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Tuesday, 20 October 1931


Mr PATERSON (Gippsland) .- This, and the Commonwealth Debt Conversion Bill, which the House has been invited to consider together, deal with the problem raised by dissentients to the recent conversion loan. The conversion to a substantially lower rate of interest of the whole of Australia's internal indebtedness, totalling nearly £558,000,000, without actual legislative compulsion, was a task the result of which was open to a good deal of uncertainty. Bondholder* generally had come to realize that the fall in the national income was so tremendous that the Commonwealth Government simply could not continue to pay on its internal debt a burden of interest which averaged well over 5 per cent.; that, to save their capital from destruction, and in their own interests, they must be prepared to accept a lower return. Yet, although this philosophical view was generally accepted by bondholders, I do not think that anybody anticipated that 97 per cent, of the huge total of our internal indebtedness would be converted without resort to compulsion. The result was truly remarkable, and whilst no one is so blind as to suppose that altruism rather than recognition of the national inability to pa'y was the dominant motive which actuated bondholders, the Australian bondholders cannot be deprived of the credit of having by an overwhelming majority consented to sacrifice from 20 to 30 per cent, of their interest income without the whip of compulsion being applied. Even more remarkable was the extremely high percentage of conversion on the direct initiative of the bondholder. Of the £541,000,000 converted, £510,000,000 was converted on the active initiative of the holder, and only £31,000,000 by passive acquiescence. Most people expected that a far larger proportion of the amount would be converted simply through inaction on the part of the bondholder, and a much smaller proportion by active consent. I was relieved when the National Appeal [Executive, consisting of the Prime Minister (Mr. Scullin), the Leader of the Opposition (Mr. Lyons), and Sir Robert Gibson, acting on my suggestion, altered the wording of the prospectus and Advertisements relating to the conversion loan ; in my opinion, the original wording was extremely dangerous, and might have invited trouble in the future.

The two bills now before the House deal with the £16,650,000 worth of unconverted stock, representing rather less than 3 per cent of the total. In normal circumstances, even if the whole amount matured in one year, it would present no difficulties. A redemption loan would be floated, and new capital would be subscribed to repay the principal, less such amount as had been already redeemed by the sinking fund. But I agree with the Treasurer that it would be almost impossible to float a redemption loan now, because nobody could be expected to invest in 4 per cent, stock at or near par when he could purchase similar stock at from £80 to £S4. The Treasurer is, therefore, faced with the necessity of finding money to meet these maturing obli- gations without recourse to a new loan, s it possible to meet the obligations presented by the unconverted loans about to mature without recourse to further borrowing or inflation ? If that is possible, it is the only honest course to take; if it is not possible, we must choose between inflation on the one hand and breach of contract on the other. We have already varied our contract with bondholders representing £541,000,000 worth of stock, of 97 per cent, of the total internal debt, but with their consent. The measures with which we are now dealing propose to vary the contract in relation to the balance without the consent of the bondholders, and nothing but sheer inability -to carry out our contract could justify such a course. So far our hands are clean, because the variation of the contract in regard to the £541,000,000 has been made with the consent of the bondholders. If we arc indisputably unable to meet the obligations represented by the unconverted loans we can pass these measures, and still keep our hands clean; but if we can meet these obligations and do not, we soil our hands, and become repudiators.

What resources have we? A further loan may be regarded as* impracticable at the present juncture, although there are some who think that it has possibilities of success. Further inflation would be dishonest. There is one other hope - the sinking fund, the very purpose of which is to redeem loans. When the Treasurer stated that £9,600,000 of the unconverted loans would fall due within the next sixteen months, my first impression was that there was no escape from this legislation. Since then, however, I have investigated the possibilities of the full utilization of the sinking fund, and I do not believe that it is impossible to meet the obligations arising out of the unconverted loans, if we are determined to do so. I realize that in addition to our legal obligations to the dissenting bondholders, we have a moral obligation to those who converted under conditions which involved them in serious difficulties and hardship. If the result of the conversion had been a 90 per cent, assent and a 10 per cent, dissent, the course which the Government proposes would have been inevitable, but with a 97 per cent, assent, and less than 3 per cent, dissent, I believe that if the obligation in respect of the unconverted balance were the only problem, and Ave had not to consider the needy converting bondholder, we could meet our obligations. Again, if Ave were free to amend the act which enables probate duties to be paid in bonds, by withdrawing that concession for two or three years, wholly or in part, the sinking fund would be more than adequate to do what needs to be done. But we are not free to do that, because the prospectus issued in connexion with the conversion loan stated definitely that 4 per cent, and 3£ per cent, converted bonds would be accepted at face value in payment of probate duties. Even with that handicap, I believe the sinking fund would be adequate to meet our liability in connexion with the unconverted stock if allied with that were not the problem presented by the needy person who converted under extraordinary conditions; for although the conversion loan has been regarded as voluntary, it nevertheless was not a normal voluntary loan. The only time when any strain would be felt in regard to meeting our actual legal obligations, as distinct from the moral obligations to the converting bondholders, would bo during the current and following financial years, when £9,600,000 of maturing bonds will have to be redeemed. During those two years there will be a total sinking fund provided in respect of the internal and external debt of £14,000,000- £7,000,000 per annum, representing £3,500,000 against the internal debt and a similar amount against the external debt. But not all of the £7,000,000 per annum is available for the purpose of redeeming unconverted maturity loans. Of the internal sinking fund of £3,500,000 available each year, £1,700,000 is received in bonds in payment of probate duty. Indeed, I understand that practically the whole of the probate duties are now paid in bonds, and for the obvious reason that if a trustee can pay £1,000 worth of probate duty with bonds which cost only £S00 in the market, he will choose that method rather than, pay cash. The cancellation of bonds received in payment of probate duty is a statutory obligation. The Treasury receives credit for the full face value of the bonds, and then the National Debt Sinking Fund Commission has to accept them at face value, and loses any profit it might have made had it received cash, and been able to go upon the market to buy bonds at depreciated rates. Of the £3,500,000 of sinking fund in con- nexion with the internal debt, £1,700,000 is, therefore, not available for the cancellation of other securities. There is left a balance of £1,800,000.


Mr Theodore - There are certain other fairly considerable commitments.


Mr PATERSON - I have mentioned the principal one. The external debt sinking fund also is £3,500,000, and there are contractual obligations in connexion with it. On certain loans raised by New South Wales and Queensland the sinking fund payments have to be made direct overseas. They amount to less than £500,000 yearly. Assuming those obligations to be in round figures £500,000, there is left £3,000,000, which, added to the balance of £1,800,000 from the internal debt sinking fund, makes a total of £4,800,000 per annum available for use at the discretion of the Commissioners for the redemption of stock.


Mr Theodore - I assure the honorable member that he has not taken into account all the commitments of the sinking fund.


Mr PATERSON - There may be other minor commitments. On the basis, of my figures it is a singular coincidence that in two years we shall have available £9,600,000; exactly the amount required to meet the unconverted bonds falling due in that period. After the first two years the position will be very much easier, because the amounts falling due will be smaller. It is true that in the first two years the unconverted loans fall due some months before the sinking fund would be fully available - on the 30th of June of each year - and some temporary accommodation from the Commonwealth Bank would be necessary, for which the sinking fund would be security. The' Commonwealth Bank could, no doubt, hold the bonds which have 'been paid off as security until, at the end of the financial year, they could be redeemed at face value out of the sinking fund. I believe that the account would be pretty nearly square with the bank at the end of this and next financial year by making use of the sinking . fund, although the sinking fund commitments which the Treasurer, by interjection, has mentioned, are apparently somewhat larger than I believed them to be.


Mr Theodore - The honorable member has missed the trade money investments.


Mr PATERSON - I have not missed that at all. It is clear that there would be £4,800,000 per annum, or £9,600,000 of converted commitments in two years, and surely that would include trade investments. I understand it includes maturities, trade and other investments. The Treasurer, by his silence, admits that.


Mr Theodore - What is the honorable member's point?


Mr PATERSON - I say that the £9,600,000 which falls due within the next two years includes all maturities, trade investments or otherwise.


Mr Scullin - It does not.


Mr PATERSON - That is how I read the Treasurer's speech.


Mr Theodore - The sum of £9,600,000 is part of the unconverted loans. Trade money is not included.


Mr PATERSON - I am dealing with unconverted trade moneys, concerning which the Treasurer has made special provision for pushing them back for a year. He proposes, in respect of unconverted trade moneys, to provide £250,000 this year, and a shade over £1,000,000 for each of the next two years.


Mr Theodore - The trade moneys form part of the converted stock.


Mr PATERSON - The Treasurer has based his case for this hill upon two arguments. One is the great difficulty that would be experienced in the next three years in redeeming maturing bonds. I contend that the sinking fund is capable of doing a great deal more in that respect than the Treasurer has led us to believe, and that the amount which the Treasurer has set out- £1,250,000- for the relief of necessitous bondholders-


Mr Theodore - It is £2,000,000.


Mr PATERSON - The Treasurer stated in reply to a question which I asked in the House, that he was going to bring down an amendment to this bill for the purpose of authorizing the National Debt Sinking Fund Commission to pay off £2,000,000 worth of bonds at face value. I understand from that, that while the National Debt Sinking Fund Commission would have authority to pay off that amount, nevertheless the Treas urer's proposal for the payment of £1,250,000 still stood.


Mr Theodore - Perhaps I did not make the position sufficiently clear. The National Debt Sinking Fund Commission has allocated £2,000,000 for that purpose.


Mr PATERSON - Another argument used by the Treasurer was to the effect that dissenters in many instances were selfish, and must not be left better off than the converters. That is an argument which certainly appeals to human nature. Many of those who have converted might be expected to say " Why should the dissenter be treated better than we have been ; make him do what we have had public spirit enough to do." I admit that that is a human sort of argument, but standing alone it would be no justification for breaking a contract. There is only one justification for this legislation, if it can be justified, and that is the proof of absolute incapacity to pay. It is said that the dissenters were actuated by selfishness. We know definitely that many thousands of them at any rate were not. The Treasurer gave us figures showing that some £6,500,000 of unconverted stock comprised amounts up to £1,000. I should say that it would be safe to assume that the average would be well under £500, because there would be an enormous number of small investments of, perhaps, £20, £50, £75 and £100. Probably the average of the particular investments amounting to £6,500,000 would be £300 or less .


Mr Gabb - The number of investors would probably be 12,000.


Mr PATERSON - If the average investment up to £1,000, is £300, the number of such small investors would be 22,000.


Mr Hughes - Is not the number known ?


Mr PATERSON - It may be known, but I do not think that it was made known in the Treasurer's speech. Let us suppose that some of these dissenters were selfish, and no doubt some were actuated by selfish motives. I have no sympathy whatever with the man who could have converted, but, for selfish reasons would not do so ; yet I repeat that that, in itself, is no justification for breaking a contract. If a man owes his grocer £10, and discovers that selfishness is a marked trait in the grocer's character, surely that would not justify refusal of payment on the due date. Whether a bondholder is selfish or unselfish, it is his money that we hold.

I have already stated that I believe that we could meet these contractual obligations, without recourse to borrowing, other than by temporary accommodation which the sinking fund would repay. But I admitted earlier in my remarks that we have a moral obligation to the person who converted, believing that it was his duty to convert, who will suffer considerable hardship thereby. The Government has to some extent recognized that obligation by making arrangements under which certain amounts will be redeemed for necessitous bondholders before the due date. A certain proportion of their bonds will be redeemed regardless of whether they come into the class of dissenters or of those who have already converted. Let me say that if by paying the last penny on the due date to all dissenters regardless of their need, we make it impossible to relieve the needy converting bondholder, then I would regard that as a much more valid reason for breaking the contract than some of the arguments used in this debate. It would, at least, mean that we are compulsorily converting because we are unable to meet both legal and moral obligations. The legal obligation is to the dissenting bondholder, and the moral obligation is to a certain proportion of those who tinder stress have converted, perhaps to their own disadvantage. It is impossible for me to gauge what the legitimate requirements of thu needy, converting bondholder may be. I do not think that any one of us can attempt to gauge that. When we have approached, so near the 100 per centgoal by voluntary sacrifice, when we have so nearly achieved success with the consent of the bondholders, it is a thousand pities that there should be the necessity for such legislation as this, to spoil what has been done up to now by giving in, as it were, at the last ditch. The test of true statesmanship is ability to take the long view. We have to look forward to 1938, or to a much shorter period than that with respect to loans maturing overseas. In 1932, there will mature overseas, State loans of £24,250,000; iu 1933, nearly £13,000,000; ' in 1934, £13,600,000; in 1935, £15,500,000; in 1936, £14,000,000; and so on. In 1938 we shall have to redeem in this country at least one-tenth of the £558,000,000 which has been converted.


Mr Theodore - A considerably greater amount than that.


Mr PATERSON - What would it mean to the investors overseas and in this country if, when their loans fell due in 1938, or before, the Commonwealth Government could say, " We have varied no contract except by consent of the bondholder ". That is what makes it so regrettable that this step should be necessary, if indeed it is necessary. We must inspire bondholders with the confidence that we are prepared to go to the last possible inch to carry out our obligations to thom. Whatever the Treasurer may say, even if he can show that the figures which I have stated with respect to the sinking fund can be somewhat discounted by other commitments of which I have no knowledge, it must be admitted that the Government is not going the whole distance to which it could go in making use of the sinking fund so as to carry out its obligations to the fullest extent.


Mr Theodore - It is the National Debt Sinking Fund, and not the Government which makes use of the sinking fund.


Mr PATERSON - I admit that, but the Government is in a position to give authority to the National Debt Sinking Fund Commission to take over at face value not £2,000,000. worth of bonds, but as many bonds as it can buy with the money at its disposal.


Mr Theodore - The National Debt Sinking Fund has not allocated sufficient money to enable us to meet all those commitments.


Mr PATERSON - I accept the Treasurer's statement, but I still adhere to my contention that the Government can go further than it is now going in relieving necessitous bondholders. The Government's proposal is to make available this year £1,250,000 for necessitous bondholders, and £250,000 for trade purposes, and next year not less than £1,000,000 for necessitous bondholders, and just over £1,000,000 for trade purposes.


Mr Theodore - It is £2,000,000 for necessitous cases thisyear.


Mr PATERSON - The Treasurer has already corrected me on that point. The Government could go beyond that. I believe that the capacity of the sinking fund is much greater than the Treasurer has said. I urge him to go further than to introduce the amendment which has been foreshadowed to give authority to the National Debt Sinking Fund Commission to use £2,000,000 out of the fund for purchases at face value. I urge him to go to the extent of asking this House to give authority to that commission to make use of the whole of its available funds for the relief of necessitous bondholders, whether they have converted or have not converted their bonds. This should be done with no niggardly hand. Viewed in the light of sinking fund possibilities the Government's proposals are niggardly. If the National Debt Sinking Fund Commission had the authority which I suggest it should have, that would show that we are willing to do all within our power to meet our obligations. There would be no objection to the National Debt Sinking Fund Commission using some of the funds to buy stock at the market value, if it could do so without inflicting injustice on any one ; but the bondholders, and especially necessitous cases among them, should receive first consideration. I appeal to the Treasurer to give the additional authority asked for. If the Treasurer will enlarge the scope of his proposed amendment for this purpose, I shall be glad to support it.


Mr Bell - Is that authority necessary ?


Mr PATERSON - I understand that it is, or the commission would not have asked the Treasurer for it.


Mr Theodore - There would be no restriction as to the amount.


Mr PATERSON - I understood that it would be restricted to £2,000,000.


Mr Theodore - No. The National Debt Sinking Fund Commission has itself allocated £2,000,000 for this purpose, but in the provision granting it authority no amount will be mentioned. The commission may exceed the sum of £2,000,000 if it likes.

Mr.PATERSON.-I hope that the authority will be exercised to the fullest extent and that both the Government and the National Debt Sinking Fund Commission will go as far as possible to meet the requirements of necessitous bondholders. In that way we may hope to retain the confidence of the investing public. The Government should, by its action, demonstrate that it has done everything that it can to meet the just claims of bondholders.







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