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Tuesday, 13 October 1931

Mr THEODORE (Dalley) (Treasurer) . - I move-

That the bill be now read a second time.

There are two measures upon which I propose to address the House, the bill of which I am now moving the second reading, and that of which the second reading will be moved to-morrow, which is ancillary to the measure now under consideration.

The outstanding public debts of Australia were considered in regard to a financial rehabilitation plan the particulars of which were settled at a conference of Commonwealth and State Ministers held in Melbourne in June last. This plan involved among other things - including the reduction of private interest rates on mortgages and bank loans - economies in governmental expenditure by the reduction of salaries, wages, invalid, old-age, and war pensions, and also in relation to certain classes of fixed money claims, a very substantial portion of these claims being the interest that had to be paid on Government securities. To effect a saving in the annual interest bill of the governments of Australia, it was necessary to provide for the conversion of all the outstanding loans under terms which would reduce the interest rates. As no cash subscriptions were to be invited, it was obvious to those attending the conference that the conversion or redemption of 100 per cent. of the debts could not be expected. Usually, when a loan matures, action is taken to provide for its redemption by issuing a conversion loan, and inviting cash subscriptions at the same time, and the cash subscriptions are sufficient to meet the unconverted portion. That course was impracticable in this case, because of the magnitude of the necessary conversion and the disturbed condition of the Australian money market at the time. It was held that the conversion could be justified on the ground of national necessity, or by obtaining the sanction to it of the large body of holders of government securities; but we could not hope to obtain the sanction of every one of those bondholders. For one thing, it was impossible to get into touch with them all. There were more than 300.000 individual holders of government securities of various kinds, and they were scattered throughout the Commonwealth, and some were abroad. By no conceivable means could their consent be obtained in advance. But we could approach a substantial part of these holders by offering conversion terms, and allowing them to express their willingness to convert or their intention to dissent. That was the course adopted. When the details of the scheme were being considered at the conference of Commonwealth and State Ministers, the consensus of opinion was that compulsion would be justified: but it was recognized that there were advantages in providing for conversion upon a voluntary basis, giving to bondholders the opportunity to participate voluntarily in the sacrifices involved in the rehabilitation plan.

Mr James - Why did not the Government give the same opportunity to the pensioners?

Mr THEODORE - If the honorable member puts that question seriously, my reply is that there was no contract between the pensioners and the Government. Pensioners - old-age, invalid, exsoldiers and others - enjoy their rights under acts of this Parliament, and although what was done by amending these acts may have inflicted hardship, it cannot rightly be held to be a breach of contract. On the other hand, a definite contract was entered into between the bondholders and the various governments to which they had lent their money. As I have said, the consensus of opinion at the conference was that, because of the financial emergency, the various governments might be warranted in providing for compulsory conversion, thus setting aside the terms of the contract with the bondholders. It was, however, thought that a conversion could be carried out on a voluntary basis, though there was the tacit understanding that if a substantial portion of the loan were left unconverted, that portion would have to be dealt with somewhat in the manner now proposed.

The results of the conversion plan will be best understood by the consideration of the following figures: -


The amount held by dissentients was thus a little less than 3 per cent. of the total outstanding public debt. This being so, it must be recognized that the conversion loan was a complete success, the response being equal to the most sanguine anticipations. This has justified the proposals of the conference for the conducting of the conversion. A little more than 97 per cent, of the holdings were converted, and the cost of the conversion operation was only about £50,000, a very small amount compared with the magnitude of the loans converted - of which about £19,000 was spent on advertising, and the balance in printing forms of application, and bonds, on postage, and on the services of various persons who assisted in the conversion operation.

The annual savings in interest to all the Governments for a full year in consequence of the conversion will be about £6,500,000, taking into account the £16,655,759 worth of securities hold by dissentients.

The following table shows the total number of conversion applications actually lodged: -



Several problems connected with the conversion operation were fully discussed by the Premiers Conference in June, and the decisions in regard to them incorporated in the Debt Conversion Agreement Act which was passed by Parliament a few weeks ago, and was the basis of the conversion operation. Among those problems was what should be the maturity dates of the new securities. The general plan of the Debt Conversion Act provides for the amounts converted being spread equally over ten maturity dates, which range from 193S to 196:1. Authority to vary this mode of allotment was given. It was provided, for instance, that the method could be varied in respect of holders of amounts not exceeding £1,000. Such amounts could be allocated to two or more maturity dates. Authority was also given to deal separately with the holdings of trustees. Other classes of securities affected were those in respect of which there were special circumstances, those held by savings banks, and those in the nature of overseas trade money investments. In respect of holdings of £1,000 or less, the following maturity dates have now been fixed : - First £200, 1938; next £300. 1941; next £500, 1944. Particulars showing the result of this allocation are not yet 'available.

Many applications were received from the trustees of hospitals and charitable institutions, pensions funds, sinking funds, and other trust moneys for special consideration in respect of holdings of larger amounts than £1,000. The trustees concerned either desired allocation over early maturity dates, or to special dates. Sympathetic consideration has been given to all these applications, and so far as possible, the desires of the trustees have been met. Approximately £3,000,000 has been specially allocated on behalf of trustees.

Mr Beasley - Why was special consideration given to the holders of tax-free securities ?

Mr THEODORE - The holders of tax-free securities were entitled to hold their securities free from taxation until their dato of maturity. If the tax-free security matures at ally time up to the 31st December, 1934, such stock will be automatically concerted, and other maturity dates fixed for it, the holders of such securities receiving new securities which will be taxable. The holders of tax-free securities who have notified their intention to convert have preserved their right to freedom from taxation for the remaining period that the stock has to run. For example, if 1933 is the maturity date of a tax-free security, it will be free of taxation until that time, but the new security which will replace it will be taxable.

Mr Mackay - Then there is no concession ?

Mr THEODORE - No; there is merely the preservation of existing rights.

The variation of maturity dates on the ground of special circumstances was subject to approval by the Loan Council. The council has agreed to later maturity dates being arranged in all cases where the holders so desired. In a number of other cases it has agreed that special circumstances warranted the allocation of securities to early maturity dates.

In the case of all savings banks, including the trustee savings banks of Tasmania, the existing maturity dates of the old securities have been maintained. Authority for this was provided in the Debt Conversion Act.

Special consideration has been given to an amount of £3,800,000 of oversea trade money investments held in Australia, and, in all cases, except one, maturity dates have been arranged to the mutual satisfaction of the Treasury and the oversea traders concerned. Traders generally desired the right to early redemption, whereas the Treasury desired some deferment of the old maturity dates in order that the redemption of the bonds could be so spread as to enable payment to be made from the sinking fund.

The maturity dates of the old securities were-


The maturity dates arranged for the new securities are -


The fixing of new maturity dates for investments representing overseas trade money presented an easier problem than the fixing of such dates for some other investments, and, with one exception, the arrangement made is satisfactory to the parties concerned.

Mr Gabb - That arrangement will limit the amount available for the relief of Australian bondholders who may be in need of financial assistance.

Mr THEODORE - The honorable member points out that because of the use of the sinking fund for the earlier redemption of overseas trade money investments, there will be less available for the relief of necessitous bondholders domiciled in Australia ; but it is not possible to ease the situation for certain bondholders without encroaching upon the privileges of others. I do not know whether the honorable member thinks that we should not have made any attempt to meet the special requirements of overseas investors whose trade money was tied up in government securities.

Mr Gabb - My complaint is that, iD this conversion operation, the Government is showing preference for cases overseas, while overlooking the claims of needy Australian bondholders.

Mr THEODORE - That is a cheap gibe. The matter was fully considered at the Premiers Conference, and all governments represented at that gathering agreed to the basis upon which it should be settled.

We had also to make provision for treasury-bills held by the Commonwealth Bank and other banks, against overdraft accommodation provided for the various governments, and the Debt Conversion Act provides that securities issued to a bank in exchange for treasury-bills outstanding at the date of the commencement of the act shall be discounted at the rate of 4 per cent., the bills to be subject to such other conditions as the Loan Council may determine. The act provides, further, that these treasury-bills shall not be subject to the other provisions relating to the conversion of old securities. Although the Debt Conversion Act was not assented to until the 6th August, and did not come into operation until the 10th August, the reduction of the interest rate on treasury-bills was effected as from the 31st July. Treasury-bills totalling £21,720,000 matured on the 31st July, but the banks agreed to renew them at 4 per cent., without waiting for the Debt Conversion Act to be brought into operation. As previously, those bills had been discounted at 6 per cent., the reduction of 2 per cent. in the discount rate represented £434,000 per annum. All treasury-bills issued since the 1st August have been discounted at the rate of 4 per cent. Treasury-bills are, therefore, not referred to in the bill now before the House.

Before speaking about the unconverted securities, I wish to refer to the eminent success of the recent conversion loan. Its success was due largely to the recognition by the great majority of bondholders of their obligation to participate in the sacrifices of the nation, and to co-operate with the Government in its attempt to restore the financial stability of the Commonwealth. Doubtless, also, they had in mind the mutual advantage that would accrue from this course because of the fact that a successful conversion would mean that the national finances would be placed on a sounder basis, and the nature of the bondholders' security would thus be improved. All bondholders who converted voluntarily acted with much prudence and with great consideration for the interests of the Commonwealth. I should also express, on behalf of the Government, its highest appreciation of the assistance given by the National Appeal Executive, which attended to so many matters necessary to ensure the success of the loan ; to the many public men who gave so freely of their services; to the various banks and savings banks, which not only converted their own holdings, in most cases without hesitation, but also made available the services of their staffs to assist the Government; to the stock exchanges, which, by creating a favorable atmosphere, contributed materially to the success of the loan; to the life and other assurance companies which converted their holdings without hesitation, and otherwise assisted; to the newspapers and broadcasting companies which gave favorable notices and publicity to the operation ; and to the trustee companies, which were faced with a very difficult problem because the conversion of their holdings was the conversion, not of their own investments, but the conversion of the savings and investments of those for whom they are trustees. The Government appreciates all that was done by these various organizations and individuals, and I think it is due to them that proper recognition of this should now be made.

The problem of the unconverted loan now remains to be attended to. It was recognized, at the outset, that it would arise when the main conversion plan had been carried through. Nobody anticipated a 100 per cent conversion. But it was impossible at the time when we were settling the conditions of the main conversion loan to lay down conditions that would apply to the unconverted portion of the public debt. Any such attempt would have been construed as an attempt to bring pressure to bear upon the bondholders. Yet it was recognized that some action would have to be taken to deal, in a more or less drastic manner, with those who refused to convert. I notice that the honorable member for Fawkner (Mr. Maxwell) is smiling atwhat I am saying.

Mr Yates - That is because the Treasurer is now using the big stick, although he declared that this would not be done. Why not be honest about the matter?

Mr THEODORE - I am trying to be honest. I do not know whether the honorable member suggests that I am not honest in this matter.

Mr Yates - Then why twit the honorable member for Fawkner with smiling; he is smiling because he knows that the Treasurer is " putting it over " the people.

Mr THEODORE - I was not twitting the honorable member for Fawkner - I was congratulating him. If the honorable member for Adelaide (Mr. Yates) smiled a little more frequently we should get along much better.

Mr Maxwell - I am concerned with the position of those bondholders whose " poverty and not their will " dissents.

Mr THEODORE - That is something which we have to consider very carefully. It is also a matter which the Premiers Conference which was called subsequent to the closing date fixed for the conversion appeal, had to take into account. I have said that 97 per cent. of Australia's internal debt was voluntarily converted, the holdings of dissentients amounting to only £16,655,769. Those who converted have willingly made sacrifices of income, and perhaps incurred hardship through the deferment of payment of principal, and it would be unfair to that overwhelming majority of our bondholders if those who dissented were placed in a more favorable position. This fact was recognized by those who attended the conference of Commonwealth and State Ministers, and there was no disagreement regarding it. In Melbourne, for three weeks, we were engaged mainly on the discussion of this problem. We adopted, tentatively, schemes which were subsequently abandoned in favour of others after the examination of every possible phase.

Let honorable members now consider what are the alternatives to what is being proposed by the Government in regard to the unconverted portion of the debt. It is not sufficient to criticize the Government for having decided to use compulsion; our critics should state what they would do in the same circumstances. The Government could have followed any one of three courses. First, it could have taken no action, merely allowing the unconverted debt to stand as it. is now. It could have accepted the conversion of those who volunteered to convert, and allowed the dissentients to hold their present securities receiving on them the full rate of interest, and the principal on the due maturity dates. Secondly, it could have taxed the holdings of dissentients with the object of subjecting them to a sacrifice at least equal to that suffered by those who had converted. As a third course, it could have converted all the holdings of dissentients, and that is what we propose to do. If the Government had followed the first course, and had admitted the right of those who had dissented to continue to enjoy the full rate of interest payable under the old bonds, and their right to repayment on the due date-

Mr Yates - In other words, if the Government had honoured its compact.

Mr THEODORE -Yes, if it had honoured the compact in full - let us put it in that way.

Mr Yates - The Government would not have been asked to do more than that.

Mr THEODORE - No it would not, buta man may, though asking for no more than the honouring of the compact. be guilty of the grossest selfishness when, by refusing to convert, he fails to accept his proper share of the national sacrifice.

Mr Yates - Because he will not submit to repudiation !

Mr THEODORE - I have already pointed out that there are factors of mutual benefit associated with this conversion, factors which benefit the bondholder on the one hand, and the Government, that is, the nation, on. the other. The nation benefits by having to pay a reduced interest bill, and by obtaining easier conditions in regard to the repayment of the loans. On the other hand, the bondholders, though asked to accept a lower rate of interest, and to wait longer for the redemption of their principal, are getting, so wc hope, better security for the eventual repayment of the money borrowed. In my opinion, those who could afford to accept a lower rate of interest, but refused to bear their share of the sacrifice in which their fellow citizens were involved, due to the present financial emergency, have acted selfishly. They have not taken into account the difficulties of the nation, or the difficulties of their fellow citizens. They are not prepared to make any sacrifice; they stand for their pound of flesh.

Mr Lyons - Have not some bondholders converted part of their holdings, and dissented in respect of the rest?

Mr THEODORE - Yes, that is true of some bondholders. I proposed to explain that aspect of the matter, but 1 was drawn off by the honorable member for Adelaide (Mr. Yates), who appears to be making a defence for the dissentients.

Mr Yates - No, I am not.

Mr THEODORE - I hope the honorable member is not.

Mr Beasley - He is merely talking about the Government honoring its contract.

Mr THEODORE - Let the honorable member for West Sydney (Mr. Beasley), who is so concerned about honoring contracts, now say definitely where he stands. Is be in favour of a conversion, and if so, does he favour the compulsory conversion of that portion of the debt regarding which dissents have been lodged? lt would bo most inconsistent of the honorable member to complain of the action of the Government in bringing in a bill for the compulsory conversion of the public debt - and, therefore, for the partial repudiation of the contract with the bondholders - when the very essence of the honorable member's own policy, the policy which was fathered by the Premier of New South Wales, and supported by him, is the reckless and unrestricted repudiation of every kind of contract.

Mr Yates - Was not the Treasurer a party to the sending of that telegram to the Prime Minister-

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