, is to cut away the irrelevant tissues which are 80 apt to confuse the mind in post-mortem examinations of this character, to expose the main artery whose adequate or deficient blood-supply means so much to the body economic, and to demonstrate that precisely the same causes have been operating in Australian business since the early days to affect the volume of that stream and. consequently, our prosperity. This observation suggests further remark upon the methods to be employed in solving the economic problems now facing all countries of recent settlement, or countries in that stage of transition where large supplies of new capital are a sine qua non of development. In the matter of application of capital, even less than in any other corner of the economic field, is the method of experiment under rigid controls possible ; but there is, therefore, an enhanced necessity for making the utmost possible use of the observations and deductions of thinkers who are working along similar lines in different parts of the world. The need for unifying economic knowledge is nowhere more insistent at the present time than in the matter of the application and direction of capital; and the problems under this head are very similar for all those countries which form the pioneer belts of the world. Capital may be, indeed has been, sunk on too large a scale in unproductive or obsolescent enterprises, especially upon duplicated and alternative systems of power and transport; and the net outcome has been considerable wastage of capital and a permanent interest liability that, by more complete foreknowledge, might conceivably bave been avoided. Capital, thus misapplied, might by wiser direction have been devoted to serving the needs of the Commonwealth in quite different and more effective modes. Sir Josiah Stamp has said, ‘We still have to face the fact that, looking at our economic interests as a whole, there may be a great waste of capital due to its piecemeal application’. .That has been profoundly true of Australia where seven independent and often competitive INTRODUCTION xiii governmental systems have achieved such duplication and lack of co-ordination that effective application of public capital is often precluded. And it is to be feared that this lack of co-ordination in efficient direction of capital may be given a much wider application even than that due to competition between the States. The supply and demand functions of capital investment have, in the past, been conducted to far too great an extent within mutually exclusive departments. Borrowing and lending on the international scale has been too casual and disjointed a business. Experience goes to show that the people accumulating savings are not necessarily the most efficient persons to decide how that capital should be applied ; and the too-ready extension of loan facilities in the past has often, in the broad sense, resulted in a wastage of capital. But the situation has altered to an extraordinary extent in the last decade, and a much more scientific attitude towards the expenditure of savings is being forced upon both borrowers and lenders by the needs of a capital-starved world. The intense demand for the available supplies is compelling the utmost economy in the use of capital, and organization to prevent misapplication is gradually taking shape. What is needed is a closer partnership in the matter of capital application between the market with its generalized supply knowledge, and governments, industrial groups, and individual entrepreneurs with a specialized demand knowledge of the facts of the situation. Arising from these conditions is a further consideration affecting the organization of research into the economic effects of capital expenditure. Under present conditions individual research workers are attacking isolated phases of a problem that constitutes a scientific whole. The results of their investigations are brought together only through the medium of publication in the journals of learned societies or through their own published works. This detachment and independence in the business of inquiry may have important advantages, but it has correponding drawbacks of a very marked kind. Too great an interval elapses between the successive advances into the field, and great wastage of effort occurs in the process of investigation. Whilst research foundations have done a great deal towards setting apart a selected body of trained investigators, little xiv INTRODUCTION concentration of a spearhead of investigation upon a major economic problem has yet been attempted. The greatest need in all scientific research is the comparison of results, and particularly of the negative results. But the story of failures in the attempt to correlate results never gets into print, and can, perhaps, only be obtained by some extension of the method of international conference, applied to workers drawn from a very wide terrain. Some attempt is needed to unify the whole economic problem presented by the international investment of capital, and to give more effective direction to the conduct of research into the many issues involved. A third desideratum which is worthy of notice affects the domestic sphere, and has reference to the relation between public and private expenditure. The pressure under the disjointed methods of investigation pursued in the past has been very uneven over the whole economic field, and this variation in the intensity of investigation is particularly noticeable in finance. Production and distribution have been heavily weighted, consumption too lightly regarded in many respects. Especially is this so in the matter of private expenditure. Little but vague generalization has been formulated concerning the effect of borrowing, for example, upon community spending; and yet, in its wide aspect, this is as fundamental as the consideration of public expenditure. Scientific research is essential over the whole field of national finance, and it is to be forecast that the next great advance in economic theorv is likely to take place along those lines. The principle of the net economic balance must be applied to all questions of this character; and, in general, it may be remarked that considerations affecting this aspect have, in this essay, been kept rigorously in the forefront of discussion. To those acquainted with the work of Taussig upon problems of international trade and of Viner upon the special problem of Canada, therefore, no apology will be necessary for the attempt to apply their technique within the limits imposed by Australian conditions and statistics. The patient elimination from a field of total possibilities is, perhaps, not possible in its entirety to any individual researcher, and within the limits of a thesis little can be said concerning the purely negative results ; but the foregoing are, at any rate, the main considerations which have prompted INTRODUCTION xv and guided the present investigation into capital expenditure in Australia in relation to general prosperity. A few further words by way of disclaimer are, doubtless, necessary. The inevitable impression made on the mind of the reader by this essay will be that Australia has achieved her present standard of welfare by way of a succession of more or less serious business relapses. This, of course, would be a sheer distortion of the true facts of the case ; but it proceeds from the undue emphasis which has, perforce, to be laid on the symptoms of disease exhibited by the patient in less healthy moments. For the economist, as for the surgeon, there lies in the contemplation of pathological complications a certain gloomy delight which is inseparable from a somewhat morbid profession. But the greater pleasure, and the vaster service, consists in devising means of remedy rather than in the mere diagnosis of disease. The attitude of both is determined by a desire for the patient’s welfare, and is directed towards prevention rather than towards perpetuation of the unhealthy conditions. In this motive must be found the excuse for the discomfort caused by the probing processes of examination, which are the necessary though painful preliminaries of recovery. PART I CHARACTERISTIC FEATURES OF AUSTRALIAN BUSINESS AND AN ACCOUNT OF THE EARLY YEARS CHAPTER I CHARACTERISTIC FEATURES OF AUSTRALIAN ECONOMIC HISTORY The inward movement of capital dominated all other factors in Canada’s foreign trade during the period of heavy borrowings, and the variations in the inward fiow of foreign capital were marked enough to effect sharp correlated variations in other elements in the situation. As a consequence an inductive study of Canada’s international trade during this period becomes largely a study of the adjustment of Canada’s trade balance, currency and banking system, price levels, and industry in general to a heavy import of foreign capital.’ — Professor JACOB VINER, Canada’s Balance of International Indebtedness. Panics do not destroy capital: they merely reveal the extent to which it has previously been destroyed by its betrayal into hopelessly unproductive works.'— J. 8. Mirt, Address to Manchester Statistical Society, delivered 11th December, 1867. ‘Economic History is not catastrophic.’—F. W. MAITLAND. * A CLOSELY-LINKED series of economic phenomena quite remarkable in their similarity is associated with each of the major Australian crises. Commencing, apparently, in some loss of confidence in colonial affairs manifested in Britain a marked check to a buoyant prosperous period was usually the first sign. The flow of trade and the related revenue received the first shock, and the impact was carried on to show itself in government deficits. On the other hand, depressed world conditions often resulted in diminished prices for primary products and thus affected both purchasing power and banking policy in Australia. Constructional and developmental work Came to a standstill, taxation burdens increased at the worst Possible time, and the flow of immigration always slackened. These are, of course, not features peculiar to the depression stage of the Australian cycle; but they stand out more prominently from related phenomena than is the case in older and larger communities. 8710 CHARACTERISTIC FEATURES OF Furthermore, they are quite definitely associated with the completion of spasmodic expansion periods. They mark, as it were, the pauses between the beats in the growth rhythm of the country. And they are just as demonstrably associated with some disproportion between the two active agents in production, or with some circumstance which interfered with the steady and regular co-operation of labour and capital in the work of Australian development. The periods marked by the advance to self-government from 1820 to 1840, the activity in South Australia associated with the Wakefield scheme, the credit inflation following the gold discoveries after 1851, the mining boom from 1860 to 1873, Queensland development after 1866, the Victorian ‘land boom’ of 1890, the buoyancy due to the high productivity of the years following 1906, the expansion of secondary industries, especially after 1912, and the post-war boom and depression are usually accepted as well-defined business cycles in Australia. These periods, too, have been marked by population growth; and the well-marked migration phases connected with all of them are regarded as another usual function of the business cycle which is common to all countries still in the early stages of development. The whole movement, however, is incapable of interpretation in terms of the modern theory of the business cycle; but must be regarded rather as the usual accompaniment of growth—the systole and diastole of our economic pulse. Leaving out of the calculation for the moment the effect of good and bad seasons, the further the investigation is pursued the stronger does the conviction become that these phenomena are correlated results of one great dominant cause that has always in Australian history played the leading part in preparing the ground for the crop of financial and industrial depression. The first fact that demands consideration in such an investigation is the overwhelming importance of overseas trade to Australia. This importance is explained by the geographical situation of the continent, by the specialized nature of its production, by the characteristics of its population, by its political organization and especially by the nexus with Great Britain, and, lastly, by the character of the economic structure developed in the community. Even with a considerable variety of soil and climate, and assuming a certain measure of success 4 AUSTRALIAN ECONOMIC HISTORY 3 in the attempt to develop diversity of industry by means of a protective policy, Australia is able to produce only a small part of the great range and volume of commodities consumed by her people. Limited as she is by the conditions of the country in regard to climate and natural resources, by the sparseness of her population, and by the high relative cost of production, her only method of purchasing the foreign products which her people so insistently demand is by means of the commodities for the production of which she has some outstanding advantage a8 compared with other countries. But there are other factors which enhance the importance of overseas trade to the Australian community and which make the statistics of international trade a fertile field for the investigator of Australian business fluctuations. The most important of these factors is the unusual compactness and homogeneity of the Australian community. The concentration of one half of the population of the country in the ports with all the advantages in industrial efficiency which that concentration implies, whatever the social disadvantages may be; and the tendency to develop the few well-equipped ports, rather than many less well-equipped, is perhaps an admission by the community of its dependence upon overseas trade. The radial concentration of railways in each state upon the relatively few outlets from the hinterland, the comparatively narrow fringe of coast-land along which the bulk of the rural population is distributed, and the small numbers of the inhabitants with relation to the territory occupied are other factors affecting and being affected by overseas trade. Furthermore, the centralization of economic and financial sontrol, represented, on the one hand, by an arbitration system which prescribes similar high standards of comfort for every State in the Commonwealth, and, on the other, by an associated banking system that treats the business of the community as 8 unity rather than as a congeries of states, has co-operated With a railway system under government ownership and a shipping system dominated by powerful combines to deepen the customary grooves along which the economic Life of the continent moves. It is necessary to enlarge a little upon the importance of these factors. Professor Viner has declared of the Canadian situation, ‘In a country of specialization in industry, CHARACTERISTIC FEATURES OF sparse population and great distances, transport, dependent largely upon overseas trade, has become one of the most important, if not the most important industry in the community ’.1 The statement is probably even more profoundly true of the Australian community, where railway transport is a government monopoly and where expansion of the system has always been carried out with a view to further concentration in the capital ports. Again, as Dr. B. W. Shanahan has demonstrated, there is in progress in all countries of recent development a definite migration of manufactures from the countryside to the seaboard, and a concentration of industry in the great seaports that is determined, on the one hand, by the ‘layout’ of the railways and, on the other. by economies in the industries themselves arising from economies in handling due to the provision of better port facilities. This movement towards monopoly control is continuous and pervasive in every department of our economic life. The Federal control of Australian loans and currency, and the close association between the relatively few banks—which are becoming fewer by amalgamation every year—constitutes a condition of monopoly control that is on all fours with the ‘trustified’ organization towards which every large industry from mining to wheat-growing is moving in the Commonwealth. Most of the raw materials of manufacture, and every important consumers’ product from sugar to coal, are already produced and distributed under monopoly or semi-monopoly conditions. All these factors, aided in an unusual degree by the government regulation of industry, have operated to establish a unified trading system, and to promote a unique condition of economic interdependence between the different states of the Commonwealth. The result has been to establish a situation for Australia as for Canada, ‘ where there is little likelihood that an important industrial or financial phenomenon arising in one part of the country will be neutralized by counteracting phenomena in another part’. Always excepting, be it understood, the more or less local variations in weather resulting in good or bad seasons. Add to these circumstances the national sentiment and the traditional commercial ties which unite Australia and Great 1 Canada’s Balance of International Indebtedness, p. 11. 2 Economica. 1923. 1 AUSTRALIAN ECONOMIC HISTORY 5 Britain, and which have been strengthened by custom and mutual benefit, and it will be clear that a situation exists that is favourable in an exceptional degree to the isolation of the dominant factors in the business of the country. The smallness of the population, even now only little more than six millions of people, and the comparative simplicity of a trade organization that confines its activities so largely to a single overseas community, together with a financial dependency upon the mother country that is as complete now as it was in 1820, all combine to offer facilities for the investigation of trade phenomena that are not presented with anything like the same clarity by the complex and many-sided trading and financial associations of older communities with much larger populations. Arising from the importance of the part played by international trade in the life of a community thus organized and controlled, is the consequence that the operation of any factor which seriously disturbs the equilibrium of trade will have profound effects on the business and prosperity of the country. And the one factor sufficiently powerful at all times and in all circumstances to have this effect is the introduction of foreign capital, or, to use the accepted term, borrowing. The causal sequence which connects borrowing with business crisis through the operation of increased volume of imports, adverse exchanges, disturbed price levels, and hobbled credit is all too clear for its significance to be misinterpreted. Professor Taussig has remarked of the Canadian situation after 1900: ‘Occasionally it happens that there is a simple situation, a train of economic phenomena in which one cause alone is in operation, or is so predominantly in operation that others can be fairly set aside as negligible. . . . The import of capital was so great, overshadowed so completely all others, that there can be no error in attributing to this the main ®conomic changes that appeared.’l The object of this study is to demonstrate that such a simple situation has existed during the greater part of Australia’s history as a collection of selfgoverning colonies or as a federation, and to show that the one cause adequate to explain economic changes that were gradual enough to affect, over long periods, our capacity to Y International Trade, p. 234. CHARACTERISTIC FEATURES OF pay, or sudden enough to endanger our solvency over short periods, was the rate at which capital was introduced. This long-period obligation—the difference between the debits and credits in our national account-current with other countries —is the equilibrating factor in the Australian balance of international indebtedness; and, over the long period a continued debit difference affects both our purchasing power and our national credit. But there are ‘settlement days’, as it were, when the balance of immediate obligations to pay—the ‘balance of payments’—becomes of urgent importance. This debit difference of payments represents the immediate liability faced by the country in respect of services rendered by other countries ; and it is usually not until such times as the difference is particularly to our disadvantage, that is to say when the financial shoe begins really to pinch, that the community can be induced to take an interest in national economics. Now one great factor in the Australian balance of international indebtedness and so, ultimately, in the balance of payments is the amount of capital invested in Australia by Great Britain, or, to be more precise, the amount of interest due and capital repayable at any moment. Furthermore, in the transition between youth and maturity as a borrower, a country moves from a position in which the interest is much less than the new debt to a position where the annual interest charge first equals and then exceeds the amount of new loan raised in each year. The net result may be stated very simply. We can distinguish, (i) a constant annual interest charge which has to be met from a fluctuating national income, and (ii) a variable annual residue of national income which is left to the community for domestic expenses after interest and repayment charges have been met, and which has been called the ‘living fund’ by Dr. F. C. Benham. It will be clear that fluctuations in productivity, and so in national income, will operate to vary, not the constant liability, but the variable residue; and that any factor, from capital indebtedness to seasonal shortages in production, which tends to diminish the residue available for ‘running expenses’ will affect, in a more than proportionate degree, the prosperity of the community through its effects upon the distribution of income and upon the standard of living. And, since these factors B AUSTRALIAN ECONOMIC HISTORY 7 take effect by way of a contraction of credit, the volume of the public debt and the rate of continued borrowing in their influence upon credit are to be regarded as the main credit controls, In addition to the variation in the rate of capital imports, special factors are to be detected in the national economy which fluctuate just as widely and even more suddenly than the rate at which capital is being injected into the economic organization, and both the boom and depression phases of the cycle are liable to intensification because of their operation. Australia is a country that has been in the past, and still is to a lesser degree, peculiarly subject to wide fluctuations in production due to the effect of adverse seasons. And such seasons of deficient production appear themselves to follow a cyclical movement which results in a series of lean years rather than an isolated year of scarcity. Such a sudden and protracted lowering of productivity accentuates the variability in that residue of national income available for the community, and intensifies the difficulty of meeting overseas liabilities at the very moment when it throws upon the community the necessity for increased production. Aggravate the position still further by a fall in prices, such as was a frequent concomitant of the depression stage of the cycle, and the imperative necessity for increased production to avoid temporary insolvency is easily appreciated. One phenomenon always associated in an unusually intimate degree with the bursts of prosperity in Australia has been speculation in land. This feature requires some explanation and perhaps, too, some reconciliation with the general theory here developed. Borrowing in its complete sense comprises far more than the mere introduction through public authorities of capital from overseas sources. The economic effects of the introduction of private capital due to the attractiveness of the country for the overseas investor are in no way different from the effects of public borrowing. And, further, capital may be forced upon a community by the eagerness of the foreign investor to share in the opportunities for profit offered by a new country. This ‘willy-nilly’ form of borrowing was a marked characteristic of several periods in our history, and more particularly of the period between 1880 and 1890 when, as will be seen later, capital was poured into the country at such a rate that the ordinary channels of finance became choked. and 8 AUSTRALIAN ECONOMIC HISTORY anything in the nature of efficient direction of capital investment became an utter impossibility. Thus the search for profit and the hectic prosperity of the community led, on more than one occasion, to reckless speculative investment in land, since all economic undertakings were already well supplied with capital. Taking all these factors into account, it is no exaggeration to say that we have here the ideal situation demanded by Viner in which the overseas trade of the community is of overwhelming importance in relation to its internal trade, and to its industry and commerce in general, a situation which is especially favourable for the accurate analysis and measurement of the ‘effects on each other and on the commercial and industrial structure of a country of the factors at work within the mechanism of its external trade’. But, despite the comparative ease in the isolation of the main controls, there are certain inherent difficulties involved in such measurement that must not be underrated. For the purposes of induction the limitations in the knowledge of the specific facts due to inaccurate or inadequate data of a statistical character, especially for the early period of Australian history, is a prime difficulty. Apart altogether from inadequacy of the statistical material, other difficulties may be indicated ; and the chief of these is the difficulty of ‘isolating the causes of a complex and joint effect’. The method of concomitant variations is sufficiently difficult of application in the carefully controlled circumstances of the laboratory, but in the tangled skein presented by a trade situation the difficulties are vastly enhanced. Again, regard must be paid to the fallibility of the human factor in the work of collecting, manipulating, and interpreting the statistics. Finally, the difficulty which faces a single investigator under the necessity of holding all the threads in proper order while engaged in the work of re-arranging and re-estimating the value of the data is almost insuperable. CHAPTER 11 THE EARLY YEARS AND THE CRISIS OF 1840-3 The arrival of capitalists has raised the price of stock to an unprecedented degree.’ —Port Phillip Gazette, 14/5/1839. As is usual in such stages of fictitious prosperity extravagance in social life followed upon the fancied attainment of riches, the manufactures of England were largely introduced, and a great variety of articles of consumption which might have been produced in the country with common industry and patience were flowingly imported, and made use of on liberal credit.’ —Braim, History of New South Wales. ‘The failure of the model colony of South Australia in 1840 injuriously affected the credit of Australia. Information had been full and interest keen concerning South Australia; and its bankrupt condition, and the untoward position of English investors in South Australian land, caused grave misgivings concerning the safety of land investments in other parts of Australia.’ —T. A. CogHLAN, Labour and Industry in Australia, vol. i. SOME surprise may be felt at the decision to carry an investigabion concerning the importation of capital into Australia so far back into our economic history. The chief justification for such & course is to be found in the microcosm presented by the early community in which many of the conditions affecting the Commonwealth nearly a century later are anticipated, as well as in the clearer correlations made possible by the smaller scale and simpler circumstances. Before 1830 financial disturbances in Australia were due rather to the unusual difficulties of exchange in a primitively organized community, to the slowness of communication with the mother country, and to the deficiency of sure and equitable means of transferring capital-—all factors which seriously interfere with the conduct of the experiment under contemplation. By previous derangements of business in the community, however, attention had been called to the necessity for providing against the undue expansion of credit,! and between 1830 and 1843 business conditions were sufficiently stabilized to enable the conditions to be strictly comparable with those of later periods. Yet, even before 1830, events can be seen forming a sequence common to later periods in our history, a sequence directly dependent upon the uncontrolled and unwise injection of capital which was, in its turn, due in large measure to the buoyancy * Commissioner J. T. Bigge’s investigation, in 1823, of the affairs of the Bank of New South Wales revealed a great deal of speculation which he blamed the bank for pay. Bills discounted by the bank rose from £12,793 in 1817 to £107,256 3710 10 THE EARLY YEARS AND THE induced by the grant of self-government. Shortly after Governor Darling took charge of the administration in 1826 a group of British capitalists formed the Australian Agricultural Company! with the object of engaging in agricultural and pastoral operations in the colony. Plans were made for wheatgrowing, stock-breeding, and coal-mining on a very ambitious scale; and these were based on a large grant of 1,600,000 acres of land at Port Stephens, on the Liverpool Plains, and on the banks of the Peel River. The nominal capital was stated to be one million pounds, and was mainly contributed from Great Britain. The introduction of this amount of capital into a community of fifty thousand people was the real origin of the crisis which followed. Huge purchases of cattle and sheep were made which had the effect of driving prices for stock up to unprecedented heights, and commenced a very fever of speculation. ‘Many who had been content before to earn a modest livelihood on the farm now mortgaged their lands to buy stock, those who had stock bought more, while many who saw the progressive value created from day to day bought and sold on speculation.’2 So general was the confidence felt in these transactions that credit was expanded in all directions; and both settlers and speculators purchased far beyond their capacity, finding themselves ultimately unable to repay either principal or interest. Attention was chiefly centred on the raising of sheep to the neglect of almost every other branch of rural industry. The results of such a relatively large importation of capital are directly traceable in the figures for overseas trade. Imports commenced to mount rapidly, and a situation of the ugliest complexion quickly developed. How large was the discrepancy between inward and outward trade can be seen by the statistics for the years concerned.? L Vide Records of the Australian Colonies, Parliament of the Commonwealth. ¥ Braim, History of New South Wales, pp. 100 ef seq. Imports AND Exports of NEw SoUuTH WALES Deficiency. 1827 1828 1820 & 362,324 570,000 601.004 x 70,314 90,050 161.716 * 292,010 479,950 439.288 CRISIS OF 1840-3 11 The check to expansion was aggravated by a drought which held the colony in its grip for nearly two years after the summer of 1827, and this necessitated the importation of large quantities of grain from Van Diemen’s Land,! thus intensifying the depression in the later stages. But the speculative abandon continued unchecked for some time, during which the community was financing itself on bills. ‘At length, however, the evil day arrived: the bills which had been circulated in the speculation of purchases in stock fell due and had to be paid. Buyers and sellers, when they came to press each other, found how delusive had been their speculations. Credit was shaken, confidence was lost, and a panic ensued.’? As events proved, however, this boom and crisis was but the Prelude to a far more serious and extensive disaster ten years later; a disaster, furthermore, which was marked by exactly the same features of capital importation, credit expansion, land Speculation, and neglect of industry. The granting of selfgovernment to New South Wales had the double effect of directing the attention of British capitalists to Australia and of stimulating speculation in that country. This was the moment chosen by the Imperial Government to raise the minimum price of land, and there can be no doubt that this action helped greatly to strengthen the confidence in the young colony. The apparently unlimited extent of the land offered for sale at such a seemingly low price was the morsel that proved too tempting for British investors. Tt is recorded that ‘the land-office on a sale day resembled some of the London “bubbles” of last century’. To cope with the boom finance two banking companies were established with a total capital of 1} millions sterling, and through these institutions large sums were invested in Australian mortgages by British investors. Nor were the settlers themselves at all behind in the business of land speculation. It is difficult at this distance to appreciate the ardent faith of the colonists and investors in the future of the colony, isolated and undeveloped as it was then. Only the ager overseas competition for Australian agricultural and ! These imports indicate the position Tasmania then held as ‘the granary of Australia’, Exports from the island to N.8.W. totalled £54,838 in 1828 and £42,640 in 1829. ? Braim, op. cit. 12 THE EARLY YEARS AND THE pastoral land will account for the extent to which people living on the spot were caught up in the whirlwind of speculation in land.! Probably the best instances of this speculative fever come from the records of Van Diemen’s Land, where Fenton mentions loans made on the security of land at the rate of 35 per cent. per annum!2 The newly commenced system of immigration, by rendering an adequate supply of labour for development an apparent certainty, helped in no small measure to sustain confidence and to maintain the boom prices for land. The crescendo of speculation was materially aided by the government policy of placing Treasury balances at interest in the banks, where they became available for the purpose of discounts and loans for land purchases. The first check came in 1838, although there had been a revenue deficit of £48,000in the previous year. Weather conditions were most unpromising in all the colonies, and a further cause for uneasiness was the discontinuance of the assignment system of convict labour. At this juncture instructions arrived from the Home Government to increase the price of land from five to twelve shillings per acre, with the avowed object of forcing on the development of land already alienated. The chief effect, however, was to divert speculation from rural areas to town allotments; but, in a final burst, since the order was not interpreted to apply to the land already advertised for sale, a frenzied rush was made by speculators to secure 300,000 acres at the former price. Nevertheless, the revenue from land sales rose steadily till 1839,3 ! Population and estimated value of land at Port Phillip: Total. Year. | Population. Buildings. Land. 1837 250 1838 | 1,800 1839 3,000 | R40 5.588 £ 1,800 60,000 112,000 220.750 £ 3,517 17,416 169,542 379.600 £ 5,317 77,416 281,542 603.350 ? History of Tasmania. In 1836 the total paid-up capital of the six banks operating in Van Diemen’s Land was only £200,000; but a considerable amount of capital was transferred to the mainland between 1837 and 1840 for investment in the purchase of town blocks at Sydney and Port Phillip. ® The Crown revenue at Port Phillip, mostly from land sales, rose in the following amazing fashion: 1837, £6,070; 1838, £39,439; 1839. £74.002: 1840. £255.422; 1841 £144.936: 1842. £87.059: 18438. £73.590. CRISIS OF 1840-3 13 while land mortgages increased enormously. Exports for the same period, despite the fall in the price of wool, increased to £950,000, but imports rose to nearly £2,250,000, for which luxuries of different kinds were largely responsible. The earlier menace of drought was now fully realized, and the failure of two successive harvests left the colony almost destitute of supplies. This disaster, it might easily be supposed, would have effectively checked the speculation in land. On the contrary, the fever ran its course quite unchecked. Around Sydney the average price per acre had advanced to £69 by 1840, while the revenue from land sales reached £313,000. This is only a slight indication of the inflation which had taken Place, since far higher prices were paid by immigrants impatient for cleared blocks. At Port Phillip, where the restrictions on the sale of land Were greater, speculation reached even greater heights! The price of land soared from £138 to £488 per acre, town blocks changed hands at more than eighty times the original price, and suburban land rose in value correspondingly. Profits of two to three hundred per cent. were not uncommon, and the process was largely sustained by the long terms of credit that were allowed to the purchasers. In the light of after events one is struck by the prophetic features of this outburst at Port Phillip. Fifty years later the wheel came round again full circle to what is probably the most amazing land gamble of modern times. This inflation of land values had an enormous effect on general prices; and in this way the whole community was affected. Those who were mainly responsible for the boom, however, were the business men of Sydney, where the bulk of the imported capital was domiciled—in fact too great a bulk to be employed with advantage. The connexion between banking Policy and speculation in land is indicated by the banks’ reserves, which for five banks owning a paid-up capital of £1,300,000 shrunk to £398,000. They were flooded. too. with bills for the ! “The attractions of Port Phillip caused a prodigious influx of British capital which wag rapidly, and in most cases ruinously, invested in the purchase of land.’— Braim, op. cit, City land in Sydney was selling at the rate of £28,000 an acre as early a8 1834, In 1840 one small block sold for £40,000 an acre. In June, 1840, 29,000 acres of the best land in the vicinity of Melbourne was put up for sale at 12s. per acre, but no bid was received 14 THE EARLY YEARS AND THE sale of land to such an extent that, of the £3,000,000 which represented the total assets of the New South Wales banks in 1841, no less than £2,610,000 was composed of discounted bills. English capital had all the while been pouring in to all sorts of ventures, the investors being eager for the ten per cent. which was regarded as normal in the colonies at this time. London merchants, anticipating the demand, sent out large speculative consignments that very soon outran the needs of the community. This introduction of capital also had the effect of raising the price of stock beyond the wildest dreams of the grazier of that day, sheep changing hands at £2, cattle at £12, and horses at £70a head. As would be expected, prices of all other commodities rose in sympathy; and prosperity bred new factors to menace the industrial health of the community. Such recklessness was displayed in speculation of all sorts, that a crash, even without the intervention of any external factor, was inevitable. It was, in effect, setting a course for the rocks with the wheel lashed. But it was not long before the serious happenings in the English banking world provided the external factor. The years from 1836 to 1839 had been critical in the history of English banking. The Bank Charter Act of 1833 had led to an enormous increase in the number of joint-stock banks, and to a consequent over-issue of paper money, largely associated with the speculation in railways. The intention of the Act, i.e. to provide a means for regulating the note-issue of the Bank of England in accordance with the size of the reserves, was not fulfilled ; and it was to the general failure to observe the Act that the pressure of 1836 and the crisis of 1839 in Britain were due.? The stringency consequent upon that crisis caused a withdrawal of money from private enterprises, and the flow of capital to Australia was abruptly checked, a circumstance which immediately produced a marked contraction in the revenue from land sales. 1 One aspect of the investment of capital was the establishment in Australia of banks working on English capital, i.e, 1825, Australia; 1832, Australasia; 1837, ope the last resort the difficulties of the Bank (of England) sprang from the movements of the trade cycle in Great Britain and the United States, the boom culminating in both countries in 1836-7, and being followed by the inevitable depression.’ —T. E. Gregory, Introduction to Documents relating to British Banking, p. 18. See also Silberling, British Prices and Business Cycles, p. 242. CRISIS OF 1840-3 15 It indicated, at the same time, the close connexion existing between capital imports and land speculation. The financial disasters which followed have been laid at the door of the government of the day, but very little blame can be assigned to that quarter. The most that can be said is that the crisis was accelerated and accentuated by the land policy. The considerable fund resulting from land sales, an amount that for some time exceeded £350,000, was placed by the government in the banks; and in this way imported capital became available for private loans based, for the greater part, upon the security of land. Thus the vicious circle of land purchases— government deposits in banks—bank loans for further purchases —government deposits in banks—was complete; and by this means the flame of speculation was kept burning so long as the government maintained its balances at the banks. The actual crisis was, however, precipitated by the government’s action. The immigration policy had made large demands upon the resources of the government, and it was forced to withdraw all its deposits at very short notice. To meet this sudden call the banks were forced into an unexpected restriction of credit that gave the initial and inevitable downward impulse to the whole structure, and sent it reeling to collapse. The banks, however, had been under no delusion as to the possibility of the recall of these deposits at any moment that they might be required. Over-speculation and over-trading alone made the outcome inevitable. The drainage upon productivity in order to pay for imports, the cessation of exports of capital from Great Britain, the withdrawal of the imperial subvention of £200,000 per annum, the protracted drought and the steady fall in the price of wool were the factors? that had far more to do with setting the stage for the ultimate tragedy than the action of the government in withdrawing its deposits. The effects of the collapse are worth relating. Signs of financial distress were noticeable in the first quarter of 1840. ! For a careful and exhaustive account of the industrial and financial condition of Australia at this time see T. A. Coghlan's Labour and Industry in Australia, vol. i. ? The apprehensions of English capitalists concerning the fate of their Australian Investments was deepened by the drought of 1838-40, which caused the failure of two successive harvests. By 1840 large imports of grain from South America and the East had been made, and these had to be paid for in gold. The price of wool fell from two shillings a pound to 14% pence in 1839. 16 THE EARLY YEARS AND THE and by December of that year many firms of importers were in trouble. For more than twelve months every means was sought to stay the tottering structure, but it was a forlorn hope. The year 1842 was one of acute financial distress. Property of all kinds became unsaleable, and many business houses of the best repute became insolvent. One merchant in every three found himself in this position, the failures averaging over fifty a month.! Nor were conditions any better in Melbourne. There was a complete glut owing to the volume of imports ; and many consignees were forced to sell goods for anything they would fetch, completely underselling the regular merchants in the process and demoralizing the whole business of the community. Produce and stock slumped in an amazing manner, and had to be sold at ruinous prices ; sheep brought sixpence a head, cattle seven shillings and sixpence, and well-bred horses three pounds. The outlook was very black for the pastoralists, who, as the mainstay of the community, found themselves at the end of a long drought with no possibility of raising funds to recuperate. Lethargy and stagnation fell upon industry and commerce in every state. The year 1843 opened with promise of easier conditions and a diminishing volume of failures. This was merely a lull before the storm broke afresh, and carried down the Bank of Australia as its first trophy in a fall that involved the largest merchants and landowners. The Bank of Sydney and the Bank of Port Phillip went the same way a little later, and every financial house in the community suffered severely. It is on record that the veteran Bank of New South Wales finished its worst day with sixpence in the till. Liquidation became a widespread trouble, if not an actual disaster.2 To enable the Bank of Australia to proceed to realization, a special Bill was passed empowering the creditors to dispose of the assets by lottery; and this was actually done, 1 Sales at auction record the pressure for realization, viz.: 1839, £513,400; 1840, £1,246,700; 1841, £963,700; 1842, £686,100; 1843, £454,500. 3 Vide Coghlan, op. cit., p- 488. ‘Judge Burton's Bill allowing voluntary bankruptcy and protecting a debtor who voluntarily surrendered his estate to creditors came into force on February 1, 1842. It led at once to the avowed bankruptcy of large numbers who had been insolvent for some time—most of little standing and for small amounts. . . . But before long many larger traders made up their mind to the inevitable, and . ... by December 30th, there were 600 failures, mostly farmers, graziers, merchants, and storekeepers.’ CRISIS OF 1840-3 17 before the veto of the British authorities was received or the Crown Law Office could intervene. As for the landowners Governor Gipps reported that ‘persons with colonial property as the only wherewithal to meet engagements were drawn in crowds to the insolvency court’. The condition of the newlyarrived immigrants was a keen embarrassment to the government, but far more pitiable was the lot of the town workers, who were glad to take half a crown a day when work was procurable. It will be seen that the features of this crisis follow fairly closely the orthodox sequence of events, but a closer examina. tion will reveal how nearly the main features agree with the movements we should be led to expect by the theory of international trade. Here was a community of small population, wholly dependent upon primary industries, and drawing its Dhecessary developmental capital from Great Britain alone. The tendencies in finance and trade accord very fully with later movements on a larger scale in Australia and in other countries of recent settlement. It becomes of interest, therefore, to analyse in greater statistical detail the conditions that pertained in Australia for the decade between 1833 and 1843. In particular, it becomes important to trace the effects on the monetary system of the introduction of capital at a more rapid rate than it could be absorbed; and to observe the trend of overseas trade as a consequence of this expansion of capital. The small volume of trade as compared with later years and the small number of banks then operating do not in any way vitiate comparison, butratherserve, by eliminating subsidiary elements, to strengthen the conclusion that the same fundamental factors have been affecting Australian prosperity from the early days of settlement. We may consider, first, the movement of commodities into and out of Australia for the period, and the resulting trade balance. The predominance of imports begins as early as 1828, when the capital importations begin to be noticeable. By 1833 & swelling flood of imported commodities was Pouring into the colonies in a volume far greater than could be turned to economic uses. And each year thereafter saw a greater and more rapid accretion to the flood which was already choking the channels of trade. With the continuance of these conditions 2710 18 THE EARLY YEARS AND THE the final disaster became inevitable, as the community became less and less able to face overseas liabilities. Imports and Exports of New South Wales (Including Port Phillip) IMPORTS T i Total. | Per head. I TasLE I Percentage of Exports to Imports. Year. 1833 1834 1835 1836 1837 1838 1839 1840 1841 1842 1843 (£1,000°s) 713-9 991-9 | 1114-8 1237-4 1297-5 1579-3 2236-4 3014-2 2527-9 1455-1 1650-5 £ 11-7 15-0 | 15-1 16-056 15-2 16:13 19-55 23-3 16:6 91 0-38 (£1,000°8) 394.8 587-6 682-2 748-6 760-0 802-7 948-7 1399-7 1023-4 1067-4 1172-3 £ 6-5 8-88 9-55 97 8:9 8:2 8:3 8 5-8 6-7 Te. 66 59 61 60 59 51 “9 46 40 73 75 A careful scrutiny of the figures in this table will provide the key for both the crisis of 1843 and the minor crisis of 1836. The amazing excess of imports continued year after year for such a time could, of course, only be due to the private importation of capital, i.e. borrowing in the broad sense, although the capital was forced on the colony by the eagerness of British investors. It will be noticed how closely all the features of this early period of private borrowing correspond with those later periods of great public loans. Anything like an accurate estimate of the effects of this relatively great influx of capital upon the position of the banks, and, in particular, upon the movement of gold, becomes a matter of the utmost difficulty on account of the paucity and of the unreliable character of the statistics of the day. Still less possible is it to trace the effects upon prices and wages, the two chief indexes of prosperity. An approximate estimate of the extent to which credit had been inflated is, however, to be obtained by a comparison of the figures for bank and treasury reserves and population. This shows very clearly the progressive diminution of reserves that took place because of the speculative tendencies and buoyant confidence of the ,period. In this CRISIS OF 1840-3 19 respect it can again be compared with the later crises; and it affords one more reason for concluding that the essential causes of our business troubles have not changed throughout the years. The gradual approach of the first great financial crisis in our history can be clearly discerned in the trend disclosed by these figures, and they are sufficient ground for assuming, in the light of later business disasters, that there was at this time an inflation of credit at a greater rate than that of the increase in reserves, which were, in fact, almost stationary for most of the period. TaBLe IT! Population and Bank Reserves of New South Wales Fear. 1836 1837 1838 1839 | 1840 1841 1842 1843 1844 184.5 Population. 78,929 86,482 98,176 113,437 127,468 145,303 162,317 169,315 178,460 187.918 Coin and Bullion in Treasury and Banks. x=420,720 427,432 520,127 516,069 397,581 162,624 175,389 423,972 659,023 855.166 (a) Reserves as dmount per head. . ee. 1. J. ) 6 2 +10 2 21 5 109 a (a) To cover the shortage of currency in this year debentures % the amount of £49,500 were issued. It is impossible to close this brief survey of the vicissitudes of the early years without some further reference to the course of events in South Australia.2 This model colony, founded on the theory that the sale of land would pay the primary expenses of development, had, under Gawler, gone far towards Proving the essential soundness of the theory ; but the requests for assistance from the Imperial Government had led to a drastic change in the administration. In this way the province had provided the initial impulse which led to suspicion and distrust in the mind " From the official Statistical Abstract for Colonial Possessions for the years concerned, and for previous table. ? An excellent account of the crisis and of the curious circumstances from which it arose is given by A. G. Price in The Foundation and Settlement of South Australio. 20 THE EARLY YEARS AND THE of the British investor, and had thus effectually pricked the bubble of speculation in the eastern colonies. Further, it was also the area where the distress consequent upon the stoppage of capital supplies was felt most keenly. When, in May 1841, Grey superseded Gawler in the government of the province, he carried instructions from the Colonial Office ‘to economize the revenue in every possible manner in order to obtain some surplus which might be available as interest on the debt’—a paltry sum, by the way, of less than £200,000. For the stern régime of retrenchment which ensued Grey proved himself an efficient instrument. As he represented the direct control of the Colonial Office, he was bound by none of the promises of the previous administration; and he felt free to repudiate his predecessor’s debts in a wholesale fashion. The Wakefield theory was entirely abandoned, and a sweeping reduction made in every government service. Expenditure was decreased from £170,000 in 1840 to £32,000 in 1843, and the revenue was increased very considerably. A sudden fall in imports and a sharp decline in prices helped this policy of retrenchment; but the immediate result was ‘a sudden and violent crisis affecting all classes of the community’. Grey noted in his dispatches that ‘the cessation of government expenditure was as if a capital of £1,500,000 had been suddenly withdrawn from the province, and that every one who lived on the profits made from the employment of this capital was thrown out of his ordinary pursuits and occupations’! Merchants found themselves stranded, contractors were unable to carry on ; some, indeed, filled the role of creditors to the bankrupt colony. The blow fell hardest upon the working classes concentrated in Adelaide. Grey dismissed 215 out of the 385 persons employed by the state, and by the end of 1841 the unemployed numbered 2,427, or one-sixth of the whole population. Including their dependants it was estimated that 60 per ! Price, op. cit., quotes some interesting facts concerning this crisis. In Adelaide 842 out of the 1,915 houses in the town were empty; and 216 were abandoned entirely and falling into ruin. Public houses were reduced from 63 to 38, but there are no figures representing their re-establishment elsewhere. Municipal government shared in the general disaster ; and the furniture of the corporation offices was seized for debt. Wages fell from 25 to 50 per cent., and the cost of construction fell even more than this. A second crisis was induced by Grey's decision to pay off the remaining claims on the government, totalling £14,000, by means of bills; but his action was repudiated by the home authorities, with some biting references to his instructions and his failure to observe them. CRISIS OF 1840-3 cent. of the people of the province were thrown suddenly into destitution, surely the most vigorous wielding of the axe of economy that the continent has ever seen. But the effect was to drive the city workers to the land, and the great productivity of the country wiped out all traces of the depression within a few years. Indeed, the wheat yield of 1842-3 was so great that it could not all be harvested. 21 PART II PROSPERITY AND CRISIS AFTER THE GOLD DISCOVERIES CHAPTER III THE GOLD DISCOVERIES AND THE CRISIS OF 1853 ‘T have always regarded the commercial results of the Australian and Californian discoveries as one of the most striking experimental verifications which a purely abstract theory has ever received. —CAIRNES, Leading Principles of Political Economy, p. 312. “The commercial history of Melbourne from the occurrence of the first decided effects arising out of the Gold Discoveries to the gradual recovery of the Colony of the settled condition which prevailed in 1851 is probably one of the most complete and interesting examples to be anywhere found of the mode in which a vast sudden influx of real wealth first disorganizes and then reconstructs a community.’ —T0o0Kand NewMaRrcH, History of Prices, vol. vi, Appendix XXX, p. 802. ‘The splendour of a digger’s wedding is something startling to ordinary people. Young Irish orphan girls, who scarcely knew the luxury of a shoe till they landed here, lavish money in white satin for their bridal dresses at twelve shillings a yard, and disdainfully decline to purchase a shawl because the poor shopkeepers do not happen to have got an article worth ten guineas.’ —Extract from a letter quoted by James FENTON, History of Tasmania. Our study of the course of business in Australia now brings us to the days following the great gold discoveries, a period that, in its economic ensemble, appears strikingly different from any other in our history. Before attempting to reconcile the onset of this boom and crisis with the general theory here advanced, however, a brief review of the decade following 1851, in order to stress certain features, appears to be necessary. The event that is said to have ‘precipitated Australia into nationhood’ had first to dispel the stagnation that was the heritage of 1843. Social, industrial, and financial relations underwent a revolution: after depression of the worst kind from which a painful recovery had been made, a reaction took place that developed into an intoxication—an orgy of prosperity that begins our next great business cycle. It is difficult to believe that, in the same communities where unemployment had lately been go rife, labour should become in a few short months an unobtainable commodity, but all states soon felt the shortage very THE GOLD DISCOVERIES 23 acutely. The wheat harvest of South Australia was gathered only by the help of aboriginal labour: Tasmania was losing companies of its people by every boat that crossed the straits: the eyes of every man were turned towards the diggings to the exclusion of all else. The most outstanding effect was, of course, that on the wages and the standard of living.! The changed conditions were to have far-reaching effects upon the Australian worker, not the least of them being the growth of that spirit of independence which has played so great a part in our later industrial history. - Every overseas ship brought men of all trades and professions to the country, the most adventurous and hardy types of all lands. In one month alone 152 ships arrived in Port Phillip bringing at least 12,000 immigrants, whereas in the previous decade the total increase in population had been but 215,000. In the ten years following the discoveries the population of the colonies increased by 750,000 and the total number of inhabitants other than aboriginals rose, in round numbers, to 1,145,600. Such an influx of people had many immediate effects, such as the impetus given to agriculture and sheep-farming owing to the increased demand for food-stuffs; but it wrought other serious changes in the social and economic structure that must be examined. The diggings attracted from every land and from every layer of society the men willing to take a risk; and, when all the circumstances of the time are considered, gold digging was supremely a speculation. The second colonization of Australia was effected by these types; and the old traditions of labour, authority, and trade, the last relics of the transportation system, were lost for all time. The influence of this change on the ‘make-up’ of the people can scarcely be overrated, more especially when the relative numbers of the old and the new Population are considered. Coghlan estimates that, of a total male population of 229,000 in Victoria and New South Wales, no less than 100,000, largely new-comers, were engaged in mining. The average earnings of these men are computed by ! The most complete and circumstantial account of the economic results following the gold discoveries is contained in Coghlan’s Labour and I ndustry in Australia, Pp. 744 et seq. Unfortunately this otherwise excellent work contains no references to sources consulted. -A shorter treatment will be found in 4 Statistical Account of Australia, Industrial Progress, p. 443, by the same author. 24 PROSPERITY AND CRISIS AFTER the same authority at not less than 30s. per day ; but, for Victoria alone, this figure of about £40 per month is probably much too low. Wages automatically went up with a bound in every occupation, and Governor La Trobe remarked that ‘the few mechanics who would work received wages from 250 to 350 per cent. higher than before the rush’. A natural consequence of this sudden prosperity was a prodigious rise in prices. In Melbourne house-rents simply soared—it is the only word. A lar8e proportion of the people had to live under canvas, or anywhere that provided shelter; and this state of things, of course, gave a tremendous stimulus to building and allied trades. A similar situation existed in Sydney, where hundreds of houses were occupied weeks before they were out of the builders’ hands. Nothing illustrates the condition of industry better than the fact that houses were imported in pieces ready for assembly, and this in a country abounding in timber and at a time when steam transport was almost unknown. A period of reckless extravagance was the immediate outcome of the discoveries, due in great measure to the mental excitement caused by trading in bullion which was the common experience of every business man and banker.?2 The storekeeper changed the digger’s gold into goods as a favour, and this independent spirit was carried right through the whole gamut of commerce. Nor was the attitude of the diggers themselves calculated to keep prices at a reasonable level. Reckless willingness to pay higher and higher rates became the boast of miners { “The incomes of the whole working population were suddenly raised in the proportion of about 300 per cent., every man’s pound became four pounds—every man’s means of expenditure became four times greater than before.’ —Tooke and Newmarch, History of Prices, vol. vi, p. 806. ? Alluvial gold of the average fineness was worth in England about 80s. an ounce. ‘During this year and the next (1852-3) the banks would not advance more than 40/- to 50/- per ounce on gold shipped to England; and, as the digger usually required an immediate return, he was forced to trade it with the storekeepers from whom he obtained his supplies. The ordinary price in Melbourne was 70/— an ounce, and on the goldfields from 60/—~to 65/—. These transactions in bullion, in which every storekeeper, merchant, and banker engaged, had a curious mental effect. The ordinary canons of trade were no longer thought to apply. The merchants and storekeepers stocked what it was convenient for them to handle with no thought of tempting a customer to buy. Customers were attended to as a favour; and merchants and bankers carried out business on similar lines,’-—Coghlan, Labour and Industry, p. 805. THE GOLD DISCOVERIES 25 of a certain type from one end of the country to the other. Ordinary canons of business went by the board, prices were gauged by no economic standards, and the trade practices of the time left ample scope for the unscrupulous. Coin shortage was a common feature of the finance of the day, and during the first few years banks in all the colonies had to go to the expense of importing coin in large quantities. Much unhealthy competition for deposits was excited by the large profits made by the older banks which had established agencies on every gold-field, an evidence of that competition which has more than once manifested itself in different forms in our banking history. In 1853 the scarcity of merchandise in Victoria was relieved with some suddenness by the arrival of large consignments which had been sent out on speculation by English merchants. Prices, however, rose with monotonous regularity for every service or commodity, although the large importations of coin had the effect of making trading transactions cheaper and more regular. Still, there were no signs that the boom was even then near its crest. Gold still threw its spell over every one, and the glamour of gold digging affected detrimentally both industry and methods of finance. Never was there a prettier example of crisis-breeding prosperity in the whole course of our history. The rise of prices, the spread of extravagance, the rush of imports, and the evils of inflation went on unchecked month after month ; but, by the middle of 1854, there were many indications that the peak of prosperity had been passed. Never before had extravagance, wages, or prices risen to such heights in the country, but the inevitable reaction and collapse were near at hand. The débdcle began in June; and, as would be expected, the gravest effects were felt in Victoria, where a crisis of the first magnitude, precipitated upon an unsuspecting community, raged for uearly two years.! The critical factor that set the avalanche in ! In the quotation which heads this chapter Cairnes passes judgement’ after an exhaustive survey of what he calls in the Essays ‘The Australian Experiment’. ‘It followed that the comparative cost of gold in relation to these things produced at home and to other things produced abroad had changed; and so a situation was brought about under which, according to Ricardo, “an immense change ought to take place in the external trade of the colony >, and this is precisely what happened. From this time until the conditions of trade were modified, partly through the exhaustion of the richer deposits and partly through the advance of Prices in foreign markets, Australia became an importer of everything that from its nature 3710 26 PROSPERITY AND CRISIS AFTER motion was the adverse state of the exchange with Europe due to the excessive imports. The banking companies had long realized the power that possession of large gold supplies had over the rate of exchange, but the fierce competition in goldbuying had, by now, forced on the extension of banking branches and facilities beyond all reason. The wonderful opportunities for banking profits formerly existing had now vanished. But through this very competition the miner was at last able to get full value for his gold. Storekeepers, contrary to their earlier experience, now found that the miner could call the tune and name the dance. Dealers everywhere were compelled to lower prices ; and also, since a drought was beginning to affect washing operations, they were now forced to extend credit. These events compelled a corresponding change of attitude on the part of the merchant and banker. The high-handed and cavalier methods of banking and finance of the ‘gold rush’ were now gone for good.1 Other causes, too, were working to call the bankers to account. The excessive imports of the last few years had generated suspicion in the minds of the English merchants, who were now becoming concerned over the fate of their speculative shipments. Pressure was brought to bear by both the London and ‘Colonial’ banks in Australia upon the speculators to whom they had been willing to lend such a short time ago.? Many of these so-called merchants were but financial adventurers devoid of capital ; and, when the pressure was applied, bankruptcies followed one another in quick succession. The usual phases of business depression then occurred in rapid sequence—stagnation in building and engineering, restriction of bank credit, contracted trade, falling prices, particularly of imported commodities, and widespread admitted of beingimported ; and, whatisespecially to benoted, among the things thus imported were many which she could have produced herself at far less cost.’ — Leading Principles, p. 312. 1 Gains made by the banks in buying gold, issuing notes,and ordinary banking tempted others into the field and three new companies began business as bankers at this time, i.e. Australian Joint Stock, London Chartered, and the English, Scottish and Australian. The effect of the competition thus engendered was most marked. Accommodation was more readily obtained, discount rates on local bills reduced, interest was paid on deposits, and mortgages increased rapidly. (Coghlan, p. 855.) ? By 18556 there were five joint-stock banks with head-quarters in London, i. o. Australasia, E. 8. & A., London Chartered, South Australian Banking Co., and the Union. THE GOLD DISCOVERIES 27 unemployment. The distress of the moment was intensified by the high price for agricultural produce, a development for which the drought, now at its worst, was mainly responsible ; and it was not until the good season of 1856 that any relief in this respect was afforded. The course of events in New South Wales presents some notable features. For various reasons the prosperity of Victoria had not been shared by the mother state, in which trade was very depressed throughout 1855. Primary producers had very little money, while the purchasing power of the artisan classes had been reduced by rising prices and falling wages. Despite the warning presented by the crisis in Victoria, however, a strong tendency to speculation and over-trading dominated business in Sydney ; and once more gambling in land and farm stock became widespread. Land mortgages were the favourite form of investment, and the registrations averaged over threequarters of a million a year. Imports swelled with amazing rapidity, although very heavy losses on account of excessive speculation had been suffered by many merchants. Suspicion and restricted credit succeeded this outburst ; and, by the close of 1859, the financial pressure had developed into a serious depression characterized by stagnation in every industry. Insolvency once started, petitions followed close upon the heels of one another until, in Sydney alone, losses of more than a million pounds had been recorded. Disastrous floods completed the depressing picture. The expansion of banking and exchange during the period has an important bearing upon later events that must be noted here! The capital introduced by immigrants, and later, the wealth stored in the banks and representing the product of work in the mines, affected the banking position in a marked manner. An enormous increase in bank deposits was followed by a remarkable inflation in the note issue that accompanied the great rise in prices during these years. The transition period in industry which followed the crisis, and which was marked by a swing away from mining and towards the primary industries. had its effects in modifying the banking system in a ! For the effects of the gold discoveries upon banking in Australia see J. Russel] French, Banking as a Factor in the Development of Trade and Commerce, Joseph Fisher Lecture, University of Adelaide. 1910 28 PROSPERITY AND CRISIS AFTER way that was to have momentous consequences thirty years later. So far the banks, while not forgetting the experiences of 1843, had taken the view that their function was to assist primary industries as the mainstay of the country; but, in the unusual circumstances of the time, the emphasis in their activities ‘had been laid rather upon mercantile transactions. From the end of the crisis onwards a very much closer connexion between banking and rural industry developed that will call for more attention at a later stage. That the banking situation was far from satisfactory is to be gathered from the comments of the bankers themselves. The chief difficulty of the time was the lack of coin for buying gold on the fields or through merchants’ drafts as the bullion was shipped. One writer says: ‘The energies of the printers and the hands of the bank officials were pretty well taxed in the preparation of bank-notes the circulation of which was multiplied with astounding rapidity; but this only mitigated the public inconvenience without supplying the want of coin, and it was not long before the banks found it necessary to purchase gold on their own account and to hold it as a metallic though not as a legal tender basis for the notes they issued.’2 The economic consequences following the sudden introduction of such huge supplies of gold into the community are of such an extraordinary character, and bear so closely upon our general theme, that a more accurate statement of the course of events is necessary. In all its essential features the expansion of the gold supply after 1851 amounted to nothing less than a sudden ' Edwin Brett, History and Development of Banking in Australasia. Paper before the Bankers’ Institute, 1882. ® The comment in Tooke and Newmarch, History of Prices, is of interest here. Statistics for N. S. Wales, Victoria, and South Australia: Year. | Population. Note Circulation. Cash Reserves. 1850 | 1856 £ £ 220,000 450,000 | 930,000 695,000 4,300,000 7,720,000 Population three times, Note Circulation nine times, Specie Reserves eight times as great as in 1850. ‘We arrive at the startling conclusion that, in the space of five years, the transactions of about 700,000 inhabitants in Australia have become so large as to require a currency of not less than about 14 millions sterling. These figures will enable us to understand why the 12 millions of gold coin exported from Great Britain to Australia in 1852-3 have almost wholly remained there.’ (Vol. vi, Appendix XXX, p. 773.) THE GOLD DISCOVERIES 29 vast injection of capital; and the trade situation which arose was, in its immediate effects, little different from that which ordinarily follows lavish borrowing. The total effect, however, by virtue of the fact that no great permanent liability for interest remained, was vastly different. The course of this erisis has been carefully stated by Tooke and Newmarch, after an exhaustive examination of contemporary trade circulars and other documents. Their examination, moreover, has a peculiar interest as being one of the first attempts to outline the pattern, and to analyse the successive phases of a commercial crisis along the lines of modern analysis. As a result of their dissection these writers resolve the whole episode into the following phases :1 LI. The Period of Excessive Demand, August 1851 to July 1853, characterized by an insufficiency of supplies and accommodation for the rapidly growing population. The Period of Transition, July to December, 1853; a reaction from the former phase, with supply rapidly overtaking demand and profits and land values falling. The Crisis Proper, January 1855. The reaction of the preceding period now ‘became a commercial crisis of the most severe character. .. . The supplies of every conceivable class of articles had become and continued to be perfectly overwhelming. For several descriptions of goods the quotation of regular prices became impossible .. . the single and absorbing object was to get rid of the cargoes at any price. Bankruptcies became of daily occurrence, especially during the last four months of what was emphatically a year of commercial crisis’ IV. The Period of Revival, February to August, 1855. ‘The torrent of imports abated and prices began to recover.’ V. The Period of Depression, September to December, 1855. Following the partial revival there occurred a severe depression in the labour market. Thousands of immigrants had continued to arrive during the commercial pressure, and at a time when a seriously reduced revenue had compelled the Colonial Government to suspend no See Tooke and Newmarch, History of Prices, Appendix XXX, pp. 802 ef seq. IT PROSPERITY AND CRISIS AFTER small part of the public works. By the autumn of 1855, therefore, the colony had arrived at a point—the first time since 1851—‘when the supply of labour became temporarily in excess of the demand and the question of a reduced Rate of Wages had to be considered in its most urgent form’—the First Period of Lower Wages. VI. The Period of Recovery and Return to Normal, when trade and industry became stabilized at the lower level of costs, the Second Period of Lower Wages. The interpretation placed upon this succession of events by Tooke and Newmarch also has a peculiar significance in the light of later social and industrial tendencies. ‘It is clear beyond all doubt that the whole train of commercial and social phenomena in Victoria subsequent to August 1851, resolve themselves into consequences flowing from the sudden increase in the proportion of about four to one of the wages of all kinds of Labour, but especially in the wages of the most numerous class of Labour, namely those possessing no peculiar kind of skifl.”? They proceed to show that the efficient cause of the situation which arose is to be found in the vast expansion in the purchasing power of the community, which was translated so rapidly into an enormously increased demand for imported commodities.2 Further : ‘the appearance in the market of these amounts of capital in the bands of persons anxious to become buyers produced its full and natural influence in raising prices, notwithstanding the difficulties connected with the command of a circulating medium of coin and bank-notes. We may, indeed, go a step further and say that the greatly extended quantity of coin and bank-notes ultimately employed in Victoria was a consequence and not a cause of the high prices.’ It will be shown that in later periods, which were marked by huge and over-rapid capital borrowings, effects very similar to those here described have followed, and that the more or less sudden cessation of fresh supplies of capital has always tended ! Tooke and Newmarch, p. 805. ? “The demand for all those articles which constitute necessities, comforts, and luxuries for a vigorous population was increased fourfold, or, to state the same result in probably the more effective mode, for every article for which there had been but one buyer there suddenly appeared four buyers.’ —Tooke and Newmarch, bid. THE GOLD DISCOVERIES 31 to produce commercial crises of the type just examined. The analysis of Tooke and Newmarch might, in fact, stand as a model for the examination of later crises. But, despite the fact that the economic consequences of the gold discoveries bear a strong family resemblance to those to be noticed later in connexion with the borrowing cycle, certain remarkable contrasts must also be indicated. The first of these goes far to explain some of those features which give the period its peculiar and characteristic significance. ‘In general terms the first effect of the gold discoveries was to confer upon the labourers the full benefit of what, in effect, amounted to a quadrupled demand for labour at quadrupled wages.” But the most dynamic change is to be found in the origin of the demand, not so much for labour, as for both foreign and home-trade commodities. The greatly increased wages ‘did not arise from the production for sale, after more or less delay, of some artificial commodity; but in the extraction by the labourers themselves of a universal instrument of exchange of intrinsic value, the process of distribution proceeding from the Labourers to the Capitalists and not from the Capitalists to the Labourers’. Here again, to digress for a moment, it is possible that in this circumstance may be detected the source of the Australian tradition which has tended ever since to place an excessive and illusory value upon the function in production of labour as compared with capital, a tradition which is responsible for much of the industrial trouble of later years. A further contrast has reference to the behaviour of prices consequent upon the changes in demand and supply which occurred. The patient accumulation of Tooke and Newmarch of lists of current Australian prices! during the period of this cycle makes possible the statement of some of those broad tendencies which can be compared with later price movements. By an application of Cairnes’s theory of ‘non-competing’ groups the commodities examined fall, roughly, into three classes, in each of which the price reactions exhibit characteristic differ ences. These groups are, (i) Foreign Trade Commodities the supply of which could be readily increased by importing, especially from the United Kingdom. Prices in this groun rose ! These exhaustive lists will be found in Appendix XXX to the History of Prices, PP. 830-44, They form a tribute to the soundness of the authors’ statistical method. 32 PROSPERITY AND CRISIS AFTER sharply in the first phase ; but, later, as the supply overtook the demand, fell disastrously. The trade advantage in the first stage thus moves against Australia, a reaction exactly the opposite of that which occurs in the first phases of borrowing. (ii) Home Trade Commodities capable of being produced within Australia, the supply of which could be rapidly increased, e.g. farm and garden produce. Prices in this group also exhibit a great rise and fall ; but the changes are not so marked as in the first group. (iii) Other Home Trade Commodities, i.e. not capable of great expansion in supplies. Prices for this group rose higher, and the rise was maintained longer, than for all other commodities. Although, in the main, this increase was transitory, it can safely be said that the whole range of prices was left at a higher level after the crisis than it had occupied before the gold discoveries. Of greater interest and importance than the measurement of this general lift in the price level, however, are the conclusions at which Tooke and Newmarch arrive from a study of the effects of the great increase in gold supplies, not only upon trade and wages in Australia, but also in Great Britain. The expansion of manufacturing in response to the stimulus of increased demand in Australia was sufficiently marked to cause a rise in both prices and wages in Great Britain. This was, of course, no more than was to be expected because of the increased demand for labour in all industries, on the one hand, and the increased supply of gold on the other, changes that were consequent, of course, upon the withdrawal from Australia of the accumulated quantities of new gold in payment for the importation of goods and services. In short, the total effects, as stated broadly by Tooke and Newmarch, are scarcely to be distinguished from the effects of great capital loans in that ‘there was set in motion a train of causes which has led rapidly to the diffusion of new gold and to the production of commodities supposed to be required in Australia’! The production, in particular, of one commodity demanded in Australia is worthy of special notice, viz. the capital goods required for the construction of railways. The rapid increase of population, the great expansion of purchasing power in the ! For the effect of the increased gold supply after 1850 upon world prices and industry see Tooke and Newmarch, History of Prices, pp. 188-236. THE GOLD DISCOVERIES 33 community, and the enhanced importance which Australia assumed in the eyes of British capitalists were undoubtedly the chief circumstances which favoured the commencement of that policy of public borrowing for developmental works which has influenced so profoundly the later history of the continent. It 1s interesting, and perhaps even profitable, to speculate upon the probable character of Australian development had gold not existed in the country in such large and accessible quantities. That the process of peopling the country would have proved a more lengthy business, that a less hurried national development Would have occurred, and that a vastly different complexion would have been given to our industrial and social life is highly Probable. But more significant for our purpose is the supposition that public borrowing would have begun later, and would have Proceeded on a far less grandiose scale. In the glamour cast upon the name of Australia by the gold discoveries, and in the Consequent greater attraction of the country for capitalistic enterprise, is to be found more than the mere groundwork of the economic troubles of later years. It is not possible after this lapse of time to reconstruct the Statistical data of the period with sufficient accuracy to bear eritical examination. There are too many missing links in the chain of evidence for the statement of a perfectly satisfactory case. Nevertheless, there is the strongest presumptive evidence that the events of the decade were strictly in accord with orthodox theory. The utmost that can be done with the statistics of the two leading colonies is to place the figures representing the introduction of capital, i.e. gold production, alongside the trade and banking figures, to compare the movement of commodities and of gold, to set out the position of the banks in so far as this can be ascertained, and to note the movements of the exchange over the period. In so doing, the inadequacy of verification which takes no account of other items in the balance of indebtedness than the movement of commodities including 8old must be emphasized. But the connexion between the main phenomena is too plain to be doubted. and it was well recognized by bankers of that day. ! The following is a typical comment: ‘In the meantime the merchants’ drafts against shipments of bullion assumed such magnitude that exchange on London was brought down to 10 or 12 per cent. discount, and the price of gold 3710 34 PROSPERITY AND CRISIS AFTER The correspondence between gold production and total imports is the first fact of importance. Adjusting the ‘lag’ of twelve months needed for the gold production of a period to be translated into the imports of the following period, it will be seen that the consilience is perfect and affords ample ground for the main contention that the effect of the gold production upon the trade balance was exactly the effect that the introduction of so much capital would have had. Tasre IIT Gold Production and Imports, New South Wales and Victoria Gold Production (In £m.). Imports. Year. ~w Total. ag. Total. 1852 1853 1854 1855 1856 1857 1858 5-8 02 )8 8-6 0-7 117 7 13-9 0-7 11-0 1-1 10-1 19-5 14.0 9-4 124 14.8 117 11-2 9 “3 +0 =7 3:5 39 6-1 1 58 377 12-0 15-G 17-5 15-1 6-0 22-1 18-3 16-7 20:5 240 21-2 The balance of trade for the period affords some striking evidence of the tendency of a young country passing through a stage of exuberant prosperity to ‘outrun the constable’ in the matter of imports. It was a period, also, in which public borrowing certainly increased but not at an unjustifiable rate. In 1852 New South Wales was alone in the possession of a public debt, and that amounted to a mere £212,000. This had risen by 1855 to £1,011,300, in which year Victoria made a beginning by borrowing £500,000. By 1860 the total debt for both colonies was £9,000,000 in round numbers, of which the Victorian share was £5,200,000. Taking into the account the amount of bullion and specie, both inwards and outwards, a pronounced change is observable in the trade balance after 1852, i.e. almost as early was limited to something like £3 per ounce. No wonder that enormous shipments of merchandise of every conceivable kind and character poured into the colonies, where they not only found a profitable market but could command returns in the shape of exchange or gold purchasable upon such advantageous terms. Nor marvel is it that prices soon found a more even level through all the available exports from the colonies being required to pay for the imports, which it should be mentioned included large shipments of British coin.’ ' From Coghlan, Labour and Industry in Australia, and presumably based on the annual Statistical Abstract for Colonial Possessions published by the British Government. See also Tooke and Newmarch, History of Prices, pp. 791 ef seq. THE GOLD DISCOVERIES 35 as the effects of the new gold production could be expected to reveal themselves. From a credit balance of £6,086,000, there 1s an abrupt change to a debit balance of £6,601,000in the following year, that is a swing of nearly £13,000,000 following the wonderful year that yielded £19,000,000 of new gold. With the exception of one slight recovery in 1855, the excess of imports continued until the community had, by severe crisis and sustained depression, been brought to 2 realization of the overtrading which had occurred. (Fig. II, p. 36.) The course of exchange during the early years of this golden age affords unique testimony to the unusual circumstances of the time. The graph (Fig. I, p. 36) will indicate the extent to Which the sensitive foreign exchange will respond to changes In the complexion of trade, and the handicap imposed upon a community by such high charges as £12 for the transfer of £100 to London needs no further comment. Examination of the banking statistics for Victoria and New South Wales, for the periods immediately before and after the inflation due to the gold discoveries, has a particular relevance to the matter under discussion. The chief factor which accentuated the inevitable pinching of the financial shoein the moment of crisis is exposed ; and the partial, even if involuntary, abandonment of the principles of sound banking stands revealed as one of the elements of the unsatisfactory trading position. Whether we have regard to the ratio of reserves to liabilities, the cover of coin for notes, or the ratio of reserves to total deposits, there does appear to have been a serious disregard on the part of the bankers of what might be considered, especially under most unusual circumstances, to be the necessary policy of safety and caution. By 1853, when the full effects of the gold discoveries Were making themselves felt, the position of the banks was, on Paper, a very strong one indeed. But, after that date, the drain upon their resources to cover commitments of Australian merchants to British consignors caused a rapid decline in the ratio of reserves to both liabilities and deposits, to a point below the normal for the years preceding the inflation, i.e. 32 per cent. and 26 per cent. Tespectively below the ratio held in 1853. Between 1853 and 1855 the ratio of notes in circulation to the reserve of coin rose from 37 per cent. to 75 per cent. an 10 PREMIUM BUYING RATE ~~ a 10 STR, DISCOUNT SELLING RATE JASOND| JFMAMJJASOND |[JFMAMJ © 1852 “1853 1854 Fie. I. COURSE OF EXCHANGE, SYDNEY AND LONDON, July 1852—June 1854 TAPORTS me — 0 + 15 S n vert = Bty ol Opn Corp PROB ch { LC, “1852 1853 1854 1855 1856 1957 1858 1859 1860 I86| Tie. II. IMPORTS AND GOLD PRODUCTION, 1852-—1861 THE GOLD DISCOVERIES 27 TasrLE IV Balance of Trade for New South Wales and Victoria (In Thousands of Pounds Sterling) IMPORTS 1850 1851 1852 1853 1854 1855 1856 1857 1858 N. S. Wales. Commodities. Bullion and Specie. 2,078 1,564 1,900 5,342 5,981 2,719 5,461 8,397 5,817 1,950 332 242 | Total. 2,078 1.564 1,900 3,342 5,081 4,669 5,461 6,729 8.059 Commodifies 744 1,056 3,666 14,680 17,671 '1,551 4,285 16,837 14.486 Victoria. Bullion and Specie. 404 {,163 88 457 a77 419 8192 Total. 744 1,056 4,070 15,843 17,659 12,008 14,962 17,256 15.108 Imports. Grand Total. 2,822 2,620 5,970 22,185 23,640 16,677 20,423 23,985 91.167 EXPORTS 1850 {851 1852 1853 1854 1855 i858 1857 185% N. S. Wales. Commodifies. Bullion and Specie. 2,400 1,329 468 1,943 2,661 2,742 1,781 3,277 773 2,675 209 3,275 156 3,825 187 26877 | 1.500 Total. 2,400 1,797 1,604 1,523 £,050 2,884 3,431 4,012 4.186 Commodities. 1.042 984 1,306 1,387 1,674 2,341 2,560 3,140 3 975 Victoria. Raullion and Specie. 439 8,146 8,674 9,081 11,152 12,930 11,940 10.714 Taial 1,042 1,423 7,452 11,061 11,775 13,493 15,490 15,080 12 080 Exports. rand Tatal 3,642 3,220 {2,056 15,584 15,826 18,377 18,921 19,092 18.176 Balance. Excess Imports over Kxporits. 820 800 6,086 8,601 7,815 1,700 1,502 4,893 3 g59 Excess of Exports over Imports shown black. A banker of the day, however, indicated the true cause of the credit restriction, and of the consequent stagnation, in the following words: ‘The extent of population and their power of consumption were entirely overlooked, and it was absurdly contended that mere wealth would convert Australia into one 38 THE GOLD DISCOVERIES vast emporium for goods where the means of absorption would exceed the supply, and the demand be adequate to produce a profit for the consignor under all circumstances. ’1 Taste V Bank Statistics for New South Wales and Victoria 2 (In Thousands of Pounds Sterling) Ttem. Notes in Circulation . Deposits. . . Coin and Bullion. 5 Assets . . " Liabilities . . . Ratio, Res. to Deposits Ratio, Res. to Liabilities Ratio, Notes to Coin . 1848. 1853. 240-3 2,743 1227-7 9,552 587-2 7,376 2375-5 12,168 1487-7 12,833 47-89, 76:99 39-5 | 57-6 41 a4 1855. 3,582 10,072 4757 18.458 14,136 47-29, | 336 | "rE 1857. 3,644 11,330 5,340 19,082 13,652 47-19 34-1 68 Per Cent 70 50 30 Ep 78 56 Fra. IIT. BANK RESERVES. 1848-57 Upper broken line percentage Reserves to Deposits, lower broken line percentage Reserves to Liabilities, black line percentage of Notes in Circulation to Reserves. L Art. ‘Commerce and Finance of Australia ’, Bankers’ Magazine, September 1855. ? From the official Statistical Abstract for Colonial Possessions for the years concerned. CHAPTER IV THE QUEENSLAND INCIDENT OF 1866, AND THE CRISIS OF 1878 "The Colony of New South Wales has been getting gradually worse these last seven years, chiefly owing to the great amount of immigration and the fall off in the goldfields, and more so through the great amount of importation of every article we left our homes to come here to manufacture.’ —Letter from Sydney unions to London workers, published in London Star, 20/1/1867. ‘The Overend-Gurney crisis closed the period of isolated, incoherent, and disunited finance. The tendency is now towards a greater differentiation and complexity of movement, and is simultaneous with a realized unity of interest—a dawning consciousness of capacity, an exclusion of excessive, superfluous, wantonly competitive and consequently mischievous heterogeneity.’—BacraoT, Lombard Street. ‘The rise in the price of wool, the great demand for meat, the higher prices of copper, tallow, oil, and other articles of export have put the people who were formerly embarrassed at their ease.’ —Sydney Morning Herald, 12/4/1872. ‘Orthodox theory would say that a depressed rate of exchange encourages importation, and thus overstocks the market and lowers prices of imports. But the conclusion is not applicable to Australia, to which, on account of distance and isolation, no merchant would be induced to export by the rate of exchange.’—Report of Royal Mint, Sydney, 1860. In its formative aspect the next phase is to be regarded as the ‘key’ period of Australian economic development. The primary industries were by then firmly established, settlement was pushing out in all directions, a process of trial and error was demonstrating the best uses to which the land could be put, the characteristic relations between labour and capital were being evolved, and the main arteries of commerce and communication defined. The dreams of Eldorado and the glamour of the gold-rush had been replaced by a realization of the special aptitudes of the country; and more natural industrial conditions were taking shape. In all respects, save that of Federation, the main outlines of Australian national development had been sketched, and the colour of our international relations was beginning to appear in the picture. The progress of settlement is shown by the area held at this date, and this has an important bearing upon the object of our inquiry. Eleven and a quarter million acres had been alienated in the six colonies, but of this barely one-eighth was under cultivation. The proportions, however, varied amazingly in the different states: and serve to show how seriously the business 40 THE QUEENSLAND INCIDENT OF 1866 of settlement was being taken, and to indicate the basis for the prosperity of later years. While Victoria had one-seventh of her settled area under the plough and South Australia one-fourth, the fraction for New South Wales was less than one-thirtieth. In an agricultural sense the two former states thus became very important, while the more pastoral mother-state was steadily losing ground. But, in the national economy, wool-growing was again assuming that position of dominance from which it had been temporarily ousted by gold-mining ; and that dominance it was to retain unchallenged in the following decades. The mining industry was also making a big bid for prominence. Coal was playing an increasingly important part in New South Wales, where the annual export after 1866 exceeded half a million tons. The importance of copper mining to South Australia cannot be over-estimated at this period ; and Tasmania, was shortly to reap a rich harvest of prosperity as a result of the mineral discoveries in the island. By 1870 Melbourne was firmly established in her control of Australian finance. The factors which gave her this imposing position were very exceptional, and impossible of repetition, She had by this time a population of 207,000, while Sydney had barely reached 138,000. This increment of people was undoubtedly due, in the first instance, to the attraction of the gold-fields; and it was, later, Victoria’s industrial development which retained them. For many years, too, Victorian banks had been assimilating the vast funds poured in by the miners. Fields for the investment of this money were eagerly exploited, and as a result the influence of Victorian finance was felt all over Australasia. The Riverina became, in effect, a Victorian province since the capital for its development was supplied by Melbourne banks. The financial impulse generated in Melbourne was felt from Malaya to New Zealand. Nor did the decline of gold-mining lessen this dominance. The steady progress in investment and development brought rich rewards to Victorian capital; and it was owing to the continuance of these returns that the decline in gold production did not in the least imperil Melbourne’s position as the financial centre of the continent. In the light of after events this fact assumes a peculiar and emphatic importance. It is quite certain that had there been no gold-rush and no consequent industrial developments AND THE CRISIS OF 1878 41 in Victoria, there would have been no land boom and no devastating catastrophe in 1893.1 The developments we have outlined effected peculiar changes in the status and policy of the banking institutions, changes that had an unusual significance in their relation to overseas trade. Melbourne and Sydney merchants, whose overseas transactions had exceeded their individual resources, became more and more dependent on the banks for working capital. Australian bankers, whatever be the justification for the development, ‘thus assumed in addition to the ordinary business of banking that of trading in wool and other merchandise. In the circumstances this was their legitimate business, but when some of the banks later on, having more money than they needed, sent out millions for investment, and especially when they lent it to speculators, the business was, to say the least, hazardous.’2 Public finance, too, was unsatisfactory and troublesome from 1860 onwards. The old, old difficulty of scaling down the inflated expenditure of boom times to accord more comfortably with diminished revenues was the stumbling-block. It is not to be wondered at, therefore, that borrowing for public works assumed larger and larger proportions as the period progressed. After the recovery from 1857 the English capitalist was still anxious to invest, but a series of unhappy shocks at the worst moment made him very shy of the Australian colonies as a receptacle for his savings. The first of these was the uneasy banking situation in general, and the second the inopportune ‘action of the United States in repudiating its liability to repay its loans in specie’ with its implication that the same course was open to Australia. Climatic adversity and poor seasons, a blight to which Australia for some years seemed peculiarly liable, constituted a third reason for hesitation. As a further deterrent no state had yet produced a man of outstanding capacity in finance despite the obvious needs of the case. The incident of 1866 concerns Queensland more nearly than any of the other colonies.3 The northern settlement had become 1 The best general summary of Australian development in this period is contained in Coghlan’s Statistical Account of Australia, section on Industrial Progress, pp. 460 ef seq. 2 Coghlan, op. cit. % For a full history of the Queensland trouble see Coghlan. Labour and Industry, pp. 1170 et seq. 2710 42 THE QUEENSLAND INCIDENT OF 1866 a separate colony in 1859, really before it was ready to stand on its own feet. The leader of the first government found himself with an empty treasury, and saddled with a debt of nearly £40,000 to British creditors. This in itself was not very serious, but neglect of the ordinary canons of sound government finance made it so. The revenue of the day was not nearly sufficient for a comprehensive system of public works, and borrowing was resorted to for the purpose. A loan of £700,000 was floated in London, and so easy did the process prove that a request was made for another million in the following year. The ease with which the money was obtained was due partly to the fact that in that year no less than twenty-eight new banks had been established in Britain with a total capital of £34 millions, of which a proportion was ear-marked for colonial investment. The young community was intoxicated with this ‘easy money’, and the government expenditure jumped at a bound from half a million to one and a quarter million pounds. Nor does this comprise the full tale of unwise financial methods. The common device of charging revenue expenditure to loan account was employed, and the position thus camouflaged. The amount borrowed was even yet not sufficient to cover the ambitious schemes of the government ; and a new loan bill for a million sterling, mainly for railway construction, was passed.l By this time the Union Bank authorities had taken alarm at the frequent recourse to the money-lender, and they refused to advance any further on such security as the colony could offer. In this difficulty the government accepted the offer of the Agra and Masterman’s Bank to float a loan and grant accommodation up to £500,000. The increasing dependence of Australian finance upon the British market is vividly illustrated by the events which followed. The few years prior to this had been marked in Britain by the number of new companies formed under the provisions of the Joint-Stock Companies Act of 1862,2 when for the three years following an excess of new issues was thrown on the London market by no less than 3,480 companies, many of them, as the Master of the Rolls scathingly observed, ‘started for the i In 1862, 368 miles of railway were open for traffic in Australia. ? The yearly issues under this Act were as follows: 1863, £100 millions; 1864, £154 millions; 1865, £107 millions. AND THE CRISIS OF 1878 43 purpose of being wound up’. It was, for banks and other institutions, a period of isolated, incoherent, and chaotic finance that very quickly brought about its own remedy by eliminating the unfit in drastic fashion. Warnings of a coming storm had already been noticed, but the shock came with dramatic suddenness in the failure of Overend, Gurney & Co. for ten millions.! It was a mercantile rather than a banking disaster, although bank reserves diminished with alarming speed. Failure followed quickly upon failure, and only the most soundly based institutions came safely through. This catastrophe was in many ways a prototype of that of 1893 in Australia. English bankers learnt in 1866 the lesson that their Australian confréres failed to agsimilate for another thirty years, i.e. that safe banking depends upon a unity of interest among the banks, and on the exclusion of excessive and adventurous competition with its mischievous industrial reactions. Co-operation, absorption, and amalgamation was the note of the new period in English banking ; but the experience of 1893 was necessary to harmonize the Australian financial orchestra. The Overend-Gurney crash had an immediate reverberation in Australia. Although quite solvent, the Agra and Masterman’s Bank was forced to close its doors.2 News of this failure and of the disastrous drop of 3d. a pound in the price of wool reached Australia on the same day; and a period of the most acute distress for Queensland in particular began immediately. It will not serve any useful purpose at the moment to trace the history of the crisis further, but the impaired government credit, following upon the heels of somewhat similar happenings in the other colonies, caused an immediate check to the flow of capital that landed almost every colonial government in difficulties: New South Wales was in such urgent need that a 5 per cent. loan could not be placed at a figure higher than 70, redeemable at par, which made the rate of interest equivalent to 71 per cent. per annum—=a very distressing figure indeed. So 1 The firm of Overend, Gurney & Co. were bill brokers handling £60 to £70 millions of commercial bills per annum; and their failure ended, at least for a time, the ‘fatal facility of credit’ which was responsible for the collapse. 3 Agra and Masterman’s was quite solvent, and in the panic paid £3,000,000 across the counter. The actual suspension was due to & run on its Indian branches caused by false telegrams advising that the bank had closed its doors. 44 . THE QUEENSLAND INCIDENT OF 1866 suddenly and to such depths could colonial governments be plunged by the loss of their credit. Nor is it necessary to examine this minor crisis in statistical detail. It will suffice that the course of events followed strictly the path of most Australian crises before or since. Swollen imports, consisting for the most part of railway iron, rollingstock, and iron piping, came into the colony; and, since the greater part of the loans went as wages in constructional work, a false prosperity was induced which, considering the circumstances of the infant colony, degenerated into public and private extravagance of the most unwise kind. The sudden drying of the stream of credit proved how unproductive for immediate purposes was the use to which much of the borrowed capital had been put by the government of the day. The second incident to which attention was drawn at the beginning of this chapter happened in the next decade. In spite of the decline in the total yield from gold-mining this phase might almost be called the mineral period. In Queensland, however, the gold yield increased from half a million in 1872 to 2} millions in 1888, as a result of the developments at Mount Morgan, Gympie, and Rockhampton. Tasmania, after the discoveries at Beaconsfield, Lefroy, and Mathinna during the same period, produced gold to the value of over two millions; while Western Australia by 1880 was yielding an annual value of nearly half a million, to be increased very rapidly a few years later by the discoveries at Kalgoorlie and Coolgardie. It was to the discovery and development of mineral deposits other than gold that the period owed its progress. Mining for tin and copper became of great importance in New South Wales, and after 1885 silver came into great prominence, a mineral that by 1890 was yielding a return of about £3,000,000 a year. The copper mines of South Australia were of increasing importance to that state, while both tin and copper meant much to Queensland’s prosperity. The discovery of the famous Mount Bischoff tin deposits,! coming at a time of industrial stagnation, helped Tasmania in a like manner; and this was merely the prelude to 1 This was the massive deposit which James Smith stumbled upon in 1871, and in the early years it yielded almost fabulous returns of tin. In 1885 alone over 4,000 tons of the metal were obtained. AND THE CRISIS OF 1878 45 a period of great mining activity after 1885, when the rich Zeehan and Lyell deposits of silver-lead and copper were developed. A great part of this activity falls after 1878, but the optimism generated by the early discoveries, especially in the mind of the overseas investor, was a prime factor in promoting the crisis of that year. Turning to the rural industries, both agriculture and pasture made good progress, in spite of a considerable and progressive decline in the prices of all primary products. J udged by production, however, the pastoral position had never been so strong. Sheep increased from 40 to over 100 millions, and the yield of wool from 200 to 600 million pounds. This was largely due to magnificent seasons, broken by only one serious drought—that of 1881-2, which falls beyond the immediate period under consideration and was particularly disastrous to the Riverina district. Fluctuations in the prices for staples constituted the main disturbing factor in the last quarter of the century. The first falling away in prices occurred in 1875 after a period of high returns, and within two years they had dropped by one-sixth. The loss in value of yields was, however, counteracted, to some extent, by the increase in acreage and in flocks and herds. The new price-level was maintained until 1884 when another severe break of 16 per cent. was experienced. No further change took place until 1890 when disaster descended in the form of a 30 per cent. reduction in market values of primary products, a total decline in twenty years of more than 50 per cent. Again the greater part of this decline does not affect the period immediately before 1878, but ib is necessary to realize that the long downward swing in prices which terminated about 1890 really commenced during that phase of Australian development which is now under discussion. But the money market had never been easier. In 1871 the various Australian governments owed somewhere about £30 millions to Britain; but, by the end of the next decade, this total had more than doubled. It is worthy of note that most of the new debt was devoted to railway construction. After 1871 ! For the pastoral industry after 1886 the fall in the price of wool ‘almost cancelled the effect of the increase of flocks’, (Coghlan, Statistical Account of Australia) 46 THE QUEENSLAND INCIDENT OF 1866 bank advances doubled within seven years, but deposits more than kept pace, and the banks were forced to seek fields for their investment. As will be seen in a later chapter, one such field was found in Victoria, and in the 1870-80 period the banks were already drawing overseas capital into that state. The financial history of the period shows very clearly the great dangers of prosperity. The classic crisis of 1893 was, in sober fact, bred by the piping times from 1872 onwards. The world setting was, indeed, fitted to produce such a cataclysm. The period was everywhere one of great business expansion and inflation of credit, as well as of great price fluctuations. Such conditions always tend to produce economic excesses, and the times were replete with examples of over-speculation. Expensive and injudicious railway construction, particularly in North America and Europe, expansive ship-building, the digging of costly canals, and the production of all forms of heavy and expensive machinery, were some of the characteristic forms that capital expenditure of the day assumed. The rise in prices for processed materials was most marked in the case of the metals, and the mining developments to which reference has already been made were a world-wide response to the call of the speculator, for whom mining has always been such an attractive field. There was no lack of employment anywhere. The cost of living, too, in sympathy with price movements of most foodstuffs fell steadily; and this had the double effect of raising wages and increasing the speculative power of the community. These effects in Australia were materially strengthened by the large sums of borrowed capital spent by all the governments, a feat made possible by the extraordinary fondness now evinced by the British capitalist for Australian investments. In Victoria this was chiefly evidenced in the land and mortgage business, in which, even before 1880, over £10 millions of British capital had been sunk in that state alone. Melbourne as the financial centre, it is worthy of note, held at this time half of the total deposits of all the Australian banks. Nor was New South Wales any less active after a different fashion. Within five years after 1872 the revenue from land-sales increased more than sevenfold. This had the effect of increasing government deposits in the banks, who were thus provided with the means for making AND THE CRISIS OF 1878 47 advances for land purchases, a reversion to the old idols which had served them so badly in the débdcle of 1843. In Queensland the progress of mining and the favourable position of the cattle industry had attracted considerable capital from Great Britain, so that the northern state shared fully in the prosperous times upon which the other colonies had entered, and which occasional droughts did not seriously affect. These were the conditions from which arose the crisis of 1878 in the Australian colonies, and its main interest is in the clear demonstration which, in common with the Queensland crisis of 1866, it affords of the increasingly intimate connexion between the British and Australian financial systems. In 1873 an international crisis, mainly German-American in its origin,! had spread over the industrial world of two continents. Yet Great Britain, in the very heart of the storm, escaped its worst effects. In her case, inconvenience rather than injury was the main effect, the worst feature of which was a bad financial scare with some loss to investors who were well able to bear it. But if she escaped the worst miseries of the moment she was not to go unscathed. Shrinking prices, stagnation, glutted markets, and unemployment slowly altered the picture until the accumulated effects of the 1873 crisis and the natural reaction from protracted prosperity culminated in the City of Glasgow Bank smash in 1877. This course of events in Great Britain found a striking parallel in Australia, which escaped with Britain the worst effects of *73 only to suffer five years later. Here again was proof, if further proof were needed, of the effects of a sudden stoppage of loans upon the prosperity of the colonies. There was no apparent reason, other than inability or unwillingness on the part of Britain to maintain the stream of exported capital at its accustomed volume, why Australia should have shared in the discomforts of the depression following 1878.2 Indeed the productive capacity of Australia in relation to the overseas debt had never been more sound; and the real prosperity of this time was not again approached until the vears * The crisis which arose in September was known in U.S.A. as the Jay Cooke panic from the financier whose failure invoked the storm. It ‘had its origin in fervid over-trading and speculation in U.8.A., and although England had no panic hér best customers were crippled’. (Wesley Mitchell.) " For an excellent statistical review of the whole Australasian situation in 1880 see the remarkable paper by Sir F. Dillon Bell before the Royal Colonial Institute, 48 THE QUEENSLAND INCIDENT OF 1866 between 1905 and 1920. But the flower of prosperity faded, the financial grass withered, immediately the streams of capital irrigating their roots failed. 1882: The Indebtedness of the Australasian Colonies in Relation to their Resources; Proc. vol. xiv. The Public Debt then stood as below: Pusric Dest 18 RELATION TO WEALTH N.S.W. . ' Victoria . S. Australia . Queensland . Tasmania . W. Australia . Total . Amount. £m. Population Thousands. Debt per head. £ Wealth, £m. 18-9 22-6 11:5 13:1 1-9 0-4 781 882 295 227 119 32 20-35 192 23-85 181 25-45 60 46-8 41 15-88 16 12.55 | 5 684 | 2336 | 29.24 | 495 Percentage public debt to wealth. 31 12-4 19-1 32-0 12:0 8.0 13-8 ‘ Besides the money which has been lent to our governments (including New Zealand) more than 110 millions of English capital are even now embarked with us in private loans: counting the commerce there are more than 260 millions of your money placed with us, and we return you altogether 18 millions a year in the shape of interest. One-fifth of the total amount of English capital invested throughout the world is already embarked with us.’—Dillon Bell, op. cit, PART III THE BOOM OF 1890 AND ITS ECONOMIC CONSEQUENCES CHAPTER V THE PRELUDE TO THE COLLAPSE OF 1893 ‘It is difficult to reduce to their just proportions the various elements in the financial outlook, but it is impossible to ignore an impression that it is overshadowed by the gigantic speculation in land that is now in progress.’ —Insurance and Banking Becord, April, 1888. “The land banks were material factors in the growth of extravagant expenditure - « . fungoid growths . . . which enabled men of the smallest means to buy a few shares and so participate in the largest dividends which were too often the produce of specious book-entries and not legitimate earnings.’ —H. GyLES TURNER, History of Victoria. “What Bacon called the “heroic work of colonization” has been thrust aside in Australasia in favour of a more showy development, which has crowded people into tities and piled up a mountain of debt, a bigger one than ever before burdened a population of four millions. It is time the position was reviewed, the borrowing checked, and more earnest attention given to the creation of actual wealth.'— Epwanp PoLsrorD in the Sydney Morning Herald, 1892. ‘As regards the amount of wealth per inhabitant the United Kingdom stands second only to Australia; and when we consider that most of Australia is mortgaged to British capitalists, we may say that in reality the United Kingdom has most wealth per head.’ —MULHALL, Dictionary of Statistics. 1891. FoR the economist as for the historian the years from 1880 to 1890 form a period of extraordinary interest.! No other decade in Australian history focuses within itself so many tendencies in our national development, nor throws upon the screen quite such an abrupt alternation of prosperity and poverty. Along with the social forces which were working to shape our national consciousness were the factors giving form and character to our financial and industrial organization. It is in this period that 1 The following are the best general sources for the financial history of this period: vicToris. H. Gyles Turner, History of Victoria, pp. 297 et seq. ; Memorandum prepared for the British Treasury by A. G. V. Peel, and the reply by Sir Geo. Gibbs; the appendix to the Victorian Year Book, 1894; and Coghlan’s Statistical Account of the Seven Colonies of Australasia, 1894. NEW souTH wALES. Fora critical examination of the period the paper, Financial Crisis of 1893 in New South Wales, given before the Australian History Society by H. L. Harris is invaluable; Coghlan, Wealth and Progress of New South Wales, is the official year-book of the colony, and indispensable, 1710 50 THE PRELUDE TO THE COLLAPSE OF 1893 we see the growth and maturity of those seeds sown in the previous decade which were now to ripen to the catastrophe of 1893. So important were the issues involved, and so well do the developments of the period illustrate and verify the teachings of economic theory, that it is proposed to examine the circumstances of the time in greater detail. The first phase of this examination merely constitutes a survey of the financial machinery by which the community was served, and by the breakdown of which so much dislocation and distress was caused. As the period progressed the apparently inexhaustible supplies of capital, the splendid seasons, and the growing sense of productive power, brought about an appearance of bounding prosperity which was fatally deceptive. The ease with which money was borrowed overseas, or rather, the eagerness with which the British investor poured his savings into Australian financial institutions, induced in the eastern states an orgy of speculation which was indulged in by every class in the community. It is quite impossible to comprehend the causes, or, more precisely, the accompaniments of the crisis of 1893, without some study of the banking developments of the period. By this time there were more than a score of banks, twentyfive to be exact, engaged in the transaction of ordinary banking business in the Australian colonies. Of these some, such as the veteran Bank of New South Wales, were domiciled in Australia ; while others, such as the Union Bank of Australia, had their head-quarters in London. The characteristic feature of Australian banking was the practice of making advances against land and farm stock. Hard experience had taught English bankers the dangers of this type of business, and their traditional views of the difference between bills and mortgages compelled them to leave it to land companies. Some precedent for this and other features of the Australian practice is to be found in the ‘cash-credit’ system of the Scotch banks, a method designed to attract and accumulate the small blocks of uninvested capital in the community. It is only fair to say that the Australian bankers recognized the danger of the procedure, and were accustomed to hold a greater ratio of gold than that regarded as necessary in Britain. It should be noted, too, as a fundamental circumstance, that very different methods of treating THE PRELUDE TO THE COLLAPSE OF 1893 51 deposits were usual in the two communities. Deposits in English banks were mainly at short call; whereas in Australia the custom had grown up of accepting these mostly for fixed periods. Another important feature of the situation which must be stressed was the change in the position of the banks during the period with regard to imported capital. In 1880 only a small part of the deposits of Australian banks consisted of British capital ; but, after that date, the position altered very rapidly. The financing of land transactions, around which the whole financial history of the time revolves, was made possible only by these deposits; and the banks were practically forced to engage in the business by the fierce competition which arose between the different financial institutions. The immediate causes of the land boom, therefore, are to be found in the policy of the banks and in the over-anxiety of the British speculative investor. There is a traditional difficulty in distinguishing between speculation and investment; but, broadly considered, the capital which came to Australia during the period was for both purposes. The capital borrowed publicly was at least sunk in some constructive work in the hope that it would be reproductive, and reached the country largely as capital goods. The invested or speculative capital was contributed wholly from private sources, and could come in no other way than as consumers’ goods, largely of the luxury type, since the volume of the capital flow was so great that it could not possibly be used in productive ways. Its diversion to speculation was inevitable, even if that were not the original intention ; and the ‘boom’ was, in effect, a period during which the eastern colonies were living upon English capital. We shall see that, as the industries of the country declined in relative productiveness, the country found it increasingly difficult either to pay the interest or to repay the principal. Another remarkable feature which calls for mention was the origin and growth of the building societies. The Friendly Societies Act in Victoria helped the promotion of these institutions, and under its shelter many companies were formed which were simply organizations for land speculation. The friendly societies had found that land dealings were an exceedingly profitable business, and very soon companies were appear- 52 THE PRELUDE TO THE COLLAPSE OF 1893 ing on all sides to take a share in the good things offering. The ‘leap-frog’ procedure then began of offering longer and longer terms to buyers of land. The next step for these institutions was to bid for the British deposits which were flowing into the banks in such a flood. Higher rates than those obtainable at the banks were offered ; and the drain on their deposits caused by this competitive bidding forced the banks in self-defence to raise their rates. To maintain the momentum, more and ever more capital was needed, and to secure this many of the institutions established ‘agencies’ in Great Britain. Scotland, of all places, was a favourite field for deposit hunting; and more than a score of Australian companies were operating in Edinburgh alone. But the day was coming when this competition was to eliminate the unfit in the financial jungle. Haldane has said, ‘Organisms may develop which in one way or another are so mis-shapen or defective that they cannot survive even though they have all the essential characteristics of organisms. They maintain their existence as organisms for a short time, blindly struggling as it were to preserve the defects which make them incapable of surviving’! So it was to prove with the building societies and land banks of the time in Victoria. The real starting-point of the ‘boom’ lies as far back as 1881, when, in fact, conditions were far from favourable for such a development. The previous year had been remarkable for a circumstance that had affected every British colony in common with other borrowing countries. This circumstance was the sudden constriction in the flow of new capital from Britain, a flow to which the Australian colonies were by then becoming accustomed. Not only was the flow stopped entirely, but demands for repayment were made which fell so uncomfortably upon the ears of the borrowers as to arrest a period of budding prosperity. The cause of the change was another financial crisis in Great Britain associated, as we have shown, with the unexpected failure of the City of Glasgow Bank. As a direct result of the succeeding credit restriction the allowance of capital from Great Britain to the eastern colonies of Australia was cut down by not less than £10,000,000, and other colonies fared similarly. The trade statement below will show the total and individual effects J. B. 8. Haldane, Mechanism, Life, and Personality, p. 102. THE PRELUDE TO THE COLLAPSE OF 1893 53 in the different colonies. For the four colonies mentioned, the stoppage of the supply of capital for the year 1880 marked a swing in the aggregate trade from an excess of imports of nearly 8% millions, to an excess of exports of nearly 3% millions, or a difference of approximately 12 millions. This situation in four independent and widely separated communities, which, however, drew their capital supplies from the same source, is a very pretty illustration, in the coincidence of precisely similar changes, of the effects of capital borrowings. Tare VI Balance of Trade for the British Colonies. Victoria ’ 3 New South Wales . New Zealand Canada ’ , Totals 1878. Excess of Imports. £ 2,580,000 £112,000 2,631,000 2 095,000 8,418.000 1880. Excess of Exports. L 1,398,000 1,575,000 191,000 984.000 3.448,000 1881. Excess of Imports. 466,000 1,279,000 1,396,000 1,708,000 4,849,000 The resumption of capital imports in 1881 marked, in Australia, an immediate return of the former prosperous conditions. Much of the new capital introduced both publicly and privately was being devoted to pastoral development in the Riverina, and to the opening up of sugar-growing country in Queensland. Added to this was the effect of a revival of speculation in mining as evidenced by the formation of many new companies. The outcome of this three-cornered competition for financial support between banks, land companies, and mining ventures was a fierce scramble for capital which led to the land companies offering the unusually high rate of 5 per cent. for money at call; and to the banks scouring the United Kingdom for deposits even at this early day. Business concerns of all sorts were paying handsome dividends. The banks for the next ten years commonly paid 10-14 per cent., and the land companies bid even higher. From this time forward small cash payments, long and easy terms, and an almost total absence of cash sales characterized the land transactions. 54 THE PRELUDE TO THE COLLAPSE OF 1893 Steady progress in the agricultural and pastoral industries, culminating in a splendid harvest and an exceptional wool clip for all the eastern states in 1882, was now checked by the drought which affected the seasons of 1884 and 1885.1 This had no effect, however, upon the buoyant conditions, since the flow of British capital was now so copious that Victorian bankers were forced to discourage its accumulation. Since pastoral and farm properties were no longer attractive as investments owing to the protracted drought, speculation now took that remarkable turn towards mining and town properties which was to be maintained till the close of the boom period. The serious fall in prices? for primary products that was mentioned earlier was balanced, to some extent, by a decline in the price-level for imports; and these fluctuations under ordinary circumstances would have had a depressing effect upon business of all kinds. In fact there was a temporary decline that caused some alarm ; but the lavish expenditure of loan money by all the governments, together with the increasing stream of overseas capital, maintained an extraordinary buoyancy that even poor seasons could not depress. By this time the excessive competition among the financial institutions was producing conditions so menacing that the more soundly based concerns took alarm. The older banks, however, were unable to agree upon a policy that would be adequate under the circumstances, although a new association was formed with the object of controlling interest rates. A far more urgent problem, in view of the influx of capital, was that presented by the exchange rates; but with this the Australian bankers were quite powerless to cope, since it arose from the great volume of funds in London awaiting transfer to Australia. This situation, of course, reacted to the financial discomfort of exporters who, as the only people who were doing anything towards maintaining the solvency of the country, were the very people to be directly penalized by the unfavourable exchange rates. The return of good seasons, and a slight recovery in the price of wool, set the ball rolling as merrily as ever in all the capitals. ! See Harris, op. cit., p. 14, for the effect of the financial situation upon the pastoral industry. 2 See Coghlan, Wealth and Progress of New South Wales, 1897-8, pp. 133 and 1071, for an analysis of the price situation. THE PRELUDE TO THE COLLAPSE OF 1893 55 In Melbourne the speculation in land-company shares exhibited an exuberant confidence to which the banks once more responded readily! A positive mania for the creation of these companies ‘pushed ordinary business quite out of court. In Victoria alone hundreds of these parasitical concerns were flourishing, every week saw the flotation of half a dozen new ones, and they were obtaining deposits totalling five millions a year from Britain. The second phase of the boom in the eastern states chiefly developed around city property, and manifested itself in the marvellous increase in the values of city frontages in main streets. But the frenzy soon spread to suburban estates, and subdivisional sales became an obsession in all three communities. Profits of fifty per cent. were quite common on city blocks, and in every way the position in suburban districts was quite as unsound. Free carriages for prospective buyers, pavilions erected upon the estate to be subdivided, free champagne lunches at the sale, and other amenities placed in the way of the purchasers, bear witness to the reckless character of the business of land selling. Added to this were the offers of longer and longer terms for repayment, with smaller and smaller initial deposits. Prices bore no relation to returns, the buyer made no attempt to improve his holding, and was solely interested in the prospect of turning it over at a profit before he was called on to pay any large proportion of the purchase-price. Some land companies in their advertisements guaranteed profits of twenty and thirty per cent. within a few months of purchase.? These unsound conditions reached their dizziest heights in Melbourne. The year 1888 proved to be the ‘annus mirabilis ’ of the whole boom period. In that year reckless speculation in mining and land transactions reached its pinnacle. Nor was the mania confined to those fields, for the community was seized with a gambling frenzy. The banks played their part by ! The lengths to which it was possible for imprudent finance to go are shown by the report of the Banking Commission appointed by the Victorian Government. Among its recommendations was one to the effect that banks should be allowed to advance money on debts before they were incurred, and a Bill was actually prepared to this end. Happily it got no farther. % The scramble for the profits in these companies pushed up the market-price of the shares of thirty land companies by more than two million pounds in a few months. 56 THE PRELUDE TO THE COLLAPSE OF 1893 increasing advances enormously, and the greater part of the increase went to bolster up allied land companies.! In the face of the competition by the land companies, much of it grossly unscrupulous, the established banks and building societies found it was impossible to restrict their activities to their legitimate functions without losing the confidence, or at least the deposits, of their customers. ‘This year saw the largest business ever transacted, the greatest fluctuations in prices, and immense flotations. Its morning commenced with active business and rising prices, advanced to wild speculation and inflated values at noon, and closed at night with relaxed tone, falling prices, and a stringent market.” The mines of Broken Hill became the centre of speculative interest. The boom continued for the whole of the first quarter. ‘Grey-haired men saw, aghast, their juniors making competencies in a few months by speculation in mines.” Then a rapid decline set in, and the market value of shares listed in Melbourne fell by nine million pounds in a single month.2 The land craze, however, continued undiminished.3 The building trade, too, was at the height of its activity; and, as yet, there were no signs that the wonderful outpouring of capital from Britain would ever diminish in volume. It can easily be realized that, with the enormous burden of debt and inflation which oppressed it, the ordinary production and enterprise of the continent could not be otherwise than stagnant. And to the whips of inflation and speculation prepared in the decade just ending, were to be added the scorpions of drought and falling prices in the period now commencing. ! Perhaps nothing shows the character of the business better than the case selected by Coghlan in which the Colonial Investment and Agency Company declared a profit of over £29,000 for the half year, of which £12,000 represented appreciation in value of freehold properties. With a capital of only £7,500 the Investment Company was able to show a handsome profit of £24,717 after writing off preliminary expenses. Mercantile Finance on a net profit of £172,340 declared a profit of 60 per cent. for the half year. (Coghlan, Labour and Industry, p. 1700.) ¥ Melbourne Stock and Share Market, 16 Jan. 1889. Broken Hill shares were quoted at 84} in 1887, rose to 413 in February 1888, and closed at 302. The most spectacular call in the history of the Melbourne Stock Exchange was the sale of 2,500 B.H.P.’s for nearly £112,000. At the height of the boom the Stock Exchange did business all night, and the operations for 20 Jan. 1888 totalled £2,000,000. ® In one week over thirty subdivisional sales took place in Melbourne. THE PRELUDE TO THE COLLAPSE OF 1893 57 The unfolding of the drama in New South Wales serves, in some respects, as a contrast to the course of events in Victoria. It must be remembered that the older colony had developed the pastoral industry whilst somewhat neglecting agriculture ; and this tendency accentuated the dependence of the colony on the world market conditions for animal products and particularly for wool. This state of affairs had a very marked effect on developments in New South Wales between 1880 and 1890. Pastoral properties were marked out for attention by the British capitalist, and in this circumstance the corresponding boom period in that colony had its rise.! As a direct result land sales, and government revenue from this source, increased enormously, the revenue alone rising in 1881 by one and & quarter millions above that for the previous year. The buoyancy of commerce and industry also assisted towards the production of a ‘three million surplus’ at the end of the year. As a result of successful loan issues, government deposits in the banks were far in excess of anything known hitherto; and these furnished the wherewithal for advances for land purchases. All this was, of course, almost exactly a repetition of the conditions preceding the disaster of 1843. Finance moved once more in the same old vicious circle. Between 1882 and 1888 precisely similar conditions prevailed in Sydney as in Melbourne, although on a somewhat more subdued scale since the effects of the 1884-5 drought were naturally felt more severely in a pastoral community. The year 1888, however, offered some remarkable contrasts in the two colonies. This year, which saw the land speculation in Melbourne at its very pinnacle, saw the decline and finish of the land boom in Sydney, where investors now turned as eagerly towards mines as they had previously towards city estate.? Two factors, however, were combining to call a halt as far as Sydney was concerned. The first of these was due to the dominant position of Victoria in financial matters. Most of the banks were already feeling the drain imposed by the Melbourne boom. and were 1 The British investor displayed as much readiness to take up securities in New South Wales as in Victoria at this time, and 4 per cent. N.S. W. stock was quoted at 110. 3 A fair index to the inflation that had occurred, although & conservative one, is given by the municipal assessments of Sydney and suburbs which increased by over £20,000,000 in five years. ar10 58 THE PRELUDE TO THE COLLAPSE OF 1893 engaged in building up deposits there by accumulating every sovereign that could be spared in the other centres. It was, of course, merely robbing Peter to pay Paul, for the object of the transfer was to maintain the buoyant conditions in Melbourne, or, in the case of the more cautious banks, to strengthen their position in that quarter. There was no sudden shutting down in Sydney, but the gradual contraction of credit there checked speculation very effectively.l The second factor was the incidence over the whole state of another drought in 1888-9. Farmers and stockowners both suffered very severe losses; and increased support had to be given by the banks, who were themselves seriously implicated, and all this accentuated the monetary tightness.? Speculation ceased entirely, and most of the land companies found themselves in serious trouble in consequence. Probably for the same reason that street lamps become dim after sunrise, the part played by Queensland in this period is not usually appreciated. Melbourne quite outshone both Brisbane and Sydney by the brilliance and the grand scale of her financial eruption, but the historian is apt to ignore the important part played by Queensland in the troubles of the day. Much of the activity in this state after 1880 depended upon vigorous development which was eminently justified. But speculative factors here, as in the south, intervened to force on an expansion that was too rapid to be healthy. Much of the activity found its chief outlet in the opening up of the lands on the coastal belt where sugar plantations were being established. The westward expansion of the pastoral industry absorbed, quite legitimately, much of the capital that began to pour in. But from these two, as financial foci, was generated a volume of speculation that ultimately overwhelmed sound enterprise in Queensland for a decade. All the features of the land gamble in the southern states were faithfully repeated in Queensland. A fictitious prosperity was reflected in a strong market for Queensland * Harris comments: ‘The largest amount of capital received for investment purposes, £6-2 millions, came in 1885; but the drop in the marriage rate and the strike suggest that the peak had been passed.’ ? The extent to which nine banks were involved is shown by their registration as early as 1883 as owners of over 500 squattages totalling at least 15 million acres. Coghlan estimates from the official returns that the banks were liable for one-sixth of the area under pastoral lease in New South Wales, THE PRELUDE TO THE COLLAPSE OF 1893 59 stocks, and this served as an encouragement to a willing government to enter upon an extensive borrowing programme. An early period of speculation in pastoral properties, which came to a timely end through drought, merely served, as it did in Sydney, to divert the current of speculation towards city properties. In addition to the annual loans floated by the government, Queensland, in common with the other states, attracted a large share of British capital through the agency of the banks. Speculation and drought early in the decade had, however, lowered the tone of business; and, in the crippled state of the pastoral industries, this acted to depress all business activities. Unemployment and distress impelled the government to relieve the situation by a big programme of public works estimated to cost no less than ten millions. This pious intention was helped in a dramatic manner and from an unexpected quarter. In December 1884 the wonderful gold deposits at Mount Morgan were discovered; and the splendid returns at once stimulated renewed speculation in mines. In Brisbane the marvellous dividends from Mount Morgan, the habitual loan, and the swelling flood of British deposits drove town values to crazy heights. Yet all the time the spectre of drought stalked through the country. At this time, in spite of the fact that overdrafts to pastoralists had practically ceased, bank advances had reached 114 millions in Queensland, an increase of over two million pounds in a single year. The splendid seasons of 1887 and 1888 effectually scotched any pessimism which the expansive policy of the government and the progress of speculation may have excited in cautious minds. The burden of the public debt had reached a total of 26 millions, or more than £78 per head of population, a situation which moved the financial editor of the London Times to vigorous and scathing criticism. But this had no effect, since the eyes of that section of the public who were not preoccupied with land transactions were filled with gold dust. In stark contrast industry and trade were stagnant, railways were becoming less and less of the nature of reproductive works, the public debt was still mounting, the return for capital expendi-1 £50,000 was paid at this time for 50 feet of city frontage in Brisbane, and in the suburbs prices just as ridiculous were obtained. 60 THE PRELUDE TO THE COLLAPSE OF 1893 ture shrinking, and, before 1890, the government was facing a deficit of nearly one and a half millions. Everything indicated that the crescendo of speculation was finished, and that the diminuendo of depression was about to commence. Events in South Australia during the decade ran a very chequered course. There are reasons for believing that the speculation of the time originated in that state, but if so it was very soon over. This activity reached its peak as early as 1882, when it was suddenly checked by the banks closing down on all advances of a speculative character; and, to point the moral, even the government was denied accommodation. Pronounced credit shortage prevailed until the depression touched bottom in 1885. Unemployment was rife, population was trickling away to other states, most of the copper mines had stopped work on account of the low price of the metal, wheat and wool prices remained hopelessly low despite the almost total failure of the harvest and a small clip, and the government budget showed a deficit of £700,000. Such a conjunction of evil circumstances South Australia had not known since the Gawler crisis. The universal distress and the general economic situation were most reminiscent of the bad times of 1840. The finishing touches to a picture of unrelieved gloom were given by the failure in February 1886 of the Commercial Bank of South Australia, a local institution that had become largely identified with the rural interests of the province and which had, therefore, been very severely hit by bad seasons. Even more sensational than the actual failure were the revelations of fraud and embezzlement. The resulting suspicion, under which all the banks fell, added to the general uncertainty and affected business disastrously. A crop of bankruptcies followed closely on the heels of the Commercial Bank failure, bank reserves disappeared, and the Savings Bank suffered from a run on its deposits which not even a government guarantee could stop. The straits to which the land finance companies were reduced can well be imagined, for the land boom in this state was by this time merely a matter of history. But this proved to be the darkest hour preceding the dawn of better days for South Australia. With the breaking of the drought, the rise in the price of copper, and the wonderful discoveries at Broken Hill, confidence crept back into business ; THE PRELUDE TO THE COLLAPSE OF 1893 61 and the loss of population to the eastern states was checked. The splendid returns from Broken Hill were the signal for a frenzied burst of speculation in metals,! which was very largely a reaction from the lean years of depression. For any mining venture except Broken Hill, however, the banks had not even an encouraging gesture, so deeply had the lessons of recent years sunk. Their action was in marked contrast to that of the banks in Victoria and New South Wales at this time. Two blows to returning prosperity were suffered in 1888. The first was a return of drought conditions, and the second the failure of the Société de Métaux and the fall in the price of copper in March 1889, just as the mines were once again in full production. This continuous succession of reverses was probably a blessing in disguise since the province was saved from the disastrous period of speculation which affected the other colonies. See Coghlan, Labour and Industry, p. 1697. CHAPTER VI THE COURSE OF THE CRISIS OF 1893 ‘To bring on a sudden crisis it but needs that some considerable creditor should sonclude that the present earning capacity of the debtor no longer warrants the capitalization upon which his collateral is appraised. When this happens liquidation begins and the depression arrives.’ —WESLEY MITCHELL, Business Cycles. Foreign loans are, with few exceptions, an unmitigated curse. Usually they arrive in Victoria in the very class of commodities that excite to waste and extravagance, aegativing the likelihood of profitable investment.’—JInsurance and Banking Record, 20 Nov. 1893. The banking crisis was not a sudden crash, but an agony, lasting in its acute stage about sixteen weeks; and the economic sickness which preceded it extended over several years,’ —CoaHLAN, Labour and Industry in Australia. This dramatic reaction from the prosperity and inflation of the previous years orought in its train a long catalogue of frauds, embezzlements, and breaches of srust, not to speak of damage to reputations.’ —Insurance and Banking Record, 16 Apr. 1893. AND now we enter upon that period of recession and final crisis that was to shake the Australian economic organization to its foundations ; and, by the lessons burnt into the minds of bankers and business men, of traders and tradesmen, to shape the financial policy of the continent till the outbreak of the Great War.l It marksin a definite and drastic fashion the end of a phase of riotous living and unsound banking, a phase made possible by the great productiveness of British factories during the cenbury and induced by those conditions of Australian development which seemed to offer a tempting field for the investment of surplus capital.? The social and economic effects of the disaster reacted upon every phase of Australian life and industry ; and, while the results upon welfare and development were most serious, it brought a very valuable and steadying influence to Australian affairs. More especially is this true for Victoria, the colony around which the greatest fury of the financial storm raged; but, although the following pages are devoted almost wholly to the course of events in the Victorian theatre, the economic life of every Australian community was similarly affected. So outstandingly is this the classic instance of business crisis for Australia that a sketch of the final stages of the collapse cannot be omitted. * For a good summary of the causes of the crisis see Turner, p. 292. } Paper by Nathaniel Cork, Council of Inst. of Bankers, 1893. THE COURSE OF THE CRISIS OF 1893 63 The first warnings that the tide was near the turn were plainly evident in the exchange difficulties of the banks. Embarrassment in the matter of securing sufficient deposits to keep the flood moving had, in fact, made the lot of the banker a continuous nightmare ; and the lull half-way through 1888 was the first sign that the crest had passed. The land companies, too, had to face growing demands on their deposits, and their reserves were so inadequate that they had no option but to seek the help of the banks. This assistance the banks could not deny their foster-children ; but the companies were belatedly warned concerning ‘the reckless methods that bad led them to such an impasse’. By the end of the September quarter the banking structure was showing those surface cracks which were to develop later into great fissures and bring down the whole fabric in ruins. For some time deposits had been almost stationary ; and, although the increase in advances for the twelve months amounted to nine millions, it was mostly to be accounted for by overdrafts to speculators upon the security of land purchased. The banks now commenced to play for safety. Credits were contracted in every direction, and the volume of land sales immediately declined. The first effect of this policy was a startling fall in the shares of the land companies, followed by a frantic search for funds to bolster the tottering structure. The collapse of the land boom definitely began at the moment that the banks started to discriminate between mercantile bills and the paper backed by land and finance companies. Notwithstanding this reversal of bank policy the companies were enabled to hold out for some time longer by the aid of the large sums still being obtained in England as deposits, and from the sale of shares. The rapid decline in speculation that followed immediately is sufficient indication that the financial community understood the precarious nature of the situation. Owing mainly to overdrafts secured on pastoral or city estate the bankers were saddled with the huge total of £113,000,000! in advances. While the companies, on the one hand, were clawing for foothold on the brink of the precipice, the sheep-farmers, on the other, were overburdened with properties acquired at inflated prices. ! Summary of Australian Finance Statistics, Bulletin No. 13. 64 THE COURSE OF THE CRISIS OF 1893 Upon these estates they had borrowed heavily for development, only to be struck by continued drought and low prices for wool. The more cautious institutions, both banks and companies, began furtively to set their houses in order, the banks by strengthening their local position and reducing commitments abroad, the sounder companies by closing down on speculative snterprise.l But events were moving to the inevitable end, and no efforts on the part of either banks or companies could now avert the disaster they had invoked. In December 1889, one of the new building societies—the Premier Permanent—demonstrated its lack of permanence by suspending, and well over half a million was lost to depositors. As this was one of the most imposing institutions of the time, with large offices and a string of prominent men as directors, the blow to public confidence coming at such a moment was almost shattering; and the effect on London opinion was disastrous. Quite apart from this added embarrassment the position of the banks, owing to the inactivity of trade and to the demands of the government for accommodation, was difficult in the extreme. Notwithstanding the difficult circumstances the government had prepared a fresh series of surprises for the jaded financiers. This was connected with an extensive railway programme which provided for the construction of over 700 miles of line at an estimated cost of over eight millions. This programme, moreover, was merely a supplement to the construction, already approved, of fifty-four country and seven suburban lines at a cost of six millions. The total commitments under this heading, therefore, were in the neighbourhood of fifteen millions; and never in the history of the country was a programme of expansion so badly timed. The suspension of building and the maritime strike of August 18902 led to extensive unemployment; and the rapid absorption of industrial savings added further to banking difficulties. Then, in October, the government budget disclosed a deficit which was creeping towards a round million. The railways already constructed were failing to pay interest and runningt The first serious strictures passed on the boom in Australia were contained in the Insurance and Banking Record, 16 Apr. 1889. ¢ For the serious effect of the maritime strike on the financial position see Coghlan, p. 1667. The banks’ chief clients, the pastoralists, could not get the sheep shorn, nor, where shearing was completed, could they get the wool to market. THE COURSE OF THE CRISIS OF 1893 65 expenses; and the depreciation in government stocks was another cause of concern. An ominous state of tension developed in London ; and money, even at 6 per cent., was now difficult to obtain. Many large colonial concerns, especially building and other contractors, were in desperate trouble ; and all the factors of stormy conditions were assembled in force. Tn November the thunderbolt fell, and from an unexpected quarter. The concussion was felt all over the English-speaking world ; and, because of the staggering blow to Australian credit which was the immediate sequel, some statement of the origin and effects of the shock is here necessary. The main cause of the crisis in London was the injudicious lending of vast amounts of British capital, especially to borrowers in the Argentine. The great financial house of Baring Brothers had placed more than a hundred millions sterling within seven years. The collapse of Argentine securities in the middle of 1890, and the subsequent attempt to bolster these, had pushed this firm into difficulties; and in November 1890 the authorities of the Bank of England discovered that the Barings were on the very edge of bankruptcy with liabilities of over £20,000,000.1 Prompt action saved an enormous disaster. The Bank of England borrowed £3,000,000 in gold from the Bank of France, realized one and a half millions on Russian securities, and exercised its enormous influence to induce all the great banks to become guarantors for the threatened institution. There was no suspension and no great dislocation of business. In fact, the country knew nothing about the crisis until the danger was well over. But the incident had a calamitous effect upon the Australian situation. In the first place the distrust that followed the disclosure of the danger that had loomed and passed, as it were in a night, affected all foreign securities; but it affected more especially those of countries in a similar stage of development to that of the Argentine. The finger of suspicion, most naturally, swung towards Australia. Financial papers in London called attention, almost hysterically, to the heavy Australian indebtedness : and the nervous state of the market was reflected 1 Australian comments on the Baring crisis are to be found in the Insurance and Banking Record, 17 Mar. 1891, 17 Dec. 1890, 17 Jan. 1891; and in the Bankers’ Magazine, Dec. 1890, May 1891, and Oct. 1891. 8710 wr 66 THE COURSE OF THE CRISIS OF 1893 almost at once in the poor support given to Australian government loans. The ‘considerable creditor’ had concluded ‘that the present earning capacity of the debtor no longer warranted the capital upon which his collateral was appraised’, and the liquidation was not long in beginning. The Baring episode calls for some further application to Australian conditions. The ‘banking hierarchy’, as Powell calls them, had, by carrying out an agreed course of action in England, saved a great house from collapse and had given a demonstration of the virtues of unified financial control such as the world had never seen.2 But its value was not appreciated by Australian bankers. The wonderful lesson, that, under the threat of a great financial collapse, the banks must act together instantly and with concentrated energy was not assimilated. The failure of the banks to support one another and the mercantile community, until half Australia had been plunged in nancial ruin, is paralleled by the inability of the government »f the colony chiefly concerned to rise to the emergency. The criticism voiced in England with reference to Australian finance met with immediate response in Victoria. On all sides the cry for a full and immediate examination of financial affairs was raised. In anticipation of such a development institutions of all kinds undertook feverish preparations to stave off disaster. But both government and private credit were now thoroughly andermined, the public finances were in a hopeless condition, and the exchange position was so full of menace that large shipments of gold to Britain became necessary, thus proportionately weakening the domestic situation. With the stream of British deposits already dry and every Australian depositor anxious to withdraw, the position of the land and building companies was thoroughly desperate. After the middle of the year a procession of failures, affecting twenty companies with 13} millions of liabilities, took place. Business of all kinds was soon in the depths of depression3 Building ! The bank clearances indicate the inflated nature of business and the lack of restraint even yet in bank advances. These totalled £310,000,000 for the year. [£ normal clearances are taken at £200,000,000 a fairly correct idea of the extent of the inflation will be obtained. ? Powell, Evolution of the Money Market, p. 639. 3 Bank clearances were £129,000,000 for the first six months, a decline of £35,000,000 on the corresponding period for 1890. THE COURSE OF THE CRISIS OF 1893 67 was at an absolute standstill, land was unsaleable, purchasers were forfeiting their blocks on all sides, and in every street stood dozens of empty houses. Then the situation took a new and more serious turn. In one month the failure of the Bank of Van Diemen’s Land had caused the suspension of the British Bank of Australia, and that involved the failure of an allied land-bank, the Anglo-Australian. The failures and their consequences did not have any great effect upon Australian investment ; but the effect upon the London market was a very different story. The Economist of September 1891 had scourged in no measured terms the land-banks of Victoria; and had warned the public against ‘those cancerous growths on the otherwise sound business of Victoria’. The revelations of the Anglo-Australian Bank inquiry provided food for this flame of criticism, and promoted such an immediate demand for withdrawals that another batch of similar institutions was also forced to suspend.? No help could be looked for from London. Trade there was declining, crops were poor and prices low and uncertain. In the words of Wesley Mitchell, 1892 was ‘a year of undigested securities’. A vast mass of stocks and bonds, which European investors had bought from promoters and had underwritten at home and abroad, weighed heavily on the market for long U After an appeal to the other banks, and a fruitless endeavour by the govern ment to preserve its solvency, the Bank of Van Diemen’s Land failed, with losses squal to the whole of the capital and reserves, in October 1891. Coghlan comments, Public works were stopped, there was a lack of confidence everywhere, government finance was hopeless, and absolute gloom prevailed with trade at its lowest ebb.’ Labour and Industry, p. 1829. * In the criminal inquiry which followed the Anglo-Australian Bank failure it was revealed that the share capital of £110,000 was represented by a sum of £37 10s., the remainder being an overdraft on the British Bank of Australasia. * For the world situation see paper by Carl Pinschof (1892), Our Financial Organization and the Present Crisis, before the Bankers’ Institute. ‘In other parts of the world we have witnessed the collapse of a reckless gold-mining bubble in South Africa, while in Asia the coffee and sugar plantations have suffered severe losses causing widespread ruin in Java, Ceylon, and also in Mauritius. The depreciation of the rupee threatened India with a monetary crisis of a most dangerous character. France suffered through the phylloxera to an extent estimated at £540 millions. In addition to this the Panama Canal Co. failed with £64,000,000 of liabilities, and the copper ring collapsed and took with it the Société de Métaux and the Comptoir d’Escompte de Paris, which was followed by the liquidation of one of the oldest financial houses in France, the Société des Dépots et des Comptes Courants. There were also serious financial complications in Italy, Spain, and Greece, the insolvency of Portugal and the Famine in Russia.’ 68 THE COURSE OF THE CRISIS OF 1893 after the Baring crisis. During the dull years that followed, European investors became as timid as they had previously been bold ; and sought security above all things. Yet, even now, a thin stream of British deposits amounting to about three millions for the year was trickling into Victoria. Early in 1892 the ‘peak’ of British investment for the period under review was reached. At this time nearly 40 millions had been obtained in Great Britain, while deposits obtained in Australia totalled 99% millions. It is important to notice the very great variation in overseas liability in the different institutions, and the following table is of more than passing interest in the light of the subsequent history of the banks specified. The important fact should here be noted that the greater part of the British deposits were for such short terms that effective utilization of them was almost an impossibility. TasiE VII Percentage of total deposits obtained in Britain For eleven banks operating in Australia. Per cent. Queensland National London Chartered . Commercial of Australis Australian Joint Stock New Zealand . ’ Union of Australia . Bank of Australasia National of Australasia ES. &A . New South Wales . “ommercial of Sydney 51-8 50-0 47-0 37:0 32-0 28-5 20-0 18-0 16-0 Ri 4.94 These figures have a very material bearing upon the events of the next few months, and confirm the impression that, while the British investor had first called attention to the financial position and had thereby generated the fatal suspicion that all was far from well, it was the importunity of the Australian depositor which hurried the crisis on to collapse. The early months of 1892 were marked by a continuous succession of failures in which both the land-banks and mercantile firms figured. The failure of the Mercantile Land and Finance Company in March of that year, with nearly two millions of liabilities, marks a definite stage in the crisis. This concern THE COURSE OF THE CRISIS OF 1893 69 was managed by a board of directors who were closely connected with some of the banks; and the mismanagement and fraud which were revealed created a most unfortunate atmosphere. The directors of the more stable banks declared that these failures were inevitable ; and that normal business could not be resumed until these pseudo-banks had paid the penalty. For this reason, and for others more urgent which were not made public, the banks refused accommodation tothe smaller financial companies; and left them to shoulder their own burdens, a perfectly justifiable course had the banks themselves been less responsible for the predicament of their clients. This policy, however, did nothing towards restoring confidence; and the withdrawal of deposits went on at a rate that very quickly assumed a quality of menace for the banks themselves. Having in mind the action of the English banks in the Baring trouble, the associated banks now conferred with a view to affording mutual support; and the decision that this was possible and advisable, upon ‘satisfactory (but undefined) conditions’, was equivalent to a resolution to do nothing since the whole financial body was one vast unsatisfactory condition. The conference at least had the effect of restoring some measure of confidence to the mind of the community, and a temporary pause gave the banks a breathing-space that was badly needed. The period of deepest gloom occurred in the middle of the year. Depression and the widespread loss of confidence strangled all enterprise, unemployment brought distress to almost every working-class home, purchasing-power and trade declined enormously, and stocks of every kind were almost valueless. The older and more carefully conducted banks now commenced to close their doors. It was impossible to realize assets or to defer withdrawals in the midst of such depression.’ Disbrust, distress, and almost despair marked the close of 1892, during which year nearly a hundred concerns had gone into liquidation with aggregate liabilities of over £15,000,000. The ! G. M. Low gives the following figures for Australian banks at the time of suspension—total for 12 banks: Paid-up capital, Reserves, and Undivided Profits . £13,442,767 Callable capital £11,230,726 Liabilities ’ . £89,872,445 Assets ” £103,315,212 70 THE COURSE OF THE CRISIS OF 1893 value of the declaration concerning the advantage to be gained from mutual support was now tested. The failure of the Federal Building Society had seriously endangered the stability of the parent Federal Bank, and an appeal for assistance was made to the ‘associated’ banks. As this appeal coincided with a Further spasm of withdrawals and at a time, moreover, when the clash between British and Australian interests was at its most bitter phase, the banks could not do otherwise than refuse to shoulder the liabilities of a bank which was conspicuously under the ban of popular disapproval for its connexion with the defaulting building society. The Federal, therefore, was forced bo suspend at the end of January, 1893. This susperision marks a further phase in the crisis. As far as the older banks were concerned their position was now most precarious. Security had depreciated everywhere. Advances had been made on a capital value that was established on returns which there never had been the remotest hope of realizing. A continuous run on all the banks now set in. In a belated attempt to secure some measure of concerted action the Premier now conferred with the bankers; but their nerveless condition and mutual suspicion made the attempt quite futile. The motive underlying this move on the part of the government, and well understood by the associated banks, was the desire to save the most important bank of the colony, the Commercial of Australia which, as a counsel of desperation, had made an appeal for help to the government. Following the refusal of the associated banks to lend their aid the Commercial suspended in April. The credit of every bank in Australia was shaken by this crash ;! and, if the blow staggered Victorian finanaial interests, it incensed to the point of frenzy those in London. The Commercial Bank of Australia reconstruction scheme was so successful that the conviction grew among the other banks that they must seek salvation along the same road. An 1 See Commonwealth Parliamentary Paper, Banks Trading in the Commonwealth, 1885-191 1, for the effect of the collapse upon the rate of dividends paid by the 1885 1886 1887 (888 {889 Per cent. 13-71 13-51 12-91 12-11 12:02 1890 1891 1892 1893 1900 Per cent. 12-37 12-75 12:09 7-20 4:05 THE COURSE OF THE CRISIS OF 1893 71 epidemic of reconstruction followed ; and within thirty days the E.S. & A., Australian Joint Stock, and London Chartered had closed their doors, with liabilities totalling 30 millions; and it seemed little short of a certainty that the National of Australasia with 13 millions of liabilities would supply the dramatic climax. At this juncture the government declared a moratorium which the banks, despite their lack of a common policy, totally disregarded. The worst was now over, and calmer conditions soon returned, although the National along with six other banks went through the mill of reconstruction! The devastation wrought may be judged from the fact that, of thirty-two institutions which traded as banks in Australia in 1890, only ten survived. Of the purely Victorian banks only one—the Royal—weathered the storm ; while of the English banks two only—the Australasia and the Union—avoided suspension and reconstruction. The total losses are estimated by Coghlan to have been not less than 114 millions through reconstructions alone ; but this estimate is very far from covering the total casualties, since many private companies of sound reputation and long standing came to grief.2 This tremendous financial convulsion was finally stayed by a measure that could have been employed from the first if the government had shown intelligence and leadership instead of weakness and vacillation. The Bank Issue Act of 1893 made bank-notes a first charge on the assets of the banks, and authorized the Governor in Council to proclaim them as legal tender. This declaration acted magically. The banks met all demands by the issue of notes; and, although a phenomenal amount of bank paper was in circulation for some time, the panic soon died away. * The reconstruction schemes are probably unique in the history of banking. The restraint from criticism, and the evident desire on the part of bankers and depositors to make the best of a situation for which they were jointly responsible, helped a speedy readjustment. The average time taken for reconstruction was two months, although the two English banks took four. In the light of the action of the depositors themselves Coghlan’s assertion that their rights were totally disregarded is neither fair nor true. 3 Note the comment made by Powell, Evolution of the Money Market, p. 640: ‘There was also a reversal of the policy in pursuance of which the Australian banks gathered deposits in the United Kingdom for use in Australia. Since then the financial relations of London and Australia have been wholly reversed. The (Australian) Banks keep large balances in London with a resulting accentuation of their dependence on the central store of gold, and of their susceptibility to be influenced by the opinion of the financial hierarchy which protects and administers it.’ CHAPTER VII IMPORTATION OF CAPITAL INTO AUSTRALIA PRIOR TO 1893 ‘A period of prosperity is ushered in by a rise in prices caused, for example, by an increased supply of gold or by heavy government purchases. . . . The important factor in determining the character of a period isthe discrepancy between current capitaliza~ tion and anticipated earning capacity.’—VEBLEN, Theory of Business Enterprise. ‘There never yet has been an occasion when a marked increase of prosperity, clearly traceable to the influence of British money, has not been treated as a national expansion, the consequences often being of a most deplorable character.’ —Epwarp PuLsForD, Notes on Capital and Finance in Australia, 1892. ‘In order that capital borrowings should enter in the form of goods instead of in the form of money there was necessary a change in the quantitative relationship of commodity imports to exports such that there would be an excess of imports over exports to absorb the surplus foreign credits created by the borrowings abroad.’ —VINER, Canada’s Balance of International Indebtedness. THE descriptive treatment of the events leading up to the crisis of 1893 which was given in the last chapter has, admittedly, little reference to the verification of the theory of international trade by Australian instances. It was, however, necessary to complete the picture of the decade; and to indicate the extremely serious nature of that dislocation of the economic life of the community. The next stage of analysis concerns the statistical data connected with the import of capital into Australia; the extent of British investment in the colonies, especially through private channels; and the relation between the increase in indebtedness, the growth of population and resources, and the general level of prosperity. There is a distinct limit to the rate at which any community can assimilate capital. The mere absorption of capital does not mean assimilation in the economic sense of the effective employment of that capital. It is merely truism to reiterate that capital arrives mainly in the form of goods; and that, in the extreme instance, these goods may be consumed without any addition to the reproductive capacity of the community. Or, to take a less extreme case, the commodities imported may consist entirely of capital goods, so rapidly introduced or so wrongly ' Mulhall, Dictionary of Statistics, gives the following progressive figures for foreign issues in London: 1862, £144 m.; 1872, £600 m.; 1882, £875 m.; 1888, £1,698 m. IMPORTATION OF CAPITAL INTO AUSTRALIA 73 employed that the increased productiveness of the community does not counterbalance the additional burden of interest consequent upon the importation. The distinction between the effective use of new capital and its mere expenditure on luxury is an exceedingly difficult one to draw; and any conclusion may be profoundly modified by 8 change in economic conditions which could not be foreseen at the time of borrowing. Fluctuations in price-level, credit constriction due to nervousness among investors, that psychological vacillation between optimism and pessimism which is utterly unpredictable, destruction of capital through war or waste, rising labour costs, diminished managerial efficiency in industry and other factors which need not be specified, may so affect the situation as to change economic advantage to serious disadvantage, even though the original estimate of efficiency was sound in the circumstances under which it was made. Most of the ‘new’ countries are turning to the economist with a demand for a criterion by which the economic consequences of capital investment in the mass can be measured ; and it has to be confessed that the reply must, in the nature of the case and for the reasons just stated, fail to give complete satisfaction. But, even though the economist is not prepared to mark a clear line beyond which borrowing becomes dangerous, the results of the uneconomic use of new capital in relatively large masses is so plainly to be read that any access of caution induced in borrower or lender as a result of his researches is a decided gain. Edward Pulsford complained in 1892 that the intimate connexion between times of exuberant prosperity and large capital importations had never been studied.! ‘The public’, he affirmed, ‘do not fully realize that it is an absolute impossibility to borrow in excess without bringing about a time of suffering more or less severe.” While we may plead some greater measure of public enlightenment in these days, the position is, in all essentials, unchanged. In vain will the voice of the academic prophet be raised in the financial wilderness while the volume of public indebtedness is determined by the sanguine expectations of politicians rather than by the prospects for the effective use of capital. The detection of capital movements in the mature communities 1 Notes on Capital and Finance in Australia, 1892, 3710 74 IMPORTATION OF CAPITAL INTO of Europe is an exceedingly difficult matter. The complexities of long-established business, and the continuous movement of securities to and fro across frontiers make anything more than approximate estimates of the net migration of capital almost an impossibility. While these difficulties do not exist to the same degree in Australia because of the simplified economic structure and geographical isolation that were discussed earlier, the methods and distribution of capital importation are not easy to trace. Especially is this true for that portion, ‘the speculative stream’, which is invested privately. [t reaches the country through so many carefully concealed channels, and from so many sources, and it assumes such diverse forms, that nothing more accurate than approximation can be attempted. A very complete and concise instance of the effects of borrowing upon an isolated community is afforded by the statistics of New Zealand trade after 1872, and a brief survey of these will serve as an effective preliminary to the examination of the Australian figures. An increased flow of British capital began in 1872; and, for the next nine years, the average of borrowings was maintained at about £4,000 per annum for every thousand of population. After 1882 the stream of loans rapidly diminished ; and, by the close of 1886, it was completely dry. A situation then arose in which not only was Britain declining to lend new capital but was not even re-lending sufficient of the old capital to balance New Zealand’s interest payments. In the decade immediately following 1886 the community was faced with the alternatives of insolvency, or of paying unaided the whole of the interest bill. The contrast between the early years when sapital was flowing in freely at the rate of £4 per head per annum, and the later years when £5 per head was being raised with sxtreme difficulty to cover the payment of interest on the overseas debt, is the key to the history of the colony over those two decades. The extraordinary prosperity of the early period when population was increasing at the rate of 10 per cent. per annum, when industries were prosperous and labour and enterprise handsomely paid, has to be set against the depression of the later years, when population was emigrating at such a rate that natural increase barely balanced the exodus, and when the standard of living had fallen in a startling manner. ‘Secarcely AUSTRALIA PRIOR TO 1893 75 an industry, a bank, a company, or business of any kind, scarcely even a private individual who was not subjected to severe strain and painful loss.” * [t constituted a difficult situation that called for both economy and exertion. Resolute national economy, and efficient management of the country’s resources, slowly and painfully made up the leeway. Even during a period of falling prices for primary products commodities to the value of nearly three millions sterling in excess of the annual average for the four previous years were exported. Thus, by the time that Australia was entering the Slough of Despond more or less precipitately, New Zealand had triumphantly re-established herself, Tare VIII New Zealand : Population, Trade, Borrowing, and Banking, 1872-91 Year 1872 1873 1874 1875 1876 1877 1878 L879 L880 1881 1882 1883 1884 1885 1886 1887 1888 1889 1890 1891 Popula~ tion. Millions. 0-280 0-296 0-342 0-376 0-399 0-418 0-433 0-464 0-485 0-500 0516 0-538 0-559 0-576 0-589 0-602 0-605 0-617 0-626 0-634 Imports. £m. 5-14 5-47 8-12 | 3-03 390 | 397 3.76 3.38 316 7.46 3.61 1.97 7.66 7-48 576 5-25 5-94 3-30 3-30 8-50 Exports. £m. 5-19 5-61 5-25 5-83 5-67 3-33 5-02 5-74 5-36 3-06 5-66 7.10 7.09 3-82 5-67 5-87 7-77 3-34 3-82 2-57 Per cent. Exports over Imports. 109 87 64 72 82 90 69 88 102 81 7 R9 92 91 98 109 131 148 156 Public debt. £m. 10-0 10-9 134 174 187 20-7 22-6 24-0 28:6 29-7 30-2 31-4 32:9 35-8 37-6 38-2 38-3 38-6 38-8 29.8 Reserves of banks. £m. 3 1-8 1.6 ‘6 6 9 9 9 2-2 2-0 9 RY 2-0 21 72 23 2.3 2 2.5 "YT Percent. Deposits |Reserves of banks. over De-£m. 208il8. 3-8 4-7 56 6-0 6-2 72 £.9 R-0 R5 9-1 9-0 8-7 9-6 10-1 10-6 11-0 11-2 11-5 12-4 12-6 34-5 33-6 28-4 27-4 26-0 25-8 21-0 23-9 25-4 22-7 21-3 21-6 21-0 20-8 20-5 21-3 207 19-2 20-4 19-0 In their bearing upon our main purpose, there are certain features presented by this conspectus to which attention may be usefully directed at this point. If capital loans do enter the 1 Pulsford, ibid... 9. 76 IMPORTATION OF CAPITAL INTO borrowing country mainly as commodity imports, we should expect some correlation to be observable between the ratio of sxports to imports and the new capital introduced. Unfortunately it has not been possible to estimate with sufficient accuracy the amount of private capital arriving each year; . PER. CENT). E870 ON IPO; 140 ver “ndNS E101 0 100 CENTAGE EXPORTS 70 IMPORTS] 3 ANE 14770 PER CENT 34 30 "0 RESERVES TO DEPOSITS pi —— i Eom — ao 25 2} 1890 Fie. IV. NEW ZEALAND. BORROWINGS, BALANCE OF TRADE AND BANK RESERVES, 1872-91 Smoothed 5-year moving-average curves shown heavy but, accepting the public borrowings alone as an index, the correlation to be noted between the moving-average curves in the graph is well-nigh perfect. Interpolating a lag for a year in the arrival of imports due to loans, the annual plottings move consistently in opposite directions, i.e. exports increase as new capital declines, and vice versa. Again, if the capital borrowings do serve as a basis of credit expansion, the demand for accommodation should show itself, if any degree of inflation exists, AUSTRALIA PRIOR TO 1893 77 in the ratio between reserves and deposits of the banks. The decline from 34 to 19 per cent. over the whole period, a shrinkage of 45 per cent. in the margin of safety, is too significant to be misunderstood ; and the drain of gold for export to restore the equilibrium of the exchange retarded the recovery towards the end. The connexion between borrowings and bank credit, and, hence, the decline in prosperity, may be regarded as conclusively demonstrated. To revert to the main topic again, it now becomes necessary to examine a little more closely the extent of Great Britain’s financial interest in Australia as represented by public and Private securities.! In 1887 the Economist published an estimate of Australia’s indebtedness to Britain at that date, and of the increase in the debt since 1883. This covers almost exactly the period of greatest loan activity, and the statistics covering both public and private debt are shown in concise form in the following table. Tae IX British Investments in Australia {In Millions Sterling) Victoria . . New South Wales South Australia . Queensland “ Tasmania . ” Western Aunstralia ToTAL . 1883. | 1887. £ £ 50 87 48 kd 22 30 23 36 6-3 & 1:5 : 160-8 29°. INOREASE. Total. Per cent. £ 17 29 R 34 60-4 36 56 60 [0 47-6 It will be seen that, during the five years, the burden of indebtedness had increased by approximately 50 per cent.; and it is also of interest to note that, during this period in which Britain ! Hobson, Export of Capital, p. 42. ‘About 1874 a series of defaults in foreign countries made intra-imperial investments appear much more attractive. About that time & number of American railroads defaulted’ (for about £40 millions). ‘This, and the fact that the prevailing price of wool made the future of the pastoral industry seem full of promise, turned the flow of capital in this direction.’ — Harris, op. cit., p. 6. 78 IMPORTATION OF CAPITAL INTO invested £71 millions in Australia, the total of British investments in all the other colonies amounted to only £52 millions, an indication of the extent to which the British investor was obsessed by Australian investments. In the following five years the public debt of Australia increased enormously. The new borrowings amounted to £33 millions of which £12 millions went to Victoria, £10 millions to New South Wales, and £11 millions to the four other colonies. During the period a further £8 millions was also borrowed for redemption purposes. In addition municipal borrowing was carried out on a grand scale, chiefly on debentures of various kinds; and, as we have seen, the financial institutions received enormous sums on deposit. Assuming a rate of increase equal to only two-thirds of that in the period examined by the Economist, a very conservative estimate indeed, a total of new debt amounting to £80 millions is obtained for the following five years, of which £33 millions is accounted for by public borrowing. By 1892, therefore, the amount of British investments reached at least £300 millions, and this total does not include a very large amount of privately invested capital for which no financial record exists. Coghlan estimates that these unrecorded investments could not amount to less than £40 millions ; and we are thus on safe ground in estimating that the total public and private debt of the Australian colonies reached, at the very least, £350 millions by the beginning of 1893.1 In 1892 an attempt was made by Pulsford to trace the movement of British capital into Australia for the preceding fifteen years by means of the balance of trade. This affords a very rough and inaccurate test; but, by balancing exports against imports, he arrives at the estimate of £92 millions for the period. In the face of the difficulties involved in reconstructing the whole balance of indebtedness for the period this estimate must suffice as a basis for examination. Having regard to the development sketched in the last chapter, it is important to estimate the distribution of this new L Mulhall, Dictionary of Statistics, gives the average interest rates for the successive decades upon British capital investments as follows: 1851-60, 4-17 %; 1861-70, 4-24 9; 1871-80, 3-28 %; 1881-5, 8:3 %. In 1890 Coghlan estimated the annual payments made overseas for interest, calculated at an average rate of 4 per cent., would indicate a capital of more than £130 millions. AUSTRALIA PRIOR TO 1893 79 capital among the three eastern states. Considerable amounts of Victorian capital, for example, had been invested in the Riverina. the sugar industry of Queensland. and the mines at tm 50 ee — = re yy 40 30 “MPORTS 28 ~ 1000 Fig. V. IMPORTS AND EXPORTS, 1887-1900 Broken Hill. Some part of the capital arriving in Victoria, therefore, represents the dividends upon these investments ; and allowance for this factor has to be made. Incorporating the adjustments under this head, the details of which need not be given, the statement of capital imported would stand thus. TABLE X New Capital Imported, 1877-91 Period. 1877-81 . 1882-86 . 1887-91 . Toran . VICTORIA. Per head. NEW SOUTH WALES, QUEENSLAND. Total Total Per head. Total | Per head. £m. 1-59 12-519 37-615 £ 1-8 13-2 24-2 £m. 5-349 23-466 4-332 £ 7-6 26-9 3.08 £m. 1-011 10-297 ‘4-760 x 4-75 34-65 14.497 51794 | 456 | 83.147 | 208 | 6548 16-7 ¥ Exported. 30 IMPORTATION OF CAPITAL INTO The unusual character of these statistics calls for some further comment. In the case of Victoria we have a progressive increase from £1:59 millions to £51:724 millions. Until 1891 no serious check to borrowing had occurred, and we are able to see up to this point the uninterrupted play of British investment. Although the halt was called earlier in New South Wales, the check had not yet become at all pronounced. In Queensland, on the other hand, the more varied nature of production in that colony enabled, under heavy pressure it is true, not merely a cessation of borrowing but also repayment of principal to the extent of nearly five millions in one year alone. Even more remarkable in its bearing upon the differences in the weight of the debt between different states is the rate of the per capita increase, the variations during the successive phases of the period, and the differences as among the various colonies. In Victoria the rate of borrowing had grown from nearly £2 per head in the first phase to nearly £38 in the last, in New South Wales it increased from £7 5s. per head to nearly £26 and then dropped back to less than £4, in Queensland it rose from £4-75 per head to £34-65 and then changed abruptly to a repayment of nearly £14-5 per head, or a difference in the ‘living fund’ representing nearly £250 for every family of five in the colony! But the mere volume of capital introduced, or even the rate of new debt per head, constitutes no adequate criterion by which to judge the economic advantage of such importation. The real test must lie in a comparison of new capital with the growth of population, on the one hand, and with the increase in productivity on the other. Comparing the capital imports with the population in each of the eastern colonies the following analysis is obtained. Tare XI New Capital and Increase of Population Period. 1877-81 . | 1882-86 . . 1887-91 VICTORIA. NEW SOUTH WALES. QUEENSLAND. New cap. per 1,000. Pop. inc. per cent. New cap. ' Pop. inc. ner 1.000. per cent. New cap. ner 1,000. Pop. inc. per cent. L 1,883 13,220 24.165 FS x 93 n523 | 27 4,745 14 25,958 | 27% 34,657 153 3.982 173 le12.497 19 51 10 + Net loss. AUSTRALIA PRIOR TO 1893 81 These figures go far towards an explanation of the fluctuations of prosperity in Australia over the period from 1880 to 1890. The remarkable differences in the welfare of each of the colonies which were sketched in the last chapter are here presented in condensed form. If, during the period, a remarkable expansion of population had taken place in all the colonies, it would be reasonable to assume that the capital imported had actually been used in development and bad resulted in increased productivity. But, far from this being the case, we find little to justify the tremendous outlay of capital which occurred. The highest rate of increase over the whole time was 3 per cent. per annum for Victoria, 51 per cent. for New South Wales, and 10 per cent. for Queensland ; and in the state where borrowing was most vigorous, the increase of population was least marked. Even the comparison of relative growth of indebtedness and Population is scarcely satisfying as an index. The real question of how far the growth of population has kept pace with indebtedness concerns rather the increase by net immigration, since in a country of such high standards of living and small population the natural increase alone could not support the growing debt. Concentrating attention on the increase by immigration the following position is revealed. Observing the division of the years between 1877 and 1892 into 5-year periods as shown in the last table, the population of Victoria increased at the rate of 1:75, 1-5, and 1-4 per cent., that of New South Wales at the rate of 2-8, 2-9, and 1-1, and that of Queensland at the rate of 5-9, 7-5, and 1-7 per cent. in the respective periods. A steady increase is thus apparent; but the average immigration per year, which is not revealed by this table, fluctuates in a curious fashion. In Victoria the increase by immigration for individual years ranged, in round numbers, from 540 for 1877 to 26,000 for 1888; in New South Wales from 27,000 in 1883 to 6,600 in 1888; in Queensland from 2,680 in 1879 to 37,000 in 1883. The figures of the table, if corrected for migration between the different states, would need some modification, but the broad result would not be greatly affected. The general conclusion to be derived is that, for a period when emigration from Europe was at its highest, and when the stream of capital imports was at its fullest for Australia, the volume of immigration is surprisingly small; and this constitutes in itself an indication that develop-2710 I B2 IMPORTATION OF CAPITAL INTO ment was not proceeding on sound lines, either from the point of view of the capital investor or from that of the people sharing the interest burden. If we except the years of the goldrush, immigration reached its highest peak in 1883 when the capital imports were just beginning; and the lowest record is shown for 1888—the annus mirabilis in Victoria—when less than 18,000 immigrants came to Australia. Again, unemployment was lightest during the very years that immigration was heaviest, and vice versa. When it is realized that the population increased by only half a million during a period when indebtedness rose by morethan £100 millions, we have to seek very littlefurther for the >xplanation of the essential unsoundness of the whole position. But even growth of population, whether by immigration or by natural increase, must be deemed less adequate as a measure for borrowing capacity than is productiveness. The expansion of all the industries of the continent was the one condition at that time which could justify the absorption of capital; and svery analysis of the situation, from distribution of the people as between town and country to progress of primary industry, tails to indicate a satisfactory advance. In the first place, that concentration of population in the cities which has since become so marked was beginning to appear. The figures given below will afford an idea of the progress of this movement; and, ignoring the social implications, it can scarcely be deemed ‘ndicative of rural expansion.? Whilst, in view of the fact that most of the economic land of the continent had been occupied by 1880, it would be manifestly anfair to expect the maintenance of the rate of settlement or of production set in the period following 1850, the diminished rate of expansion has to be seen in the light of the increasing burden 5f debt. The progress in rural industry is indicated by a review U Tn 1888, when the net increase for all Australia was only 15,000, Victoria showed an increase of 25,760 due to the influx of iramigrants from the other states attracted by the continuance of boom conditions after depression had set in elsewhere. Victoria obtained 10,550 people from New Zealand, 8,480 from South Australia, 1,050 from Western Australia, and 390 from Tasmania in that year. 3 See The Peopling of Australia, chapter by E. T. McPhee on Australian urbanization. URBANIZATION IN AUSTRALIA 1871. 1881. 1891. . 28 32 42 . 26 29 33 12 14 25 Victoria, per cent. in Melbourne . N.S.W., per cent. in Sydney . . Queensland, per cent. in Brisbane , AUSTRALIA PRIOR TO 1893 83 made by Coghlan, and indicates very clearly the slower rate of the second period. Comparing the decades 1871-81 and 1881-91, the acreage under crop in Australia increased by 107 per cent. in the first, but by only 27 per cent. in the second ; flocks and herds grew by 70 per cent. in the first period, but the rate declined to 37 per cent. in the second ; population rose by 43 per cent. in the first decade, but the rate had fallen away to 34 per cent. for the second, despite the fact that capital was being spread ever more thickly on the land. As a justification of expanding debt, however, the real test lies not so much in acres occupied, nor in stock and people supported thereon, as in the increasing value of production. The following table, therefore, reviews the production of the continent from the standpoint of value available for export. The figures are corrected for the movements of interstate trade; and the most remarkable feature is the poor showing made by Victoria during the period of greatest capital importation. TapLe XII Exports from Australian Colonies New South Wales Victoria . . Queensland S. Australia . W. Australia Tasmania ToTALS 1879. £m. 9-97 7-28 3-04 3-81 0-4¢& A ow Dl i 1890. £m. 16-96 7-91 8-41 4-49 0-66 1-40 20.86 | Increase. £ 6-99 0-63 5-37 0-68 0-21 1-22 Per cent. 70 9 176 i8 46 1 55 It must be noted that this is scarcely a fair representation of the volume of production. The fall in prices! of Australian products between 1880 and 1890 meant a loss of £32 millions for the year 1890 alone, since the volume of production had increased by nearly 50 per cent. during the ten years. On the basis of production, therefore, the year 1881 yielded £25 per head, whilst 1890 gave £23 per head during a period when interest indebtedness increased by £2 per head. In other words, I On the fall in prices as it affected Australia’s finances see the paper by David Murray before the Adelaide Chamber of Commerce, 1893, The Appreciation of Gold; and also the Commonwealth Labour Report, No. 1, p. 51. 84 IMPORTATION OF CAPITAL INTO the margin between the value of exports and the liability for interest was becoming narrower through the operation of the price-level even by 1890, since a diminution of prosperity equal to £4 per head of the population had occurred, a decline that was sufficiently serious without the intervention of other factors. Examination of the figures presented with this chapter shows clearly that neither the growth of population nor the expansion of production kept pace with the increase in indebtedness. The amount of the debt and the annual liability for interest are the two aspects still necessary to conclude the survey. Coghlan estimates that, by 1890, the total private payment of interest abroad for New South Wales alone amounted to not less than £2.75 millions, in addition to £1-75 millions on the public debt or £4-5 millions in all.l If £2-75 millions represented the interest on private debt and this was the average rate of interest for the whole of the six colonies, the annual interest bill at this time sxceeded £9 millions. Adding this to the £6 millions payable on the public debtit is clear the total interest payable on both the private and public debt of Australia amounted to, at least, £15 millions. Other estimates made at the time, based on different data, agree so closely with this total that it may be accepted with confidence? Allowing for that proportion of the private debt which was purely speculative in character, the community was faced with an annual interest bill amounting to not less than £15 millions. A very interesting comparison of the prosressive balance available for meeting the overseas debt can now be extracted from Coghlan’s figures. Tasre XIII Progressive Balance available for Interest (In Millions Sterling) 1861. | 1871. | 1881. 1891. Total exports . . . . . Aggregate interest on whole debt ; Balance available . . : y ’ Percentage exports needed for interest Percentage exports available to buy imports 16:6 | 231 | 312 2:0 40 | 8-0 46 | 191 | 232 1° 17 26 88 83 "4 36-3 15-0 21-7 41 89 1 Wealth and Progress of New South Wales, 1892. 2 Reginald Black estimated the total public and and £400 millions. private debt at between £350 AUSTRALIA PRIOR TO 1893 85 The private wealth of Victoria and New South Wales has an important bearing upon the whole subject which should not be overlooked. The importance of this estimate lies in the large proportion of land included in the total of assets, the production from which, through seasonal variations and movements of prices, is subject to very wide fluctuations in value. According to Mulhall’s Dictionary of Statistics the wealth of Australia rose from £300 millions in 1870 to £1,250 in 1888, but ‘the great bulk of this increase was in real estate, and it affords some measure of the enormous inflation that took place as a result of the speculative influx of capital after 1880’. Tare XIV Private Wealth of New South Wales and Victoria, 1890 Land, houses, and improvements Live-stock . ’ . 8 Coin and bullion , . . Merchandise . . Household property Shipping . Mines and plant . All other . ToTAL N.S. Wales. £m. Victoria. £m. Total. £m. Per cent. 303-0 34-6 9-7 17-9 17-95 1-9 18-3 8-0 256-0 21:9 11-1 14-5 20-4 1-4 61 12-5 569-0 56-6 20-8 32-4 38-36 3-3 24-4 21-4 74-0 7-8 2:76 4-0 50 0-4 3-26 31 112-25 | 3439 | 756-15 | 1000 CHAPTER VIII AUSTRALIA'S RELATIVE DISADVANTAGE IN OVERSEAS TRADE AFTER 1890 In popular talk on these matters it is assumed that a creditor country ipso facto has an excess of merchandise imports and a debtor country an excess of exports. The creditor country—so people imply in their everyday tallk—has payments to receive, the debtor country has payments to make: the former is expected to show 2 net credit in its accounts, the latter a net charge or net outgo. Not at all. The state of the merchandise account, the balance of the money values of imports and sxports, may run either way, for either debtor or creditor country. It depends on the stage which credit operations have reached.’ —Prof. F. W. Tavussia, Iniernational Trade. Thus it is usual to speak of countries such as Brazil, Argentina, and (before the war) the United States as “‘debtor countries’ because “they had an adverse balance »f indebtedness”. All this was intended to mean was that such countries have sorrowed large sums on capital account in Europe. . . . How was this “adverse indebtedness” liquidated ? All that happened was that, in addition to exporting enough to pay for current purchases of goods, these countries exported wheat and maize, meat and rubber, in sufficient quantities to meet their instalments of debt interest as these fell due. There was no “adverse balance’ at all in the sense that, taking all the items into account, during each successive period, there was not available sufficient means of payment.’—Prof, T. E. GREGORY. Foreign Exchange Before, During, and After the War. TuE last three chapters have been concerned with the history, description, and statistics of the decade previous to 1893. The entire episode, comprising the collapse and the events which led up to it, has been regarded as a means of verifying the theory of international trade by observing the effects of an experiment in the course of which great quantities of capital were injected into a community small in numbers and isolated in an unusual degree. We have now to trace the causal connexion between capital imports and the commercial crisis, and to investigate the influence of protracted borrowing upon national prosperity. The approach to the investigation is indicated by the foregoing argument; and consists, in the main, of an analysis of the Australian balance of trade. Since, however, so much of the data necessary for adequate analysis has either not been recorded or demands so much assistance for its dissection, we are compelled to adopt the methods devised and applied with conspicuous success by other investigators in similar circumstances. But before entering upon this task a few preliminary observasions having reference to the terms to be used in the discussion OVERSEAS TRADE AFTER 1890 87 must be ventured. One difficulty in any discussion upon international trade lies in the common usage of the words ‘favourable’ and ‘adverse’ in connexion with the balance of trade. To the extent that these words connote a theory of trade which postulates the advantage of a credit balance in international trade we can discern the influence of mercantilist tradition. The commercial application of the doctrine that, in trade as in charity, it is more blessed to give than to receive, had, of course, it greatest significance in the effect of trade upon the movement of gold; and belief in the advantage of a national system of trade organized in such a way that it promotes an influx of gold is still lively. For many reasons, but chiefly because they concentrate attention upon the mere physical volume of incoming and outgoing commodities, such theories of trade must be disregarded. Movements of goods in international trade are merely the outward and visible signs of the operation of factors hidden deeply and often inextricably in the fabric of national finance and industry ; and it is rather upon the operation of the factors causing the movement of goods between countries that we must focus attention. The first approach to ‘the complex problem of world trade by way of the relatively simple problem of the exclusive trade between two countries’ was made by Ricardo; and Marshall took this a stage further by emphasizing the individual transactions of which the fabric of international trade is built, and by stressing the specialized function of the merchant in selecting those goods for international exchange which offer the best chance of profit.! The merchant’s work consisted in establishing an equilibrium in trade by exchanging what the population of a country produced for what they wanted. International trade was thus recognized as pure barter; and, from the merchant’s point of view, all he wants to know is ‘whether the prices for the things which he has to sell, i.e. the country’s exports, are high relatively to the things which he looks to bring back. If they are he does not care so long as there is no appreciable change in relative price-levels between the completion of his sales and the settling of his terms of purchase.’ From this arose the concept of the barter terms of international trade ; although Mill’s Theory of International Demand recognized that the ratio at which 1 Qee Marshall, Money, Credit, and Commerce, Chap. VIL, 88 AUSTRALIA'S RELATIVE DISADVANTAGE IN things exchanged in international trade always adjusts itself bo bring demand to the exact level of supply. It is this fluebuating ratio of exchange that must now be kept in mind. The next advance in the theory of international trade is due bo Taussig, who distinguishes the ratio at which international barter in goods takes place from the relative advantage or disadvantage of the barter to any one country compared with similar previous exchanges.! Just as one bidder at auction will buy better than another, so will a country acquire its purchases In one year more cheaply in terms of its own labour than in another year. Taussig thus distinguishes between the nef barter terms of trade, i.e. the ratio measured by price at which one country exchanges its products for those of another, and the gross barter terms of trade which take into account both the value and advantage of the trade. As labels for the ideas which they are meant to convey the words ‘net’ and ‘gross’ are not ideal ; and, indeed, may even be misleading. In default of better, however, they must continue to serve; but it will be necessary to examine their connotation a little more fully. The net barter terms of trade merely denote the basis on which goodsexchange for goods without regard for any other. consideration whatsoever. The ratio of exchange and that alone is the central fact to be kept in mind. This idea of exchange ratio with reference to the complex of international trade is something of an abstraction; but as a measure of the advantage of barter it is nevertheless very useful in theoretical discussion of the conditions upon which trade will result between two countries, and of the range within which the exchange of goods will be possible. In considering the net barter terms of trade nothing enters into discussion except the monetary conditions governing the sale and purchase of merchandise ; and its application will be clear to all who are familiar with Professor Taussig’s writings on the subject of international trade. Gross barter terms of trade, on the other hand, have reference bo the total Tecorded value of goods exchanged for all reasons, 5.8. in exchange for other goods, as the visible tokens of borrowed capital, as payment for interest on that borrowed capital, for freight, insurance, or other services. The aggregate of these transactions is the aspect which has real significance because ! Taussig, International Trade, pp. 113 ef seq. OVERSEAS TRADE AFTER 1890 89 of its influence upon the business cycle, and because of its implications for national welfare as a result of sudden interruptions in the rhythm of trade. For the purpose of this discussion, some quantitative measure of the relative advantage or disadvantage of trade is indispensable; and the gross barter terms offer a convenient criterion by which the rise and fall of trade advantage can be judged. Where payment for services does not enter into the problem at all, it is clear that there must be some advantage for both parties in the exchange or there would be no trade at all. It is equally true that, where services have been rendered, payment of goods or services in return must be made; and, where the liability for repayment of borrowed capital or for payment of interest has been assumed on one side, some portion of the trade becomes a continuous and compulsory acknowledgement of that liability. It is in this variation between the proportions of the optional and compulsory parts of a country’s trade that the greatest fluctuation in the relative advantage or disadvantage of trade becomes possible. Or, to be more precise in our Australian application, as a result of the interaction of so many factors there is possible a very wide range between more favourable and less favourable terms in overseas trade. It is, therefore, as the non-merchandise factors enter into overseas trade that the necessity for distinguishing between gross and net barter terms arises. That part of overseas trade which is merely an exchange of exports for an equivalent value in imports has then to be distinguished from the excess of exports over imports which represents payments for services or ‘the balance of non-merchandise transactions’, to use Taussig’s phrase. A country such as Australia which has borrowed largely has net payments to make on the invisible account, and must maintain over long periods an excess of exports over imports. But the money value of imports and exports does not serve as an effective measure of the advantage of trade from year to year, since the volume of goods exchanged is not thus brought into the reckoning. It is for the comparison of the whole of a country’s physical imports with the whole of its physical exports that the gross barter terms become peculiarly valuable. Regarding international trade from this angle the only meaning which can be given to such phrases as ‘favourable balance of 3710 h] 90 AUSTRALIA'S RELATIVE DISADVANTAGE IN trade’ or ‘adverse balance of trade’ is seen to depend rather on She ratio at which goods of one country are exchanging for the goods of another, or on the rising and falling advantage incidental to that trade, than upon a ‘balance’ which may be quite as fallacious and deceptive as a government ‘surplus’. Stated in another way, (i) the disadvantage in net terms may be due to changes in the demand or supply of international trade goods by which the people of one country must give more of their own goods in exchange for the goods of the other country than they did previously; or, (ii) the disadvantage in gross terms may be due to an over-indulgence in international credit which amounts to furnishing the national house on the hire-purchase system; a plan which may result eventually in ownership, but which always entails a long struggle to satisfy the demands of the mortgagee, and too frequently leaves insufficient living expenses out of the national income. In the second case the non-merchandise factors in overseas trade become the most potent of the immediate causes which depress living standards, expecially at those times when national production is for any reason suddenly diminished. [t must now be noted that the progress of a borrower follows a certain logical sequence. It will be seen that there are welldefined phases in the economic history of a new country which constitute a definite evolution from youth to maturity, an evolution that is determined by the relation between the amount of fresh capital and the interest payments on the old capital. A country in the early stages of borrowing, i.e. when the amount of fresh capital is greatly in excess of the interest payments, tends to have an excess of imports—an ‘unfavourable’ balance of trade—which may persist over a longer or a shorter period during which the new capital is arriving. If we assume a steady continuance of borrowing, it is clear that a time comes when the new capital arriving is just balanced by the annual payment for interest on the old capital, and at this point axports tend, approximately, to equal imports. This is a stage of great financial instability when the equilibrium of trade is most easily overset, and when the trade crisis is perennially imminent. But, as borrowing still continues, the annual interest bill comes, more or less quickly, to exceed the volume of new capital arriving, the country becomes a mature borrower, OVERSEAS TRADE AFTER 1890 91 and exports tend to exceed imports as a regular condition of trade. As a matter of fact, however, the stages of youth, adolescence, and maturity in national borrowing never exhibit this ideal regularity. ‘On the contrary they usually take place with marked irregularities. And not only are they irregular: they are subject to abrupt stoppages. They frequently entail spasmodic changes in international payments and in the movements of goods.” It is in this irregularity, rather than in the economic effects of borrowing as such, that the chief mischief of the situation lies. To a steady and economically justifiable increase in the national debt most new countries can adapt themselves easily; but intermittent and uncertain supplies of capital may strangle legitimate development, just as easily as a too copious supply may drown it in a flood of credit with the help of the mill-stone of over-capitalization. The life-history of most countries in relation to capital movements may be likened with some effect to that of a river. In the early stages the youthful borrower resembles the stream in its mountain tract—vigorous, plunging, and liable to sudden falls and freshets; but easily capable of carrying off the new accessions to its volume from the tributary streams. In the second stage our borrower enters the valley that lies between youth and maturity, where the stream fluctuates between the riches of winter and the poverty of summer, a phase where great accessions to volume may easily choke the channel, cause disastrous flood, and hold up production. Here, too, are to be found those rapids that impede the even flow of the stream, always to be feared bub always looming in view when least expected. Lastly, our stream meanders over the plain as the broad and placid river, easily able to assimilate the sudden floods which spell such trouble in the higher reaches, but which here merely hold the promise of greater productivity on the plains fertilized by the overflow. This irregularity in the flow of capital and the consequences of intermittent supply in all borrowing countries merits some further consideration. ‘If’, says Taussig, ‘loans on capital account were continued regularly at the same amount year after year, the accumulating interest 1 Taussig, op. cit., p. 129. 92 AUSTRALIA'S RELATIVE DISADVANTAGE IN payments would bring about, at the date when reversal of the relations began to set in, a slow and gradual readjustment, not a sudden overturn. The borrowing country would almost imperceptibly accommodate itself to a new situation, in which specie would seep out, prices gradually fall, merchandise exports rise and imports fall. A “favourable” balance would become in time a settled feature of its international trade. In fact, however, the loans from the creditor sountry, so far from being made at the same rate year by year, oegin with modest amounts, then increase and proceed crescendo. With the advent of a crisis, they are at once cut down sharply, even sease entirely. The interest payments on the old loans thereupon are no longer offset by any new loans, they become instantly a net charge to be met by the borrowing country. A sudden reversal takes place in the debtor country’s international balance sheet; it feels the consequences abruptly, in an immediate need of increased remittances to the creditor country, in a strain on its banks, high rates of discount, falling prices. And this train of events may ensue not once only, but two or three times in succession.’ The underlying causes of 1893, and of every other major crisis in Australian history, have never been more clearly stated. The true facts of the situation are that we have suffered in the past and are suffering in the present not from the effects of the business cycle but from the natural accompaniments of the borrowing cycle. Our progress, like that of Dante, has been through a series of heavens each one more glitteringly radiant than the last; but, to our discomfort, we have discovered that bo each paradise is annexed a peculiar and appropriate purgatory wherein the errors of misapplied capital may be expiated. Returning now to the discussion of Australia’s relative disadvantage in overseas trade after 1890, it will be seen that the terms of trade tend to favour the borrower during the early stages of the international credit cycle; but that continued borrowing swings the balance of advantage more and more towards the lender. Over the whole period of borrowing and repayments, however, the balance of advantage tends to be nicely adjusted in the figures of international indebtedness, and she ultimate gain or loss is not likely to be great on either side. In the long run’, nevertheless, is poor consolation to the community caught in the toils of commercial crisis, and ‘while the grass grows the horse dies’. The consequences to be predicted from a sudden stoppage in OVERSEAS TRADE AFTER 1890 93 borrowing, and from an abrupt disturbance in the rhythm of trade, are to be clearly traced in the period now being reviewed. Up to the year 1880 the overseas trade of Australia exhibited all those features that the economic history of young and undeveloped countries would lead us to expect. After that year 8 natural and inevitable transition towards maturity as a borrower was forced on by the stupendous volume of capital imported. By 1885 it was becoming apparent that the stage was arriving in-which the interest on old loans was becoming larger than the amount of new loans contracted each year. Australia was rapidly—far too rapidly as events proved— becoming a mature borrowing country. Owing to the sudden cessation of the influx of capital in 1893, through a complexity of causes, external as well as internal, the interest on old loans became immediately and unexpectedly more than five times the amount of the new loans that it was found expedient to raise. This catastrophic pinching of the financial shoe, in addition to the other factors still to be examined, was sufficient to explain the limping industrial and commercial gait of the country for the succeeding decade. This situation is summarized in the following table: TaBLE XV Australian Public Loans and Annual Interest! {In Millions Sterling) 1883 1884 1885 1886 L887 1888 1889 1890 1891 892 1893 1894 L895 ear. New loan. 14-629 12755 12-356 7-529 6-375 5-230 11-874 7720 8230 8-147 8-321 1-179 2.184 Annual interest and charges. 2:904 4-370 4-462 4-601 4-865 5-112 5-367 5-617 5-871 8-117 6-859 7-066 7.008 Compiled by Commonwealth Bureau of Census and Statistics. 94 AUSTRALIA'S RELATIVE DISADVANTAGE IN As would be expected, this great volume of imported capital completely reversed the relations between commodity exports and imports. The effects of the great acceleration began to show in the figures for overseas trade as early as 1890. The excess of imports abruptly changed in 1892 to an excess of exports, a relative position that was maintained unbroken until 1914. So sudden and striking is the change-over, that the intimate connexion between capital imports and overseas trade stands revealed as the real heart of the problem for the investigator. In view of the fact that the crisis of 1893 is still regarded in some quarters as a banking collapse, pure and simple, a brief examination of the banking position will be in order. The monetary system at this time was so organized that a large expansion of the circulating medium could follow from a comparatively small increase in the gold reserves. That this increase was not inconsiderable is proved conclusively from the figures of the accompanying table ; but it is a matter for wonder that, ander the extraordinary circumstances of the time, the inflation was not of a much higher order. If we have regard to the great flood of capital which deluged the country after 1880 it is surprising that inflation was not greater. One feature of TaBLE XVI Reserves, Deposits, and Advances of all Banks in Australia {In Millions Sterling) 1887 (888 1889 I890 1891 892 893 894 896 896 1897 Year. Reserves. 14-8 16:5 156 | 178 175 177 177 20-6 1-5 236 1.2 Deposits. Advances. 79-9 93-9 88-5 105-4 92-2 118-7 97-5 122-3 97-6 125-6 28-6 127-5 95-1 120-6 37-8 105-4 32-0 102-8 84-0 98-4 R4-8 06-8 Ratio reserves to deposits. Per cent. 18-6 18-3 16-8 18-2 18-4 17-9 184 234 26-2 28-1 256 * Commonwealth Bureau of Census and Statistics, Finance Bulletin No. 11. [his bulletin contains an extensive series of comparative banking statistics from 1884, OVERSEAS TRADE AFTER 1890 95 the situation does lend some colour to the belief that the banks were largely responsible for undue expansion of credit in connexion with land transactions; and this is to be observed in the excessive advances. The Australian practice in the matter of granting overdrafts, and the customary use of cheques, readily lent themselves to an inflation of this type. The relatively low level of the ratio of reserves to deposits is a reliable indication that the superstructure of credit was expanding at a faster rate than the growth of the gold basis warranted. The effect of excessive capital importation upon gold movements has also a particular bearing upon the matter under discussion. Theory would predict that the normal flow of gold from Australia to Britain, which was a consequence of Australia’s Tare XVII Stocks, Production and Movement of Gold! (In Millions of Pounds Sterling) Year. 1886 1887 [888 889 £890 1891 1892 1893 1894 18956 i896 . Stocks. | Production. | Export. 81-53 86-09 94-89 97-60 102-92 103-16 103-37 100-13 89-99 39-39 21-90 4-5 4-8 4-8 5-9 5-3 5-3 6-0 6-2 6 76 7.8 2-020 1-367 £507 4-456 3-730 5-108 3-696 1-956 4-161 4-407 5-091 Gold retained. 2-568 3-568 0-411 1-436 1-474 0-295 2-628 4-632 3-006 2-516 2.017 position as a gold producer, would be retarded; and that an abnormal proportion of the gold yield would be retained in the country. Not all of the capital introduced into Australia could come in the form of commodities; part took the form of an increase in reserves, since some of the gold that would normally have been exported was retained. In addition, a very large proportion of the loans was diverted to Australia from other fields of investment, and for no other purpose than that of speculation in land. We can expect, therefore, to trace the effect of capital importation in retarded gold movement, as well as in a tendency for the ratio of imports to exports to increase; and the figures L Coghlan, Statistical Account of Australia and New Zealand, Reports of the Royal Mint, and Commonwealth Bureau of Census and Statistics, Finance Bulletin No. 11. 96 AUSTRALIA'S RELATIVE DISADVANTAGE IN in the table above tell the tale quite plainly. It is a matter for regret, nevertheless, that the recorded figures upon this aspect of the problem are not more satisfactory. It will be noted that there is an amount of £10,000,000 not accounted for over the whole period. While mathematical exactness is impossible of attainment, the disparity is too large to be ignored; but a possible explanation would lie in the relatively large amounts of gold that were hoarded during the disturbed years following she collapse, and of which no record could be made. All the circumstances passed in review up to this poiht constitute a coherent and causally connected series such as that which Viner has outlined in the parallel Canadian episode.! Expansion of settlement, rising loans and deposits, the depression of reserves in proportion to deposits, a rate of exchange favourable to the borrower in the years previous to crisis, and a steady expansion of gold stocks, accomplished in Canada by zold imports and in Australia by a retarded export of the metal, mark the period. At this point, and at first glance, the Australian instance is apparently less satisfactory in its accordance with the previsions of theory. In direct contrast to the period chosen for Canada during which, after 1900, world prices were rising, the period under review for Australia was marked by a long down-swing in the price-level. But the discrepancy is only super-Seial, and tends but to reinforce the main thesis. In Canada, after 1900, prices rose, and rose on the whole [aster than did world prices owing to the heavy and continued import of capital. In Australia after 1880 prices fell more slowly than did world prices and for the same reason. The tendency in a period of falling prices would be for the level to fall more rapidly in the lending than in the borrowing country; and this is precisely what took place. Wholesale prices in Britain between 1880 and 1890 fell from 1,100 to 900; while in Australia this world movement was not only resisted but reversed, and prices actually rose from 1,112 to 1,174. This bulk movement of prices, however, tends to hide certain important facts concerning the movement of price-levels for particular commodifies. The argument for the rise of both general and sectional price-levels is given at some length by Viner for the Canadian mstance, The first result of the influx of capital is an increase 1 Viner, op. cit, OVERSEAS TRADE AFTER 1890 97 in bank deposits and reserves, and this has already been noticed for Australia. Consequent upon this there will follow a rise in prices which will shift some part of the demand for home-trade goods to foreign-trade goods, since the changing price-level will first make home-trade goods dearer. A certain amount of substitution will also take place, and will tend to 120 | 710 SMPORTS “00 90 EXPORTS 0 J0 158 1890 1892 1804 “1896 Fie. VI. PRICE-LEVELS OF IMPORTS AND EXPORTS (After Coghlan.) reinforce this effect. Increased purchasing power in Australia will result in intensifying the demand for goods which enter into both home and foreign trade; and on this account also imports will increase and exports diminish. The rising cost of domestic production would tend to lessen the comparative advantage possessed by Australia for the production of commodities for overseas trade, since labour would tend to be less effective by being diverted to the constructional works for which the capital was borrowed. Some commodities will even disappear from the export trade altogether, and may even tend to be imported. 3710 98 AUSTRALIA'S RELATIVE DISADVANTAGE IN In the state of things outlined above we should expect goods imported into Australia to fall in price, and we should further expect a greater fall in the prices for imported than for domestic commodities or exported goods. Taking the indices for the chief domestic groups, viz. Meat and Dairy Produce, we find a recorded fall from 2,296 to 2,083 or a decline of 9 per cent. over the whole period. The prices for the three main export groups, viz. Wool, Agricultural Produce, and Metals, fell from 4,027 to 3,453 or 15 per cent. over all. The three typical import groups consisting of Textiles and Leather, Chemicals and Groceries (tea, sugar, soffee, tobacco, and kerosene), fell from 4,139 to 3,242 ora fall of 22 per cent. over the three groups.! After 1890, however, the normal trends of the borrowing cycle are masked by the phenomenal fall in prices for primary products and by the spread of a world crisis purely monetary in origin. The harmonizing of Coghlan’s import and export indices (Fig. VI) with Knibbs’ group prices, therefore, proved too difficult a task. Money rates of wages, however, present the best single index of trade movements adverse to the prosperity of any community. It is unfortunate for the purposes of this analysis that no index of wages had been compiled for the years prior to 1901 ; and this constituted a serious difficulty in estimating the effects of trade movements upon welfare. Further, an index of wages was indispensable if the scheme devised by Taussig was to be applied with any prospect of success, and the rather troublesome feat of reconstructing the data had to be attempted. The result, however, abundantly justified the effort; and the completed statistical picture closely supports the conclusions reached by investigators for other countries. At the risk of becoming wearisome, therefore, it will be necessary to indicate as briefly as possible the steps. by means of which an index of wages was constructed for the years covered by our period. Nominal wages offered very little difficulty. The statistical registers of the various colonies contain continuous and reliable series of wage rates for the more important types of labour ; and the result accords closely with the remembered experience of wage movements during those years. Retail prices for Sydney * Knibbs, Prices, Price Indexes, and Cost of Living in Australia; Commonwealth Bureau of Census and Statistics, Labour Report No. 1, especially Appendix II containing an invaluable and extensive series of current retail prices and annual wholesale prices. OVERSEAS TRADE AFTER 1890 99 and Melbourne were also available, and from these two series the construction of an effective wage index then became possible. The chief difficulty arose, however, in connexion with the adjustment of effective wages for unemployment, the real crux of the matter for our purpose. An estimate of unemployment for these years had, therefore, also to be made; and the method used was that of calculating the average of employment or, to use a shorter term, the norm. From the figures given by Coghlan it was calculated that, TasLe XVIII Percentage of Unemployment, New South Wales and Victoria N ler af employees in. factoriest Vitoria. ' N.S. Wales.| Total. (Dhousands.) 51-300 50-879 47-916 42-057 46-502 18-030 19-840 51-439 52:518 55-646 80-779 86-230 1890 1891 . 1892 . 1893 [894 1895 1896 1897 . 1898 . i899 . 1900 . . 1901 . Thousands.) 56,369 | 54413 15-415 41-729 13-319 17-646 50-397 32-650 54-778 60-070 84-207 36-529 * Pigure in brackets Commonwealth Bureau of Statistics estimate, Labour Report, No. 2. + Norm raised to correspond to growth of population. exclusive of aborigines, 5 per cent. of the population of New South Wales and Victoria was engaged in manufacture of some kind. This would give for the two colonies mentioned a norm of 113-63 thousands for 1891, when the population totalled 2,272,637. If a different line be pursued and calculations made for each state separately of the employment-in peak years, say 1886 for New South Wales and 1888 for Victoria, a norm of 56 for New South Wales and 58 for Victoria or a total of 114 is obtained. Since population was nearly stationary for the years between 1890 and 1897 these results are sufficiently close to 1 Statistical Registers of New South Wales and Victoria; and Coghlan, Statistical Account of Australia and New Zealand. 100 AUSTRALIA'S RELATIVE DISADVANTAGE IN justify the adoption of 114 as the employment norm for those years. After the series had been constructed, it was discovered that the Commonwealth Bureau of Census and Statistics had constructed an index at 5-year intervals after 1891, and the close agreement of the results from these independent investigations is a matter for satisfaction. It must still be emphasized, however, that the index is open to the rather grave criticism shat it takes no account of the exodus to the country as the smployment in manufacture fell away, nor of the extent of anemployment in the primary industries, which was, indeed, not very serious. It is now possible to construct an index of wages that is adjusted for (i) changes in the retail price-level, and (ii) fluctuations in employment. It must be noted that the fall in wages was accompanied by a fall in prices which, contrary to the usual experience in such circumstances, displayed very little ‘lag’. The fall in prices is, therefore, ‘masking’ the effect of unemployment in the last two columns showing effective wages. The complete table is now given. Tare XIX Wages Index for Australia, 1886-96 V oar. 886 1887 1888 1889 1890 i891 1892 . 893 1894 . | 1895 . . 1808 Nominal | waaes. 1,000 321 48 931 44 384 371 346 727 387 707 Retail Drees: Effective wages. 1,000 1,000 928 992 924 1,262 912 1,023 912 1,035 398 984 385 | 083 362 083 757 960 746 | 921 7577 994 Effective wages allowing for unemployment. 1,000 1,007 1,282 1,013 1,018 1,016 1,015 997 976 944 D61 We are now in a position to measure quantitatively the relative disadvantage in which Australia was placed with regard bo her overseas trade by the operation of the two main factors, excessive importation of capital in the first place and the fall in world prices, particularly for primary products, in the second. OVERSEAS TRADE AFTER 1890 101 It becomes possible to compute the actual terms of exchange by means of commodity values, i.e. to measure the net and gross barter terms of Australian trade, and to trace the steady deterioration in bargaining power which affected prosperity so disastrously. The table which now presents the result in the form designed by Taussig will convey the essential features of the trade position, and the graph which follows will show at a glance the real and logical explanation of the crisis of 1893. Bearing in mind the fall of 25 per cent. in the export price level after 1886, the strength of the national effort to accumulate credits abroad is shown by an amazing expansion in production which drove up the export surplus from approximately £22 millions in 1886 to an average of £33 millions for the six years following 1890, an increase in value alone of 50 per cent. The desperate nature of a trade situation caused, in the main, by excessive borrowing is now exposed ; and the mounting curve for the gross terms, the steady rise in that for net terms, and the fall in that for effective wages are charged with significance. (Fig. VII.) The plain text of this narrative is that the Australian episode was no ‘unique and unparalleled disaster’ as one economist has labelled it. It falls into place as merely one, albeit a distressing one, of a great series of such incidents occurring not merely in the economic history of Australia but in that of every new country. Further, by the very facts of its magnitude and of the severely isolated conditions of the experiment it has become a standard of measurement for subsequent Australian disturbances of a similar character. The ‘incidents’ of 1901, 1907, and 1912 all reinforce the conclusions to be drawn from 1893, and provide a panorama of economic phenomena agreeing exactly with deductive expectation. ‘It is rare’, says Professor Taussig, after reviewing the Canadian experience, ‘that the possibility of verifying the deductions of theory is found so successfully; and it is of no little significance that for this particular sort of situation the conclusions of theory prove to be so completely verified.’* It may be claimed without any serious fear of contradiction that no neater case of such verification exists in the annals of international trade than that of the period leading up to the 1893 crisis in Australia. L Op. cit., p. 235. Tare XX Australia INTERNATIONAL TRADE, 1886-96 NET IMPORTS. Declared value. [mport price index. Value at 1886 level. Absolute.) Relative. Declared value. A+B YVear.! Sm. '1886=1000' £m. C+3418 1886 =1000 2... 1886 1887 1888 1889 1890 1891 1892 1893 1894 1895 [898 34-179 29-573 36-881 37-577 35-168 37-711 30-107 23-765 21-897 23-195 20.658 o 1000 1009 1004 1048 1035 990 948 912 866 858 RQ92 0 Dn 34.18 1000 29-31 857 26-73 1075 35-79 1051 13-98 994 38-09 | 1114 31-76 1 929 26-06 762 2629 | 740 27-03 791 azon | g73 21-720 23-420 28-900 29-553 29-321 36-042 33-370 33-225 32-131 33-644 23.084 NET EXPORTS. Export price inder. Value az 1886 level, Absolute. | Relative. Net barter, trade torane 18886 = 1040 E+F £m G+2172 B+F 1x86 — 1000 1886 = 1000 L600 1027 996 1012 978 889 843 761 686 1 703 740 G 21-72 22-80 29-02 29-20 29-98 40-54 39-58 43-66 46-84 47-86 A4.-85 od 1000 1050 1336 1344 1380 1866 1822 2010 2156 2203 2051 1 1000 982 1008 1034 1058 1114 1125 1198 1262 1220 1205 Index of prices. (Wholesale) Gross barter, trade forme Index of wages. Effective lowing for Unemplt. Melbourne. | Gt. Britain. H+D 1886 = 1000) 1886 = 1000) 1886 = 1000) 1886 = 1000 | 1886 < 1000 Effective, L000 1225 1243 1279 ‘388 1676 1961 2638 2914 2785 2108 £ 1000 992 1262 1023 1035 984. 983 983 960 921 an. L M 1000 {000 1007 982 1282 952 1013 968 1018 1055 1016 951 1015 849 997 826 976 764 944 674 3161 BRS N 1600 959 957 975 1003 1014 1019 967 962 907 1076 Volume and prices of imports and exports, net and gross barter terms of trade, with indexes of wages and prices, 1886-96. Sources. Columns 4 and E. Coghlan’s Seven Colonies, 1895-6. Band F. Adapted from Coghlan’s Statistical Account of Australia and N.Z. K. Calculated from wage rates in N.S.W. and Vie, Year Books. L. Calculated from unemployment figures for factories. # and N. From Comwlth, Bur. Census and Statistics. Labour Report No. 1. 1023 0 0 @® in o ® 1 0 © 3 a @ 0d » mo 0 es OQ 3) 0 oN © © @ D 9 ™ w © ©O © @ 9 2 NY ~~ Ty od o oO gx3aNI® o o © © Qo AY Fie. VII. TERMS OF TRADE AND WAGES Tt is to be noted that this graph merely records the facts of international trade in the later phase of the 1870-90 borrowing cycle after the exchange and banking crisis was actually in sight. It is to be presumed that both the gross and net terms of trade would show the orthodox rise and fall over the period; but the difficulties of constructing the indices from the defective data proved so great that the task was reluctantly abandoned. PART IV THE COMMONWEALTH, 1900-14 CHAPTER IX THE COURSE OF BUSINESS FROM 1900 to 1914 ‘It will be seen that the projects involving borrowing are on a magnificent scale notwithstanding that, on the one hand, population is increasing very slowly for a new country, and that, on the other hand, every leading material interest excepting Western Australian gold-mining is now slowly retrogressing. It is time that a halt wag called to save Australia from being plunged into irremediable difficulties.’— Insurance and Banking Record, 9 Apr. 1902. ‘The excess of exports is unprecedented in the history of Australia. It is impossible to trace with exactitude how the balance has been disposed of. . . . All that can be affirmed with certainty is that the large exports and the restricted imports of 1904 have contributed to place the people of Australia in a much easier position than at any time since the days of excessive borrowing.'— Insurance and Banking Record, 20 June 1905. ‘Prosperity of good seasons induced an orgy of extravagance, first among the pastoral and agricultural community who plunged into real estate activities in Sydney and laid the foundation of many wild-cat and genuine company-promotion schemes. All this created a trade boom; new and untried ventures sprang up, plodding concerns blossomed into companies which were often grossly overcapitalized, others without solid foundation were snapped up by investors without question. Amusement companies sprang up like mushrooms with directors who were now and untrained and often mere guinea-pigs. Land values and rents shot up to absurd figures. Estates were subdivided every day of the week and a general land-boom set in.’—Sydney Morning Herald, Editorial, 15 Apr. 1913. For the special purposes of this study no other period of Australian history is quite so satisfactory as the years between the inauguration of the Commonwealth in 1901 and the Great War, and that is not because of any peculiar verification of the thesis here developed but because of the vastly more satisfactory conditions for inductive study which are presented during those years. In the first place, the federation of the states effected a political unity that was reflected in a more closely knit economic organization which greatly simplifies the task of analysis. Not the least important result of federation for our purpose was the initiation of a satisfactory system of national statistics. Parallel with this amalgamation in the political system a similar development was taking place within the banking and currency system which also had a definite advantage for economic study. Under the influence of the tariff, the national reorganization THE COMMONWEALTH, 1900-14 105 was, moreover, accompanied by a realinement of all industries, and by developments in land and water transport that have a very definite bearing upon the organization of trade. For the study of business cycles, in particular, this period presents certain features which are not projected with quite the same clearness during any other phase of our history. In the first place, two interruptions in prosperity occurred of sufficient severity to be classed as major crises, viz. those of 1903 and 1907; and both of them coincide in a remarkable manner with world business crises. This fact has a very definite bearing upon the task of exposing the relative force of foreign and ‘domestic factors in influencing the Australian business situation. The link between the external and internal conditions of Australian business is, of course, that of capital borrowing ; and over the period under review there were phases during which the importation of capital was alternately accelerated and retarded in a manner most satisfying to the mind of the experimental economist. Further, the activities connected with settlement and development were not disturbed during this period by any abnormal external or internal complications other than those connected with the credit cycle; and a laboratory atmosphere is thus given to the experiment which is again eminently satisfying. Finally, the whole period is marked by a clearly defined rise in world price-levels; and this rise has been the subject of careful measurement and analysis. The improved statistical data for trade, currency, and production, in both the foreign and domestic spheres, gives to the years following 1900 an accuracy for analysis that cannot be approached by earlier periods. Most inauspiciously for the new Commonwealth, the years immediately following Federation were marked by a reaction from the prosperity which had characterized the close of the century in Australia. Severe drought, which affected Queensland and New South Wales most seriously, resulted in a diminished volume of production at a time of falling prices for most Australian staples. The lowest recorded wool prices accompanied a fall in metal values, the export of dairy products declined by 50 per cent., and the record harvests of the southern states had to be marketed under conditions of high freights and 2710 106 THE COMMONWEALTH, 1900-14 depressed prices. How severe the reaction was in the metal markets can best be judged from the figures quoted below.} The chequered course of 1901 continued into the following year ; but, after a depressing period marked by rising prices for domestic commodities, falling prices for exports, distress in rural and mining areas, and government deficits in every state, the promise of brighter conditions came with the breaking of the drought. Business interests were by this time, however, beginning to feel the strain imposed by the considerable decline in exports ; and it is significant that during 1903 gold shipments were on a scale larger than usual. A marked decline in imports was only to be expected ; and, as trading interests in the cities became involved to a greater and greater extent, the most intense depression experienced in the eastern states for a decade now developed. A secondary but far from unimportant factor originated in the aftermath of the South African War; and was sufficiently serious in Great Britain to diminish considerably the volume of capital available for investment. This shortage of loan funds reacted most unfavourably upon Australia, in a way that will be traced presently. The position of the Australian money market for the greater part of the year was one of comparative ease; but the stationary bank figures merely reflected a want of enterprise and a dullness of trade characteristic of the ‘deficiency phase’ of the borrowing cycle. That this state of affairs was largely the direct result of the expansive loan programmes embarked upon previously by all the States cannot reasonably be questioned. As early as 1902, in fact, criticism was being directed to the precarious condition of Australian government finance by business leaders and economists. In less than three years the public debt had increased by nearly £20 millions of new loans; and the onset of drought, accompanied by the disastrous fall in the value of exports, PRICES FOR PRINCIPAL AUSTRALIAN METALS 1901. Per ton. Metal. Copper , Tin . . Lead . Speltar £ a d. 73 0 ¢ 121 156 ¢ 16 6 ¢ IR 17 + sd 49 0 0 106 8 0 10 3 0 a IE THE COMMONWEALTH, 1900-14 107 reproduced, almost exactly although on a smaller scale, many of the features of the great collapse in 1893. But the Australian situation in 1903 has to be examined more carefully in the light of world credit. The British financial system had for some time been labouring rather heavily under the strain imposed by the war in South Africa. In particular the non-productive absorption of capital consequent upon that unfortunate episode necessitated a pause for reconstruction, especially as it was becoming increasingly evident that all was not well with the British export trade. In September, as a result of the overcharged condition of the stock market, a serious fall took place in British consols; and, as the demand for capital became more insistent, the Bank rate was raised rather abruptly. By all these happenings, Australia, as a borrower in the London market, was seriously affected ; and the situation was succinctly put by The Times: ‘It has for some time been evident that the constant succession of new colonial and municipal issues was having a very bad effect on the market for all investment stocks. This is only another way of saying that there have been too many of these demands for money. In view of these facts the leading underwriting firms have to-day (July 22) decided that they will not for some time to come underwrite anv colonial or corporation loans.’ It is no exaggeration to say that this slamming of the door in the faces of importunate state treasurers caused a sensation in government and business circles. The sober comment of financial writers at a moment when neither the states nor the chief cities knew where to turn for money was cold comfort but it, nevertheless. stated the position exactly: “The recent fall in the market quotations for Australian government stocks’, asserted an editorial, ‘should be regarded as a warning not merely that British investors are not disposed to take out new Australian loans, but that supplies of floating capital are not as large as usual. According to some authorities the fixing of floating capital has gone on at too rapid a pace throughout the world for several years past. However this may be, it is-certain that the fall in Australian government stocks is by no means singular’ The remarkable feature of this crisis was the onset of the depression so hard upon the heels of the decisive action on L Tneurance and Banking Record, Sept. 1903. 108 THE COMMONWEALTH, 1900-14 the part of the London market. Business, in the eastern states especially, was almost brought to a standstill by the sudden constriction of credit which developed ; although even harassed state treasurers were able to appreciate the salutary nature of the check.! That the drying of the stream of loans was due to a loss of confidence in Australia as a field of investment, as well as to inability on the part of the Britishinvestor to lend, isindicated by the fall in Australian government stocks at this time.2 Nor were the difficulties eased by the disfavour with which advanced Australian legislation was being viewed in Britain. Hardening money rates, dullness in trade, stationary bank figures, stagnation in industry, diminished customs revenue and imports, declining immigration and a crop of business failures were the outstanding characteristics of 1904, a year which exhibited all the features of the recession stage of the cycle. The increased strain thrown upon the productive activities of the country is reflected in an expansion of exports by nearly £91 millions, while economy is indicated by the decline of nearly £2 millions in imports. The excess of exports over imports increased from nearly £11 millions in 1903 to nearly £20} millions in 1904, a feature that indicates the strength of the community effort made under steady financial pressure. The year is distinguished, too, by the decline in loan issues, in fact for the five years from 1903 to 1907, inclusive, only 14} millions were raised in loans compared with 20 millions borrowed in the previous three-year period. The natural consequence, however, was that governments and corporations in Australia were increasingly compelled to approach the domestic money market for help in their financial difficulties; and the rising money rates were a direct outcome of the increased ! “We must be satisfied that even the closing of the London money market is a blessing in disguise, for it means that not only our administration but also our public works for which we require to borrow money will be put on a business basis.’ — Treasurer of Western Australia in a Budget speech, 16 Oct. EXCHANGE QUOTATIONS OF AUSTRALIAN GOVERNMENT STOCKS Government Stocks. Victoria, 33 per cent. . . Victoria, 3 per cent. . . New South Wales, 3} per cent. New South Wales. 3 ner cent. THE COMMONWEALTH, 1900-14 109 competition for the limited supplies of available capital. The marked credit stringency which ensued was an additional factor in forcing on economy in the community; and was directly responsible for the movement towards .the consolidation of state debts which occupied the attention of treasurers for some years. It was likewise the thin end of the wedge of financial control by the Federal Government. This control became stronger in later years when expanding revenues doubled and redoubled the Federal Government’s power to assist financially embarrassed state governments. The recovery both in Britain and in Australia during 1905 must be regarded as astonishing in its rapidity and completeness. In London the large blocks of securities that had been created since 1900 and had glutted the market ever since were gradually absorbed ; and, by the end of 1904, the market was again ready to entertain fresh applications. In the first quarter money rates became distinctly easier, and exchange quotations showed a rising tendency. This state of affairs was immediately reflected in the Australian financial situation; but the real prelude to complete recovery in the Commonwealth came in the form of splendid rains in all states. The wonderfully quick return to prosperous conditions after the dry seasons afforded a remarkable demonstration of the recuperative powers of the country. The end of the year saw the export trade in a flourishing condition, but with imports still on a very moderate scale. Partly as a consequence of the greatly increased rural productivity, partly as a result of the general rise in world prices which was now becoming marked, and partly, also, as the normal rebound from depression, Australian stocks now found more favour in the eyes of investors than for years past. The slow net increase of population, 1-5 per cent. for the year, the shrunken stream of immigration, and the lack of enterprise attested by the increase in fixed deposits, indicated, however, the lingering effects of the recession period. Nevertheless, the bank and mercantile position was in general quietly sound and moderately prosperous already; and the non-success of the Western Australian loan towards the end of the year was not in any way a reaction, but was probably due to political uncertainty in England, and to the feeling among investors that the prosperity of that state was too uncertainly poised upon 110 THE COMMONWEALTH, 1900-14 gold-mining as a staple industry. The one cloud in the financial sky was the approaching maturity of the old debts, and the consequent necessity for troublesome and unproductive conversion operations. We must now leave Australia at the moment when she was entering perhaps the most uniformly prosperous period of her history, and direct our attention once more to the course of world events. Thespacioustimesof 1906 and 1907 were, in fact, largely a reflection of similar conditions then prevailing in most of the countries of the world. Nowhere, however, had buoyant enterprise and industrial expansion been more marked than in the United States, where trustified industry’ aided by the enormous immigration of the period had built up a system of mass production and inland transport that was the marvel of the economic world. This ‘rampant prosperity had begotten reckless speculation and in no direction had this evil assumed larger proportions than in real estate’. But, with the opening of 1907, bankers, statesmen, industrial leaders, and economists were becoming apprehensive of an imminent collapse.! American bankers, indeed, were already preparing for the worst by building up their gold reserves at the expense of Great Britain, a development that engendered much hostile criticism and no small financial disturbance in London, where discussion concerning the adequacy of the gold reserves of the Bank of England clearly indicated widespread uneasiness. [n middle March, owing to the fact that the demand for capital had outrun the immediately available supply, a sharp panic in New York was precipitated by a ‘bear’ movement which was deliberately engineered but got out of control. This was followed a week later by a violent collapse in which national and savings banks, trust companies, industrial groups, and public credit generally were deeply involved. London financial interests, realizing the gravity of the position, immediately abandoned any attempt to stave off disaster in the United States.2 and concentrated on safety measures which implied the ! Professor Andrew of Harvard University indicated an attitude of mind that was very general: ‘It is then simply because the United States has enjoyed a fabulous prosperity for an unusually long period that one may conclude that the situation to-day only requires some sharp blow to the general confidence to precipitate a new movement of liquidation and reorganization.’ 2 T.ondon Times of 15 November: ‘When there was a reasonable chance that a THE COMMONWEALTH, 1900-14 111 conservation of all financial resources and, in particular, a sudden constriction in capital loans. A rapid shrinkage in the value of all investment stocks and particularly of government securities culminated in a third crisis in New York in September, and the Bank of England rate was raised from 41 to 7 per cent. between September 12 and November 14. It is unnecessary for our purpose to follow the course of the crisis abroad any further, but the effects on Australia of the disturbance to world credit are, of course, of the greatest interest. The shock was immediate and serious. The financial and trade dependence upon Great Britain, the break in prices, and the collapse of the American metal market and the European wool market, would alone have produced severe effects. The seriousness of the decline in trade is indicated by the recorded figures. In 1908 exports from the Commonwealth fell £8 millions below the value of the previous year, and that despite an increase of £3} millions in the export of gold. Total overseas trade of all commodities declined, therefore, by £14 millions, since imports also fell by £2 millions. The excesss of exports over imports has a remarkable bearing on the Australian position at all times; and the general trend during this decade is of special interest and will be discussed more fully at a later stage. It will be sufficient here to mention that the total recorded excess of exports over imports reached the peak of £24-9 millions in 1906, but rapidly declined to £0-9 million in 1912. The influence of borrowing upon this situation is also reserved for later consideration. But the whole of this decline after 1908 is not to be attributed to world conditions. Yet again at this juncture outrageous fortune decreed that a world credit shortage should coincide with unfavourable seasons and falling prices. The occurrence of drought over wide areas in Australia resulted in small harvests and a diminished wool clip. The translation of these adverse factors into terms of monetary strain induced a depression few millions imported might suffice to restore confidence in the United States it was worth while to devise ways and means for providing them. But now that the many millions shipped have been swallowed up without any improvement in the position on the other side it becomes clear that the only attitude for European finance to adopt and to maintain is one of the most vigilant self-defence, no facilities of any kind being granted to New York and no gold being sent thither except such as it can command by sale of produce or securities.’ 112 THE COMMONWEALTH, 1900-14 throughout the Commonwealth which deepened with the progress of the months. An immediate reaction in overseas trade and disturbances in the rates of exchange between Australia and Britain were the immediate consequences. During the two previous years of wonderful prosperity the great excess of exports had acted so much in favour of Australia that ‘drafts on London had sold at a discount, a state of things almost without precedent for half a century’. But the adverse trade balance which marked the last half of 1908 so seriously altered the situation that the exchange position was not only reversed, but gold shipments were stimulated and a credit restriction immediately developed. The reaction of all these factors on Australian business was cumulative, and the course of events followed the usual distressing sequence. Dullness deepening to stagnation quickly succeeded the previous buoyancy, all industries experienced a sudden check, unemployment figures swelled, construction and building slackened everywhere, and prices for most materials fell. From the financial viewpoint the situation was quite as difficult. Bank deposits, advances and clearings fell sharply, the value of production declined largely on account of the drop in wool and copper prices, wholesale prices reached the lowest level since 1899, and bankruptcies showed a marked increase. Even these facts fail to furnish the complete explanation of the credit stringency which developed so suddenly. The increased speculation and over-trading of the boom years had weakened the position of the banks very considerably. By 1907 the percentage of coin and bullion held against average liabilities, viz. 20-05, had reached the lowest point since 1889; and the ratio of reserves to deposits subject to cheque was dangerously low. The realization by the banks of their somewhat precarious position led to the usual recall of advances and credit stringency. This is, of course, merely a normal phase of the credit cycle which Hawtrey and others have treated exhaustively! The tendency to inflation during the prosperity phase of the cycle is as common a feature of Australian business as it is of all 1 Vide Hawtrey, Trade and Credit, p. 22: ‘Before the war . . . the gold-using countries, as a group, used quite regularly to allow credit to expand to an excessive extent, and then, when their gold reserves threatened to fall short of legal requirements, they hastily took steps to contract credit. often at the cost of precipitating a panic.’ THE COMMONWEALTH, 1900-14 113 other gold-using countries ; but the policy is more than usually dangerous owing to our peculiar sensitiveness to derangements of world credit. The key to this situation, as indicated by Professor Copland, lies in the tendency for bank policy in Australia to be regulated by the size of funds held in London by Australian banks. The connexion between bank policy and the rate of exchange in Australia, and the balances of loan funds in London awaiting transfer to Australia, is sufficiently obvious. That it has been a very persistent factor in our financial relations with London, and still influences, perhaps unduly, our bank policy cannot be doubted ; and it constitutes the greatest weakness or the greatest strength of our financial system, according to the two opposing schools of thought on the subject. But to return to the history of the period. The year 1909 was one of the most remarkable of the period for many reasons; but the chief of these was the rapidity of the revival which now took place. The 1908-9 wool season was ‘one long succession of pleasant surprises’; and it was, doubtless, due to the recovery of the wool trade that business so quickly took on a sanguine tone. By the middle of the year the country was again moving on to prosperity with easier monetary and more active investment conditions. Every state enjoyed a splendid season, wheat and wool prices were high and metal prices improving, while industry was quickening everywhere. These circumstances formed the chief justification for a big series of loan issues for developmental works. But, in order to understand the phase of prosperity which now commenced, the vigorous world developments of the period must be considered. A great outburst of investment took place which involved all the primary raw materials, especially wool, wheat, cotton, silk, and rubber. Australia’s position in the face of this increased industrial demand was most favoured. A wave of prosperity ensued which swept the country along with it until 1913. The two features which stand out most prominently in our economic history at this time were, first, a remarkable increase in prices which affected Australia in common with the rest of the world ; and, secondly, the growing burden of the public debt. Reserving the matter of the public debt for the next chapter, we must consider the movement of prices a little further. It will be remembered that since 1850 prices had 2710 114 THE COMMONWEALTH, 1900-14 made wide swings which had very marked effects on Australian prosperity. Between 1846 and 1871, to review the fluctuations briefly, prices had risen by 28 per cent. ; but the cheapening of ocean transport towards the end of this period assisted a definite downward swing which, by 1896, marked a decline of about 30 per cent. below the 1871 level. After this a steady upward movement developed which by the year 1912, as estimated by the Economist, represented an increase of about 34 per cent. upon the 1896 level. The search for reasons for this increase hardly lies within our province; but it is undoubtedly connected with the expansion of credit and enlargement of currency made possible by the great increase in world gold production. Unalloyed prosperity marked the whole of 1910 as the expansive government programmes, based chiefly upon swelling customs revenue, the large capital borrowings, and increased productivity consequent upon bountiful seasons, took effect in industrial activity and increased purchasing power. By the middle of 1911, however, the critics were again stressing the dangers inherent in the business situation, and the possibility of a sudden check being experienced. Extravagant public and private expenditure, the stimulation of city industries and the resultant rural depopulation, an indulgent bank policy, and the machinations of company promoters were all castigated. In that year, also, several remarkable developments tended to unsettle business and to promote uncertainty. Not the least of these was the establishment of the Commonwealth Bank and the passing of the Commonwealth Notes Act. While the Australian banking system was not greatly affected as the result of these changes, a great deal of uneasiness accompanied these adjustments. Rural industry was also much disturbed by the new Federal policy of ‘bursting up large estates’ by means of land taxation. While none of these innovations were revolutionary in themselves, the general suspicion which was engendered introduced an unfavourable factor at an inconvenient moment, since the export of specie was now exceeding the production and bank reserves were thus being depleted. The situation held the germs of a contraction of credit which was to develop into something more serious. The cvele had, in fact, again come full circle. After years of THE COMMONWEALTH, 1900-14 115 depression following the collapse of the land boom, the Australian community had made a remarkable recovery, and had accumulated wealth. In the years from 1906 to 1912, inclusive, the output of minerals had totalled £175 millions, wool had been exported to the value of £176 millions, other pastoral and dairy produce averaged £42 millions per annum, agricultural produection rose steadily in value from £25 millions in 1906 to £46 millions in 1912, while the total value of manufactures went from £33 to £57 millions. This advance was, of course, the result of both rising prices and increased production. Total exports rose from £481 millions to £70} millions, and bank deposits advanced from £123} to £206 millions. But over against this had to be set a more than proportionate increase in indebtedness. It will be sufficient to say here that, after 1910, bank advances rose 22 per cent. in three years, whereas the increase for the previous similar period had been less than 4 per cent. Federal and state expenditure reached £55 millions in 1912 and new public, municipal, and business loans totalling £16 millions were raised. In the consequent expansion of the national income is to be found the source of the remarkable prosperity of this period. The threat of an unfavourable season was once again the first cloud. Heavy losses of stock, small harvests, and a decline of 300,000 bales in the wool export soon confirmed the worst fears. For the first time since 1891 the total value of imports exceeded that of exports. Primary producers were in sore straits and importers found themselves heavily overstocked. The natural result was an alarming decrease in bank deposits. All this was a dramatic change ; and the increased interest rate, the reduction of overdrafts, the difficultyin obtaining accommodation, and the decline in the value of all investment stocks told of strained conditions which were similar in all respects to those of 1908. Further, a sudden collapse in shipping freights took place which was a symptom of the general world reaction, and another effect of the capital shortage which was causing London once more to frown on overseas loans. The reasons for this reaction can be more conveniently examined in the next chapter; but there is little doubt that Australia was on the edge of a severe crisis when the tremendous happenings of 1914 intervened. CHAPTER X ANGLO-AUSTRALIAN EXCHANGE IN RELATION TO CAPITAL MOVEMENTS AND TRADE BETWEEN 1900 AND 1913 ‘The effect of borrowing money is inevitably to increase imports. For example, for the 10 years ended 1890 the Australian imports exceeded exports by £74 millions. The loan indebtedness increased from £61-327 millions in 1880 to £143-662 millions in 1890, an increase of £82-4 millions. The same explanation holds good of the phenomena of the past few years. It is the heavy borrowings by Australian states that account for the increased importations into Australia beyond the increases naturally to be looked for in consequence of increased productiveness and increased exports following a run of good seasons.’ —Review by ‘Scrutineer’, Melbourne Argus, 8 July 1913. “When reserves are dangerously depleted obstacles to advances are raised, therefore borrowing is made unprofitable. At this point there can be no further additions to the volume of trade (unless prices decline), and no further rise in prices (unless there is a reduction in the volume of trade). —Economic Journal, September 1923. ‘Equilibrium cannot be fully regained till the demand for capital has been damped down by the adverse state of the investment market, not merely to normal but below normal; for the exceptional indebtedness of the investment market has to be liquidated. ——HawrrEY, Trade and Credit, on the Gold Standard and the Balance of Payments. It will be necessary at this stage to examine more closely the financial relations existing between Australia as a borrower and an exporter of primary products, and Great Britain as a lender of capital and exporter of manufactures, under the conditions of a gold exchange standard which obtained between the two countries during this period. Before doing so, but without entering into a discussion of the phenomena attendant upon the operation of such a standard, it will be well to emphasize the immediate function of gold in such a situation. The gold which moves from one country to the other merely ‘plays the part of settling a clearing balance just like a payment made by one clearing bank to another’, to use the illustration of R. G. Hawtrey.l It equalizes supply and demand between the two countries concerned, not by an adjustment of the relative values of Australian and British currency, but by providing a means of paying for the immediate difference in indebtedness between the two countries.? If these differences are merely transitory, ! For a comprehensive statement of the general argument which is here given particular application to the Anglo-Australian position, see Hawtrey, Trade and Credit, Chapter II. 2 ‘There is no free exchange market in Australia. The banks accept the rates MOVEMENTS AND TRADE 117 gold would move to one or the other but in relatively small amounts. If, however, the excess on one side or the other were long continued, gold would be drained away in such quantities that bank reserves would be in danger of exhaustion in the debtor country. The manipulation of a gold exchange standard demands, in fact, continuous and close consideration of adverse movements of the exchange because of their tendency to stimulate the export of gold, and it also necessitates the formulation of measures to check undue depletion of gold reserves, i.e. credit contraction, which, as we have seen, may be sudden and severe enough to produce a crisis. Hawtrey has examined very exhaustively the root causes of such movements of gold, and has shown that they arise both from purely monetary and non-monetary causes. The monetary causes of gold movements are connected with changes in the relative value of British and Australian currency. Gold moved from Australia to Britain either because British currency appreciated in value owing to contraction of credit there, or because Australian currency depreciated through expansion of currency here.! Keeping in mind the conditions between 1900 and 1913, consider the case of an inflation of credit in Australia in its effects on trade and gold movement. An expansion of credit increases temporarily the purchasing power of the community affected. Exporters of Australian products may be expected to enlarge the scope of their operations by working on increased overdraits. Primary producers from whom they buy receive the money as income; and, as this is spent, the demand for both foreign-trade and home-trade commodities is increased. Foreign-trade commodities are those which might be either exported or imported, together with Australian commodities which compete with imports, that portion of primary products which is consumed in Australia, and, lastly, any commodities which, though wholly produced and consumed in Australia, are so far exposed to potential competition that they are tied approximately to world-prices. All commodities on foreign countries ruling in London, and fix their rates with London according to the state of their cash balances in London. Only in exceptional circumstances do the (British and Australian) rates move far from parity. —Copland. L An excellent treatment of the Anglo-Australian exchange situation will be found in Chapter IT of Foreign Banking Systems (Henry Holt) entitled ‘The Banking System of Australia’, by Professor D. B. Copland. 118 EXCHANGE IN RELATION TO CAPITAL not included within these groups are home-trade goods, e.g. local services and bulky or perishable goods which cannot be transported. Now, enlarged purchasing power consequent upon an expansion of credit in Australia will affect both home- and foreigntrade goods, although not to the same extent. Increased demand for the former will be followed by either increased supply or rising prices or both. ‘But foreign-trade products will continue to be governed by world-prices, and the increase in demand for them will be felt mainly in the attraction of additional imports, and the diversion of exportable goods to the home market.’ The important consequence for our purpose is the excess of imports which develops, and which, if other factors did not intervene, would have to be paid for in gold. ‘The true significance of this phenomenon is that, when the currency is depreciated by a credit expansion, the world prices of foreign-trade products at the fixed par of exchange become too low in relation to the people’s purchasing power. Too many of these artificially cheapened goods are bought; and, being bought, have somehow to be paid for. There can be little doubt from the examination made so far of the prosperity phases of Australian business cycles that this has been one of the factors operating to produce an excess of imports. But the banks, by timely control of credit, could manage such a situation with comparative ease. Always providing that other more powerful factors did not influence the situation. heroic measures would not be necessary.! But the alternative of credit contraction in London is an entirely different matter. Again and again in the course of this survey the instantaneous and emphatic effect on the Australian financial system of a sudden credit contraction in Great Britain has been noticed. The explanation of this phenomenon is, of course, that a maladjustment of credit as between the two L See Copland, op. cif., p. 81: ‘In addition to the automatic correctives applied by the exchanges to undesirable price and trade movements the gold standard gave the necessary elasticity to currency. . . . If imports were heavy and banks found it necessary to pay out funds in London on behalf of their Australian clients, they could always procure sufficient cash for their London reserves by the simple expedient of obtaining gold there or shipping it from Australia. This would cause a contraction of currency in Australia at a time when excessive importing demanded it. Such expansion and contraction of credit and currency in Australia was a orominent feature of pre-war banking conditions. MOVEMENTS AND TRADE 119 countries at once causes a monetary disturbance of the balance of payments. The corrective, quite obviously, is a corresponding regulation of credit; although a drastic reduction in Britain tends to have on the Australian system a more than commensurate effect. The wider the swing from expansion to contraction in Britain, the more serious is the inevitable dislocation of credit in Australia. For an adequate explanation of the majority ‘of Australian business crises we need scarcely look further than to the fluctuations in available bank credit which are consequent upon sudden changes in credit conditions in London. It 4s, however, more strictly to what Hawtrey calls with doubtful accuracy the ‘non-monetary’ causes of such disturbances that our examination should be directed, since the phenomena are not nearly so definite nor so clearly expressed in terms of the trade balance. Non-monetary disturbances may have their origins in a change in the demand for, or the supply of, foreign commodities in Australia. More important still, they may arise in borrowing; or, to be more explicit, in changes in the rafe at which British capital is injected into the Australian economic system. Consider for a moment the position created when exports of primary products from Australia are stimulated either through increased production due to good seasons, or through an increase in the overseas demand for these commodities. The farmers and export merchants will now become entitled to increased sums of foreign currency which, by the operation of bills, will bank up in London under normal conditions, and there await transfer to Australia as opportunity offers. But the preliminary stages leading to this result are the immediate payment by the banks in Australia to the merchants by discounting their bills, and the settlement by merchants with the producers. The seasonal situation which thus develops is that in which the Australian banks in London hold large amounts of Australian bills which, other things being equal, would tend to upset the equilibrium of the exchange. But nothing of the sort normally happens. For, meanwhile, the producer will be expending his income partly on investment, and partly on consumption goods which may be either foreign-trade goods such as American motor-cars, home-trade goods such as boots, or either foreign- or home- 120 EXCHANGE IN RELATION TO CAPITAL trade goods such as farm implements. The money spent on investments will come mainly into the Australian investment market ; and, as a consequence, Australian capital borrowings abroad will tend to be diminished to the extent that Government securities are taken up. Thus, as the result of good seasons, Australia may be expected to increase very largely her demand for foreign-trade products; and, in this way, to counteract the disturbance in exchange by intensifying the demand made on the London balances of Australian banks. Again, increased spending power in Australia will, by affecting both the demand for home-trade products and the home investment market, tend to raise prices in Australia in relation to world-prices, and thus to stimulate imports. Increased incomes will accrue both to producers of home-trade products and to the merchants handling these, and they in turn will expend their incomes partly on domestic investment and partly on foreign-trade goods. The excess of exports will thus tend to be counterbalanced, or even more than counterbalanced, by the increase in imports.! The part played by gold during these developments is relatively simple. Gold in the hands of the bankers tends to increase as a basis for the temporary inflation of credit made necessary by the buoyant conditions. The effect on Australia, as a normal gold-producer is, of course, merely to retard the export of gold while the currency is expanding. The condition peculiar to Australia and many other countries of predominantly primary products is the marked seasonal character of the export trade. But the problem is not one of great difficulty because of the possibility of predicting accurately the course of trade. The banks are prepared to ‘hold assets in one country against liabilities in another’ because of the certainty of an automatic adjustment of the balance as the wool-clip and the wheat and fruit crops are marketed. The risk inherent in the exchange operations, slight though it may be between Australia and Britain, in financing seasonal exports, is, in accordance with a well-recognized principle, thrown upon the Australian banks. In effect this is merely a precautionary { In the contrary case where there is a shortage of exports the movements are parallel but opposite. ‘The exporting interests must curtail their expenditure. External investment is diminished, external borrowing is increased, purchases of foreign-trade products fall off . . . There must be a contraction of credit; and, if the contraction is not sufficient, there will be an export of gold.’ —Hawtrey, ibid. MOVEMENTS AND TRADE 121 measure to defer the actual exchange operations until ‘the compensatory imports begin to come into the market’. When this becomes difficult, as it did on at least one occasion between 1900 and 1913 and more than once since 1920, critical disturbances of the exchange are the outcome. But the outstanding advantage of a gold exchange standard is the virtual elimination of this risk, and the facilities which it offers in the financing of seasonal exports. Any temporary discrepancy between imports and exports can be quite well taken up by the creation of credit instruments to bridge the interval between paying the producer in Australia and selling the exports abroad, and this is what normally happens. [+ must be understood, too, that for Australia, as a primary producer, the seasonal disturbance of the exchange is accompanied by a parallel disturbance of the currency due to the purely domestic business of paying for the products. At shearing and harvest times the producers have to make exceptionally heavy payments in cash to their workmen, and the producers themselves or their local bank branches are compelled to hold a supply of coin and notes much larger than usual as ‘pocketmoney’. Wheat merchants, wool agencies, and fruit firms are also drawing more actively upon their current accounts to pay the farmers ; and the gross effect is a big seasonal increase in the circulation of currency. Under such circumstances the credit system must be flexible in a marked degree, as the events of 1923-4 taught us. The disturbance of the currency as between urban and rural areas at these times is a somewhat similar phenomenon to the disturbance in the exchange between Britain and Australia as the exports are marketed. With the consideration of capital movements, the second non-monetary cause of disturbance to the balance of payments, we enter upon the discussion of the predominant factor as far as Australia is concerned. Capital which is assigned for investment in Australia accumulates in London, and the real problem is constituted by the remoteness of the area of investment from the investing country. Hawtrey rightly puts the emphasis upon fluctuations in the volume of capital awaiting investment! 1 See Hawtrey, Trade and Credit: ‘The stream, however, is far from continuous. Capital projects are frequently very large. And only large issues are suitable for dealings in the investment market, and more especially for international dealings.’ 3710 122 EXCHANGE IN RELATION TO CAPITAL World conditions of business affect the stream of savings in a remarkable manner; and, in addition, the minds of investors are so peculiarly susceptible to political and psychological influences as to make the prediction of the volume of capital forthcoming a very difficult matter for the market. But even more uncertain is the estimate of demand, and this factor has perhaps the greater influence in inducing relative shortages of capital from time to time. To sum up, the primary consequence of uncertainty concerning the volume of capital awaiting investment is the constant necessity imposed upon the exchange market to adjust itself to considerable exports of capital from Britain, which, moreover, are far from constant in volume.l The manner in which these exports of capital are transferred to Australia constitutes a most controversial phase of our subject. The undisputed facts that the greater part of the capital borrowed will be expended in Australia in the payment of labour engaged upon developmental works, or on the purchase of material or machinery in Australia or abroad, has raised the question as to the exact amount of benefit which ‘the industries of a lending country derive from capital loans. J. M. Keynes and others have rendered a service to economic discussion by calling into question the orthodox views held on this matter,2 and by advancing the point of view that Britain and British industries would be better served by the investment of a greater part of surplus capital in Britain itself. More especially, doubt has been cast upon the stimulating effect upon the export trade of Britain which these loans are supposed to initiate. That such stimulation does take place as between Britain and Australia can scarcely be seriously questioned, although the benefit is shared by non-lending countries engaged in trade with Australia on a large scale, such as the United States. Nor can it be seriously questioned that there is a progressive stimulation over the long period as a result of continued loans. ! Copland has tested this by a comparison of the London funds and the excess of deposits over advances in Australia in the case of the Bank of New South Wales for the period 1903-24. ‘It may therefore be assumed that the most important influence in Australian banking is the balance of payments and the flow of bank funds in London. Gold is used only to sustain movements in banking and credit set in motion by this controlling influence.’—0p. cit., p. 83. 3 Qe editorials and correspondence in Economist, March 1929. MOVEMENTS AND TRADE 123 The explanation of the stimulation of British exports lies in the ‘compensatory tendency’ indicated by Hawtrey. Contractors, labourers, and retail dealers employed in Australia upon the constructional work obtain an increase of purchasing power during the term of the contract. This purchasing power being spread through the country is translated into demand for both foreign-trade and home-trade products. ‘In so far as they buy the latter, they bring about a rise of internal prices and an increase in the incomes derived from producing and dealing in home-trade products. These incomes, in turn, are applied partly to foreign-trade products. The process must go on till imports are so increased relatively to exports that equilibrium is attained, and the whole of the capital imported is being received in the form of goods.’ Again, the part played by Australian banks concerns the necessity for the provision of increased credit facilities consequent upon the capital imports. The effect of this inflation, whether it is temporary or cumulative, is to raise the price-level in Australia sufficiently to make it a more favourable market for foreign-trade commodities; and so to help in the tendency ‘to attract a relative excess of imports equivalent to the amount of the capital imported’. The play of loans upon the export trade of Britain in particular does not, however, urgently concern our present purpose. The fact that fluctuations in the volume of capital available in Britain for investment abroad do normally occur, and that the demand abroad for this capital also varies very widely, is the fact of primary importance. It is with the latter phenomenon rather than the former that dealers in loans are. chiefly concerned. The demand periodically becomes excessive; and, as we have seen, the consequences of the inevitable stoppage of investment upon importunate borrowers are salutary but unpleasant. Regulation of the demand is, in fact, always necessary, and is practised as a usual function of the loan market. Far more strict control, and a process of ‘queuing loans’ is, indeed, strenuously advocated by some authorities. The first indication that demand is exceeding available supplies is usually that a large proportion of the new issues is left on the hands of the underwriters. In such a case the market itself automatically regulates the situation; and a decrease in 124 EXCHANGE IN RELATION TO CAPITAL the price of securities accompanied by an increase in the charges for issuing and underwriting gives very plain warning to investors. An extreme example of this method of defence will be remembered from the last chapter. The periodical congestion or over-lending which is typical of the investment market is merely another form of credit inflation which has advanced to the breaking-point. There ensues a contraction of credit accompanied by a rise in the bank rate which discourages both borrower and underwriter. Dear money will persist until the credit position recovers; and the ‘unwillingness of the investment market to hold securities’ is the first authoritative indication that further borrowing is not expedient. The disastrous attempts made at different times by Australian states to persist in attempts to float loans despite the frowns of the market will illustrate the point. ‘If’, as Hawtrey puts the matter, ‘borrowers are very insistent there may be a very heavy depreciation of securities. In an extreme case there may be a crisis and a panic, in which the flotations of new issues become temporarily impossible.’ I+ now remains to establish as definitely as may be the link between borrowing and banking; and to indicate how fluctuations in the rate of capital injection are followed by corresponding oscillations in prosperity as marked by available bank credit. The connexion to be made is, of course, through the movement of gold ; and to test the connexion the accompanying graph was constructed. In this graph the imports of capital are shown year by year in relation to the retention of gold in Australia, i.e. the excess of production plus import over export of the metal. It is obvious that capital, whether in the form of goods or gold, does not move immediately after the market has completed the flotation of a loan. Months may elapse before definite government orders for capital goods, or rather the payment for these, begins to affect the London balances which now represent the loan; or before a government commences to draw upon its London credits in order to defray labour and other expenses upon constructional work in Australia. Many instances could be quoted, indeed, of loans which appear among the flotation figures for one year being carried over in London intact to the following year. As a rough corrective, the plottings representing goldretentioninthe graph weremoved back one year, MOVEMENTS AND TRADE 125 The movements of the two curves then revealed a consilience that is singularly perfect. In the twenty-five years represented, the movements of the curves are in opposite directions only in the 1901-4 period, when there were extraordinary circumstances of national emergency connected with the war in South Africa. More perfect correlation than that obtained in the decade 1904-14 could scarcely be imagined, and the control exercised upon Australian gold reserves by fluctuations in the volume of loans may be accepted beyond the possibility of question. In its turn the volume of bank credit varies with the size of the gold reserves, and the connexion is complete. joan £m ‘GOLD £m 15 PUBLIC I0A? A A (910 Fig. VIII. PUBLIC LOANS AND GOLD RETAINED, 1890-1914 Plottings for gold movement retarded one year. The plotting of oversea loans only, by the elimination of domestic loans which rose from 10 per cent. in 1890 to 23 per cent. in 1910, has no perceptible effect on the parallel movements of the two lines shown in the graph. CHAPTER XI AUSTRALIA’S FLUCTUATING ADVANTAGE IN TRADE BETWEEN 1900 AND 1913 ‘The point that is less familiar in connexion with the theory of the subject, or ab least is not commonly considered, is the closeness and rapidity with which the varying balance of payments has found its expression in the varying balance of trade. The actual merchandise movements seem to have been adjusted to the shifting balance of payments with surprising exactness and speed. The process which our theory contemplates—the initial flow of specie when there is a burst of loans; the fall of prices in the lending country, and rise in the borrowing country; the eventual increased movement of merchandise out of one and into the other—all this can hardly be expected to take place smoothly and quickly. Yet no signs of disturbance are to be observed such as the theoretic analysis previses.’—Taussig, I niernational Trade, Chapter XX. “Those commodities which advance most in price in the world markets should become, other things being equal, the most profitable to produce for export, and should consequently become a larger instead of a smaller proportion of the total exports. But the reverse was true as far as Canadian prices were concerned. It was the commodities whose prices rose least whose export increased most. This proves . . . that the relative rise in prices of the commodities important in the export trade was due predominantly to Canadian conditions, and was not simply a reflection of conditions in the world market. The factors incidental to great capital borrowings operated to break the normal relationship between the trends of prices of export commodities in Canada and in the world markets, and thus tended to restrict export trade.’ —VINER, Canada’s Balance of International Indebtedness, Chapter X. TaE task of clinching the connexion between the flow of capital and prosperity, and of linking stoppage of that flow in Britain to depression in Australia still remains. We have already noticed that the crisis of 1893 marks a stage of transition, a point where the tendency towards an excess of commodity imports gives way to a tendency towards an excess of exports. The reasons for the change will be quite apparent from an analysis of capital movements before and since. Although broken by intermittent phases of reversion, the dominance of imports before 1893 arises from the fact that Australia was still in the early stages with reference to its loan operations. After 1880 capital had been borrowed in rapidly increasing amounts, but it was not until after 1890 that the interest payablé on the old loans began to exceed the amount of new loan raised each year. At this stage the Australian loan position bears a striking similarity to that of the United States before 1873. In both countries, in the periods being compared, the pioneer phase of TRADE BETWEEN 1900 AND 1913 127 settlement had passed; and the stage of expansion and the moving frontier was merging into that stage of consolidation marked mainly by the need for capital. From about 1870 onwards one of the great bursts of international capital movement was associated very intimately with railway construction in most of the new lands; and, without sufficient counting of the costs, expansion was pushed on recklessly in both Australia and the United States. The crisis of 1873 was the nemesis in the United States just as that of 1893 was in Australia! “The collapse’, to use Taussig’s words, ‘was as severe in the United States as elsewhere, and—what is significant for our subject—led at once to a reversal of the relation between imports and exports. Imports suddenly dropped and continued low until the end of the decade. Exports increased almost at. once, continued to expand, and began to be greater than the imports. The situation thus dramatically initiated was thereafter maintained for over forty years, until a new dramatic overturn came with the Great War.’ So singular is the precise application of these words that, with the substitution of ‘twenty’ for ‘forty’ years, they might have been written of Australia after 1893. But the facts of capital loans dominate the situation in both countries to such an extent as to put the possibility of a mere coincidence completely out of court. The circumstances but reflect the long-period effects of two large-scale, but identically similar, experiments in capital injection carried out in different laboratories. The course of events in Great Britain during this time was in nearly every respect the complement of that in the United States, Canada, and Australia. In particular, the international trade of Australia and Great Britain represents ‘two aspects of one and the same series of operations. More especially the loans of one and the borrowings of the other were closely connected with the recurring alternations of activity and depression. The export of capital from Great Britain increased rapidly during the upswing stages of the several cyclical periods, and her excess of merchandise imports then declined: relatively her exports became greater.’? The same stages appear in both Australian and American experience. In Australia, after a period of vacillation, imports achieved an overwhelming dominance during the \Taussig, International Trade, Chapter XXIV. ? Paussig, ibid., p. 283. 128 AUSTRALIA’S FLUCTUATING ADVANTAGE IN classical burst of borrowing after 1880; but the ‘cross-over’ to an excess of exports in 1892 is so sharp and abrupt, and is maintained so unwaveringly until 1914, that the Australian experiment is even more satisfactory than the American. It is this period, after the great change in the balance in commodity trade occurs, that more intimately concerns us at the moment. The figures for capital loans, and annual interest payable in respect Tapre XXI New Loans and Percentage of Exports over Imports Year. 1890 1891 1892 1893 1894 1895 1896 897 1898 i899 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1012 New loans! £m. 6-720 9-230 8-147 8-321 1-179 2-184 5-386 3-696 3-956 5-371 3-823 5-2 6-7 50 1-7 0-7 2:0 & Percentage of exports over imports? 83-4 95-6 110-8 139-8 146-7 145-0 111-1 118-2 127-6 141-6 111-0 117-1 108-0 127-6 1565-3 148-2 1565-9 140-6 120-1 127-6 124-1 118-7 101-2 98.5 of these by Australia, are given above; and the feature to be smphasized concerning the volume of the flow is the fluctuation trom mere trickle to great flood as between one year and another. Still more informative and even more definite for the purpose of correlation is the comparison of the percentage of total exports over imports with the volume of new loans. It is not 1 From figures prepared by Commonwealth Bureau of Census and Statistics. 1 rom Commonwealth Year Book, No. 8. «2 3 = [Fs ht 160 140 120 A. CEN" ——y er 20 4 10 100 CAPITAL TS KO 1890 1895 1900 1905 1910 Fra. IX, EXPORTS AS PERCENTAGE OF IMPORTS, AND CAPITAL LOANS, 1890-1914 Smoothed 5-year moving-average curves shown heavy. 130 AUSTRALIA’S FLUCTUATING ADVANTAGE IN antil the smoothed moving-average curves are introduced on the graph that the extraordinary inverse correlation between the two becomes apparent. The fall in capital exports from Great Britain, midway in each decade, is faithfully reproduced in the Australian curves. But it is in the rise and fall of the excess of exports that our interest chiefly centres. The increase in exports as capital loans diminish, and the decline, i.e. the growing excess of imports, as borrowing revives, are obviously very closely correlated. For the score of years after 1890 the evidence that capital loans had the effect of increasing British exports to Australia cannot be doubted. The cognate phenomena in the two countries fit together too exactly for any other explanation to be feasible. The next phase of our examination concerns the banking situation in Australia during the period following 1900. In supplementing what has been said already on this matter, we are unable, however, to do more than strengthen the conclusions obtained from the earlier period, i.e. before 1893. Theory would lead us to expect fluctuations in overseas trade corresponding with the rise and fall of capital importation ; but neither theory nor the geographical situation of Australia would lead us to expect the surprising rapidity with which variation in the volume of trade follows the fluctuations in the flow of capital from Britain to Australia. Not once or twice, but in practically every instance, effect follows cause so closely and corresponds so intimately in degree that no other explanation of our prosperity phases would appear to be tenable. Banking figures also show a close correlation with the increase and decrease in capital imports. In the light of what was said in the two previous chapters, consider the changes in the banking position as revealed by the statistics for the period which are given immediately below. The spell of stationary advances and deposits between 1900 and 1904, and the relatively heavy drain on the gold reserves towards the end of that phase, a drain that was repeated again in 1906, tell in unmistakable language the story of the difficulties imposed upon a country obliged to sontinue heavy annual interest payments during periods of deficient production. Just as patently the lean years give place to the fat ones as the period of prosperity, expansion of credit, rapidly rising prices accompanied by rising bank deposits and TRADE BETWEEN 1900 AND 1913 131 Tapre XXII Reserves, Deposits, and Advances of all Banks! Year. 1900 1901 {902 1903 1904 1905 1906 1907 1908 1909 1910 1911 " 1912 1913 Reserves. £m. 22-272 19-781 21-076 20-021 19-358 21-490 22-681 23-711 24-932 26-298 30-160 33-471 28-686 31-252 Deposits. £m. 90-521 91-487 03-436 91-757 91-548 98-143 106-515 112-698 113-694 117-758 129-891 143-447 149-806 149-828 ddvances. £m. 84-743 88-239 87-726 88-224 87-062 85-167 87-228 94-223 100-844 97-693 100-611 112-766 123-760 118-919 Ratio of reserves to deposits mer cent. 24-5 21-6 22-5 Gold moving out. 21-8 21-1 21-9 21-4 Gold moving out. 21-04 21-9 22-3 24-8 23-3 19-1 Gold moving out. 29.9 BC 30 110 TING A ADVANCES 00 —_ a—————— 1895 1905 1910 Fig. X. BANK DEPOSITS AND ADVANCES, 1888-1914 In millions sterling. advances, succeeds to scarcity in the period between 1907 and 1912. Just as surely once more does the drain on gold stocks in ! Summary of Australian Financial Statistics, Finance Bulletin, No. 11; Commonwealth Bureau of Census and Statistics. 132 AUSTRALIA'S FLUCTUATING ADVANTAGE IN 1911 and 1912 reflect the strained nature of the banking situation. The piling of effect upon effect tells so forcibly, and reinforces so closely the reasoning of theory, that here again the completeness of verification is of a very high order indeed Taken in conjunction with the banking figures for the period, the records of gold movement are of unusual and peculiar significance. With the complete picture of credit conditions between Tasre XXIII Production and Movement of Gold, 1900-13 1001 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911. 1912. 1913 Year. 1 Stocks.t 20-627 21-075 20-021 19-358 21-490 22-681 23-711 24-931 26-297 30-149 33-480 28-685 31-252 Production? ' Net export? 14-006 13-558 14-812 13-152 16-295 17-175 15-897 15716 15-551 9-478 14-632 14-723 13-515 7-375 13-059 11-144 12-605 7-762 11-553 3130 10-552 9-931 9-880 | 10-473 | 0.377 1.707 Retained.t 0-448 0-660 —0-880 (loss) 0-180 6-073 -0-091 (loss) 6-140 1-915 4-843 8-423 0-621 —0-593 (loss) 7.670 1909 and 1913 before us, the ebb and flow of gold between Britain and Australia is seen to be a most sensitive response to the three main controls of domestic gold production, general productivity in Australia, and the volume of capital imports. In this connexion the correlation to be observed between the curves in Figs. VIII and IX, showing the excess of exports over imports, the volume of capital loans, and the amount of gold retained in Australia has a special interest. It accords so fully with logic and experience, however, that little elaboration is needed at this juncture. A word of emphasis may, perhaps, be ventured for the position after 1900. The vacillation in the ‘ Coin and bullion held by banks; from Summary of Australian Financial Statistics, Finance Bulletin, No. 13 ; Commonwealth Bureau of Census and Statistics, 1922. The figures include stocks of silver coin and bullion, but are approximately correct as stated since the gold held outside the banks, the amount of which cannot be ascertained, is not included. ? Annual figures extracted from Commonwealth Year Books. 8 Exports less imports of gold, from Commonwealth Year Books. + Computed from Annual Reports of Royal Mints in Australia. TRADE BETWEEN 1900 AND 1913 133 figures for gold retained in the Commonwealth for the first halfdozen years of the period is of particular interest. The contrast between the £6 millions retained in 1905 and the net loss of nearly a million in 1903, despite the fact that gold production was in that year a record for the decade, is a direct reflection of the effect upon gold stocks of good and bad seasons. A series of dry years meant a deficiency in exports which had to be made good by gold shipments. The small quantity of gold retained in the early years is sharply contrasted with the high and relatively steady figures for the years from 1907 to 1911. The sharp decline in 1911 and 1912 constitutes a considerable loss of gold which again has to be contrasted with the very high retention of nearly £8 millions in the next year. The correlation with the upswing of capital import and the adverse movement of the commodity trade balance is again too clear for doubt. The records of price movements during the period also contain evidence of the utmost importance. Over these years of heavy but unevenly spread borrowing we should expect prices to rise more rapidly than for Great Britain during the acceleration phases; and to display a marked convergence towards Great Britain following the stoppage of loans and the onset of financial stringency in Australia. With this in mind the graph of wholesale prices in Great Britain and Australia for the period is of importance (Fig. XI). The long-period rising trend in prices is clearly exhibited by the parallel moving-average curves; and the Australian price-level relative to the British, rose in the earlier and fell in the later phase of the borrowing cycle. A slight tendency for the levels to approach one another towards the end of the period is discernible, but is not clearly marked. Indeed the great outburst of loans in 1912 and 1913 would lead us to expect otherwise. The coincidence of financial stringency with the break in prices is very emphatic for the three periods of crisis. The effects of borrowing, however, should be more clearly indicated when the sectional price-levels for export, import, and domestic commodities are compared. While the statistical data, especially on the side of imports, is defective in some respects, the material available is far more complete and accurate than that obtainable for the 1880-93 period. It is therefore a matter for satisfaction to find once more that the phenomena 134 AUSTRALIA'S FLUCTUATING ADVANTAGE IN indicated in Chapter VIII which the theory of international trade would lead us to expect are again to be found here. The exact measurement of the tendencies in sectional price-levels cannot be claimed, but the accompanying figures confirm the observations made by Viner. TasLe XXIV Domestic, Export, and Import Price-level. Australia, 1 900-13 Year.’ | Domestic.t! Export? | Import? 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 911 . 1912 . 1913 [ncrease per cent. 1,000 1,097 1,078 977 1,050 (,046 1,037 1,103 1,107 1,114 1,154 1,328 L371 | mq 1,000 1,072 1,118 1,123 1,192 1,249 1,309 1,177 1,212 1,243 (,161 1,263 1,290 90.0 1,000 1,008 993 1,001 988 1,032 1,001 1,024 1,016 1,099 1,101 1,123 ,117 - All this has an important and specific bearing upon the terms of trade over the period, which are now to be examined. The rise affecting domestic prices and the consequent increased demand for imports has little compensation for the Australian producer. With the exception of wool, albeit an important exception, the volume of Australian production could have had little effect on world production and world prices. Those Australian commodities, therefore, which entered into world trade did so at world prices. But, because of the effect of capital loans upon price-levels in the lending and borrowing countries, Australia in the early stages of borrowing cycles procures a relatively greater physical volume of imports for her exports. But towards the end of the period the swelling interest payments sperate in the other direction, and with the approximation once ¢ Adjusted to 1901 as base year from Sydney and Hobart retail prices as computed by Knibbs from State data for forty-six commodities with rent, ‘Prices, Price Indexes and Cost of Living’, Labour and Industrial Branch, Report No. 1, ssued by the Commonwealth Bureau of Census and Statistics, 1912. ? and ? Compiled from data given by Knibbs. Section TV. ibid., and adjusted to 1901 as base. TRADE BETWEEN 1900 AND 1913 135 more of the price-levels in the two countries, the exports tend to become less valuable in relation to the imports; and the advantage in trade goes to the lending country. These phenomena may be clearly seen in the indices for wholesale and sectional price-levels. But, despite the careful and patient examination of price statistics and the laborious compilation of index numbers, no more than general trends can be stated with confidence. The work done by Knibbs, in comparing more than twenty index numbers — IC © CTRALL. 190! to! GREAT BRITAIP ' 2/909! en 10n0 1910 1915 Tig. XI, WHOLESALE PRICES, GREAT BRITAIN AND AUSTRALIA, 1900-14 Qocular trends shown heavy. compiled in different countries, goes to show how very sceptically sweeping conclusions based upon them should be received. In the first place the difficulties involved in separating commodities into foreign- and home-trade commodities are almost insuperable, since commodities are constantly changing from one class to the other. Secondly, the exceptions are S50 numerous and so important, and variations depend so entirely upon the fortuitous circumstances of weather and business conditions in other countries, that the very greatest caution in interpretation is imperative. Argument from particular instances is dangerous ; but we may safely illustrate the difficulty from a simple case. No commodity enters more thoroughly into both home and over- 136 AUSTRALIA'S FLUCTUATING ADVANTAGE IN seas trade for Australia than timber. Owing, also, to the peculiar circumstance that Australian timber is almost wholly hardwood, it enters comparatively little into foreign trade, whereas softwood, especially from Europe and the Pacific coast PORTE "Or Th {030 0 Myf er p-——————————o————————————— 1901 1903 1905 7907 - 1909 1911 1913 Fig. XII. SECTIONAL PRICE-LEVELS:—IMPORTS, EXPORTS, AND DOMESTIC COMMODITIES Smoothed 3-uear moving-averaqe curves shown heavy. of North America, was during the period under review, and still is, an important item in the commodity balance. In 1908, a typical year, the ratio of the value of imported softwood to the value of exported hardwood was 5: 2; but, contrary to the general conclusion stated above, the price of hardwood—the mainly home-trade commodity—rose only 18 per cent. ; whilst the price of softwood, the wholly foreign-trade commodity, rose 28 per cent. TRADE BETWEEN 1900 AND 1913 137 The final index to be considered, before attempting a comprehensive review of the change in the terms of trade over the period, has reference to the price of labour services, a wholly domestic commodity. Wages data, while more satisfactory than for the preceding years, are compiled on a basis that is not TasBLE XXV Index of Wages, Australia 1900-13 BEF REOTIVE WAGES. Year. 1901 . 1902 1903 . 1904 . 1905 . 1906 . 1907 . i908 1909 1910 . 11 | . 1912 . * 1913 . Nominal Wages! Tnemployment per cent? BR A 848 6-6 340 78 330 11-5 365 3.3 360 34 366 5-7 393 57 900 a0 923 5-8 955 56 ,000 4-7 ,051 | 56 0768 53 Retazl price index. Is] 380 929 | 310 358 901 302 897 951 248 970 +,000 1,100 | 1.121 Full work. D 964 950 950 | 280 976 | p60 p96 946 974 985 1,000 955 | 975 Allowing Jor unemployment. TT" 1.000 995 984 1,010 1,028 994 1,043 988 1,019 1,030 1,058 1,000 1.026 entirely free from criticism. It is only fair to say, however, that the authorities responsible for their compilation are fully aware of the limitations, and that the process constitutes a method of ‘sampling’ that is probably accurate in a high degree, except in abnormal years. The chief difficulty concerns the registration of unemployment, the factor which affects so seriously the index of effective wages. Prior to 1913 comparable statistics, allowing for variations in both the purchasing power of money and the volume of unemployment, cannot be computed with great accuracy. It is highly probable, however, that the index ' Computed by Knibbs for 1901, and 1908 onwards. Figures for 1902-5 computed by writer from data in Statistical Registers for Victoria and New South Wales. ? From Commonwealth Year Book for the years 1908 onwards. Earlier years omputed by writer from State registers. * Wholesale prices computed for Labour Bulletin, No. 1, Prices, Price Indexes and Cost of Living, Commonwealth Bureau of Census and Statistics, 1912. 4 Commonwealth Year Book, Chapter XIII (No. 20), for years from 1908 onwards. Earlier years computed by writer from columns B, C, and D. 3710 = 138 TRADE BETWEEN 1900 AND 1913 given above records the main variations with a precision sufficient for our purpose. The correlation of all these factors into a complete statistical picture will now be possible for our period. The comparison of export and import prices, the relation known as net barter terms, gives a comparison that measures approximately the changing margin of advantage in prices received by Australia or Great Britain from year to year. The smoothed moving-average curve shows during the earlier years a gradual rise of the net terms in favour of Australia which has to be compared with the curve for export prices in Fig. XII. Very little advantage is indicated as between the beginning and the close of the period, that is to say that the price-levels have been automatically adjusted over the whole period as the theory of prices would lead us to suppose. A net increase in the return to labour, at least for those occupations for which the wage statistics are collected, is indicated by the curve for wages which tends slowly but steadily upwards right through the piece. But the consideration of the physical volume of goods figuring in overseas trade, taken in conjunction with the import. and export price indices, i.e. the gross barter berms, reveals a very different state of affairs. There is clearly a gain as shown by this curve of approximately 30 per cent. for Australia during the early years of the period followed by a steep decline of over 40 per cent. by the end of the period. Here, then, is the key to the growing financial tension of 1913; and the crises of 1903, 1907-8, and 1912 fall into place as mere phases in the steadily increasing disadvantage in trade which was the chief result of the growing burden of overseas debt. TasLeg XXVI Australia [INTERNATIONAL TRADE, 1901-13 year. 901 L902 L903 .904 905 806 £007 1908 1909 1910 1911 1912 913 NET IMPORTS. Value at 1901 level. Absolute. ' Relative. I=Ir IIr—+I Declared value. gm. | 12:434 10-876 37-811 37-021 38-347 14-745 71-809 19-799 51-172 30-014 56-968 78-159 70-749 1 4 L000 | 1.008 903 1,001 988 032 001 1,024 L016 009 “101 0123 Cir |! I 12-434 10-353 38-077 36-084 38-813 3-357 17-479 18-631 50-366 54-608 60-825 69-598 71-306 wv 1,000 950 807 872 915 1,022 118 145 ,188 ,287 ,433 -,641 ,681 | Declared | value. em. 16:696 | 3-015 18-250 37486 | 56:841 50-738 72:894 34-311 35-319 74-491 19-482 79-006 78-579 NET EXPORTS. Value at 1901 level. Absolute. | Relative. vV=vVI VII=V Export price index. <4 000 1,072 ,118 1,123 1,192 249 ,309 177 ,212 1243 ,161 1,263 L.290 | vil 16-696 10-965 13-159 1279 | 7-601 15-836 5-635 14-640 53-893 59-920 58-460 32-625 30-900 VIiil 1,000 877 924 1,098 1,019 ,191 191 170 , 154 ,283 ,466 .,340 1.804 Net barter terms. '1=v7I 4 Lh 1,000 921 i,018 1,051 1,087 1,089 ,079 1,033 1,073 1,027 948 1,011 1.029 Gross barter terms. TTII=IV 1,000 923 1,030 1,259 1,118 1,165 1,065 1,022 971 997 1,023 816 776 WAGES. Effective allowing for unemployment. Effective. ad 964 950 950 980 976 960 996 46 374 985 ,000 955 975 ail t,000 995 984 1,010 £,028 994 1,043 988 1,019 1,030 1,058 1,000 1.026 | Melbourne wholesale pricelevel. o IIT 1,000 1,078 1,076 914 934 973 1,048 1,144 1,020 1,029 1,026 1,205 1.201 = + - GROSS| TERMS 14 IC Hi eee ee + 1902 1904 1906 1908 1910 1912 Fra. XIII. GROSS AND NET TERMS OF TRADE AND WAGES, 1901-13 Smoothed 3-year moving-average curves shown heavy. CHAPTER XII THE AUSTRALIAN BALANCE OF INTERNATIONAL INDEBTEDNESS FROM 1900 TO 1913 ‘In New and Old countries alike, consumption and therefore imports are usually large in an ascending phase of general commercial credit; and at the same time prices are high, and therefore imports appear larger than they are. But a lending country, like Britain, generally exports capital largely when credit is good ; and her working and other classes are spending freely ; while a borrowing country is likely to swell her imports by goods obtained on credit, just when her imports would be largest and at the highest prices, even if she were not borrowing.’ —ALFRED MamrsuarL, Money, Credit, and Commerce. *We draw so extensively upon other countries for many commodities, while at the same time the prices of our great staple products are so affected by the foreign demand for them as to render the Australian price level more a product of two sets of factors, domestic and foreign, than is the case in most other countries. It is thus necessary to consider the whole problem relative to Australian conditions before any general conclusion may be stated concerning the relation of currency and prices.—Prof. D. B. CopLanp, ‘Currency Inflation and Price Movements in Australia,’ Economic Journal, Dec. 1920. ALTHOUGH in these days the use of certain terms borrowed from the writings of theorists upon international trade has become common in press and forum, some confusion in thought and language still persists. This ambiguity in economic discussion arises not so much from difficulties in the conception of international indebtedness, or from the want of thought upon the subject, as from failure to agree upon the exact connotation of the terms employed. There is little doubt that the attempt to express the two aspects of the international account in terms of ‘exports’ and ‘imports’ is primarily responsible for this confusion, since many items making up the total of international indebtedness can be thus described only by a somewhat violent distortion of language. It would therefore appear to be expedient to classify the items in indebtedness rather as ‘debits’ and ‘credits’ ; and thus to emphasize the effect of the transfer of goods and services, rather than the direction of such transfers. Since strict consistency in the use of terms is indispensable to scientific discussion it is necessary to state here the exact sense in which they are employed. Transactions which create monetary obligations by Australians to individuals or firms abroad are debits, while transactions which create similar obligations to Australians are credits. The Australian ‘balance of indebtedness’ is therefore taken to mean the equilibrium established 142 AUSTRALIAN BALANCE OF INTERNATIONAL between debits and credits, i.e. the whole balance sheet ; while the difference between the debits and credits is regarded as the equilibrating factor in the balance, having regard, of course, to the values rather than to the physical quantities involved in the transactions. Similar confusion arises concerning the ‘balance of payments’ which is applied indifferently to both the equilibrium momentarily existing between payments due fo and by a country, and to the difference between the immediate debit and credit obligations. In both meanings it is the state of monetary obligation at any moment rather than the long-period situation having regard to all indebtedness that is to be emphasized; but, for the sake of consistency, it is the equilibrium existing, rather than the difference, which is to be here understood. It is conceivable that, during a period when the general trend of international indebtedness is against Australia, there will be occasions when the international account is, at the moment, ‘in credit’, i.e. the immediate difference is in Australia’s favour. With these distinctions in mind, it is proposed now to ascertain as nearly as possible the debit difference of international indebtedness for Australia over the period between 1900 and 1913, i.e. the net amount of Australia’s obligations to other countries which was not offset by the shipment of goods, money, or services during that time. These obligations will be considered under the following heads: I. The Commodity Balance of Trade. IT. The ‘Service’ Balance, i.e. the balance of Freight, Insurance, and Tourist expenditures. ITI. Capital Investments and Interest Payments. IV. Non-Commercial Items, viz. : (a) Migrants’ Capital and (b) Non-commercial Remittances. V. The Total Estimated Balance of Indebtedness. The total debit difference thus ascertained! will then be com-' “The commodity balance of trade, the balance of service transactions, and the balance of non-commercial transactions, indicate respectively the differences between the amounts of commodity imports and exports, of debit and credit. international service transactions, and of debit and credit international non-commercial transactions, irrespective of whether or not the obligations created thereby are immediate or deferred. The total of these three balances equals the total balance of international indebtedness.” — Viner, op. cit., p. 22. INDEBTEDNESS FROM 1900 TO 1913 5 pared with the total estimated importation of gapitel: fomthe period, in an attempt to establish the exact velar boon these two facts in the situation. Later, the positidnBspablished under pre-war conditions will be compared with the Psk-War situation, and an endeavour made to indicate the "Bwasntial similarity between them. > hod - I. The Commodity Balance of Trade. The real significance of the total values of commodity exports and imports has already been broadly examined in connexion with the terms of trade. For the purpose of reckoning the balance of indebtedness over the whole period, however, a more accurate analysis is now necessary. Happily for our purpose, the Australian trade statistics are unusually complete and well arranged, and any elaboration of the data given in official publications is not called for. Beyond the actual tabulation of the figures for overseas trade little is required but a brief explanation of the method of recording exports and imports, and a short note or two upon the relevant table set out below. The recorded value of imported commodities represents the amount -orr-which ‘duty i§ payable, or would be payable if the duty were charged ad valorem. ‘The value of goods is taken to be 10 per cent. in advance of the fair market value in the principal markets of the country whence the goods were exported, the increase being roughly intended to represent the cost plus insurance, freight, and other charges to the place of landing’! Ten-elevenths of the recorded value has therefore been taken to represent the invoice value of inward cargoes. Since Australia is one of the chief producers of gold, the imports and exports of gold and coin have been included as ordinary items in the commodity balance. The recorded value of exports represents the value ‘in the ordinary commercial acceptance of the term’ in the principal markets of the Commonwealth. The gross trade figures, however, are modified by imports from adjacent areas, e.g. the Pacific Islands and Papua, of commodities which come to 1 Year Book of the Commonwealth, No. 3 (1910), p. 594. 144 INDEBTEDNESS FROM 1900 TO 1913 Australian ports for transhipment to overseas ports. These imports for re-export have therefore been deducted from the gross figures for both imports and exports. A further note is necessary with reference to interstate trade. Until 1904 ‘goods dispatched from one Australian state for transhipment in another state to an overseas country were simply recorded in the former as an export to the transhipping state, and thus no proper record of the export as ‘‘oversea’ was made. Owing to this defect the overseas trade prior to 1904 is understated by an amount which it is impossible to estimate accurately, since it varies with the development of the shipping facilities of the states concerned.” An analogous discrepancy occurs in imports for which, however, an official estimate for the years affected is included in the table below. Ships’ stores represent another item not included in the total figures. For the years prior to 1906, however, this item was included in the recorded total of imports, and the blanks in the relevant column are thus explained. The import or export of vessels was not recorded before the year 1905, and the value of this item has been obtained from the annual statistics under this head recorded by the Board of Trade. As the value is quite a considerable item in the balance of indebtedness it has been included in the general table. For the items concerned, the Commonwealth statistics are as comprehensive and accurate as can reasonably be expected, and the pleasure of working with such excellent and well-arranged returns must be recorded. The recorded value for exports, however, constitutes the least satisfactory item in the commodity balance. The method of registering the value of exports at current Australian prices, even if the returns furnishing the necessary data were accurate, leaves considerable room for over-statement. It is believed that the figure for exports are somewhat in excess of the true value; but any estimate of the error from over-valuation and of the deduction necessary to take into account overseas charges paid by Australia, presents great difficulty. Such estimates must be mainly guesswork, but it is felt that 5 per cent. of recorded value represents a conservative allowance. The figures, therefore, have been adjusted in accordance with this view. (145) Tare XXVII Commodity Balance of Trade, 1900-13 (In Millions of Pounds Sterling) DEBITS. Year. 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 Imports for consuUMDII0MN. 38-577 36-978 34-374 33-856 34-861 10-678 47-100 45-272 46-520 54-599 60-380 71-054 792-466 Imports for re-export. 1-944 2-646 2-601 2-385 2.713 3-437 3-007 2-192 2-475 2-655 3-277 3-134 3-434 ¥ Imports less exports of ships. nr 0-500 0-142 | 0-223 0-186 0-315 0-591 0-618 0-619 0-718 0-640 0-322 1-181 1.944 Unrecorded imports. IV 2-121 1-547 1-024 Total. I+1IT+4 IvV—-JIr 39-254 36-021 33-030 31-457 32-463 37-832 44-711 43-699 44-763 52-544 57-925 69-101 70-276 OREDITS Year. 1901 1902 1903 1904 1805 1906 1907 1908 1909 1910 1911 1912 1913 Recorded exports less 59 VI 47-211 41-718 45-838 54-611 53-999 66-261 69-183 61-096 62-058 70-766 76-008 75-141 74.576 Re-exmorts. VII 1-944 2-646 2-591 2-385 2-713 3-437 3-007 2-192 2-475 2-655 3-277 3-134 2.434 Ships’ stores. VIII 0-876 0-999 1-196 1-072 1-080 1-238 1-432 1-450 Total. PII4-FX VELL Excess of Credits. IX X 46-667 7-413 39-072 3-051 43-247 10-217 52-226 20-769 51-286 18-823 63-690 25-868 87-175 22-464 60-100 16-401 60-655 15-892 69-191 16-647 73-969 16-034 73-439 | 4-338 72.601 92:325 I and II. Including Gold and Specie. From Quarterly Summary of Australian Statistics, Bulletin No. 85, 1921. 1V. Ibid. Estimated understatement due to failure to record as imports goods received in one State for transhipment to another State. Il. From Commonwealth Year Books and Annual Reports of the Board of Trade. IX. Ibid. For years 1901-5 estimated by writer on basis of outward tonnage and total devartures from Commonwealth. 3710 146 AUSTRALIAN BALANCE OF INTERNATIONAL I1. Freight, Insurance, and Tourist Expenditures. Services of various kinds function equally with commodity imports as items in the balance of indebtedness. Freight and insurance upon imports are the most important of these charges to Australia; and, in order to calculate Australia’s capacity to borrow, the amount chargeable from year to year upon these ‘invisible imports’ must be computed. No continuous estimate of the cost to the Commonwealth of freight and insurance for the period under discussion was known to the writer; and in the face of the perennial controversies as to the fairness or otherwise of shipping charges, and the total dependence of Australia upon other countries for overseas carrying services, the lack of interest in the matter is as surprising as the lack of data. Because of the geographical isolation, the close integration of shipping services, and the custom by which all shipping charges are met by the Australian importer, the problem of estimating the annual charge for freight is not to be compared for difficulty with that of other countries such as Canada. Nevertheless the task of making an accurate estimate of the cost of inward carriage is one of extraordinary complexity. Goods arrive mainly by regular ‘liners’ of two distinct types, viz. the cabincargo or passenger vessels, and the purely cargo vessels trading on regular or irregular schedules. The kind of cargo carried in each type of vessel differs to some extent; and the chief difficulties in calculation arise from the differing rates of freight for the various groups of commodities. Imports consist broadly of two classes, viz. bulky, light articles such as textiles, and heavy articles varying greatly in value such as machinery and metal goods. Shipowners distinguish to some extent between the two classes of goods by a twofold system of freight charges, i.e. by weight and by measurement ; but thereis no ready meansof establishing a basis for computing the gross cost of ocean carriage. "This difficulty is not by any means the only barrier in the way of correct estimates. No statistical connexion between the value of the cargo and the charge for freight upon that cargo is made in the Australian returns. Ships’ manifests contain entries which are merely descriptions of packages. Invoice values of imported goods are declared for customs purposes by each importer ; and thus, while the freight paid is known to the shipowner, the value of the cargo scarcely concerns him. Insurance INDEBTEDNESS FROM 1900 TO 1913 147 brokers, likewise, deal with cargoes piecemeal. It would be extremely useful to have one or two sample cargoes analysed for value by the Australian customs department, the only authority in possession of the facts necessary to establish a connexion between cargo and freight values. The essential difficulty, in working from the Commonwealth Statistics relating to trade, is that of translating figures representing value into statistics of quantity from which the value of an average cargo might be determined and the amount of freight payable reckoned. This relationship being established for one year, a further complication is presented by the fluctuations in freight rates, although it is believed that these do not swing quite so widely for the Australian trade as for the world in general. Still another difficulty, especially in utilizing the figures for shipping tonnage inwards for all ports, is the variation between arrival in ballast and arrival fully loaded. The ‘method devised by Viner when faced by the similar Canadian problem was, of course, applicable ; but there was an advantage to be gained by choosing another method of estimating freight charges which would serve as a check upon the results obtained by him. .The device finally selected consisted of taking the analysis of imports into classes made by the Commonwealth Statistician, and loading for a normal year a sample cargo representative of all lines imported in a typical ship of 15,000 tons displacement loaded to three-fifths of capacity. Working on this classification for the years 1901, 1904, 1906, and 1908, an average cargo consisting of 127 units of textiles, 94 units of metals and metal manufactures, 30 of animal and vegetable foodstuffs, and so on down the list, was obtained. For a normal cargo composed in this way it was calculated that the value at prices prevailing in 1908 was approximately £230,000, upon which the freight payable at 1908 rates would amount to about £15,000. In other words, the freight charged upon this representative cargo amounted to approximately 6 per cent. of the value of the cargo. But in order to arrive at the net freight charge paid upon Australian imports it was, further, necessary to make allowance for various disbursements by the shipping companies represented by port dues, wages, wharfage, &c. in Australian ports. On this point C. K. Hobson calculated that 30 per cent. of the gross 148 AUSTRALIAN BALANCE OF INTERNATIONAL receipts of British vessels are expended in foreign ports. Assuming that this figure is approximately correct, it is calculated that the proportion expended in Australian ports on a typical voyage during this period amounted to 20 per cent. This estimate can be confirmed from other sources. Two series of voyages to Australian ports have been analysed in great detail by W. G. Rickman.2 The first series comprised 14 sample voyages in which grain cargoes were lifted in every Australian port handling wheat. The wheat shifted amounted to 94,607 TasLe XXVIII Freight Index on Imports from Great Britain 1901 . 1902 . 1903 . 1904 . 19056 . 1906 . 1907 . 1908 . 1909 . 1910 . 911 . 1912 . 1913 . Year. Eeonomist. 103-056 86-99 87-26 88-17 38-88 39-37 950-90 78:32 32-02 84-48 06-94 130-95 116-34 Board + Canada of Trade. (Viner). 95-0 89-5 77-6 71-3 80-6 100-0 100-0 94-0 101-56 103-0 123-9 169-7 95-0 89-5 77-6 71-3 80-6 100-0 100-0 101-9 103-8 105-8 114-9 124-0 133-2 Australia.’ 100 76 Composite. 100 94 83 74-3 85-2 93-1 98-0 98-1 101-0 107-0 114-8 122-9 132.5 ship tons, and the payments in connexion therewith amounted bo £28,346. The average cost per ton was therefore approximately six shillings. The second series embraced 15 sample voyages in which general cargoes were moved. The ports covered were all the principal points of entry in the Commonwealth. In all 59,425 ship tons were loaded at a total cost of £17 ,430, or an average cost per ton of 5s. 10d. On the average value of outward freight this represents a deduction of about 124 per cent. for port charges and other costs. It is probable, however, that these disbursements by the shipowners during the period were, since the Navigation Act was not then in force, more than offset by the earnings in the interstate trade. The net charge on inward ‘ The Export of Capital, p. 173. ! W. G. Rickman, Shipowners’ Register of Port Charges. ' Angier’s Fifty Years’ Freights. INDEBTEDNESS FROM 1900 TO 1913 149 cargoes has, therefore, been calculated at 6 per cent., and at 4-2 per cent. for outward freight. Even though it is prepared on the actual ‘make-up’ of imports, this is admittedly rather a slender basis upon which to build an estimate of the Australian bill for carriage inwards. It is believed, however, that it yields a fair estimate of the charge made ; and this belief has been confirmed by reference to many authorities who are acquainted with Australian shipping from various angles, either as accountants, executives, customs Tape XXIX Freight Payments by Australia on Imports Year. 1901 19502 1903 1904 19056 1908 1907 1908 1909 1910 1911 1912 1913 Recorded value of imports. £m. 12-434 10-676 37-811 37-021 38-347 44-745 51-809 19-799 51-172 50-014 56-968 78-169 79-712 if Estimated vercentage freight to cargo. [if Freight index. [Vv L000 940 330 743 352 I31 380 381 10 0 8 3 5958 Wholesale price index 0¢. Britain] Percentage freight charge to tmports. VI 912 6-5 909 6-2 914 5:5 p26 | 47 921 5-5 851 3-9 000 59 971 8:1 982 5-1 -026 6-2 1032 6-7 1084 6-8 1099 7:2 Total freight. £m. VII 2-756 2-523 2-079 1-739 2-012 2-638 3-056 3-038 3-123 3-720 4-249 5-318 5.746 IV. Estimated by the writer. V. Labour Dept. Board of Trade, Cost of Living Report. 97. TIT x IV =~ V. officers, or statisticians. It is further confirmed in rather a remarkable way by the estimate for the post-war years, from incomparably better data, which is given in a later chapter. It also bears comparison with the estimate made by Viner for Canada for the year 1907. By an entirely different method he arrived at the figure of 3-6 per cent. for the shorter voyage and more competitive conditions of the Canadian trade. With one exception the authorities competent to compare the figures by actual experience were prepared to admit that this was approximately the relation between the two cases. It was finally 150 AUSTRALIAN BALANCE OF INTERNATIONAL necessary to construct a freight index covering the whole period; and, by making allowance for the variations in the price level, to estimate the freight bill for each year of the period. The proportion of exports for which freight was paid by Australians has been estimated at 25 per cent. of recorded value. (0) Insurance. Although there are differences in the rates quoted by brokers for the different kinds of commodities consigned to Australian ports, the great bulk of cargoes falls within Tasre XXX Insurance on Imports, and Freight on Exports 1901 1902 1903 1904 1905 1906 1907 1908 1909 i910 11 1912 . 1913 Year. Imports at Insured Value, £m. 44-362 12-524 39-529 38:699 10-090 16-673 58:400 52-062 33-498 62-739 70-012 31-696 33208 Insurance Charge. £m. 0-166 0-159 0-148 0-145 0-150 0.175 0-219 0-195 0-201 0-235 0-262 0-306 0-312 Exports, 25 per cent. of Declared Value. £m. L resghi Index per cent, of Cargo Value. 124 46 11-0 4.3 12-1 38 144 3:3 42 3-9 74 4-1 '82 D0] 16-1 42 16°3 4.3 18:6 4.3 19-9 , 4-6 198 | 48 19-6 5+) Freight Charge. £m. 0570 0-469 0-460 0-475 0-550 0-713 0-786 0-676 0-701 0-800 0-915 0-950 0-980 a fairly narrow range of quotation. The two methods of estimating the average rate of freight upon the sample cargo mentioned in the last section, and of collecting the impressions of a number of brokers constantly handling Australian cargoes at Lloyd’s were employed. The estimate of average insurance upon which the figures in the accompanying table are based was fixed in this way at three-eighths of 1 per cent. The method followed at Lloyd’s in computing the value of cargoes for insurance is to add 10 per cent. to the invoice value, add the freight which is payable in advance, and to quote the rate upon that total. (¢) Tourist Expenditures. The calculation of expenditure by tourists moving to and from Australia is necessarily very inexact. The records of shipping companies engaged in carrying INDEBTEDNESS FROM 1900 TO 1913 151 passengers, and the Commonwealth returns of overseas arrivals and departures constitute the chief and almost the only sources of information. No pretence is made of any high degree of accuracy; but it is believed that the method used here in arriving at the total expenditure gives a result that is, at any rate, not in excess of the true figures. In estimating the average expenditure of different types of passengers, the proportion of travellers in different classes, and the number of return tickets taken out respectively in Great Britain and Australia, the writer has been mainly guided by the working knowledge possessed by responsible officials of the greater companies engaged in passenger traffic. These impressions have been reinforced by random ‘samplings’ of passenger statistics in the different years ; and by the known conditions of accommodation that existed on the type of cabin-cargo steamer trading to Australia during the period. From the table of oversea arrivals and departures published quarterly by the Commonwealth Bureau of Census and Statistics! it is possible to eliminate immigrants and emigrants, and to compute the proportion of tourists travelling in the different classes of passenger accommodation. It is estimated that on Australian routes there were two passengers in other classes to every one travelling on a first-class ticket. The period is very interesting in this respect, since the difficult years from 1902 to 1905 restricted outward travellers from Australia mainly to people engaged in business, whilst the prosperity at the end of the period was responsible for a great expansion of the tourist traffic proper. The numbers of tourists are represented in the statistics by the holders of return tickets taken out either in Australia or abroad. It then became necessary to separate these into inward and outward passengers. This was not so difficult as it would seem since the numbers of inward passengers exhibit some degree of regularity, and are represented, for the great part by business men engaged in regular seasonal work such as wool buying. Further estimates then had to be made concerning (i) the average amount of money spent in Australia by tourists from abroad. Under the circumstances which govern such ‘business trips’ it is held that £100 represents a fair allowance for the normal duration of these visits: and (ii) the 1 Demography Bulletins, and also Quarterly Summary of Statistics. 152 AUSTRALIAN BALANCE OF INTERNATIONAL average expenditure, including the cost of transport, by tourists leaving Australia. Taking into account the different types of Tasre XXXI Numbers and Expenditure of Tourists in Australia 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 Year, FIRST CLASS. Number. Amount, £000. 9,000 8,000 7,000 7,000 7,000 7,600 8,000 8,600 8,000 9,000 9,000 10,000 10,000 900 800 700 700 700 750 300 850 800 900 900 1,000 1.0600 OTHER CLASSES. Number. Amount. £°000. 10,000 10,000 8,000 8,000 8,000 8,600 9,000 9,600 9,000 10,000 10,000 10,000 10.000 500 500 400 400 400 425 450 475 450 500 500 600 750 TOTAL. £m. 1-3 11 1-1 11 1-175 1-25 1-325 1-25 14 14 1-5 2.0 Tasre XXXII Number and Expenditure of Australian Tourists Abroad 1901 1902 1903 1904 19056 1906 1907 1908 1909 1910 1911 1912 1912 Year. FIRST CLASS. Number. Amount. £000. 18,000 15,500 | 7,000 7,000 7,000 9,000 12,000 13,000 13,000 13,000 13,500 15,000 25.000 2,700 2,326 1,050 1,050 1,050 1,350 1,800 ',950 1,950 1,950 2,025 2,275 2 750 OTHER CLASSES. Number. Amount, £000. 89,000 37,000 23,000 23,000 23,000 27,000 34,000 35,000 35,600 36,000 40,000 40,000 43.500 1,950 1,850 1,150 1,150 »180 1,350 ,700 +760 775 1,800 2,000 2,000 2.120 TOTAL. £m. 4-850 4-175 2-2 2:2 2-2 2:7 3-5 3-7 3-725 3-76 4-025 4-275 5-870 passage available, and the various destinations indicated by the bookings, it wasreckoned that, for this period, £1 50 was a conservative estimate for a first-class passengerand £50 forall other classes. These calculations may now be presented in the form of tables. INDEBTEDNESS FROM 1900 TO 1913 153 III. Capital Investments and Interest Payments. After 1850 the practice of floating Australian loans in London almost eliminated domestic loans. But the stoppage of the flow of capital from Great Britain after 1893 and the increasing surplus of domestic capital led, during the period after 1900, to the placing of many redemption and other loans entirely within Australia. This is, indeed, the outstanding financial feature of Tape XXXII Government Loans raised and Interest Payable Abroad 1 Year. 1901 1902 1903 . 1904 . 19056 1906 1907 1908 1909 1910 . 1911 . 1912 . : 1913 Loans raised. £m. 5-2 6-7 5-0 1-7 0-7 2-0 | 5-1 2-@ 6-8 L 4 Total held in London. £m. 174-8 181-5 186-5 188-2 188-9 190-9 185-6 183-3 189-4 192-0 183-2 190-0 204-4. Average rate on debt per cent. 3-68 3-64 3-78 3-62 3-63 3-63 3-60 3-60 3-58 3.57 3-57 | 3:67 9.60 Interest payable abroad. £m. 6-433 6-608 6-775 6-805 6-847 6-911 6-687 6-591 8-771 6-855 8-544 6-775 7.951 the first decade of the Commonwealth ; and there is little doubt that the rapid increase in domestic holdings of Australian government securities has done much to increase confidence overseas in these loans. Between 1900 and 1913 the portion of the public debt raised in London increased from £174-8 millions to £204-4 millions, while the portion raised in Australia rose from £288 to £90-1 millions. In other words the proportion of the public debt raised at home rose from 14-1 to 30-5 per cent., in itself some indication that the capital previously borrowed was largely reproductive. By comparison with Lehfeldt’s estimate of the return on large colonial investments (Table XXXV) it will be seen that Australia had borrowed very advantageously, despite the fact that interest rates were relatively high until 1890. By 1900 the 1 Pinance Bulletins, Commonwealth Bureau of Census and Statistics. 3710 154 AUSTRALIAN BALANCE OF INTERNATIONAL rate asked for long-term loans had declined to an abnormally low level. A further fact of importance is that the increase in the amount of the debt was more than counterbalanced by the growth of population, and by the rise in prices. Comparing the public debt at the 1901 price level, the burden per head fell from £53-27 to £50-01 per head by 1913. Looking back over this period with particular attention to the annual overseas debt for interest, the most striking feature is the almost uniform amount of this item. This must be considered in relation to the whole record of business which, despite the three difficult episodes of 1903, 1907-8, and 1912-13, exhibits stability and soundly based prosperity to a greater degree than any other period of our history. Steady industrial expansion, rising productivity, easy banking, and a relatively heavy volume of immigration all bear witness to the progress of the time; but, it is also noted, there is no lack of evidence of that tendency to accumulate liabilities beyond the limit which could be justified by the normal production of the country. The prosperity and easy money of the golden years after 1906 revived the temptation to promote over-expansive schemes in public and private business. Optimism once more overshot the bounds of prudence; and the concluding portion of this chapter will demonstrate how heavily the indebtedness so lightly undertaken in the middle years began to weigh at the end. Australian financial history after 1900 is marked by another feature of major importance, and that is the tendency to approach the London market for ‘business’ loans of one sort and another. But, while the evidence of heavy private investment at this period is undoubted, the estimation of its volume is a matter of the greatest difficulty. Private investments, as Viner rightly remarks, ‘take a great number of forms; in most cases theyreceive little publicity, and no comprehensive and systematic attempts have ever been made to compile annual totals for such investments from actual information’! The to and fro movements of securities are so difficult to detect, the volume of transfers so entirely impossible to estimate, and the methods of transfer from one country to another so varied and devious, that one can be sure of one thing only—the under-statement of the total liability under this head. The incentive to evasion of 1 Viner, op. cit., p. 120. INDEBTEDNESS FROM 1900 TO 1913 155 taxation, moreover, during a period of increasing government attention to private wealth has here to be given full weight. Again, the influence of the strengthened protective system in inducing, nay compelling, foreign business to establish itself within the tariff wall, in order to preserve its Australian connexions, is also beyond computation. British and American capital investment for the period runs in many channels. Manufacturing of many kinds, but especially textile industries, the expansion of British shipping interests in the coastwise trade, direct capital contribution to banking, industrial and trading establishments, enlarged foreign interests of many kinds in the export and import trade, and the influence of American capital in the amusement business must all be mentioned. The data for reckoning the volume of such investment is so effectively hidden in company records that no attempt to calculate a great proportion can even be made. The following table, however, Tape XXXIV British Loans to Australia, 1900-131 (In Millions of Pounds Sterling) Year. 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 TOTAL Government. 9-736 5-338 0-720 3.941 0-970 2-667 9-518 4-760 1-950 8-898 11-613 0.517 Municipal. 0-157 1-005 0-251 1-413 Business. 1-511 0-671 0-656 0-449 0-472 2-380 0-684 0-759 1-143 2-165 1-208 1-508 3:118 16-714 Total. 7-633" 6-009 1.736 0-449 3-813 2-380 1-654 3-583 10-661 6-915 3-158 11-411 14-982 "7 ".638 Per cent. All tasues. ' Australia. 4:54 3-89 1-27 0-004 2.29 2.02 1-36 1-86 5:84 259 1-64 541 7.62 2180-6 | 3.04 165-5 153-8 108-5 123-0 166-2 116-0 121-6 192-2 182-4 2677 191-8 210-8 196-5 based on the figures of the Economist by 8. R. Cooke and E. H. Davenport, will give some indication of the growth of the purely ‘business’ type of loan, and of the increasing percentage of the annual investment of British capital which was coming to Australia at the end of the period. ! From Imperial Finance, by S. R. Cooke and E. H. Davenport, 1929. 156 AUSTRALIAN BALANCE OF INTERNATIONAL There is no reason to believe that this estimate comprises the total sum of private borrowing from abroad in the years under review. In addition to the sums for which the London market was publicly approached, there must have been a considerable amount transferred of which no public record exists. But it does, at any rate, indicate the growing importance of the ‘business’ loan ; and is, in addition, a fair index of the proportion between public and private borrowing. But, as an offset to this calculation, it is to be presumed that some amount of duplication occurs, especially where loans were opened for subscription on both the London and Australian markets. Again, there is some ground for mis-statement in the difference between the amounts authorized and the amounts subscribed. It is thought, therefore, that the omissions on one side of the account may very well cancel out the over-statements on the other. In any case, there was an ever-accumulating burden of indebtedness overseas that was reduced on only one or two occasions by redemptions. The old debt was usually carried on by means of conversion loans. It is, unfortunately, quite impossible in the present condition of our business statistics to give more than a very rough estimate as to the amount of overseas capital effectively invested in Australia prior to 1901. The very great losses consequent upon the reconstructions and failures after 1893 make our former estimate under this head entirely useless for the period now being treated ; and resort had to be made to the very disconnected and inadequate primary records of the stock exchange, company records, and financial journals. It is known that considerable payments are made annually to shareholders abroad in con; nexion with investments in mining, pastoral, and mercantile concerns operating in Australia. The sum-total which leaves these shores year by year in the form of interest and dividends cannot, however, be disregarded in our computation. That it is considerable in volume, and an important factor in the total balance of indebtedness, is beyond any doubt. From anexamination of a mass of data bearing upon this point it is concluded that the total investment of private capital from overseas could not be less than the order of £150 millions at the end of the period and might easily be considerably more. It has been assumed for the purpose of establishing a balance of indebtedness, therefore, INDEBTEDNESS FROM 1900 TO 1913 157 that the amount of privately invested capital rose from £125 to £150 millions between 1900 and 1913. In order to determine the amount of the return upon this capital the average rate of interest upon capital invested during the period was estimated from various sources, and the computation is presented in the next table. TasLE XXXV Estimated Rate of Return on Private Capital Year. 301 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911. 912 1913 Lehfeldt.t 3-4 3-2 3-2 3-8 3-8 2-9 1.0 £0 £0 1-2 J 2 Australian productive activity 2 00 23 27 19 31 42 34 128 138 Average of 12 companies.’ 4 5-0 0 8 0 3-0 56 55 51 52 55 5:2 54 Estimated Average. “4 4-0 3-5 42 4 1.7 1.8 , 2 1-8 £9 5-4 3.9 3:0 The estimates made by Lehfeldt based on the return for preference and government stocks issued in London have little bearing upon the immediate problem ; but they are of interest in marking the general trend of interest rates during the period, and the minimum return which might be expected upon capital. The steady increase in productivity as indicated by the official index of productive activity, and the ready market which existed for Australian loan issues, would seem to indicate that a fairly high relative rate of interest might be expected ; and this was confirmed by the analysis of the dividends of twelve representative companies. The estimate of average yield can, therefore, scarcely be considered too high in the light of all the circumstances of the time. It now remains to estimate the total of interest 1 Lehfeldt, ‘The Rate of Interest on British and Foreign Investments’, Journal of the Royal Statistical Society, Jan. and Mar. 1913. ? Commonwealth Bureau of Statistics, Labour Report No. 13, p. 88. 3 From Insurance and Banking Record, for 2 banks, 3 mercantile agencies, 2 life and fire assurance companies, 2 mining companies, 3 industrial companies, 158 AUSTRALIAN BALANCE OF INTERNATIONAL payable on private capital, and this appears in the following table: Tare XXXVI Interest on Capital, Privately Invested in Australia 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 [1913 Year. Estimated amount! £m. Estimated average refurn per cent. 125 125 126 128 131 ‘34 36 37 140 . 42 4-9 145 54 148 | 52 150 50 Total Interest payable. £m. 5-500 5-000 4-410 5-376 5-764 6-298 6-480 5-838 6-720 6-958 7-830 6-696 7-500 From the data already accumulated it is now possible to compute the total interest payable abroad, which is given in the appropriate column in the balance of indebtedness. These payments for interest on capital invested privately in Australia are not offset to any extent by Australian capital invested abroad. Although there is reason to believe that the movement in this respect is now considerable, for the period under discussion it was relatively small. The chief item was constituted by the excess of income from overseas over expenditure in obtaining it by the life assurance societies. The credit on this account rose from about a quarter of a million pounds in the early part of the period; to about half a million in the later years. This was taken to be at least half of the total payments credited to Australia from overseas. IV. Non-Commercial Items. There are certain other movements of goods and capital into ! The Private Debt of Australia in 1915 was estimated by the Commonwealth Statistician (Mr. C. H. Wickens) to be £150 millions, and this would appear to be en vative. See the preface to the Report on the War Census of the Common. INDEBTEDNESS FROM 1900 TO 1913 159 and out of Australia which are not included in the tables already set out. The most important of these concerns the transfer of capital and effects consequent upon migration. These transactions are of a one-sided character; and, while they do not involve payments in the usual trade sense, they do have an appreciable effect upon the balance of indebtedness and must be included in the final reckoning. Goods and capital arriving with immigrants increase the credit total to that extent; Tare XXXVII Net Migration and Related Capital Movements Year. 1901 . 1902 . 1903 . 1904 . 1905 . 1906 . 1907 . 1908 . 1909 . 1910 . 1911 . 1012 . 1918 | Emigrants. 4293 9876 2983 2600 2040 Capital loss. ; £m. 0-0859 0-198 0-059 0-052 So Immigrants. 2 059 5,195 5,437 21,783 29,912 74-379 91,803 63.227 Capital gain. £m. 0-059 0-104 0-109 0-436 0-698 1-488 1-838 1-266 emigrants’ effects and capital correspondingly swell the debit total. The evaluation of these items, however, is a matter of considerable difficulty, and anything like accurate computation is out of the question. Nevertheless, sufficient is known of the circumstances attendant upon migration movements to Australia to enable a rough estimate to be made. There is no compulsory declaration of capital by immigrants entering Australia; and the scanty records of government departments, eked out by the impressions of migration and welfare officers, are the chief basis for the calculation. The estimate has been compared with the corresponding estimates by investigators of this aspect in Canada, the United States, and New Zealand ; and it is claimed that the sums mentioned are, at least, not excessive. Having regard to the number of children included in the total immigra-* Commonwealth Bureau of Census and Statistics, Commonwealth Demography. 1913 and Previous Years, Bulletin No. 31. 160 AUSTRALIAN BALANCE OF INTERNATIONAL tion, and to the certainty that even assisted immigrants do not disclose the total capital being transferred, it is estimated that £20 per head would be a fair average. For the reason that emigration is mostly of adults, often with considerable capital in their possession, a like sum has been computed in the case of emigration. Remittances from abroad to persons resident in Australia, and from Australians to persons living abroad, also set up minor capital movements. These, however, are negligible in their effect upon the balance of indebtedness, as indicated "by the foreign money-orders transmitted through the post offices during these vears, since the income almost exactly balanced the outgo. V. The Balance of Indebtedness. We are now in a position to set out our (largely hypothetical) balance sheet, by bringing together the information presented in the foregoing tables. Attention may be directed to certain features of the situation as revealed in the final column of the table, which must now be regarded as adequate explanation of the vicissitudes of the period. In the first place, approximate agreement between the total of capital imported, and the long-period excess of debits over credits in the balance of indebtedness, is obtained. The principal facts of the situation are here presented in summary form: CAPITAL IMPORTS. DIFFERENCE OF INTERNATIONAL Drsrrs Axp CREDITS. £m. Government . Municipal . Business » Private . + oy Total of Debits Total of Credits . : . 867 . . 808 “59 This discrepancy of £16 millions represents little more than 20 per cent. of error; but it is to be supposed that the agreement would be even closer were all the facts obtainable. Unexpended loan balances in London at the end of 1913 were not taken into account, and this sum together with the ‘lag’ of imports behind capital outlay would doubtless cover some of the difference. A more complete case as far as the main effects of overseas borrowing are concerned can scarcely be expected: and it INDEBTEDNESS FROM 1900 TO 1913 161 must be reiterated that this period is merely one of several phases in our history where identically the same effects are to be discerned. Another, and perhaps more important, consideration in relation to business cycles is revealed by the graph (Fig. XIV) which £m 25 wy : . IMPORTF™' +1 PEBIT CREDIT ir SPATE PNAS — — - — rset i902 1904 1906 1908 791 0 z 912 1914 Fra. XIV. CAPITAL LOANS AND THE BALANCE OF INDEBTEDNESS, 1901-13 Smoothed 5-year moving-averages of loans and of excess of debits Aner eredits shown heavy. concludes the survey of the period. The precarious poise of national finance, when either normal productivity or the customary flow of capital falls away, is exposed by the intersection of the moving-average curves in 1903 and again in 1910. That business depression should accompany, the excess of indebtedness over capital borrowings is no mere coincidence. Effect follows cause with logical precision ; and the main facts stand out too starkly from the picture to admit of misinterpretation. Iv 10) | BO TasLe XXXVIII The Australian Balance of International Indebtedness, 1900-13 (In Millions of Pounds Sterling) DEBITS. Year. Imports. 901 (902 1903 1904 1905 1906 1907 1908 1909 i910 1911 1912 1913 39-254 36-021 33-030 31-457 32-463 37-832 44-711 13-699 44-763 52-544 57-925 69-101 70-276 roran| 593.076 Freight. 3-326 2.992 2-539 2-214 2-562 3-351 3-842 3-714 3-824 1-520 5-164 8-268 68.796 51.042 Insurance. Tourist and Migrant. Interest. Total. 0-166 0-159 0-149 0-145 0-150 0-175 0-219 0-195 0-201 0-235 0-262 0-306 0-312 4-591 4-261 2-398 2-259 2-252 2-801 3-500 3-700 3-725 3-750 4-025 4-275 5-870 11-933 11-695 11.284 12-320 12-783 13-482 13-469 12-739 13-897 14-343 15-012 14-203 15-738 59-270 55-128 49-400 48-395 50-210 57-641 85-751 64-047 66-410 15-392 82-388 04-153 08.0292 9.674 | 47407 | 172.008 | 867.107 CREDITS. Year. Fanorts. Tourist and Migrant. Interest. Total. 46-667 1-459 0-558 48-684 39-072 1-300 0-500 40-872 43-247 1-100 0-620 44-867 52-226 1-100 0-550 53-876 51-286 1-100 0-650 53-036 63-690 1-176 0-670 65-535 67-175 1-354 0-760 69-289 60-100 1-434 0-850 62-384 60-655 1-686 0-920 63-261 69-191 | 1-998 1-180 72-369 73-969 | 2-888" 1-260 78-117 73-439 3-338 1-450 78-227 72-601 3-365 1-540 77-506 TOTAL | 773-318 93.997 | 11-408 | 808.022 Difference between Debits and Credits. —10-586 — 14-256 4-533 5-481 2.826 7-804 3-538 1-663 -3-149 —3-023 —4271 —15-026 — 23-416 __ED.084 PART V AUSTRALIA DURING AND AFTER THE GREAT WAR CHAPTER XIII BANKING AND BORROWING POLICIES IN AUSTRALIA DURING THE WAR ‘Tt is not enough to say that the abnormal events of the war and post-war periods are responsible for the bad times entered upon in the middle of 1921. The general affect of these events was to impoverish us, but for many years there was a great outward show of increasing wealth.” —Prof. D. B. COPLAND, The Trade Depression in Australia. Paper before Section G of A.A.A.S. 1923. ‘In ascending periods Britain exports largely on credit. Her area is so small relatively to her capital—it is, go to speak, so nearly saturated with capital—as to allow scope for any new enterprise that holds out prospects of high return. Conseguently the activity of her industries depends in an exceptional degree on the confidence and strength of business enterprises in other countries, and especially in new countries. That confidence is sometimes misplaced. But so long as it lasts capital flows from her for investment abroad and especially in new countries; and the only way in which this flow can be effected is by a net increase of exports, visible and invisible; that is by making aggregate exports larger, relatively to imports, than they would otherwise have been. Of course there is no necessary connexion between increased investment of British capital in any particular country and an increase of her exports to that country.’ —ALFRED MARSHALL, Money. Credit, and Domanerce. [1 is not proposed to examine the period between 1914 and 1919 at any great length, paradoxically enough because of its extraordinary character. While it is doubtless true that it is quite unjustifiable to wrench that period from our analysis, and to disregard the momentous developments in every phase of our national life that occurred within those years, it is equally true that the conditions of the time were too abnormal to bear examination, in an economic sense, except as a period of great national emergency which justified as expedient in practice so much that was unsound in theory. Our purpose would be served, therefore, if the chief threads were gathered together, and an endeavour made to weave some picture of the war years which would serve to fill a gap in the ambitious panorama we are attempting to portray. But, actually, no specific survey of the period is believed to be necessary. It can be demonstrated for 164 BANKING AND BORROWING POLICIES IN this as for more normal periods, that borrowing was again a potent factor in the national economy, and that, in this respect at least, the period was normal in its abnormality. Financially, the dominant characteristic of the war period for Australia as for most other countries was the great currency inflation that took place. More or less deliberately planned as a war finance measure, this inflation brought in its train a whole series of economic effects of the first importance ; and of these the chief was undoubtedly the great and rapid rise in the pricelevel. But that is not to admit that the sole cause of price movements during the period was currency inflation. Other factors of relatively smaller importance, but far from negligible in their total effect, must be taken into account. The interruption or abrupt stoppage in the supply of almost every commodity from overseas in the early phases, and the heavy borrowings as the war proceeded, to mention only two other causes, were extremely important in their effect on prices. There is not any intention here of belittling the overwhelming importance of the war-time inflation upon prices. This has been the subject of a masterly analysis by Professor Copland®; and further examination of that aspect does not fall within the scope of this essay. Price movements, moreover, will be considered from another angle in a later chapter when the terms of trade come under discussion. We have seen already that a general upswing in prices had been in progress since 1900. Wholesale prices rose, during the years between 1901 and 1914, by 18 per cent., while the cost of living rose by 26 per cent., mainly because of the great increase in house-rents. The average annual increase was very slight in the last decade before the war. Between 1914 and 1918 wholesale prices rose by 115 per cent., retail prices by 56 per cent., and the cost of living by 70 per cent. ; and although these increases did not approach the extent of similar movements in other countries, they ‘must be considered as quite abnormal in a country like Australia with abundant supplies of the necessaries of life’.2 The relation 1 See in this connexion (i) Article, ‘Currency, Inflation, and Price Movements in Australia’, Beonomic Journal, Dec. 1920; (ii) a more extended treatment in the Joseph Fisher Lecture, Currency and Prices in Australia, University of Adelaide, 1921; and (iii) Paper, The Trade Depression in Australia in Relation to Economic Thought, Proceedings of Section ‘G’ of the A.A.A.S., Auckland, 1923. 2 Article cited above, Economic Journal. Dee. 1920. AUSTRALIA DURING THE WAR 165 existing between the rise in price-levels and the volume of loans has, however, escaped examination; and it would seem to be necessary to attempt to evaluate the effect of loan operations upon price changes for the war and post-war years. It is also, for our purpose, very necessary to sketch the financial system which was developed as a response to war conditions, particularly in so far as these bear upon the circumstances governing public loan policies. A prime factor in the mew situation after 1914 was the development in the banking system which had been commenced in 1910. In that year two important Acts had been passed by the parliament of the Commonwealth, viz. the Australian Notes Act and the Bank Notes Tax Actt The joint effect of these two measures was to concentrate the issue of paper money in the hands of the Commonwealth Government. Under the original Notes Act a system was inaugurated by which the Commonwealth was empowered to issue notes subject to certain safeguards. Up to the amount of £7 millions a gold reserve of not less than 25 per cent. was compulsory, while all issues above that amount had to be secured on a pound for pound basis. Whether some prevision of the monetary disturbances incidental to a world war inspired the change or not, in 1911, and in the face of the very vigorous opposition of the private banks, the provisions of the Act were amended ; and the Treasurer was afterwards merely required to hold ‘in gold coin a reserve of not less than one-fourth of the amount of Australian notes issued’. The new power of issue authorized by the amendment was not called into play until September 1914; but after that date, as will be shown in a later chapter, it was freely exercised. Another momentous change in the light of after events was the establishment in 1911 of the Commonwealth Bank.> The newly-constituted bank was performing all the normal functions of issue at the outbreak of the war; and it was afterwards of the utmost service in giving effect to war-time financial measures, especially in floating and administering the successive warloans, and in putting into circulation the greatly increased noteissue authorized by the Federal Government. ‘With a State * See Commonwealth Parliamentary Debates, vol. Iv. 2 On the formation and control of the Commonwealth Bank see Copland, Foreign Banking Systems, p. 85: and articles in the Hconomic Journal, Dec. 1920 and 166 BANKING AND BORROWING POLICIES IN monopoly of the note-issue and a State bank, Australia was in rather a unique position for financing a war.’ The use made by the Federal Government of its powers has a direct bearing upon our theme, and the course of events must be carefully noted. The three main safeguards under the gold standard were the free export of gold, the use of gold as a reserve for bank clearings, and, just prior to the war, the maintenance of the original conditions of the Australian Notes Act of 1910. ‘Within three months of the declaration of war these safeguards had all been surrendered. The note-issue was restricted, in a country where new gold supplies were forthcoming yearly, by a 25 per cent. reserve only; the export of gold was prohibited, and the banks had adopted Australian notes as a basis for clearings. The gold standard was thus in practice abandoned, and Australia had a note-issue which was virtually inconvertible, inasmuch as the banks had adopted the notes for clearing purposes and would not press the Treasury for gold, where alone the notes were legally convertible.’”l The normal corrective of gold movements was thus abolished, an inconvertible paper issue established, and a system of financing war-loans adopted which amounted to a deliberate policy of inflation, not only of government notes, but also of bank credit. The evidence all goes to show that the enlarged issue of notes was the main dynamic behind the general expansion of bank credits which occurred, and that the fluctuation in prices was in some degree dependent upon the increase in the note-issue from £9-5 millions in 1914 to £59 millions by the end of the war. But to attribute the whole difference in price-levels to the influence of the inflation of the currency would be to disregard the very important influence of borrowing operating through the trade balance. Copland, indeed, realizes to the full the importance of this factor: but. owing to the difficulty of ! The actual details of the change are well summarized by Copland, Foreign Banking Systems, p. 51. ‘The traditional arrangements under the Anglo-Australian gold exchange standard . . . were completely altered soon after war broke out. In the first place, an embargo was placed on the export of gold which was allowed only under licence from the Federal Treasurer, Secondly, the mints no longer freely issued sovereigns to the public in return for gold bullion. Thirdly, the practice of the banks in providing gold freely was abandoned, and notes became the basis of their clearing-house arrangements. The Federal Treasurer also discouraged the practice of paying out gold in return for notes at the seat of government, and the note issue was thus virtually inconvertible.’ AUSTRALIA DURING THE WAR 167 statistical measurement, he specifically excepts it from consideration in his analysis. But the fundamental condition by means of which foreign trade should exercise its influence over price-levels, i.e. through the gold-exchange standard, was now missing. The peculiarity of the war-period as a phase in which the gold standard in both Britain and Australia was temporarily abandoned, and the consequent effects of this step upon domestic finance and foreign exchange, will be noticed later. An aspect of greater importance at the moment is the general relation of this change to overseas borrowing. From Copland’s exhaustive survey of the war-period it would appear that the greater increase in the British price-level, relative to the Australian level, indicates that the latter was much more subject to local factors than at times when the foreign exchanges were controlled by the gold standard! This is unquestionably true ; but when he declares that, even in normal times, the Australian price-level is influenced only partly by external factors because foreign trade is less important than home trade, he is on much more debatable ground. The analysis of barter terms of trade made for earlier borrowing cycles reveals a connexion of very great significance between the volume of external loans, and changes both in the relative levels of the borrowing and lending countries, and in the sectional price-levels of the borrowing country. But the fact that the export-import pricelevel increased during the war by 53 per cent. while wholesale prices rose by 70 and retail prices by only 40 per cent., certainly appears to support his conclusion, that local factors were operating in addition to the external factor of loans, and operating to an extent so much greater than they would normally do under a gold-exchange standard as to completely overshadow | Commonwealth Labour Report, No. 13, p. 150. Wholesale Price Index Numbers 1911 1913 1918 1920 1922 Year Gt. Britain. { Board of Teade.} 1,000 1,065 2,443 | 3,343 1.801 Australia. (Commonwealth Statistician.) 1,000 1,088, 1,934 2,480 1,758 168 BANKING AND BORROWING POLICIES IN the external factor. But further consideration suggests a partial explanation which accords closely with the facts of past experience, and with the theory of international trade. That the government's financial policy of currency inflation at a time ‘when the quantity theory was operating in a closed System’ was the main cause of disequilibrium and of the rise in prices scarcely admits of argument. From the study of other phases of our monetary history we should be prepared to find & connexion between capital imports and the rise in domestic prices; and, despite the abandonment of the gold-exchange standard, there are grounds for supposing that, in part, the increase in foreign indebtedness was the external supplement of the internal inflation policy. Between 1914 and 1920, the Australian overseas debt increased from £208 millions bo £375 millions, i.e. at the rate of £24 millions a year, whilst the total interest on the overseas debt rose from £8 millions to £16} millions. In other words, the annual amount of new overseas loan was once more largely in excess of the interest on the old debt. The meaning of this change has scarcely been appreciated in discussions concerning Australia’s present sconomic position. Under circumstances which could probably never be repeated, the borrowing cycle had begun afresh, and all the ‘boom’ phenomena associated with the early phases of heavy borrowing—the cheap and -easy money, extended credit, ambitious public works and rapid industrial expansion due to governmental spending—became more prominent at a time when every circumstance called urgently for the conservation of capital. In this astonishing expansion of loan issues, allowing for the proportion of borrowings spent abroad, is to be found one officient cause, not only of the paradoxical prosperity of the war years, but also of the settled depression of the later years. Only the most highly favourable circumstances for the produetion and marketing of her commodities, resulting in a rapidly enlarged proportion of the national income applicable to the payment of external liabilities, in short nothing but a miraculous comparative advantage in trade, could have enabled Australia to traverse unscathed the years following 1920. And these highly favourable and urgently desirable conditions for cither production or marketing have been notably lacking. The phase of ascension in the borrowing cycle had to be followed AUSTRALIA DURING THE WAR 169 inevitably by the phase of declension, and it is here that an explanation must be sought rather than in world business conditions. Looked at in this light the figures representing new debt and interest as shown in the following table, and the relation betaveen them as disclosed by the accompanying graph, help to TABLE XXXIX Australian Public Debt held Abroadt (In Millions Sterling) Year. 1914 . 1915 . 1916 . 1917 . i918 . 1919 . 1920 . 1921 . 1922 . 1923 . 1924 . 1925 . ’ 1926 . ‘ 1927 . 3 1928 . COMMONWEALTH. Amount. | Interest. I. II. 3-5 18-3 10-1 58-4 102-6 106-1 111-7 117-3 (31-3 |26-2 142-5 (46-1 155-9 168-2 06-1 0-16 | 0-779 1-764 2-790 5-067 5-268 | 5-546 5-993 5-678 8-414 7-248 7-409 7-950 8-457 10-622 STATES. Amount. | Interest. 111. IV. 224-1 229-2 232-0 243-7 261-1 258-2 266-3 272-0 300-3 309-2 339-6 336-9 359-2 374-9 416-7 8-068 8-480 8-587 9-261 10-182 10-328 11-717 12-240 13-812 "4-378 15-957 16-339 17-601 18-370 20-466 Total interest. y. 8-215 9-259 10-350 12-051 15-249 15-596 7-263 18-233 20-490 20-792 23-205 23-748 25-561 26-827 31-088 New debt net.? VI. 19-666 6-7 2-7 18-4 19-4 2-2 10-8 13-4 40-3 79 41-6 2-6 40-4 11-7 54-3 explain the prosperity of war-time as they do the adversity of peace. In particular, attention is to be directed not so much to the high average of overseas borrowing as to the spasmodic character of this process of capital injection. The abrupt changes from plenty to dearth, wave upon wave as it were, precluded anything like an effective assimilation of the loan money, and strained the Australian financial system badly in the process. If ever there is to be found support for the ‘orderly marketing of loans’ it is surely in the records of Australian public borrowing since 1914. An examination of the facts of Australian public indebtedness Commonwealth Finance Bulletins, Nos. 11 and 18. ? Allowing for duplications in columns I and ITI for loans raised by Commonwealth for the various States. 3710 170 BANKING AND BORROWING POLICIES IN leads to the conclusion that the transition from the ascension to the declension stage of the latest of our borrowing cycles was taking place after 1922; and that to the persistent pressure of the interest burden, as much as to the general world depression in trade, was due the lack of resilience in Australian business conditions. Further, it is clearly evident that, in relation to Te fm 60 50 40 30 2. i 0 INVERSE 4 a Fre Sm ri: 1915 1017 foig_ 1921 1923 1925 1927 1929 Fra. XV. NEW LOANS AND ANNUAL INTEREST Smoothed 5-year moving-average shown heavy. ' loans, the discrepancy between ‘receipts’ and ‘expenditure’, i.e. the difference between the amount of new loans and the interest on the existing debt, has been steadily growing ever since, thus increasing both the necessity for economy and the incentive for national effort to bridge the discrepancy. That the unhealthy condition of indebtedness has merely been exacerbated by the operation of other factors, such as static productivity and the adoption of ambitious social and building schemes that could not be justified on the score of either urgency or reproductive sapacity, cannot reasonably be open to doubt. A thorough and comprehensive examination of the national debt in all its aspects still awaits the patient attention of the economist, notwithstanding the very valuable work that has AUSTRALIA DURING THE WAR 171 been accomplished in certain aspects. In particular, a critical analysis of the Australian public debt, with reference to its reproductive capacity, both absolute and in relation to the public debts of countries in a similar stage of development, is urgently needed ; and until such a survey is made it is difficult to compute the extent to which the burden of overseas debt is being felt by the community as a whole. An attempt will be made in the later chapters of this book to indicate the tendencies shown by national productivity in relation to the increasing interest burden; but the statistical analysis of the effects of loan expenditure, of the relative weight of indebtedness in the different states, of the incidence of that burden upon the factors of production, and of the effects upon distribution of income, comprises a task for the co-operative effort of experts spread over a term of years. Until that task is completed dubious sstimates of ‘untapped’ taxable capacity, and of the rapidity with which the public debt might be extinguished, must remain largely in the realm of conjecture. But it is obviously the bedrock of any investigation into the effect of borrowing upon productive efficiency, and upon prosperity in general. CHAPTER XIV THE BOOM OF 1919 AND THE SUBSEQUENT DEPRESSION IN RELATION TO PUBLIC BORROWING ‘Statistics are, indeed, often powerful in the destruction of error. They seldom show precisely what share of any event is to be attributed to each of the many influences bearing upon the time and in preceding years. But they often prove that a result which has been attributed to a certain cause cannot have been produced 9y it, and such destructive work is a considerable factor in scientific progress,’— AvrRED MarsuarL, Money, Credit, and Commerce. ‘It was a common error to mistake these factors for the real causes of the crisis. They were results only, and arose through the inevitable delay in readjusting the varied elements of costs and expenditure to a new situation forced upon the economic system by the dramatic fall in wholesale prices. But they have led men to con-“lusions regarding the regulation of wages and industrial conditions, the functions of trade unions and labour organization, and the problems of public finance which might materially affect the future of government and industry.’—Prof. D. B. Cop-LAND, The Trade Depression tn dustralia. THE vicissitudes of business in Australia since 1918 have been commonly ascribed to the ‘aftermath of war’ and ‘war-time inflation’; and this current belief has found a certain measure of support in the utterances of economists and business leaders. This belief, with its implication that the exigencies of national orisis excuse all economic sins, has been responsible for a somewhat fatalistic attitude in the face of serious difficulties, and for an apathetic state of mind which regards the situation as an inescapable reaction from the excesses of the war years, with particular emphasis on inflation. The close correspondence between economic conditions in Australia and in Europe has fostered this too-ready acceptance of a theory concerning the economic consequences of war. Such a comfortable shelving of the responsibility for our present economic disabilities, however, finds little support in the evidence so far adduced as to the effects of excessive borrowing abroad. It is, in fact, an attitude to be vigorously resisted rather than complacently condoned ; and it is believed that the present examination will place the years of depression since 1921 in rather a different light. The joint effect of inflation and heavy borrowing had, after 1916, been plainly evident, and the outcome had been an era of THE BOOM OF 1919 173 rising prices and plentiful credit which stimulated both public and private enterprise. Further, Australia as a producer of food and raw materials which were in such urgent demand during these years found herself in a particularly favoured position. The unprecedented rise in price-levels, the increase in both imports and exports, and the great expansion of credit have been exhaustively examined by Professor Copland ; and it will not be necessary to do more at this juncture than to state his main conclusions.! The industrial expansion which accompanied rising prosperity, and the government expenditure of loan money on repatriation schemes, war-service homes, closer settlement and developmental works exaggerated the upswing of business activity after the war to an extraordinary degree. The purchasing power of the community, vastly increased by payments on government and private contracts, was further swollen by distributions of deferred pay to repatriated soldiers and dependants. Although Copland indicates the expansion of credit as the chief cause of this artificial prosperity, it seems apparent that the fons et origo is to be found as much in borrowing as in banking. Capital importation was one officient cause which produced a whole train of phenomena which marks the boom of 1919. Tt is only fair to say, however, that despite the emphasis which he lays on inflation as the major cause he clearly recognizes the importance of the borrowing factor. He believes, too, that government expenditure was not the real cause of the boom, and that its influence was felt only after the boom developed; but fails, nevertheless, to indicate the initial importance of the enormously swollen flood of domestic and overseas loans on the credit structure. Of the seven factors which he detects as contributory causes of the boom, three only are not related in any way to the import of capital 2 He recognizes also the important effect of private borrowing upon the expansive tendencies of the time. Joseph Fisher Lecture (University of Adelaide), 1921. Art. Economic Journal, Dec. 1920. Paper before Section G of A.A.A.S. Wellington, 1923. ? Professor Copland’s analysis of the main causes of the great prosperity in business in 1919: 1. Increase in the prices of exports. 2. Rise in domestic prices. 3. Expansion of credit and relatively low rate of interest. 4. Development of secondary industries. 5. The great overseas demand for raw materials and other products. 6. Government expenditure of loan money. 7. Natural psychological factors operating in all boom periods. 17¢ BOOM OF 1919 AND SUBSEQUENT DEPRESSION “This is not the place’, he says, ‘to criticize the general tariff policy of Australia, but the great increases in duties imposed in 1920 would, no doubt, encourage the expansion of establishments and the investment of capital in factories. It would be difficult to find an exact statistical measure of this; but it appears certain, however, that it was a factor contributing to the boom.’ ! Assuredly it was; and, in so far as the tariff stimulated private capital imports it was, for the generation of boom conditions, only less important than the imports of public capital. The main causes of the post-war depression are to be found not so much in the outstanding events of the war years, as in the more normal operation of the factors which produce borrowing cycles. That ‘High money values and the enormous expenditure of loan money created conditions indicative of increasing wealth’ is surely attributable in the main to one factor, i.e. that capital was still flowing in faster than interest was flowing out. But as the burden of interest more and more nearly approached the volume of new capital, without any corresponding expansion of the value of production, the financial pinch was felt once again; and the prosperity of the post-war boom period stands revealed in its true light. The experience of 1893, 1903, and 1913 had apparently all gone for naught, the hectic pleasures of the spendthrift were more enticing that the satisfaction from an expansion justified by earnings; and it was inevitable that the reaction would be severe in proportion to the excesses of ipending. That the severe contraction of loans from Britain in 1919 and [920 was a far more potent factor than the internal banking situation in hurrying on the crisis which was already preparing appears highly probable. That the chief factor controlling the situation in Australia was realized in some measure by successive Prime Ministers is indicated by the natural transition from the slogan of ‘Produce!’ adopted by Mr. Hughes to that of ‘Men, Money, and Markets’ which epitomized the policy of Mr. Bruce. That greater consuming power was desirable at home in order to diminish Australian dependence upon overseas markets, and that there was urgent need for greater productivity in order to sustain the growing weight of debt, were almost self-evident facts. What received far less sanction from the lessons of the { Copland, A.A.A.8. paper cited above, p. 561. IN RELATION TO PUBLIC BORROWING 175 past was the plea for further supplies of capital for developmental purposes. This amounted to a wish to perpetuate those very conditions of expanding debt which constituted the chief cause of this and every other major Australian crisis; and to an admission that the serious effects of the uneconomic use of borrowed capital were not realized. Nor was there any great measure of agreement to be found among economists or business men. Even so keen an observer as Copland appears to minimize the significance of this great dominating factor in Australian finance; or, rather, to over-emphasize the effects of internal inflation as compared with those of the foreign borrowing which in part made this inflation possible. ‘Too much has been made’, he says, ‘of abnormal war conditions and not enough of this inherent weakness (optimistic speculation during the boom) in business mgnagement. Yet it is a factor of overwhelming importance in explaining industrial conditions just prior to the crisis, and our present depression is, to a large extent, the result of an ordinary commercial crisis intensified by the extraordinary financial conditions (i.e. inflation) of recent vears.’ 1 The pertinent inquiry here, of course, concerns the interpretation he put on the phrase ‘ordinary commercial crisis’. Of the reiterated connexion between crises and capital imports the reader will by now be wellnigh weary. But there seems little doubt that the ‘extraordinary financial conditions’ were intimately connected with the adjustments of credit consequent upon the flow and ebb of capital from Britain ; and it is difficult to avoid the conclusion that internal and external movements towards credit expansion were supplementary. [+ will be worth while at this stage to review briefly the onset of a crisis which was the prelude to a depression that has lasted, with brief interludes, until 1929. The first signs of recession in world business conditions came early in 1920, when an abrupt break in prices successively involved countries so widely separated and so differently organized as Japan, the United States, and Great Britain. The collapse was not long delayed in Australia. The last phase of the boom had reached its climax in August 1920 some months after the first check had been experienced L Thid.. ». 583. 176 BOOM OF 1919 AND SUBSEQUENT DEPRESSION abroad. Steeply rising prices had been a feature of the whole of 1919 and most of the following year! After the break there followed an equally rapid decline of 42 per cent. in less than eighteen months. This sudden collapse of prices was a feature of the recession in all countries. The severe check due to the onset of the ‘writing down’ period in Britain brought about an inevitable double reaction in Australia, first through the fall in the prices for Australian products, and, secondly, because of the shortage of overseas loan supplies. Bearing in mind the relation between interest and new loans sketched in the last chapter, we must now mark the coincidence of several factors which tended to intensify the subsequent credit shortage. ‘During this process of deflation difficulties of another kind arose. For each of the years 1917-20 there had been an excess of exports over imports, and for the year ending 30th June, 1921, this excess reached the record figure of over £50,000,000. But for the following year there was a decrease of exports of over £1 6,000,000, and a very heavy increase of imports of £65,000,000. This brought about an excess of imports of over £30,000,000, and caused great difficulties in financing imports at a time when the banks were deliberately restricting their advances for home trade.’ The immediate debit balance, as an index of the very serious situation which developed, was estimated by the Commonwealth Statistician to amount to £27,000,000 in respect of excess of imports and £22,000,000 by way of interest liability, ‘consequently the value of the exports for the year was about £50,000,000 short of the amount required to pay for the imports and to meet the standing obligations on account of interest, &c.’ 2 The strain imposed upon the exchange facilities as the outcome of such a situation can easily be imagined. Contraction of credit we have now learnt to regard as the normal reaction at the end of the borrowing cycle following the expansion which characterizes its earlier phases. The crisis of 1921 was no exception: restricted credit and the recall of advances omee more marked the cessation of capital supplies. The inflation ! “The rise in this period was nearly 40 per cent., and indicates a period of feverish trade activity.’ —Copland, ibid., p. 564. ¢ Commonwealth Year Book, No. 14, p. 497. ‘Exchange on London was very difficult and demand drafts rose to £1 17s. 6d. per cent. No doubt business was done at a much higher figure. but this was much the highest official quotation since 1900.’ IN RELATION TO PUBLIC BORROWING 177 which took place during the war years as well as the tension which developed after the crisis is indicated in the following table: June 30 of year 914 . [919 . 2 1920 . . 1921 . 19029 Deposits in Australian Banks! TABLE XL Percentage reserves to current deposits. Percentage reserves to total deposits. Deposits. Join, bullion, and notes. £m. £m. 159-209 231-270 247-647 248-231 240.200) 41-447 58 57-894 19 56-940 | 42 56-120 44 55-200 45 26 25 23 23 9% The lower margin of safety as expressed by the ratio between reserves and deposits before and after the war is here clearly expressed. Even after the very strenuous efforts made by the banks to strengthen their position by means of a drastic reduction of credit, the percentage of reserves to total deposits was no higher than 19-5 in September 1921, as compared with about 25 per cent., which was regarded as normal in the pre-war period. It will now be of interest to gather together the several factors combining to produce this recession phase in Australian business. Copland indicates the following as the chief causes of the crisis, and they form an interesting comparison with factors which were operative in producing the boom.? They are as follows: (1) The deflation in England and America, and the heavy fall in domestic prices. (2) The over-issue of credit beyond the limits allowed by reserves. (3) The stringency of the money market, and the action of the banks in respects of credits. (4) The heavy fall in prices of agricultural products and meat, and later on of dairy products, i.e. a general fall in the export price-level. 1 Commonwealth Finance Bulletin, No. 13. ? Copland, A.A.A.S. paper cited above. An 178 BOOM OF 1919 AND SUBSEQUENT DEPRESSION (5) Heavy importations due largely to the supplying of orders long overdue. (6) The drop in metal prices. (7) The difficulties of regulating industrial costs to the changing price-level. (8) The decrease in production towards which the poor season of 1919-20 largely contributed. (9) The psychological reaction from the boom period. The analysis of previous Australian crises has prepared us to detect the connexion, mainly of a very direct nature, with the great underlying cause of capital shortage. For reasons which need not be examined here the creation of fresh capital supplies receives a check; and Britain, as the great market for international loans, immediately sets the marvellously sensitive organization of the money market to the task of rationing the available supplies. Upon Australia, accustomed for the greater part to receive her applications for capital without question, such a stoppage of supplies has an immediate and peculiar significance which is reflected in the deflation, changing pricelevels, and restriction of domestic credit lying behind the causes of the crisis outlined by Copland. Further analysis of the relation between borrowing and business is deferred to the succeeding chapters; but before passing on to an examination of the balance of indebtedness and the effects of the return to gold some further facts in the domestic situation call for notice. During the years now under discussion the great amount of foreign capital invested in Australia, taken together with the normal increase from community savings, resulted in a much greater relative increase in the total stock of capital than in the supply of either labour or land for the purposes of production. The population of Australia between 1913 and 1928 increased from 4-8 to 6:3 millions, a total increase over the period of 31 per cent. According to the estimates here collected the stock of capital as measured by the estimated increases from various sources grew from £380 to £660 millions in the same period. Even for the very conservative allowances we have made for capital imported, this represents an increase of 73 per cent.; or, if we adopt the standard of the 1913 wholesale price-level, a rise of 45 per cent. These figures for capital increase can be checked from another IN RELATION TO PUBLIC BORROWING 179 source. The value of plant and machinery sunk in factory equipment in Australia was approximately £65 millions in 1913; and this had risen to £120 millions by 1928, an increase of 84 per cent. Again, Knibbs, in his estimate of private wealth made for 1915, reckoned the value of all private capital represented by plant and machinery in mines and factories at £116 millions. The corresponding estimate made by Wickens for 1925 was £203 millions. which represents an increase of 76 per cent.} The supply of land available for agricultural and pastoral purposes, on the other hand, remained relatively constant; and governmental efforts to open up new territory were made at great cost with returns that were by no means commensurate. A very considerable intensification of the demand for urban land, which assumed all the characteristics of a land boom, took place between 1915 and 1920. Extensive subdivision and building schemes were developed in all the capital cities. Expansive government schemes for building homes for returned soldiers, together with an extension of the existing schemes for financing home building through State banks, increased the pressure upon urban residential sites ; and this was reflected in an abrupt rise in rents. An even more remarkable boom in the value of city sites occurred ; and this affected every town of importance in the Commonwealth. Prices were obtained for city blocks which had not been approached since 1893; and an extraordinary outburst which took the form of great activity in rebuilding of city premises was common to all the capital cities. tis obvious that this alteration in the relative importance of the different factors in production would have considerable effect in varying both the respective rates of return to those factors and the distribution of income in Australia. Now changes in the relative demand, where there exists such extreme variation in the elasticity of supply as between the different factors, could only mean an advantage which would be graduated between the factors according to their elasticity of supply. Under the conditions which have been outlined for the period this would lead us to expect a marked rise in the retirn +a land a rise less marked in the return to labour: and. ! See comparisons of Australian private wealth at different periods, Commonwealth Year Book. No. 21, p. 436. 180 BOOM OF 1919 AND SUBSEQUENT DEPRESSION in view of the continuous supply of capital through loans, less noticeable changes in the rate for interest. The facts necessary to indicate the respective movements in the rate of return to the different factors are wanting, but consideration of the position is not thereby made valueless. Greatest importance in this connexion attaches to the case of rent. Whilst the pressure of population upon available urban land continued, in so far as it was due to the increase in population itself and to an enlargement in general purchasing power that was reflected in the demand for new houses, some rise in rents was doubtless inevitable. But a more important factor intensifying the pressure upon such land is revealed in the tendency, which is now becoming so pronounced, for industries and their attendant population to migrate to the seaboard, i.e. to the capital cities. This tendency is determined by the movement towards largescale production, by the industrial economies offered by a location at or near one of the major ports, by nearness to the chief consumption centres, and by the lay-out of the railways. The migration of industries formerly carried on in country towns carries with it the smaller subsidiary industries and their population, and also that quota which is concerned with the business of domestic supplies, from foodstuffs to amusements. The use of the motor for business purposes is a further factor in concentrating the personnel of distribution services in the cities; and this is paralleled by the tendency for country residents to use the cities as shopping centres by means of the private car and road motor services of all kinds. All these are agencies assisting in the concentration of population in the capitals ; and it is merely a logical sequence that the return to owners of urban land is out of all proportion to the service which that land is performing in the matter of production. It 8, in fact, a matter for serious consideration how far high land values have contributed to the high costs of both primary and secondary production, and to the recent recession of business right through the Commonwealth. The statistics connected with the function of land as a factor in production are, however, open to the objection that they are mainly based on the rent of urban dwellings. This does not, nevertheless, invalidate their use in this connexion. In the first place the rise in rents for business and factory sites has been IN RELATION TO PUBLIC BORROWING 181 even more marked. The figures for city municipal assessments indicate a much greater relative increase than even those for suburban residential areas. Again, for this period, the figures for successive sales at auction of business premises contain all the essential evidence of a rise in rents far greater than that which would be justified by the mere rise in the general price-300 20 200 GREZA. 50 “A 1 4 — . 100 --1916 1920 1924 1928 Fre. XVI. RETAIL PRICES FOR GREAT BRITAIN, US.A, AND AUSTRALIA level. Similarly the increase in rents in both industrial and residential districts was also in excess of that due to the rise in prices. This has a most important bearing upon the costs of manufacturing, since, in computing wages for the purpose of arbitration awards, rent is one of the major factors taken into consideration.! The system of calculation used in the fixation of wages did not tend to minimize the increased nature of the L “The demand for food and housing is constant, urgent, universal; the demand for clothing is casual, fluctuating, particular.’—Chief Justice Higgins in the Engineers’ Case, 1921. 182 THE BOOM OF 1919 rent charge, but rather the reverse. The net effect was, of course, that the excessive rent charge was passed on to industry as an important factor in the rising costs of production in the two ways here indicated, viz. cost of living and cost of site ; and the check to business after 1920 owing to the fall in prices must have been intensified by the inertia of rents. See Anderson, The Fixation of Wages in Australia, p. 263. CHAPTER XV ANALYSIS OF THE TERMS OF TRADE BETWEEN 1914 AND 1928 'A large country with ample natural resources and simple manners, such as Russia or China, resembles a self-sufficing family: her real income consists mainly of her own products; and it is not very greatly affected by the terms on which she exports a small part of them in exchange for foreign goods. Nearly the same may be said of the United States: for, though her economic life is very complex, and though her people are alert to discover, and resolute to obtain, any foreign product that will meet their needs or their fancies; yet her area is so large, her mineral resources are so various, and the range of climate between her northern and southern states is wide. Therefore her consumption of foreign products is relatively small; and it is not a matter of vital importance to her whether the terms on which she obtains her imports in exchange for her exports are very favourable. But the case is different for a country whose natural resources are small; especially if her people have accustomed themselves to somewhat luxurious habits of life, in which a great part is played by imported products.’—ALFRED MarsmarL, Money, Credit, and Commerce, p. 109. ‘An investigation has been made covering the ten years 1917-18 to 1926-7, in. clusive, and for this decennium as a whole it has been found that Australian products averaging in value £125,000,000 have been exported annually, representing almost exactly one-third of the total production of our primary and manufacturing industries. The other two-thirds represent our local consumption of such products, thus indicating that our local market absorbs twice as much of this produce as the market overseas. The several industries contribute, of course, different proportions of their total output to this export outflow. Thus of Pastoral products 649, are exported, of Mining 59%, of Agricultural 36%, of Dairying 20%, of Forestry and Fishery products 16%, and of Manufacturing 5%. It thus appears that the Pastoral and Mining industries find considerably more than 50%, of their market overseas.’ — The Commonweslth Statistician, Mr. C. H. Wickens, on ‘Some Statistical Aspects of Australian Industry’, Economic Record. May 1929. Ir the conclusions stated in the last chapters will bear criticism, if it is true that the war-period was in large measure normal in its abnormality and that the economic situation during those years was to a great extent conditioned and determined by the orthodox functions of the borrowing cycle, we may expect to find some confirmation in analysis of the terms of trade. Comparing the economic phenomena with those observed in the successive phases of preceding cycles we shall expect to find similar reactions in respect to the excess of exports over imports, to bank policy, to sectional price-levels, and to the decline in trading advantage. In view, however, of the internal inflation, and of the abandonment of the gold exchange standard, in short of all those conditions which tend 184 ANALYSIS OF THE TERMS OF to what Taussig calls ‘dislocated exchanges’, we should not, indeed could not, expect to observe that correlation between gold and capital movements previously discerned. But, if it is found that, while net barter terms of trade vary little as between the beginning and the end of the period, gross terms rise considerably at first but finish with a sharp decline, we may confidently regard these changes as the customary manifestations of the borrowing cycle, even though they are masked and overlain by the effects of the serious inflation which occurred, and by the price movements of which inflation was the chief nase. Notwithstanding the revolutionary changes in the mode of marketing Australian products, the dislocation of carrying and insurance services, and the abolition of the gold standard, the mechanism of trade as between Great Britain and Australia was not greatly altered.! More especially the financial nexus, that reliance by the Commonwealth on the financial support afforded by Great Britain, was strengthened. The dependence upon the Mother Country in the matter of capital loans was increased rather than diminished. These, then, are the chief grounds for including the Australian experiences between 1914 and 1928 in this survey. Indeed they form an integral part of that picture which is being completed in the post-war period. In 1915 and the following years there developed a great demand for Australian products. The wool, foodstuffs, minerals, and many other items which the Commonwealth was able to contribute towards the civil and military prosecution of the war assumed an enhanced importance. Year by year, too, exports mounted under the stimulus of higher prices and the government encouragement of increased production. Imports also increased, but at a slower rate owing to difficulties in getting orders fulfilled in Britain. For the same reason remarkable changes took place in the direction of the import trade, from which Japan and the United States mainly benefited. An excess of exports developed, averaging £25 millions a year in the 1916-19 period compared with an annual excess of £13 millions ! This comparative stability was due to the long-established relations between British and Australian banking and the traditional view that the two currency units were identical. Even without the common basis of gold, and in spite of the abnormal conditions imposed by war finance, the expansion and contraction of credit proceeded as in pre-war days.’ —Copland, Foreign Ranking Systems, p. 84. TRADE BETWEEN 1914 AND 1928 185 between 1910 and 1913. The volume of imports and exports, however, did not mount at the rate indicated by the figures for value. ‘But as regards the problem of international payments —the mechanism of international trade—it is the money values that signify.’ The chief feature of trade at this time was the great development of government buying and selling under the pooling system, and the mobilization of Australian resources for the more effective waging of the war.! Here we are confronted by phenomena quite outside the range of normal experience. Both borrowing and exports take their place in a vast scheme of war finance in which economic principles and the ordinary canons of business are quite lost from sight. The volume of loans both at home and abroad, the rise of prices, and the increase in exports, assume a far more intimate relation than ever before ; but they are so bound up with the larger issues of world financial policy that, in many of their aspects, they almost cease to have purely Australian significance. Under these circumstances the problem defies satisfactory resolution into elements which can be correlated and interpreted as a verification of trade theory. It is when we come to examine the gold movements of the time in relation to the movement of commodities that the astounding character of the war operations stands revealed. That the disposition of Australian gold became, to a great extent, an Imperial matter during these years is scarcely to be doubted. At least the gold resources of the Commonwealth, like its products,? were mobilized and moved according to a policy of banking expediency that hardly admits of analysis in this essay. Consider the situation presented in the following table. During the early period which is characterized by an excess of imports gold is retained in large quantity when we should expect it to be moving out. Similarly, when the excess of merchandise imports before 1916 changes to an excess of Copland, Foreign Banking Systems, p. 83. ‘During the war when free gold movements were impossible, the exchanges were kept remarkably stable despite serious differences between the British and Australian price-levels, and considerable variations in the balance of payments. This was due in part to the special financial measures adopted by the British Government for purchasing Australian produce and assisting the Commonwealth Government.’ ? For discussions of war-time control of marketing, especially of wool and wheat, see Economic Record, Special Marketing Supplement, February 1928. 3710 at 186 ANALYSIS OF THE TERMS OF exports after that date, gold is flowing out freely when we should look for its retention. Nothing in the theory of international trade accounts for the anomalies ; and we are forced back upon the double effect of external borrowing and internal inflation, coupled with the embargo upon gold export, for a satisfactory explanation. TasLE XLI Gold Movements and Imports of Capital, 1915-281 Year. 1915 1916 | 1917 1918 1919 1920 1921 922 ! 1923 | (924 1925 1926 1927 | 19928 Gold production. £m. 8-270 7-076 6-185 5-408 3-454 5-494 1.018 3-645 3-161 3-144 2-376 2-214 2-159 1-939 Stocks. £m. 64-134 70-364 87-462 61-904 61-575 84-910 63-816 32-389 51-220 51-1 50-494 71-369 68-8156 58-06 Imports. £m. 0-868 0-780 0-272 1-652 7-071 0-046 0-020 0-043 0-031 0-062 10-5643 0-421 0-589 1-008 Exports. £ am, 2-908 10-758 12-015 7-389 9-180 5-634 5-465 4-877 3-301 3-812 2-043 5-489 12-303 2.740 Retained. £m. 6-230 — 2-902 — 5-558 —0-329 3-335 —1094 —1-427 1-289 —0-119 —-0-606 10-876 — 2-854 —9-5565 —0-793 New loan. £m. 5-1 4-3 18-6 20-9 0-5 10-8 11-3 42-2 39 48-1 0-1 37-5 11-8 54-3 Borrowing and the exigencies of war-time finance between them forced Australian overseas trade during this period into new channels. The inability of Europe, and of Great Britain in particular, to supply in the old way either the capital or consumption goods which Australia required, together with the swelling indebtedness of Great Britain to the United States, were responsible for the development of a trade relation among these three countries that has been widely misunderstood. The raising of great Australian loans in London during the war became possible only through the huge credits placed at the disposal of Britain by the United States. The chain was completed as far as the Commonwealth was concerned by America furnishing a proportion of Australian imports many times * Commonwealth Year Books, Nos. 10-21, and Quarterly Bulletins of Statistics, Nos. 85-115. TRADE BETWEEN 1914 AND 1928 187 greater than formerly, a development that was quite inevitable and quite independent of any comparative advantage in trade acquired during these years by the United States. £m Per Cent 60 prL PAPORTE" 1A oc "APORTS AS PERCENTAGE OF EXPORTS *n J GOLD FLOW n A 1 Yer Loss £8 Mo 1918 or 2 N vba 2328 Fre. XVII. TOTAL OF CAPITAL IMPORTED, IMPORTS AS PERCENTAGE OF EXPORTS, AND GOLD MOVEMENTS Vertical interval of £20 millions. Smoothed 5.year moving-average curves shown heavy. But the circumstances which lend the period the greatest interest for the investigator were ‘the continued upward movement of prices, the continued war-boom, and the specious appearance of wonderful prosperity’. The movement of prices i 188 ANALYSIS OF THE TERMS OF (see footnote on page 167) began in an upward direction in 1915, fell back again in the next year, and then mounted rapidly through the years from 1917 to 1920. That this first rise was an effect of the shortage of essential supplies from overseas, and the second of the internal credit expansion and grand-scale borrowings, has already been demonstrated. But the extraordinary operations by which this credit was diffused throughout the Commonwealth call for further examination. The machinery set in operation by the Federal Treasury in pursuance of the war-time financial policy, served to expand the circulating medium even more effectively than did the actual retention of gold. Professor Taussig’s description of the analogous situation in the United States is so close in its application to the Australian situation that it might be adopted almost verbatim. The disposal of the successive war-loans was accomplished by utilizing to the utmost the credit machinery of the banks. Purchases of the bonds and certificates were encouraged, ‘indeed were fairly pumped up, by great subscriptions for which the banks supplied the funds’. Millions on millions were disposed of by this forcing process. ‘The banks made loans to the subscribers, creating deposits to their credit; cheques against these deposits served to pay for the bonds, the Treasury again deposited these to its credit, and in due time drew its own cheques for war expenditures.’l The large stock of gold held in the country enabled inflation to take place without any dangerous symptoms manifesting themselves, and surprisingly little criticism of what at ordinary times would be regarded as a dangerous proceeding was evoked.? Indeed the one infallible sign and the one effective check—the movement of gold—had been damped down by the embargo. In other words, the traditional links between price changes and international trade were no longer present; and the banks were thus free to raise war-loans by unlimited creation of credit. These new deposits were no temporary addition to the credit structure; but were piled one on another in the process of ‘pyramiding’, as the phrase of the time went. ‘First they were used by the Treasury ! Taussig, International Trade, Chapter XXV. * See Parlinmentary Debates, 1918, No. 32, p. 4320. ‘I do not consider that we are within the danger zone. What should be the extent of currency reserves is largely a matter of opinion. I feel that at the present time the Australian note issue is perfectly safe.’—The Federal Treasurer (Mr. Watt). TRADE BETWEEN 1914 AND 1928 189 for its various payments, and then used and spread broadcast by the contractors, merchants, manufacturers, farmers, soldiers, into whose hands the “money” flowed. The really significant operations were purely domestic—quite divorced for the time being from international trade.’ But a halt had to be called some time, and a period set to both the abnormal excess of exports and the rise in prices, and this was brought about by the natural death of war-time Anancial measures. ‘The revulsion did not take place immediately. For a few months succeeding the armistice there was a halt, a taking of breath as it were. Then the business world (in Australia as elsewhere) made an endeavour to resume and maintain the mad pace of the war... a stage of release and buoyance, and then at last the slow and bitter process of recovery from the lasting effects of the desperate struggle.’? In this recovery from the manifold excesses of the years between 1914 and 1020 is to be sought the explanation of the economic difficulties in Australia for the next decade. The historian of the future may tease out from the tangled skein the main threads which still run through the fabric of business, and may indicate unfalteringly the chief controls in what appears, at this distance, little better than a chaotic and depressing tangle defying our best efforts to unravel. In one important respect the theory presented here quite fails to fit the facts of the post-war situation. The movements of group prices were too disturbed and spasmodic, the distortion of the whole field of prices too great in consequence of the de-Aation policies being pursued at home and abroad, to enable us to detect those phenomena connected with group prices which were indicated for the more normal pre-war period. Changes in domestic price-levels, due to the reaction from the extraordinary internal inflation that had occurred, were too overwhelming in their effects to enable the relatively fainter trends due to the borrowing cycle to be clearly discerned, although the conviction that these weaker currents were present in the main stream remains. Here again the explanation has to be sought in the fact that the gold standard—the regulator of the relative price-levels for our purpose—had ceased to operate for the 1 Paussio. op. cil., parenthesis by present writer. 190 ANALYSIS OF THE TERMS OF TRADE greater part of the period; and that the interval since the return to gold has been too short for statistical analysis of a satisfactory kind. Nevertheless the statistics of international trade, despite the gaps in our knowledge of the situation, afford a profoundly interesting study for the decade and a half following 1914. For the first two years of war the recent excess of imports was maintained. But, after 1916, a great change takes place and an sxcess of exports develops and attains phenomenal dimensions, rising to a climax of £50 millions in the fiscal year 1919-20. Then, once again, an abrupt change-over occurs ; and, with the exception of the year of crisis, 1921-2, and the year of partial recovery, 1924-5, imports once more dominate the position. Nothing but an analysis of the terms of trade will serve to reveal the true inwardness of the situation, or show how closely all these events, underneath their apparently chaotic surface surrents, reveal the effects of the main stream of capital imports. Thus, once more, the normality of the trade situation is exposed ; and it becomes possible to range the experiences of this latest borrowing cycle in line with those of previous similar episodes. By reason of the explanations already given in the foregoing pages, no extensive comment on the table which now follows will be necessary. The co-operation of factors unusually favourable to Australia in the matter of trade, combined with the orthodox effects of the borrowing cycle, are seen to have given Australia an increased advantage until 1921. But, afterwards, the normal transition from the first to the second phase of the cycle, together with the extraordinary recession in world business, rapidly dissipated this advantage; and the history of the years, until at least the end of 1929, is one of growing adversity in trade. Tasre XLII Australia INTERNATIONAL TRADE, 1914-28 Year. 1914~15 1915-16 1916-17 1917-18 1918-19 1919-20 1920-21 1921-22 1922-23 1923-24 1924-25 1925-26 1926-27 Declared value. £m. 64-432 77745 76-229 62:335 102-335 098-974 83-802 103-066 31-758 40-618 157-143 151-638 164-717 IMPORTS. Value at 1914 prices. [mport price index. 10714 == 100 Absolute. £m. Relative, £m 100 127 160 206 | 226 242 205 182 54 152 164 160 Th 64-432 61-219 47-644 30-259 45-281 40-899 55526 56-629 85-557 38-441 95-820 89-726 111-295 rl 1000 935 739 185 70 835 361 378 327 372 1487 1392 17927 Declared value. £m. 60-593 74-748 97-955 81-420 113-964 149-824 132-159 | 27-847 117-870 19-489 162-030 148-562 44.005 EXPORTS. Value at 1914 prices. Export price index. 19714 = 100 Absolute. £ an Relative. £m. 100 123 151 180 BT 17a 60-593 60-795 64:870 50-893 72-588 36-604 76-392 96-854 74132 82-559 75-363 90-038 30-550 1,000 1,003 1,076 840 -198 429 260 596 223 032 ,243 1,486 © 404 22 FT 191 215 165 160 t Net barter berms. 100 103 106 129 4 “0 70 87 98 132 131 103 108 Gross barter terms. ‘00 107 146 173 255 225 146 182 as 75 83 107 RE Wage index. Effective allowing for unemnloyment. Effective. ,000 Lo11 (,000 (oso | 1,062 1.067 1,260 1318 1,243 1,282 1,265 1,255 Le 1,000 1,050 1,115 1,133 1,003 1,008 1,232 ,318 ,273 1,286 1,272 1,285 Wholesale DrICes. 1,000 1,396 1,309 1,446 1,683 L789 2,159 ,656 ,530 692 1,641 1,605 1 594 Column B from selected group prices and British wholesale prices 20 GRVS& TERMS 100 15° 100 n ay rw 100 |-& ee 3:7 1919 1921 1923 1925 1927 Fig. XVIII. GROSS AND NET TERMS OF TRADE AND WAGES, 1915-27 Smoothed 5-year moving-average curves shown heavy. CHAPTER XVI THE BALANCE OF INDEBTEDNESS, 1918-28 ‘The investment of capital abroad, the travel of tourists, and all the other factors outside of the balance of trade itself are the comparatively independent variables, bhe balance of trade in goods is the compensatory variable in the balance sheet of botal indebtedness.’ —A. C. Warraxer, ‘The Ricardian Theory of Gold Movements’, Journal of Economics, Feb. 1904, The adjustment of the balance of trade to a newly introduced or increased disturb. ng factor is brought about through the influence of divergent price-levels on the quantitative ratio of exports to imports.’ —VINER, Canada’s Balance of International Indebtedness, 1. 254. As compared with the pre-war period, Australian overseas trade for the years between 1918 and 1928 exhibits some striking changes. Reference has already been made to the effects of war-time conditions upon the economic relations of Australia and Great Britain, and the weakening of former trading connexions must be regarded as not the least of these. The loss by Britain and the gain by the United States of financial power, the enlargement of advantages acquired by other nations in their trade with Australia during Britain's preoccupation in waging the war, and the search by Australia for markets for her increasing output of primary products, were all to some extent responsible for the more pronounced multi-angular trade relations of the post-war period. The Anglo-Australian trade organization which had such pronounced effects in shaping the financial system of Australia before 1914 was now passing; and the effects are to be seen in the curious changes in the trade balance, in the even more unusual exchange situations which developed, and in the uncertainties of business which are still a puzzle to both bankers and traders. The history of the exchanges between Great Britain and Australia in the post-war period has still to be written; and the extraordinary situations which developed, particularly in 1921 and 1924, indicate the operation of factors that have not yet been adequately examined. There seems little room for doubt that the alternate plenty and dearth of funds in London awaiting transfer to Australia was the immediate explanation; but evidence concerning the causes of these fluctuations, except in a?10 aoe 194 THE BALANCE OF INDEBTEDNESS, 1918-28 a very broad fashion, is very difficult to come by.l That we must look to the importation of capital, both public and private, for the major dynamic behind these economic changes is now certain ; but the main difficulty here concerns the computation of the amount of private capital which has been invested in Australia during recent years. A further attempt must be made, therefore, to reckon the balance of indebtedness over the period as a logical conclusion to the survey respecting the terms of trade. I. The Commodity Balance of Trade. The importance of the commodity balance of trade as an item in the total balance of indebtedness has already been discussed at some length. The argument may now be taken forward another stage by indicating some of the more obscure effects of borrowing upon the movement of commodities. Viner has demonstrated conclusively that when a disturbing factor of substantial proportions and long-continued duration, such as the Australian overseas borrowings, ‘breaks the even balance of debit and credit international obligations, an even balance of payments is re-established, and is maintained in spite of the debit balance of indebtedness, mainly through compensatory variations in the commodity balance of trade, exclusive of gold’. It is important to realize, first, how this compensatory variation takes effect, and, secondly, the relatively greater part played in the process of equilibration by imports as compared with exports. In the article from which a quotation has been selected to introduce this chapter, A. C. Whitaker has shown that, with the exception of the commodity balance and overseas borrowings, all the other items in the balance of indebtedness are relatively constant. They are of the nature of fixed charges, and our previous examination of the Australian balance has shown within how narrow a margin interest, freight, tourist expendibure, insurance, and the rest, fluctuate from year to year. The tension is sustained by the inflow and outflow of commodities ; 1 For the best and most exhaustive discussion of the post-war exchange position, as well as for a clear exposition of the principles governing Anglo-Australian sxchange, reference should be made to the section entitled ‘The Banking System of Australia’, by Professor D. B. Copland, in Foreign Banking Systems, 1929 (Henry Holt & Co.). THE BALANCE OF INDEBTEDNESS, 1918-28 195 and, in this sense, the commodity balance of trade may be regarded as the ‘governor’ regulating the whole balance of indebtedness. Under normal conditions, however, variations in commodity imports function more sensitively in this matter of maintaining equilibrium than do variations in exports. Especially is the variation in the flow of imports a critical function of the borrowing cycle. By this means, and by this means almost exclusively, is it possible to adjust the international balance of indebtedness to the variations in capital borrowing. The argument has special reference to Australia which belongs to that group of new and undeveloped countries needing the injection of great amounts of capital for the rapid and effective exploitation of their resources. For Australia, as for all such countries, comparative advantage in foreign trade is ‘confined to the export of the primary products of her natural resources, limited in their range but representing a large part of her total commodity production’. Marked variations in the export of these few commodities is a natural consequence of seasonal variations in their production. Continuous production is, however, enforced by the necessity for providing employment, on the one hand, and for meeting the charges on capital invested in the industries, on the other. Changes in the price-levels for these commodities in world markets will be followed only very slowly by changes in production and export, and then only if the price changes are maintained over long periods. Imports, however, are far more flexible. They display much greater variations, both in volume and ‘make-up’, than do exports ; and are, moreover, less intimately associated with the volume of domestic production. Thus it happens, as Viner remarks for Canada, that ‘marked and rapid fluctuations in imports cause less disturbance to industry, and necessitate less internal readjustment, than do correspondingly marked variations in exports’. The natural consequence of the relations existing between domestic production and overseas trade is that the sharp adjustments in the commodity balance of trade necessitated by capital borrowings are effected to a far greater degree by variations in the rate of imports than by variations in the volume of exports. 1 See Viner, op. cit, Chapter XI. 196 THE BALANCE OF INDEBTEDNESS, 1918-28 But the foregoing argument concerns the merely positive aspect of fluctuations in the commodity balance. The negative aspect concerns the definite restrictive effect of overseas loans upon exports, that is to say that borrowing not merely accelerates the rate of import movements, but also definitely retards the rate at which exports leave the country. Presumptive evidence of this effect is contained in the following figures for the earlier and later phases of the latest Australian borrowing cycle. The statistics quoted hereunder show that, despite an expansion in total production, the proportion of production which has been exported has tended to diminish. Commodity Production and Exports 6-year period. 1914 to 1919-20 1,606 | 579 | 1922-3 to 1927-8 2,566 | 836 I. Production. £m. 11. Exports. £m. Percentage II on I. 36-0 32-6 This restrictive effect of borrowings upon exports needs careful examination, especially as we may, to some extent, be undoing with one hand, foreign loans, what we are attempting to do with the other, the tariff. Stated briefly, the diminishing proportion of total production which figures in the export trade is a result of four factors, all of which are closely connected with capital importation. (i) Australian raw materials are being increasingly manufactured for the home market, largely as a result of the tariff policy, but also because of the growing investment of foreign capital in Australian industries. This may also be partly an inevitable result of the world-wide tendency to manufacture raw materials as near as possible to the point of production. (ii) The expansion of secondary industry tends to draw labour and capital away from primary industries, i.e. to throw the emphasis on production for the domestic rather than for the foreign market. The greater concentration of industries at the seaboard, the evidence of rural depopulation, and the very small proportion of the product of Australian secondary industry which is exported are all noticeable features of recent development. (iii) Expansive immigration policies, coincident with the carrying out of great developmental works and closer settlement, both tend to lower the exportable surplus THE BALANCE OF INDEBTEDNESS, 1918-28 197 by increasing domestic consumption. (iv) Finally, over the long period, the relative changes in the import and export price-levels which have been indicated as a normal function of the borrowing cycle pile further disadvantages on the export as compared with the import trade. How serious this effect may be at the end of the cycle is indicated by the analysis of the terms of trade in the two previous periods examined. Arising partly from the operation of tariff amendments after 1920, and partly from altered conditions in Australia’s overseas markets, certain remarkable changes in the direction of trade have now to be noticed. The most important of these changes has reference to the diminished proportion of total imports and exports that is represented by the trade with Great Britain and Germany, as compared with pre-war years. No less significant is the increased proportion of Australian trade with non-British countries, especially with the United States, Japan, and France. These changes are best represented by setting side by side the percentages of import and export trade with each country for the pre-war and post-war years. The decline in the share of the United Kingdom and the increase in that of the United States are of the utmost significance in regard to the effect of capital movements on commodities, and to the manner and form in which capital imports reach this country. Direction of Australian Overseas Trade Shares of various counlries as percentages of total trade. Exports. 1998 1908 U. Kingdom . . Brit. Possessions * Total. Brit. Countries . 50-10 | 12-83 72.09 42-65 13-06 Bb571 15-83 14-39 A029 37.90 10-63 18-53 France . ® . Germany . , " [taly z . . Japan ’ 2 [Tnited States 0-97 7-058 0-46 1-09 2-13 2-65 312 0-92 2-90 99.686 8-01 14-32 0-53 1.97 3.73 10-59 8-39 3-59 878 6-25 1 An Economist editorial (9th March, 1929) makes the following comment: ‘Tracing the various stages of the effect of an investment abroad is as difficult a task as tracing the course of a drop of sea-water that rolls around the oceans of the world.” To vary the explanation of the Statist (21st Oct. 1905), Australia borrows money in London to finance rural development; and with this capital Australian farmers purchase American tractors. motor-cars, and agricultural machinery, so 198 THE BALANCE OF INDEBTEDNESS, 1918-28 Two considerations arise here with reference to capital loans. [t is widely assumed that such loans enter the borrowing sountry mainly as capital goods. Viner found in the Canadian investigation that it was impossible to determine what proportion of the imports was properly to be classed as capital and what proportion as consumers’ goods. The problem is closely allied to the old controversy as to the distinction between necessities and luxuries. No hard and fast line can be drawn in either case. But, after an attempt to group Canadian imports into capital and consumption goods, he is forced to the conslusion that, while capital goods did enter to some extent as direct purchases by the borrowing from the lending country, the loans entered predominantly in the form of consumption goods. Pursuing the same plan for the investigation of Australian imports it is possible to summarize the inquiry in the form of a statistical comparison. Australian Imports Group 1. Capital Goods. 1925-6 £m. 115 21-2 | 304 1-5 41 15:1 130 | 263 | 455 100-0 195-0 350-0 Metals and Machinery . Vehicles and ships Index " ' . Increase, for Capital Goods, per cent. of 1908, 250. Grove II. Consumption Goods. 1908 £m. "1919-20 | 1925-6 £m. £m. 69-7 95-8 233-0 | 320-0 All commodities . r 29-9 Index . £ Increase, for Consumption Goods, per cent. of 1908, 220. that the borrowings arrive partly in this form. Britain has then to settle with the United States, herself a capital exporter. Now the U.S.A. requires very little of Britain’s manufactures, but she does need wool, silk, and rubber. The export of the first from Australia and of the second from Malaya partly satisfies the creditor. The silk is purchased from Japan, and this is paid for in raw cotton from India. [ndia takes payment for the raw cotton in cotton manufactures and heavy goods of all kinds. In this way British capital may be exported to Australia in the form of cotton piece-goods or motor-cars exported to Bombay. THE BALANCE OF INDEBTEDNESS, 1918-28 199 The year 1908 has been chosen as a base year on account of the normal character of its trade, and also because it was representative of the era before the import of motor vehicles began to figure largely in overseas trade. In that year the capital imports were £13 millions out of a total of £50 millions, or 26 per cent. Further, borrowings for 1907 and 1908 amounted to about £2-5 millions a year, while the average for the decade was about £6 millions. It will be seen, therefore, that the heavy subsequent borrowing did not increase the import of capital goods out of proportion to that of consumption goods, measured by the statistics of 1908. But this balance between the two is maintained by including with capital goods the import of motor vehicles, If these were removed from one class to the other, a procedure for which there would be doubtful justification, the respective percentage increase for each group would become 164 and 226. In any case the evidence fails to show an increase in capital as compared with consumption goods in any way commensurate with the borrowings for the period. Nor does the analysis of imports year by year, correlated with new loans, make the case for capital goods any stronger. The second consideration bears upon the changes in the direction of trade to which reference has already been made; and has particular application to the relation between British capital loans and British exports to Australia. The belief that loans from a country necessarily imply a corresponding increase in the exports from that country has recently been called into question by Mr. J. M. Keynes; and the facts drawn from the history of Australian trade by no means support the traditional view. While it is certain that in the early days of the development of the country, capital loans entered largely as capital goods in the form of railway and constructional material, in the later period no such definite correlation can be traced. Neither an increased British proportion of imports into Australia nor a predominance of capital goods among the incoming commodities can be discerned. What can be detected is rather a tendency for borrowing to increase the predominance of consumption goods in the imports, and to facilitate the purchase of both capital and consumption goods from other than British countries. I Commonwealth Year Book, No. 21, Chapter VI, Section 14. 200 THE BALANCE OF INDEBTEDNESS, 1918-28 In connexion with the effect of borrowing upon imports some further features may be noticed. Australian experience would indicate the following sequence as fairly representing the facts of the situation. The issue of a loan is invariably for some specific purpose; and most usually is for some developmental work which requires the expenditure of the greater part of the loan in paying the labour engaged upon the construction. Undoubtedly some portion of the loan leaves Britain in the form of capital goods ; but analysis tends to show how surprisingly small is the proportion of recent borrowings which is so expended as to stimulate directly the export of capital goods from Britain. For an explanation of the contradiction of accepted theory involved in this statement we must turn to the conditions under which the loan is translated into purchasing power in Australia, i.e. in the payment of wages. The commencement of a constructional work and the mobilization of the labour necessary for its carrying out, either in rural areas or urban factories, involves the establishment of all sorts of retail supply services through the medium of which the greater part of the wage fund is expended in the consumption goods required by the labourers or technicians. The import of all the foreign-trade goods which the community ordinarily requires is stimulated; and the anticipated demand for these is measured by a multitude of petty traders of various kinds. The cumulative effect of a number of small and localized booms in trade excited by and dependent upon the expenditure of loan money is concentrated at a relatively few importing points. Thus the business of importing houses in the capital ports responds in a highly sensitive fashion to the stimulation of trade ‘up-country’ as the expenditure of the loan money proceeds. Owing to the distance over which foreign-trade commodities have to be transported, and to the time-lag involved, the ordering by importers of these goods is necessarily largely speculative, and always tends to be in excess of actual requirements. This is, in itself, one of the reasons for the ‘over-spending’ or ‘over-trading’ which normally characterizes booms based on loan expenditure. Correspondingly the depression in trade in the capital ports as the expenditure of loan funds ceases in the hinterland is again a normal reaction that tends to be very emphatic. THE BALANCE OF INDEBTEDNESS, 1918-28 201 One further aspect of the relation between gold and capital movements may be conveniently observed at this point. The present analysis of capital transfers from Great Britain to Australia has not made possible any material contribution to the debate as to whether the flow of gold precedes or follows the issue of a loan. The retention of gold parallel with the import of capital which has been noticed for the pre-war period may be regarded as either a gold flow, in effect, from the lending to the borrowing country, or as an anticipatory strengthening of the gold basis upon which the consequent expansion of currency, the enlargeinent of purchasing power, the rising pricelevel, and the secondary stimulus to imports and check to exports will depend. Under the conditions of intimacy existing between the Australian and British financial systems effect is given to the loan issue by opening credits which enlarge the London funds of Australian banks; and it is, within certain limits, immaterial whether the gold resides in the English or the Australian vaults of these banks. These funds are moved as required and largely in accordance with expediency, i.e. in the light of the existing equilibrium of payments; but the more or less gradual transfer of the credits to the Australian end necessitates, in the last analysis, an expansion of the Australian reserves of the banks affected. The order of precedence as between the enlargement of bank stocks of gold in Australia and the issue of the loan thus becomes largely an academic question of little practical importance ; and recent modifications of the theory of international trade would appear to support the view stated here. Nothing further need be said concerning the commodity balance of trade for the post-war years, except to call attention to the very curious fluctuations in the differences between debits Cf. Angell’s position: ‘The doctrine set up here regards the gold flows as an essentially short-run phenomenon usually of temporary importance alone, It bases its more long-run conclusions on the effects which significant changes between the demand and supply of bills of exchange produce upon the total volume of pur. chasing power in circulation. —T'heory of International Prices, p. 414. Also Keynes: ‘The modern age in which debits and credits between nations are settled by changes in the volumes of liquid balances held in international financial centres, instead of by movements of gold, brings with it a new type of problem for which ready solutions are not available. At present our authorities are content that the so-called “invisible” items in the international balance sheet should remain invisible in a literal sense.’ — Economic Journal, 1927, p. 551, “The British Balance of Trade’, 3710 a 202 THE BALANCE OF INDEBTEDNESS, 1918-28 and credits. The deficits as represented by the debit balances in 1920-1, 1923-4, and 1926-7 tell their own tale of the difficulties experienced in those years, and further elaboration will serve no useful purpose. If to these conditions we add the fluctuations in purchasing power owing to the normal seasonal character of primary production which again are transferred in a marked manner to the trading centres, we have an economic organization of a peculiar pattern, in which the activities of the great aggregations of population at the seaboard are responsive in a very delicate fashion to the prosperity of the back country. It is obvious that bhis arrangement tends to exaggerate in the capital ports the effects of expanding and contracting trade to an extraordinary degree. In the dependence of a large proportion of the population of the seaboard cities upon the activities of overseas trade, it is to be supposed, is to be found the chief reason for many of the recurrent seasonal problems which cannot be treated here. That they are, however, connected with the acceleration and retardation of capital supplies from overseas is undoubted, and the position is far from comfortable in many of its aspects. Tare XLIII The Commodity Balance of Trade, 1320-8 (In Millions Sterling) DEBITS. Year. (919-20 1920-21 1921-22 1922-23 1923-24 1924-25 1926-26 1926-27 1927-28 Commodity | imports. 81-045 143-078 37-926 116-633 124-454 130-186 | 134-403 146-253 129-313 Imports Jor re-export. | 5-254 5-387 5-728 3-119 3-326 3-088 3-067 2-989 4-266 Specie and bullion. 0-046 0-020 0-043 0-031 0-062 10-543 0-421 0-589 1-008 Imports of ships. 0-038 1-330 +575 2-133 3-379 )-268 0-303 0-213 0-350 Total Debits. 86-373 149-815 98-272 119-916 128-220 144-076 138-194 150-044 134-937 { See in this connexion the remarks by D. H. Robertson: * With the partial closing of the vast gaps which existed in the nineteenth century between the comparative effectiveness of different countries in agriculture and industry respectively it is becoming natural that the world should settle down to a smaller relative volume of international trade. Yet fiction, prestige, tradition are all on the side of pushing loreign trade to its utmost limit. The result is the problem of “sheltered” and *‘un- THE BALANCE OF INDEBTEDNESS, 1918-28 203 OREDITS. Year. 1919-20 1920-21 1921-22 1922-23 1923-24 1924-25 1925-26 1926-27 1027-98 Commodity sports. 137-936 121-307 117-791 111-451 112-349 156-999 140-006 129-848 135-207 Re-2 rnOrts. 5-254 5-387 5-278 3-119 3-325 3-088 3-067 2-989 1-988 Specie and sullson. 3-634 5-465 1-328 3-300 3-813 2-043 5-489 2-303 2.740 Ships’ stores & coal. 2-688 3-561 3-163 2-887 2-614 2-716 2773 2-781 2.825 BAWRA dividends. 77 9-9 5-9 5-3 2.0 Total Credits. 162-512 143-420 140-900 126-657 127-401 164-845 151-335 147-921 149-048 Difference ‘minus sign for Debit). 66-139 —6-395 42-628 6-741 -0-819 20-770 13-141 —-2-123 15-011 Excess of Credits 155-093 II. Freight, Insurance, and Tourist Expenditures. The calculation of freight charges paid by Australia on inward cargoes is a comparatively easy matter for the post-war years. In the first place a satisfactory freight index has been computed for the years since 1920 by the Chamber of Shipping of the United Kingdom.! Secondly, the comparative data for all British lines trading to Australia has been assembled for the years 1926, 1927, and 1928 by the Oversea Shipping Representatives Association. These two groups of data make possible a far more accurate assessment of the cost of shipping services to Australia than for any previous years. Taking, first, the statistics for all British lines represented in the report referred to, the following estimates may be extracted. The figures are arranged in two groups, viz. (i) Cabin-cargo ships, and (ii) Cargo ships. Dividing the total tonnage carried by these ships for the three-year period by the number of voyages made, the average cargo is found to be about 14,000 ship tons. The average annual invoice value of merchandise imported for the three years amounts to £150 millions in round figures, and the average value of an inward cargo was estimated to be £397,000 in 1926. The total freight for eighty-one round voyages was £4-123 millions, or £51,540 per voyage. Now the proportion of inward bo outward cargo was 534 to 518, but some deduction has to be made for intermediate ports. Therefore £21,000 may be regarded sheltered” industries.’ —ZEconomic Journal, 1928, p. 276, in a review of Taussig’s International Trade. 1 Annual Report, 1928-9. 204 THE BALANCE OF INDEBTEDNESS, 1918-28 as a fair average for the freight upon the average inward cargo for the year 1926. This proportion of £21,000 upon £397,000 gives the estimate that freight charges amounted to 5-3 per cent. of the value of cargo carried. But expenses in Australian ports, other than cost of fuel, amounted to 21 per cent. of the gross freight which leaves the net freight charge at 4:2 per cent. of Tarte XLIV Freight Charges on Imports, 1920-8 Year. 1920 1921 1922 1923 1924 1925 1926 1927 1928 Recorded value of ymports. £m. 98-974 163-802 103-066 131-758 140-618 157-143 151-638 164-717 148-117 Freight as percentage of cargo (estimated). Price index. 1,363 1,038 959 1,061 1,029 1,008 1,000 992 a72 Freight index. 3,671 1,343 1,060 1,014 4,067 908 1,000 993 021 Freight as percentage of cargo (correcied). & 54 4.6 4.0 43 3-8 4-2 4-2 2.9 Cost of inward freight. £m. 11-084 8-845 4-743 5-271 6-047 5-971 6-369 6-918 b-776 the invoice value of the typical cargo.l The method used by the customs authorities for arriving at the value of imports for revenue purposes adds 10 per cent. to the invoice value, and the figures should, strictly speaking, be reduced by one-eleventh. But, since the value of the typical cargo was obtained on the basis of the recorded figures, and the freight figures published by the steamship companies were reckoned as a percentage of the recorded value of imports, the customs figure has been retained in the next table. A lower cargo value and a higher L At first sight it is somewhat surprising that the cost of freight does not differ more widely for the Canadian and Australian trade. Rates of freight, however, are not determined on mileage alone, since the number of ports and the expenses in loading and discharging ships are important considerations for the shipowner. Conditions in the Canadian and the Australian trade are, in fact, vastly different. Ships sailing from Britain to Australia usually carry good cargoes of manufactures and both the outward and homeward voyages contribute fairly to the cost of the round trip. Cargoes to Canada, on the other hand, are usually very small, and a higher rate proportionately to distance is charged than for the Australian voyage. This seems to explain the relatively small difference between this figure and that of 3-5 per cent. obtained by Viner for Canada. THE BALANCE OF INDEBTEDNESS, 1918-28 205 freight percentage would, of course, give the same freight charge. Freight rates for the years in question broke away sharply from the high rates prevailing between 1915 and 1919. An abrupt fall of more than 60 per cent. took place in 1921, followed by a further gradual decline of 30 per cent. by 1925. For the post-war period it is now possible to present the cost of inward freight with some certainty. (See Table XLIV.) Insurance. Nothing need be added to what was said in Chapter XII upon the method of computing the charges for insurance of inward cargoes. We can therefore proceed to estimate the cost of insurance in accordance with the method there indicated. Tare XLV Insurance on Australian Imports Year. 1920 1921 1922 1923 1924 1925 1926 1927 1G98 Imports at insurance value. Lam 110-058 172-647 107-809 137-029 146-665 162-114 158-007 171-635 152.802 Rate of insurance per cent. Cost of insurance. em 0-412 0-647 0-405 0-513 0-650 0-609 0-594 0-651 J-576 Tourist Expenditures. In recent years tourist expenditures have acquired considerable interest, not merely by reason of bheir effect upon the balance of international indebtedness, but also because of the comparative estimates which have been made concerning the amount of travel undertaken by the people of different nations. The estimates here made indicate that fewer Australians go abroad now than before the war, despite popular opinion to the contrary. The average number of passages taken out by Australians in the nine years previous to 1914 was, in round figures, 49,000. The corresponding figure for the nine post-war years is approximately 44,000. Owing, however, to the decline in the value of the pound in the later period, the present expenditures make a much larger showing than formerly. 206 THE BALANCE OF INDEBTEDNESS, 1918-28 Revising the estimates for the pre-war period in accordance with the difference in money values it is estimated (i) that the disbursements of travellers from abroad while in Australia now average £150 for first-class passengers, and £80 for all other classes; and (ii) that the average expenditure by Australians abroad amounts to £300 for first-class passengers, and £150 for all other classes, inclusive of the cost of transport. In making this estimate, and in computing the higher charges for steamer and railway travel, hotel accommodation, and the different services that are in demand by tourists, every opportunity has been taken for consulting bank officials, responsible officers in steamship companies, hotel managers, and others. From every point of view the present estimate of the cost to Australia of such services, amounting to less than £10 millions per year, will not appear surprisingly high ; and the estimate was confirmed by the slightly higher computation made independently by the officials of Australia House. One further note should be made concerning the somewhat high figures for 1920 and 1921. During these years the rate of travel from Australia was, for several reasons, abnormally high. [t represents, to some extent, a reaction from the restrictions on travel during the war; but, in addition, very many people were anxious to visit Europe for a variety of motives that need not be discussed here. Further, the high prices and high profits of the post-war boom were not without their effect in placing the means for travel at the disposal of many business people. In the light of all the circumstances the high figures at the end of the period are more difficult of explanation. (See Tables XLVI, XLVIL.) ITT. Capital Investments and Interest Payments. In the years since 1920 a great deal of attention has been given to the financial circumstances of the Commonwealth ; and the British investment market, in particular, has adopted a very critical attitude towards any enlargement of borrowing programmes. The chief benefit arising from this more careful scrutiny of loan projects for the investigator has lain in the more careful compilation and comparison of statistics of capital investment ; and, at any rate for the three main groups of public loans, the true facts of the case are more easily obtainable. As a consequence of the more careful regard for the disposition of THE BALANCE OF INDEBTEDNESS, 1918-28 207 the diminished surplus of British capital it is possible to tabulate with a high degree of accuracy the Australian borrowings, year by year, and to calculate with some certainty the amount of TasrLe XLVI Numbers and Expenditure of Tourists in Australia Vear. 1920 1921 1922 1923 1924 1925 | 1926 1927 1998 FIRST CLASS. Number. | Amount. + Number. £m. OTEBER CLASSES. Amount. £m 13,000 10,000 9,000 9,000 9,000 10,000 10,000 10,000 10.000 1-950 {-500 1-350 1-350 -350 -500 -500 +500 500 14,300 1,000 10,500 :0,000 1,000 1,000 12,000 13,000 4.000 1-144 0-880 0-840 0-840 0-880 0-880 0-960 1-040 1-120 Total. £m. 3-094 2-380 2-190 2-190 2-230 2-380 2-460 2-540 2.620 TasrLe XLVII Numbers and Expenditure of Australians Abroad Vear. 1920 1921 1922 1923 1924 1925 1926 1927 [928 FIRST CLASS. | | Number. | Amount. £m. 14,000 11,000 9,000 9,000 10,000 10,000 11,000 12,000 13.000 £-200 3-300 2-700 2-700 3-000 3-000 3-300 3-600 2.900 OTHER CLASSES. Lumber. | Amount. £m 40,000 33,000 27,000 27,000 30,000 32,000 33,000 34,000 - 25 600 6-000 4-950 4-050 4-050 4-500 4-800 4-950 5-100 5-340 Total. £m. 10-200 8-250 6-750 8-750 7-500 7-800 8-250 8-700 3.240 interest and dividend payments for which the Commonwealth is liable overseas. The amount of interest payable on the public debt is calculable almost to the proverbial penny, that on municipal loans somewhat less exactly, and only in the case of the ‘business’ loans are hypothetical estimates at all necessary. For the calculation of the interest payable on this latter class of loans resort had to be made to estimates of the approximate average 208 THE BALANCE OF INDEBTEDNESS, 1918-28 profit made by Australian businesses during the years in question. Working on the dividends paid by twenty representative concerns, the average dividend rate which appears in the following table was reckoned. It is, therefore, now possible to set out the situation in this respect as far as the known facts will take us. Year. 1920 1921 1922 1923 1924 1926 1926 | 1927 1928 TasLe XLVIII Interest Payable Abroad on Government, M: unicipal and Business Loans, 1920-8 (In Millions Sterling) MUNICIPAL.? GOVERNMERT.! | Amount. | Interest. Amount. | Interest. Amount. Rate. + Interest. 419-1 £30-5 172-6 176-5 524-6 524-7 562-2 574-1 628-3 17-263 18-233 20-490 20-792 23-205 23-748 25-551 26-827 28-088 1-0 2:0 2-9 3-4 7-5 38 8-9 11-0 15:9 0-065 0-107 0-160 0-186 0-411 0-485 0-491 0-606 0:878 36-6 381 40-4 42-5 45-7 47-2 51-5 58-6 61-3 8-2 4-4 3-6 4-8 33 55 7-0 6-7 53 2:201 1.676 1-456 2-083 2-427 2-597 3-605 3-926 2.940 Total. Interest. 19-519 20-016 22-106 23-061 26-043 26-830 29-647 31-359 39.215 Tt is not possible to compute accurately the amount of capital introduced through private channels since 1915, although it is certain that this movement went on at an accelerated rate. Expansion of business financed from overseas in connexion with motor vehicles, moving pictures, electrical and wireless equipment, textile manufacture, &c., was particularly active. Tariff amendments after 1921 were responsible for similar developments, especially in textile and motor industries. The utmost that could be attempted, therefore, was to continue the progressive movement of capital already computed for the 1900-14 period ; and this was estimated pro rata with the importation of capital by public ‘business’ loans. The impression obtained was that the estimate made by Wickens,* considering that his estimate includes private capital here called business loans, is ! Finance Bulletins of Bureau of Census and Statistics. 2 and * Estimate by the Economist published by Cooke and Davenport, Imperial Finance. 4 Mr. C. H. Wickens, Commonwealth Statistician, arrived at an estimate of £200,000,000 for the year 1925. See paper, Australia’s National Balance Sheet, 1926. THE BALANCE OF INDEBTEDNESS, 1918-28 209 considerably below the real total. The reckoning of a fair rate of interest on the capital involved was again a matter of guesswork ; but since probably 50 per cent. of private overseas capital in Australia is sunk in mining and pastoral ventures, an index based on the value of agricultural, pastoral, and mining productivity seemed to offer the best guide for the changing rate of remuneration. The result of the consequent calculation is given in the following table: Tare XLIX Investment of Private Capital in Australia Fear. 1920 1921 [922 1923 1924 1925 1926 927 ' [028 Progressive total. £m. 200 201 202 | 204 206 208 210 212 214 Index of production. 100 88 75 38 100 118 80 70 75 Estimated rate of return, per cent. 3-9 49 38 31 3b 6-3 5-4 50 Estimated Interest. £m. 14-800 11-914 9-946 12-028 12-740 13-464 13-130 11-608 10-760 IV. Non-commercial Items. With the exception of capital privately invested in Australia the least satisfactory item in the estimate of Australian international indebtedness is that concerning capital introduced by immigrants, and the counterbalancing cost of assisted immigration. It is difficult to understand why the facts connected with assisted immigration in particular should be so difficult to obtain, except that the conditions and restrictions affecting assisted passages invite some manipulation on the part of the immigrant in respect to the amount of capital which he transfers. Considering, first, the capital introduced, the total amount declared by migrants to the Immigration Office admittedly bears no relation to the total amount transferred; and there is no method by which the devious transfers can be traced and computed. Again, the number of assisted passages is only about 60 per cent. of the total immigration; and it is highly probable 3710 we 210 THE BALANCE OF INDEBTEDNESS, 1918-28 that the unassisted incomers bring in a relatively high amount of capital, despite the high proportion in some years of southern Europeans. It is considered probable, therefore, that the actual volume of incoming capital from both sources is at least three times as great as that recorded in the statistics of assisted migration. The cost of immigration in post-war years has been shared in varying proportions by the Imperial, Federal, and State Governments, and the actual cost per annum is somewhat difficult to trace in budget statements. The total cost of assisted immigra-Tape L Capital Movements Connected with M igration! {In Millions Sterling) Year. 1920 1921 | 922 923 | 1924 1925 1926 1927 19928 Net migration. 000 15-1 16-7 38:0 37-6 43-8 37-4 42-2 48-9 27:2 Assisted passages. 000 91 14-7 24-3 26-6 250 24-8 31-3 30-1 96.7 Declared capital. £m. *0-095 *0-191 0-254 0-320 0-384 0-483 0-334 0-287 0-209 Total estimated capital. £m. *0-190 *0.382 0-762 0-960 1-162 1-449 1-002 0-861 0-627 Cost of nssistance. £m. *¥0-084 *0-140 0-224 0-252 0-224 0-224 0-280 0-280 0-300 Balance nel capital imported. £m. *0-106 *0-242 0-538 0-708 0-928 1-225 0-722 0-681 0-327 * Wetimated. tion schemes since 1921 has, however, been computed by the Development and Migration Commission ; and these published statistics have been accepted as accurate for the purposes of this investigation. This total cost has been apportioned for sach year on the basis of the number of assisted passages involved. The difference between the amount of capital introduced by immigrants, and the total payments made to shipping companies and immigration agents abroad in respect to those passages, enables an estimate to be made of the net movement of capital connected with immigration. No other non-commercial item ! The amounts transferred through official channels by migrants, in thousands, are: 1022, £253-7; 1923, £320-1; 1024, £383.7; 1925, £4828; 1926, £3340; 1927 £986-8: 1928, £200-1. THE BALANCE OF INDEBTEDNESS, 1918-28 211 has been deemed of sufficient importance to call for special consideration. As in the pre-war period the receipts from Australian capital invested abroad were not of a high order, although it was evident that the amount is steadily on the increase. On the basis of the excess of the receipts from overseas over the expenditure overseas by life assurance and other companies, rates of dividends in tin, rubber, and other concerns, and other related data, the computation shown in the interest column under ‘credits’ in the final table was made. It is, admittedly, not much more than conjecture. The completed balance of international indebtedness is of more than ordinary interest. Notwithstanding the disjointed nature of the period, and despite the adjustments made necessary by the return to gold, the situation revealed by the table is precisely what orthodox theory would lead us to expect. The mechanism of adjustment varies in no important respect from that indicated by the pre-war balance of indebtedness. Setting the two main facts of this last phase of the investigation side by side, the following comparison is obtained for the whole period 1920-28 - Tora oF OVERSEAS LOANS. Government Municipal . Business . . Private ‘ . . “ Capital imported . . 266 . £m. 210 16 28 DIFFERENCE BETWEEN INTERNATIONAL DEBTS AND CREDITS, Total debits Total credits £m. 1635 1360 Excess of debits , . . 278 The discrepancy of approximately £9 millions can be partly reconciled. The calculation is taken to 30 June 1928; and the first half of this year was a period of relatively heavy loan issues. At the end of the half-year London banks held about £3-5 millions of unexpended loan balances in connexion with loans floated by the Commonwealth for the States, and this amount, of course, would not show in the total of imports. The surprising feature of the whole balance of transactions is once again the rapidity and accuracy with which loans become translated into imports of all kinds, both services and commodities. 219 Tasrr LI The Balance of Indebtedness, 1920-8 (In Millions Sterling) DEBITS. Year. 1920 1921 1922 1923 1924 1925 1926 1927 1928 Year. 1920 1921 1922 1923 1924 L925 L926 1927 ]928 Imports. Fresght. 86-373 149-815 08-272 19-016 128-220 44-075 138-194 50-044 134-937 11-084 8-845 4-743 5-271 5-047 5-971 5-369 5-918 5-776 . 149-846 . 61-024 Faports. Tourist. 162-512 (43-420 40-900 126-657 127-401 164-845 (61-335 147-921 149-048 3-094 2-381 2-190 2-190 2-230 2-380 2-460 2-540 2.620 1304-939 22.085 Insurance. Tourist. Interest. 0412 0-647 0-405 0-513 0-550 0-609 0-594 0-651 0-576 10-200 8-250 8-750 8-750 7-600 7-800 3-250 8-700 9-240 34-339 31-920 32-052 35-089 38-783 40-294 42-777 42-967 45-975 4-957 | 73-440 {344-196 OREDITS. Sale of ships. Interest. Migration. | 3-200 2-800 1-400 2-200 2-800 3-000 2-900 2-800 3-000 0-190 0-382 0-762 0-708 1-152 1-449 1-002 0-861 0-627 2:0 24-100 2:0 7-065 Migration. 0-084 0-140 0-224 0-252 0-224 0-224 0-280 0-280 0-300 2-008 Total. 158-996 148-983 145-252 131-755 133-583 171-674 167-697 154-122 158-195 1360-189 Total. 142-492 199-617 142-446 167-791 181-324 198-973 196-464 209-560 196-804 1635-471 DIFFERENCE, Minus sign Jor debit difference. 16-504: -50-634 2-806 — 36-036 —47-741 — 27-299 — 38-767 56-438 40-609 —975:214 27193 Em 60 ie pI PITAL IMPORTED £ CRY 2, er 1022 1024 BN I 1926 1028 Fig. XIX. TOTAL CAPITAL IMPORTED AND THE BALANCE OF INDEBTEDNESS Thick black line smoothed 3-year moving-average for capital; dotted line smoothed 3-year moving-average for excess of debits over credits in the enternational account. CHAPTER XVII THE ECONOMIC EFFECTS OF THE RETURN TO GOLD IN 1925 "The re-adoption of the gold standard may prove in the future to have been the wrong policy to adopt: revolution may undo again what was done last year, or the slower and more subtle modifications which the development of technique can bring with it may perhaps make the recent change irrelevant. But for the moment bhe fundamental decision, fatal or beneficent, good or evil, has been taken; and we are now concerned, not with questions of high principle, but with questions—irritating, difficult, insistent questions—of immediate policy and results. It is with these questions, and not with the gold standard as such, that we are concerned aere.”—Prof. T. E. GREGORY, The First Year of the Gold Standard. "The credit restriction already in force has been effected in several ways which are vartly independent. First, there is the embargo on new issues which probably retards the normal rate of the circulation of money; then in March the bank-rate was raised; more recently market-rate was worked up nearer to the bank-rate; astly—and far the most important of all—the Bank has manceuvred its assets ind liabilities in such a way as to reduce the amount of cash available to the Clearing Banks as a basis for credit. This last is the essential instrument of credit restriction. . . . Credit restriction is an incredibly powerful instrument . . . especially n circumstances where the opposite course is called for. The policy of deliberately ntensifying unemployment with a view to forcing wage reductions is already partly n force, and the tragedy of our situation lies in the fact that, from the point of view of the advocates of the gold standard, this course is economically justifiable.’— Mr. J. M. KeyNEs, The Economic Consequences of Mr. Churchill, For Australia the decision to return to gold was made at a most propitious moment. Actually, in point of time, the event could not have happened more fortunately. But the ease with which the change was accomplished, and the apparent absence of untoward consequences, have been responsible for a too-ready acceptance of the belief that the restoration has had none but good effects upon the economic situation in the Commonwealth. Yet we should be justified, on the grounds of economic theory alone, in adopting an attitude of profound scepticism towards this belief ; and, in fact, all the weight of the evidence is in the other direction. In the first place, Australia is, financially, so dependent upon Great Britain,! and the monetary systems of the two countries are so vitally connected, that a circumstance which ! ‘There is no evidence that the position of dependence is likely to be changed in the near future. Australis at present finances most of her external payments through London, and accepts the prevailing rates of exchange ruling in London. There is thus no independent exchange market; and the rates of exchange vary only occasionally as announced by the banks after agreement with the Commonwealth Bank. —Copland in Foreign Banking Systems, p. 85. THE RETURN TO GOLD IN 1925 215 seriously affects the one must also affect the other in some measure. Secondly, and perhaps more importantly from the aspect of the business cycle, is the relation in which Australia stands as debtor to Britain. The dependence upon Britain for capital supplies is of far greater significance, especially in the post-war period, than the relation between the English and the Australian pound. It is scarcely to be supposed, therefore, that the Commonwealth has come scatheless through the most momentous change in her recent financial history. The disabilities for which that change was partly responsible in British industry have, on the contrary, been shared in full measure by Australia; and an examination of its concomitant circumstances will do much to explain both the facility with which the transition was made and the manner in which the effects of the return to gold have been masked by other developments. It is not proposed to translate the controversy concerning the expediency of the return to gold into the Australian field. The step having been taken, our interest lies rather in its economic results than in hypothetical alternatives. Nor will our purpose be served by entering upon an inquiry as to whether the period of transition commenced by that momentous decision is yet over, or whether the difficulties of the consequent monetary adjustments are safely surmounted. But, in so far as the return to gold affected both the value of the Australian pound in relation to other currencies, and the British surplus of capital available for investment overseas, it has had an immediate reaction upon Australian business that cannot lightly be dismissed. Nor can this matter be viewed in its proper perspective without some description, however brief, of the world situation at the moment when the Imperial Government decided upon the restoration of the gold standard, or apart from some theoretical discussion of the issues involved. Alarmed by the steady inflation accompanying the post-war boom, and fortified by the Cunliffe Report in 1918, the Bank of England raised the bank-rate to 7 per cent. At about the same time and by similar measures, the Federal Reserve authorities of the United States sharply constricted credit in the United States, and by 1919 had achieved a notable appreciation in the value of the dollar. The British wholesale price index fell from 306 to 158 by January 1922; while, over practically the 216 THE ECONOMIC EFFECTS OF THE same period, there was a corresponding fall in the United States from 247 to 138.1 As a result of this approximation in the purchasing power of the two currencies, sterling then stood at about 90 per cent. of parity in terms of the dollar.2 Despite femporary reactions from time to time, this movement towards parity between the British and American currencies was steadily maintained throughout the years 1923 and 1924. The two main dynamics to be detected in this movement towards the recovery of sterling were, first, the depreciation of gold itself, which, owing to the inflation in the United States, was worth only 60 per cent. of its pre-war value; and, secondly, the relatively greater degree of inflation that was forced on in Britain. } At this stage, prompted by the knowledge that the Gold and Silver Export Prohibition Act was about to lapse and that some statement of government policy was demanded, the British Government set up a committee, in June 1924, on the currency and exchange question. This body brought in a report of which the main findings were that the sovereign was only 1} per cent. away from parity with the dollar, and that the moment was favourable for clinching the return to parity by the restoration of the gold standard. The Baldwin Government thereupon adopted the recommendations of the committee, a decision to which it was urged by British financial opinion and by the banking authorities of the Dominions. The Chancellor of the Exchequer (Mr. Churchill) announced the decision in the House on 28 April 1925, a step which ‘represented the definitive shifting of the balance of power in the sphere of monetary policy *.4 But the new situation differed in several important respects from that which pertained prior to 1914. Both the Home and the Dominion authorities took steps to discourage domestic circulation of gold, although free exports of gold were resumed from the United Kingdom after the beginning of 1926. The close co-operation of the monetary authorities of the English-' The position of Great Britain immediately before the decision to return to gold is reviewed at greater length in Gregory’s First Year of the Gold Standard, p. 39. ? For international exchange purposes the value of the English and of the Australian pound may be regarded as identical; and what is postulated concerning the one may be assumed as approximately true of the other. * Committee on the Currency and Bank of England Note Issues. Gregory, The First Year of the Gold Standard, p. 1. RETURN TO GOLD IN 1925 217 speaking world was revealed in the arrangements by which a gold credit of 200,000,000 dollars was set up by the Federal Reserve System for the use of the Bank of England should the necessity arise. The Bank of England, on its side, inspired an unofficial embargo upon British capital investments overseas. By this means the threatened world cleavage between gold currency countries led by the United States, and paper currency countries led by Great Britain, was averted. The monetary adjustments called for by the decision to return to gold bore very lightly upon the Australian financial authorities. By a singularly fortunate coincidence Australian currency was at a substantial premium.! The adjustments connected with the restoration were made so easily that the significance of the step was scarcely realized by bankers or business men in Australia. Few apprehended the part that happy chance, in the shape of plentiful funds awaiting transfer to Australia, played in the smoothly operated change ; and still fewer recognized in after events the presence of depressing factors arising out of the necessary financial adjustments. These fortuitous funds in London were the substantial untransferred balances of large loans that had been floated in 1924, some money accumulated from a succession of good seasons, and the very considerable Bawra dividends. At the very moment when there was a paramount necessity for the balance of international payments to be heavily in Australia’s favour that desirable circumstance existed.2 Little wonder, therefore, that the real deflation which ensued was masked for the time being, and that the most effective factor operating to conceal the true inwardness of the situation was once again the great volume of capital borrowing. ! ‘During 1924 the exchanges were favourable (to Australia) and the price-level Fell to parity with U.S.A. prices. When the sterling dollar exchange moved towards parity at the beginning of 1925 it was profitable to import gold from the United States for the Australian pound was at a premium with the British. As the banks had been complaining of low cash reserves in Australia and ample funds in London this movement was encouraged, and imports during the early months of 1925 amounted to over £10,000,000.'—Copland in Foreign Banking Systems, p. 53. * For a time, indeed, the volume of funds in London was a source of great smbarrassment to bankers in Australia, and the buying rate was at one period 70s. per cent. discount. This situation ultimately, of course, had the effect of dissouraging exports and encouraging imports, and this in the end helved to restore the equilibrium of indebtedness. a1 rd 218 THE ECONOMIC EFFECTS OF THE The estimation of the deflation consequent upon the return bo gold, and of the relative disadvantage reaped by Australia, by virtue of the diminished value of exports and the increased total of the payments on account of imports, interest, and services, represents a difficult exercise in the measurement of the effects of currency appreciation. Over-lain as these effects are by price changes due to tariff adjustments and to wage fixation, the isolation of the purely monetary phenomena cannot be achieved with any great degree of satisfaction. Sufficient can be accomplished, however, to indicate the broad effects of the change upon Australian business, and to put the penalties of the previous inflation in a fairly clear light. In his reply to the attack made by Mr. J. M. Keynes upon the decision of the Baldwin Government to restore the gold standard Professor Gregory has touched upon the very factors which have told most effectively in the Australian situation. The stabilization which was effected was on the basis of the higher, i.e. the external, value of both the British and Australian currencies, and in this way an adjustment crisis was induced which varied in the two cases by the extent of the divergence between the internal and external values of the pound, and with the elasticity of the factors of production, i.e. with the extent to which capital and labour in particular could be used more or less effectively than before the change. In particular, if there had been over-valuation of the currency prices for exports would represent a smaller return in the local currency ; and this would form one of the chief tests to be applied to the situation. "Meanwhile all expenses in terms of the local currency remain what they were. How will the adjustment be made ? If wages in the exporting industries remain fixed, if there is no possibility that depression in these trades will lower supply prices in other industries, if, in spite of the fact that wages and prices in the other industries are not directly affected, labour cannot be transferred and by com. petition reduce wage rates, and by increasing supply, reduce supply prices, if there is no reduction in the cost of living, or, if there is a reduction, it is not allowed to affect wage rates ; if, in other words, we assume a rigid, water-tight organization of labour, a quasi-monopolistic organization of industry, there will be no speedy adjustment. Under such conditions real wages in the ‘sheltered’ trades will rise, un- RETURN TO GOLD IN 1925 219 employment will increase, exports will fall off and imports will increase.’ It is scarcely open to dispute that in advancing for the sake of his argument the conditions which he does not believe obtained in Britain, Professor Gregory has outlined with almost uncanny precision the exact situation which did exist in the Commonwealth. Nor can it be denied that the phenomena which he associates with this situation have been fully evident in Australia since 1925. No country in the world at the time covered by the events under discussion possessed such a rigid system of wage fixation, nor, on both the side of capital and the side of labour, a more decided quasi-monopolistic organization of industry. It is not, therefore, to be wondered at that real wages rose in the industries sheltered by the tariff, that unemployment has been a pressing problem since the return to gold, that productivity and exports-have fallen away, and that imports have tended to increase. The tests, therefore, which will provide strong presumptive evidence, if it is to be found at all, of the effects of stabilizing the pound at parity with the dollar will have reference to the relative cost of living, to the level of wages, to the volume of unemployment, and to the volume of foreign trade for the period immediately following the restoration of the gold value of the currency. Let us take first the ‘cost of living’ test. If the Australian pound had been previously over-valued in terms of the dollar we should expect to find an increase in the cost of living in Australia after the return to gold. Table LIT indicates that, whereas the American cost of living rose after the return and then fell within eighteen months to about its original level, the British index number rose in sympathy and then fell sharply. On the contrary, the Australian cost-of-living index rose and continued to rise over the whole period, thus strengthening the suspicion that the favourable situation in April 1925 was due to factors which afterwards ceased to function. Overseas loans and payments on account of Bawra. it will be noted, ceased abruptly in 1925. From thé records of unemployment little that is conclusive ! Gregory, The First Year of the Gold Standard, p. 17, The italics are mine. 220 THE ECONOMIC EFFECTS OF THE can be deduced. Unemployment had been high for a year before the return to gold, and it remained at the same high level for the year following. Failing the dissection of unemployment into the constituent industries it is not possible with any degree Tas LII Cost of Living for Great Britain, Australia, and the United States (Pre-war=100.) Month. 1924 Mar. June Sept. Dec. 1925 Mar. June Sept. Dec. 1926 Mar. June GREAT BRITAIN. AUSTRALIA. U.S.A, Rate of exchange. Sterling. ‘Board of Trade.) Gold. Sterling. ‘Commonwealth Statistician.) Gold. (Labour Bureau.) Gold. $to£ 4:29 i 4-32 4-46 4-69 178 157 169 150: 172 158 181 174 169 174 165 166 148 164 151 159 170 169 171 173 4-78 179 176 168 164. 174 The return to gold, 174 176 178 4-86 4-85 4-85 172 174 177 172 174 177 171 173 174 171 173 | 174 4-86 172 487 | 168 | 172 174 168 179 174 | 177 179 178 of certainty to connect the prevailing high rate of unemployment with the restoration of the gold standard. Effective wages, however, reached their peak at the end of 1924, fell steadily till the end of 1926, and then declined rapidly in the following year, a far more significant index altogether, especially as the nominal wage rose steadily through the whole period. The final index to be examined is the volume of foreign trade. Here the volume must necessarily be connected with the figure for population, and the value of exports per head is the most effective test available. This fell from £27 11s. 9d. per head in 1924 to £24 15s. 10d. in 1925 and to £23 14s. 3d. in 19261 partly owing to the decline in the export price-level, another ! Commonwealth Year Book, No. 20, RETURN TO GOLD IN 1925 221 significant index to be noted in this connexion. From a pricelevel of 2,803 for all classes of exports in 1924, the price fell to 2,152 in 1925, and to 2,080 in 1926, pre-war level being reckoned at 1,000. Thus each and every one of the indices examined moves in sympathy ; and apparently, in response to the operation of some factor which commences to function in 1925. Cost of living, Tasre LIII Unemployment, Wages, and Trade Activity, Australia l nemployment. ner cent. Month. 1924 Mar. June Sept. Dec. 1925 Mar. Tune Sept. Dec. L926 Mar. 3.2 June 5-8 Sept. 7-8 Dec. 5-8 16 8:3 94 10-1 9-3 10-3 79 B.] Nominal waages. 1,848 1,840 1,838 1.839 1,840 1,846 1,869 1.887 1,892 1,904 1,922 1,938 Effective wages. 1,060 (for year) 1,096 (for year) (,080 (for year) 1,070 (for 1927) Exports ver head. £27-588 (for year) £24792 (for year) £23-712 (for year) | Export price-level. 2,803 (for year) 2,162 (for year) 2,080 (for year) wages, unemployment, and export activity all tend to corroborate the contention that the return to gold was not a negligible factor in the adverse Australian situation which developed in the period immediately following the 28th of April 1925. Something further must now be said concerning the steps taken by the British Government at the time of the restoration to prevent any excessive export of gold owing to the adverse trade balance. ; “The first remedy was to put obstacles in the way of our usual lending abroad by means of an embargo on foreign loans, and recently on colonial loans also; and the second remedy was to encourage the United States to lend us money by maintaining the unprecedented 1 Commonwealth Labour Reports, Nos. 15, 16, 17, 222 THE ECONOMIC EFFECTS OF THE situation of a bill rate 1 per cent. higher in London than in New York.’ 1 Both of these measures had important reactions upon Australian finance which must now be examined. The embargo on foreign issues was in effect a form of censorship exercised by the Bank of England ever since the difficult times of 1924. Tt was continued until the end of 1925 ostensibly with the object of preventing a strain on the exchanges at a time when world prices favoured the export of gold from Britain. It was not remarkably successful, since it was impossible to hold back all types of foreign issues, and, particularly, to prevent private purchase of foreign securities which was the alternate form assumed by the ‘flight of capital’. While the censorship was both unpopular and ineffective, it had very serious effects upon the Australian financial situation? For the rationing of issues led to the rigorous scrutiny of all overseas issues; and, because of the privileged position held by Australian Government bonds as trust securities in the British market, a great deal of criticism was directed against Australian loan policies. There can be little doubt that the attitude adopted in Britain evoked the defensive response which took shape as the Austratian Loan Council.® The immediate result of the embargo was bo cut down loans of all sorts to Australia from the £42 millions which were transferred in 1924 to less than £3 millions in the following year. Over the three years 1925-6-7, loans of all classes averaged a bare £25 millions per annum. This oscillalion from fat to lean years in the matter of capital loans led ! See J. M. Keynes, The Economic Consequences of Mr, Churchill, Pp. 17 ef seq. * See on this aspect of the embargo, article ‘Australian Credit as viewed from London’, by Sir Hal Colebatch, Economic Record, Nov. 1927. * By an agreement between the Commonwealth and the States which was arrived at in 1928 and validated by statute in the following year, (i) State debts are taken over by the Commonwealth, (ii) a Loan Council is created, (iii) Annual contributions are to be made from Commonwealth revenue towards the payment of ‘nterest on the State debts, and (iv) Sinking funds are provided. ‘The new law provides for a Loan Council, to consist of one member of the Commonwealth and one for each State. Each Government (Commonwealth or State) must submit to the Loan Council a programme setting forth the amount it desires to raise by loans for each financial year; and if the Council decides that the total is not available at reasonable rates and conditions the Council shall fix the amount to be borrowed and shall allocate the amount between the Commonwealth and the States.’ —J. R. Collins, The Public Debts of Australia, p. 20. "RETURN TO GOLD IN 1925 223 inevitably to abrupt restriction of bank credit in Australia and to the recession of business which was so marked a feature of the triennium following the return to gold. Arising from this compulsory deflation were other effects of no less consequence. The year 1924 saw the almost complete re-establishment of world trading connexions, and it was a matter for comment in the bulletins of economic services that the uniformity of the international trade cycle once more definitely appeared. ‘But whereas in the previous year the growing international solidarity was manifested in the expansionist tendency in the various countries associated internationally, this improvement at the turn of the year almost everywhere came to an end, and was displaced by a stagnation which became more marked month by month. This change in the world situation was marked by a general fall in the world level of prices, a decline in trade turnover and in the demand for credit, a growing unemployment in western and eastern Europe, and in a portion of the overseas areas.’ Under the urge of world conditions and local deflation, prices in Australia reacted sharply, and a movement commenced which took the wholesale price index from 1.878 in December 1924 to 1,710 by March 1927. The maintenance of higher interest rates by the Bank of England relative to the New York rate was the second effect of importance. Professor Gregory has estimated that from July 1924 the London discount rate was in excess of that for New York by from 0-7 to 1-8 per cent., and that for the whole of 1925 it never fell below the American rate. A period of relatively dearer money was thus ushered in for Australia, which persisted until, by 1928, the depression in business and the anxiety among investors to play for safety by investing in Government securities in preference to industrial stocks achieved the paradox of a cheaper rate for money in Melbourne than in T.ondon. t First survey by German Imperial Statistical Office, the Institut fiir Konjunkturschung, on the World Economic Position at the end of 1925. Nos a — yy = BUSINESS ral A A -—yre-Iorr 4 ro gL r mb 1925 1927 Fre. XX. SMOOTHED CURVES FOR BUSINESS, SPECULATION, CREDIT, AND CAPITAL IMPORTED Seale for Capital exaggerated. AA. Business based on Sydney and Melbourne Bank Clearings. BB. Speculation based on Share Indexes by Alexander Hamilton Institute (Sydney), and Mr. E. C. Dyason (Melbourne), CC. Bank Credit from Alexander Hamilton Institute Index. DD. Import of Capital on estimates by present writer. CHAPTER XVIII THE ECONOMIC EFFECTS OF CONTINUOUS BORROWING ‘Even if external borrowings were ‘to cease altogether, and the existing amount of Government capital expenditure undertaken either by taxation or internal loan or both, the effect on the nation as a whole if the change were carried out gradually should not involve more than either an average reduction in the standard of living of, say, about 5 per cent., or an increase in the efficiency per head of a similar amount. —Mr. E. C. DyasoN, ‘The Australian Public Debt’, in the Economic Record. November 1927. ‘The necessities of a nation in every stage of its existence will be found at least >Gusl to its resources. —ALEXANDER HAMILTON in The Federationist. ' A reference to the nature of credit shows that a national debt is no creation of wealth ; that at best it can only be, in Bagehot’s phrase, “additive” and give greater energy to production. Moreover this position can only be obtained where credit is productive, i.e. used in the creation of fresh wealth. Where the resource whose use is obtained serves merely for some object which, however important, is not conducive to economic production . . . there is so far a loss of material power. Present borrowing of this latter kind implies less income in the future until the loan is repaid '—RBasTarLe. Public Finance, v. 658. IT is to be supposed that, since borrowing first began, this method of acquiring property has not lacked defenders. Nor have there been wanting those ready to justify the quality of the statesmanship which initiated and maintained the policy of public borrowing in Australia. It is to be pleaded, of course, that it is easy to be wise after the event; but experience shows that it is easier to be instructed than to be wise concerning the follies of financial sin, that is if borrowing is to be placed in the catalogue of transgression. The belief may be modestly tenable, in any case, that the facts concerning national indebtedness as presented in the preceding pages, justify at least some hesitation in pronouncing upon the wisdom of a plan of action that would persist in following the paths which have led to such economic disorders in the past. A very close parallel is to be observed between the economic situation resulting from public borrowing and that policy in retail trading known as instalment buying, or the hire-purchase system. Most of the arguments, too, that are used so freely in 8710 Gg 226 THE ECONOMIC EFFECTS OF these days to defend the latter have been used, very lightly disguised, in the last fifty years to justify the former policy. These arguments will be quite familiar; but it will at least crystallize the discussion if they are restated here. In relation bo state borrowing the justification takes the following forms: (i) That there is a vast difference to be observed between the character of the public debt of a mature community like that of Great Britain where the debt represents unproductive expenditure ‘incurred mainly for war purposes and leaving assets that are of comparatively small value’, and that of countries like Australia and Canada which has resulted in the creation of assets ‘worth to the developing country (and presumably to the creditors) at least as much as the amount of the public debt, omitting only the war-loans’.! (ii) That in a new country like Australia ‘the scope of general government—owing to the peculiar conditions of lands thinly peopled, with vast undeveloped areas—embraces many functions which, in the earlier stages of development, would be impossible to resign either to local bodies or to private enterprise.2 (iii) That the proportion of the Australian debt to the national wealth, even under the urgency of development, is not greater than that of older countries whose financial stability is unquestioned. In particular that a comparison of the proportion of the public debt not covered by assets, £153 per head in the case of Great Britain, £43 per head in that of Australia, demonstrates the essential soundness of the Australian position ; and that while ‘the interest on the public debt of Great Britain in relation to total income was as 8-1 to 100, the interest bill of Australia bore to total income the ratio of 7-1 to100, although the Australian public debt to the extent of about one-half is held externally, while the outside public debt of Great Britain amounts to only one-eighth of the whole.’3 (iv) That it is impossible in any other way than by resort to overseas loans to procure the necessary permanent equipment necessary for an expanding population; and that the policy of entering into partnership with foreign capitalists, instead of ‘J. R. Collins, The Public Debts of Australia, p. 6. R. M. Johnston, State Borrowing, p. 4. } Collins, op. ¢cit., pp. 9 ef seq. CONTINUOUS BORROWING 227 being a mistake or a hindrance to Australian industrial and financial progress, has been the principal means whereby our productivity, and consequently our standard of living, has been so markedly improved.! (v) That the increased productiveness made possible by means of overseas loans is more than proportionate to the increase in the annual liability for interest. (vi) That ‘the vast potentialities awaiting development in Australia’ represent a responsibility for which Australia must be prepared to account to an overcrowded world ; and that, for political as much as for economic reasons, Australians are compelled to assume the burden of accelerated development. The urgency of the case leaves no alternative to the policy of borrowing for developmental purposes. (vii) That Australia’s capacity to borrow, as judged by her ability at all times to make prompt payment of the interest on overseas debt, is unimpeached. This readiness and ability ‘honourably to meet all obligations’ is the most practical test of the economic soundness of any community 2 (viii) That the resources awaiting development in Australia are complementary to the capital seeking investment in Great Britain; and that both stand to gain by a policy of keeping capital within the Empire. ‘Investing British’ is our soundest defence against the economic aggression of competing national groups. (ix) That the constant liability for interest imposed upon the community as a result of the long-continued loan policy, just as the hire-purchase contract is to the private citizen, constitutes a continuous spur to endeavour, and an insurance against ‘slacking’. The community is thus kept in a state of efficiency, and productivity maintained at its maximum, at least for those industries which contribute to the products acceptable for overseas payments. (x) That the co-operation of the foreign investor results in greater security, efficiency, certainty, and ease in budgeting for the financial necessities of the Commonwealth and the States; { Johnston, op. cit., p. 3. ! Bastable, Public Finance, p. 661: ‘The best support for the policy of paying in full is derived from the economic advantage that a reputation for honesty secures “in the long run”’, and nations have a far greater interest than individuals in paying attention to what happens “in the long run.’ 228 THE ECONOMIC EFFECTS OF and that this relief means much to the stability and prosperity of the continent.! (xi) That the direct increase to the country’s wealth-prolucing ability, at least as measured by revenue obtained, does not by any means comprise the whole total of the benefits conferred upon the community by the provision of capital assets. For example, in the case of railway construction we must consider (az) the saving in time of transit of goods and people which represents an all-round increase in productive efficiency ; (b) the commercial value given to vast natural resources hitherto lacking value because of inaccessibility ; (c) the impetus given bo the creation of fresh wealth in areas formerly barren or unproductive ; and (d) the great immeasurable social gains by the provision of the amenities of civilization. All these things constitute intangible assets or undisclosed profits in the national balance sheet.? (xii) Finally, but not least in importance from an Imperial point of view, the co-operation of Australian governments with British capitalists enables provision to be made in advance for reapportioning the population of the Empire. The benefit to be obtained by Britain through relief from her congested social conditions, is paralleled by the advantages conferred upon a country lacking both capital and labour for its development; and that these rearrangements of labour for efficiency in Empire production have a direct economic value that is impossible of measurement.3 It is to be observed that the foregoing arguments embrace far more than strictly economic considerations; and further discussion of many of them, weighty though they be from the wide Imperial outlook or the narrower national viewpoint, can find no place in a somewhat technical analysis of this character. [t will, however, be strictly to the purpose to examine more narrowly the economic aspects both for and against external ! Bastable, op. cit., p. 674: ‘The division of the charge over a longer period makes she proper apportionment of the burden far easier, and more especially allows of sufficient time for its full consideration.’ But, later, ‘The policy of paying all expenses out of taxation has been regarded as a salutary and wholesome check on the natural disposition to indulge in extravagant outlay’. * R. M. Johnston, op. cit., pp. 6 et seq. ® See Phillips and Wood (edit.), The Peopling of Australia, for a full discussion of his aspect. CONTINUOUS BORROWING 229 borrowing. The readiness with which British investors have co-operated with Australian governments in the past, in order to obtain the mutual advantages to be gained from the partnership has been sufficiently obvious. So, also, has been the distressing dislocation caused in the business of this country whenever the dominant partner has temporarily lost faith in the articles of the borrowing creed, or has lacked the financial ability to implement it. For this reason alone the British demand for an ‘orderly marketing’ of loan issues should find a ready response in the Commonwealth. But far more than regulative action on the part of the lender seems to be indicated by the necessities of the case as here presented ; and much of the plausible argument comparing the constitution of the British and the Australian national debt quite begs the main question. For the real economic criterion, and the chief test which may be legitimately applied to the justification of Australian loan policy, has reference to the effect on the balance between the cost of indebtedness and national income. The comparison of productivity with indebtedness per head is the true economic criterion; and economic opinion would be inflexible on this, that the safety-point in borrowing has been passed when the increase in productivity is less than sufficient to provide a surplus adequate to sustain the annual charge at a normal rate of taxation. Before, however, proceeding to investigate this phase of the problem, the very important effects upon a community of continuous supplies of cheap loan money must be considered. For the nation, as for the individual, it is still a truism, despite our twentieth-century technique in disguising the true inwardness of the case, that ‘borrowing dulls the edge of husbandry’; and the effects of unrestricted lending must be discussed, therefore, in its psychological, political, and economic bearings.! Every episode we have examined confirms the fact that cheap loan money has inevitably led to over-expansive schemes of national development, to that national attitude of mind which we can only describe as the abandonment of the prin-© Of. Bastable, op. cif., p. 657: ‘One general fact is discernible in the course of the modern history of debts, viz. the universal tendency to increase. and in some rases to press dangerously on the limits of national solvency.’ 230 THE ECONOMIC EFFECTS OF ciples of thrift, to the removal or at least to the depression of the stimulus to private enterprise, to the acceleration of that spurious form of enterprise which we have, with probably little justification, labelled speculation, and to an attitude of dependence upon government initiative in development which has gone far to undermine the economic virility of the Commonwealth. That this is a hard saying, as painfully obvious to the present writer as to the most unreflective patriot, need not be doubted ; but so conclusive is the evidence that it is ‘worthy of all acceptation’. In its political aspect the situation we have described leads to many evils that are, of course, fundamentally economic. Under a party system of government such as that which characterizes British communities, unrestricted borrowing facilities tend to be translated into experimental social legislation which, however praiseworthy in a social sense, is economically unjustifiable. The capital wherewithal for the indulgence of political whims is too fatally accessible ; there is, in effect, an apparently unrestricted supply of cloth for cutting coats of many unserviceable patterns.! But the primary evil is to be detected in the possibility which is held out to political parties of bargaining for power with borrowed money. That this condition is inseparable from our present financial organization, and that other communities in a similar stage of development bo that of Australia have done likewise, is beside the question. If, as we believe, there is a good case presented for an economic examination of the Australian position in common with all other borrowers in the same category, the hostile critic is likely to prove in the end the best friend. The purely economic dissection based upon the evidence accumulated in the preceding pages would be directed towards a solution of the following problems. What are the purely economic tendencies to be observed as a result of long-continued external borrowing ? Which of them are adverse to prosperity, and, particularly, to the maintenance of the high standards of living to which we have become accustomed? On balance, * ‘No readier or more dangerous mode of increasing debt can be found than the execution of public works that are not economically productive. Vague assertions of indirect benefits should not be allowed to conceal the fact that “improvements” of this kind should be paid out of income, and cannot be regarded as investments In the proper sense of the term.’—Bastable, op. cit., p. 627. CONTINUOUS BORROWING 231 what is the verdict as to the wisdom, first of incurring, and latterly of increasing, the public debt? The onus of answering these and similar questions is being thrown, to an increasing extent, upon the professional economist; and he would fail in his duty if he refused to assume it. The first of the effects, and from the aspect of the business cycle the most important, is the almost inevitable tendency to develop a standard of living that is too high in proportion to the range of resources possessed, and to the degree of industrial development attained, by the community. The stimulation of purchasing power in the borrowing country, as a consequence of large foreign loans, has now been adequately examined through its effects in expanding credit, and in enabling the undertaking of great developmental schemes by means of which this purchasing power is dispersed through every channel in the community. The characteristic rise in the wages curve in the early phase of the borrowing cycle, and its tendency to fall towards the end, is a strict counterpart of the rise and fall in available bank credit. That the maintenance of heavy borrowing over a decade or more accustoms a community to a standard of living that is relatively too high has been emphasized in each instance we have examined. This was shown by the necessity for a reversion to the economic level of wages, and to standards of living within the capacity of the community to maintain, at the end of each borrowing cycle. A second effect originates in the mental attitude which is characteristic of periods of prosperity generated by expanding credit, and that is the failure to measure rigidly every capital investment by its immediate productiveness. Admittedly this is a counsel of perfection in a community faced by the necessity for providing quickly so much permanent equipment, and in which the method of trial and error in solving problems that involve so many unknown factors is the only possible line of attack. But, despite this concession on the matter of urgency, it will scarcely be contended seriously that the expenditure of loans promotes that care in calculating probable returns which we would expect to find accompanying the investment of the domestic capital surplus, if that were the only source from which development could be financed. This condition will persist while overseas capital supplies remain cheaper than domestic 232 THE ECONOMIC EFFECTS OF supplies, and amounts, in effect, to a depression of the will to save on the part of the borrowing community. Intimately associated with the consequences upon foresight and the ‘telescopic faculty’ as applied to public business is another of the utmost importance in its bearing upon national efficiency, i.e. the effect of long-continued loans in depressing the national capacity for saving. This shrinkage in the power to save, as distinct from the will to save, has its origin in the effect of a period of rising prices upon business efficiency, and particularly upon the efficiency of management in industry. Upward price movements, long continued, free business men from watching the most precarious factor in costings; and the result is an insidious tendency to slackness which permeates all business, both public and private. This damping-down of the incentive to efficiency in times of prosperity, and its stimulation in times of depression is, however, so well recognized that no further comment is necessary. Another consequence upon which much emphasis is placed by Viner, and the justice of which is upheld by the Australian instances examined, is the variation in price-levels throughout the course of the borrowing cycle. The alteration, as we have seen, is not only in the relative levels of prices in the borrowing and lending countries; but there is also that characteristic change in the price-levels for import, export, and domestic commodities. The relative changes in sectional price-levels has most to do with turning the advantage in overseas trade against the borrowing country in the later phases of the borrowing cycle. And this is bound to happen quite independently of internal developments, which could not produce changes in the level of prices of that kind and degree. The measurement of the terms of trade, especially of the gross terms, has demonstrated with a fair degree of accuracy the effects of this change 1 See Copland, Trade Depression in Australia, paper before Section ‘@’, ALAAS. 1923. Proc., pp- 561 ef seg., and Appendix to Report on Unemployment, Development and Migration Commission, 1928. % (Of. Copland, D. and M. Commission Report cited above. ‘Every major crisis n Australia emphasizes the fact that fluctuations in the prices of exports may be of more consequence in their effect on prosperity than variations in the volume of sxports. The price-level for exports vitally affects the balance of banking funds in London, and this has an important influence upon banking and credit conditions in Australia.’ CONTINUOUS BORROWING 233 for Australia since 1890, and corroborates the evidence accumulated by Viner for Canada. Still another effect, and, from the standpoint of fluctuations in business, one of critical importance, is the effect of borrowing abroad upon the regulation of credit. It is an economic disadvantage of the utmost influence that expansion by means of borrowing should be initiated in one community, when the control of that capital stream, and consequently to some extent the control of domestic bank credit, is dependent upon the decisions arrived at in another community, remote, independent, and organized industrially in a vastly different manner. In other words, it is a relatively easy matter for Australian banks to regulate the momentum of development and to regulate the flow of credit and hence to control the factors generating crises ; but it is a relatively difficult matter, if not impossible altogether, to prevent crises from developing when the check to expansion is applied in London, and through causes that are only remotely connected with Australian conditions. The only course of action for the Australian banks when that check is applied is a proportionate, or, since the stimulus to pessimism then operates, a more than proportionate constriction of credit in Australia. This contraction, since it is necessarily rapid, is almost certain to cause depression or even crisis. And, in the position occupied by London, dependent to such an extent upon world economic conditions, and sensitive to a superlative degree to economic fAuctuations in any quarter of the globe, this contraction at the London end is always liable to take place more or less suddenly. Finally, and solely in the domestic field, the effect of borrowing in stimulating imports must be further considered in relation to government revenue. Owing to the operation of the Federal tariff system the effect of borrowing is to inflate the revenue from customs, since imports are accelerated. Thus a part, and a relatively large part, of the capital imported becomes transformed in the process of entering the Commonwealth into current revenue which drains away along many channels. Whether the uses to which this revenue is put are productive or otherwise is beside the question, gince they are presumably quite alien to the purpose for which the loan was floated in the first place. This, of course, bears very closely upon the 2710 gh 234 THE ECONOMIC EFFECTS OF arguments already put forward relating to the depression of saving power, the lowering of productivity, and the decline in managerial efficiency owing to continuous loans. Criticisms of Australian public indebtedness usually measure the weight of the burden by reference to its effect on national solvency. While that extreme standpoint may be justified, it is to be observed that there are many degrees between buoyant prosperity and utter bankruptcy. The question for the economist is not whether Australia can afford the annual interest charge ; but, rather, whether her economic organization would operate more effectively by utilizing a little more or a little less of capital in combination with her labour and resources. It is conceivable, indeed highly probable, that the decision to foreswear foreign borrowing entirely, if that were a practicable policy, might ultimately be compensated to some extent by a stimulation of national enterprise, by an increase in efficiency and productivity, by avoiding the economic dislocations consequent upon interruptions in the flow of foreign capital, and by consequently increased stability in business. But the charge apon the capital already invested in the country would have to be met in perpetuity, or until such time as the debt was repaid. A discussion of borrowing policy can therefore have meaning only in regard to the most expedient policy for the future. The present situation has been very clearly presented by Mr. E. C. Dyason,! by means of a comparison of the public debt, and in particular the external debt, with the other factors in the national economy ; and his conclusions form an important contribution to the study of the national debt. His first comparison is based upon the public debt in relation to the wealth of Australia; and his summary table, brought up to the year 1928, is given on p. 235. Dyason takes the view that the most weighty consideration for the purpose of estimating the soundness of the financial position concerns the proportion of the external debt to the total of public and private wealth. Admittedly this would be a weighty consideration in direct proportion to the degree of accuracy with which the total wealth could be computed. But it is to be thought that, despite the advance made in statistical Sechnique in the interim, Basfable’s dictum is still substantially ! E. C. Dyason, ‘The Australian Public Debt’, The Economic Record, Nov. 1927. CONTINUOUS BORROWING 235 true. The choice-he offers is contained in the statement that ‘the annual income, and especially that part of it which is disposable, must always be more or less doubtful : and estimates of national wealth, whatever method be employed, have even less chance of approximating the real position’. If this judge-Tasre LIV Public and Private Wealth® compared with Indebtedness (In Millions Sterling) Year. 1915 1921 1923 1925 1998 Public wealth. 517 657 | 725 825 a00 II. Private apealth. 1,620 2,166 2,425 2,835 3.150 111. Total wealth. Iv. Total debt. Raternal debt. VI, Uncovered debt. 2,137 380 261 2,824 828 389 171 3,150 905 435 180 3,660 1,013 500 188 4.050 1.094 600 194 Percentage of : Year. Viol. 17 to 111. Vie III. Vite III. 1915 13-6 17-8 11-7 — 1921 126-0 20-3 18-7 6-1 1923 | 124-8 28-7 13-8 5-7 1926 122-8 | 30-7 15-2 57 10928 121-5 27-0 14-8 4-8 ment is accepted, it would seem that the sounder criterion of a country’s capacity to borrow depends rather upon the known value of the disposable income than upon estimates, still largely conjectural, of the wealth standing as security for the indebtedness. Indeed the issues to be faced must be drawn even more finely than that, since it is desirable to indicate the point at which borrowing becomes excessive. The tests which it is imperative to devise and apply concern not so much the total debt in relation to the total wealth, the ultimate comparison, as the immediate annual liability for interest in relation to the disposable portion of the national income, the immediate comparison. In attempting to set a limit beyond which borrowing becomes 1 From the estimate by C. H. Wickens, The Wealth of Australia, paper before Section ‘G’, A.A.A.S. 1923, and Year Book, 1928. 236 THE ECONOMIC EFFECTS OF excessive, the economist’s attitude would be stated somewhat in these terms. Excessive borrowing is that which, under the circumstances to be foreseen as far as may be in the future, promises to return less than it costs; in other words, that portion of the external debt is in excess of the national borrowing capacity the value of whose marginal net product from the national standpoint is less than the annual interest charge. When the final trade return provides through normal taxation an amount that is less than the charges for the use of the capital the safety-point has been passed. It is in fact a special case of the application of the law of diminishing returns; and bhe point which it is desirable to indicate is that at which the surve for increasing returns is at its highest. For in its broad aspect the problem is not so much the academic question whether public borrowing is expedient. It is rather, in that stage of industrial organization occupied by the Commonwealth, how much or how little each year the public debt should be increased. The position created is exactly similar to that of a business maintained partly by bank overdraft. The best of whether or not it is desirable to increase or diminish the overdraft, in effect to have a little more or a little less of capital in the business, implies the same decision as to the point at which borrowing becomes unprofitable. That is to say that the test is one of the marginal utility of the increment. So, in the national sense, productivity in relation to annual interest on the external debt is the only sound test of the economic advantage due to the increase in debt. It must be conceded, however, that there is a fundamental difference between the two cases. The solution of the problem for the private enterprise will depend upon the immediate prospective return, whereas that for the public undertaking must be decided to a greater extent by the potential returns in the more remote future, especially when development must anticipate a relatively rapid increase in population by immigration. Further, the mobilized credit of a state, and the greater long-period stability in the case of national undertakings, justify public borrowing to a greater degree than is the case in private business. } In considering problems of national indebtedness, moreover, it is important not to lose sight of the fact that the ultimate objective of both borrowing and taxation must be the improve- CONTINUOUS BORROWING 237 ment of the national standard of living to its economic maximum. The final form of the test to be applied, therefore, becomes a comparison between indebtedness as measured by the annual interest charge, and productivity as measured by the value of the disposable national income per head; and Dyason would seem to be guilty of a false economic emphasis when he regards the proportion between external debt and total wealth as the critical test to be applied to the public debt. This is the more remarkable since he does proceed to an excellent comparison of productivity, national dividend, and annual interest payments. The disposable income which is capable of application in discharging external indebtedness consists of those products which have been called in an earlier chapter foreign-trade commodities. The Commonwealth Statisticians estimate of the value of Australian production is arranged in six divisions, viz. agricultural, pastoral, dairy, forestry and fisheries, mining, and manufacturing. Of these it is safe to assume that not more than 10 per cent. of divisions IV and VI enter into foreign trade ; indeed from the calculation by Wickens noted previously this would appear to be a liberal estimate. The remainder of total production can therefore be accepted as a fair estimate, comparable from year to year, of disposable income. The second table with this alteration. and brought up to 1927, is given on p. 238. From this analysis some very important results are to be obtained for the purpose of estimating the relative marginal productivity of the debt from year to year. and hence of Australia’s capacity to borrow. These may now be summarized: (i) The ratio of total debt to production rose from 10-8 to 13-3 per cent. in the nine years. That is to say, the percentage of that part of the national income used for paving for overseas debt increased by 23 ver cent. (ii) The ratio of the external interest to production, i.e. the ratio of annual overseas interest to that part of the national income available for that purpose increased by 22-5 per cent. (iii) The ratio of the external debt to the whole national dividend rose from 3-5 to 4-6. an increase of 31 per cent. 238 THE ECONOMIC EFFECTS OF (iv) The ratio of the total debt to the whole national dividend rose from 7-7 to 10-1 per cent., or an increase in liability compared with the total available for all purposes of 31 per cent. TasrLe LV1 National Production, National Dividend, and External Interest (In Millions Sterling) be ear. 1920 1921 1922 1923 1924 1925 [926 } 097 Production of all commodities. 344 391 344 379 400 454 432 447 11. Production of foreignrade commodities. 242 278 211 245 256 304 275 281 II7. National dividend. 167 537 84 532 562 636 595 B01 Ia External interest. xd 18 20 20 22 24 26 27 Total snterest. B ra ‘9 52 56 59 I. Productive activity. 95 301 961 933 014 998 9562 1,008 Percentage of: Year. (920 1921 (922 | .923 1924 1925 | 1926 1997 V of I. 10-8 10-5 13-2 12:3 12-4 11-6 12-9 18-3 Vof III. © IV of II. 71 7-6 9-3 3-7 8-7 3-2 32 0.5 {7-0 65 754 ap 81 186 7.9 31 . 9-8 8.2 IVofI | IVoflIIl 4.9 4.5 58 52 57 Fed 5-8 8-0 3-6 3-2 8-1 3-8 4-0 3-8 41 4.5 Interpreting these results in terms of the marginal productivity of the debt, it is clear (i) that indebtedness as a whole is claiming an increasing share of the national income and of that part of the national income available for paying overseas indebtedness; (ii) that the same relative increase is observable in both foreign and domestic loans; (iii) that the Commonwealth has entered a period of diminishing returns as regards the } Columns I, IV, V, and VI from 1928 Year Book; II, estimate by present writer; ITI from Sutcliffe, The National Dividend. CONTINUOUS BORROWING 239 productivity of the overseas debt. The increase in the percentage of the disposable income necessary to pay the annual overseas interest charge is the most serious aspect of the situation. While the analysis does not indicate that the proportion of the disposable income which is used to hire capital is unduly high, since production itself rose during the period by 32 per cent., it does indicate the real crux of the external debt situation. A second point established by Dyason has reference to the relative proportion of external debt to production in the prewar and post-war periods. It must again be emphasized that Tare LVI Bxternal Interest and Productivity per Head §-year veriod. 1910 to 1914. | 1923 to 1997 dverage annual production of export commodities. Mean vopulation. Millions} 14R 4-657 987 | 5-929 Increase per cent. Annual average production of export sommodities per head at pre-war mprice-level. 30-3 32-3 6-6 Interest on the ternal debt. 2.119 16-456 Baternal interest charge per head at pre-war nrree.devel. 1-6 2.7 68-0": the value of total production does not seem so important for this purpose as the value of the production of export commodities. It would appear to be necessary to compare pre-war and postwar interest and disposable income at a common price-level. The picture then assumes a somewhat different complexion, for it is evident that, while the annual average production per head of export commodities increased by. 6-6 per cent., the external interest charge had increased by 68 per cent., or more than ten times as fast. By a further comparison of annual indebtedness due to borrowing with the estimated annual savings, Dyason arrives at the final decision that Australia is living well within her income. Admittedly this may be true, although the estimate of national savings made by Sutcliffe upon which he bases his judgement remains the most conjectural and the least satisfactory aspect 240 ECONOMIC EFFECTS OF CONTINUOUS BORROWING of an excellent piece of statistical analysis. But it scarcely affects the main question as to whether the productiveness of the public debt justifies continued borrowing abroad, or, in fact, whether it ever has justified that policy. For it is difficult to concede that the expenditure of external loans would either be as carefully administered or as fruitful as the expenditure of a similar amount of domestic savings by means of internal loans. Nor can it be said that the lengthy array of government deficits and private insolvencies in recent years affords empirical support to his argument. Impartial consideration of the statistics of the position, indeed, scarcely justifies the complacency with which Dyason regards the national position.! Neither his own analysis nor the facts of recent experience in the economic life of Australia would seem to support his statement that ‘the nation has now fully recovered from the losses inflicted by the war’. Still less can his dictum be accepted that ‘the burden of indebtedness does not begin to approach the danger-point either to debtor or creditor’. If the point he has in mind marks the arrival of national insolvency he is undoubtedly right. If, however, he refers to the point where diminishing returns begin to operate, that point is not being approached, it is already far behind. Uneasiness concerning this aspect is, in fact, indicated by his admission that ‘the figures of national income per head over the past sixteen years, when reduced to pre-war values, are not so encouraging as to make it certain that large expenditure of loan moneys on development has produced corresponding benefits in production’. * For a careful analysis of the productive capacity of the Australian public debt see the less sanguine statistical summary by Sir Lennon Raws, ‘ Australian Loan Expenditure’, Economic Record, Nov. 1928. The permanent equipment upon which loan money has been expended in the Commonwealth is indicated by the following table: Summary of Loan Expenditure in Australia. Railways and Tramways . [rrigation and Water-works Advances to Settlers Harbours and Rivers Industries and Mines Closer Settlement Roads and Bridges . € m. 332 122 Public Buildings Posts and Telegraphs Costs of Raising Loans Electric Supply . . Advances for Houses . [mmigration . £m. 25 22 20 17 B CHAPTER XIX THE IMMEDIATE FUTURE IN RELATION TO CAPITAL REQUIREMENTS ‘Whether the wealth to be consumed in the outlay which is the primary cause of borrowing be derived from the stores of home or foreign lenders may have some immediate influence; but when we bear in mind the close connexion of all the countries of the world, and the great mass of private borrowing from foreigners, it is evident that the distinction may easily be exaggerated.’—BASTABLE, Public Finance, p. 679. ‘The great additional foreign indebtedness incurred since 1914, much of it resulting from economically unproductive military expenditures, from the completion of an extravagant programme of railroad and town building, from the construction of an unprofitable merchant marine, and from the further extension of manufacturing industries of which few would have any expectation of surviving if their tariff subsidy were withdrawn, will intensify the seriousness of the problem which will face Canada when the borrowings cease and the difficult burden of repayment must be assumed.’ — VINER, Canada’s Balance of International Indebtedness, p. 306. THE economic reactions set up within the Australian national economy by borrowing have now been examined in some detail. In particular, for three separate and independent cycles, similar long-period changes in prosperity, operating through rising and falling prices in the earlier and later phases, respectively, of each cycle have been traced ; and the necessity imposed upon the community for assigning an increasing proportion of its disposable income to the payment of interest upon the external debt has been indicated. The mechanism for adjusting the disequilibrium set up in the international balance by heavy external borrowings, and the parallelism of gold movements and capital importations, have been investigated. Lastly, an equation between the volume of capital imported and the total difference between the debits and credits in the international account over the long period has been established ; and an attempt has been made to synchronize credit restriction within the Commonwealth with the temporary divergence between the moving averages of capital imported and the excess of debits over credits in the balance of external indebtedness. It now remains to consider the development and persistence of a world credit situation which might involve a reversal of the whole process ; and to anticipate as nearly as possible the effects which 3710 T1 242 THE IMMEDIATE FUTURE IN RELATION a cessation of loans would have upon industry and prosperity in Australia. Movements of capital have assumed an enhanced significance in the world economy during the post-war years. Immense changes in the amount of international indebtedness, and in the character of a great portion of the mass of debt, have occurred. Economically, we are now realizing that the war years cannot be regarded otherwise than as a temporary ascension of the forces making for capital consumption over the forces making for capital accumulation; and the cost of this temporary dominance is to be measured by the increase in net indebtedness. Australia, in common with Britain, enormously increased her external obligations during the war and after; and because of the peculiarly close economic and financial nexus between the two countries, it is inevitable that world conditions which affect Britain's economic stability will not be without commensurate reactions upon the prosperity of Australia. The conclusions to be drawn from the general theory of international indebtedness must, therefore, have a particular interest for Australia in the years immediately ahead. The development of the Commonwealth, like that of all other debtor countries, must be profoundly influenced by the conditions governing the world supply of capital in the future. If, and in proportion as, the stream of capital loans from Britain diminishes in volume, Australia will be compelled either to have resort to other sources and at increased cost, or to maintain development and expansion out of domestic savings, i.e. by internal loans, at the same time that the old debt is being renewed or redeemed. There is no necessity to enlarge upon the effects of merely exchanging one creditor for another. Our immediate interest lies in an examination of the probable economic effects of a cessation or diminution in the supply of new capital over a term of years. That the resultant situation would be difficult in the extreme needs no emphasis. The decision to renounce the traditional policy of borrowing abroad, either through conviction of its attendant disadvantages or because of inability to obtain accommodation, would reverse the operation of most of the factors which have co-operated to produce an extremely complex situation. To a greater or lesser extent, determined mainly by the volume of internal savings, Australia would be faced by the TO CAPITAL REQUIREMENTS 243 necessity for making increasing external payments ; and the only response possible would involve an increase in exports, a decrease in imports, or both. To the extent that Australia finds it economically impracticable to secure additional supplies of capital on the same scale as in the last half-century, she would be compelled to widen the margin between production and consumption. All the phenomena characteristic of the short-period credit restriction occurring at the end of the borrowing cycle would become the normal condition of a less marked but more protracted period of depression. Within certain limits an increase in exports and a decrease in imports might be easily achieved ; and the impact on living standards, as Dyason indicates, might be so slight as to be almost negligible. Beyond these limits, however, a depression of the standard of living must be anticipated ; and, in the process, a certain amount of economic friction would characterize the change. To cover the increased payments abroad—increased, in effect, because there would be no incoming capital as an ofiset—both State and Federal governments would be under the necessity of increasing taxation; and the effect of this upon the community as a whole would be to reduce consumption by a like amount. The decline in demand which would follow diminished purchasing power would be felt in the markets for both home- and foreign-trade commodities. The effect on the market for foreign-trade goods would be to diminish imports: that on domestic markets would be to release an additional portion of production for export. To that extent the regulation of the international equilibrium would be automatic and sufficient. It will be seen, however, that the effect upon the balance of trade is merely an indirect one. A situation is conceivable, indeed has already developed, when this indirect stimulation of exports would not be adequate to bridge the discrepancy between the two sides of the international account. Means would then have to be devised, partly by means of still higher taxation, partly by industrial policy, to enlarge the disposable income, i.e. to divert such a proportion of the productive power of the community from the production of home-trade commodities to that of foreign-trade commodities as would cancel the difference in the balance of payments. Such a diversion could only be 244 THE IMMEDIATE FUTURE IN RELATION effected by the deliberate adoption of policies aimed at stimulation of primary industries, by public retrenchment and private sconomy, and by such a reorganization of national industry as would intensify the effort to discover and exploit new resources. If secondary industry remained static, such a change would entail a reversal of the movement of population towards the capital ports such as took place after the 1893 crisis in Victoria. This rearrangement of the factors in national production would necessarily accentuate unemployment during the adjustment, and would entail some sacrifice upon almost every section of urban population—the sections, that is, which stand to gain most by the expansionist tendencies associated with periods of heavy borrowing. The process, when complete, would realine national production in accordance with Australia’s existing comparative advantage in overseas trade; would, by the consequent changes in relative price-levels, intensify any advantage in trade that formerly existed ; and would tend to increase both the volume and the value of export commodities. This is not to assert that the existing secondary industries would necessarily disappear or be left relatively weaker. Those which are based more upon natural economic foundations than upon tariff buttresses would, at the most, be in no worse position ; but it is not to be supposed that the uneconomic diversion of large blocks of productive power to inefficient industries could be maintained in the face of the circumstances that we have assumed are likely to arise. It may be that the increased efficiency induced by hard necessity, and the relative fall in labour costs, would enable most of the existing manufacturing plants to continue. The elimination of the economically inefficient would, at the worst, merely mean the postponement of that ideal self-sufficiency in industry to which no modern sommunity has yet attained. The transition period now being contemplated would bring its own difficulties connected with the operation of the foreign exchange. The probable maladjustment of domestic credit owing to tapering capital imports would need careful management of bank credit; and, in the international sphere, the oppressive factor of adverse exchanges would call for countermeasures. All the conditions of expanding credit and favourable exchanges associated with vigorous overseas borrowing would, TO CAPITAL REQUIREMENTS 245 in short, be reversed ; and no possible manipulation of domestic credit or of foreign exchanges could stave off some measure of the reaction inevitable during such a period. Irrespective of whether there is deliberate intention on the part of the authorities, or whether it is forced on by the pressure of the external debt, it is certain that the final position, apart from the increase in the total volume of production and the change in proportion of foreign-trade to home-trade commodibies, will be achieved by a fall in nominal wages relative to those of the creditor countries. The lowering of nominal wages, however, would be accompanied, step by step, by a fall in the prices for home-trade commodities; and the fall in real wages would, if there were an acceptance by the community of the necessity of the change, not necessarily be very great. The chief benefit from the standpoint of the balance of trade would be the lowering of the cost of production, and a corresponding betterment of the terms upon which Australia competes in foreign markets. That is to say that the terms of trade would turn to the advantage of Australia; and as the change gathered momentum the advantage would necessarily increase. It is to be thought that in this betterment of the comparative advantage with which Australia competes in the industries for which she is naturally qualified lies the silver lining to the cloud which must accompany the transition. Compulsory limitation of loans from the British end must automatically force on the economies theoretically foreshadowed above. The extravagances associated with unrestricted borrowing will, it must be supposed, be corrected by the negation of the very conditions which induced them. The transition period leading up to the time when Australia will be capable of providing her own capital requirements with the assistance of private importations can scarcely be pleasant; but it should result in a stability which sould be achieved in no other way. The assumption has been made that Great Britain, by reason of her own vastly increased international liabilities, will be no longer able to sustain her pre-war rate of capital investment overseas; and this assumption needs substantiation. The most efficient measure of Britain's lending capacity is to be found in the annual statement of the Board of Trade relative to the national income and the surplus for investment. The difference 246 THE IMMEDIATE FUTURE IN RELATION between the debits and credits in the British international account has only to be compared with the total of foreign loans to afford conclusive evidence of the shrinkage in Britain's power to save.l This comparison is set out below. Surplus of Income Account and Foreign Loans for Great Britain (In £ Millions) Total income from all sources Less excess of imports . Surplus available . . Overseas loans . : Surplus available at 1913 prices. v Overseas loans at 1913 prices . , 1913. 1928. 504 | 508 390 359 114 149 148 105 181 5 64 | 100 160 50 | 84 70 1926. It is clear from this analysis that the volume of foreign loan issues in 1928 was only 44 per cent. of the pre-war volume, although it should be noted that the amount retained for domestic investment was greater by about the same proportion. After 1924, since there was no available surplus from production, Britain was actually borrowing to finance her foreign loans, although the rate of borrowing progressively declined thus: 1924, £81 millions; 1925, £60 millions ; 1926, £55 millions ; 1927, £20 millions. Ineffect over the four-year period she thuslent £470 millions and borrowed £205 millions. Short-period borrowing, however, if it did not actually cease was almost negligible by 1928, since there was in that year a surplus of £30 millions applied to domestic investment. But the post-war surplus was £100 millions as compared with £180 in 1913; and the volume of loans but £70 millions as compared with the pre-war £160 millions. It would appear, therefore, that Australia cannot rely apon the imminent recovery of Britain’s former ability to provide capital for investment abroad. Further, the reorganization of British industry is making heavy demands upon the capital surplus. Over the period 1924-8, inclusive, an annual average, reckoned on the pre-war price basis, of £70 millions was thus absorbed, compared with the annual average of £30 millions for the five-year period immediately prior to the war. Although ! See Gregory, First Year of the Gold Standard, pp. 15 ef seq. TO CAPITAL REQUIREMENTS 247 the ultimate outcome of the reorganization of British industry should be increased productivity and, consequently, increased capacity to lend, the immediate effect will inevitably be to curtail, if not to stop entirely, British foreign loan issues. Competition for markets with countries whose industrial organization and technical improvement was not impeded by the war will intensify and prolong the British effort to regain her prewar status; but the drain on available capital supplies will be correspondingly increased. On the other hand, however. it is to be thought that invisible exports, both of capital and services, from Great Britain have been grossly under-estimated. The ‘flight of capital’ from taxation, unrecorded receipts from overseas, and international ‘windfalls’ of one sort and another undoubtedly modify the situation as presented above; but not sufficiently to invalidate the truth of the assertion that Britain’s power to export capital has dwindled in a very marked manner; and little but disadvantage is to be gained bv postponing the determination to reorganize Australian internal resources in accordance with the changed situation abroad. Another possibility in the situation operates in the direction of lightening the incidence of the overseas debt by increasing the number of burden-bearers. Hand in hand with a more effective use of the national resources goes the necessity for an increase of both producers and consumers in Australia. A rapid increase of population by means of immigration would, through the increase of both producers and consumers, relieve the pressure in several ways. First, as producers effectively engaged in development, the new-comers should enlarge the volume of disposable income. At the same time they would take up some of the weight of taxation. But it is to be thought that the greater effect would be felt by reason of the increase of consumers. The present capital equipment, especially in the form of railways, roads, irrigation, postal and other public services, is adequate in the settled districts for a much greater population and a vastly enlarged volume of transport. Rapid growth of population would, by a greater use of these facilities, ensure a larger return apon much of the capital sunk in these enterprises; and would tend to diminish the steady drain upon production represented by persistent deficits. Further, the increase in demand repre- 248 THE IMMEDIATE FUTURE IN RELATION sented by an enlarged population would expand a market that for many industries is now almost stationary. Many of these industries, established under the protection of a tariff devised for that purpose, are in a static condition because of the impossibility of realizing the economies of large-scale organization, on the one hand, and because of excessive competition for a limited market on the other. On a smaller scale the same arguments for the ‘rationalization’ of industry apply in Australia as in Britain; but every industry in the Commonwealth needs urgently the impulse to be derived from a more rapid enlargement of the body of consumers. But the very real difficulties connected with an acceleration of the stream of migration during the difficult transition period that confronts us cannot be ignored. New settlers mean capital provision; and that implies a continuance of the external borrowing policy. This in its turn tends to maintain an artificially high standard of living which is the greatest barrier in the way of a successful migration policy, because it both increases the resistance on the part of the Australian worker who fears that immigration means lowered living standards, and decreases the ability for the products of Australian industry to compete in world markets owing to the relatively high cost of production. Looked at from another angle, it is clearly to be seen that every economic inducement exists for a reapportionment of population as between Britain and Australia. Apparently, the only method of achieving this redistribution of people is by means of capital loans. Again, this implies an increasing volume of Anglo-Australian trade to implement such a policy; and here, also, mutual advantage would seem to lie in its realization. But the industries which would be stimulated by this overseas trade are not those ‘sheltered’ industries predicated by the tariff policy. Such, in outline, is the economic impasse at which the Commonwealth has apparently arrived. In the light of what has been said, consideration of this relation between tariff policy and overseas indebtedness may be conveniently taken a stage further. In the traditionally difficult transition stage, from an industrial organization as a purely primary producer to an organization as both primary and secondary producer, there is necessarily much vacillation and sxperiment. The effect of a relatively large external debt is to TO CAPITAL REQUIREMENTS 249 place undue emphasis upon the industries producing the world commodities applicable to the payment of overseas interest. The debtor, in short, is compelled to devote his energies to producing those things which the creditor is willing to receive in payment. Tariff policy, designed to develop manufactures, and the steady persistent influence of the external debt in forcing on the development of primary industries, are thus, to some extent, complementary ; but this method of securing co-ordination may be both unwise and costly. The greater the external debt, the greater the dependence upon overseas markets, and the greater the proportion of labour power engaged in the production of purely consumption goods. So long as heavy external indebtedness is a dominant factor in the national economy, so long will the natural emphasis be placed upon primary as opposed to secondary production; and so much greater will be the apparent necessity for increased protection to manufactures. The failure to consider in sufficient detail the relation of overseas debt to overseas trade is the main defect to be indicated in the report of the special committee on the tariff! The peculiar significance, for Australia, of overseas trade resides in the fact of external indebtedness, and the periodical resurgence of debate upon over-trading arises from the disequilibrium set up in overseas trade by heavy imports of capital. The relatively large international trade for Australia is due not so much to its ‘specialized conditions’ as to the necessity for overseas payments which arises from the migration of capital from Britain to Australia; in other words, it derives from the fact that, over any period, the gold values of goods and services imported must be balanced by the gold values of those exported. It requires rather a serious distortion of the facts of the case, therefore, to assert that external loans are the effect of the movement of goods rather than the dynamic cause. The classical theory of international trade has, in fact, made too little of the operation of capital loans upon demand schedules, standards of living, and real wages in the borrowing country. It would hold that the real income of a country depends upon ite efficiency in production, and that the gains in external trade are roughly proportionate to the relative efficiency of the combined factors The Australian Tariff, An Economic Inquiry by a special Committee. See sspecially the arguments advanced in Appendix T, and in Part III (5). 710 x k 250 THE IMMEDIATE FUTURE IN RELATION of production in the output of international goods. But the real income may be proportionately affected over long periods by net borrowings abroad, and affected detrimentally if there has been uneconomic and wasteful application of capital to export industries. If the hire of the capital applied is not balanced by the gold value of the increased output from those industries, the need for exports will be correspondingly increased. Classical economists find the ‘real ratio’ of international exchange in ‘labour costs’, and by this the comparative advantage in international trade is to be measured under ordinary circumstances. But it will not explain why a country must persist in exporting greater quantities of international goods produced at increasing costs, and at a corresponding disadvantage in international trade. The only fact which will explain this phenomenon in the case of debtor countries is the real fact of over-borrowing, i.e. of having the farm over-encumbered with mortgages. Relative to the loan situation, even more important are the trends to be noticed in the domestic sphere as between industries producing home-trade and those producing foreign-trade commodities. Heavy interest payments abroad must depend upon a sufficiency of export commodities to provide the necessary credit instruments. This compulsory premium upon exports forces on an undue expansion of all industries producing foreigntrade as compared with those producing home-trade commodities. The fundamental economic effects of such a situation arise from the excessive concentration of national effort and capital, and especially of loan capital, upon the production of international goods ; and, despite current opinion to the contrary, it is extremely doubtful whether these industries share the national burden of external indebtedness to a proportionate degree. Thus, the ease with which capital has been borrowed in the past, the partial unloading of the interest charge for borrowed capital upon industries not employing the capital borrowed, and the political tendency in economic matters to take the line of least resistance, have all helped to attain the uneconomic situation outlined in the last chapter. Every consideration of the consequences to be expected from an abrupt termination of overseas borrowing shows the very real difficulties which lie in the way of such a consummation ; and it would be a disservice to belittle the risks involved in such TO CAPITAL REQUIREMENTS 251 n change of policy. The conclusions to be drawn from any speculation concerning the immediate future are matters of some consequence in determining Australian financial policy. The facts presented in the last two chapters would seem to support Copland’s conclusion that ‘our margin from savings has been much greater than our policy of foreign borrowing in the past would lead us to believe’;! but whether the margin is sufficiently large to enable us to proceed in the future without recourse to loan issues is a matter that cannot be theoretically established. That the resources of the country for the purposes of capital provision have been - greatly under-estimated is probably true ; but it is scarcely to be thought that a complete cessation of capital loans would not involve most, if not all of the adjustments predicted here. A legitimate objection to such an abrupt reversal of policy is that an absolute reliance upon domestic savings for developmental capital would force interest rates in Australia above the rates ruling overseas, and that, so long as foreign capital is obtainable, this would be far too costly a policy for a young and under-populated country. But it must also be assumed that higher rates would attract the investment of private’ capital, and that the shortage of supplies would be thus more effectively met than by a continuation of public borrowing, even if that course of action still remains open. Such a rise in interest rates, moreover, would not be without its advantages in compelling a more economic use of savings, at the same time that the inducement to save was increased. But in any case, if overseas borrowing has to be restricted for a period, Australia in common with all other countries would be under the necessity of facing higher interest rates and rising costs, accompanied, doubtless, by higher taxation. It would seem that the wisest policy from every point of view would have regard to the need for ruthlessly confining the ‘necessities’ of the community within its available resources. Should an entire renunciation of overseas borrowing not be forced on by a world credit shortage, or should it be deemed impracticable to reduce our dependence upon foreign capital supplies. the anticipated transition period may be indefinitely t See Copland, Economic Record, May 1926: ‘Respective Merits of Internal and External Borrowing.’ 252 THE IMMEDIATE FUTURE IN RELATION deferred. But this cannot be regarded as anything more than the postponement of the evil day when the liquidation of external debt must be accomplished; and it is probable that the ultimate remedy will be more oppressive in its effects the longer the obvious remedy is delayed. Every consideration forced upon the writer in the preparation of this essay upon the economics of borrowing compels a reluctant admission of the truth of Viner’s verdict concerning the Canadian situation, and its close application to the problem of the future liquidation of our own external indebtedness. But the time has now come to round off this survey of a century of Australia’s economic history by bringing the discussion back to the point from which it started. The chief motive underlying the examination of the different factors in Australian business, and of the interrelation to be detected among the various tendencies, has been the desire to demonstrate the control exercised upon Australian prosperity by the rate at which capital has been injected into the economic organization. It cannot be pretended that anything more than a beginning has been made in dissecting the very complex situation presented by the economic life of a modern state. No single investigator could be competent, or even physically able, to cope with the vast number of subsidiary issues raised by such a problem as this. Much more light will need to be thrown on the international movements of capital before many of them can pass from the realm of conjecture. But a few observations still remain to be made. It has been a matter for comment in the past by investigators of our business fluctuations that, contrary to current opinion on the matter, no close correlation was to be discovered between business conditions and the volume of agricultural and pastoral production. Although relatively wide swings in productivity have occasionally produced violent fluctuations in business, excellent returns from the land have not invariably ! Canada’s Balance of International Indebtedness, p. 308. ‘The further discovery and exploitation of rich natural resources, a generous increase in population, an increase in the intensity of the world demand for the important Canadian products, the adoption of a sounder and more far-sighted commercial policy, and of a more conservative policy of capital investment in questionable enterprises— these would substantially lessen the severity of the task of liquidating foreign ndebtedness.’ TO CAPITAL REQUIREMENTS 253 been associated with healthy business; nor, on the other hand, have poor seasons invariably coincided with depression.! That this is substantially true-cannot be doubted; and the reason, at any rate in recent years, is to be found in the diminishing dependence of the total volume of Australian production upon weather conditions. The balance which is being established between primary and secondary industries, the application of science to Australian rural problems, the measures to combat the onset of drought which have been taken in every state, the improvement in transport facilities, the progressive exploitabon of new resources, the great extent of the continent, its climatic variety and the improbability of adverse seasons affecting the whole area simultaneously, all these are helping to stabilize production. The steady uninterrupted march in the total value of production is sufficient evidence of this fact. That there is a diminishing degree of coincidence between seasonal conditions and business fluctuations merely emphasizes the importance to be attached to the effect upon the domestic credit situation of the introduction of capital. The wide swings in business prosperity have been traced in every major instance to abrupt fluctuations in the rate at which capital was being introduced, and to the strain thrown upon the banking organization by the necessity for adapting Australian monetary policy to the condition of world credit as expressed by the readiness or reluctance of London to lend on long terms for Australian development. That a more scientific control of borrowing from the Australian end has not been developed is, of course, due to the fact that all branches of business, and particularly importing and contracting enterprises, are vitally interested in promoting and maintaining the flow of foreign capital. Large annual loans mean an enlarged purchasing power which is radiated to the remotest settlement in the country, they mean expanding customs revenue and easy conditions for government finance, they mean a large volume of merchandise passing through warehouses, they mean corresponding stimulation of exports and that spells satisfaction to export agencies, they mean profits to the banks and to the smallest traders. The farmer, expectant of subsidies 1 See Copland, Appendix to Development and Migration Report on Unemployment. 1928. 254 THE IMMEDIATE FUTURE direct or indirect, is quite as eager as the industrialist, anticipating active markets for his manufactures, in the preservation of the steady volumes of loans. Railway commissioners vie with steamship companies in viewing with alarm any falling away in the volume of overseas trade. Thus the whole weight of the community, despite somewhat hypocritical protests to the contrary, is thrown in the balance against the endeavour to retard capital imports; and in this situation lies the most difficult of the practical aspects of the problem. To the operation of both the external and internal factors in the national situation, therefore, is to be ascribed the inability on the part of the banking authorities in Australia to impose a greater measure of control upon the credit position. It is to be feared that no amount of improvement in the volume and quality of information bearing upon Australian business conditions would bring any measure of relief to Australian bankers while vigorous public borrowing continues. Statistics presenting an accurate measure of prosperity, and better indices of every phase of the domestic situation, would still leave them impotent in the face of a credit situation the chief features of which are determined on the other side of the world. What that situation demands, even before a more cautious borrowing policy, is a more intelligent lending policy ; and the co-operation of the London market with well-balanced economic opinion in Australia is required in an effort to regulate the violent fluctuations in the stream of capital to a even flow which will permit of its more satisfactory application to the needs of Australian industry, and to abolish those distressing and, we believe, avoidable reversals in business which affect the prosperity of both countries. This, however, will not avoid the necessity for a more efficient use of capital by both public and private borrowers. The plain moral of this tale is that, when the possibility of repaying debt out of the increased production made possible by the borrowed capital no longer exists, all sconomic justification for expansive borrowing programmes automatically disappears. APPENDIX TrE preceding chapters left my hands towards the end of 1929. Since that time a conjunction of evil circumstances—not unknown in sarlier days—has afflicted the Australian Commonwealth. Falling world prices, unresponsive loan markets, declining production due to unfavourable seasons in some states, and adverse exchanges have been marked features of the more recent period. The impact upon the Australian financial and industrial system has caused such grave dislocation as to menace the established standards of living of the entire population of the continent. Preoccupation with the economic problem has become an obsession which leaves little room for the consideration of the many important social and political difficulties associated with Australian development. The whole problem is essentially one which is conditioned by fluctuations in national income, and every analysis made by economists and business men emphasizes this aspect. The adversity of the moment is, admittedly, due only in part to conditions that have their origin in the Commonwealth ; but some interest remains in the task which I have attempted of tracing those effects which are merely the normal accompaniments of the borrowing cycle. The immediate decline in national income is due in the main to three causes: (a) the fall in world prices for primary products; (b) the contraction in the volume of loans; and (c) the decline in productivity due partly to unfavourable seasons, and partly to those more obscure causes associated with ‘easy money’ to which reference has been made in an earlier chapter. It must be emphasized that no fall in national income of a marked character occurred until the early months of 1930; or, rather, that the downward movements of national income before that time were compensated by the volume of capital flowing in from overseas. The monetary problems arising from the fall in prices of Australian export commodities have affected all countries possessing a similar economy. The decline in national income from this cause is not due to any marked decrease in the volume of national production ; nor does the present financial situation have its origin in any fundamental unsoundness in business such as the excessive speculation which has prevailed in some oversea countries in recent years. An important fact calling for attention, however, is the persistently high level of Australian wholesale prices in relation to those of Great Britain and the United States. Still more significant is the fact that, since 1920, the general trend of Australian retail prices has been upward, whilst 256 APPENDIX those of the other two countries mentioned have been downward. This may be interpreted as the normal movement to be expected in a country that has resorted to overseas borrowing as freely as Australia has done during the last decade. It will be anticipated that the introduction of capital into Australia would be regarded by me as the chief factor maintaining this relatively higher price level; but this does not prevent me from conceding considerable weight to the joint effects of tariff and wage fixation policies. The compulsory contraction in the volume of overseas loans is due in great measure to the disturbance of the world money markets by the events of 1929. Uneasy conditions, especially in Britain following the Hatry crisis, the steady draining away of British gold occasioned by French financial policy, the break in the speculative boom in the United States, and the general failure of the central banks of the world to ‘keep in step’, occasioned the reluctant response to the demands for loan issues, a reluctance which finally hardened into positive denial. These causes tending towards a shortage of world sredit have intensified Britain's difficulties in the matter of overseas loans, difficulties that were already troublesome on account of the demands for domestic issues for the rehabilitation of British industries. For Australia, accustomed to the annual receipt of from £25 to £30 millions of fresh capital, this meant a second sudden contraction in national income. Crippled in both feet, productivity and fresh capital, her financial system hobbled painfully through a period of grave crisis; and the restoration of equilibrium became the great obsession of her people. The effect of these world changes has been such seriously dislocated exchanges that the most adverse rates within living memory were experienced. The third circumstance affecting national prosperity concerns the comparison of earning power, or borrowing capacity, with the felt burden of overseas indebtedness. This is the economic criterion already indicated as the final economic test, and a recent computation made by the Commonwealth Statistician makes possible the most exact application yet made to the Australian situation. From a comparison of total output from all industries with the number of workers engaged, adjusted to the 1911 price level, he reaches the index of productive efficiency which is here reproduced. In the final analysis the burden of overseas debt must be sustained by the workers in all industries. After computing this indebtedness per worker it is then possible to reach a figure for the ‘felt’ burden by adjusting the interest figure for each year to the price level for exports by means of which the interest is payable. The construction of an index for this felt burden gives an immediate comparison of the rate of productivity increase as compared with the rate of increase in the APPENDIX 257 burden of oversea debt per worker. This is here presented in graphical form, and it is notable that while productive efficiency between 1916 and 1927 has risen from 982 to 1,014, or by approximately 4 per cent., the felt burden has risen from 1,000 to 1,842, or by 84 per cent. PropucTivE ErriciENcY ! AND INTEREST BURDEN PER WORKER Productive Efficiency Index. 18186 = 1.000 Interest on Overseas Debt. £m. Interest on Overseas Debt per Worker. £ Felt ® Bur. den of Interest per Worker. Export Price Index. Index of Felt Burden per Worker. 1816 = 1.000 Year. 1916 1917 1918 1919 1920 1921 1922 '923 924 925 1926 1927 A. 1.000 962 935 915 t,029 1,039 1,029 974 1,089 1,042 1,084 1.032 B. 2780 10-792 13-520 14-012 7263 .8:233 20-490 20-792 23-205 23-748 254551 56-897 | O.. 11-2 12-2 15-0 14-9 18-2 187 21-0 20:9 22:8 23:0 24-2 Obed D. 1,591 1,965 2,084 2,033 2,249 2,254 1,721 2,039 2,476 2,803 2,152 2 080 70 62 7.2 7.3 31 83 12:2 10-2 92 8-2 12-2 19.0 1,000 885 1,028 1,043 1,157 1,185 1,742 1,457 1,314 1,071 1,742 1.8492 The long-period trends of productivity and ‘felt’ burden of interest per worker are not quite so grave as the relative changes thus stated would appear to indicate; but at least there remains a discrepancy which points to serious ineffectiveness in the application of borrowed capital. Australian labour and oversea capital, co-operating in Australian industries, bave failed to enlarge production with suffisient rapidity to cover the rising burden of debt; and whilst each worker has been able to increase his output by 4 per cent., his liabilibies even in 1927 represented an increase of over 80 per cent. Further, a sustained decline in export price levels which is far from impossible, or even improbable, in the years immediately ahead, tends to make the felt burden heavier by diminishing the exchange value of the commodities which we are able to apply to the satisfaction of the debt. Tt may be of interest to compute here the actual reduction in 1 Revised estimate of Australian Productive Efficiency as presented in 4.4.4.8. Proceedings, vol. xviii, 1926, by Mr. C. H. Wickens. ? Column E = C+D. 2710 ¥ 258 APPENDIX national income that is being faced in Australia. This may be stated as follows: € m. Estimated loss on wool values . 28 Estimated loss on wheat values . : . 8 Estimated deficiency through inability to borrow 22 Total 58 Mr. E. C. Dyason and Professor L. F. Giblin have furthered the study of the problem by calling attention to the effect of diffusing i8 16 14 INTEREST BUs PER WORKER 12 {4] SOPUCTIVE ZFFLCIENCY 8 = —— —— cere ee. - | 19716 1918 1920 1922 1924 1926 Fig. XXI. PRODUCTIVE EFFICIENCY AND FELT BURDEN OF INTEREST PER WORKER, 1916-27 this immediate loss of income through the community. Whilst the present writer has no intention of examining their findings critically, it may be stated that the secondary and tertiary effects of this front line loss of approximately £60 millions may well be of the order of £120 to £150 millions. The shock of such a diminution upon a community of six and a half million people compels the most intense concentration of attention upon the economic foundations of our prosperity. Even this primary loss of £60 millions represents a APPENDIX 259 decline of from £40 to £50 in the income of every family of five in the Commonwealth. This may convey some idea of the magnitude of the disaster. Mr. J. M. Keynes has said: ‘The fall in wholesale prices of rawmaterials has now taken on the character of a world-wide disaster. The storm centres are to be found neither in Great Britain nor in the United States, but in the great producers of raw materials overseas. For great areas are being reduced to very serious distress by the combined circumstances of a fall in the prices for their chief products and the difficulty of obtaining funds on the International Money Market.” What the future holds is beyond the skill of any man to foretell ; the legacy of the past as far as Australia is concerned can be read in part within these covers. 192 BIBLIOGRAPHY AUSTRALIA Official. Commonwealth Bureau of Census and Statistics, Canberra. Year Book of the Commonwealth. Summary of Financial Statistics, especially Bulletin No. 11. Special Publications: Cost of Living in Australia, 1910-11. Prices, Price Indexes, and Cost of Living in Australia (G.H. Knibbs), Labour Report No. 1. Trade Unionism, Unemployment, Wages, Prices, and Cost of Living, Labour Report No. 2. Expenditure on Living in the Commonwealth, Labour Report No. 4. Private Wealth of Australia, 1918. Trade, Customs, and Excise Revenue Bulletin. Annual. Commonwealth Parliamentary Papers. Banks Trading in the Commonwealth, 1885-1911. Development and Migration Commission, Report on Unemployment, 1928, Report of the Special Economic Commission, 1928. Historical Records of the Australian Colonies. General. Peel, A. G. V., Memorandum prepared for the British Treasury on the Financial Position of Australia, 1894. Reports of the Royal Mints, Sydney and Melbourne. State Publications. Year Books (for N. S. Wales and Victoria). Statistical Registers (all States except Victoria). Wealth and Progress of New South Wales (T. A. Coghlan), annual to 1900. New South Wales and Port Phillip Gazeties (for Early Period). Report of the Royal Commission on Banking, Victoria, 1894. Unofficial. Age and Argus Year Books, Melbourne. Anderson, G. A., Fization of Wages in Australia, 1929 (Melbourne University Press and Macmillan). Bell. Sir F. Dillon, ‘The Indebtedness of the Australasian Colonies in Relation to their Resources’, Proc. Boyal Colonial Institute, vol. xiv, 1882-3. Benham, F. C., The Prosperity of Australia, 1928 (P. 8. King). Brett, Edwin, History and Development of Banking in Australasia. Bankers’ Tnstitute, 1882. Butchart, J. R., Money, Credit, and Exchange, Joseph Fisher Lecture, University of Adelaide, 1923. Special articles in Melbourne Argus on trade and banking for the 1890-1910 period. 262 BIBLIOGRAPHY Coghlan, T. A., Seven Colonies of Australia and New Zealand: A Statistical Account of Australia and New Zealand, 1894. Labour and Industry in Australia (4 vols.) (Oxford). Collins, J. R., The Public Debts of Australia. Special articles in London Times, April 1929. Committee Report, The Australian Tariff, An Economic Enquiry, 1929 (Melbourne University Press). Jopland, D. B., ‘Currency, Inflation, and Price Movements in Australia’, Economic Journal, Dec. 1920. Currency and Prices in Australia, Joseph Fisher Lecture, Adelaide, 1921. The Trade Depression-in Australia tn Relation to Economic Thought, A.A.A.S. Proceedings, 1923. Commerce and Business, 1926 (Melb. Univ. Press). ‘Respective Merits of Internal and External Borrowing’, Economic Record, May 1926. Chapter II, ‘The Banking System of Australia’, in Foreign Banking Systems (Henry Holt), 1929. Monetary Policy and its Application to Australia, 1926 (Melb. Univ. Press). Cork, Nathaniel, The Financial Crisis in Australia, Institute of Bankers, 1893. Dysason, E. C., ‘The Australian Public Debt’, Economic Record, Nov. 1927. French, J. Russell, Banking as a Factor in the Development of Trade and Commerce, Fisher Lecture, Adelaide, 1910. Harris, H. L., ‘The Financial Crisis of 1893 in New South Wales’, Proceedings, History Society of Australia, 1928. [rvine, R. ¥., War Finance, Loans, Paper Money, and Taxation, Joseph Fisher Lecture, Adelaide, 1917. Johnston, R. M., ‘State Borrowing’, Proc. Royal Soc., Tasmania, 1908. Low, -Geo. M., ‘The Recent Australian Bank Failures’, Proceedings of the Actuarial Society, Edinburgh, 1893. Phillips and Wood (Edit.), The Peopling of Australia, 1928 (Melb. Univ. Press). Pinschoff, Carl, Our Financial Organization and the Present Crisis, Bankers’ Institute, 1893. Pulsford, Edward, Notes on Capital and Finance in Australia. Special articles Sydney Morning Herald, 1892. Raws, Sir Lennon, ‘ Australian Loan Expenditure’, Economic Record, Nov. 1928. Salter, Chas., The Possibility of another Period of Inflation, Insurance Institute, 1899. Shann, E. 0. G., The Boom of 1890 and Now, 1927 (Sydney). Sutcliffe, J. T., The National Dividend, 1927 (Melb. Univ. Press). Teare, H. E., Australian Banking, Currency and Exchange (Sydney) 1825. Digest of Banking and Currency Legislation (Sydney) 1926. Turner, XH. Gyles, History of Victoria. Were, J. B., Australian Banks: Official Schemes of Reconstruction, 1894 (Melbourne). Wickens, C. H., Report on the War Census, 1915 (Bureau of Census and Statistics). The Wealth of Australia, A.A.A.S. Proc. 1923. Australia’s National Balance Sheet, 1926. BIBLIOGRAPHY Wickens, C. H., ‘Some Statistical Aspects of Australian Industry’, Economic Record, May 1929. Periodicals. Particular reference must be made to the following: The Economist, London, articles on Australian banking and trade too numerous to particularize. The Insurance and Banking Record, Melbourne, the best running commentary on Australian conditions. Monthly. The Statist, London. The Economic Record, very valuable from 1925. : The Stock Exchange Journal, Melbourne. Bulletins of the Alexander Hamilton Institute, Sydney. Jobson’s Business Digest. AENERAL Official. Annual Reports: Board of Trade, London. Chamber of Shipping of the United Kingdom. Statistical Abstract for Colonial Possessions, London. Statistical Abstract for the United Kingdom. House of Commons Returns: Annual Statements of Foreign and Colonial Trade. Dominions Royal Commission, Final Report, 1917, Cd. 7,971. U.S. Department of Commerce: Miscellaneous Series. No. 59. Methods of Computing Values tn Foreign Trade Statistics. U.S. Department of Labour: Bureau of Labour Statistics, Bulletins, especially No. 181. Wholesale Prices, 1890-1914. League of Nations, Economic Section: Balance of Payments; Foreign Trade Balances, International Memorandum, 1910-24. Vol. I. Balance of Payments and Summary of Trade. TI. Trade Statistics of Forty-two Countries. Paper of Brussels International Financial Conference: 1. International Financial Situation. 3. Currency Statistics. t. Public Finance. 5. International Trade. Memorandum on Credit, Currency, and Exchange Fluctuations, by A. C. Pigou. Memorandum on Public Finance. Memorandum on World's Monetary Problems, by Gustav Cassel. Bulletins of the London and Cambridge Economie Service. Bulletins of the Harvard Economic Service. Bulletins of the National Bureau of Economic Service, New York. 264 BIBLIOGRAPHY Unofficial. Angell, J. W., Theory of International Prices, 1926 (Harvard). Boggs, T. H., ‘Capital Investments and Trade Balances within the British Empire’, Quart. Jour. Econ., Aug. 1915. Tooke, S. R., and Davenport, B. H., Imperial Finance, 1929 (London). Crammond, Edgar, British Investments Abroad, Quarterly Review, July, 1907 and 1911. Binzig, Paul, International Gold Movements, 1929 (Macmillan). Flux, A. W., ‘The British Export Trade’, Economic Journal, 1927. Gregory, T. E., Foreign Exchange Before, During, and After the War, 1921 (Oxford). First Year of the Gold Standard, 1926 (Benn). Select Documents relating to British Banking, 1929 (Oxford). Introduction to Tooke and Newmarch, History of Prices. Hawtrey, R. G., Trade and Credit, 1928 (Longmans). Hobson, C. K., The Export of Capital, 1914 (Constable). British Investments Overseas, Annals Amer. Academy of Soc. Se., Nov. 1916. Keynes, J. M., ‘The British Balance of Trade’, Economic Journal, 1927. The Economic Consequences of Mr. Churchill, 1925 (Hogarth). Lehfeldt, R. A., ‘The Rate of Interest on British and Foreign Investments’, Jour. Royal Statis. Soc., Jan. 1913 and Mar. 1914. Mulhall, Dictionary of Statistics, 1890. Nash, R. L., A Short Inquiry into the Profitable Nature of our Investments (London), 1881. Paish, Sir Geo., ‘Great Britain's Investments in Other Lands’, Jour. Royal Stat. Soc., Sept. 1909, Jan. 1911. Silberling, N. J., British Prices and Business Cycles. Taussig, I. W., International Trade, 1928 (Macmillan). Tooke and Newmarch, History of Prices, 1928 (P. 8. King). Viner, J., Canada’s Balance of I nternational Indebtedness, 1900-13, 1924 (Harvard). Whitaker, A. C., “The Ricardian Theory of Gold Movements’, Quart. Jour. Econ., Feb. 1904. Wicksell, Knut, International Freights and Prices’, Quart. Jour. of Economics, Feb. 1918. Williams, J, H., Argentine International Trade under I neonvertible Paper Money, 1880-1900, 1920 (Harvard). INDEX Agra and Masterman’s Bank, 42. Anderson, G., on wages fixation, 182. Angell, J. W., on international prices, 201. Anglo-Australian exchange, finance, 116 fi. Australian Agricultural Co., 10. — Loan Council, 222. — Notes Act. 1910, 165. Balance, commodity, 143, 194, 202; of indebtedness, 8, 141, 160, 193, 211; of payments, 6 (see Contents); of trade, 1840, 17; 1850, 34-7; of British colonies, 1881, 53. Bank, amalgamation, 4; British deposits, 68 ; Charter Act, 1833, 14; competition, 1850, 26; 1890, 53 ff.; dividends, 70 n.; Commercial of 8. Aus. failure, 60; failures, 1843, 16; 1893, 69 ff.; lack of concert, 69 ff. ; land banks, 52, 63 ff.; Note Tax Act, 1910, 165; policy, after 1860, 41; after 1890, 50; after 1900, 163, 177; reconstructions 1893, 70f4f.; statistics, to 1856, 36 ff.; 1890, 94, 112; after 1900, 130 (see Contents); Van Diemen’s Land, failure, 67. Baring crisis, 65. Bastable, on loans, 226 fi. Bell, Sir F. Dillon, on loans and debt, 1882, 48. Bibliography, 255. Bischoff, Mount, 44. Boom, of 1851-2, 23 ff.; of 1890, 49ff.; in Queensland, 58; in S. Aus., 60; of 1919, 172 ff. ; and tariff policy, 174, 249; and borrowing, 253. Sorrowing, arguments in favour, 226 ff.; and bank policy, 124; and business, 225; and govt. revenue, 233; and prices, 134, 167 ff.; and tariff policy, 249; co-operation in, xiii, 263 ; cycles, 91, 106, 115, 163 ft. ; diminishing returns from, 236; affects of continuous, 225 ff.; prospect, 242 ff. See Contents. Braim, on 1840 crisis in N.S.W., 9. Broken Hill, 58, 61. Building societies, in 1893 crisis, 51 ff. Business, dominant factors, 1 ff. loans. 154. Cairnes, on gold discoveries, 25 ff. Conada. Taussie on. 5 ff. 101; Viner on, xiv,3, 96, 252 ; freight rates ef.d. with Australia, 203 n. Capital, and business, 224 ff.; and industry, 244 ff.; and migration, 159; and population, 81; arguments for loan of, 226 ff. ; cycles in borrowing, 91ff., 115 f.; future requirements, 242 ff; goods imported, 200 ff.; Great Britain’s surplus, 245 ff. ; imports of, after 1880, 73 ff., 80; after 1900, 153 ; mechanism of transfer, 122, 156; misapplied, xii; movements, 121; private investment, 157 ff., 209; regulation of loans, xiii; return on invested, 167; rewards to factors during losns, 178; rate of investment of. 8. See Contents. Jentralization, 3, 180. . Coghlan, T. A., on bank failures, 67, 71; on 1843, 16; crisis of 1893, 49; Broken Hill, 61; gold discoveries, 23: indebtedness, 78; pastoral industry, 45; price levels, 97. Jollins, J. R., on borrowing, 226; on Loan Council, 222. Commonwealth Bank Act, 1911, 165. Cooke and Davenport, on loans, 155. Copland, D. B., on bank policy, 113, 166; boom of 1919, 173; exchange position, 118, 122; return to gold, 217; price changes, 164 ff.; wartime inflation, 164; external and internal loans, 251. Oost of living and return to gold, 220 ff. Credit, contraction in London, 118; regulation of, 233; seasonal disturbances, 121; domestic, see Contents. Crises, Baring, 65 ff.; causes, xii ff.; Copland on, 177; features, 1ff.; 1843, 10ff.; 1853, 26fi.; 1866, 39 ff.; 1878, 44 ff.; 1893, 63 fi.; 1903, 1907, 10ff.; 1921, 175 fi. ‘see Contents); Overend Gurney, 43. Cunliffe, Report. 215. Debt, see Indebtedness. Dillon, Sir F., on public debt, 1882, 48, Dvason, E. C.. on borrowing, 234 ff. Exchange, after 1850, 28, 53; after 1900, 108, 112; Copland on, 118, 122: Hawtrev on, 116 ff. : effects of 266 loans on, 244; seasonal changes, 119; quotations of Aus. stocks, 108. Exports, after 1880, 79ff.; price levels, 97; and loans, 129, 134, 187, 196; and production, 196. See Trade. IND Factors, of production and loans, 178. Federation, effects of, 104 ff. Finance, Anglo-Australian, 47; after 1860, 40; F. Dillon Bell on, 48; early troubles, 9; Melbourne dominance after 1860, 40 (see Bank); Imperial, 155. See Contents. Freight, charges, 146, 203 ff.; index of, 149, 204; Viner on, 146 ff. Glasgow, City of, bank failure, 47. Gold, discoveries, 22 ff.; embargo on export, 216; Hawtrey on, 117 ff.; movements, 95, 125 (see Contents); after 1901, 132; after 1914, 185 ff.; return to, 214, 219 ff.; Mount Morgan, 44, 59; production, 34 fi. Gregory, T. E., on Bank of England, 14; on discount rate, 223; on return to gold, 216. See Foreword. Hawtrey, on causes of capital movements, 116 ff. ; international credit, 118 ft. ; exchange, 116 fi. [mmigration, 81, 210. Imports, and loans, 128 ff., 187, 195; capital goods after 1850, 32; after 1900, 198 ff.; excess of, 17, 118; price levels, 97. See Trade. (mperial finance, 1565. [ncome, ‘disposable’, 237. Indebtedness, balance of, 6, 141 ff., 160 ff., 193 ff., 211 ff. ; estimates of public, 169 ff., 193 ff,, 211 ff.; and wealth, 235 ff. index, of prices, see Prices, Contents; of wages, 99, 137; of freight, 149, 204; of productivity, 238. Industry and capital, 244. Inflation, after 1850, 27; war-time, 164, 188; Copland on, 188. Insurance, on imports, 150, 205; investments abroad by Aus. companies, 158, 211. [nterest on public debt, 150, 205 {i., 251. See Indebtedness. [nternational Trade, see Trade. Investments (see Capital), Australian, abroad, 158, 211; and tariff, 155. Johnston, R. M., on borrowing, 226. Joint Stock Companies Act, 1862, 42. BX Keynes, J. M., on credit, 201 ; imports and loans, 199 ff.; return to gold, 214 ff. Knibbs, on price indexes, 98, 135. Land, bank policy and the, 13 ff.; booms, 7, 11 ff., 55 ff., 59; banks in 1890, 52, 63 ff.; rewards to, rent, 179; sales 1830-40, 11; after 1850, 27, 46. Lehfeldt, on return to capital, 153. Loans, argument for, 226; Aus. and U.S.A. cfd, 126; and imports, 128, 198; and govt. revenue, 234; and capital goods, 200; and standards of living, 231; and tariff policy, 249 ; ‘business’, 1564, 225; classified, 1901, 155; diminishing returns from, 235 ; expenditure, 240 ; municipal, 208; regulation, xiii, 123; statistics, 47, 52, 93, 108 fi., 122, 153, 178; stoppage of, effects, 47, 52, 108, 111 fi., 174 ff., 243 ff. See Contents. Marshall, Alfred;-on imports, 141; capital export, 163; statistics, 172. Melbourne, dominance in finance after 1860, 40, 46. Migration, assisted, 209. Mining after 1860, 40 ff. Monopoly, organization towards, 3 ff. Mount Morgan, 59. Municipal loans, 155, 208. New Zealand, after 1872, 74. Overend Gurney crisis, 43. Overseas trade, see Trade. Pastoral industry, 45, 54, 57, 64; and banks, 58 n. - Phillips and Wood, Peopling of Australia, 228. Population and borrowing, 80, 247. Port charges, 148. Price, A. G., on 1840 in 8. Aus., 19. Prices, Copland on, 164 ff. ; after 1830, 14 ; after 1870, 45; after 1880, 96 ff. ; after 1900, 133 ff., 167, 189; changes in group (sectional), 31, 136, 232; metals, 106, 114. See Contents. Private capital, 168. See Capital. Productivity, fluctuations, 6 ff., index of, 238; and debt, 1890, 84; and exports, 196; after 1900, 238. Prosperity (see Booms), after 1872, 46; after 1880, 50; after 1906, 154. Public, debt, in 1870, 45 ff.; in 1887, 78 ff.; after 1900, 153 ff.; after INDEX 267 1914, 169 ff. (see Indebtedness); Terms of trade, 87 ff., 140 ff, 191. nance, 41; wealth and debt, 235. See Contents. See Contents. Tooke and Newmarch, effects of gold Pulsford, Edward, on the public debt discoveries, 24; statistics, 1850-6, after 1890, 73 fi. 28 n.; course of 1853 crisis, 29; sectional prices, 32. Queensland, crisis of 1866. 39 ff.; of Tourist expenditures, 151 f£., 205. 1893, 58. Trade, balance of, 90 ff.; 1840, 17 fi.; . 1850, 34ff.; for British colonies, Railway, organization, 3; loans, 45, 1880, 53; after 1914, 184, 190; 64 ff. changes in direction, 186, 197 ff.; Raws, Sir Lennon, on Loan Expendi- commodity balance, 143, 194, 202; ture, 240. comparative advantage, 103, 139; Reconstructions, bank, 70 ff. effect of loan stoppage, 243; index Rent and loans, 179. of, 100; interstate, 144; N. Zealand Research, method, xiii; difficulties, 8. after 1872, 74; terms of, 87, 140, Rickman, on port charges, 148. 183, 191. See Contents. Robertson, D. H., on trade, 202. Transport monopoly conditions, 3. See Railways, Shipping. Saving, capacity, 232. Turner, H. Gyles, on 1893. 49 fi. Scotch *cash-credit’ banking, 50. Seasonal fluctuations, 7: and credit, 116 fi. Service, balance, 146, 203. Settlement problems, after 1860, 39; present, 247 ff. Shanahan, E. W., on centralization, 4. Shipping, monopolistic organization, 3; charges, 146 fi., 203 ff. Ships’ stores, 144. Speculation, land, 7, 11, 27, 50 ff. Stamp, Sir J., on capital, xii. Sutcliffe, J. T., on national dividend, DQ Unemployment, after 1886, 99 ff.; and the return to gold, 221; statistics, 139. [7.8.A. and 1907 crisis, 110 fi.; and return to gold. 216. Victoria, early statistics. 12. See Booms. Viner, J., on prices, 126, 231; freight, 147; method, xiv; trade, 8; Canada after 1914, 252. Tariff, policy and bonus, 174; and loans, 249; report of special committee, 249 ; investments, 155. Tasmania, 12. Taussig, method, xiv ; ont Canada, bon; terms of trade, 88 fi.; on balance of srade, 126; on léans, 127; on inflation, 188. Wages, 1866, 98; after 1900, 137, 178. Wealth and debt, 48, 235. See Contents. Weather control, 253. Whitaker, A. C., on imports, 193. Wickens, Chas., on private debt, 158, 218; public debt, see Year Book; production, 183; national wealth, 235. PRINTED IN GREAT BRITAIN AT THE UNIVERSITY PRESS, OXFORD BY JOHN JOHNSON, PRINTER TO THE UNIVERSITY ic 2 ; whl ne c = QO RA oo NY & x ot > Nn ho oD il ye le e)) = ™ - ori - Cy A — oo o wn oo CQ) Q NY © al 0 FJ 0 oir > oy CONTINUOUS BORROWING 239 ctivity of the overseas debt. The increase in the per: te of the disposable income necessary to pay the annual sas interest charge is the most serious aspect of the situa-While the analysis does not indicate that the proportion + disposable income which is used to hire capital is unhigh, since production itself rose during the period by 32 :nt., it does indicate the real crux of the external debt ion. jecond point established by Dyason has reference to the sve proportion of external debt to production in the prend post-war periods. It must again be emphasized that Tare LVI External Interest and Productivity per Head ] Annual average production of export sommodities per head of pre-war nrice-level. External interest charge per head at pre-war price-level. Average annual production of export commodities. Mean population. { Millions.) Interest on the eacternal debt. a. to to 7 - 146 | 4657 5.090 30-3 7.119 1:6 82:3 18-455 | 2.77 Increase per cent. 6-6 68-0 alue of total production does not seem 80 important for this ose as the value of the production of export commodities. ould appear to be necessary to compare pre-war and postnterest and disposable income at a common price-level. The ire then assumes a somewhat different complexion, for it ident that, while the annual average production per head tport commodities increased by. 6-6 per cent., the external est charge had increased by 68 per cent., or more than ten 3 as fast. -y a further comparison of annual indebtedness due to owing with the estimated annual savings, Dyason arrives at final decision that Australia is living well within her income. iittedly this may be true, although the estimate of national 7; ngs made by Sutcliffe upon which he bases his judgement + pins the most conjectural and the least satisfactory aspect 4 Q cn =. = x on = 0) wo XT pot