Dr H. C. Coombs on Central Banking, Wartime Finance, and Monetary Policy in Australia

by Peter Myers

Date October 15, 2004; update July 1, 2020.

My comments within quoted text are shown {thus}.

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Dr H. C. "Nugget" Coombs was Governor of Australia's publicly-owned Commonwealth Bank (from 1960 renamed the Reserve Bank of Australia) from 1949 to 1968, when I was growing up; his signature was on all of our bank notes.

He helped create our leading University (ANU), and was later its Chancellor.

He led the campaign for a treaty between Aboriginal and non-Aboriginal Australia. Aborigines nicknamed him "short father".

Item 2, a tribute from academics at ANU, is adulatory. But Coombs also advocated Free Trade - as he says in his book Trial Balance - which has undone the Full Employment policy he had espoused.

Subsequent to that article (1974), he produced a report for the Whitlam Government whose implementation has ruined Rural Australia, and created the Welfare State which has destroyed family life and disrupted the transmission of Aboriginal Culture.

In item 3, Gough Whitlam, Prime Minister from 1972-5, reveals that it was Nugget Coombs who was behind the 25% drop in tariffs Whitlam implemented.

(1) Coombs as Marxist and as Taoist
(2) The Coombs Contribution (1974)
(3) Gough Whitlam's eulogy at the funeral of Nugget Coombs
(4) The Aboriginal Legacies of Dr "Nugget" Coombs - by Peter Myers
(5) An exchange between Dr Coombs and myself
(6) Dr Coombs' article on the destruction of the Australian economy, Banana Republic? No, Banana Colony
(7) Trial Banance: Coombs on Central Banking and the BIS
(8) Coombs: Other People's Money - Wartime Finance, and Monetary Policy in Australia

(1) Coombs as Marxist and as Taoist

by Peter Myers, October 15, 2004

Coombs' goals seem Marxist. He hints at it: "... I have all my life turned to men like Adam Smith, John Stuart Mill, Karl Marx, and Alfred Marshall, for enlightenment." (H. C. Coombs, Trial Balance: Issues of My Working Life , Sun Papermac, South Melbourne, 1983; first published in 1981 by Sun Books, p.5).

But his method was Taoist. He was fond of quoting the Tao Te Ching; many chapters of his book Trial Balance begin with a quote from Lao Tsu. Here are some:

{p. 1} 'If the sage would quide the people he must serve with humility." - Lao Tzu

{p. 107} 'Better stop short than fill the brim.' - Lao Tzu

{p. 141} 'Working yet not taking credit Leading yet not dominating This is the Primal Virtue.' - Lao Tzu

{p. 183} 'Look, it cannot be seen - it is beyond form." - Lao Tzu

{p. 185} 'Knowing others is wisdom Knowing the self is enlightenment.' - Lao Tzu

{p. 261} "Who can wait quietly until the mud settles? Who can remain still until the moment of action?' - Lao Tzu

{p. 263} 'Is there a difference between yes and no?' - Lao Tzu

(2) The Coombs Contribution (1974)

The Australian National University News

August 1974, Vol. 9, No. 2

{p. 1} Coombs: midwife to the University adviser to the Nation

by Rosemary Mayne-Wilson

ANU News July 1974

During his forty-year public career Herbert Cole Coombs is credited with having altered Australians' thinking in five directions - central banking, full employment as an accepted norm, on research as a necessary component for universities, the appreciation of the Australian arts and raising the consciousness of Australians towards Aborigines.

And curiously enough the basis of his own social thinking has hardly changed in that period at all. He remains the embodiment, albeit tightly compressed, of small c, small h, small s, Christian, humanist, socialist values.

'It is true', he sald, 'that my social values were indelibly formed in the thirties. I had been brought up in Western Australia which was largely unindustrialised at that time. There was not much stratification in society and although the onset of the depression brought hard times there was no desperate poverty. The weather was pleasant and people didn't need many clothes. We all had enough to eat.

'And then I left for England to study at the London School of Economics. Suddenly real poverty, hardship and social injustice struck me for the first time.

'I was appalled by it. If ever I dreamt of changing the world, it was then', he said with a wry chuckle.

And although he and his social planning colleagues of the thirties and forties may not have influenced thought beyond Australian shores, they started quietly at home with banking and fiscal policies. Coombs soon emerged in the forefront of the times.

'When I was at the London School of Economics it was economically largely a conservative institution dominated by Professors L. Robbins and F. von Hayek. I was writing a PhD thesis on central banking. At that time Australia, being a federation of states, neither had nor had felt the need for a central banking policy. I guess I came in at the right time because the Scullin (Labor) Government had been forced

{p. 2} to realise that monetary policy was important but little was known about it.

'At that stage the Commonwealth Bank issued notes but was rather unprofessional in its lack of policy. Of course central banking wasn't highly organised anywhere except in European financial centres and in America '.

On returning to Australia in 1935 Coombs went as assistant economist to the Commonwealth Bank in Sydney but within a short time he came to the attention of Roland Wilson (later Sir), then Commonwealth Statistician and Economic Adviser (later Secretary) of the Treasury, who brought him to Canberra as an economist to the Treasury in 1939.

He soon came into contact with Menzies, Spender and Fadden, Treasurers in succession, and Curtin who was then Leader of the Opposition.

The Treasury appointment signalled the commencement of Coombs' most charismatic role in public life, adviser to seven successive Prime Ministers - Curtin, Chifley, Menzies, Holt, Gorton, McMahon and Whitlam. Despite their differing range of political views, all have been forthcoming in praising his integrity, sincerity and devotion to work.

Characteristically, Coombs describes this advisory role, unparalleled in Australian history, in terms of 'I've been lucky. I've been round at the time when someone was needed'.

In 1941, with Australia involved in the War, John Curtin became Prime Minister and Chifley, a former engine driver, his Treasurer. Curtin, a West Australian, usually stayed in Canberra on the weekends while other parliamentarians from the closer states went to their electorates. This also helped Coombs.

'I used to meet Curtin at weekend football matches where we would chat. I was lucky that both he and Chifley liked me: they gave me many opportunities .

'Although I am a pacifist by conviction my views weakened when the Japanese made advances in the Pacific. I had joined the V.D.C when Curtin asked me to become Director of Rationing in 1941 and in 1943 I became Director-General of Post-War Reconstruction ' .

And it was as Director-General of Post-War Reconstruction, the most difficult job of the 40s, that Coombs' name became known in every Australian household.

Dr Coombs has never been a member of a political party, except for a brief period during his student days in the University of Western Australia's Labor Club; nevertheless he exudes an air of excitement when he speaks of the forties under Labor management.

'The forties were very special years for several reasons', he explained. 'The depression and the war brought about a strong spirit of nationalism, and a desire to change things for the better. It was a creative time and social planning seemed the first essential of the new life. I greatly enjoyed the challenges of that period'.

And challenges they were. Among the foremost was creating the 1945 White Paper on full employment, advocating a doctrine which has become for Australians something of an eleventh commandment ... as successive governments which have not heeded the creed have learnt.

Some other current ideas were brought together by Post-War Reconstruction and led, after much discussion, to the formation of the Australian National University .

{p. 3} In numerous ways', he said, 'the University was the product of war and social thinking. Curtin, in 1944, asked Howard Florey (later Lord) to Australia to advise on the practicability and desirability of setting up a medical research centre in Australia.

'The war also brought home the need for Australia to know more about its neighbours, particularly in the Pacific, and Dr Evatt, the then foreign minister, urged that a centre for Pacific research be established. He hoped it would also serve to train young diplomats and Asian students', Dr Coombs said.

Another challenge lay in reversing the brain-drain of talented young scientists who, through lack of research opportunities, left Australia.

Concurrently the Minister for War Organisation of Industry, John Dedman, sensed a need for the formulation of a Commonwealth policy on education. In 1943 an interdepartmental committee was set up which among other things advised that a national university in Canberra be formed. A second committee. with Coombs as a member, considered the first committee's proposal on a postgraduate and research centre and sent its report to Cabinet, combining the current suggestions in one body. In August 1945 Dedman announced the decision to establish a postgraduate and research university in Canberra.

During 1946 four committees were set up to advise on the proposed research schools - medical sciences, Pacific affairs, social sciences and physical sciences.

'Then I think about those times', he said, 'I am always most amused about the rationale for setting up a physical sciences school. The Commonwealth Astronomer, Dr R. V. D. R. (Dick) Woolley (later Sir Richard) argued that you should have a centre for theoretical research because it would be the one really cheap research school.

"Just a few chaps sitting round desks with pens and pencils", Woolley used to say. He claimed they would work on theoretical maths and physics, offshoots of astronomy.

'Of course, Woolley was forgetting the Oliphants and Tittertons of the physics world with their enormously expensive machines for nuclear physics and the other costly branches', he said, chuckling again.

Following membership of the 1946 Interim Council, Coombs was a member of the first ANU Council and has been on Council ever since, serving as Deputy Chairman since 1957, Pro-Chancellor from 1959 and Chancellor from 1968.

Dr Coombs was asked how the University has lived up to its title as the 'National University' and its role, envisaged in the 40s, as a 'powerhouse for social reconstruction'.

'When we put forward the Cabinet submission early in 1945 I favoured calling it the Canberra University. After all, there was a tradition that universities were called after the cities in which they were located.

'But the title was changed in Cabinet to the Australian National University. I recollect that it was Arthur Calwell who strongly argued in favour of the national title and this was a real piece of political thinking. He saw that the tide of feeling was nationalistic and the new name cashed in on those sentiments. I then thought it was a rather chauvinistic and pompous title, but, all in all, the advantages of the name have outweighed the disadvantages'.

What then were the advantages of the 'National' title?

'Firstly ANU got considerable government support because of its title.

Because it was to be a place where the ideas and facts on which policies to remodel the world (another chuckle) were to be based, the government was generous in its support'.

Has, then, the University not lived up to the aspirations the creators had for it?

Here Coombs the realist, the man who has seen decades of fashions come and go, answers.

'You see, after all the inspiration, the planning and the nationalism of the forties, people grew tired. They wanted to be free simply to plan their own lives, not to change the world. The academics appointed to the University were soon caught up in the reaction against social planning. The community as a whole rejected Labor in 1949, starting a new era.

'As the new Prime Minister, Menzies did a lot for the University in financial terms but it became a more traditional centre for learning. Neither he nor the majority of academics saw it as an instrument for social change.

'Now society seems to have gone full

{p. 4} circle. In the seventies there is again a cry for relevance. People see the need to think about themselves in a corporate way and this consciousness produces nationalism.

'The "new nationalism" is evident in people's concern for planning in education, health and environmental matters. Students want courses which have a bearing on the social issues of the day'.

Has the University, set up as a research centre, played a special role in Australian tertiary life?

'I think that would be an exaggeration', he said reflectively. 'Perhaps the region in which ANU has influenced other universities and hence the community is in its attitude to research. Now most universities expect to have research facilities as a necessary component of their university .

'It was inevitable and not to be regretted that ANU's national role has been diminished by the establishment of national research centres in other parts of the country. I don't see any reason why ANU should be unique in this respect. It will always have a large research component and therefore a distinctive character, but that can be said about State universities, for different reasons, as well. Because of its geographical position in the Federal capital, it may keep its role in providing material for governments, but too much of the "special role" reputation incites envy.

'However, the setting up of ANU did create an appetite in State universities for similar funds and in turn the Federal government showed a willingness to assume this responsibilty. The logical end of this was the formation of the Australian Uniersities Commission and, through it, the Federal government has now taken full financial responsibility for tertiary education'.

Unlike many chancellors and pro-chancellors the world over, Coombs has never been content to play a merely ceremonial role. During his association with the University he has influenced its development in several directions, but outstanding are two projects which he initiated - Creative Arts Fellowships and the North Australia Research Unit.

The University's arts fellowships, which have benefited writers, poets, painters, sculptors, musicians and photographers, have also served to encourage Australians of the stature of novelist Christina Stead, musician Don Banks, painter Sidney Nolan and composer Malcolm Williamson back to Australia.

The ANU fellowships were a logical step from Coombs' actions as Chairman of the Commonwealth Bank and Chairman of the Reserve Bank when he commissioned major paintings and sculptures for the interiors and exteriors of bank buildings.

It was also Coombs who persuaded Menzies that the Government should have a role in patronising and supporting the arts, starting with the Eliabethan Theatre Trust in 1954, developing to the Australian Council for the Arts in 1968 and, more recently, under the Whitlam Government, to the Australia Council.

Under his influence, Government grants to the Arts had risen from almost nothing to a dizzy $14 million this year.

The North Australia Research Unit grew from Coombs' conviction, gained on numerous trips north in his capacity as Chairman of the Council for Aboriginal Affairs, that the area, a rich source of significant problems and material for research, had been neglected by academics.

He said in a submission on the Unit that 'apart from the economic and related problems associated with development of the north, there are sociological changes taking place there of profound importance and of great interest academically and for the future of Australian policy'.

The new Unit will involve several disciplines including sociology, geography, economics, prehistory, demography, anthropology and education.

But should the impression be given that Coombs noses about in University affairs, the illusion must be sharply corrected.

In fact, although the Chancellor is concerned at the conservative nature of the University and many of its staff, he knows, and believes it to be right, that laymen have only a limited influence on university councils. 'I think laymen in university government have to learn to mind their own business. It is the active members of the institution that must deliberate on its decisions and mould its character and policies'.

If his policy is rather the gentle art of suggestion and persuasion, why did Coombs lead the April meeting between students and Council following a sit-in in the Chancelry by aggrieved students, particularly those from the Economics Faculty?

'Firstly' he replied in his gravelly Australian accent, 'I chaired the meeting with students because I believed it was the Chancellor's duty to do so. I also had sympathy with the students' views. I believe most of the issues raised by them, particularly that of academic assessment during the year, hadn't adequately been treated by appropriate bodies, even though the complaints have been round for a time. It is surprising, but nevertheless true, that universities are quite conservative, indeed often very resistant to change and frequently dominated by male chauvinist views.

{p. 5} However I don't know that I altogether go along with the request for a course in women's studies. It may be interesting to study in itself but I don't like to think of it polarising men and women'.

Which brings the Chancellor to the issue of women in society, his own view of society and his unfulfilled hopes for it.

'One thing that saddens me about Australian society is that not only is it male-dominated, but 'male' values, in the form of power, status, force and greed, are most influential in our society.

'I believe that most men, and therefore their institutions, are more chauvinistic than they are aware of. I know I have to examine my own thoughts and actions to eliminate it in myself. I don't want to be a chauvinist. I believe that a University such as ANU, that doesn't have even one woman professor, is just about the most male-dominated of all in Australia, even if the discriminatory attitude is unconscious.

'But although I sympathise fully with the women's movement I don't like to see the extremist women's groups wanting power and to be like men. I realise that they, like other oppressed groups, may see the holding of power as the only way to bring about changes, but I hope it is only a transitional phase. I would rather see more attention in our society paid to what might be called 'feminine' characteristics or values - tenderness, concern for others, kindness, sympathy - ideally found in both sexes.

As it happens, these are the virtues which Dr Coombs remembers most strongly in his own mother, a hardworking Protestant woman, who brought her children up to believe that the injunction 'to love one's neighbour' was meant to be applied personally and by society.

'She was a strong influence on me, as I was effectively the oldest of the five children in our family (the eldest died in infancy). She was interested in intellectual things and encouraged me to read widely. I helped around the house and, being the eldest, we were rather like companions.

'Although she was not a politically-minded woman - few were in those days - she was disappointed that social institutions didn't reflect Christian values'.

Coombs today shares the same Christian 'golden rule' concern for the welfare of others but does not accept the supernatural aspects of Christianity.

Is he a socialist?

'I don't like labels', he replied, 'but if you define socialist as someone who believes that everyone should have a fair deal in life and reasonable equality of economic opportunity, then I am a socialist. But I regard matters such as public ownership of companies and facilities as an entirely different matter. I think they are purely practical issues - not a matter of belief. I see such matters as a question of the most efficient and practical manner of doing things'.

Added to his views on a 'fair deal' for everyone he seems to have, in strong measure, the Aristotelian notion that power corrupts and money taints the owner.

In short, this is the ultimate Coombs paradox. The man who has been at the top for forty years, the friend of the rich and influential, the adviser of the powerful and great, claims to dislike the results of money and power and the seeking of them.

Above all he seems to fear the haughtiness, the status-consciousness and the inability to communicate with the more lowly that results from being powerful. This is probably why, of all the Prime Ministers he worked for, Chifley remains the most special to him.

'As I see it, the exercise of power is an insidious thing. It leaves a mark on the character and personality of those who have it. But Chifley was little affected by it. Whereas to a greater or lesser extent it went to the others' heads, he remained a simple man who was able to talk to anyone. He had a good mind and a natural capacity to understand economics. The things he wanted for Australia were good things, I think. His character was not corrupted by vanities and status-consciousness. If, in his observations, power under-

{p. 6} mines the character, how has Dr Coombs, often described as the most powerful Australian, avoided its consequences?

For a second he pauses. 'Well, for a start, I have never had the direct power of a politician. Perhaps I kid myself, but an administrator and a(iviser's power seems different. And whether I have been affected by the positions I've had is difficult for me to judge. I hope I haven't. But it is up to others to judge that'.

It. is probably the fear of power and position corrupting character that has led Coombs to turn down knighthoods and Vice-Regal positions, while his colleagues and friends have accepted them. Well then, does money motivate him'? The answer is a quick, firm 'No'. 'I dislike wealth. It's rather like power. It's a very good man that can be rich and still be good'.

What then causes him at sixty-eight to work as he does and keep up such a pace?

'I don't think I'm ambitious', he says, shaking his head. 'I have never deliberately pursued positions and achievements. I like doing things I think are important and worthwhile. I admit that I enjoy hard work and like to be active and play squash and golf regularly. But pottering round the home in retirement doesn't appeal to me'. In truth, talking about Dr Coombs' retirement seems highly hypothetical.

He has in front of him the task of heading a lengthy inquiry into the Australian Public Service. Then there is his other long-range plan - to make his own 'quiet and unostentatious' study of an Aboriginal settlement to bridge the role of professional academic and administrator.

This interest in Aborigines is not something new. It was kindled in the 1920's when as a young teacher he taught in country schools in Western Australia where he had Aboriginal students in each class.

'It was my first contact with Aborigines. All my work with Aborigines since then and on the Australian Council for Aboriginal Affairs (he has been its Chairman since 1968) has made me want to know more about them. I get pleasure from being with them. They are intensely interesting people and I would greatly like to see their position improved.

'I would also like to see Australians less impatient towards cultural differences and more tolerant of diversity. We have been isolated for a long time which has led to a too uniform social character. I would like us to value some oddity and eccentricity in our midst and foster relationships across social strata.

'Of course these are dreams', he said wistfully. 'I don't imagine I will be able to achieve much but that is what I would like'.

Post-war planning: some reflections on the results

by J. G. Crawford

The University's former Vice-Chancellor, Sir John Crawford, and the Chancellor, Dr H. C. Coombs, have been friends and colleagues for more than thirty years. In this article Sir John pays tribute to Dr Coombs' leading role in post-war planning but takes issue with him on some aspects of the role of ANU in Australian life and its influence on other tertiary institutions .

It is difficult to do full justice to Dr Coombs' role in the early post-war period. The interview recorded in these pages does reveal something of the motivation that drove him. And it is this I would like to discuss a little. He once described his post-war team as a band 'of pragmatic idealists who laboured in Post-War Reconstruction (PWR) and who gave to Australian political and economic thinking its characteristic patterns during the forties and early fifties'.

This was right and the leadership was his although the inspiration also strongly reflected the views of Ministers like Curtin, Chifley and Dedman and the hold they had on civil service loyalties and affection. We were indeed pragmatic idealists and I like to think it hasn't all disappeared. The band included such people as Fin Crisp (ANU), Alan Brown (later Secretary, Prime Minister's Department), Perc Judd (who became a senior and successful United Nations official in rural economic affairs ), Bill Lockwood (biochemist), Dr Pike Curtin (later Reserve Bank), Gerald Firth (Professor, University of Tasmania), Lloyd Ross, and many others. Many in the regular executive departments participated in the work of PWR. Professor R. C. Millwas not the least among these, playing a key role in the formation of the ANU.

The social and economic background of Coombs' band of 'new style civil servant' hasn't, to my knowledge, been fully written. The fact is, however, that most of us came from low income family backgrounds. Coombs and I

{p. 7} had at least one thing in common: our fathers were station-masters (mine a coal-miner in his very early teens But perhaps the most influential link between us was that we all had experienced the Great Depression of the early thirties and had seen what it did to people. No wonder we all willingly slaved away at draft after draft of the White Paper on Full Employment. As a pseudo historian in recent years, I have, I think, fairly labelled this document as 'one of the most prescient documents to be written on economic policy in Australia'. Among other things, it foresaw the economic and social problems of overfull employment - but alas we were not too'sure of the solutions. (Nor have our successors done any better. ) Even so, we were sure that these problems were a small price to pay for the abolition of the pre-war 'norm' for unemployment of eight to ten per cent, let alone the recurrence of anything like life in the thirties.

Except when 'the Doc' was abroad selling full employment to the heathen and converted alike among the nations, or was arguing problems with ministers in Cabinet, many of us were in informal and lively seminars with him defending our blue prints for the post-war world and sometimes resisting his. Full employment had pride of place, but rural policy and regional planning had a strong (but, perhaps, too imaginative) hold on our thinking. It is ironic, but not unhopeful, that principles we expounded at our seminars are now 'in things' - especially in the regional (including rural) planning area.

The times were stirring and the discourse heady. Alas the wine of evening discourses (hardly less frequent than the daytime sessions) was not really vintage - all too often, for my taste, it was rather acidy homebrewed beer. (I hope there is some Statute of Limitations that defuses his admission.)

In all our efforts to shape things to come, Coombs was the central figure. Although the realities of the post-war were often tougher than forecast, the ideas hammered out under his guidance served the country well. Whether by our grand design or by accident of economic circumstances we did gain full employment: so much so that unemployment at or over two per cent is probably now politically disastrous for any government. On the other hand, it has banished, one hopes, for ever the spectre of the 1930s. When lecturing to students I often wonder that they know so little about it. Then I remember they are, after all, postwar babies born, for good or ill, into an affluence the Coombs' band hardly knew.

Much is rightly made of Coombs' part in the foundation of the ANU. I like to think that one small factor in it was the way Post-War Reconstruction functioned as a continuing seminar on post-war problems. Appropriately, our offices were in A block of the old Hospital Building which we knew was on ground dedicated to a university of the future. I still cannot visit that building without vivid and somewhat nostalgic memories of PWR. Part of the nostalgia is no doubt for the tennis we played on the nearby court. (But I never could understand the Director-General's mania for golf!)

Having read the interview with Dr Coombs, published in this issue of ANU News on page 1, I hope I will be pardoned for taking issue with him on two points. I believe he quite understates the significant part played by the ANU's 'laymen' on Council. True they have carefully and wisely respected the views of the academic members of the University and refreshingly supported efforts to increase sensible participation by students. Nevertheless their careful discussion of issues often led to significant rethinking on academic matters which was much welcomed. The Chancellor has proved fully capable of taking issue on academic matters. As a former Vice-Chancellor I had ample experience of this.

The other understatement is his too heavy discounting of the University's achievements which I regard as considerable. Any largish institution has to struggle with inertia and ANU is no exception. But it is impossible to look over the history of the Research Schools and some of the School of GeneraI Studies faculties without realising that their achievement has been direct in many fields of science and humanities as well as in national affairs. The achievement goes much beyond developing and encouraging positive attitudes to research in other universities of which the Chancellor speaks. Not least, was the reversal of the post-war brain drain achieved by ANU: and for this many Australian universities have cause to be grateful. If the dreamer cum pragmatist of the 1940's is a little disappointed, he must, nevertheless, know that the cry again for relevance has met with increasing response in the faculties. For good or ill, also, not many universities can surpass the ANU contribution to a reinvigoration of government in recent times I hope that as Royal Commissioner, leading an inquiry into the Public Service, he will not overlook the fact that interaction between universities and government is good for both. I like to think that the Director-General of PWR (now the Chancellor of ANU) and his Director of Research in PWR (later Vice-Chancellor, ANU, 1968-73) have always agreed on this.

{p. 8} Nugget and the National University by R. Douglas Wright

There is probably no member of the University's Council who has had more continuous asbociation with ANU from it beginning than Professor R. D. Wright - except for the Chancellor, Dr H. C. Coombs - about whom he writes here. Wright met Coombs while the former was Professor of Physiology at the University of Melbourne (a post he held from 1939-71) and Coombs was Director of Rationing in the mid-war years. A few years later Professor Wright was asked to join the group to advise on the form medical research should take in the national university. He also served as honorary secretary of the Interim Council from 1946-48 and on Council from its formation to the present. In this article Professor Wright provides insights into the role of Coombs in the affairs of the University since its conception and reveals some of the tussles, manoeuvres and achievements of those years.

The Australian National University in 1974 is an outstanding example of successful acclimation. In 1946 the seeds of a graduate university were set and now there are seven graduate schools - each of a standard which attracts interstate and international applications at all levels from postdoctoral to directorial. It has taken on a symbiont undergraduate component with advantage to both sections. Its campus is well developed and developing well - already it has had to be remodelled to correct for the latifundian tendencies of our early designers. It has led the thinking in Australia which has brought universities from trade schools for school teachers, parsons, technologists - medical and material - to places of high intellectual endeavour and ferment.

How did this all happen?

The start of the change was in 1941 when the Curtin government came to power at an unpromising period of the war. But there were a number of members of this government who were pragmatist-idealists and in our context the outstanding ones were Jack Dedman and Ben Chifley. On 3 November 1942 Jack Dedman, as Minister for War Organisation of Industry, addressed the vice-chancellors of the universities on the government's plans for reserving students for essential courses, giving these reserved students stipends but keeping the other courses going and open to suitable students 'maintaining that continuity of cultural studies which is an essential part of what we are fighting for'. 'Our ideal should be that of the Chinese, who have kept their universities going in the face of almost unbelievable difficulties, and whose guerilla fighters have even maintained a university behind the Japanese lines ...' 'It is necessary to start thinking of plans for the post war problems which must arise'. 'The Government has decided to appoint for these purposes a small commission of three, responsible to myself' - Professor R. C. Mills was appointed as Chairman.

Mills had been on the Banking Commission with Chifley and a deep trust was between them. Dr H. C. Coombs was one of the new recruits to the Treasury and a senior adviser to Chifley. When the Ministry of PostWar Reconstruction was set up with Jack Dedman as Minister, Coombs transferred to become civil head of it. Another new recruit was Bert Goodes who came to the Treasury from West Australia and grew with and of Ben Chifley's Social Services Section of the Treasury. Both Goodes and Coombs had come through the no-fee Western Australian University. Consequently when an Inter-Departmental Committee to consider the future of university

{p. 9} development at Canberra was set up there was academic strength to draw on with trustworthy access to the points of power.

A feature of Australia's isolation at that time was the desire of some expatriate Australians to come to supervise the installation of major developments with which they had been associated - the two outstanding in relation to the National University were Mark Oliphant - in regard to radar - and Sir Howard Florey - in regard to penicillin. The details of their influence on thinking about post-war university development is recorded elsewhere but this stage calls for emphasis on Coombs' companionableness - he likes people and when he accompanied Ben Chifley on his whirlwind post-war tour in 1946 they met Florey and Oliphant in London. This reinforced the proposals that a new level for universities should be set up in Canberra: a graduate university with a level of establishment which would interest people of the stature of Florey and Oliphant. The Bill to establish the Australian National University was presented by the Minister for Post-War Reconstruction, the Hon. J. J. Dedman; the Interim Council was set up and naturally Dr H. C. Coombs was on it and happy that his old mate Mills was available to be Chairman. Coombs was always on hand to make suggestions and keep things moving. When the people thought of as Directors of the proposed research schools (Oliphant, Florey, Hancock and Firth) came to Canberra to confer with the Council in February 1947 it was a new experience to some of us to see Mills, Goodes and Coombs going to and coming from the Treasury in the negotiation of how much the physics school could have - the statutory endowment had looked good by old standards but it was not enough by contemporary costs and the Treasurer accepted the advice of his trusted advisers.

But still the four invitees mentioned above would not believe that there was yet enough will and muscle for a graduate university to attract them from their own excellently placed chairs. So there was to be a conference in England which Coombs took in with one of his trade conferences and I as honorary secretary of Council. The elasticity of Nugget is shown by an episode during this occasion. The invitees wanted first hand knowledge of some of the organisational characteristics of graduate universities in the USA and suggested that I should go over and find out - with the barbed suggestion that if this could not be done the level of support of ANU might prove to be traditional poor Australian university level. With support from Coombs I cabled to the Interim Council a request for approval and supply. Apparently oriented to 'no trips to the boys' they cabled refusal. Nugget agreed that I could approach Sir Errol Knox, Managing Editor of the 'Argus' who was at the Savoy, for currency (severely rationed at that time). He agreed to supply it and to be silent. But my cable 'Proceeding to America by courtesy Melbourne Argus' gave us both a giggle and the expected reply providing fares. And at the end of the mission we had to be content with setting up the Academic Advisory Committee - not appointing four directors. But this did lead to the appointment of Mark Oliphant to Physics, Florey agreeing to give his close attention to the building and staffing of the Medical School and great assistance from Hancock and Firth. Thus as ever, Coombs, conditioned by his long years of negotiation with parties who don't have to agree with you, found partial agreement better and more useful than no agreement at all.

This was well exemplified when the Menzies Government decided that the Canberra University College should be incorporated into the ANU to give a 'normal' western university pattern. The graduate school had had thirteen years to develop its four schools to a high level and had done so. Its effect on other universities had been enshrined in the Murray Committee's report and the establishment of the Universities' Commission and all were elevated. A long step forward from Dedman's statement of 1942 had been taken. Now the Government was insisting that ANU also walk on two legs. To many of the academic staff this seemed like a great step backward

{p. 10} - to some it seemed the chance to do for the undergraduate scene in Australia what we had done for the graduate section. Much innovation has come - both sections have moved forward. It reflects somewhat the forecasts put forward by Coombs in the early forties in memoranda for Chifley on the benefits of full employment .

The Department of Astronomy has grown in a way which reflects the influence and techniques of the ANU. The head of the Commonwealth Observatory, Dick Woolley, was an old friend of Dr Coombs. When the National University was to be set up the question of Astronomy as one of the traditional disciplines was well to the fore. But Woolley accepted appointment as Astronomer Royal in Great Britain and almost moved out of the scene. By great good fortune and the keen ear of Mark Oliphant it came to be known that Bart Bok would be interested in appointment to a working observatory with a southern view. And so negotiations for the transfer of the observatory (minus the time service) to the University were opened and proceeded. Then there were stumbles and hesitations - A. A. Calwell asked me was it a fact that this was being done so that an American could be appointed and take control of the heavens over Australia. The notion of Bart Bok as CIA agent was an index of the degree to which conspiratorial theories can go. However the transfer occurred without real hindrance and it is common knowledge how the Department proceeded under Bok's leadership. The next stage was the development of resources at Sidings Spring Mountain and then the location there of the jointly owned and run British and Australian telescope. There was every opportunity for impasses in these negotiations but the old Coombs recipe of the acceptability of a productive workable compromise has kept the project active.

The ANU could easily have settled in to being a place of paper and pencil study. Some influence has, however, always been active to keep its sensorium receiving from real situations. The New Guinea research unit, the Fijian demography, archives, law workshop, myxomatosis and many other instances of productive contact with real human activities have occurred. The present surge from the market place to corridors indicates that Dedman's wartime attitude might have to be revived - namely that maintaining continuity of cultural studies at the University is the basic function of universities.

Not every event along the road has been to the advantage of the University. There was, for instance, the famous conversation in the Park in Britain between Copland and Hancock which led to the latter withdrawing from us and has never been a subject of serious inquiry. It all came right in the end when Hancock's tactful revelation of attitudes in his book Country and Calling opened the direction to new approaches. Similarly, Melville's consolidation policy for the foetal stage of development of 1954 led to Florey's remonstrance and final denunciation of 1956. But it was all played cool - the walls of ANU did not fall down and indeed more flowers sprang up. One day however the ANU may find that full scale requirement of highest academic standards is the sine qua non of survival at the highest level.

There have been many instances where the ANU has had unacceptable pressures applied and has withstood them. In the early fifties it was fully to be expected that in the atmosphere of Spry and Petrov there would be pressure to take into account the political affiliations or even attitudes of applicants for appointments. This was deflated by undertaking to take in to account any attitude which was known to pollute an applicant's academic performance. Members of staff have sought to influence their promotion by a selection of 'games people play' but frank inquiry and report has revealed the source of trouble. Accusations of racism have been the mask of inverted racism. And always in the councils on the side of the preservation of academic safeguards Nugget has been a persuasive anchor point.

A feature of the ANU which was a welcome revival of ancient customs in universities has been the policy of encouraging opportunities for cultivated (I prefer this to cultural) practices. Music and music rooms, acquisition and display of art objects, creative art fellowships etc. have been actively advanced and greatly promoted by the Chancellor over the three decades of his association with the University. Indeed the University has been the unifying influence in his life. Outside it he has been economic theorist, rationing officer, national reconstructor, banker, art director, counsel for indigenes and ballet master and most recently chief choreographer of the Public Service show. I fear for them, for the only time he and I were ever irreconcilably opposed was when the Executive of FAUSA directly negotiated a salary adjustment with John Gorton and did not consult the cancellarial officers while successfully doing so! We can hope that he will present his design of an efficient public service which will incorporate his same-as-before mixture - common sense and warm sentiments which he has engendered in the National University. We know from his eponymous lectures that he could make of all these experiences an inspiring history - we should see him next soon as a creative arts fellow for there is so much that only he can tell.

ANU News July 1974 {end}

(3) Gough Whitlam's eulogy at the funeral of Nugget Coombs

Update July 1, 2020

The original file is no longer at: http://www.whitlam.org/collection/1997/19971114_nugget_coombs/19971114_Sydney_NuggetCoombs.rtf

This eulogy is no longer online anywhere except here. However, it is still accessible via the Internet Archive: https://web.archive.org/web/20050317151238/http://www.whitlam.org/collection/1997/19971114_nugget_coombs/

[The Whitlam Institute] St Mary's Cathedral, Sydney, Friday 14 November 1997, 1330 Hours

Prime Ministers like to describe themselves as the servants of the people. The most striking claim of the Supreme Pontiff is to be the servant of the servants of God. If, in this setting and as the last of the seven Prime Ministers whom Nugget Coombs served, I were to suggest an epitaph for him, it would be "the servant of the servants of the people".

Nugget was destined to be a central banker. In 1930 he graduated from the University of Western Australia, the only free university in Australia. His bride Lallie went with him to London in 1931, the year in which, because Australia had no central bank, the State Savings Bank of New South Wales closed its doors and had to be taken over by the Commonwealth Bank. In 1933, Nugget was awarded a doctorate at the London School of Economics for his thesis on central banking, The Dominions' Exchanges.

In 1935 he was appointed an assistant economist at the Commonwealth Bank's head office in Sydney. The student who used to dine with Keynes on the other side of Piccadilly from Green Park now regularly met the Keynesian economists from the Commonwealth Bank and the Bank of New South Wales in Repin's coffee shops. On the outbreak of World War II he was appointed Economist to the Treasury. Two years later, J.B.Chifley became his fourth Treasurer; they had met in 1936 and 1937 when Chifley was a member of the Royal Commission on the Monetary and Banking Systems of Australia. One of John Curtin's first acts as Prime Minister was to appoint Coombs to the Commonwealth Bank Board. At an Australian Rules match in Canberra in May 1942 Curtin asked Coombs to be Director of Rationing. In December 1942, a year after Pearl Harbour, Curtin made Chifley Minister of Post-war Reconstruction.

My admiration for Dr Coombs goes back more than half a century, my association with him exactly a quarter of a century. In January 1944, while on home leave with my wife and our baby son in Sydney, I decided to spend some of the Australia Day weekend with my parents in Canberra. Coombs used to walk over Capital Hill with my father on their way from Forrest to West Block. My father took me to the Albert Hall to hear Dr Coombs, Director-General of Post-war Reconstruction. I remember the zest with which he was fulfilling the war-time promises of a better world.

Between the legislation in March 1944 and the referendum in August for the 14 Powers - No.14 was "the people of the Aboriginal race" - my squadron moved from the airstrip at Cooktown Mission to a new airstrip at the Yirrkala Mission. I now know that the Aborigines at the former had adopted names such as Costello and Pearson and at the latter still used names such as Yunupingu, Marika and Djerrkura. My first political campaign was in support of the referendum. There was a large majority in favour in our squadron and in the armed forces but a civilian majority in only two States. I was devastated and forthwith decided to take a continuing interest in politics.

During and after the War Nugget was engaged in the Keynesian Crusade for a new international economic order. It involved various organizations, companions and places - FAO, GATT, IMF and World Bank, Chifley, H.V.Evatt and John Dedman, Washington, New York, London, Paris, Geneva and Tokyo. In January 1949 Nugget was appointed Governor of the Commonwealth Bank. R.G.Menzies was restored to power in December and came to rely on his Seven Dwarfs. All except Coombs were transformed into knights. (In June 1975 Coombs was among the first Companions of the Order of Australia. Knighthoods were introduced in the Order in May 1976; Coombs resigned in June.)

Let me illustrate how Nugget brought out the best in his four Liberal Prime Ministers. Menzies had little interest in any of the Arts. Nugget, no doubt inspired by the example of such bankers as Keynes and the Medici, became a patron of the arts. His splendid collection was exhibited at the Reserve Bank in Martin Place five years ago. In 1954 Nugget turned the first visit by our Head of State to brilliant account by securing Menzies's blessing for the Australian Elizabethan Theatre Trust; Nugget remained chairman of its Board till 1968.

In May 1967 Harold Holt submitted the Aborigines referendum which Menzies had resisted. He sought advice: "You know, Nugget, I've never spoken to one. I don't think I've ever met one". In September Holt announced a Council for Aboriginal Affairs and in November an Australian Council for the Arts. Nugget was to chair both. Nugget found that John Gorton's interest in the arts centred on films and television. He showed how to extend the role of the Council for the Arts in that area. He retired as Governor of the Bank in July 1968.

Bill McMahon asked Nugget to accompany him on his visit to Washington, New York and London in October 1971. Exactly 25 years ago, on my initiative, Nugget agreed that it should be known that he was as willing to advise me as he had been to work with McMahon.

I inherited the habit of walking to work with Nugget. These walks led to the one billion dollar Budget savings recommended by the expenditure review task force appointed in March 1973 and chaired by Coombs, the 25% tariff cuts recommended by the committee appointed in June and chaired by Alf Rattigan and the Green Paper on Rural Policy prepared by the working group appointed in December and chaired by Stuart Harris. Fred Gruen, who died on the same day as Nugget, was a member of the Rattigan committee and the Harris group. In June 1974 my Government appointed the Royal Commission on Australian Government Administration, chaired by Nugget; its report was presented in August 1976.

In October and November 1973 I took Nugget and Lallie to Tokyo and Beijing. They had previously made an unpublicised visit to study central banking in China and the USSR in 1961. In Australia Nugget arranged many meetings for me with Torres Strait Islanders and Aborigines. In August 1975, after the Parliament had passed acts to establish the Aboriginal Loans Commission and Aboriginal Land Fund, to override Queensland's discriminatory laws and to enact the 1965 United Nations Racial Discrimination Convention, Nugget arranged for me to visit Daguragu. When I ceremoniously poured some soil into Vincent Lingiari's hands I delivered the words that Nugget had drafted.

Late in 1978 Nugget and I were visiting fellows at the ANU, where Nugget had been pro-Chancellor from 1952 and the first Australia-based Chancellor from 1968 to 1976. I was with him at University House and in the H.C.Coombs Building for three years. His book Kulinma, Listening to Aboriginal Australians, was launched in February 1979. I treasure my copy, which he inscribed Your government was the first and so far the only Commonwealth Government which has listened to Aboriginal Australians. In October 1981 Nugget asked me to launch his Trial Balance, from which the Governor-General has quoted. It gives a valid and vivid account of his work with colleagues at home and his counterparts abroad, and not least with his seven Prime Ministers at home and abroad. After my time at Unesco Nugget invited me to the North Australia Research Unit that the ANU had established in Darwin along similar lines to the New Guinea Research Unit which it had established in 1964. He himself spent many months there every year. Nugget was the only whitefella to attend the crucial Eva Valley meeting in 1993, at which an indigenous position on the proposed Native Title Bill was hammered out. There can be no doubt whatsoever about the views that he would have held and expressed about the Native Title Amendment Bill which was passed by the House of Representatives on the day he died.

I last spoke to Nugget 14 months ago. I read him key passages from the Inaugural Lingiari Lecture, "Some Signposts from Daguragu", which the Governor-General delivered at the Northern Territory University in August 1996. Nugget clearly grasped the points, although he was not well enough to articulate a response. I thank John Coombs QC, a recent President of the Bar Association, for briefing me on behalf of the family last July on this service of thanksgiving. I have tried to show how Nugget influenced me throughout my working life and, I believe, for the better. At some time or in some place or in some way the life of everybody in this gathering and in our country would have been touched by Nugget's manifold activities and enriched by his talents. He was given many talents. He produced great dividends on them. All Australians can say, in the words of the parable, "well done, thou good and faithful servant".

(4) The Aboriginal Legacies of Dr "Nugget" Coombs

by Peter Myers, October 15, 2004

Dr Coombs both helped and harmed Aboriginal interests.

In 1992, Australia's High Court recognized a new type of title to land, Native Title. After a decade of claims and deliberations by courts, aboriginal people by 2002 owned 15% of the Australian continent. Most of this land is in the Outback, i.e. the hot, flat, dry inland or the remote monsoonal north.

Dr H. C. Coombs was one of the key movers in achieving this result; among Aborigines he gained the nick-name "Short Father". Coombs was head of Australia's publicly-owned central bank, the Reserve Bank, in the postwar years; his signature was familiar on Australia's bank-notes.

He gained his Ph.D. with a thesis on central banking  at the London School of Economics, whose teaching staff included free-marketeer Friedrich von Hayek and the Jewish Marxist Harold Laski: http://www.science.org.au/academy/memoirs/coombs.htm.

He occupied many important posts, including Chancellor of Australia's leading research university, the Australian National University (ANU) in Canberra. The building housing the leading Research Schools in History, Social Sciences, Economics etc is named after him, the Coombs Building.

{update March 13, 2020. The following links from ANU Library no longer work.}

The ANU Library catalogue's listing of Coombs' publications shows his strong orientation to Aboriginal issues:

http://library.anu.edu.au/search/acoombs+h/acoombs+h/1,5,59,B/exact&F=acoombs+h+c+herbert+cole+1906&1,55

When the (New Left) Labor Government of Gough Whitlam came to power in 1972, Coombs was given a new role: to draft finance policies that would cut away the subsidies which underlay the Agrarian Socialism of the postwar years, and divert the funds into creating a Welfare system. Whitlam commissioned the Coombs Task Force to produce a major report:

http://library.anu.edu.au/search/acoombs+h/acoombs+h/1,5,59,B/frameset&F=acoombs+h+c+herbert+cole+1906&39,,55

http://library.anu.edu.au/search/acoombs+h/acoombs+h/1,5,59,B/frameset&F=acoombs+h+c+herbert+cole+1906&40,,55

In his eulogy at the funeral of Nugget Coombs, Whitlam said of Coombs,

"I inherited the habit of walking to work with Nugget. These walks led to the one billion dollar Budget savings recommended by the expenditure review task force appointed in March 1973 and chaired by Coombs, the 25% tariff cuts recommended by the committee  appointed in June and chaired by Alf Rattigan and the  Green Paper on Rural Policy prepared by the working  group appointed in December and chaired by Stuart Harris."

Whitlam's eulogy is at item 3 above.

In his book The Whitlam Government:1972-1975 (Penguin, Ringwood, 1986), Whitlam wrote,

{quote}
{p. 196} In March 1973 Cabinet decided that 'action be set in train to apply a close scrutiny to continuing programs of the previous Government so that room may be found for our own higher priority programs'. After discussions with Coombs I agreed that a high-level task force had to be set up and he agreed to be the leader of it. Most of the research was done by Stone, then Deputy Secretary (Economic) in the Treasury, but Coombs took sole responsibility for any judgements or comments made by the Task Force. Its report was given to me on 24 June in time for the consideration of Ministers in formulating the 1973 Budget.

{p. 270} The Coombs Task Force provided an effective means by which the Government could rationalise its assistance to rural producers. ... Coombs recommended and the Government acted upon the abolition of several forms of rural assistance.
{end quotes}

Prior to these changes, Australia had a nation-building kind of socialism in one country, with budget measures to ensure that people living in rural areas did not pay higher prices than the cities, for the necessities of life. The Federal Budget was devoted not to welfare handouts, but to creating industries which employed people.

Coombs' report laid the blueprint for the abandonment of this self-sufficient economy, a major shift of population from rural areas to cities, greater dependence on imports, and massive welfare pay-outs.

Coombs did try to help Aborigines create businesses, and otherwise establish themselves financially; some of these projects will no doubt be successful.

But the overwhelming welfare dependency subsequent to his Task Force Report was to have disastrous effects on Aborigines, counter to the benefits Coombs brought them.

Despite all the unfairness of the pre-Whitlam era, Aboriginal culture had survived in remote areas, and Aborigines had jobs as stockmen on cattle stations. Post-Whitlam, many Aborigines moved from the remote stations to mission settlements, the missionaries replaced  by New Left advisers. At the same time, passive welfare was making many Aboriginal communities dysfunctional. Alcohol and idleness led to a break in the transmission of the culture to the younger generation, which instead learned to follow Hollywood and the city fashions. An independent culture came to an end, partly through the efforts of utopian One-Worlders.

As it was dying, the New Left's SBS TV was presenting artificial images depicting a dynamic revival, an illusion which was only burst when Aboriginal leader Noel Pearson repeatedly admitted the rampant substance-abuse and domestic violence which welfare-dependency had led to.

(5) An exchange between Dr Coombs and myself

My Letter to Dr Coombs, dated March 4, 1995:

{quote} 21 Blair St.,
Watson ACT 2602
(06) 2475187 4/3/95

Dear Dr Coombs,

With regard to your recently reported comments, I put the following points to you:

1. Credit for the Keynesian policies from the forties to the seventies belongs to leaders of all parties: ALP (Chifley etc.), Liberal (Menzies), Country (McEwen), as well as yourself. It is not a party matter.

2. Keynes saw his economy as Post-Capitalist. It had elements of Socialism; one might see it as midway between Capitalism and Central-Planned: it was controlled capitalism, market socialism. Right-wingers still dismiss the New Deal as "socialist", while Communists dismissed it as "capitalist". They are both right - it was midway. But the Keynes economy is not a welfare state: it provides jobs instead of welfare. Whitlam prefered Welfare.

2. The abandonment of Keynes was begun by the Whitlam Government. Whitlam was an "Internationalist", whereas Keynes had argued that "knowledge should be international but goods home-spun". Further, Whitlam had little interest in the economy; he took it as an article of faith that Australia would remain wealthy and strong. (I supported Whitlam; I was bitterly disappointed over the Dismissal; but I make these points nonetheless).

3. You yourself, a stalwart of the Keynesian period, contributed to its dismantling via your 1973 Report, commissioned by Whitlam. (I am one of your admirers, but I must put this to you. The current hardships of rural Australia surely go back, in part, to that Report. I am keen to have your rebuttal or other observations on this matter.) You no doubt disagree with me, but I call on you to abide by your own rules of integrity, and engage me in debate - the lifeblood of intellectual life - by answering me. I hope for your reply.

Your observations about aboriginal culture are most interesting. Most "Enlightenment" intellectuals seem to have "Social Evolutionist" beliefs, i.e. that "more evolved" societies are superior to "less evolved" and show them the way, the path being linear. Some "Enlightenment" intellectuals however posit an initial "Golden Age" corresponding to the Garden of Eden. For some, this was Ancient Greece; for others, aboriginal societies. I incline to your view about the latter, but I think that an overromantic or "constructed" view is as harmful as a dismissive one.

If you read once again The Social Contract, by Jean-Jacques Rousseau, forerunner of Marx and the architect of our Enlightenment Age (now drawing to an end, with such agony - you express it well!), you will note some interesting anomalies in his views about aboriginal peoples (his perspective mainly came from European encounter with America). On the one hand, he praises their society, as superior to that of Europe. On the other, he makes no attempt to draw upon their culture when drafting a blueprint for an Enlightened society; instead he draws lessons from Plato's Republic, Sparta and Rome. To sum up, he uses Aboriginal Society to de-legitimate the Old Order of Europe, but not to reconstruct the New Order. Why so? I am sure that this dilemna is central to your own thoughts.

Yours Sincerely,
Peter Myers {endquote}

Dr Coombs' letter to me, dated March 15, 1995:

{quote}
15 March, 1995

Mr Peter Myers
21 Blair Street
WATSON ACT 2602

Dear Mr Myers,

Thank you for your letter of 4 March 1995. I was interested in your views about 'the dismantling of the Keynesian period' to which you believe my report for the Whitlam Government on expenditure policies of the previous government, contributed.

I think your comments on the effects of that report are based on misunderstandings. The essence of the Keynesian doctrine was, and is, that aggregate income and employment is a reflection of aggregate expenditure and that it is generally desirable for government policy to increase or stimulate expenditure unless resources (and labour in particular) is at, or close to, very fully employed. It is a necessary corollary of that proposition that, if aggregate expenditure, private and government, for consumption and capital investment is causing inflationary rises in the cost of these resources and prices generally, it becomes necessary for policy to constrain or reduce expenditure. In such circumstances it will be wise to reduce or constrain expenditure selectively judged by criteria about their purposes and related considerations.

In the Whitlam period it was believed (I think correctly) that resources, including labour were fully employed and that costs and prices were rising and threatening to damage our capacity to balance our international payments, to maintain reasonably stable prices etc.

Since the Whitlam Government had plans for expenditure (eg. on developing social welfare, education, the protection of the environment etc. which in their opinion (and generally speaking, in mine) they needed to reduce some expenditure - government or private - directly or by increased taxation or similar means.

The choices made in the Report reflect the preferences and prejudices of the Committee, including mine. It is true that I thought expenditure on so-called Defence was excessive, that large dams on rivers often did more harm than good and that valuable as migration was socially and as a source of growth, we were overstraining our capacity to absorb and use migrants wisely.

I feel in retrospect some agreement with your concern about the rural scene but I think the balance of rural expenditure by governments at that time was socially biased and economically misdirected, ignoring ecological and other environmental considerations. Little had been done, or was proposed to give effect to the recommendations of the Rural Reconstruction Commission set up as part of the Post War Reconstruction. A different and preferred set of recommendations could have been put forward with approximately the same aggregate effect on expenditure, employment etc.

Your criticism (and mine) are not directed at the Keynesian component but at the social and political choices the report proposed.

Yours sincerely,

H.C. Coombs
Visiting Fellow
{endquote}

An image of Dr Coombs' letter to me: coombs950315.jpg.

The impact of those reports of 1973 and 1974 on rural Australia has been very great. The lives of millions of people have been affected. The rural towns, apart from retirement areas & hippy areas, have been gutted; in many, there are few young people left, and there's also a shortage of women.

There were other influences too, not just these Reports. Whitlam & Tom Uren wanted to build the cities. Even so, those Reports were the turning point for rural Australia.

Meat, which is produced in rural areas, now costs twice as much in small towns, as in the cities, because new rules prevent local butchers from killing meat for sale - it must be done in big attatoirs. Country people pay much higher prices for groceries, petrol etc than city people, especially in small towns; and usually have much lower incomes.

In referring to rural expenditure as "socially biased", Dr Coombs probably implies that Whitlam wanted to target the Pitt Street farmers, i.e. the city-based professionals (doctors, lawyers, bankers etc) who own farms. But those people, and city-based Agribusiness, have been beneficiaries of the hardship of family farmers in recent decades, buying up the farms cheaply after the bankruptcy sale.

(6) Banana Republic? No, Banana Colony, by Dr H. C. Coombs

update March 12, 2020: this article by Coombs is not online anywhere except here:

Banana Republic? No, Banana Colony

by Dr H. C. Coombs

The former Governor of the Reserve Bank Dr H. C. Coombs, who has been described as the Australian of the century, argues that Australia 's crisis will not go away until we regain our economic independence.

Australian Business Monthly, March, 1992

It is a pity that Paul Keating, in announcing the success of his challenge for the prime ministership, repudiated his earlier judgment that "this was a recession we had to have."

Like the utterances of all oracles, this statement was cryptic and its meaning obscure. But it at least conveyed the suggestion that the recession could be a consequence of what had gone before - that it derived from perhaps unwarranted assumptions and misguided judgments which, at least in part, underlay our government's earlier policies. It therefore could have been interpreted as expressing a willingness to think again.

Such an interpretation would have afforded more closely with Keating's earlier one-liner, that he feared Australia was on its way to becoming a "banana republic"; in other words, that he feared the Australian economy was becoming so burdened with debt to the outside world that it had lost the ownership and control of its own resources and industries and had beeome simply an instrument of the capital, the enterprise and the technology of its dominant imperial power. There was wisdom in that judgment.

{Keating used it to justify the deregulation and privatisation which brought this result about.  The public's worry over foreign debt was used as an excuse to further sell off Australian assets}

Unfortunately, Keating identified the destructive debt only as that arising from the government's borrowing. To his credit he acted forcefully to redirect fiscal policy to the reduction of that debt. But he ignored the need to reduce the greater burden on the economy imposed by payments abroad to which the private sector was increasingly committed.

Enterprises taken over by, or merged into, overseas interests are now committed to remit interest and dividends; to hire technological property from their principals; and to employ expensive consultants, accountants and others providing professional services from firms associated with those principals or with their Australian branches or subsidiaries. These commitments, like those of governments to overseas creditors, have to be met from the proceeds of the Australian economy's production or, increasingly, from the sale of the nation's assets.

Had the government acted as promptly to see that these commitments were repatriated and the relevant services provided by our own knowledge and skills and financed from our own savings as it had to bring government indebtedness under control, the dilemna now facing the economy would be less absolute.

That dilemma is classical. At present we are impaled on the horn of unemployment, flagging expenditure and investment. But if the government is too enthusiastic in its attempts to blunt that horn or to enable the economy to evade it, we may swing to face the horn of even greater deficits in the balance of our international payments, of increasing losses of our national assets and of rising levels of inflation.

But that is not all.

So far the businessmen, union and community leaders with whom the Prime Minister has chosen to consult seem to be interpreting the recession as just another minor hiccup in the flood of expenditure which essentially has been running strongly for the last 40 years. This flood had its origins in the colossal scientific and technological innovations stimulated by World War II and was financed largely by the vast accumulation of international purchasing capacity which the US derived from the obligations towards it incurred by its allies and enemies.

That international purchasing power has been used to help rebuild the war-damaged economies of Europe and Asia, to set in train the industrial colonisation of the third world and to impose a pattern of international trade specialisation on the world which is highly favourable to U.S interests and those of other industrialised and creditor nations.

But clearly that exercise in economic imperialism is flagging. The rate of innovation has slackened and the incentive to spend on research and development and on investment has slackened with it.

Furthermore, the very optimistic assumptions which underlay the attempt to industrialise the whole world now seem to have been mistaken. The physical world is in revolt against the progressive exhaustion of resources and rising pollution, and against population growth beyond the capacity of world agriculture to feed it, even after the Green Revolution.

In other words, it cannot be assumed that this recession is a temporary or limited phenomenon, or that the Australian economy can be kick-started into renewed consumer and investment spending, and so resume and maintain its confident progress.

We in Australia have substantially shared the optimistic assumptions of surging industrialisation and have acquiesced in the pattern of international trade specialisation which has gone along with it. Our economy, as well as the economies of other colonised countries, bears the marks of the effects.

As we come to look more closely at what our business and community leaders propose, I fear we will realise that those marks are evidence of structural defects in our economy, in its priorities, its allocation of resources, and its relevance to the world in which we will have to live.

But first let us look at the relationship between the threats embodied in the two horns of the dilemma to which I have referred: at how far it is possible to stimulate domestic expenditure without dangerous inflation or unacceptable deficits on our balance of payments.

It is easy to increase employment, but not without changing other aspeets of the economy. Employment is closely linked to levels of expenditure. Action can be taken to stimulate consumption expenditure, for instance, by increasing social security benefits, by tax concessions, by subsidies, or even by allowing Aborigines a modest share of the profits arising from the exploitation of the minerals and other resources of the lands we have stolen from them.

However pessimistic industry may be, there are urgent capital investment tasks appropriate to the public sector that are crying out for action: to reduce pollution, to restore the waterways, the forests, the beaches; to protect the ozone layer; to provide adequate, well-equipped schools, health and other facilities for all communities and their children.

The submissions to the groups recently studying the prospects for sustainable development especially those from the CSIRO the Australian Conservation foundation and other science-based "green" sources, have highlighted opportunities arising from resources and research results available in Australia. These could provide a more sustainable stimulus, comparable in effectiveness with that from which the imperialist expansion of the post-war world emerged. Action to increase expenditure on any of these would increase the incomes of those employed in the projects and lead to increased production of the goods and services on which those incomes could be spent.

But any action to increase domestic incomes and employment would bring us sharply on to the other horn of the dilemma: the effect of increased domestic spending on the balance ofour international payments and on the level of our prices and costs of production.

As employment increases, expenditure abroad increases also - partly because of consumers' choice of imported goods and services, but also because Australian industry incurs costs (directly or indirectly) in foreign currencies in the process of producing, financing, transporting and marketing their nominally Australian-made goods and services.

It is the increasing participation of non-Australian enterprise in the Australian economy which has brought closer and more sharply under notice the reality and imminence of this horn of the dilemma. Between 1969-70 and 1989-90 our total exenditure on imports of goods and services, debt servicing and other debits rose from $5.865 billion to $91.133 billion and on services and other debits from $2.304 billion to $40.342 billion.

We have, for decades, tended to ignore that part of this remarkable increase which was ircurred throuh the costs of Australian production. An important part of this increase is in the servicing of private sector debts, in the greater dividends and other shares in the profits of Australian-based enterprises, in payments for the use of foreign-owned technology, patents and the like, and in the hiring of foreign experts to design, organise, transport, advertise, market, deliver and service the goods and services produced by the Australian private sector.

Successive balance of payments problems arising, at least in part, from these growing costs have been deferred by fiscal and monetary policies including relatively high interest rates and progressive downward adjustments in the value of the Australian currency. This has encouraged the sale to non-Australian interests of the natural capital resources of the country and the ownership of profitable enterprises. It is hard to remember that when the gold value of the Australian dollar was fixed with the IMF at the time decimal currency was introduced, it was set at $US1.1. Such policies have not merely made it easier and cheaper for non-Australians to buy our goods and scrvices, but also to own the enterprises which produce them and the natural resources which they consume and often progressively exhaust.

In contemporary "Newspeak" this is referred to as "foreign investment" rather than a loss of capital, and is talked of as if it were the solution to our problems rather than merely their deferment. Recent trends in the foreign exchange market and in official responses to them indicate that the mind of the new Treasurer is running on similar lines. Decisions affecting our mineral and forestry resources suggest that the "new" government is even more determined to sell off what remains of the farm as rapidly as possibly - a certain recipe for the realisation of Keating's prophecy of our descent into "banana republic" status.

Much is currently being said about the "benefits" to farmers, mining companies and other exporters from the increased money incomes which they derive as a result of depreciation. Let it be clear that those benefits derive internally, from decreased real incomes of other Australians, especially consumers, wage and salary earners, pensioners and others who live on fixed incomes. Such income shifts may be justifiable components of economic policy, but the real advantage to the government of achieving them by exchange depreciation is that it does not have to justify them to Parliament, nor to suffer the electoral reaction of those who are on the losing end of the deal.

If one can judge by past experience, it should also be realised that some of the effects of these shifts are promptly offset or reversed: for example, by the highly organised or politically powerful, such as key unions or members of parliament. The stimulus to export production provided in this way can prove to be temporary and, therefore, to serve as a misleading guide to enterprises affected.

A glance at the economic history of acknowledged "banana republics" will show a long record of progressive exchange depreciation and inflation, followed by increasing domination of productive enterprises by foreign owners, combined with declining real domestic incomes and employment for the peasant and wage-dependent populations.

Is it a road we wish to travel?

If we wish to avoid it we must earnestly and promptly seek an alternative economic strategy from the one we have been following in |recent decades: one which will enable us to confront or evade both horns of the dilemma; which will halt the growth of our overseas indebtedness and commitments, private as well as public: which will enable us to begin to stop selling off the farm; to maintain, indeed increase, Australian ownership of the productive enterprises upon which our international and domestic income depends; which will progressively enable us to rely more adequately on our own savings, our own science and technology, our own skills, initiative and enterprise, and in due course to buy back some of those assets which have been passing into foreign hands.

But also, in the immediate future, we must find ways to restore domestic expenditure to levels which will revive employment opportunities and provide access to essential living standards for the Australian people.

These immediate objectives are vital and urgent, and their achievement requires that governments increase some levels of expenditure and accept an increase in their indebtedness, at least for the present. If this is not to call into question the practicability of these policies it is important that:

¥ The new expenditure should create jobs and productive opportunities in sustainable enterprises in a more independent Australian economy; and

¥ The new indebtedness should be internal, owed to Australian citizens and balanced by increased savings (including debt reduction) from personal and corporate incomes. The critical, and most difficult component of this recipe, is to achieve the higher level of savings.

I suggest, therefore, that Mr Keating's Economic Statement should announce a 10-year program to restore Australia's economic independence; to work towards more debt-free governments, households and enterprises, public and private; and to stimulate sustainable use of Australian labour, natural resources and human creativity.

Such a program should include plans to increase personal and corporate savings; to limit the depletion of exhaustible resources; to redirect development policy to give greater emphasis to regional and national self-sufficiency in meeting basic needs; to make better use of the natural resources of the continent; and to raise the level and use of Australian science-based technology. To these ends it is essential that the government and community has regular and significant access to information by which to assess the performance of corporations engaged in industry and commerce in Australia.

The adoption of such a program, with its emphasis on debt reduction, increased saving and Australian ownership, would minimise the risks of the economy being driven onto the second horn of the dilemma by a blow-out in our balance of payments. It would also help to reduce the threat of the third horn - a descent into the status of a "banana republic" - by promoting a significantly more independent economy, more regionalfy based both in its use of domestic resources and in its relationships with the rest of the world.

{end}

(7) Trial Balance: Coombs on Central Banking and the BIS

Here, Dr Coombs writes that, during World War II, "The government's military expenditure was financed from the proceeds of taxes and public loans but also by borrowing from the Central Bank".

In other words, Australia's war effort was partly funded by Monetary Financing.

H. C. Coombs, Trial Balance: Issues of My Working Life (Sun Papermac, South Melbourne, 1983; first published in 1981 by Sun Books)

{p. 141} Central banking is a strange institution little understood by members of the public whose interests it exists to protect, by gopvernments with whom it shares responsibilities, or by financial institutions whose activities it to some extent controls. ... This mystery was intensified, perhaps deliberately, by the personality of Montagu Norman, who for twenty-one years was Governor of the Bank of England, in his day the best-known central banker in the world. ...

It was Norman who created the international freemasonry of central bankers. He had been involved with the establishment of the Bank of International Settlements, to which all the major central banks of Europe belonged, which had been set up to ease the transfer problems caused by the payment of reparations imposed by the treaty of Versailles. This bank had its headquarters in Basle in Switzerland and the heads of the constituent central banks met there periodically. It was rumoured that these meetings continued during the Second World War and were used to provide a channel of communication between bankers of Allied and enemy countries. The United States was deeply suspicious of the institution, and exerted strong pressure to have the Bank wound up. However, it managed to survive and to provide a meeting place for central bankers.

But Norman's influence extended beyond Europe. Between

{p. 142} the two world wars there was a rush for nations to establish their own central banks, indeed they became like a national flag, a symbol of sovereignty. Many of these were modelled on the Bank of England and many turned to that bank for guidance and frequently for top executives to establish and administer them in their early years.

It was Norman too who established the tradition that central banks act as agents for one another, without charge and maintain communication by confidential letters and visits. There is a story that not long after the 1917 Bolshevik revolution the new government caused havoc in the London gold market by selling large quantities of gold, causing a dramatic fall in prices. Norman got in touch withg the State Bank of the USSR, drew their attention to the losses they had incurred by their lack of expertise and offered to act for them confidentially and without charge. The offer was accepted and a working relationshipo established which both protected London gold traders and gave the Soviet a significantly better return.

I cannot vouch for the truth of the story, but in my tome the Bank of England was better informed about the Soviet economy than any other official agency of which I was aware.
{end}

(8) Coombs: Other People's Money - Wartime Finance, and Monetary Policy in Australia

The Development of Monetary Policy in Australia

H. C. Coombs

Australian National University Press, Canberra 1971

The English, Scottish and Australian Bank Research Lecture, University of Queensland, 15 September 1954. Reproduced by permission of the University of Queensland Press.

{p. 9} The Development of Monetary Policy in Australia

THERE has been in recent years a change in the attitude towards monetary policy. Most of us can remember when anything which had anything to do with money was both in the mediaeval and modem sense of the term something of a mystery; an activity carried on by an exclusive group behind closed doors.

In these times almost anybody is prepared to express views on monetary and banking policy - some of them less well-informed than they might be. Although those responsible for monetary policy act in the light of the fullest knowledge available, and I believe with a high sense of responsibility, it is important that monetary as well as other economic problems should be the subject of analysis and discussion.

The mystery element in monetary policy was sharply reduced with the emergence of what has been described as the 'Keynesian Revolution' in economics. The Keynesian analysis of the economic system provided the means by which the effects of monetary policy could be assessed. The essence of the Keynesian analysis was that in a market economy the level of production and employment is determined by the level of spending; spending by households, by firms and businesses, and by public authorities and government. And consequently it followed that there is a level of spending which is sufficient to employ the whole of the labour and available resources of the economy. If spending falls short of that level the economy will experience unemployment and resources will be idle. On the other hand, if spending exceeds that level, since output and employment can be increased no further, the increased spending will show itself in rising prices and shortages of goods, labour, and materials.

This over-simplified version of the Keynesian analysis brings out the significance of spending on employment and production and thereby provides us with a criterion by which monetary policy can be tested. What will be the effect of a given policy on spending? Would such an

{p. 10} effect be appropriate in the current condition of employment and production?

Any given piece of expenditure can be financed from one of four sources (or a combination of these sources):

(1) new savings;

(2) accumulated reserves;

(3) money borrowed, other than from a bank;

(4) money borrowed from a bank.

The last source differs from the first three because when money is lent by a bank it passes into the hands of the person who borrows it without anybody having less. Whenever a bank lends money there is, therefore, an increase in the total amount of money available.

Spending can be influenced by the amount of money which is available in a community and also by the freedom with which people will draw upon their stocks of money to spend or lend. It can be influenced also by the willingness of banks to lend. Since monetary policy can influence both the supply of money and the willingness of banks to lend, and consequently the total volume of spending, there is a close connection between the monetary policy and levels of employment and production. Monetary policy can be examined, either in prospect or retrospect, by tracing its effects on spending, production, and employment and judging whether these effects are appropriate to current circumstances.

Monetary policy is not good or bad in itself. Almost any form of monetary action can be justified in some circumstances and can be utterly wrong in others. For instance, I can remember when people used to get very agitated about a central bank lending to its government. Such loans, like any other form of monetary action, are good or bad according to the circumstances in which they are made. We must beware of an approach to monetary policy in terms of rigid rules. The test of monetary policy is in its effects.

With these things in mind we can turn to the development of monetary policy in Australia over the last few decades. It is an interesting thing that the first result of the emergence of the Keynesian analysis was rather to push monetary policy as such into the background. For a while it came to be regarded as purely incidental to public expenditure policy and consequently as having little initiative of itself. This tendency arose largely from the conviction that grew out of the depression of the 1930s, that there was an inherent tendency in a market economy for expenditure to be insufficient to sustain employment and production. If this conviction were true, monetary policy became simply the means to increase expenditure - a task in which the initiative needed should properly be with governments, businesses, and individuals; the banking system acting as the responsive servant of governments and

{p. 11} of industry to provide finance as called upon. In a period of substantial under-employment of resources is was perhaps not an unreasonable over-simplification. It was clear that almost anything which increased the level of expenditure would overall have desirable effects. In such a situation monetary policy inevitably came to be looked on as a secondary and rather passive instrument of economic policy.

The war pushed monetary policy even further into the background. The economic problem of the war was to divert the physical and human resources of the economy to the greatest possible extent to activities associated with the war. Such a diversion, once resources were fully employed, required the withdrawal of resources away from other activities. In financial sense these two aspects of wartime policy were reflected tremendous expenditure by government, and by measures to restrict expenditure by all other persons, firms and authorities which might require the production of goods not strictly necessary for war purposes. The government's military expenditure was financed from the proceeds of taxes and public loans but also by borrowing from the Central Bank. Measures to restrict other expenditure included taxation and loan raising but also a variety of more direct limitations. By rationing and by various forms of control people were prevented from spending. Furthermore, price control was imposed on the whole range of goods available so that the amount of money which could be spent on civil goods was limited. As a result people and businesses found they earned far more money than they could spend even after taxes, and there was steadily built up a large accumulation of deposits in the banks and of notes in the hands of the public. By the end of the war, the volume of money was 120 per cent higher than it had been at the outbreak of the war. Thus throughout the war the role of the monetary authority was the largely passive one of providing the financial needs of government to the extent that these could not be met from taxes and public loans, and the task of limiting other forms of expenditure and restraining the inflationary tendencies inherent in this form of finance was undertaken primarily by the government through direct controls.

Thus we entered the post-war period with a very restricted conception of the role of monetary policy and relying heavily on the direct controls characteristic of the war economy.

Progressively, however, the wartime direct controls were abandoned and, of necessity, monetary policy re-emerged as a significant factor in the economy. In the study of this re-emergence I propose to examine the changing forms of monetary action by which levels of expenditure have been influenced. For this purpose we need to consider:

(1) action which affects the volume of money;

{p. 12} (2) action which affects the willingness of banks to lend;

(3) action which directly affects expenditure by governments, businesses or individuals.

The volume of money in Australia fluctuates widely but, in post-war years, was growing rapidly. Factors which affect its volume include:

(1) the balance of international transactions;

(2) government cash deficits or surpluses;

(3) purchases or sales of negotiable assets by the central bank;

(4) changes in bank loans and investments.

In the years immediately following the war, our export receipts were very high and there was a heavy inflow of capital. On the other hand, we were unable to spend freely on imports. Bank deposits of those receiving payments from abroad tended to rise more than the fall of the deposits of those making payments abroad and deposits in the aggregate expanded greatly. This tendency for the balance of international transactions to increase the volume of money was a dominant factor in the background to monetary policy in the post-war years up to 1951/52.

The significance of monetary policy can be assessed only in relation

to the tasks which face it and it is worthwhile, therefore, to summarise the general character of the post-war period from an economic point of view. Three stages are fairly readily discernible:

1945/46 to 1950/51. This was a period of good export proceeds and heavy capital inflow leading to rising international reserves; internally marked by rapidly rising public and private investment expenditure; generally an increasingly inflationary situation with growing shortages, rising costs and prices and, in the final stages, an unwillingness to hold fixed money assets.

1951/52. This was a year in which imports were very high and export proceeds and international reserves fell sharply. Monetary stringency emerged internally and there was a sharp check to public and, to a less extent, private investment. There was some unemployment and a general tone of uncertainty developed.

1952/54. This was a period of steady recovery, followed by a slow but persistent growth in the pressure of demand on labour and materials, although prices have remained relatively steady.

In simplified terms, therefore, the tasks of monetary policy were:

1945/46 to 1950/51. To restrain the growing pressure on resources while providing for a rapidly expanding economy.

1951/52. To allow the natural check to the growing inflation to operate but to prevent it getting out of hand and setting up a cumulative downswing in activity and employment.

1952/54. To encourage the steady recovery and, progressively, to restrain growing inflationary tendencies.

{p. 13} ACTION WHICH AFFECTS THE VOLUME OF MONEY

In Australia, fluctuations in balance of payments are a major cause of change in the volume of money, but these fluctuations are largely beyond the direct control of the monetary authorities. Monetary policy must therefore be based largely on government financial operations and central bank action.

Government finance. If governments spend more than they take from the public in taxation and in loan raisings, there will tend to be a net increase in bank deposits since those receiving money from the government will have their deposits increased by more than the reduction in the deposits of those making payments to the government. In the case of the Commonwealth Government, which is the dominant factor in this respect, the net effect is broadly shown by the change in the volume of Treasury bills outstanding from year to year.

The figures show that, up to 1949/50, the Commonwealth Government was able to reduce each year the volume of Treasury bills on issue to the banking system. This reduction was made primarily from the accumulation of funds in the various social service and other trust funds. It is noticeable, however, that, in the years in which inflationary pressure was reaching dangerous heights, government finances exercised little, if any, restraint on the mounting volume of money. In 1949/50, the reduction was only £15m., and in 1950/51, despite a Commonwealth Government surplus of almost £100m., the deficiency of loan raisings to meet state loan requirements prevented any reduction in the Treasury bill issue.

This inability to reduce Treasury bills at so critical a time was due in part to mounting pressure for tax reductions but, more particularly, to the increasing demands of public investment programs. At that time the level of public and private investment was too high in relation to available resources, and consequently there was a heavy strain on the capital market, already weakened by the general inflation. Through 1949/50 and 1950/51 rapidly rising prices produced a reaction against fixed money claims. Investors became anxious to hedge against further depreciation in the value of money by switching to equities, and subscriptions to public loans fell away despite the continued liquidity of the banking system and the public.

The history of this period emphasises the importance of government finance in economic and monetary policy. It is clear that lack of discipline in public investment planning can undermine the firmest of budgetary policies. On the other hand, if public investment can be maintained at relatively stable levels, the variation from year to year in the cash surplus or deficit of the government can be a major factor influencing the money supply. In an inflationary situation this variation

{p. 14} could easily prove the most effective instrument of restraint.

Since 1951/52, the public investment program has been relatively stable. In that year and in 1952/53, the government cash deficit was substantial - Treasury bills on issue increasing by £45m. and £72m. respectively - adding to the money supply in a period when it had been substantially reduced by the balance of international payments and when it was necessary in the first year to resist a tendency for internal activity and employment to be contracted and in the latter year to stimulate the steady recovery which was taking place. In 1953/54 the Treasury bill issue fell by £35m., exercising some restraining influence as the economy moved towards full employment.

The period since 1951/52 demonstrates the valuable influence budgetary policy can have on the money supply and, therefore, on levels of expenditure once reasonable discipline has been established in the public investment programs. No other element . in monetary policy can exercise so direct an influence or involve amounts so likely to be significant.

Open market operations. In economies with developed and active markets for government securities and for Treasury and other short-term bills, the conduct of open market operations is one of the major instruments by which a central bank influences the money supply. Thus, when a central bank purchases a security on the market, there is likely to be a direct and corresponding increase in the deposits of the public with the commercial banks and in those banks' holdings of cash assets. Correspondingly, when the central bank sells assets in the market, the volume of deposits and banks' cash tends to be reduced. The central bank can, therefore, alter the volume of money and so influence expenditure by the balance between its buying and selling in the market.

In Australia there are limitations on the degree to which these policies can be employed. While the total volume of government securities issued is relatively large, there is not a large market for them in a day-to-day trading sense and large-scale transactions are clearly beyond its normal capacity. Consequently, in order to ensure the marketability of government bonds and so to maintain their attractiveness as a medium for the investment of savings and the funds of financial institutions, the Commonwealth Bank is frequently a ready buyer on the market of small parcels of bonds and frequently facilitates other transactions where large buying or selling orders are involved.

The fact that the Commonwealth Bank, together with the Commonwealth Sinking Fund, constitutes so large a part of the market, gives it special responsibilities and tends to limit the effective use of purchases and sales of government bonds for monetary reasons.

{p. 15} The short-term market, which is so important a factor in the City of London and which is of great value to the Bank of England smoothing out seasonal and temporary fluctuations in the moneysupply, is non-existent here. In Australia Treasury bills are held only by banks and there is little short-term paper of other kinds suitable for central bank operations.

Nevertheless, some use can be made of market operations. The Commonwealth Bank has an arrangement with the trading banks that they will consult it before undertaking large security transactions. Similarly, the Commonwealth Bank can influence the security transactions of the Commonwealth Savings Bank, the Commonwealth Trading Bank and of its own specialised departments. Furthermore, some variation in the pattern of its market sales and purchases is practicable. Unfortunately, market operations by the Commonwealth Bank and Commonwealth Savings Bank were not an effective offsetting influence at the time when inflation was becoming most acute, that is in 1951. The reasons for this ineffectiveness are interesting since they throw light on Australian attitudes towards interest rates which themselves form a significant aspect of monetary policy.

There is in Australia a widespread conviction that interest rates should be low. This view is surprisingly held by many lenders as well as by borrowers. The reasons are understandable and not without validity for our economy. Australians are expansion-minded and look to the rapid development of their country. They realise that expansion will be expedited if enterprise is not burdened with heavy capital charges. The relevance of this judgment is increased because in our major successful industries capital represents a high proportion of total costs.

This general prejudice in favour of low interest rates was intensified by the events of the 1930s. Many were convinced that the high rates of the late 1920s were a factor in precipitating the depression and that the low rates of the later 1930s were a significant element in stimulating recovery. Then followed the war with a widespread conviction that low interest rates were essential to keep down the ultimate burden on public finance of the wartime debts.

Thus, by the end of the war, belief in low interest rates had almost become a dogma. This, together with the knowledge that the many who had for the first time during the war become bond holders would be unlikely to understand the normal market fluctuations in the prices and yields of government securities, made interest rate stability at the low wartime rates an important objective of post-war policy.

In 1950/51, however, the inflation had become acute and mounting price levels had come to be regarded as inevitable. Those holding fixed money assets, including government securities, became conscious

{p. 16} that these assets were declining rapidly in real value even though their money prices were stable. A growing tendency developed to quit fixed money claims in order to acquire properties and equities whose prices might be expected to rise with other values.

Thus the market for government securities came under heavy pressure from sellers and prices tended to fall and yields to rise. The Commonwealth Bank found its purchases rising day by day. For the Central Bank to be a heavy buyer of securities involved adding to the money supply - a procedure clearly inappropriate in an already inflationary situation. The issue had to be faced whether the Commonwealth Bank would continue to push out central bank credit to bolster the government security market and so add to the mounting inflation or whether a new and higher level of interest rates had to be accepted. After a brief period in which the Commonwealth Bank bought millions of pounds worth of government bonds in an attempt to hold the market, the inevitability of the change was accepted and yields were permitted to rise to about 4 per cent by mid-1952, compared with the wartime 3 per cent.

This experience is very significant. There can be no doubt that our capacity to restrain mounting inflation was weakened by the desire to maintain interest rates at the low wartime level. Furthermore, it made clear that there are advantages in some degree of uncertainty about prices and yields on government securities from day to day. The development of a rigid anticipation of unchanging yields is a powerful stimulus to inflation. The development of a stronger internal market for government securities, less directly dependent on Sinking Fund and central bank support, in which normal market variations of yields were accepted as natural, would greatly add to the capacity of the Central Bank to use open market operations in the restraint of inflationary pressure. It is important, however, that such restraint be exercised while the pressure is still manageable. Once confidence in the future value of money is seriously shaken, the swing away from fixed money claims can make government securities unsaleable and face the Central Bank with a dilemma in which it must choose between a serious deterioration in government credit and an intensification of the inflation itself.

ACTION AFFECTING THE CAPACITY AND WILLINGNESS OF BANKS TO LEND

In addition to the effect of the balance of payments, government finance, and of open market operations, the money supply can be influenced by the transactions of the trading banks themselves. Loans to their customers and purchases of securities increase the deposits of the public with the banking system. Bank loans (and investments)

{p. 17} have, therefore, a double monetary effect. Directly, they provide funds to the borrower to enable nim to spend more and, indirectly, they increase the total money supply thus making it easier for other spending projects to be financed. Consequently, the volume of bank lending is a matter of major importance in credit policy.

The 1945 banking legislation clearly recognises the importance of trading bank operations. Those responsible for this legislation recognised that the great increase in bank deposits and in bank cash which resulted from wartime finance had placed the banks in a position where, consistent with the maintenance of traditional standard of liquidity, they could provide for an enormous expansion of bank loans and that this potential, if realised, could be a source of dangerous inflation.

The legislation, therefore, left in the hands of the Central Bank two controls over the lending policies of the trading banks which had originally been established temporily under wartime powers: the Special Account and the qualitative control of advance policy.

Under the provisions relating to Special Account, the Central Bank could call upon the trading banks to deposit with it the whole or any part of the increase in their assets after a date early in the war period. In effect, these provisions gave to the Central Bank the power to impose variable standards of liquidity limited only by the extent to which total assets had increased. They have a good deal in common with the 'variable minimum deposit' powers exercised by central banks in other countries, but the greater flexibility of Special Accounts is a special advantage to a country such as Australia, which is subject to wide fluctuations in its balance of payments and therefore in the levels of bank deposits and liquid assets.

It was clearly hoped that the Special Account provisions would be an effective influence on bank lending policy and the Central Bank used its powers under them extensively. It is of interest, therefore, to trace the history of their use.

During the war itself there was little need for bank advances. A great deal of war production was financed by advance payments from the government and, as the war progressed, banks found their outstanding advances falling. During this period, practically the whole of the increase in bank assets was called to Special Account but over much of the period falling advances tended to be replaced by increased holdings of government securities.

If the expansion in bank deposits and assets had halted with the end of the war, the outcome, as civil production was resumed and arrears of development began to be overtaken, would probably have been:

(1) a growing volume of bank advances financed in the first instance by realisation of government securities but increasingly by releases

{p. 18} from Special Account;

(2) the gradual contraction of the amount in Special Account as it was absorbed into the normal liquid assets of the trading banks.

In fact, however, with the continued rapid increase in our overseas reserves, the deposits and assets of the trading banks continued to rise rapidly - clearly on a scale excessive in relation to the monetary needs of the economy even allowing for the need to restore normal sources of finance for civil production. It was necessary, therefore, for the Central Bank to continue calls to Special Account. During this period, some part of the increased assets of the banks was left in their hands but large amounts were called to Special Account: banks were, therefore, expected to finance their customers' increasing need for advances from the new funds not called to Special Account and the proceeds of sales of government securities.

During this period there was a very considerable growth in bank deposits and in bank advances. Furthermore, the economy began to show marked evidences of inflation. At the same time, pressure on the banks for new and increased advances showed little signs of abating and banks, having used up the greater part of their government securities, found it increasingly difficult to meet the requests of their customers within the limits set by the Central Bank's Special Account policy.

By 1947 a clear conflict of policies had emerged. Some of the banks were unwilling to keep their advances to levels which could be financed by the funds left them by the Central Bank, and the Central Bank, worried by the growing inflationary pressure, was unwilling significantly to relax its Special Account restraint. At the same time, it was reluctant to adopt a policy which would face a trading bank with the necessity of completely withdrawing from new lending - particularly because it was recognised that, in Australia, months elapse before a change in policy towards new lending shows itself in movements of actual debit balances. Some device was necessary which, while giving the trading banks time to bring their lending policies into line, would maintain pressure on them to do so.

The device adopted was that of Central Bank loans. Trading banks were not permitted to draw on their Special Accounts but they were allowed to borrow against them from the Central Bank but at a rate of interest (at first 3 per cent, then 31 per cent) which it was hoped would be sufficiently high to provide an effective incentive to prompt repayment. Whether or not the rate was too low compared with the standard overdraft rate (4- per cent) to provide effective restraint, the fact remains that some banks were prepared to see these Central Bank loans grow to substantial amounts, reaching the peak of £68m. in January 1952, and the growth of bank advances continued unabated

{p. 19} There is no doubt that this was a serious deficiency in the anti-inflationary policy of the time. Even when allowance has been made for the fact that the fundamental sources of inflationary pressure were elsewhere, in the swollen public and private investment programs, in grossly inflated rural prices and incomes and in the heavy speculative inflow of capital, subsequent events suggested that greater financial stringency could have been effective in checking these excesses.

The experience of this period draws attention to two important elements in the Australian financial system. Firstly, the effectivess of any central banking power, however apparently great, depends upon the response which banks, members of the system, make he exercise of the power. In some countries, the nature and extent of this response is predictable because of established conventipns of appropriate relationships between liquid assets and total deposits which are accepted and used as a basis of policy by the member banks themselves. Such conventions have not existed in the past in Australia and, consequently, the Central Bank cannot anticipate, even within wide limits, how trading banks will respond to its actions.

Secondly, the period shows a difficulty, from the Central Bank's point of view, in the banks' control over their lending operations. The banks' direct control over movements in their advances is reduced to the extent that drawings may be made by customers against limits approved in an earlier period. A tightening of a bank's lending policy will, therefore, not be immediately effective. Even the rate of creation of new advance limits cannot always be changed immediately. This makes it difficult for the banks to adjust their advances promptly to the general needs of the economy, and in a period of rising activity can cause bank lending to add to any inflationary tendencies.

In the second period, 1951/52, Special Account policy had to meet an entirely different situation. In that year we faced a sharp drop in export income and a delayed delivery of swollen import orders. As a consequence, we lost, in one year, £400m. odd of the £800m. reserves we had built up in London over a decade. These factors had dramatic internal effects on the position of the banks. The deposits of their customers and their own cash fell sharply and they found themselves facing an acute shortage of cash.

There was a clear danger that this set-back could have deteriorated into a recession. While it was important that the effects of falling London funds should be permitted to halt the gross inflation which had developed, the danger of a cumulative down-turn in activity could not be ignored. In particular, the flood of import deliveries and the sudden check to retail sales had forced unwanted stocks of goods on to importers, wholesalers, and manufacturers. Some expansion of bank advances was necessary if widespread damage was to be avoided.

{p. 20} Consequently, substantial releases from Special Account were made to sustain the cash position of the trading banks and so enable them to meet the needs of their customers. Thus, Special Accounts fell from £578m. in May 1951, to £158m. in December 1952, and trading bank advances increased by £180m. over the financial year. A great part of the Special Account releases reflected action taken to sustain the trading banks' capacity and willingness to lend but a part was due to a change in the principles of Special Account administration of which more will be said later. It can, however, reasonably be claimed that, whatever doubts may have existed about the effectiveness of Special Account policy in the restraint of inflation, it proved an invaluable support and stimulus to the banking system and the economy generally when faced with the need to counter serious deflationary influences originating in the balance of payments.

It was about this time that certain basic changes were made in the principles on which Special Account was administered. By 1951, a stage had been reached where a very large part of each bank's more liquid assets (apart from till money) was held in Special Account. This situation had arisen because some trading banks were unwilling to base their lending policies on their asset structure excluding Special Account and consequently found their other liquid assets steadily depleted.

This situation was an unsound one. Trading banks complained that, with a large part of their liquid assets in Special Account, they were denied the opportunity to increase their earnings and so build up their reserves against their greatly increased liabilities, and also that the normal responsibilities of bankers for the management of their assets to meet variations, seasonal and longer term, in the demands upon them were being taken from them.

Furthermore, the experience of past administration of Special Account policy suggested:

(1) that the Special Account was a useful instrument in off-setting the effects on the banking structure of major factors affecting the volume of deposits and the cash assets of banks, i.e., major changes in the balance of payments and in the sources of governmental finance; (2) that it was less useful in dealing with the more irregular and unevenly distributed factors affecting bank liquidity;

(3) that the effectiveness of Special Account policy, particularly in the restraint of inflationary tendencies, was greatly weakened by the absence of conventional standards in the attitude of Australian banks towards their asset structure;

(4) that trading bank borrowing from the Central Bank for other than short-term or emergency purposes was a serious source of weakness to any credit policy;

{p. 21} (5) that since the effectiveness of any Special Account policy depended upon the response of the trading banks it was important to increase their responsibility and their understanding of the purposes the Central Bank was seeking to achieve.

As a result of these considerations and after consultation with the trading banks substantial releases from Special Account were made to enable trading banks to pay off Central Bank loans and/or to purchase from the Central Bank other assets including Treasury bills and government securities.

This was the first step towards a general change in Special Account administration which had earlier been discussed in principle with the banks and which was subsequently introduced. The banks were informed that, in the future, Special Accounts would be used to offset as far as practicable the effect on the banking system of major cyclical changes arising from the balance of payments and from government finance. This would leave entirely to them the task of providing for seasonal variations in the needs of the customers and, subject to this need, the management of their more liquid assets would be in their own hands. It was emphasised that this system would work only if they accepted responsibility for basing their lending policy on their asset structure excluding Special Accounts and, to this end, they were asked to work towards, and to aim to maintain, a stable conventional ratio of liquid assets plus government securities to deposits of about 25 per cent, subject only to seasonal and other short-term variations.

These new principles are still being tested and it is too early to decide whether they will be successful. They are designed to give greater freedom and greater responsibilities to the management of the trading banks and their success will depend upon the degree to which bank lending policies reflect the acceptance of those responsibilities.

During the period after the difficulties of 1951/52, the banking system has not, up to the end of 1953/54, been subjected to great pressure. During 1952/53, with steady liquidation of excess stocks and with steady recovery in overseas funds and the level of internal activity, bank advances were reduced from a peak of £699m. in July 1952 to £593m. in April 1953. Thereafter, as stocks began to rise again and as the level of full employment was approached, bank advances began once more to rise. During 1953/54, the growth was over £100m. (about 17 per cent) - a rate of expansion which at a time when the economy was pushing against the upper limit of activity short of inflation gave some reason for concern.

Looking back over the history of the use of Special Account a student of credit policy can have little doubt that it is an instrument of great actual and potential value, especially in the Australian scene where more traditional instruments of credit policy are inevitably less

{p. 22} effective than in more developed money markets. However, the success of Special Accounts has been impeded by two characteristics of the Australian banking system:

(1 ) The absence of stable conventional standards generally accepted by banks as to their own asset structure.

(2) The very wide seasonal fluctuations in banking figures arising

from the markedly seasonal character of international payments and the flow of funds into the Treasury. These fluctuations tend to obscure more fundamental influences and therefore to delay the response of banks to changes in their own positions.

QUALITATIVE ADVANCE POLICY

The second power over the lending policy of the banking system entrusted to the Commonwealth Bank by the 1945 legislation was that of giving directions about policy in relation to various classes of loans. This power, like the Special Account, originated with the need to direct resources during the 1939/45 war to purposes essential to the conduct of the war.

A good deal of this discriminatory content - seeking to classify various forms of production as 'essential' or 'non-essential' - continued into the post-war period itself. The attitude is illustrated by the fact that housing and rural production were privileged forms of production throughout the post-war period. Gradually, as the transition to peace became more complete, this normative element in advance policy declined and it became more exclusively designed to restrain the developing inflation and its content was, therefore, more general and less directed at specific forms of production. In its later stages, its emphasis was to concentrate bank lending on the provision of working capital for current production, seeking to force outside the banking system the provision of funds for financing development, i.e. capital expansion.

This policy was designed to restrain the growth of private investment, which was a major factor in building up the boom conditions of these years. It was argued that if capital projects sought credit funds from the market they would absorb some of the pressure being exerted by the swollen money supply and the discipline of having to go to the market would itself exercise a restraint on the more exuberant. Furthermore, it was recognised that if these projects were financed partly or wholly from bank advances, they would add further to the volume of deposits and so add to the inflationary pressure.

The reasoning behind this policy was, I believe, fundamentally sound and something of the kind may well have been inevitable in any period of gross inflation. Nevertheless, our experience of the operation of the policy was not happy. It was a source of irritation between the Central

{p. 23} Bank and the trading banks, between the trading banks and their clients, and between the Central Bank and the public generally. It conflicted with many of the traditional practices of trading banks and involved them in unwelcome security problems. Their clients resented the application of general rules to their own particular cases which they were invariably convinced had 'special' features unknown to the Central Bank, and when the opportunity came in 1951/52 the control was cheerfully abandoned. Although the policy was a necessary part of an adequate anti-inflationary policy in the conditions of the time, our experience with it suggests that so far as possible a central bank should seek only to determine the general setting within which banks can operate leaving judgments of individual cases to them.

ACTION DIRECTLY AFFECTING EXPENDITURE

So far in this review of monetary and credit policy the types of action examined have exercised an indirect effect on expenditure. They have been actions which, by affecting the volume of money and the liquidity and attitudes of the trading banks, could influence the readiness with which potential spenders could obtain funds to finance their expenditure. The Commonwealth Bank can, however, affect certain classes of expenditure more directly.

Firstly, the Commonwealth Bank is the banker to the Commonwealth Government and is one of the sources to which the government looks for information and advice on monetary and financial matters. It can, for instance, exercise some influence on the plans of the Commonwealth Government in relation to plans for public investment and public borrowing. In the first of the periods under review, governments were reluctant to exercise restraint in their public investment plans. The needs were clearly great and in a liquid and security hungry market government loans could be raised without difficulty. This period demonstrates how the normal discipline of having to raise funds to finance development can be undermined by an inflated money supply.

This situation was cut short when, as a result of continued rising prices, there was a swing away from fixed money claims and the public became unwilling to subscribe to government loans. The first task was to bring public investment programs to levels which could reasonably be compassed within the resources made available by normal savings but, once this had been accomplished, it became important to ensure that the funds required to support these programs were available. It is interesting to note that in 1951/52 and 1952/53 the holdings of the banking system of government securities (including Treasury bills) rose by about £120m. and £125m. respectively - in the first year largely

{p. 24} in the Commonwealth Bank but in the latter in the trading banks also. Thus the banking system played an important part in sustaining public investment and the demand for government securities in a period when they might otherwise have been exposed to acute uncertainty.

The Commonwealth Bank is in a position to influence the policies of the Commonwealth Savings Bank and the Commonwealth Trading Bank as well as its own specialised departments. These two banks - the Commonwealth Savings Bank in particular - are major sources of funds for two groups of activities which exercise a significant effect on general levels of activity and employment: semi-government and local government works expenditure and housing. While, over a period of years, the funds available for these purposes are determined by the flow of new deposits and the claims of alternative investments, there is room for modest variation from year to year in the light of the availability of funds elsewhere and the state of activity in the constructional industries. Thus, in 1952/53, the finance for housing from the Commonwealth Savings Bank, with some assistance from the Commonwealth Trading Bank, was the greatest on record. Similarly, in these years maximum support, both directly and by underwriting, was given to semi- and local government loans. In these ways the constructional industries were sustained at a time when other sources of funds had largely dried up and so stability of the economy was promoted.

Since December 1953, as the economy moved again towards full employment and funds became more readily available, it has been possible to reduce the funds allocated to these purposes without any slackening in the total activity in these industries.

It is important to realise that, by the direct influence which the Commonwealth Bank exercises over the family of banks of which it is the head, it is able, within limits imposed by their commercial (and, in the case of the Commonwealth Trading Bank, competitive) character, to influence their policy so that they contribute directly to the achievement of the objectives of central bank policy: the stability of the currency and the maintenance of full employment.

There can be little doubt that this direct link gives to the Commonwealth Bank a source of strength which can be of particular value in times when the economy is threatened with declining activity and employment.

CONSULTATION

Central Bank policy can be most effective when it is understood by and concurred in by the banks directly affected by it. This can be only if there is frequent and sympathetic consultation between the Central Bank and the member banks. Over recent years there has been a steady devel-

{p. 25} opment of consultation both at the level of general managers and at the technical levels.

In this consultation the basis of Central Bank policy is placed fully before the trading banks and every opportunity given for the expression and examination of conflicting or critical opinion. Finally, of course, responsibility must be taken by the Central Bank, which is responsible to parliament and the government.

The task of handling the economic set-back of 1951/52 was made much easier by the consultation and by the substantial unity of outlook in relation to the problems facing the banking system.

CONCLUSION

The record of monetary policy during the post-war period is a mixed one.

The task of bringing under control the post-war inflation may well have proved beyond the wisest of monetary policies - yet there can be no doubt that Australian experience showed up weaknesses both in our understanding and in our techniques. Certain clear conclusions can be drawn:

(1) No monetary policy can be effective unless there is reasonable discipline in public investment programs.

(2) Such discipline is practically impossible to achieve in conditions of grossly excessive money supply.

(3) In the restraint of a growing money supply, budget policy and more effective open market policy by the Central Bank can be of great value.

(4) If it is necessary to counter a growing money supply, open market sales must not be subordinated to low interest rates however desirable these may be.

(5) Both Central Bank and trading bank policy would be given a surer foundation if there could be established a firm convention among banks as to an appropriate relationship between their liquid assets (other than Special Accounts) and total deposits.

On the other hand, we can be modestly encouraged by our experience in 1952/53 which showed that monetary policy can contribute to the maintenance of internal stability in the face of external shocks. I say modestly because, while the achievement of the period was real, we were greatly aided by factors in the situation (e.g. fundamentally good prices for exports, good seasons, and a strong undercurrent of internal development) which we cannot necessarily count on for the future.

Finally, we can say that monetary policy re-emerging as a significant force to grapple with these problems has proved itself useful. We have

{p. 26} much to learn and many improvements in technique to develop. In these tasks we can be greatly aided by frank discussion and the widest possible understanding. It may well be that we will never wholly solve the problem of combining economic stability with full employment and development but it is a task worthy of our best intelligence and our utmost devotion. Those of us who are concerned with developing and giving effect to monetary policy, while realising that our efforts can contribute only a part to the total solution, can be assured that we have a significant contribution to make.

{p. 27} Conditions of Monetary Policy in Australia

SOME years ago I reviewed the development of monetary policy in Australia during the period from 1945 to 1953. It would, I believe, be useful to continue this review to cover the subsequent years up to 1957. This was a period of some economic unity and focuses attention on problems characteristic of the Australian economy. It was a period in which a short but sharp recession gave way quickly to economic recovery, a recovery marked by rising levels of activity until boom conditions had developed. During this period the task facing monetary policy was to determine at what point the rising levels of activity were becoming inflationary and to prevent inflationary conditions emerging or to bring them under control to the extent that they had in fact emerged.

The period is, I believe, particularly instructive to students of monetary policy because:

(1) the factors producing the recovery and the subsequent development of inflationary conditions were essentially internal in character (This was a 'home-made' boom rather than an imported one.);

(2) the danger of inflationary conditions developing was recognised reasonably early;

(3) while the inflation was reflected in the balance of payments by the steady attrition of our international reserves in 1954/55 and 1955/56, these changes in the balance of payments did not of themselves set up effective restraints on our internal economy. (Unlike that of 1951, which was halted by external factors, this inflation had to be halted by the effects of internal policy measures deliberately and consciously applied.)

THE RECESSION OF 1951/52

It is necessary at the outset to recall certain features of the recession of 1951/52 and the measures that were taken to counter it. The collapse of the Korean boom in this year, with the drastic fall in export

R. C. Mills Memorial Lecture, University of Sydney, 29 April 19S8. Reproduced by permission of Sydney University Press.

{p. 28} prices and the sudden rush of imports into Australia, brought to an end the post-war inflation. The end of the inflation was precipitated by events which had their origin outside Australia but which:

(1) reduced exporters' incomes sharply below the 1950/51 level; (2) reduced the money supply and brought an unprecedented fall in the liquid assets of the banking system;

(3) flooded the consumers' markets with goods on a scale which produced the first post-war buyers' market and faced Australian manufacturers with a sharper taste of effective competition than they had experienced since 1939.

In the circumstances, these external influences could be relied upon to deflate the economy, which had been grossly expanded by the Korean boom, to bring some discipline into its developmental plans, and some competitiveness into producers' attitudes towards costs. The task of the monetary authorities was, therefore, to guard against this healthy adjustment growing cumulatively into a general recession of the traditional pre-war kind.

In this latter task the authorities were greatly helped by the inherent strength of the internal situation. Seasons continued to be good and export prices recovered to levels both profitable to producers and providing reasonable strength to international receipts. Furthermore, the strong undercurrent of internal private development persisted.

It is, therefore, not surprising that the action taken by the monetary authorities quickly ended the threat of depression and stimulated expenditure adequate to sustain full employment:

(1) The public investment program was stabilised at a reasonably high level and finance was ensured for it.

(2) Very substantial releases were made from Special Account, providing banks with the liquid funds to support a considerable increase in advances.

(3) Banks were freed from all advance policy restrictions on the character of bank lending and were encouraged to expand their advances.

(4) Through the various units in the Commonwealth Bank family additional funds were provided to sustain a high level of activity in the home building and general construction industries.

Recovery was rapid, so that probably by about June 1953 the economy was moving close to the full employment level. It is worth keeping in mind the various measures used to stimulate the economy since the effects of some of them persisted long enough to become factors in the subsequent tendency for expenditure to become excessive.

The recovery was first apparent in a rise of £147m. in personal consumption expenditure in 1952/53; expenditure on durable consumer goods financed by hire purchase was important. The effect of this increase in expenditure on production was delayed since supplies were

{p. 29} drawn heavily from the great accumulation of stocks which had been built up in the previous year - the year of flooding imports. And in 1952/53 private investment still lagged, showing a decline of £82m., although it was soon to respond to the effects of increasing consumption expenditure.

Thereafter until 1955/56 there was a rapid growth of almost all classes of expenditure with the exception of public investment expenditure, which remained under reasonable control. Gross domestic expenditure increased by 13 per cent in 1953/54, by 13 per cent in 1954/55 and by 7 per cent in 1955/56; increases which greatly exceeded the increases in the quantity of goods physically available and which reflected also the rising prices which these inflationary conditions produced. In this expenditure the growth was especially evident in durable consumer goods and capital expenditure in industry and commerce.

Internally, the period showed the characteristics of inflation with which we had become familiar in the pre-1951 period. Shortages of labour emerged, leading to competition for labour and to rising wage rates, followed by rising costs, cost of living adjustments, and so on. Inefficiencies emerged again in the construction industries, where costs rose more than proportionately.

The internal effects quickly spilled over into the balance of payments. As expenditure ran beyond the value of effective production, it tended to increase demands for imports and to absorb exportable goods. It quickly became apparent that, despite reasonably satisfactory export prices, we had insufficient margin to provide for overseas expenditure at this rate. After an approximately balanced year in 1953/54 our international reserves began to fall sharply - not because of adverse seasons or low prices abroad but because of excessive internal expenditure. It was not until 1956/57 that restraint in domestic expenditure combined with a very favourable wool year to reverse this trend in our international reserves.

THE PROBLEM FACING MONETARY POLICY

It is reasonable to ask, 'Was it not possible for monetary policy to restrain the growth of expenditure when it tended to go beyond the level of full employment?' The question is particularly apt since as early as November 1953 the Central Bank had reached the conclusion that the economy was passing through the range of full employment into conditions where some restraint was called for. In present Australian conditions the net effect of the government's position is generally indicated by the level of Treasury bills outstanding, although in some years changes in government balances and investments can be significant.

{p. 30} In 1951/52 and 1952/53 the Treasury bills on issue had increased by £43m. and £72m. respectively, supporting expenditure directly and providing a significant addition to the money supply at a time when it was substantially reduced by the balance of international payments. With the change in the direction of the economic trend, it was appropriate for the net cash effect of government transactions to reduce the money supply in the three subsequent years. In fact, the Treasury bill issue fell by £35m. in 1953/54 and by £30m. in 1954/55 and rose by £5m. in 1955/56.

The government's budgetary policy, therefore, made a useful contribution to reducing the money supply and so countering the upward trend in expenditure except in 1955/56, when the net monetary effect of its policies was neutral. This may be a surprising conclusion when it is recalled that 1955/56 was the year of the 'little budget' when sharply increased taxes were introduced. It is clear that in the absence of these tax increases the government would not merely not have helped reduce the money supply but it would have sharply increased it, adding to the growing inflationary trends.

Of course, budget measures are wider in their implications than their mere effect on the money supply and the impact of these tax increases on imports and the rising levels of business investment were of considerable economic importance.

Some light is thrown on the problems facing monetary authorities when these conclusions are considered in the light of the bitter criticism to which these budgetary measures were subjected. It is a sad commentary on the level of political and economic understanding that action which was no more than adequate to maintain the integrity of public finance and to avoid intensifying an already vigorous inflationary trend required political courage of such a high order.

The apparently acute difficulty of taking specific budgetary action to restrain inflationary trends at the time action is called for does, I think, suggest that we should reconsider the rejection of some of the so-called 'built-in' stabilisers which were embodied in the immediate post-war financial structure. In the National Welfare Fund and in Export Stabilization Funds there were provisions which tended automatically to build up Trust Fund reserves in times of high incomes and employment and to run them down in times of falling incomes. With the long post-war boom it looked as if these funds would continue to accumulate indefinitely - but that fear is unlikely to be seriously held today.

OPEN MARKET OPERATIONS

When the Central Bank buys a government security from the public, the money supply and the liquidity of the banks are increased. On the other

{p. 31} hand, a sale by the Central Bank reduces the money supply and bank liquidity. Accordingly, it is part of central banking technique to influence the volume of money and so affect the level of expenditure by its purchases or sales of securities. These are legitimate activities for the Central Bank and they help maintain the attractiveness of government bonds as a medium for the investment of funds of institutions and investors generally.

However, from time to time they involve the Central Bank in unpleasant dilemmas and can inhibit the prompt performance of its primary functions. While the Central Bank is so dominant a factor in the day-to-day conduct of the government security market, it acquires undue responsibility for movements of yields on these securities. Although it is helpful for the Central Bank to vary its transactions to smooth out random fluctuations in market yields, it is undesirable that its transactions should be determined solely or mainly by interest rate considerations.

In 1950/51 and again in 1951/52 the Central Bank found itself involved in market purchases on a considerable scale to prevent a decline in the price of government securities, and, as a result, pushed into the economy considerable amounts of Central Bank credit, which added to the inflationary pressure of an already swollen money supply. It would be pleasant to be able to record that when the problem recurred in 1954/55 the Bank was able promptly to resolve the issues and to avoid adding to the money supply - limiting its purchases on the market and accepting the higher level of yields which this implied.

In fact, however, while the character of the dilemma was recognised from an early stage, the claims of low interest rates and stability of prices of government securities were difficult to resist. The process of resolving the dilemma was slow - indeed resembling what in another context has been called 'an agonizing re-appraisal', and it was not until early in 1956 that Central Bank support for the market was reduced to normal amounts.

The net results of the Central Bank's security transactions were a fall of about £30m. in 1953/54 and increases of about the same size in each of the two following years. After the break in interest rates in March 1956, Central Bank holdings began to fall. Over the period this was a disappointing performance and indicated an inconsistency between the general policy being followed by the Central Bank and the effects of its activities in the market.

Delay in changing the direction of Central Bank market policy whenever such a change would involve the acceptance of lower prices for government securities is inevitable so long as the Central Bank continues to be so large a factor in the market as it is at present. In more developed economies, e.g. in the United Kingdom, the United

{p. 32} States of America, and Canada, there are markets which provide channels for large transactions, in which prices and yields are determined essentially by market considerations. Recently there has been a tendency, encouraged by the Central Bank, for such a market to develop here. The Australian economy has reached a stage where this can go further. It is desirable that there should be a number of firms participating in the market as dealers - themselves holders of government securities and financially strong enough to quote prices for a range of government securities. In such a market the Central Bank could operate in a way which ensured that its participation was marginal only and which would avoid it necessarily becoming involved for purposes conflicting with its basic policies. The adequate development of such a market may require the participation of more firms and probably a wider range of securities - particularly at the very short end of the maturity spectrum.

Effective open market operations by the Central Bank in the restraint of inflation are also unlikely unless we adopt more flexible attitudes towards interest rates. For my part, I accept what I understand to be the prevailing 'political' attitude of Australians of all parties towards interest rates - that is that they should be low. I qualify my reference to Australian attitudes by the adjective 'political' because in their private and business capacities Australians seem content, indeed anxious, to pay or receive interest at rates which to bankers appear abnormally high. Experience since the war suggests that in our pursuit of persistently high levels of employment and business activity we are likely from time to time to be faced with active or potential inflation which can be checked or controlled only by measures which involve the acceptance of a rise in interest rates - particularly on government bonds. Unwillingness to face this action would make periodical bursts of inflation almost inevitable and would increase the need to resort to more brutal methods of correction - such as sharp tax increases and the like.

When an investor buys, say, a ten-year government bond, he has a right to the interest promised, and his money back after ten years, and in the meantime reasonable certainty that he can sell his bond at a market price if he needs to. But it is unreasonable of him to expect also that he will be guaranteed the whole of his money back at any time, while being permitted to keep any premium that the market may offer him. The market now deals in a very wide range of maturities and the answer for those who do not wish to risk capital loss on possible realisation before maturity is to spread their purchases over maturities appropriate to their needs. If investors behaved with reasonable prudence in their purchases they would be less likely to be embarrassed by interest changes, and the government and

{p. 33} Central Bank would not be so hampered in their practices. Thus they would be the better able to protect the long-term value of people's savings in whatever form they are held.

While it is important that the public and political parties should regard interest rate variations as a normal and necessary feature of the market, those responsible for monetary action must guard against interest movements becoming a one-way traffic. In an economy where full employment is successfully maintained by a high rate of capital development there are unlikely to be frequent occasions when market conditions will of themselves produce a major fall in interest rates. Does this mean that we have to contemplate interest rates rising over a long-term trend in a series of steps - with the steps coinciding with measures necessary from time to time to check inflation? A glance at the graph of interest rates since 1945 would provide support for this expectation. We may need to be bolder in seizing opportunities to reduce interest rates if our development is not to be hindered by excessive capital charges.

CONTROL OVER BANK LIQUIDITY

Ever since the war, the Australian banking system as a whole has had a very much greater volume of liquid assets than it needed to support its lending policy - indeed if banks were able and willing to go on lending or investing until a normal pre-war relationship were established between the liquid assets of the banking system and its loans and other investments, there would be an enormous expansion in bank loans and in the total money supply, which would be grossly inflationary. Consequently, since 1940, the liquid assets of the banking system have been divided into two parts - the so-called Special Account, which is held with the Central Bank and is not available to the banks and therefore must be excluded from their available liquid assets; and those assets, usually referred to as their L.G.S. assets (i.e. Iiquid assets and government securities), which are in fact available and genuinely liquid. It is on these, their L.G.S. assets, that banks' lending policy should be based. Since the total liquid assets of the system are subject to violent fluctuations, reflecting primarily changes in the balance of international payments, it has become the practice to allow such fluctuations to have their impact largely on that part of the liquid assets held in Special Account, leaving it to the individual banks to meet normal seasonal fluctuations in their control of their L.G.S. assets. Banks, therefore, watch the movement of their L.G.S. assets in deciding whether they can afford to lend more freely. In making this judgment they must allow for the seasonal fluctuations. Banks tend to have very high liquidity in the period December-March when export income flows in strongly,

{p. 34} when the Central Bank is financing advance payments to wheatgrowers and when the government is a net spender. On the other hand, they tend to lose much of this liquidity in the April-June period, when tax money flows strongly to the government and export proceeds weaken. The task of the banks in interpreting their liquid position is made more complex by the magnitude and uncertainty of this seasonal movement. A more even flow in the receipts of government revenue and a greater participation of the public in the provision of the seasonal finance at present provided by the Central Bank would be of great value in evening out this movement.

It will be seen that the Central Bank can, by altering the distribution of the banking system's liquid assets between the Special Account and the banks' L.G.S. assets, affect the banks' capacity and willingness to lend. Generally, it is the object of the Central Bank's Special Account policy to ensure that the banks have sufficient L.G.S. assets to support an adequate but not excessive lending policy.

It will be recalled that in 1952 there had been very substantial releases from Special Account. In part these were due to the Central Bank's desire to support the banks in lending more freely to help counter declining expenditure. However, in part also they were due to a deliberate change in the policy governing the division between the two parts of the total liquid assets of the banking system - a shift from Central Bank-controlled Special Account to trading bank-controlled L.G.S. Since this change had profound effects later, it is important that the circumstances in which it was made should be understood.

By 1951 the position had been reached when a very large proportion of the liquid assets of the system (apart from till money) was held in Special Account. This position had been reached because some banks had been unwilling to base their lending policies on the L.G.S. assets alone and had continued to lend even when these were low and had to be sustained by borrowing from the Central Bank. The position was clearly unsatisfactory. Trading banks complained that, with a large part of their assets in Special Account, they were denied the opportunity to increase their earnings and strengthen their reserves and that they were being deprived of the normal responsibilities of bankers in the management of their assets. The Central Bank, on the other hand, felt that the value of the Special Account system was reduced by the absence of any clear basis for the relationship between bank loans and their L.G.S. assets, that it was desirable to confine Central Bank loans to short-term or emergency purposes and that it was important that trading banks should be permitted and expected to exercise greater responsibilities.

Following consultations with the trading banks during 1952, and on the understanding that, if a greater proportion of the liquid assets

{p. 35} of the system were placed under their control, banks would ensure that they remained part of their L.G.S. assets and would not merely become a basis for expanded lending, Special Account action was planned so that the banks, after paying off Central Bank loans, could build their L.G.S. ratios to about 25 per cent by June 1953. It was emphasised that this new division of responsibility would be ineffective unless the banks based their lending policies on their L.G.S. assets only and they were asked by the Central Bank to work towards and seek to maintain a ratio of L.G.S. to deposits of 25 per cent, subject only to seasonal and other short-term variations. It was hoped thus to establish a convention of behaviour, similar to those operating in other countries, which would be a guide to both Central Bank and trading banks in their relationships.

Let us look now at the role played by bank advances over the period under review. It will be recalled that in 1951/52 there was an increase in bank advances of £185m. - a large part of which was associated with the financing of increased stocks of goods imported, although some part reflected the easier lending policies which the Central Bank had encouraged the trading banks to undertake. In 1952/53 there was, despite the easier policy, a fall in bank advances of £97m. The running down of the heavy stocks of imported goods, a somewhat lower level of activity in manufacturing industry, and a general tendency among businesses to tighten up their own internal financial positions were reflected in this decline. During this year the attitude of banks towards new approvals continued to be relatively easy. During 1953/ 54 advances rose further by £113m. The Central Bank had continued to encourage a relatively easy lending policy until about November 1953, by which time it was becoming apparent that the economy had recovered fully from the recession and was advancing rapidly again. At this time the direction of Central Bank policy in relation to bank advances changed to one of restraint. Despite this change in policy the advances of the banks continued to rise - increasing again in 1954/55 by £140m. Not until 1955/56 was any check apparent; in that year advances fell by £24m. and in 1956/57 by £26m.

There can be no doubt that the rise in advances of £250m. in the two years 1953/54 and 1954/55 was excessive and contributed significantly, both directly and through its impact on the general money supply, to the rapid emergence of inflationary conditions. However, the magnitude of this contribution can be and indeed has been exaggerated. The rise in 1953/54 reflected the working out of the easier lending policies of the previous year and showed itself particularly in loans to the rural sector and to housing. It was not the rise in advances themselves in 1953/54 to which criticism could be directed but the continuance of lending policies which ensured a further rise in the

{p. 36} next year. Even in this year, however, some rise was justified. There was a considerable restoration of stocks which had been run down to unduly low levels, and expanding manufacturing activity justified some increased provision of working capital. However, it is clear that perhaps £80m. to £100m. of the increase in advances over these two years was excessive and also that it took place despite strong Central Bank pressure to restrain it.

Special Account action in 1952/53 placed the banks in a position where, if their advances had moved in accordance with policy, they would have been able to bring their L.G.S. ratios on the average to 25 per cent by June 1953. This ratio was substantially achieved. Banks whose ratios were lower than 25 per cent, if they were in fact observing the convention, should have pursued a more restrictive policy. Some of the less liquid banks, however, continued to expand advances and to dispose of government securities and Treasury bills. For some time the Central Bank was unwilling to discard its reliance on the convention. Its first response was to squeeze the trading banks' L.G.S. ratios further below 25 per cent, in the hope that the banks would respond. Its hesitation was understandable. Movements of liquidity are frequently obscured by temporary factors. Some banks were unaccustomed to basing their lending on their L.G.S. ratios. Some had expressed the view that 25 per cent was too high a ratio to be uniformly applied but nothing had been said to justify the Central Bank in concluding that the banks were not actively trying to adapt themselves to the convention, and it was desirable that they should be given time to adjust themselves to new responsibilities and to learn the techniques of management required of them. However, by June 1954, it was apparent that more forceful action could no longer be delayed if the rise in advances was to be halted. Consequently, the Central Bank was obliged to conclude that the urgency of the current problems did not permit it to delay forceful action until the problems of establishing a uniform liquidity convention were resolved. Accordingly, it proceeded to administer Special Account so as to withdraw from the banks some part of the assets previously released to them. Even so, it was much less drastic than it might have been; 1954/55 was a year in which there was a substantial loss of international reserves, amounting to £142m. If the whole of this loss had been allowed to fall directly on the L.G.S. assets of the banks, their liquidity and their capacity to lend would have been abruptly curtailed. The Central Bank, however, felt this would be unjust to those banks who were effectively co-perating and was anxious to resolve this issue amicably. Accordingly, releases were made from Special Account totalling £71m., about half the liquidity lost through the fall in international reserves. This, however, was sufficient to bring the liquidity of the least liquid banks to very low levels. This action

{p. 37} proved effective and it soon became apparent that banks had at last brought their lending under effective control.

The time was opportune, therefore, for a fresh approach to the question of a firm liquidity arrangement with the trading banks. The Central Bank could not administer Special Account on the basis of a convention until there was firm evidence of the banks' willingness and capacity to observe it. In the absence of a convention, it could only revert to the practice of keeping the least liquid banks with little more than till money and thus continuously dependent on the Central Bank for loans. This was an arrangement which banks could scarcely find palatable.

Further discussion with the trading banks followed and a clear understanding was reached:

(1) Each bank undertook to direct its policy to ensuring that its L.G.S. ratio would not fall below an agreed uniform minimum.

(2) Each bank undertook that, if for any reason its L.G.S. ratio fell below the agreed minimum, it would borrow from the Central Bank on terms which would be fixed by the Central Bank in the light of current policy and its assessment of the policy of the bank concerned, i.e. on terms which could be penal if the Central Bank thought this justified.

(3) The Central Bank informed the banks that it proposed to administer Special Account so that, if bank lending was in accord with Central Bank credit policy, banks generally would be able to maintain the L.G.S. ratios above the agreed minimum.

The working of the convention can be illustrated by the following example. If, following a period of relatively easy credit conditions, a more restrictive policy was called for, the Central Bank would, in addition to advising the trading banks of the need for a more restrained policy, administer Special Account so as to bring the L.G.S. ratios of the banks closer to the minimum. If the response of the banks was inadequate, more funds would be called to Special Account, forcing the L.G.S. ratio to lower levels - perhaps making it necessary for some banks to go into debt to the Central Bank.

On the other hand, if a more expansive credit policy was called for, the Central Bank would administer Special Account so as to increase the banks' L.G.S. ratio above the minimum and so provide them with the means and a stimulus to expansion. Movements in the L.G.S. ratio would thus serve both as an indicator of, and a support for, credit policy.

This new arrangement differs from the earlier attempt in two important respects:

(1) This plan is based on a minimum L.G.S. rather than an average. It relates, therefore, to the low point of the seasonal fluctuation in

{p. 38} liquidity and banks need to interpret their position at any other time with due regard for the run down in liquidity which they are likely to experience. It is more precise than the earlier arrangement and appears likely to provide a satisfactory working basis for Central Bank-trading bank relationships.

(2) It leaves in the hands of the banks a generally lower proportion of the total liquid assets of the banking system than did the earlier plan. This does not affect its value as an instrument of credit policy but it leaves the trading banks with an asset structure not wholly satisfactory. If a bank maintains sufficient 'quick' liquid assets - cash, deposits with the Central Bank, and Treasury bills - to provide for fluctuations, it will be weak in its second line of defence - government securities - and it will be sacrificing income. On the other hand, if it keeps up its average holdings of government securities, it will be relying perhaps unduly on the immediate marketability of government securities.

The first attempt to establish a firm liquidity convention was not successful. It would be purposeless to try to allocate responsibility for the failure, but it is worth while to consider what objective factors contributed to it. Looking back on the attempt I feel that the plan lacked precision in the obligations it placed on the trading banks and made insufficiently clear what they could expect from the Central Bank. It assumed that banks could and would be willing readily to adjust their practices to a system which required them to base their lending policy predominantly on their L.G.S. ratios. Furthermore, it underestimated the time lag in policy changes becoming effective and the difficulty of interpreting changes in the L.G.S. ratios because of the magnitude and variability of the seasonal fluctuations to which they are subject.

The new convention has been in operation now for two years and, although this cannot be regarded as an adequate test, experience so far gives modest hope of continued effectiveness. Banks have been faithful in their adherence to it and understanding of its working and the adjustments it calls for in Central Bank and trading bank management is steadily being built up. Its greatest weakness lies in the fact that it necessarily leaves to the individual banks the responsibility for judging the impact of our very variable seasonal movements on their own figures. A more even spread of government tax receipts over the year and a development of the short-term money market, in which the Central Bank could help smooth out major irregularities in the seasonal swings of liquidity, would give it greatly increased strength.

If the convention continues to function adequately, it will, I believe, prove to be one of the major steps in the development of our monetary system. It is gratifying that it has been established, after one false start, as a result of co-operation between the trading banks and the Central Bank.

{p. 39} QUALITATIVE ADVANCE POLICY

Experience of qualitative advance policy in the post-war inflationary period had not been the happiest. Those responsible for its administration were, therefore, glad when it could be allowed to pass into disuse.

This did not mean that banks were left without any knowledge of Central Bank views on the credit needs of different sectors of the economy. In the regular consultations between the trading banks and the Central Bank, the incidence of current lending was, when necessary, discussed and from time to time suggestions were made for shifts in emphasis.

The upsurge of inflationary pressure in 1955, however, required some return to rather more specific and more public forms of guidance. In July 1955, banks were asked not to grant additional advances for the expansion of hire purchase or instalment selling. In September, banks were asked not to approve new or increased accommodation for capital expenditure or imports and were asked to review large overdraft accounts with the object of achieving reductions in limits and indebtedness - especially where substantial long-term borrowing was involved. These directives were designed to strengthen the banks' efforts to bring their advances under control and to reduce the period of delay in making a change in lending policy effective.

It will be noted that the directives, unlike those earlier current, were in broad terms and left detailed interpretation to the individual banks.

Since May 1957, after inflationary conditions had been brought substantially under control, there have been progressive relaxations of the earlier directives with the exception of the prohibition of additional finance for hire purchase.

CHANGES IN THE USE OF THE MONEY SUPPLY

The prohibition of additional finance for hire purchase and its effects on the hire purchase finance houses draw attention to an interesting feature of the period. The purchase of durable goods - motor cars, refrigerators, radio sets, furniture and so on - financed by hire purchase transactions was an important factor in the growing levels of expenditure in the period under review. This is illustrated by the rate of growth of amounts outstanding under agreements entered into by hire purchase companies:

June 1953 £88.8m. June 1954 £132.3m. June 1955 £182.5m. June 1956 £212.2m.

This growth of credit-financed purchases had a profoundly stimulating effect on the industries concerned and on the economy gener-

{p. 40} ally. Until 1953/54, hire purchase companies had relied heavily on bank overdrafts as a source of finance. Thus in 1953/54 nearly 30 per cent of their funds came from bank overdrafts. Thereafter, as a result of credit policy measures, there was a net decrease in their indebtedness to the banks. But the loss of these funds was more than compensated for by the great increase in funds obtained from sources other than share issues and bank advances. Some of these companies had already been relying significantly on funds raised by deposits, debenture issues, notes, etc. Issue of debentures and notes jumped from £6-5m. in 1953/54 to an average of £18-8m. in the three subsequent years. In other words, hire purchase companies changed the emphasis in their financing from borrowing from the banks to borrowing directly from those who had reserve stocks of money - usually in the form of bank deposits.

In the event, hire purchase companies generally found funds easy to raise and the need to go to the market did not impose any significant restraint on their activities. They were highly profitable enterprises and able to offer attractive rates of interest. They were, however, not alone in the field. Many business enterprises, particularly in the field of commerce, sought additional funds direct from those able to lend or invest. This is illustrated by the following figures for new money raised by listed companies:

Share issues £m. Debentures, notes, deposits £m.

1952/53 26.5 11.9*

1953/54 42.6 28.3*

1954/55 59.7 27.5

1955/56 59.2 50.2

1956/57 43.7 51.6

* Estimated.

This great flow of funds directly from those holding stocks of money was largely financed by a more frequent use of the existing money supply rather than from an increase in the volume of money itself.

As a first approximation, one would think it desirable that the money supply should bear a reasonably constant relationship to the value of total production. However, ever since 1946 there has been a persistent downward trend in the money supply expressed as a percentage of the gross national product and since 1955 this percentage has been appreciably below the pre-war level. Expressed in general terms this has meant that the banking system has been becoming a less significant element in the financing of the economy. This is not necessarily a bad thing - indeed, it is a natural development in a growing economy with its financial institutions evolving and becoming more

{p. 41} diverse and specialised. But it does mean that to the extent that monetary policy relies primarily upon action through the banking system it is operating in a steadily contracting field.

The development is not without wider implications of some difficulty. People are entrusting more of their financial reserves to business firms and proportionately less to banks and savings banks than previously. In this they are encouraged by the greater reward in interest earned and the fact that in recent years they have not experienced any losses. Nevertheless the greater risks of this type of investment need to be recognised. Unlike banks, business firms are not required by law to conduct their business in a way which ensures their continuous ability to meet the withdrawals of those who have entrusted their money to them.

The development is having its effects also on the classes of purpose for which funds are readily available. Money lent direct has tended to flow to the borrowers offering the highest rates. The traditional borrowers - governments, semi-government and local authorities, housing societies, schools, churches, etc., who offer safety but lower returns and who have in the past been financed through the institutional lenders - have fared relatively badly. Already it has become necessary for about half the public investment program to be financed from taxation. Every day doubts are expressed as to the adequacy of the flow of funds for housing, for schools, and so on.

Is it desirable to check this development? Has it run its course? Can anything effective be done? These questions are difficult to answer. The growth of direct investment has been linked with generous rewards but we may well be concerned if socially necessary forms of capital expenditure have to compete with the rates offered by hire purchase companies and other similar borrowers, or if we have to finance them increasingly from taxation.

To some extent the rise in bank interest rates in 1956 and in 1957 was designed to increase the relative attractiveness of bank and savings bank deposits. The changes have had some effect but the basic trend has continued and remains a problem for the future.

GENERAL CONCLUSIONS

If we look back over the experience of these years, I think certain general conclusions about monetary policy emerge:

(1) The effective action taken to counter the set-back of 1951/53 involved expansive policies which took longer than anticipated to exercise their full effect and contributed significantly to the subsequent boom. This suggests, I believe, that we might borrow from the engineers the 'feed-back' principle - so that even while we are still seeking to accelerate the pace of the economy we are gradually

{p. 42} countering the acceleration, even before the optimum rate of activity has been reached.

(2) The task of restraining excess expenditure in the 1953/56 period was intensified by two institutional changes over which traditional forms of monetary action have little influence and which helped make available much of the finance for the growth of expenditure on durable consumer goods and on private, industrial and commercial expansion:

(i) a dramatic growth of hire purchase finance as a major factor in the demand for durable consumer goods;

(ii) the tendency for people generally to invest a greater part of their savings directly rather than to rely on fixed deposits, savings bank deposits, etc., as a repository for their reserves and the increased reliance by business enterprises on deposits, debentures, notes and similar sources of funds.

(3) Despite reasonably early diagnosis of the rising trends of expenditure, the government, the Central Bank and the trading banks delayed effective action to restrain the growth of the money supply and the flow of finance for expenditure fast becoming excessive.

(4) Budgetary policy, with its well-controlled growth of public investment and the prevention of a threatened cash deficit in 1955/56, was reasonably effective but a significant contribution to help counter increases in the money supply due to non-budgetary causes seems unlikely unless more effective 'built-in' stabilisers can be devised.

(5) The Central Bank will continue to be handicapped in its open market policies until institutional developments in the government security market reduce dependence on the Central Bank and until we become educated to accept changes in interest rates more readily.

(6) Effective restraint of bank lending was rendered acutely difficult because of the failure of the first attempt to evolve a liquidity convention; however, subsequent experience of a modified convention gives reason to hope that an effective instrument of credit control appropriate to Australian conditions is being evolved.

(7) The task of the banking system in regulating the flow of credit is made more difficult by the magnitude and uncertainty of the seasonal fluctuations in the liquidity of the Australian economy. Action to achieve a more regular flow of tax funds to the government and greater participation of the public in the provision of seasonal finance would be of great value.

( 8 ) Despite hesitations and delays, the conscious application of policy measures finally restored balance to the economy; the objective must be to take action before cumulative tendencies have been established. It is probably wiser to act even before the evidence is conclusive - accepting the risk that it may quickly become necessary to change the direction of policy. Frequent small adjustments are

{p. 43} almost certainly better than allowing positions to develop in which major action is called for.

The record of monetary policy over these years is a mixed one - if it had been completely successful there would be little to say about it. But in failure, or partial or delayed success, there are lessons to be learned. If these lessons are learned there is, I believe, reason to hope that we can maintain reasonable stability in the activity of the economy in the face of causes of fluctuations essentially internal in origin.

Whether or not we can deal effectively with major fluctuations originating outside Australia and affecting us through our export income, or whether over a long period we can guard against the slow depreciation of the value of the currency which comes from a persistent upward trend in prices, are questions about which our recent experience gives us little help.

I have tried in this review to look honestly and objectively at our experience and to be frank in my discussion of it. I believe that the more widely these issues are discussed and understood, the more likely it is that prompt and effective action will be possible to deal with our problems.

{p. 44} Other People's Money

'NEITHER a borrower nor a lender be', said Polonius to his son when sending him forth to face the temptations of Paris and, no doubt, most of us would nod sagely and approvingly at this pearl of paternal wisdom. Yet in doing so we would be more than usually hypocritical, for it is almost certain that we are, all of us, both. Most of us have made loans to savings banks and to banks, to governments and governmental instrumentalities, to public companies engaged in finance, commerce, or industry. In other words, most people own bank balances and often government and semi-government bonds, and frequently notes, debentures, or shares of companies. Most of us, too, are borrowers - from banks, building societies, or life assurance companies to finance our houses, from hire purchase companies to finance our cars and other durable equipment, from our grocers and other retail stores for the goods we buy on monthly account, and so on. Those who are engaged in business on their own account would find a similar picture of borrowing and lending in relation to their business activities.

Over the centuries, community attitudes towards borrowing and lending have changed greatly. Once one borrowed only to meet misfortune and, in doing so, one became an object of compassion or of censure, according to the charity of mind of the observer, while a lender was widely suspect as an exploiter of human misfortune. However, as people began to borrow from one another to use the proceeds of the loan for their own profit rather than merely to mitigate misfortune, the image of the borrower changed to that of the commercial adventurer - active, creative, and bold - sometimes, it is true, reckless, but certainly no object of pity. Lenders still tend to be regarded with more suspicion - at best, cautious and parsimonious, at worst, grasping and hard-hearted. Since we are most of us both borrowers and lenders, what Jekyll and Hyde creatures we must now be!

As the use of other people's money becomes more respectable and more universal, institutions develop to handle the transfers involved.

Sir John Morris Memorial Lecture, Adult Education Board of Tasmania, 5 April

{p. 45} First, there are banks which offer primarily safe custody for surplus funds, sometimes with a modest rate of interest, but also serve borrowers as a source of borrowable funds. As the purposes and processes involved in these transfers become more complex, more specialised institutions emerge. These are of two kinds: firstly, financial intermediaries more specialised than banks, firms which gather other people's money, establishing their own liability to the people concerned and then lending the funds themselves. Such financial intermediaries include insurance companies, building societies, instalment credit companies, etc. Secondly, there are institutions designed to make it easier and safer for individuals to lend directly to the ultimate borrower or user of the funds - these would include stock and share brokers, the Stock Exchange, issuing and underwriting houses and so on.

This complex of institutions, which can broadly be referred to as the capital market, mobilises other people's money for the benefit of a great variety of users - governments and their agencies, industrial and commercial enterprises, home builders, and of course householders and others who need access to consumer credit. It is difficult to comprehend how important the movement of these funds through the economic system has become and how significant this flow can be in its economic effects. In the Reserve Bank we have conducted a study of this flow of funds in recent years, out of which a number of interesting conclusions emerge.

For persons and unincorporated businesses, savings were lodged 37 per cent in banks, 35 per cent with other financial intermediaries (life assurance and pension funds being particularly important), about 16 per cent in shares, debentures, and other securities issued by non-finance companies, and about 7 per cent in government securities. On the other hand, this group were substantial borrowers both from banks and other financial intermediaries (instalment credit firms, building societies, insurance companies, pastoral finance companies), with other financial intermediaries providing about 40 per cent of the loans, compared with 26 per cent from banks.

Companies not engaged in finance have, despite large savings from their own profits, been substantial net borrowers but have relied less on financial intermediaries than have individuals. Their financial assets

(apart from credit extended in the course of business) have been mainly with banks and their borrowing has been mainly through shares and other capital issues, the major part taken up direct by individuals. They have, too, drawn heavily upon lenders in other countries.

Governments, like companies, have financed much of their capital expenditure from savings (that is, the excess of current receipts over expenditure on non-capital items). It is interesting to note that the Commonwealth Government has been a net lender and governments as a

{p. 46} whole have financed 85 per cent of their capital expenditure from savings. Governments are substantial lenders - the Commonwealth Government to other governments and all governments to individuals, particularly for housing. More generally, the following conclusions emerge:

(1) There has been, since the war, a very great increase in the flow of funds through the capital market.

(2) The greater part of this increase has occurred in the funds which have moved either through non-bank financial intermediaries or direct from lender to borrower through the making of deposits or the purchase of notes, debentures, shares and other securities.

(3) The proportion of these direct borrowings which have taken the form of loans rather than participating share capital has greatly increased.

(4) The flow of investment funds from abroad has become an increasingly important element in financing capital expenditure - particularly that of non-finance companies which obtained almost 20 per cent of total funds used for these purposes from outside Australia in the five years ending June 1958. Approximately two-thirds of this represented profits retained by Australian branches and subsidiaries of overseas enterprises.

(5) The consumers have resorted to borrowing through hire purchase and similar time-payment devices to an extent hitherto unknown. The recorded outstandings of retail hire purchase lending by finance businesses in 1947/48 was little more than £20m.; by 1959/60 this had risen to more than £420m. The annual increase rose from less than £10m. to almost £70m.

(6) While the pattern of post-war experience has been one of a substantially increasing flow of funds for lending through the capital market, there is recorded in 1960/61 quite a dramatic fall in this flow which is apparent particularly in one of the sectors which had previously grown most rapidly - hire purchase. Here for the first time there was an actual fall in the amounts outstanding at the end of the year. In the same year issues of debentures, notes, and deposits fell appreciably, particularly by financial intermediaries.

Although these developments in our money market are in a sense natural in that they follow the broad pattern of similar developments in more mature economies, they have been of such a magnitude and have occurred at such a speed as to represent almost a revolution in our financial structure. Certainly they have created and will continue to create problems for us. It is the purpose of this paper to glance quickly at some of these problems and the ways in which we are trying to deal with them. In particular, I would like to consider the following issues:

{p. 47} (1) What significance has this development of the capital market to the individual in the employment of his surplus funds?

(2) What is the significance of the rapid emergence of financial intermediaries other than banks?

(3) What has been the effect on the economic system of the rapid development of consumer credit - through hire purchase finance companies and the like?

(4) How important economically is the flow of capital from abroad - and what should be our attitude towards it?

(5) What is the reason for the rapid growth of the total funds flowing through the capital market and of the fluctuations in this flow - such as the decline which occurred in 1960/61? Can anything be done to mitigate these fluctuations and their effects?

THE CAPITAL MARKET AND THE INDIVIDUAL

The increase in the flow of funds through the capital market via non-bank financial intermediaries and direct to ultimate users creates problems for lenders.

So long as people were content to entrust their reserve funds substantially to banks they had, in recent years at any rate, little anxiety about the security of these reserves. This is not because banks are inherently safe. Indeed, a bank is in essence a very risky enterprise since it takes money from its depositors in the main with a guarantee to return it on demand, while at the same time using the money so entrusted to it to buy income-earning assets and to make loans. Obviously, if a very large number of a bank's depositors sought to withdraw their money at the same time, it would be impossible for the bank, without assistance, to meet their demands.

The early history of banking is crowded with occasions when doubts as to the management or stability of some bank brought a run of its depositors demanding their money back. Frequently on these occasions the managements, even of banks whose affairs had been prudently managed, found it impossible to realise their assets sufficiently promptly and were forced to suspend payment. However, as a result of these experiences, most civilised countries now have legislation (or conventional arrangements of similar significance) designed to protect depositors and to ensure that banks will always be able to meet their commitments to their depositors. Broadly, this legislation:

(1) requires that banks should hold a substantial proportion of their assets in highly liquid form;

(2) limits the freedom of action of banks in the choice of the assets they can buy or the loans they can make;

(3) establishes, in the form of a central bank, a source of emer-

{p. 48} gency support for banks, that is, a place to which a bank threatened

by a run on its deposits can turn for direct financial help; help which can be provided either by central bank purchasing from the bank concerned assets which it could not sell readily otherwise, or alternatively simply by the central bank making a loan to the bank.

These rather elaborate provisions for the control and the support of banks have developed slowly and somewhat painfully over some 150 years but now, in all reasonably civilised countries at least, deposits with banks can be regarded as almost completely safe.

Other financial intermediaries or business enterprises to which individuals may entrust their funds so as to get a higher return are subjected to much less rigid supervision and receive no comparable assurance of support in an emergency.

This does not, of course, mean that other financial intermediaries are necessarily unsafe; but it does mean that lenders and investors need to be aware of, and capable of assessing, the risks which balance the higher return which borrowers may offer. Unlike banks, other financial intermediaries and non-finance companies do not promise to repay mainly 'on demand' but usually on specific repayment dates. Borrowers accepting such a liability to members of the public can be confident of their capacity to meet it only if they have corresponding assets which will be liquid at that time, that is which can be converted into cash. A borrower who proceeds on the assumption that it will always be possible to repay old loans by borrowing anew is heading for disaster.

And so, if you are thinking of lending either to a financial intermediary other than a bank or to a business enterprise which will use your funds in its business, you would be wise to look at the character of the assets which the intermediary or the enterprise holds. The test is whether its assets are such that, when the maturity date arrives, they will be able to repay, even if a lot of other lenders are seeking repayment at the same time and if it is difficult or impossible to borrow from other people. In other words, i is important that financial intermediaries and business enterprises who borrow should so arrange the timing of the maturity of their assets that they match the maturity of their liabilities.

One of the problems facing investors in Australia is that it is difficult, indeed in many cases impossible, from published balance sheets, prospectuses, or other information available to them, to find out sufficient about the timing of a company's liabilities and assets. It seems to me that accountants, stockbrokers, and, indeed, the authorities of the Stock Exchange itself, should use their influence to persuade or to require companies with substantial maturing liabilities to the public to publish regularly information which discloses the maturities both of

{p. 49} those liabilities and of their relevant assets. It cannot be too strongly insisted that it is not sufficient for a borrower to be conducting a profitable business or to have a net worth substantially in excess of his borrowing liabilities. Unless liabilities and assets are appropriately matched in their timing, these will not guarantee that the borrower will be able to meet his liabilities on the due date.

This need for maintaining a proper balance in the timing of maturing liabilities and assets is not merely in the interest of the investor.

A business enterprise relying largely on borrowing needs to take care not to be misled at times when it is easy to raise money. If it is wise, it will plan its affairs with an eye to periods when people wish to be more, rather than less, liquid. This is especially important for non-bank financial institutions such as hire purchase and other finance houses, building societies, investment banks, discount houses and so on which rely largely on fixed term borrowing of amounts often many times their shareholders' funds. There has been an interesting tendency in the United Kingdom in recent years for such enterprises to form themselves into associations and to establish for their members voluntary standards designed partly to protect themselves against these risks of instability but also as evidence of their responsibility towards the people whose money they are using. These standards are concerned primarily with the maintenance of reasonable proportions of liquid assets and the appropriate timing of liabilities and assets. They also, of course, include standards designed to preclude unsound commercial practices.

There would be great difficulties in any attempt to supervise the activities of commercial borrowers, particularly financial intermediaries, in the same way as those of banks. The business undertaken by these intermediaries is infinitely diverse and the policing of the legislation would be complex and possibly ineffective. Furthermore, there is a good deal to be said for avoiding legislation which could prove unnecessarily restrictive if this can be done without harm to the economy and injustice to the investing public. The price of freedom here as elsewhere may be the voluntary acceptance of responsibility. Our experience during the last year has demonstrated the dangers both to businessses which rely upon other people's money and to the investors themselves when such responsibility is ignored.

NON-BANK FINANCIAL INSTITUTIONS

Why has the post-war period seen such a proliferation of new financial institutions? They are not, of course, all new. Pastoral finance houses, life assurance societies, building societies have long been a feature of the Australian financial scene. But hire purchase finance houses, investment trusts, land trusts, short-term money market dealers, real

{p. 50} estate development firms, merchant and development banks, discount and factoring firms and so on are, if not entirely new, novel in their scale of operation and in the impact which they are having on the economic and financial scene.

It is sometimes argued that the emergence and growth of this multiplicity of financial agencies reflects the rigidity of official banking policy: that the strict limitations on the freedom of bank lending has caused the banks to confine their loans more and more to the narrow provision of working capital on overdraft and to contract out of more adventurous and particularly longer-term classes of business: that limitations on the freedom of banks to pay interest on fixed deposits have left depositors with too limited opportunities to earn a return on surplus funds and have encouraged them to turn elsewhere. Correspondingly, business enterprises faced by unresponsive bankers and concerned at the periodical intensification of restrictive credit policy have sought other channels of access to other people's money they need for their businesses.

There is indeed some truth in this view. Necessary though the periodical restraints on bank activities have been, there is no doubt that they have at least encouraged this tremendous expansion of other financial institutions and that every stage in that expansion limits the area to which official monetary policy directly applies. However, like most simple explanations, this ignores many important factors.

Each of these financial institutions is highly specialised - it undertakes the task of intermediary between the lender and the user of funds in a particular field or fields about which it possesses or aims to build up special knowledge or skill of a kind which a banker with more diverse responsibilities may not be able to match. The opportunity for such institutions emerges as the economy and financial system reach appropriate degrees of maturity. It seems, for instance, that the United States passed through a very similar period of specialisation some forty years earlier than Australia.

These financial institutions undertake also classes of business which banks, because of their special responsibilities to their depositors, would not wish to undertake and become skilled in the assessment of the risks involved. This is one reason why their charges are generally substantially higher than those of banks.

To my mind, therefore, there is a place for such institutions, especially in an expanding economy with a public increasingly able and interested to invest their accumulated savings. I do not, however, think that their presence makes necessary or justifies the complete withdrawal of banks from fields of finance in which these more specialised institutions operate; indeed the contrary. Banks, because of their comprehensiveness, because they get their money relatively cheaply, be

{p. 51} cause they have well-trained staffs possessed of a wide range of lending skills, can compete successfully with these newly-emerged rivals, taking in many cases the cream of the business at more moderate cost. It seems to me desirable that they should aim to do so - both because this will provide an effective check on what sometimes seems to me to be the rapacity of the charges imposed but also because it will help keep a more vigorous competitive quality in our banking system.

For this reason I view with some concern the growing tendency for banks to participate as major shareholders in fringe banking institutions. Such participation may blunt the edge of their competitiveness and expose the public to exploitation.

CONSUMER CREDIT AND ECONOMIC FLUCTUATIONS

While I see a value in the activities of these specialised financial institutions, they can at times of rapid growth create acute problems for the economy as a whole. This is well illustrated by reference to our experience in the hire purchase field during the last decade.

It is well known that at some times people are much more willing to incur hire purchase commitments than they are at others. This wilingness varies, partly with the prevailing sense of optimism or pessimism in the community but more specifically in Australia with the employment situation. When labour is scarce and opportunities exist for supplementing normal earnings, either by overtime or by part-time work, people enter into hire purchase commitments with great alacrity. If at such times the capital market provides increasing funds for the financing of hire purchase transactions, very remarkable increases in expenditure on durable consumer goods can take place. For instance, during the years 1953/54 and 1954/55 the amount of hire purchase outstandings increased by approximately 50 per cent and 40 per cent respectively and, although the percentage rate of increase fell away sharply in 1955/56 and 1956/57, it remained at a high level right through until the end of 1960.

During years of rapidly expanding hire purchase commitments, industries producing durable consumer goods enjoy unusually high levels of demand. If such periods are prolonged for a number of years, as they were in the last decade, the firms engaged in the industry expand to levels only justified by abnormally high levels of demand.

The problems of over-expansion are intensified because of another feature of instalment buying. Just as people incur heavy instalment commitments when supplementary employment is readily available, they reverse their attitudes if these opportunities are suddenly and unexpectedly reduced and there is uncertainty as to continuing employment. The effect of this can be severe. Not merely are people no

{p. 52} longer willing to enter into new commitments but they must continue to meet instalments from reduced family income. Retail sales will therefore be affected, not merely by falling demand originating from new commitments but also because part of the basic family income goes to meeting instalments and must be diverted from more normal expenditures.

There is no doubt that the sharp decline in the demand for durable consumer goods in the recent recession and the present slowness with which retail trade is responding to measures designed to stimulate employment and expenditure reflect the continuing effect of instalment commitments previously entered into.

FLOW OF OVERSEAS CAPITAL

I mentioned earlier that Australian non-finance enterprises had been, during the last decade, substantial users of funds from outside Australia. This flow of capital from non-Australian sources (partly, it is true, from the retention in Australia of profits earned by Australian subsidiaries of overseas enterprises) has become an important factor in our development - so important, indeed, that from time to time doubts are expressed at the wisdom of our growing dependence on it.

Over the last few years the inflow of capital has averaged more than £200m. a year and last year reached the record figure of about £325m. The importance of these totals becomes clear when it is remembered that over the same period our total income from exports has been of the order of £875m. a year.

There are no doubts that considerable benefits accrue to Australia with this inflow. With it comes often the benefit of overseas knowledge, managerial capacity, research, and marketing experience. Certainly manufacturing industries would have developed much more slowly had we not had access to these associate benefits. Above all, the inflow of £200m. of capital from abroad enables us to purchase £200m. worth of additional imports and so to divert our own resources to the production of other goods both for capital development and consumption. A study of the difficult progress of less-developed countries such as those of South-east Asia shows how shortage of foreign exchange for the purchase of imports is a restrictive bottleneck in the achievement of their developmental plans.

As against this, there are those who argue:

(1) we are building up foreign claims on our future income from exports which will become excessive and so embarrassing;

(2) we pay an excessively high price in dividends and interest for the benefits in know-how, and so on, which we obtain;

(3) we are selling control of our national resources to foreigners and so endangering our independence and security.

{p. 53} Weight is usually attached to these arguments according to prejudice rather than reason but It is, 1 think, reasonable to say that:

(1) the burden of servicing our foreign obligations is small relative to our international income;

(2) there are some instances where the dividends remitted are inordinately high - particularly in relation to the foreign capital actually put at risk here in the first case - but it is unfair to judge this question by individual cases; (When we consider the indirect benefits to Australian industry deriving from the more rapid establishment of an industrial environment, of a supply of skilled and experienced managerial and technical personnel, as well as access to results of research and development we could ill afford to undertake, the price overall is probably not excessive.);

(3) foreign ownership, despite uncomfortable concentration in some sections of industry, does not seriously impair our sense of national independence - even less, for example, than it does in Canada. (Yet there is probably good reason at this stage for looking ahead on this problem and overseas enterprises here may do well to make concessions to the prevailing sentiment in favour of Australian participation. For ourselves it might be wise to avoid setting up obligations abroad for the development of enterprises from which little national benefit can be expected.)

Probably a more serious problem arises from the fluctuations in the flow of capital and the degree to which this could exacerbate a balance of payments problem arising from other causes. However, this is a problem which, given adequate reserves (including access to the International Monetary Fund) and effective internal policies, we should ourselves be able to deal with.

CAUSES OF GROWTH AND INSTABILITY IN THE CAPITAL MARKET

Generally speaking, the post-war period through to the end of the 1950s has been one of a substantially increasing flow of funds through the capital market, with an increasing diversification of the institutions which have mobilised and distributed these funds. The great growth in the volume of these funds reflects firstly a strong demand for funds from those in industry, commerce and agriculture who see profitable investment opportunities. On the other hand, it has been possible to meet this demand for funds:

(I) because the period began as one of excess money supply, with people on the look-out for profitable employment for funds they judged excess to their liquid requirements;

(2) because people's attitude towards what is an acceptable degree of liquidity in their asset structure continued to change, up to the

{p. 54} end of 1960 at least (with a minor check in 1952/53), so as to encourage them to favour less liquid but more remunerative assets.

Because of this latter factor, it is possible for the flow of funds through the capital market to bear very little relationship to savings being made from current income. If people are not merely increasing their assets with savings from their current income but are replacing, on a sufficient scale, cash, bank deposits and other liquid assets they already possess with debentures, shares and the like, this can make available to borrowers funds in excess of the physical resources available for the expansion and development of their enterprises.

In such circumstances, planned development will expand beyond what can physically be realised, wage and other costs will tend to be bidden up by competition, funds will be diverted into speculation in land and security markets. In other words, inflationary conditions can develop as indeed they did at various stages through the 1950s. For a while the rising prices and capital gains associated with such conditions encourage people to feel that they are losing opportunities by leaving any of their funds idle in liquid form.

Such conditions are of their nature unstable. An individual failure or threatened failure can cause people's expectations to be checked or reversed and the resultant scramble for liquidity can threaten even sound enterprises with financial obligations accruing.

Such a reversal occurred in the latter part of 1960 although we were saved from most of the really unpleasant consequences, partly by an unexpectedly strong inflow of capital, partly by measures taken early enough to check the worst speculative elements, and partly because, throughout, the banking system remained in a strong enough condition to sustain enterprises which might otherwise have been embarrassed.

It is part of the functions of the monetary authorities, including the Reserve Bank, to understand these fluctuations in people's attitude towards liquidity and to mitigate their effects. This is difficult, partly because of lack of information, partly because our formal authority is limited to the banking system proper, and partly because traditional monetary measures are uncertain in their effects on them. It does seem that changes in interest rates paid and charged by the banks in relation to those current in the capital market generally can slow up or expedite the rate at which liquid assets are turned over through the capital market. For interest rate policy to be a significant instrument of control, however, it would be necessary for rates to be moved more promptly and decisively than we have been able to move them in the past and, the desired result having been achieved, for the movement of rates to be reversed promptly. Political and social attitudes towards interest rates continue to make such flexibility difficult.

{p. 55} SUMMARY AND CONCLUSIONS

It has, then, been a characteristic of the Australian capital market in the post-war period that it has passed through a series of institutional changes following the introduction of types of enterprises and capital market practices that have previously developed in London and New York and other highly developed markets. These developments have caught on quickly here and have obtained surprisingly quick support from the investing public. When such institutional changes are taking place, such as that which occurred in connection with the growth of hire purchase finance houses in the first half of the 1950s, it is very difficult for any form of restraint imposed by the authorities to prevent the emergence of inflationary conditions. It is to be hoped that this phase of institutional development has largely run its course and that fluctuations in the future will be of more normal and manageable proportions. If so, it may be that the capital market in Australia will continue to serve usefully the purposes of industrial and commercial development and of rising standards of usage of valuable durable consumer equipment without creating quite such severe problems of instability in the industries concerned and the economy as a whole. If this is to be achieved, however, it will be necessary:

(1) that investors themselves should assess more carefully the risks associated with the various avenues of investing their funds; should be more conscious of the dangers of increasing the proportion of their funds which is not readily available to them; and should realise that at those times when it appears most certain that capital gains will accrue to investors who forgo liquidity, the risks involved are probably greatest;

(2) that those who hold themselves out to accept funds of various maturities from the investing public should first undertake the responsibility properly to balance the timing of their assets and liabilities and to make available to the community information which demonstrate that they have in fact honoured this responsibility (It will be necessary also, I believe, for them to collaborate more closely with the government and Central Bank in seeking to avoid major instability in the capital market, even, or perhaps particularly, when they seem for the moment to be profiting most greatly from this instability.);

(3) for the community generally and those concerned in the capital market in particular to accept action through interest rates and by other means to restrain any tendency towards too rapid growth of the flow of funds through the capital market. (It cannot be too strongly emphasised that if the growth of the capital market outstrips the physical capacity of the economy and the market becomes distorted by speculative tendencies and unjustified exuberance, a subsequent reversal of the direction of the flow of funds to more, rather

{p. 56} than less, liquid forms of investment is inevitable. The deflationary consequences of such a reversal can be acute and long-sustained If we insist upon enjoying a periodical binge, then we will certainly have a hangover.)

{p. 57} The Relationship of the Central Bank with the Government

NO INSTITUTION which exercises significant power and authority affecting the lives of people can properly exercise that power without feeling itself accountable for the way in which it is exercised. This is true of central banks as well as other institutions but for them accountability is not an easy concept. To whom are they accountable? How often should they be called to account, and by what machinery? Most central banks these days have been established by legislation or in some cases older central banks have been nationalised. It can therefore be argued that central banks are responsible to the people generally through parliament.

But central banks work in a particular field and their actions bear directly upon banks and other financial institutions over whom we exercise authority most immediately although the consequences can affect the lives and welfare of people generally. But because our actions make an immediate impact upon the financial system, we should hold ourselves partly responsible to them at least to the extent that we seek to ensure that they understand the motives for what we do and are prepared to accept it without active resentment.

Furthermore, a central bank forms a link in a chain which spreads throughout the world and most central bankers feel that they belong to a family of central banks which accepts a moral tradition. We of the Central Bank should behave in conformity with the best features of that tradition and regard ourselves to some degree as accountable to our international colleagues for the quality of our work and our standards of integrity.

However, our prime accountability lies within the society in which we function, where the central bank exercising the powers entrusted to it by legislation exists alongside the executive government which has general authority for the conduct of national affairs within its own constitution.

It is now widely accepted that a government must accept broad responsibility for the economic welfare of its people. Since the actions

Fifth SEANZA Course, Karachi, 4 March 1964. Reproduced by permission of the State Bank of Pakistan.

{p. 110} greater savings. Here we start from a position in which Australians' performance is good. Despite our reputation for extravagance we are among the thriftiest people in the world. Our savings per head can be matched only in such countries as Canada, New Zealand, and the United States of America. To some extent this reflects our high standards of income and partly the relatively modest and stable consumption habits of our primary producers, but it reflects also the effectiveness of our institutions for collective savings - savings banks, life assurance societies, pension funds - as well as the practice of companies of ploughing back for expansion a substantial part of their profits.

The recent rapid growth in the use of hire purchase facilities has had the effect of diverting more savings to the provision of consumers' durable goods which contribute less than other forms of equipment to future standards of production. This diversion is at its greatest while the use of hire purchase facilities is growing and a continuance of the growth at the same rate as the last two years could limit significantly the resources available for development.

Can savings be increased from their already high level? Something could perhaps be done by changes in the tax structure so as to favour the saver as against the spender and the company that ploughs back its earnings as against the company that distributes. Colin Clark has made an ingenious plea for taxation of expenditure rather than of income and recent work in the United Kingdom may help overcome the frightening administrative difficulties which such a plan offers. The idea is certainly worth examination. The extension of pension schemes into industries and occupations employing workers on a weekly basis has become a widespread feature of United States industry, and if developed here could tap a field of income with great saving potential. So far our trade union leaders have shown much less interest in such plans than their American counterparts - but if the means test for old age pensioners is sufficiently modified their interest may be quickened

Saving can in a sense be imposed on people by taxation and indeed to the extent that developmental work is financed from revenue it may be said that this is already being done. Theoretically it would be possible to extend this principle further and development would benefit, provided taxpayers responded by reducing their consumption rather than their own savings. The precise effect would be difficult to assess but the ultimate limitation is the willingness of the community to allow itself to be taxed.

There are clearly possibilities here, but we would be unwise to expect that we could so change consumption and savings habits as to add greatly to the resources for development even in the long run. Even now we may be fighting a losing battle with the wiles of the advertisers.

{p. 111} Increased production or greater saving could contribute to development by giving to it greater domestic resources. The need to pay for imports, increased by expenditure on development, may also impose a restraint on our plans. We must look, therefore, at what can be done to increase our capacity to pay for imports.

Overseas borrowing. One of the quickest methods of adding to our resources for development, if it is practicable, is to borrow abroad - either by public authority loans or by encouraging private investors to bring their funds to Australia. These have added substantially to our development potential in the last decade.

I have mentioned earlier that there is a growing interest in Australia as a field for investment. This has been reflected in a substantial flow of private capital and in the governmental loans from the I.B.R.D. and other overseas sources. Most of this has come with little direct persuasion and it may be that if we sought to do so we could make Australia an even more attractive field of opportunity for overseas capital.

But here there are three problems. First, there is a danger that in increasing our borrowings from overseas we will so increase the claims which non-Australians have on our production that they will become embarrassing either in relation to our total production or in relation to our export income. This is not a serious problem for Australia. The service of our foreign owned capital does not represent a major part of our international income and we could increase it without great concern - particularly if we could see the capital being used to increase the international income itself.

Secondly, there is the problem of the uncertainty in the flow of foreign capital. An economy receiving capital from overseas gradually gears the structure of its production to that flow. If it is suddenly interrupted (as it was for instance in 1929), there may be acute embarrassments and possibly the need for substantial changes in the pattern of domestic production. Arrangements of the kind that have run over the last decade between Australia and the I.B.R.D., by which a series of loans was arranged, represent a useful device to offset this danger, but it is difficult to see this technique being applied widely in the private sector, although the steady ploughing back of profits earned has the same sort of effect.

Thirdly, there is the political problem of how far we wish to extend foreign ownership of Australian assets and enterprises. Generally, our experience with non-Australian owners of enterprises in this country has given little cause for concern, but there is room for wide differences of opinion on how far it is wise to go.

Finally, of course, the possibilities in this field are limited by what overseas institutions and investors are prepared to invest in Australia.

{p. 112} It would be easy to expect too much from such a source.

Increase in export production. There is no doubt that expenditure on improvements, major irrigation, and other developmental works, together with the application of existing and growing technology, is expanding and can greatly expand our export production. However, a number of factors limit the rate at which this can be done:

( 1) The scope for the opening up of unused lands is not great and where it exists requires slow and expensive preliminary development. (2) The use of the new technology requires capital expenditure, new knowledge, and time.

(3) Some of the initial increase in productivity is generally (and wisely) taken out in the greater security of better rotations, safer stocking, and other aspects of better and safer farming rather than in increased output.

(4) Farm development is traditionally financed from internal sources - ploughing back of profits and bank borrowing against equity already built up. It is difficult for farmers, however good, to find finance for potential production.

There is need for thought on how these limiting factors can be minimised since our need of exports is great and day by day our growing population is eating into our export surpluses.

Import replacement. Since the extension of our basic export industries must be a slow process, it is natural that attention should be concentrated on the possibilities of directing development at the replacement of imports by local production. To the extent that this can be achieved development serves a double purpose. In a sense it provides some part of its own requirements of imports by the savings which it makes by meeting other people's needs for goods previously imported. Furthermore, by diversifying our production, it reduces our dependence on the income from a few major export industries and thus adds to the insulating value of our international reserves. There is also the additional advantage that most import-replacing production is not limited by the sorts of factors that restrain the growth of our primary industries. Sources of capital are readily available, up to the minute overseas techniques can be acquired and used, and production at full rate of flow follows promptly on capital expenditure.

There is no doubt that the concentration on import replacement that has characterised our development since the war has a rational justification and can contribute greatly to solving the international problems created by the development itself. But there are qualifications. The production locally of goods previously imported is not a net gain, since almost invariably the production itself involves imports - of

{p. 113} materials, components, capital goods - and frequently requires payments of other sorts - capital charges, royalties, etc. The net saving in import expenditure may be small, and, indeed, it is possible in the period of expansion when capital equipment is being imported for the developing industry to make greater payments abroad than it saves. Moreover, it is possible that we could build up a pattern of import requirements of industry that would be very inflexible in the face of a serious deterioration in our terms of trade, so that restriction of imports would fall directly on the means to production and employment.

These problems may be the greater if development is unduly concentrated on production of final consumers' goods running ahead of the base on which they stand - the production of materials, fuels, power, transport, and the like. There may be some reason to believe that our own development is somewhat top-heavy in its superstructure in this way.

MEANS FOR LIMITING DEVELOPMENT EXPENDITURE

There is undoubted scope for extending the practicable rate of development by action in the fields I have run through briefly. Yet, if I am right that we can reasonably hope for a continuance of the factors stimulating our development, we must expect to find ourselves pressing against the limits set internally by the resources available after consumption demands have been met and externally by the pressure of expenditure on the international resources available for imports. We must expect therefore, that our governments and banking institutions will from time to time find it necessary to restrain development so as to preserve reasonable financial stability. Are effective measures practicable?

Expenditure on development may be undertaken by governments and other public authorities, or by private firms and individuals. In Australia developmental expenditure by public authorities is brought under review in the annual budgets and loan programs and there is some co-ordination at the Loan Council. It has been shown that this coordination can effectively discipline these programs - the growth of their aggregate has in recent years been reasonably held - taking into account the growth of the national production. Here there is no problem of knowledge or technique, but a problem of judgment and will.

Private expenditure on investment presents a much more difficult problem. It is diverse in character and widely distributed. Knowledge of its prospective changes is imperfect and there are no means whereby those conceiving and executing plans can become aware of the effect of the plans of others or be forced to reconcile conflicting plans.

In many countries governments seek to bring about such a reconcilia-

{p. 114} tion by control over investment projects or by control of capital issues. In Australia, except in war or threat of war, such measures are constitutionally impracticable. Here we have at our disposal the instruments of budgetary policy and monetary and banking policy. Budgetary policy is the basic instrument of economic policy and it can be used to exercise restraint or to provide a stimulus to expenditure. To some extent the restraint or stimulus can be directed so as to affect particular forms of expenditure such as expenditure on development, but there are limits. Fundamentally the public sees the budget as the means the government uses to finance its activities and of distributing the cost equitably among its citizens. Too great a variation in the content of the budget for reasons of economic policy impairs the plain man's basis of judgment of its reasonableness and its equity. Above all the budget cannot be violently altered frequently. Nevertheless, Australian history has shown the value of a soundly conceived budget policy and the dangers of irresponsibility towards basic economic problems in its formulation.

Monetary and banking policy too have their part to play and something is undoubtedly achieved by them. However, our less fully developed money market, our conviction that interest rates should be kept low, render our techniques less complete and the influence of monetary and banking policy probably less effective in the restraint of a tendency to overspending than in some other countries.

These are issues which will no doubt be explored further by others. I must, however, confess that I feel that there is some danger to the Australian economy if we cannot evolve ways of exercising effective restraint on our healthy but exuberant tendency to want to do more than our resources will permit.

CONCLUSIONS

Finally, I shall bring together the broad conclusions which I feel emerge from this survey.

( I ) There seems good reason to believe that the conditions underlying Australia's recent rapid development are soundly based and that the urge to expansion will continue.

(2) That there are, however, real limits, both internal and external, to the rate of development Australia should undertake if it is to maintain financial stability.

(3) That when all possible has been done to push back these limits, we will be able to achieve much but probably less than most of us would like. (4) We are likely therefore to be faced from time to time with

{p. 115} the need to restrain developmental plans, both public and private. (5) There are significant weaknesses, partly constitutional, partly technical, but partly arising from our own attitudes, in our capacity to restrain excessive expenditure on development especially when the initiative lies predominantly in the private sector of the economy.

{p. 116} A Matter of Prices

MUST prices always rise? The problem has, I believe, been posed sharply by what has been happening over the last two or three years. We had, at the end of the war, the normal aftermath of inflation when the excess demand built up by wartime abstention from spending and the accumulation of the means of payment produced an inflation of quite classic textbook character. This was demand inflation and its nature was well understood. Its effects have by now been substantially worked out, and it seems certain that what has been happening in more recent years is of a different character. Despite the fact that the excess demand of the post-war inflationary period has been substantially worked out, prices have continued to rise although the rate of increase has been slower than previously. The characteristic pattern seems now to be a tendency for prices to rise more or less steadily by about 3 per cent a year. Moreover, a significant new factor appears to have entered into the situation - that is a widespread acceptance of price increases of this order as natural and inevitable.

An important reason for believing that this trend of prices does in fact represent a significant and continuing element in our economic climate is the experience of the United States during the recent business recession when, despite the fact that almost every indicator of economic activity turned downwards, consumer prices continued to rise. Between August 1957 and April 1958 the index of industrial production fell by 13 per cent, retail sales by 5 per cent, and unemployment almost doubled, but the consumer price index and wage rates rose - by almost 3 per cent. The situation in Australia, though not as pronounced, is not unlike that in the United States. June figures reveal that the interim retail price index is 2 6 per cent higher than it was a year ago in spite of uncertainties in general economic conditions, which suggests that the economy needed some stimulus if growing unemployment was to be

Presidential Address, Thirty-fourth Congress, ANZAAS, Perth, August 1959. Reproduced by permission of Economic Record and the Australian Journal of Science.

{p. 117} avoided. In the past, periods of declining economic activity have almost invariably brought falling prices - even though the decline of retail prices has been much less than that of materials and basic foodstuffs. If this change in the relationship of price movements to other indicators is due to continuing factors, it would bring about a vital change in people's attitudes towards prices - a change which could have profound economic effects. Previously, even if people felt that the long-term trend would be upwards, they had to take into account that there would be times when prices would fall. This probability introduced some uncertainty into any assessment they were making. In other words, while the long-term trend of prices might be upwards, any judgment relating to a particular period had always to allow for the possibility of a fall. This prevented people from being able to plan on the assumption of continuously rising prices. Recent experience suggests that this may be no longer true.

If recent events here and abroad can be interpreted in this way and we can expect prices to rise always and even in times of slight economic recession by 2-3 per cent per year, and the risks of occasional reversals in this trend are remote, we face, I believe, a very serious economic problem. Of course, it is not a problem of the same human urgency as the unemployment and stagnation of the 1930s and there are, I know, people who would dispute that it is a problem at all. I am satisfied, however, that this attitude is based on a failure to realise the consequences of the continuance of this trend. I propose in this address therefore

(1) to examine the question of whether this slow deterioration in the value of money, this creeping inflation, matters to the economy and to the people who compose it;

(2) to examine briefly the attitudes which underlie the decisions which produce rising prices and to pose certain questions to test whether these attitudes are valid for the groups of people who hold them;

(3) to consider the practicability of a stable price level and the conditions which would be necessary to achieve it;

(4) to throw out certain ideas about institutional and political changes which might promote these conditions.

I do not expect to produce final answers on these matters - but I believe that if economists, administrators, political groups, and the public generally can turn their minds to this problem as they did to the problem of unemployment in the 1930s, there will emerge the insight necessary to its solution.

{p. 128} should be at hand. In the interests of reasonably stable purchasing power of money it would be preferable if means could be found to raise living standards other than by the increase in wage rates. As I have said earlier, I believe that much can be done through the extension and development of free and subsidised services, of which education and medical services are illustrations, as well as by the improvement of the physical environment - our homes, our towns and cities. I personally would like to see a great extension of aid given to non-profit making bodies concerned with providing greater opportunities for the enjoyment of and participation in sporting activities and artistic and cultural pursuits. These, with greater leisure time, can greatly enrich our lives. Within the industrial field itself there is a great variety of profit sharing devices which I think merit the interest of employees and their representatives. Even in the field of money rewards I do not think we have exhausted the possibilities of the redistributive powers of government taxation and expenditure. A variation in tax scales which reduces the taxes falling on wage earners and their families or increases in money payments such as child endowment would be at least as valuable as and almost certainly more secure than an equivalent increase in wage rates. While the institutional and political changes I have described would help create conditions in which price stability would be easier to achieve, basically we must look to the changes in attitudes of industrialists and traders, of wage earners, and of consumers, which I have urged in an earlier part of this paper. Fundamentally, prices rise because too many people wish them to rise and too few are anxious to resist. As an encouragement to your own change of heart in this matter, could I conclude by summarising the conclusions my argument leads to?

(1) It does matter if prices continue to rise - the trend is a serious and growing threat to the health of our economy; if it continues uninterrupted there is a grave danger that it will gather momentum from the efforts of people to protect themselves from its effects and cease to be merely a 'creeping inflation'.

(2) The tendency of prices to rise, even in times of mild recession, derives basically from attitudes of industrialists and traders, of wage earners and of consumers, which seem of doubtful validity even from the point of view of their own interests.

(3) Reasonable stability in the value of money can be achieved if we think it worth while - although it would be facilitated by some institutional changes designed to ensure a high rate of development backed by ample savings, and greater concentration on improvements in the standard of living by means other than money wage increases.

{p. 129} The Problems of External Balance

HE first question I want to discuss briefly is why we trade overseas. A bird's eye view (or a space-ship view) of Australia would

show that we are all busy producing a vast and motley collection of goods and services. Some 85-90 per cent of these goods and services are consumed within Australia. The other 10-15 per cent are swapped for the products of other countries.

Not only in the last twelve months but throughout our history we have suffered, from time to time, a lot of discomfort and sometimes considerable hardship so we can go on trading in this way. A fair question then is whether it is really worth it.

The economics textbooks defend foreign trade on the grounds that countries, like regions within countries, are better at producing some things than others. If this is so, it can be easily shown that we can all benefit by concentrating on the things we can do best and exchanging some of these products for the goods and materials which other countries can produce most efficiently.

We can divide imports into three broad categories. First there are the goods and materials which we cannot produce in Australia at all, even at high cost. Some raw materials are in this category, and so far oil is too. If we could not import them we would have to go without and would not be able to support our present industrial structure or our present population, let alone a growing one.

Secondly, there are the goods which we can produce in Australia but at relatively high cost, which is the case the textbooks usually have in mind. By importing these goods we can enjoy a higher real income than if we produced them ourselves. We can buy more television tubes with a bale of wool than we could make with the resources which it takes to produce the wool. Or if we do not want more television tubes we can buy as many as we could have made ourselves and still have some funds or resources left over for something else.

Address to the Australian Administrative Staff College, 4 June 1961.

{p. 130} Finally, there are the goods which we can produce in Australia at reasonable cost, but which we still import. The benefit here comes from the wider variety and choice which foreign trade makes possible. If we look at world trade we see that it is becoming increasingly a matter of swapping manufactures for manufactures, often of rather similar goods. Motor cars are an obvious example - many countries, including Australia, are both exporters and importers. As we become richer, both as countries and as individuals, the widening of consumer choice can form an increasingly important part of rising living standards.

We might note here that foreign travel can be looked on in the same way as visible imports. Foreign travel is something which we cannot produce locally and forms an increasingly important part of many people's current or prospective standard of living.

MECHANISM OF FOREIGN TRADE

Let us turn now briefly to the mechanism of foreign trade. The most important feature, perhaps, is that the figures of imports and exports which we watch so carefully from month to month are the outcome of a vast number of decisions made by individuals and businesses. Farmers decide how much wheat they will sow and whether they will sell all their wool now or keep some back in the hope of better prices later; housewives decide whether they will buy imported sheets or saucepans or tinned fish or the local product; manufacturers decide whether they will try to find export markets or sell all their products locally, or whether they will buy an imported machine or a local one; and so on.

The other items in our balance of payments are also the outcome of many individual decisions. Mrs Smith has to decide whether she will take that overseas trip and whether she should contribute to that new world charity; Mr Jones decides whether he will send some money to his old parents in Birmingham; the X.Y.Z. Co. decides whether it will build a new factory in Australia, or how much of last year's profits it will remit to London. It would be interesting to try to add up the decisions which determine one year's balance of payments; it is hard to think of any decision regarding expenditure (from the toddler's choice of sweets up) or any decision regarding production which does not affect the balance of payments in some way.

FORCES MAKING FOR EQUILIBRIUM

As the items in our balance of payments - our receipts and payments of foreign exchange - are the outcome of so many apparently unrelated decisions, how do they ever balance?

{p. 131} The first explanation we can give is the bookkeeping one - the balance of payments balances because we draw it up that way. But a more helpful explanation is that it balances because any difference between receipts and payments of foreign exchange is reflected in a corresponding movement in our bank balance - i.e. our international reserves.

But when we look at reserves we find that they are not particularly large in relation to our overseas transactions. Our total overseas payments for imports, freight, travel, interest, and dividends and so on are running at around £1,500m. a year. Our reserves are around £500m. or, say, four months' payments. Are there any equilibrating forces which prevent reserves from being exhausted in times of adversity or built up to embarrassingly high levels in times of unusual prosperity?

Part of the answer is that exports and imports are not unrelated. Imports depend partly on the levels of incomes and liquidity in Australia; these levels are determined at least in part by export income. When export incomes rise the farmers become more prosperous and the community more liquid; this is usually reflected in a rise in imports, perhaps in the next year. Conversely, a fall in export incomes means a direct loss of incomes and of liquidity and usually has a dampening effect on business confidence; all these factors encourage a cutting back of import orders and a subsequent fall in actual imports.

But clearly we are not prepared to allow fluctuations in our export prices to have their full effect on domestic activity and so on imports. Balancing our international accounts is not our only or indeed our main objective; we also want to maintain high levels of employment, high rate of economic growth, and reasonably stable prices. If export prices fall, what has really happened? Foreigners have decided to pa us less for the 10-15 per cent of our total production which we export While this is regrettable it does not seem sufficient reason for cutting back the other 85-90 per cent of our activity if we can possibly avoid it. Conversely, if foreigners decide to pay us more for our exports, w do not want this to lead to a wild boom affecting the whole economy

We therefore interfere with the automatic mechanism. When export income and international reserves fall we offset the fall in liquidity one approach to this is by releasing funds from the trading banks Statutory Reserve Deposit Accounts. Conversely, when international reserves are rising we seek to mop up some of the increase by raisin the Statutory Reserve Deposit ratios or by other means. This all make the task of balancing our receipts and payments of foreign exchange and so avoiding wide swings in our international reserves more difficult but we believe it better serves the ends which the vast majority of Australians prefer.

{p. 132} POLICY MEASURES TO BRING ABOUT EQUlLlBRIUM

By what means, then, can we bring about external balance? Before considering this question we should perhaps define what we mean by external balance. We do not mean that our receipts and payments of foreign exchange must be equal each year; we mean that over a period of years they should be approximately in balance. Mild swings from surplus to deficit in the balance of payments from year to year must be expected in an economy such as Australia's, but major changes will also occur from time to time depending on the state of overseas markets, seasonal conditions in Australia, the level of economic activity in Australia and international economic conditions. The purpose of holding international reserves is to act as a buffer against these fluctuations: in good years reserves will rise and in less favourable years reserves will run down.

If our external accounts are in long-term balance and international reserves are adequate to meet any short-term drains upon them, due perhaps to a temporary but sharp reduction in overseas demand for our exports, then we have no worries. If, however, our external accounts are not in a position of long-term balance or our reserves are not adequate to meet these short-term drains then we will need to consider what action is necessary to balance the position. It can be seen, however, that there are two facets to the problem - the short-term and the long-term - and different policies may be required for each.

In most developing countries, such as Australia, the problem has been mainly one of avoiding deficits in the balance of payments and we might take a look at the main policy measures available to deal with this situation.

Monetary policy, through the influence it can exert on the level of internal demand, can be used to reduce the rate of flow of imports with a consequent improvement in the balance of payments position. However, we have already seen that balancing our international accounts is not our only objective and therefore care has to be taken to ensure that the level of overall demand is not pushed down to a point where it is insufficient to keep the economy, its workers and its equipment reasonably fully employed. This conflict of objectives is extremely difficult to resolve by the use of monetary policy alone.

Import restrictions have been used by many countries as the main means of ensuring external balance. As you all know, Australia has had restrictions on imports since just before the last world war and it was only in February 1960 that we became virtually free of import controls. Although they are a fairly certain method of keeping imports within the bounds of our foreign exchange income, they cannot be regarded as an appropriate way of correcting a long-term deficit in the balance of

{p. 133} payments. Their main disadvantage is that they do nothing to improve the underlying imbalance, but in fact allow the imbalance to widen. Behind the cloak of import restrictions, costs and prices tend to get further out of line with costs in other countries. The lack of competition from imported goods results in rises in the price of home produced goods; whilst the incidental protection afforded to inefficient industries raises costs. In addition, import controls divert capital resources into forms of production that are uneconomic and give no encouragement to the production of goods for export.

Devaluation of the currency is another measure which has been advocated as an answer to the problems of a country with a long-term balance of payments deficit. Devaluation of a country's currency relative to all other currencies raises the prices of all its imports and, depending upon whether prices for its exports are determined locally or on overseas markets, either makes its exports cheaper to the foreign buyer or increases the profitability of exporting. In either case an expansion of exports could be expected. It is argued that this would tend to bring about a better balance in the country's overseas trade and a consequent improvement in the overall balance of payments position. On the other hand the expected improvement depends very largely upon the response of overseas buyers and local exporters to the changes in prices and incomes which the devaluation brings about. Consequently there is no guarantee that even a substantial devaluation would achieve an improvement in the balance of trade sufficient to balance the overall position. In addition it is likely that the higher incomes generated in the devaluing country would be reflected in a rise in domestic prices and costs which could nullify to a large extent the advantages derived from the devaluation. The effects of devaluation on the inflow of capital are also uncertain, but they could be serious.

Other measures which could be taken in an endeavour to overcome a continuing deficit include the more widespread use of tariffs on imports, subsidies on exports, and perhaps higher taxes on goods with a high import content or on goods which could be exported. As with a devaluation, the object of these measures is primarily to make imports dearer and exporting more profitable. However, they would also tend to raise the level of domestic prices and costs and would be extremely difficult to administer. There is also the danger that once imposed, taxes and, more particularly, tariffs would prove difficult to remove.

I have briefly touched upon these measures in order to underline the uncertainties which exist when economic policy making is under consideration. I think you will agree that it is very difficult to make a confident decision as to which measure would be most likely to achieve the desired result. In fact, a combination of the measures may be most appropriate.

{p. 134} OUR PRESENT PROBLEMS

This brings us to our present balance of payments problems.

Let us go back to early 1960. The situation then seemed fairly satisfactory:

(1) Reserves were over £500m. and we also had drawing rights on the International Monetary Fund.

(2) Export prices had recovered nicely from the 1958/59 low; the export price index in January 1960 was 21 per cent higher than a year earlier.

(3) Export volume was increasing steadily; the wool clip had risen by 10 per cent in 1958/59 and was expected to be up another 6 per cent in 1959/60.

(4) Imports had been held at around £800m. for several years, and although administrative difficulties might have increased there was little evidence that the demand for imported goods was pressing strongly against the restrictions, at least before inflation got well under way in 1959/60.

The government therefore decided in February, as part of its anti-inflationary program, to remove nearly all remaining import restrictions. It was thought that increased import competition would have a generally beneficial effect in helping to restore internal balance between supply and demand and in helping to reduce prices. Also, of course, this move was consistent with the broad policy of returning as soon as possible to the system of allowing import decisions to be made in the market-place rather than administratively.

Unfortunately, the fates were already conspiring against us. In the very month in which restrictions were removed export prices fell by 4 per cent and then went on falling until by January 1961 the index for wool was 14 per cent lower than a year earlier and the overall index 13 per cent lower. If export prices had been the same on average in the financial year just ending as in 1950/60 export income would have been significantly higher, and our whole balance of payments position would be rather different.

The volume of wool production was also 5 per cent lower in 1960/61. While increases of the 1958/59-1959/60 order could not be expected to continue indefinitely, this particular fall came at an unfortunate time. Thirdly, it seems that unsatisfied or latent demands for imported goods were stronger than was realised, or that stocks had run down further, or that the time lags are greater. Whatever the reason, imports increased sharply around mid-1960 and showed no signs of falling until March 1961 .

The main item in the balance of payments that turned out much

{p. 135} better than expected is capital inflow, and this has helped to sustain reserves. Some of this capital inflow, however, seems to be due to delayed payment for imports and could be quickly reversed.

MAKING THE DECISIONS

Before we talk about our balance of payments prospects let us turn to the question of decision making. We have seen that the government and Reserve Bank were faced in 1960 by these problems:

(1) At home there was strong inflationary pressure.

(2) Imports were still subject to restrictions, but there seemed a good chance that if inflationary pressures could be eliminated imports would not exceed our capacity to pay for them at then current export prices.

(3) The longer-term balance of payments prospects were uncertain, but it seemed likely that in any case we would have to strengthen export income.

The decisions which were taken in February 1960 and since then are familiar to you. The government decided substantially to remove import restrictions and in other ways to pursue a firm anti-inflationary policy, and the Reserve Bank has continued with its policy of credit restraint. While there have been successive reductions in the Statutory Reserve Deposit ratio during 1960/61 they have by no means fully offset the loss of liquidity resulting from the run-down in international reserves. Banks have accordingly found it necessary to reduce their lending, and outstanding advances, as some of you will know only too well, have fallen by nearly £100m. from their peak in October 1960.

To help meet the medium- and longer-term problem the government has taken action in regard to coal-handling facilities, rail gauge standardisation, and road works in Queensland, as well as granting certain tax concessions designed to encourage the expansion of exports. Some of you might feel that these measures are inadequate; others might feel that in the name of the balance of payments we are creating anomalies which are hard to justify and at the same time are exposing sound and long-established Australian enterprises to unnecessary and unreasonable pressures.

But what would you have done? Before you decide, let me remind you that hindsight makes decisions a lot easier. And the balance of payments is one field in which we are forced to base our decisions on information which is already out of date, and where any action we take now will have little effect on imports and exports for at least months and in some instances years.

{p. 136} THE PROSPECTS

I will leave this thought with you while I turn quickly to our balance of payments prospects.

My comments on recent balance of payments developments so far have been related to 1960/61 as a whole. In the last few months the short-run balance of payments prospects have improved markedly. Wool prices have risen by around 15 per cent. Further wheat sales have been negotiated. Imports have begun to fall. Private capital inflow appears to have risen further. And our first-line reserves have been strengthened by the drawing of £78m. from the International Monetary Fund and the arranging of a stand-by of £45m.

But most of this improvement seems to be essentially short-term, although the improvement in wool prices and capital inflow could be continuing. It seems appropriate then that we should shift our attention from the immediate prospects to the longer-term outlook.

In the long run our export earnings must increase at least as fast as our import needs. The only ways in which we can avoid this necessity is if net capital inflow increases faster than our import needs (and I am not sure that this would be wholly desirable even if it were likely) or if net invisible payments for freight, earnings on foreign capital and so on increase more slowly than import needs, which seems unlikely.

The rate at which our import needs grow depends partly on the' rate of expansion of the economy and the rate of population growth, partly on the direction of development, and partly on the relation between Australian and overseas price trends. These factors are all largely within our own control or influence, although there are some grave practical difficulties in the way of influencing them.

The growth of our export income is only partly dependent on factors and conditions within Australia. It also depends on changes in income, prices, tastes, production of competing products and so on in the rest of the world and these are completely outside our control.

It can be argued that Australia's balance of payments problems in recent years have arisen largely from our attempt to grow faster than the rest of the world's demand for our export products. Although there is plenty of room for argument about this, import needs seem to have grown at something like the same rate in volume terms as Australian output. The volume of exports has also grown at quite a fair rate, but the volume increases have been accompanied by deteriorating terms of trade.

As we have seen, the possible rate of growth of our imports over the long run is determined by the rate of growth of our exports. If imports tend to grow faster than exports we have to do something to slow down the one or speed up the other.

{p. 137} There are several technical possibilities which would slow down the growth of our import needs without interfering with the mechanism of importing or decision making. One would be to slow down our rate of growth by drastically cutting our migrant intake. Another would be by making imports dearer and we have already seen how this could be done by higher tariffs, by higher sales taxes on goods with a large import content, or by changing the exchange rate. (We should note here, however, that repeated action might be needed if the tendency for imports to grow faster than exports were a continuing one.) Another possibility would be by making goods and services with a low import content cheaper or otherwise more competitive with goods and services with a high import content. For example, a more efficient metropolitan railway system would reduce the need for a second car, and there is little doubt that the direct and indirect import content of motoring is high.

There are also several ways of speeding up the growth of our exports. Exporting could be made more profitable, by subsidies or tax concessions or by changing the exchange rate. Or the growth of 'exportable surpluses' could be speeded up by slowing down the growth of home consumption. Or the rate of investment in export industries could be speeded up in various ways.

There is not time tonight to consider further the relative merits of each of these methods. But there is one thing I want to stress - we must never lose sight of what we are trying to achieve and we must always weigh the costs of any proposal against that of the alternatives. We cannot afford to waste resources by pouring them into inefficient industries, even if they produce exports or replace imports.

I hope I have given you something to think about. If there is any conclusion it can only be this - of all the problems of an expanding economy perhaps the most difficult is the double-headed one of maintaining internal and external balance. While we seem to have gone at least some way towards solving the internal problem (and after all the solution to this is very largely in our own hands) we have been less successful in handling the external problem (which arises, at least in part, from trends and policies in other countries over which we have no control or influence). But if we cannot find consolation anywhere else we should reflect on history and realise that what today seems an intractable problem may well have been forgotten a decade hence, or have paled into insignificance beside new and more troublesome issues.

{p. 160} Capital, Growth, and International Payments

I WANT to start by saying a little about what I understand by capital, which in physical terms we tend to think of as durable equipment used in the production of future goods and services. Thus, factories, plant, and equipment, as well as farm improvements, roads, power plants, administrative offices, shops, are all characteristic forms of capital. But the concept also covers other things to which we have devoted our resources which are capable of increasing future production or consumption. It includes, for instance, consumers' capital, such as houses, hospitals, libraries, art centres, and opera houses but also productive capital embodied in the skill and knowledge which comes from education and training; in new knowledge and technology which comes from research and development; and most generally, in the improvement of the physical, intellectual, cultural and social environment in which we live, the quality of which affects profoundly the character of our lives. Let us not forget that this, after all, is the final purpose of all economic activity - to enable people to live better. Where we devote current production to producing durable goods, facilities or amenities of the kind I have described, we are producing capital, and resources for their production must be provided from our own savings or from the savings of other people.

OUR CAPACITY TO ADD TO CAPITAL

Having said that to show what I mean by capital, let us go on to look at capital in Australia. No one has usefully estimated the total quantity of capital in use in Australia or its distribution between various industries. We can do a little better in estimating the amounts of new capita formed year by year. Thus it has been estimated that over the last five years we have spent 272 per cent of our income or G.N.P. on capital goods. That 27 per cent would not include all the kinds of expenditure that I have referred to a moment or so ago. It would not, for in-

Address to the Australian Industries Development Association, Melbourne, 26 September 1967. Reproduced by permission of the Reserve Bank of Australia.

{p. 161} stance, include expenditure on the development of new knowledge or new technology.

However, even allowing for the exclusion of those items, this 27 per cent is a very high figure, comparing favourably with most countries in the world, although it does fall short of what is achieved by Japan, which has, I think, the highest ratio of investment to G.N.P. or of new capital formation to G.N.P. in the world.

Now this high level of new capital formation reflects itself in Australia - and indeed in Japan too - in a very high growth rate. Figures that were issued along with the last budget estimate that the value of our production in recent years, excluding variations in prices, has grown at a very steady rate of about 6 per cent annually, except for the drought year of 1965/66. With population growth of about 2 per cent a year, we have raised output per head by more than 3 per cent per year, even allowing for the effects of the drought. Now, by anybody's standards, that is a very impressive performance; but I do want to look at the questions of whether we could have done better and, incidentally, whether it would have been worth while.

Capital formation has to be financed. It has to be financed by saving, by somebody setting aside some part of his income and not spending it on current consumption. Now the savings necessary to finance this new capital formation have been provided in Australia in the following ways: governments and public authorities have accounted for about 6 per cent of G.N.P. (6 per cent out of the 27 per cent). The private sector, including businesses as well as individuals, have provided 18 1/2 per cent and the rest of the world - the people who have lent us money or invested it here - have provided 3 per cent.

If we are going to look at whether we could have done better in our achievement, the first thing we have to decide is whether we could have increased that 27 per cent to a higher figure and then, of course, to see whether we could have made effective use of a higher figure or whether we could have made better use of the figure we now have. Having a look first at the question of whether we could have increased that 27 per cent, let us look first at governments and public authorities. Now, they could have increased their contribution to savings only by imposing higher taxes and charges or, on the other hand, by reducing their current outlays. I think there are few people who would advocate higher taxes, even for so economically virtuous a purpose as a nigher growth rate and, while I am sceptical about claims that are often made that taxes have reached their upper limit, I think it is realistic to agree that increases in taxation would to some extent at any rate be offset by a reduction in private savings. So, there does not seem to be much to be hoped for from an increase in saving by the public sector on that side of their balance sheet.

{p. 162} On the side of expenditure, of course, there are plenty of people who see all forms of public expenditure as inherently extravagant and a proper subject for the pruning knife. I do not entirely share these views, although I would not deny that there is some waste in public expenditure - probably much about the same percentage as there is in private expenditure. On the other hand, as incomes and standards of living rise, more of the goods which can add appreciably to the quality of life are characteristically provided collectively and it is increasingly necessary to take collective action to conserve and improve our physical environment. A well-planned town or city, with uncluttered roadways and an effective transport system, which is rich in parks and gardens, has fine buildings, libraries, art galleries, theatres and the like, with easy access to areas of unspoilt rural and natural environments, is the foundation of a good life for the citizen and it becomes increasingly difficult to preserve and more expensive to create. And only public authorities can do a great many of these things, so that for these reasons we should not hope for much increase in savings by a contraction of public expenditure.

There is, however, one form of public expenditure which is encroaching seriously on our provision for growth. This is expenditure on defence and war. Now I am not competent to judge the urgency of the need for this expenditure or the wisdom of the way in which it is spent. I think it is sufficient to say that expenditure on defence and war is a cost that we will pay for by having to accept a slower rate of growth than would otherwise be possible. I think it is possible to say further that the lower we can keep - consistent with safety - our expenditure on defence, the more quickly we will be able to grow and, looking ahead, the easier it will be to provide whatever is necessary in the way of defence goods and services. However, that takes me well beyond the scope of my present subject.

Let us turn now to look at the possibilities of increasing private saving. Whether you can do anything about private saving by policy action is extremely uncertain. Certainly our experience shows that it helps if there is a wide range of securities available to meet the taste and convenience of savers of all kinds. Our experience shows also that reasonable stability of prices strengthens the incentive to save, especially if this reasonable stability is strengthened from time to time by periods where prices do not rise at all (this is necessary to confound those characters who bet on prices always rising). If we have these conditions of reasonable stability, it is clear that this does give savers confidence and they are more likely to be prepared to set aside current income for the benefit of the future. But no one wants to save from income now if he knows that when he wants to use these savings at some future time they are going to be worth substantially

{p. 163} less than now. Nothing is a bigger incentive to spending quickly than a feeling that your money will rapidly depreciate the longer you leave it unspent.

Much is claimed from time to time about special concessions in the tax structure to favour those who save. Indeed, some concessions of this kind are built into our own tax law. It is hard, however, to see much benefit in a concession which is confined to a particular form of saving - it may affect merely the composition of saving and if at the same time it reduces revenue and consequently public saving, we may be the worse off for that particular concession.

However, I think there is a different story about tax concessions that apply to all forms of saving. Some years ago I suggested that thought might be given to financing the desired level of capital formation by a special form of income tax which would give a rebate for all income saved, assessing the amount saved by the increase, for persons and for companies, in their net worth over the year. I still find this idea attractive, although tax administrators blench at the thought of its complexity and some financial writers saw in it a 'socialistic' device; though I may say, recalling my friend Mr John Dedman, that I can think of nothing more likely to encourage lower income people into becoming 'little capitalists'.

However, if we could achieve an even higher level of domestic savings than the 24 per cent we have achieved over the last five years, there would undoubtedly be promising benefits. We may well be able to sustain a higher rate of growth and with a higher rate of growth a more rapidly increasing level of income and improving standards. Apart from this - and I know this is of interest to businessmen - economically life is simpler when the economy is growing fast. Business expectations are more readily fulfilled and, even if they happen to have been rather extravagantly calculated, in due course growth will catch up with them. Furthermore, since most of you have to meet the persistent desire of wage earners to share in what they see as the steady upward growth in production, the fact of growth makes it a little easier to meet the demands that they put upon you. Consequently, there is a good deal to be said for growth.

Furthermore, we could ourselves own a larger proportion of these capital assets created if we ourselves saved more. We would need to borrow less from abroad, or, alternatively, if we were content to go on borrowing from abroad, we could perhaps ease the restraint that the wicked Reserve Bank places upon your freedom to invest outside Australia. This would aid development in neighbouring countries and perhaps open new opportunities for Australian enterprise. So the benefits from a higher rate of savings are considerable.

On the other hand, we do have to remember that if we do save

{p. 164} more it becomes the more urgent that we have capital expenditure projects on which to use the savings. For if we fail to have those capital projects we may once again face unemployment and waste of resources. Now, of course, it seems to me - as I hope it does to you - ridiculous to suggest that in Australia we may lack profitable and useful projects on which to spend our resources. At the same time, I have been a little worried over the last year at the persistent slowness of private investment spending to pick up from a slightly low level it reached a year or so ago. This suggests that businessmen may need to be a little more flexible and perhaps more adventurous in the search for new projects. However, on the whole I would not rate the danger of our not being able to use increased savings resources as very serious.

Finally, of course, there is a point beyond which it is not good sense to sacrifice present consumption to the future. If I may make an illustration here - the recent somewhat disturbing reports of more widely spread poverty among the old and the sick in Victoria than most of us would have been prepared to admit existed does suggest perhaps that there are some claims on our current resources that should have some priority even over those needed for growth.

Let me turn to that part of our savings which we get from outside Australia. This is a little more than 10 per cent of the total - 3 per cent out of 27 per cent of G.N.P. But this amount, small though it is as a proportion of the total, may well be the margin which lifts us into the high growth rate league and, therefore, it is important to Australia. Now, it is well known, of course, that there is some anxiety about our dependence on this inflow of capital from outside Australia and I would like to touch on some of the questions that can reasonably be asked about it.

First of all, looking at it from the point of view of Australia as a whole, is it good business to borrow so much? Secondly, are we building up economic risks for the future by this borrowing? And, thirdly, are we establishing dangerous enclaves of foreign ownership in our industries?

Looking at the first of these questions and assuming we are, as I have argued and believe strongly, a good growth prospect, it seems to me to be good business to borrow, even though we have a high rate of domestic savings ourselves and even if we could raise it further. Given growth, it will be easier to repay from a higher G.N.P. in the future than to cut our consumption further now. We have borrowed pretty heavily in recent years yet the cost of servicing this borrowing abroad - as measured by the rent, interest, and dividends accruing abroad each year - has remained remarkably stable at about 2 1 per cent of G.N.P.

{p. 165} On the whole, it does not seem to me that there is any risk at the moment of this not being good business. As to risks, capital inflow is uncertain being, as we have learned during the last two years, influenced by public policies as well as by economic conditions in the countries from which it comes, and therefore subject to some extent to unpredictable changes. A combination of adverse influences on capital inflow with bad seasons and poor export prices could, without doubt, face Australia with a painful adjustment similar in kind to that which hit us back in the late 1920s. However, we are less exposed now than we were then. Our exports are more varied and represent a much smaller proportion of our G.N.P. Our reserves are reasonably healthy and are buttressed by international institutions designed to help us and others meet just such contingencies. Clearly, therefore, I would say the risks of allowing capital inflow or borrowing abroad are well worth while taking. But nevertheless they are real risks and their existence emphasises the need for good reserves and for a high rate of domestic savings.

Turning to the question of the distribution of foreign capital and its concentration on some areas in the economy, it can fairly be said that the distribution of foreign capital through the economy in Australia is uneven. To some extent this reflects certain features in our own institutions and capital markets. The capital market and our system of public finance have tended to concentrate the use of domestic savings in certain fields. We finance almost entirely the public investment program of governments and semi-governmental bodies. We finance almost entirely the construction of houses; we finance almost entirely the provision of transport facilities. Again, we finance almost wholly expenditure on farm improvement and other rural investment and, generally speaking, we finance in the main smaller-scale manufacturing enterprises.

There has therefore been a tendency for large-scale enterprise - particularly in mining and large-scale manufacturing - to be the special preserve or special area of influence of foreign capital. Now I see nothing particularly harmful in this concentration. These are industries in the main where we probably have most to gain in access to know-how in large-scale operation. But it is a pity if it happens merely because of organisational weaknesses in our capital market or in a lack of entrepreneurship on the grand scale in our industrial community.

There are, however, growing evidences that Australians are learning quickly to mobilise resources in large-scale ventures and innovations in our capital market are increasingly enabling it to cope with very large raisings. Here, if I may be permitted to say so, I have a confident hope that the newly established Australian Resources Devel-

{p. 166} opment Bank will play an important part in increasing our capacity to give effect to this mobilisation.

But the diversion of Australian savings into large and exciting ventures does not, let me remind you, necessarily increase the total of such savings and if we put more of our savings into big ventures we may well have to turn to other sources for a greater part of the savings needed for other forms of capital formation. In this respect, the easiest but obvious suggestion to make is that governments could borrow more of their requirements abroad and, so far as this can be done without impairing the markets for the governments themselves, it could be helpful for us to diversify our overseas borrowing a little. It is hoped, for instance, that the Australian Resources Development Bank will itself be a borrower abroad for short- and medium-term funds in amounts and from sources on the whole unlikely to be tapped by governmental issues.

There have, too, been some interesting experiments which suggest that housing may be a possible avenue for the use of overseas savings. There are some institutional problems associated with this development but I see no reason why they should be insuperable. Interesting also are the movements of foreign capital to agricultural and pastoral developments. These are interesting not merely because it is a relatively new development of scale but also because it might provide a demonstration to our own large-scale entrepreneurs that here are fields of development which can yield handsome returns to those prepared to spend substantially and wisely and who are able and prepared to wait for a few years for a return.

On the whole then I think the case for continued encouragement and welcome to foreign investment is pretty well established for our circumstances. But, as I say, I do not think we should sit down and leave exclusive areas to overseas people - exclusive to them not for any technological or efficiency reason but from a failure on our part to modify our own institutions and to be really genuinely enterprising. If we fail in these two respects, we should not be captious about the help which we derive from overseas capital.

COULD WE USE OUR SAVINGS MORE WISELY?

Could we have done better with the savings that we have or could we do better with an increased volume of savings? Here I am concerned not with the amounts but with the use that is made of them. Now it may seem captious even to raise this question, as I began by saying that our performance both in the amount of savings and the resultant rate of growth was very creditable by any international standard, but it is the function of an economist (and I used to be one) to seek to make the best use of limited resources.

{p. 167} Many questions could be asked on this topic of whether we use our resources wisely, but I want to confine myself to three which seem to me to be fairly important. The first is: would we do better if we accepted a somewhat smaller population growth? Secondly, are we wasting resources by unwise development, particularly where it is encouraged by the use of protective devices? Thirdly, are we neglecting the opportunities for investment in that form of capital I referred to in new knowledge and new skills?

Looking first at the question of population, we have population growth of about 2 per cent per annum and this means that a substantial part of our savings is necessarily used to equip the newcomers at the existing standards - every new family needs a home, access to schools, to hospitals, a place for the breadwinner to work, a piece of a farm, a factory, a shop, or an office or what have you. Clearly, if our population growth was somewhat smaller, if in effect we had slightly fewer migrants, theoretically at any rate we would be able to equip a smaller work force more adequately than we can at present and it would be a reasonable assumption that, better equipped, they could increase their output per head more rapidly.

This, of course, is not solely an economic question. Along with most Australians I regard immigration as a 'Good Thing'. It has brought very welcome diversity to our population and has enriched our community with skills and talents we can properly value.

Despite the cost in reduced equipment per head, I am inclined to think it worth while also from a strictly economic point of view. We have the physical resources for large-scale production but we lack in important fields the sound base of a mass home market. A rapidly growing population is both a strong stimulus to investment and to enterprise and an insurance against the effects of excessive optimism. In a world of shifting technology and changing demands, it enables us to redistribute our resources, particularly our labour, with a minimum of social friction.

Consequently, I would conclude that the benefits of a reasonably rapid population growth outweigh for Australia the costs of spreading our capital formation a little more thinly over the population.

However, I myself would argue that we are fairly close to the optimum of our present rate of population growth - certainly in the years when we attempted a migration flow which brought the annual increase in population to something over 2 per cent there were abundant evidences of strain in the economy.

Turning to the question of development sponsored by protective policies: over the years I think the policy of protecting industries capable of development has, despite occasional extravagances, served us well. It has enabled us to bring into production resources which might otherwise have long lain idle. It has enabled us to build up in

{p. 168} a skilled labour force, in supervisory and managerial capacity, in a wide range of financial, industrial, and technical services available to industry, in a growing cadre of skilled and experienced entrepreneurs, an industrial environment which did not exist before, in which the real productive capacity of this country can be developed on a competitive basis. Its effects are reflected in the wide range of industries producing for consumers (we now spend only about 2 per cent of our gross national product on imports of finished consumer goods) and also it is evident in the many industries which are demonstrating in export markets their capacity to compete with the world on equal terms.

But I think the time has come when we can, with advantage, review the generality of this policy of protection and begin to use it with more discrimination - remembering at all times that when the economy is fully employed, and this is the prevailing condition of our economy, a subsidy or a tariff in one area of industry reduces spending power or raises costs in another. I think you will agree one needs a good reason to penalise one industry for the benefit of another.

Conditions are now substantially different from the time when this widely protective policy was adopted. So long as we continue to be a good growth prospect there is little doubt of our capacity to achieve substantial full employment. Secondly, we were able in those days to carry through an extensive policy of protection because its burden fell primarily on export industries of a large-scale agricultural and pastoral type whose output, so far from being restricted by the higher costs, was, in some circumstances at least, stimulated into more economical methods - the more easily since for most of the time they were working on a substantial profit margin. Today the most important of these industries may well be struggling for survival. Furthermore, the make-up of our exports is increasingly shifting to minerals, meat, wheat and, most interestingly, to manufactures, the rise of which in our export figures over the last five years has been most dramatic. Now in some of these industries marginal additions to costs can be critical. We have shown that there is a wide range of industry within which we can produce and sell competitively with the world and there is much to be said for concentration of or resources to a greater extent in these industries.

Now an additional reason, I believe, exists in the changing structure of world trade. Increasingly the industries of the newly emerging countries of Asia are knocking at the door of the markets of the world. These countries - not far away geographically from this country - are in many cases our present markets and, even more importantly, our future markets. Our prosperity over the coming decades is likely

{p. 169} to be as much bound up with the success they have in raising their standards of production and income as it has been bound up over the last twenty years in the great growth of Japan. It is very much in our interests that the great markets of the world - in the United States and in Europe - should open their doors to the products of these countries and enable them to raise their standards of income and of living. Consequently it is very much in our interests that we set a good example to the rest of the world.

Some of the protection given here arises from a desire to provide a base for large-scale production in industries offering substantial economies of scale. I have sometimes wondered whether the device of some limited pooling of markets between countries is not a device worth fighting for. We would have to fight to be able to achieve it, in the face of resistance from established industrial powers - in the commercial councils of the world. A kind of common market between a regional group of countries, covering only particular industries, might well provide the opportunity - much more cheaply than extreme protectionist devices - of giving economies of scale to industries while still preserving something of a competitive environment. It is hard to see why a common market covering everything is virtuous, and a common market covering only a limited number of commodities is sinful. I think this is an idea which it would be worth while industries and government exploring.

Above all, is it wise to continue to use protective devices for maintaining producers in industries where it has been proven over the years that they lack the requisite resources or capacity? Let us indeed protect them against short-term fluctuations, let us be generous and humane in helping them into other occupations but surely it is foolish to burden the other industries in our economy with the relics and mistakes of the past. Such policies are no kindness to those concerned in these industries, who face in any case a declining future, and it is, believe me, an injustice to their children. Briefly, on this question, I would say:

(1) We are a good growth prospect and resources, particularly capital and entrepreneurial skill, will, for many years, continue to be scarce in this country. We should therefore economise in using them where they can be best employed.

(2) More and more of our industries will for effective operation depend less on local consumption and more on exports and on the production of capital goods.

(3) It will pay us to concentrate on these with an eye to economies of scale and not to burden costs by attempting to do a little of everything.

{p. 170} (4) We stand to gain by international commercial policies which

give the newer and poorer countries of the world a chance to raise

their standards of income.

Now let me emphasise this is not a case for no protection but an argument for a more discriminating use of it.

CAPITAL IN THE FORM OF KNOWLEDGE

Finally, I want to turn to the question of whether we have devoted enough of our capital, enough of our savings, to that form of capital which is embodied in knowledge. Increasingly industry becomes more and more dependent on human skills and knowledge - skills embodied in highly trained and experienced workers, technicians, scientists, technologists, supervisors, managers and entrepreneurs - and knowledge embodied in processes and in know-how. These resources do not come into the world unbidden or by accident. They must be planned for, worked for, and paid for.

In the past we have largely been content to borrow or to buy other people's knowledge. Now within limits this is good sense and good business - the world has built up and is adding, year by year, to a vast store of knowledge and skill, which we would be short-sighted to ignore and, judging by the cost of payments for patents, royalties and the like which we pay out overseas each year, I think we get good value for what we spend. However, to rely solely on the results of other people's work in these fields is to condemn ourselves to industrial mediocrity.

A few years ago I criticised Australian industry in this respect - saying that with a few honourable exceptions Australian enterprises were content to accept the best overseas techniques as the best possible. Since then the honourable exceptions have become more common but the interaction between newly emerging research and technological development and Australian industrial practice is still far from impressive by international standards.

Let me quote three examples from overseas. I am told that if a Japanese firm finds it necessary to install an imported machine, machine tool, or even a whole plant, there descends upon it before and during installation, and in the early stages of operation, a team of perhaps twenty young engineers, each of whom will write a personal report for the management on the equipment and its possible improvement. Often before it is even installed they have proved it to be obsolete or at least obsolescent. But where do you think the next machine, machine tool or plant is constructed; and who enters the international market for the supply of such equipment?

In the State of Massachusetts, U.S.A., there is a whole range of

{p. 171} industries which has grown there because in and around the city of Boston there is the greatest concentration of universities and research institutes in the world. There is a constant and planned communication between top management and technicians in industry and the scientists and teachers in the universities and institutes. These industries, chemicals, pharmaceuticals, electronics and the like - the science based industries - lead the world in their fields. And they lead the field because they make use of a particular resource that they have in tha area - the existence of scientific knowledge and scientifically trained people.

In America and in Europe it is standard practice for major firm to engage university teachers and research workers as part-time consultants. In Australia communication between universities and research institutes on the one hand and industry on the other is surprisingly small. There is a vast storehouse of stimulus and ideas existing in this country largely neglected by industry.

Accordingly, I commend the recent action by the Australian Academy of Science in setting up a Science and Industry Forum to stimulate the interchange of ideas between industry and science but this Forum is not likely to get far unless there is a change of heart on the pa of much of Australian industry.

Now I make this point for a particular reason. We in Australia are passing through a phase of unprecedented discovery of natural resources. Over the last few years we have discovered bauxite, iron ore, nickel, natural gas, oil, and copper in great quantities, actual and potential, and these are by no means the end of it. At the moment our activities in these fields are largely exploitative, directed to expo] markets in relatively unprocessed form. Everybody expects, however that in due course these resources will become the basis of a high] sophisticated processing and manufacturing industry, with a great variety of associated enterprises. But it must be recognised that may be decades before this development can be fully achieved.

Now what an opportunity is there here? Are we going to sit back and accept, at each stage of the development of these industries, t best available technology from overseas? Or are we going now l devote real resources to the problems of these industries so that when we come to the next stage of development we will be in the forefront of technology, not just in the ruck? In some of these industries techology is already in a state of flux and change is inevitable and, abo the rest, who knows what intelligence, energy, and resources will reveal? It seems to me that here a planned assault on the science and technology of these future industries by a partnership of the firms concerned - Australian Government research enterprises, universities, ar institutes of technology - would be a splendid adventure and would

{p. 172} almost certainly pay handsome dividends to the owners of these developing industries.

In other words, I am convinced that in the long run the most important capital for industry is the capital which is embodied in knowledge and in the people who possess it. One of my fellow bankers has a slogan which urges you to 'Get with the Strength'. My advice is 'Get with the Knowledge'. Cast your bread generously on the waters in this respect and it will almost certainly return to you many-fold - and in the meantime, it will open up for you new horizons more exciting than any you have known.

END

Monetary Financing during the Coronavirus crisis (2020): Central Banks should directly fund government expenses. The only reason for NOT doing it, is that foreign investors don't want the value of their investments reduced. But since all countries are in the same boat, all can do it without much effect on exchange rates: coronavirus-finance.html .

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