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Tuesday, 10 November 1959

Mr HAROLD HOLT (HigginsTreasurer) - by leave - I have thought that it would be of interest to the House if I were to review briefly the proceedings at the meetings I recently attended of the Commonwealth Economic Consultative Council in London and the International Monetary Fund and International Bank for Reconstruction and Development in Washington. I should also like to say something of my borrowing negotiations abroad and of the present state of world trade and finance generally. In London I attended the first meeting of the Commonwealth Economic Consultative Council so far held at the ministerial level.

Honorable members will recall that, at the Montreal conference last year, it was decided to bring together under this general title the various gatherings of Commonwealth Ministers and officials which meet from time to time to discuss financial and economic matters. Marlborough House, which was generously offered for the purpose by Her Majesty the Queen, is to be the head-quarters of the council, when the necessary renovations and adaptations to the building have been made.

At the recent meeting the main subjects discussed were the outlook for the sterling area balance of payments, problems associated with the financing of economic development, and European trade arrangements.

Our discussions on economic and financial matters had a background of rising world production, employment and trade. In the United States real gross national product in the second quarter was 10 per cent, above the figure for the second quarter of 1958 and, although subsequent falls in the index for industrial production indicated some slackening in this rate of growth, it was expected to be no more than a temporary setback caused by the steel strike. The recovery has led to a drop in unemployment to around 5 per cent, of the labour force, compared with about 7 per cent, in the middle of last year, and there are no indications that it has upset the relative stability the price level has shown over the past year. In Europe it was also evident that, after a rather slower beginning than in the United States, recovery was well under way. In the second quarter, industrial production in Organization for European Economic Cooperation countries was over 5 per cent, higher than a year earlier, and in practically all of these countries the recovery has been accompanied by a fall in unemployment and relatively stable prices. In Japan the expansion of economic activity has proceeded at an even faster rate than in the United States; industrial production in thesecond quarter was over 20 per cent, higher than in the second quarter of 1958.

The review of the sterling area balance of payments revealed a position of quite remarkable strength. Since the move te? external convertibility undertaken by the United Kingdom Government in concert with the governments of the major European countries at the end of December last, sterling has remained strong and the United Kingdom's reserves of gold and convertible currencies have been rising steadily. At the same time, the sterling area countries have added to their second-line reserves by reason of their increased quotas in the International Monetary Fund. This is also true of other members of that institution. It is probable that the full significance of this massive addition to international liquidity has still to be realized.

From one standpoint, the improvement in the fortunes of the sterling area reflects the turn-round which has taken place in the United States balance of payments. The United States had a balance of payments deficit in 1958 of some 3 billion dollars and, in 1959, the deficit seems likely to increase still further to some 4 billion to 4.5 billion dollars. Despite this large balance of payments deficit the United States gold reserves remain high and there are no valid grounds for lack of confidence in the soundness of the dollar. What has been taking place is a welcome and valuable redistribution of monetary reserves to the benefit of the world trade and payments system as a whole; and it is encouraging to see that these developments have begun a widespread movement towards the reduction of trade restrictions and discrimination which is still in process.

Not all Commonwealth countries have, of course, fared equally well. Most of the primary exporting countries are still feeling the effects of the earlier swing in the terms of trade against them. Trends in commodity prices have lagged behind the expansion of industrial output in the major industrial countries. The reserves of some countries which depend on primary exports remain low, and most are still obliged to retain fairly comprehensive import restrictions to safeguard their external financial position.

Nevertheless, although the terms of trade may for some time remain less favorable to primary exporting countries than in the earlier post-war years, there has been some firming of the prices of major sterling area commodities and, in view of the obvious signs of economic expansion in the United States, the United Kingdom, Europe and Japan, to which I have already referred, further improvements may be expected. Thus, although individual sterling Commonwealth countries still have their problems, the outlook for the balance of payments of the sterling area as a whole can be said to be more favorable now than at any time since the end of the war.

Turning from this general review of the economic background to the practical difficulties that arise in financing economic development in the Commonwealth, Ministers were faced with the familiar problem of a world-wide shortage of capital, with competition for it becoming ever keener. This competition comes not only from the less developed countries but from within the industrialized countries themselves, where the rapid pace of technological change is continually creating new demands for investment.

Within the Commonwealth the only net exporter of capital is the United Kingdom. With the improvement in her economic situation, exports of capital from the United Kingdom have been rising. It is, however, natural that the United Kingdom Government should wish to maintain a proper balance between investment at home and investment abroad, and the demands for development capital in other Commonwealth countries greatly exceed the total the United Kingdom can supply.

The council considered the question of whether the setting up of a Commonwealth Development Bank might assist in mobilizing additional capital for economic development in the Commonwealth. The general view was, however, that it would not be opportune to pursue this proposal further until more was known of the outcome of the American proposal to set up, as an affiliate of the International Bank, an International Development Association - now widely referred to by the initials I.D.A. The purpose of the I.D.A. would be " to promote, by financing sound projects of high priority, the economic development of less-developed member countries whose needs cannot be adequately met under International Bank lending programmes". Those words are taken from the statement of the proposal by the representative of the United States; the formal definition of the association has not yet been promulgated.

Under the American proposal, which has so far been put forward only in broad outline, the I.D.A. would have an initial capital equivalent to one billion dollars. Members would pay 50 per cent, of their subscription immediately and the remainder in equal instalments over five years. The United States subscription would be proportionate to its subscription to the International Bank and would thus amount to about 320,000,000 dollars. The Americans would also presumably expect other countries to contribute proportionately to their International Bank subscriptions. On this basis Australia would, if she became a member, be called on to subscribe about 20,000,000 dollars of the one billion dollars proposed.

The United States hopes that all " industrialized " countries - a definition which appears to be generally regarded as including Australia- would agree to make their subscriptions fully convertible. The lessdeveloped countries would be required to make only 20 per cent, of their subscriptions convertible, the balance being contributed in their own local currencies.

The Americans also propose that the I.D.A. should be permitted to accept additional contributions from one member in the currency of another, a device which is apparently designed to enable the United States Administration to pass over to the I.D.A. some of the local currency holdings the United States has accumulated from surplus disposal deals.

Only the less-developed countries would be eligible for loans from the I.D.A., and it seems to be contemplated by the Americans that provision will be made for the loans to be repaid, at least in part, in local currencies. This would mean that the I.D.A. would tend to use up its resources of convertible currencies and the Americans propose that there should be periodic replenishment of the I.D.A.'s capital resources to which each member would have a right, but not an obligation, to subscribe proportionately. It was, I think, extremely useful for Commonwealth Ministers to have the opportunity to discuss this important American initiative amongst themselves before the Washington meetings.

Those honorable members who heard the discussions at the recent meeting of the Commonwealth Parliamentary Association will be fully aware of the importance attached to developments of this kind by members of the British Commonwealth of Nations, particularly those who do not come within the definition of industrialized countries. Undoubtedly, they are looking to sources such as this for development capital to enable them to make more effective use of their own resources and their potential in order to raise living standards.

All present at the conference in London could accord a warm welcome to the general purpose of an institution such as the I.D.A. which would channel additional funds towards those less-developed countries whose needs cannot be met from other sources. But there are many points, both of principle and of detail, in the broad outline of the American plan so far available which raised doubts in the minds of various Commonwealth Ministers. The discussion in London assisted all of us in dealing with the subject in the later Washington meetings, and will be of continuing value in the detailed work still to be done in drawing up the draft articles of agreement of the I.D.A. for consideration by governments.

The other main subject dealt with in London was the recent developments in relation to the European Common Market and the negotiations now in progress for the separate establishment of a European Free Trade Association consisting of the United Kingdom, the Scandinavian countries, Austria, Switzerland and Portugal.

The European Common Market is now an established fact, and the negotiations for drafting the charter of the proposed European Free Trade Association have reached an advanced stage. The Australian Government, although a supporter on political as well as economic grounds of closer European economic integration, has viewed recent developments with some concern.

The United Kingdom sees the European Free Trade Association as a step towards a wider European Free Trade Area, the earlier negotiations for which broke down. Continued economic division between separate European trading blocs could scarcely fail to be a disruptive influence. It is certainly to be hoped that the formation of the European Free Trade Association will lead to a wider grouping embracing all the countries of western Europe.

Apart from concern about the need for avoiding political and economic division in western Europe, Australia, in common with other primary exporting countries, has felt some anxiety about the degree of agricultural protectionism in Europe and the indications that this deeply entrenched protectionism may be intensified as the European countries draw closer together.

I took the opportunity at the London meetings to express our concern on these matters and sought, and obtained, from the United Kingdom Government assurances that we should be fully consulted at every stage. I made it clear that we could not give any general approval in advance to new arrangements which might affect our interests. The interests of a number of Commonwealth countries are, of course, very similar to our own and I think we may expect a good deal of support in the Gatt and elsewhere in seeking to ensure that these regional arrangements do not unduly prejudice the trading interests of third countries. The tone of the Commonwealth meeting throughout was warm, friendly, constructive and mutually helpful. I came away more than ever convinced of the value of such discussions between members of the Commonwealth family.

In Washington it was my privilege to attend, as. Australian governor of those institutions, the annual meetings of the International Bank and International Monetary Fund. A pleasing feature of this year's meeting of the International Bank was that it marked both the tenth anniversary of the assumption by Mr. Eugene Black of the office of president and also the doubling of the authorized capital of the bank. Under Mr. Black's wise leadership, the bank has made great strides in developing its lending programmes and, with the increased backing now available to it, its growing importance as a source of capital for the economic development of its member countries seems assured. As expected, the United States moved a resolution referring its I.D.A. proposal to the executive board of the bank in order that draft articles of agreement might be drawn up for consideration by governments. This resolution was unanimously adopted.

Speaking for Australia, I welcomed the American proposal in principle. I recognized that there is no more important challenge facing us in the field of economic statesmanship than the question of adequate development capital for the needs of the underdeveloped countries. At the same time, I made three points. First, I drew attention to the fact that the world cannot be neatly divided into the two categories " industrialized " and " less-developed ". Australia, and a number of other countries, stand at a half-way stage between the maturer more highly developed countries "and those still trying to find their feet. We are ourselves large net importers of capital and have only limited capacity to contribute to the capital needs of others. Within the limits of our resources we are already making a substantial contribution, through the Colombo Plan and in other ways. Second, I urged that provision be made in the I.D.A. charter for aid to dependent territories who would not be eligible for

I.D.A. membership in their own right, a matter of very great importance, to Commonwealth countries.

Third, I joined with others in expressing concern at the local currency aspects of the American proposal. I pointed out that, with the important progress made towards full convertibility of currencies, it would be incongruous, and on the face of it undesirable, if we were to set up at this time a new international institution one of the consequences of which would be the creation of new holdings of inconvertible or semi-convertible local currencies. Operations in local currency could, particularly in the long run, lead to distortions of the normal patterns of trade. I said I did not believe it to be beyond the ingenuity of the bank's executive directors to devise means of avoiding the creation of new holdings of local currencies. On the question of possible Australian membership, I made it clear that we could accept no advance commitment.

The executive board of the bank has already begun preliminary discussions on the I.D.A. charter, taking into account the views expressed by the various bank governors at the annual meeting. Through our representative on the board we shall, of course, continue to keep in close touch with, and play a part in, this important task. The whole matter will be given further consideration by the Government as soon as a draft charter is available.

The outstanding feature of the speeches on the annual report of the International Monetary Fund was the high quality of the debate on the world economic situation. The tone for this debate was set by the admirable introductory address by the distinguished managing director of the fund, Mr. Per Jacobsson. The governors for the United States, the United Kingdom and other important countries also made notable contributions. Listening to the debate, I could not help gaining the strong impression that the annual meetings of the fund and bank this year could be seen as marking the end of one epoch and the beginning of another.

After a period of almost a decade and a half since the end of the war, during which practically all countries have suffered from periodic bouts of inflation and associated balance of payments difficulties, it may well be that we are now entering a period of more orderly and stable conditions. In part, this is associated with the final overcoming of the initial back-lag of demand, both for consumer and capital goods, which was the aftermath of the war period. In part, too, it derives from the continued expansion of world sources of supply, particularly of raw materials and foodstuffs. Certainly, the major industrial countries now seem more confident of being able to sustain the growth of their economies with much greater stability in prices than has been the experience in recent years. Indeed, Mr. Jacobsson included in his speech the pregnant statement, " In all likelihood, world inflation is over". He added a warning which I think we should all be wise to ponder. He said, " My belief is that strong forces in the world economy will act as a brake on price increases and that the international trend will therefore be towards stability. If any individual country - I ask my colleagues in this country to mark these words - embarks on inflation, it will do so at its own risk, for gone are the days when any one country which inflated might hoped to be saved by inflation elsewhere. The balance of payments difficulties which would quickly ensue might even make it hard to maintain a high level of employment."

The developments to which Mr. Jacobsson referred have undoubtedly played a large part in the transformation of the world payments situation. The trends in the United States balance of payments and the enlargement of fund quotas, to which I have already referred, have greatly increased the size and improved the distribution of international liquidity. The foundation has thus been laid for further substantial progress towards reducing restrictions and discrimination in the field of trade and payments. Certainly, the international mood has hardened against restrictions imposed on balance of payments grounds. Countries seeking to justify retention of such restrictions will in future be required to prove their case up to the hilt. This is a trend from which Australia, as an important trading nation, can only stand to gain. But we must recognize our own responsibility to make progress with the dismantling of our remaining restrictions as rapidly as we can prudently do so.

Finally, I might mention that, on the final day of the Washington meetings, the Australian governor was, on the motion of the United Kingdom, seconded by the United States, unanimously elected as chairman of the Boards of Governors of the Fund and Bank and the International Finance Corporation for the ensuing twelve months. I regard it as a great honour that I should have been able to accept these posts, which may fairly be interpreted .as a mark of the esteem in which Australia as a country is held in these important and influential international institutions.

Apart from my attendance at the London and Washington meetings I was concerned while overseas with the completion of negotiations for our recent 25,000,000 dollars loan in New York and with taking soundings in a number of other capital markets in which we have present or potential interests. The position we faced in New York in September was a difficult one. After the timing of our issue had been tentatively decided, there was a crisis of confidence in the market associated with the refusal of the United States Congress to authorize an increase in the maximum permissible interest rate on long-term bonds. In point of fact, by statute the United States administration is not permitted to raise loans on a long-term basis at an interest rate in excess of 4i per cent., and although it sought to have Congress raise this permissible limit and allow it to operate more realistically within the market as it existed at the time, Congress so far has not shown that it is willing to do so, or certainly has not carried through the necessary legislative processes. Yields on United States government securities rose very sharply, carrying with them the yields on other securities, including our own. This was followed by increases in the prime lending rates of the commercial banks and in the Federal Reserve Bank's re-discount rates. In fact, the United States Government, since our own loan was raised, has had to pay interest at 5 per cent, for a loan of four years ten months' duration inside the United States.

Despite this adverse turn of events we received an underwriting offer for 25,000,000 dollars at a time when several local corporate issues were being undersubscribed and several proposed issues were not able to reach the market at all. The terms finally negotiated were more expensive than we had previously had to pay in New York - not on this operation, but on the earlier categories - being 5i per cent, at an issue price of 97 to yield 5.75 per cent., compared with our loan in October, 1958, there, which was issued at 97i per cent, with a coupon rate of 5 per cent, to yield 5.2 per cent. But, because of Australia's high credit standing, they were certainly better terms than any other borrowing government outside North America would have been able to negotiate. Associated with the regular underwriters, Morgan Stanley and Company, were 70 of the strongest finance houses in the United States of America.

A further indication of the state of the North American market is given by the price the Canadian Government had to pay to finance a refunding operation it launched on 1st October this year. Bonds for one year seven months carrying an interest coupon of 3 per cent, were offered at 94.65 to yield an effective return of 6.6 per cent.

Our new securities sold slowly at first, but in the end the issue was over-subscribed. After opening at a small discount on the issue price of 97 the securities are now trading at a useful premium. Latest reports reveal that the price has risen to 98i. I am confident that the success of this issue will enhance our prospects for further capital raising on the New York market. Certainly it assisted to raise our prestige there at a time when the market was in such a sensitive and difficult condition.

It is perhaps not widely realized how large a share Australia has been able to secure of the very limited amount of capital which outside governments are able to raise on the New York market. I stress this because there are criticisms that our credit cannot be so very good if we do not raise very much overseas, as has been the case in recent years in comparison with our internal loan raisings. It will be found, however, that the amount we raise overseas is high compared with what other governments outside the international financial markets are able to secure .from them. Quite clearly it is easier for Canada, which is the United States' next-door neighbour and has had a very close relationship with the United States over the years, to raise loans on the New York market than it is for governments outside North America; but even Canada, on its internal loan operations recently found it necessary to pay the sort of interest rate I have mentioned. On the New York market since April, 1954, governments outside North America have raised about 417,000,000 dollars, which is about £186,000,000 Australian, by longterm borrowings. Of this total 145,000,000 dollars, or £65,000,000 Australian has been raised by Australia in cash or refinancing loans. So more than one-third of the total loans raised by outside governments on the New York market since 1954, although by the standards of our own internal borrowings the amount is not very great, have been raised by this country. That confirms what I have publicly claimed - that our credit stands very high indeed in the United States.

Apart from this specific loan negotiation in New York I had discussions of a more general character in that city and also in London, Basle, Bonn and Washington on our needs for external capital and on the general situation in the world's capital markets.

In referring to our own position I stressed that the rapid rate of economic growth and population increase in Australia called for increasing supplies of capital to finance the essential works programmes of Australian public authorities. I pointed to the magnitude of the efforts we ourselves were making through internal loan raisings - and they are very considerable indeed by the standards of other countries - and by meeting from current revenue not only the Commonwealth Government's whole capital needs but also the residual needs of the States over and above what we can raise by way of loans. The Australian picture therefore, I was able to point out, was not one of an improvident country seeking overseas assistance to remedy deficiencies created by its own policies; it was rather one of a fast-growing economy seeking to supplement its own considerable efforts by obtaining marginal, but useful, assistance from overseas capital. During 1958-59, for example, of the total of £209,000,000 of loan raising, £31,000,000 -but only £31,000,000 - was derived from overseas, and that was one of our largest borrowing years overseas.

It is my hope that we may be successful in raising a further substantial amount in 1959-60. However, it has always to be realized that, where capital markets are concerned, external lending is conceived as being on a totally different plane from, and subject to much greater hazards than, internal lending.

Many people have fresh in their minds the experience of earlier periods when those who invested in Government bonds of countries outside their own boundaries suffered heavy losses because of war, depression and other difficulties. But confidence is, I think, being steadily restored in the international bond market, and certainly investors are disposed to look for those countries whose policies are sound and whose credit standing is high. Australia can fairly claim to be in the front rank of this category. Thus, notwithstanding the magnitude of such capital markets - and when I say " thus " I mean that the market is limited - as New York or even London, the amount of their resources which is, in fact, available to external borrowers is marginal in the extreme. There are, moreover, a great many applicants knocking at the door.

New York has become, and probably will remain, our most important source of new money raisings. We would hope to be able to continue to raise some new cash in London also as opportunity offers. The position there is complicated by the need for refinancing existing stocks of ours which will mature in the next financial year; but our credit standing is high in London, and we should be able to take advantage of any borrowing opportunity which occurs during the next few months. However, again illustrating the comparative smallness of the market available, I point out that the only external borrowers on the London market between September 1958 and September 1959 were Commonwealth countries, and of the total amount of about £50,000,000 sterling raised by way of cash and conversion loans Australia secured £35,000,000. The United Kingdom, of course, has to have regard for the requirements of other Commonwealth countries as well as ours. I think this should indicate to the House that, although the United Kingdom Government welcomes our approaches, there are practical limits to what that market can yield to us.

We examined what might be available on the Swiss capital market. This, though small, is a well-established international market and a useful source for marginal amounts of new capital. We have already arranged two issues there - in 1953 and 1955 - and my talks in Basle were directed to the possibility of further issues as circumstances permit. The matter of timing, however, is one for discussion with the Swiss authorities, who naturally wish to ensure an orderly approach to their market by foreign borrowers, and a fair allocation of available funds.

My talks in Bonn, in West Germany, were of a general exploratory character. They revealed a new attitude by German financial interests to external lending, arising from a growing consciousness of West Germany's strong creditor position. The German capital market is in an interesting state of transition. It has never been, in these post-war years, 'of course, a large international lender, but, in the long run, it may well become a useful source for us to tap. For the immediate future, the prospects are not promising.

Mr Calwell - Are you thinking of borrowing from West Germany?

Mr HAROLD HOLT - Interest rates and other borrowing costs in Germany remain high. Moreover, the West German Government has just floated its first public issue at an effective interest rate in excess of 6 per cent. That is on its own market. The internal government borrower, of course, can usually borrow at much more favorable terms than can any external government borrower. The amount involved - £32,000,000 or thereabouts - would be regarded by us as comparatively small. Yet I gather that this is regarded as a substantial operation on the German market as it exists at the present time, despite the obvious financial strength of that country. That market is not at present really geared to this business of large-size bond market operations, and the internal interest structure is considerably higher than that of countries which do engage in a considerable way in bond market operations. All of the West German Government's previous capital requirements have been financed from budget surpluses. This new trend under which the Government is coming into its own domestic market in this way will inevitably reduce the amount of funds available for foreign lending.

Finally, I took the opportunity, while in Washington, to talk over with Mr. Eugene Black the outlook for further International Bank loans to Australia. The bank's attitude on this, understandably, is influenced by the fact that Australia has already obtained from the bank more development capital than has been obtained by any other bank member except India. It is also fundamental to International Bank policy that countries able to borrow adequate sums on the world's capital markets on their own credit should do so rather than seek aid from the bank. Nevertheless, I do not by any means regard the bank as being closed to Australia as an additional source of loan money. We shall certainly continue to seek further borrowing possibilities which will comply with the bank's requirements.

Official borrowings, of course, represent only a small part of the total external capital which has contributed to our economic growth in recent years. In view of the interjection made a little earlier by the honorable member for Melbourne (Mr. Calwell;, I think I should stress again that these borrowings represent only a small part of Australia's total loan raisings. We are doing a major job for ourselves by what we raise inside Australia, but anybody who suggests that we can maintain our current rate of national growth without supplementing our internal loan raisings, and what we apply from revenue for capital purposes, by some marginal and supplementary assistance from overseas, just does not understand what he is talking about, and is inviting an upsurge of inflation in this country.

Mr Calwell - You could divert loans to the Government by amending the Australian Constitution and doing something about interest rates.

Mr HAROLD HOLT - Does the honorable member want us to increase interest rates?

Mr Calwell - 1 want you to control them and to do something about the people who are charging exorbitant interest rates.

Mr HAROLD HOLT - I think most people in Australia feel, Mr. Speaker, that we are increasing our national loan indebtedness at a considerable rate. They are by no means dissatisfied with the financial policies of this Government, which have enabled us to maintain a relatively satisfactory degree of price stability, to keep employment high - higher, I believe, than is employment in any other industrialized country - and, at the same time, to go rapidly forward with our process of national development.

Much larger sums than we have borrowed overseas have come into Australia through private investment channels. The strong impression I gained in the various centres I visited is that there is a growing interest overseas in investment in Australian industrial and commercial enterprises. There seems no reason why, if we are successful in keeping up the momentum of our econ.nomic growth while, at the same time, maintaining reasonable internal stability, Australia should not continue to attract a steady inflow of private investment capital. Certainly, I can vouch from first-hand experience for the high standing Australia enjoys at the present time in the business and financial centres of the world.

I lay on the table the following paper: -

International Finance, Trade and Development - Visit abroad of Treasurer - Ministerial Statement.

Motion (by Mr. Downer) proposed -

That the .paper be printed.

Suggest corrections