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Tuesday, 19 December 1911

Mr DEAKIN (Ballarat) .- The experience of Queensland is an open book to the financial institutions of Australia, and the fact that Queensland institutions have not seen fit to protest against this proposal, while perhaps worthy of casual notice, cannot be instanced to depreciate the general experience of Australia. The proposal goes to the root of the financial position, not merely of Queensland, but o£ the whole Commonwealth. The Prime Minister is entitled to make what he can of the fact that there has been no sort of failure in Queensland under this system, but any financial stress of that State is but a fraction of that of the Commonwealth, whose interests we are considering. The verbal promise of the Prime Minister to keep for the next twelve months a reserve in gold of 40 per cent, is, so far as the period goes, fairly satisfactory.

Mr W H IRVINE (FLINDERS, VICTORIA) - It renders the Bill unnecessary.

Mr DEAKIN - Perhaps, for the time for which it holds good. I suggest that the period during which a gold reserve of 40 per cent, shall be held to meet all emergencies be extended to two or three years. If that is agreed to, the whole matter may be disposed of in a few minutes.

Mr Fisher - The holding of 40 per cent, in the manner suggested by the honorable member will not work at all.

Mr DEAKIN - Will the honorable member extend his promise to hold 40 per cent, until the commencement of the next Parliament ?

Mr Fisher - I am willing to agree to that; to hold 40 per cent. until we have been before the electors.

Mr DEAKIN - The Bill will be amended to provide that ?

Mr Fisher - I do not think that we can do that.

Mr DEAKIN - No one doubts the iPrime Minister's word, but it is necessary to put his promise on record on the statutebook for the information of the people of the Commonwealth, and of our critics overseas.

Mr Fisher - We could not provide by Statute for a 40 per cent. reserve, because there might not be a working margin. I have promised to retain 40 per cent. against any sudden demand.

Mr DEAKIN - I understood that 40 per cent. of the whole issue was to be retained.

Mr Fisher - Yes, but there must be 15 per cent. as a working margin. We shall replenish the reserve, if necessary, from time to time.

Mr DEAKIN - I should like to see that provided in the Bill, though there is a good deal in the Prime Minister's objection, and I shall not press my request.

My feeling in regard to the original measure was largely due to the statements of the Prime Minister when introducing it. He then pointed out that while, to use his own words, a reserve of 25 per cent. was "not in any sense absolutely necessary," yet, to make things doubly secure, he was willing to increase that margin. He went on to say that therefore he - deemed it advisable to limit the issue of Australian notes, or rather to increase the protection to the note holder by compelling the Treasurer to hold gold against all issues in excess of £7,000,000.

That has been, and is now, the position. He continued -

We agree with that, but the clear implication is that to depart from it would make the scheme unsafe or not " absolutely safe," and in national 'finance absolute safety is essential very much more than in individual affairs. Then take the next sentence -

There, again, the implication is that, with an issue above £7,000,000, there would be danger of an inflation which we must be prepared to meet.

If it should happen that notes are issued ondemand to the extent of a million or two in excess of ordinary requirements, then, of course, this precautionary measure would take effect.

All above £7,000,000 was to be represented by gold retained in the Treasury.

Mr Fisher - What is the practice now ?

Mr DEAKIN - The Prime Minister, by his own confession, is forsaking the absolutely safe course for one wnich he thinksnearly safe ; he passes from a state of things in which there was no danger of inflation to one in which there is confessedly that danger. This is only met by the guarantee he has given to the House this afternoon. The deduction from his own statement is that the arrangement which hesuggests as temporary should certainly be permanent. Confessing that in these matters I am dependent on information supplied to me, and am not relying wholly on. my individual opinion, I have thought it well to fortify myself by considering, not only the reserves which have to be kept, but the reserves actually kept without compulsion for the most part by the foremost financial institutions of the world. These are standards by which Australianswill be judged, and can be judged, I hope, without fear. I find, taking the returns for the last two years available, that in. the case of the Bank of England the actual percentage of reserve to liabilities was but a shade below 50 per cent., whilst in the second year it was all but 52 per cent. The-' reserve retained in the case of the Imperial Bank of Germany during the last year for which the figures are available amounted to more than 50 per cent., while that retained by the Swiss National Bank was also above 50 per cent. I look through theIndian currency returns, and find that they are but a little lower. In the daily management of these huge financial undertakings we find that the amounts thought necessary to be retained, whatever the compulsory reserves may be, approach 50 per cent. This surely establishes the standard that we ought to adopt. In New Zealand, for the time being, the gold reserve amounts to one-fourth up to an issue of £3,000,000, and above that amount a sovereign is retained for every note issued. That is the position in the Dominion, where finance has always been more enterprising than in Australia, The statement made by the PrimeMinister has altered the whole situation in relation to this measure.

Mr Fisher - I am not after money.

Mr DEAKIN - But it was with some surprise that I read the communication addressed by Mr. French, General Manager of the Bank of New South Wales, to the Prime Minister, in which, speaking for the banks in their head offices in Sydney, he strongly deprecated - any alteration in gold reserve to be held against note issue of Commonwealth Government as agreed toafter very full discussion between yourself and representatives of Australian banks. I would remind you that a very large proportion of notes outstanding is held by banks themselves as part of their cash reserves.

Mr Fisher - With great respect to Mr. French, I say that there was nounderstanding whatever with regard to the amount in notes which the banks should hold.

Mr DEAKIN - Mr. French states that the matter on which an understanding was arrived at was that there should be no alteration in the gold reserves held against the note issue.

Mr Fisher - I did agree at their request to put that in the Bill.

Mr DEAKIN - This throws a further light on what was in the Prime Minister's mind at the time.

Mr Fisher - I did it to please Mr. French and the others, although they never convinced me of the necessity for it.

Mr DEAKIN - It was necessary for the Prime Minister to give that undertaking then in order to convince the representatives of the banks, and they are more than ever convinced now that a great deal depends on the observance of that undertaking. These experts not only represent a huge amount of capital and a long experience, but have no possible interest in crippling the financial operations of the Commonwealth. It is rather to their interest to encourage the Prime Minister's financial and other operations, in order that they may secure a better harvest for their own shareholders.

Mr Fisher - There was no agreement as regards the amount in notes which they should hold, and it is not desired that they shall hold more than their necessities demand.

Mr DEAKIN - What we have to foresee is a condition of affairs forecast already by the Journal of Commerce, which devotes its columns to the consideration of questions of this character. It points out that at any moment in Australia, notwithstanding the broad distinction between our own circumstances and those of Canada, to which the Prime Minister referred, our banks may be required by their exchanges with the Mother Country and elsewhere to ship gold heavily in adjustment, and that -

With the exchanges adverse, the banks with which the Treasurer does by far the greater portion of his business - which have to depend upon him whilst he depends upon them, would, by their very business necessities, have to make demands upon the Treasury that would entrench upon the 40 per cent. reserve which the Treasurer now proposes to maintain.

Mr Fisher - A demand for £2,000,000 would not disturb us.

Mr DEAKIN - An even greater demand might be made in some circumstances.

Mr Fisher - I cannot conceive of the banks demanding more than. £2,000,000 without giving notice.

Mr DEAKIN - They would give the best notice open to them, but whether or not that notice would be sufficient for the Treasurer, is quite another matter, and one of vital importance to the country.

Mr W H IRVINE (FLINDERS, VICTORIA) - When the banks wanted the gold, the Government would be without it. The same circumstances that would make the banks want gold would cause a stringency so far as the Commonwealth Government was concerned.

Mr DEAKIN - Exactly. We are to have another eighteen months' experience of the working of this system before we are likely to be visited by circumstances that will put a strain on our reserves. In view of that fact, the present discussion is to be postponed, and I propose to refrain from making certain other observations that I had intended to offer. From my own point of view, I venture once more to urge that every step taken at the present is more important than a number of steps taker, when we shall be better known and understood. I advocated, and would still advocate, a 50 per cent, instead of a 40 per cent. gold backing being retained during the first years of this operation ; and I advocate extra caution, not merely for its own sake, but until the financiers of the Mother Country and our own great financial institutions, understand our system sufficiently to give them complete confidence in it, no matter how the financial clouds may lower on the other side of the world, or how war or insurrection might threaten to plunge us into difficulty. If, for the first few years, we maintained an unreasonably high margin, we should be acting in the best interests of the community. We are now at a stage at which even a little panic might have serious effects. We have our financial reputation to establish. Once it is established, we can sit at our ease, as they sit at ease in England, notwithstanding operations that may be affected by the most distant crisis, and other circumstances that give one a feeling almost of vertigo, until one discovers how much of this is built on credit, and the reputation of the Mother Country for unimpeachable finance, as well as a capacity to face all situations. In a lesser degree, that should be one of our aims ; and if I, like others, am a timid and cautious counsellor at this stage, it is because I believe we have now an opportunity to win the confidence of the financial world, which is a great deal better than running even a very small chance of losing it by some unexpected hazard.

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