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Wednesday, 21 October 1931


Mr LATHAM (Kooyong) .- This is a profoundly important measure, and one of an entirely new character so far as this Parliament is concerned. No other Commonwealth Parliament, and no Parliament in Australia, I think, has hitherto been asked to pass a bill whichdecisively and clearly proposes a legislative default in respect of the contracts solemnly entered into by the Government of the country. In November or December of .last year, a conversion loan was on the market, and a competition was held for a slogan. The winning slogan was, " Commonwealth bonds are as good as gold ", and it can still be seen, stained and disfigured, posted on many buildings and hoardings. A newspaper advertisement dealing with the loan said -

Give yourself a Christmas box and collect 5i to 0 per cent, interest for it. The £28,000,000 Commonwealth loan offers you the opportunity of giving Australia a magnificent Christmas present that is also a present to yourself, your wife and family, your home, your fellows. It is an interest-bearing reserve for the future, a safeguard against business failure or times of personal stress.

Another advertisement read -

It is a gilt-edged investment that is also a patriotic duty.


Mr Martens - The honorable member's leader made all those statements.


Mr LATHAM - All parties joined in the appeal to the investing public. The bill proposes to alter contracts made as a result of these and many similar invitations; it can only be regarded with the utmost anxiety and apprehension, and must be examined carefully before this Parliament places on it the seal of its approval.

I propose to examine the measure in relation to both principle and expediency; under the heading of expediency, I include considerations of practical possibility. One of the objects of a legislature is to define, maintain, and enforce the rights of citizens, and in the sphere of civil law one of the most important classes of rights consists of those arising from contract. Recognition of the sanctity of lawful contract is one of the signs and symbols of civilization. When mankind is in a state of complete barbarism there are no contractual rights ; might alone is right. In a further stage of evolution a man's rights and obligations are determined entirely by his status; they depend on whether he is a slave or a freeman; a noble or a commoner, an ecclesiastic or a layman, and he has little or no opportunity to determine those rights for himself. The rights of an individual as a freeman come into real existence and fruition only when the importance of contracts is realized, and when he is allowed by law to determine his own rights and obligations in a large measure by his own agreement. There are some contracts which the law prohibits, or declines to enforce, on the ground of policy, but the essence of our modern western civilization is the recognition and enforcement of lawful contracts. Thus the right of man to obtain rights for himself, and his power to impose obligations on himself by his own agreement, arc among the fundamental elements in the conception of personal freedom as developed in the modern world. It is the duty of a government to maintain and enforce all rights and obligations which are lawful in character, and any general failure of a government to perform this duty will involve the collapse of civilization as we know it. The relation of the citizen to tho Government raises considerations of a different kind. Primitive forms of government, it is true, are largely limited by the custom of the tribe "or clan; but there is always a large element of more or less arbitrary will; often the arbitrary will of the chief or king is the determining factor. In time a doctrine of sovereignty develops under which the king or the State is represented as having all rights and no duties. This idea survives iu the maxim, " The King can do no wrong ", and the escape of mankind from despotism and tyranny is largely dependent upon the limitation and ultimate denial of this doctrine. In our community it has almost completely disappeared, although there are still some traces of it in legal procedure. The principle is now established, that a government can bind itself as effectually by contract as a citizen, and a citizen can acquire rights against a State, which the courts will enforce with evenhanded justice. Indeed, it is a fundamental principle of our life that the King's courts will do justice even, against the King himself. The obligation resting upon the Government to perform its contracts is in a sense higher than the obligation resting on the citizen to perform his contracts, because, first, the Government ha3 a greater power to perform what has been promised, and, secondly, it has power to repudiate, which enhances the duty and obligation to perform to the maximum of possibility.. If a government unnecessarily uses its power in the legislature to enable its citizens to disown their contract's, it runs the risk of shaking the foundations of social life. If it unnecessarily uses its power to free itself from contracts, it runs the risk of undermining the foundations of government itself. Upon a short view, the evil may not be apparent - there may be even an immediate advantage-^ but upon a long view such an advantage may very well disappear, for the whole future of a country may be jeopardized by such an act.

Let us apply these principles to our own country. I would like to see Australia regarded as an attractive land for the investment of capital from other countries. I do not resent the introduction of money, from abroad to develop enterprises in Australia, and give employment to our people. Australia has been ' helped very greatly in the past by development fostered and made possible only by capital from abroad. In considering where money is to be invested, a person with capital will obviously have regard to the degree of certainty that he will obtain a return. That factor is largely affected by the reputation and character of the people and government of the country. Whilst an immediate advantage may be gained by setting aside a. government contract, it may be that, in the long run, such an advantage will prove to have been very dearly bought. These arc considerations which we must bear in mind when we are dealing with a. measure such as that which is now before us.

There is an obvious and important limitation upon the general principles to which I have referred. There may be other limitations in special cases; as, for example, where a government has been guilty of such conduct in relation to a particular contract that there are grounds for a subsequent parliament setting it aside. But I am dealing with only one limitation/which is universally recognized. An individual may become unable to pay his debts: in such circumstances, proceedings in bankruptcy provide for the winding up of his business, and the equitable distribution of his assets among his creditors. A State or government also may become incapable of paying its debts, but we cannot wind up a State, dispose of its assets, and discontinue the business of. government. As there cannot be a general realization of public assets, the full conception of bankruptcy is inapplicable to a State. That being so, the duty of seeing that there is real inability to pay becomes enhanced in the case of a government or State. Before any government takes steps to release itself by legislation from a contract on the ground of inability to pay, such inability should be conclusively demonstrated.

I hope .1 have made it clear enough that. I recognize the practical limitations upon the general principles which should normally guide our conduct. This bill proposes partial repudiation of contract's with people who responded to appeals by Commonwealth and State Governments to lend to them money in return for a promise to pay interest at a certain rate, and repay the principal on the due date. I have conceded that there are circumstances in which such a proposal is justinfiable because it is inevitable - when any alternative course will mean only worse default. I readily concede that a reduction of the rate of interest on the national debt was necessary. The national income had dropped from approximately £600,000,000 to £450,000,000. The annual interest bill was approximately £70,000,000, and with the drop of the national income that burden of interest became proportionately heavier. The reduction of interest charges on both public and private debt's was unavoidable. This bill deals with the internal public debt, and so far as financial necessities dictated a reduction of the interest charge the financial objective has been attained. Wo less than £541,000,000 of our internal public debt has been converted under' the measure which this House passed in July last; the balance outstanding is only £16,500,000. This bill deals with that balance. I consider that the success of the conversion, which left less than 3 per cent, unconverted, is a wonderful tribute to the sanity, intelligence, and patriotism of the people of Australia. When I remember how the proposals which were made from this side of the House for a voluntary conversion were greeted from some quarters - with more than ordinary criticism and comment - that such a course was declared to be impossible, and was met with sneers and jeers from many, I think it wonderful that this thing should have been accomplished. It is a matter for congratulation.

I do not think that any honorable member believes that it has been an easy thing for many to consent to this conversion. AVe have all heard of persons of small means whose circumstances are gravely affected by the reduction of income derived from the accumulation of many years of thrift. In the case of those who are more wealthy, the result of the conversion has sometimes been very serious indeed. There is one case in connexion with which I have the precise figures. I admit that the person who converted is wealthy. By his conversion of a considerable amount of New South Wales tax-free stock which fell due on the 10th August last, this man receives interest at a lower rate aud also becomes subject to income taxation, which reduces his income by 41 per cent.


Mr Theodore - He would have lost the advantage of his freedom from tax in any case.


Mr Paterson - He could not have found a new tax-free investment.


Mr LATHAM - That, no doubt, is so; but, still, his income was seriously reduced by the conversion. I have no personal interest in any dissenters. The small amount of stock that I held or over which I had any control was converted, and I would not have it otherwise. The Treasurer recognized in his speech that persons did not in all cases dissent from unworthy, grasping motives. In many instances they were actuated, when dissenting, by dire necessity.

The first and natural reaction in regard to the dissenters is to ask, " Why should they do better than other people; why should they be left better off than those who recognized the need of the country and converted?" That argument has no relevance on the question of principle. There is all the difference in the world between a man who has a standing contract which he is entitled to preserve, and another who, from whatever motives, however worthy, has agreed to a reduction of the benefits that he was to receive under a contract. If we can do so, we should pay the dissenters. We should do our best to pay them; for one reason, in the interests of those who converted. I submit that point for the consideration of honorable members. There are two things that are important to those who have converted. First, that the value of their present stock shall be maintained so far as may be possible, and shall increase, if that can happen, as time passes. Secondly, it is very important that there should be the best possible prospect of their being paid in full when their bonds mature.

What will be the effect of what might bc termed a compulsory reduction of contract on the value of their stocks in the future? It must inevitably depreciate the value of the stocks held by a very large number of persons who have converted. It may be asked, "How will it affect the chances of their being paid in full on the due date?" In 1938 a sum of between £65,000,000 and £70,000,000 will fall due under the new arrangement of the maturities of our internal public debt. ' How can the payment of that sum be handled? The sinking fund will provide for the repayment of only a part of it. The rest can be repaid only by obtaining new money, or by a voluntary conversion, if ordinary methods are adopted. Compulsory conversion now will considerably prejudice the chances of meeting that very great liability in 1938. It will make it most difficult to obtain any new money, or to exercise effective persuasion upon people to renew their holdings by way of voluntary conversion.

The only alternative to these methods of dealing with this money in 1938 are first to impose very heavy taxation to provide the necessary money out of revenue - taxation so heavy that probably the proposal would be rejected as impossible. On the other hand there could be in 1938 another compulsory conversion, amounting to repudiation. In the interests of everybody, and particularly of those who have converted, it is important that we should do our utmost to meet the obligations outstanding on these bonds. Before February, 1933, an amount of some £9,600,000 will be required. If there were general confidence in governments in Australia, that amount could probably be raised without difficulty. But we must take things as they are. I am not speaking now of any particular government when I say that I do not think that the people will lend much money to governments at this time for this or any other purpose.

This measure results from the unfortunate general lack of confidence. 1 bad hoped that it would be possible to do something less subversive of principle than the proposals now before the House. On the facts, so far as I have been able to ascertain them, we have to admit thai in the early years complete payment on the due date now appears to be impracticable. The honorable member for Corangamite (Mr. Crouch) referred to an article of mine which appeared in the press in which I stated " Let us deal with the contingency when it arises ". If the contingency had been that out of £558,000,000 of our internal debt, £500,000,000 had not been converted, the position would be very different from that which at present faces us. I might then, under pressure of stern necessity, have been compelled to give my full support to a measure which I would regard as unjustified under existing circumstances. Even recognizing the smallness of the amount, it would appear that in the early years it would be very difficult, by the use of all the money that could bc made available from the sinking fund, to pay our commitments in full, having regard to the provisions for dealing with necessitous cases, of which I approve. All that we could hope to do is to pay part of our obligations, either on a ballot system or by way of dividends, and postpone the payment of the balance. Ae a reluctant concession to the financial necessities of the situation, and having regard to the general result of the conversion, one would be justified in agreeingto the special taxation of interest. 1 quite admit that under such taxation dissenters would not suffer so much as those who had converted. Whatever policy was adopted, it would be impossible to put the dissenters, in connexion with th« near-dated maturities, iu the same position as those who had converted.


Mr Maxwell - Would not a special tax be victimizing the dissentients in another way?


Mr LATHAM - I have admitted that there were objections to the proposal. It is only the necessity of the case that makes me consider it. I do not wish to repeat the figures that were quoted by the Leader of the Opposition (Mr. Lyons) and the, Deputy Leader of the Country party (Mr. Paterson), but there will be certain moneys available from the sinking fund, which could be used to pay dissentient bondholders in part.


Mr Theodore - That would necessitate the Government using money which is to be made available for necessitous cases.


Mr LATHAM - The Treasurer has detailed information which is not available to honorable members. The Deputy Leader of the Country party, speaking last night, intimated that from figures supplied to him by the Treasury there would he available from the sinking fund an amount that would almost pay the £9,600,000 that is due in 1933. The Treasurer then stated that he had omitted to provide for certain commitments, including overseas obligations.


Mr Theodore - There are others.


Mr LATHAM - The honorable gentleman has information which is not known to honorable members generally; I can deal only with the facts as I know them. From them it would appear that there will be some money which will be available to pay off, at least in part, our commitments as they fall due. I suggest that new bonds should be issued for the bonds which -have already fallen due, and for the other unconverted bonds, with a right vested in the Commonwealth to pay off at, say, six months' notice, and with an undertaking given by the Government that every effort would be made to meet the liability at the earliest possible date. In order to make that possible, every care should be taken to avoid incurring unnecessary expenditure in other directions. In New South Wales, I think there is room for savings which would, at least, make it possible for that State to meet a considerable portion of the liabilities in respect of New South Wales bonds. If New South Wales were to exercise economy to the extent that the other States have done, there would not be any necessity for the same amount of reduction.


Mr E RILEY (SOUTH SYDNEY, NEW SOUTH WALES) - New South Wales has reduced the expenditure on it's Public Service by 20 per cent.


Mr LATHAM - I do not agree that New South Wales has performed the obligations' undertaken at the Premiers Conference.

In my opinion, there are still other alternatives which ought to be carefully examined. The House has not had placed before it all the relevant facts. A particular scheme has been submitted for our approval; but there has not been a precise statement of the sinking fund moneys available, and the extent to which they might be used to meet necessitous cases and other commitments.


Mr Bell - It is doubtful whether the Premiers were fully informed regarding these possibilities.


Mr LATHAM - Until we have fully examined all these possibilities in the light of full and detailed information - which we have not yet had - we cannot say that inability to perform the contract has been demonstrated to the extent to which it is necessary to demonstrate it in order to justify a measure of this character. It may be that' there are other means of dealing with this matter than those to which I have referred in outline. No one can speak on this matter with the same authority as a Treasurer, since he has behind him tha officers of the Treasury, and all the information which is available to them, but the principle at stake is so important that we ought to take all pains to see that there is justification for a measure of this kind. In the interests of the fair fame and the well-being of this country, both now and in the future, it is incumbent upon us to consider this proposal closely in the light of all the circumstances - some of which have not been adequately examined - before we agree to this measure. Having regard to all the circumstances, and to the fact that other possible alternatives do not appear to have been successfully excluded, it does not appear to me that the Government is justified in asking honorable members to support this bill. [Quorum formed.']







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