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Thursday, 21 May 1970

Mr CREAN - -He may be a Scot, by tendency, but he is a Belgian by origin. Any honourable member who wants a copy of this document may get one free by writing to the Reserve Bank of Australia. This should appeal to my colleague the honourable member for Boothby. Al page 22 he said:

There is no general agreement on a simple way of measuring whether there is adequate international liquidity or not.

What we are now concerned about is a scheme to increase international liquidity. Last night in this House there was a great debate centred upon an organisation known as the Australian Industry Development Corporation.

Mr McLeay - I think we won it, too.

Mr CREAN - The Government won in a rather hamstrung sort of way. If the honourable member claims that the Government won it on the basis of 102 votes to 4, then I hope that a lot more propositions in Australia will be won in the same way. Nevertheless, such dissent as there was in that debate came from honourable members on the Government side. Such dissent as there was came from what might be called the hill-billy attitude of certain elements in the Party which the honourable member for Boothby represents. Those honourable members on his side who dissented in the debate on the Australian Industry Development Corporation do not realise that we are living in a period which will change very significantly in the next 10 years. We were dealing last night with some of the mystifications, if one likes to refer to them in that way, that can surround the business called banking. One of the points that was not clearly brought out last night was that once an organisation is called a bank it has certain capacities within itself to create credit. Last nightI instanced a body espoused by the Government parties - the Australian Resources Development Bank. With an initial capitalisation of the magnitude of $10m it has been able to posit advances of the order of $250m.I contrasted that with thatI called the pigmy institution, the Australian Industry Development Corporation, which has been hamstrung by the initial capitalisation provided by the Government. It is to attempt to borrow principally externally, but I have some doubts about how much external borrowing it will be able to achieve on the terms available today. It can expand its activities only because it is a fund rather than a bank.

There have been recent developments in the International Monetary Fund around the concept of what is called paper gold.I submit that this is of significance for any who have great faith in gold as a measure of international currency.I want to quote from an article which I commend to all honourable members interested in banking. I refer to a series called 'Penguin modern economies'. With due respect to the Government, sometimes I am not sure that it is aware of what modern economics are. I think the Government is caught between the world of laisser faire, which is no longer applicable anyway, and modern economics and that it is not quite sure what it has to do in this modern world. The particular volumeI refer to is entitled 'International Finance' and is edited by R. N. Cooper. It contains an article by Mr Machlup, an authority who I am sure my friend the Treasurer (Mr Bury) will acknowledge, which is entitled 'The Cloakroom Rule of International Reserves: Reserve Creation and Resources Transfer'. It appeared in the quarterly journal 'Economies', volume 79, at pages 337 to 355. I submit firstly that Mr Machlup is not a gentleman who could be described as a credit crank. We get some curious examples at times of what can happen in this field. In recent times the Treasurer has been submitted to this sort of assay in connection with the recent rise in interest rates. I shall quote what Mr Machlup said about three fundamental propositions. He states at page 343 of this volume:

The essential points will be understood more readily if we go back to some more general relationships that hold on different levels of the monetary system and can be formulated in three fundamental propositions:

1.   For payments among customers of the same (commercial) bank, the assets (amounts, quality, composition, liquidity) of the bank are irrelevant; they become relevant only for payments to customers of other banks, that is, for inter-bank payments.

In other words he is saying that if my friend the Treasurer and I are customers of the same bank our transactions take place quite simply within the bank. It is only if he happens to be in a bank other than mine that the structure of my bank relative to his arises. Mr Machlup goes on to note:

For inter-bank payments -

That is to say, payments between the Commercial Bank of Australia and the Commercial Bank of Sydney, the difference being more in name than in substance - in the same country the assets -

And again he notes amounts, quality, composition and liquidity - of the National Reserve Bank are irrelevant They become relevant only for payments to persons or banks in other countries, that is, for international payments.

Then the learned writer goes on to note thirdly:

For international payments in the same world -

At the moment whether we like it or not we are still living in the same world. We can have significantly political differences but we are still part of one world - the assets -

Again he notes amounts, quality, composition and liquidity - of the International Reserve Bank (or an appropriately organised IMF) are irrelevant. They become relevant only for payments to persons, banks or reserve banks on other planets, that is for interplanetary payments.

Al this stage we have not had to face the question of interplanetary payments. At least that is what the writer is hinting at. He notes some quite distinct reservations about what took, place at the Bretton Woods Conference, as my friend the Treasurer knows. An attempt was made to have an international currency. The principal reason why we did not achieve an international currency was that the most preponderant economic power at the time, the United States of America, did not want it. The author notes this at page 34 1 . He says:

The United Nations and other founding countries did not want the Fund to be a credit-creating institution and. hence, they anxiously avoided what would have been a pre-condition to the creation of a new international currency, namely, the acceptability of the Fund's deposit liabilities in international payments among national monetary authorities.

By adopting the special drawing rights, which are sometimes blithely described as paper gold as 1 have said, we have accepted the fact that there can be international creation of credit. I know that we get into great difficulties once we talk about the creation of credit. Some rather curious doctrines have been expressed on this subject.

I quote from a later book by Mr M.achlup, which is available in the Library, entitled 'The Structure of the IMF'. He said;

The debt character of money has confused economists and lawyers for centuries. The fact that the recipient and holder of money has, on the one hand, taken over a legal claim against the issuer of the money and, on the other hand, acquired an economic claim against the rest of the community lo be honoured, when he so desires, in goods, services, or other titles to wealth, has been the source of perennial bafflement and endless twattle. The 'loan' to the legal debtor and the Moan' lo the community implied in the exchange of present for future goods or services have rarely been separted wilh sufficient clarity in the students' thinking.

This is the point at which we have arrived concerning international liquidity. 1 am glad to see the honourable member for Mitchell (Mr Irwin) in the chamber. He at least has more practical experience than some of these other gentlemen. T am glad to see also the honourable member for Lilley (Mr Kevin Cairns) who claims to be a student of financial transactions. I have mentioned the Australian Resources Development Bank. There is no doubt that once any institution is allowed to call itself a bank - this was the essence of the debate last night but we did not get around to it - it has within itself the capacity to create credit. Some people suggest that there is no limit to the capacity to create credit. Unless some limits are placed upon it we distort the existing arrangements of any people who hold money in one remove or another.

That is the situation in which we are placed at the moment in regard to international transactions. I submit again that it is quite clearly brought out in Mr Machlup's article, to which I have referred, that the great problem in world trade at the moment is the disparity between the standards of living of the rich and the poor. I heard a certain gentleman at the farmers' protest march say that if Australia suddenly increased the amount of its aid to poor countries from 1% to 2% - we have not even reached 1% yet - by some mysterious process all our surpluses of wheat and wool would evaporate. This is sheer nonsense, economically. Nevertheless if we had more systematic arrangements for international transfer - surely this is what has to happen - we could arrange for the transfer of physical surpluses from one country to another. I am sorry that the honourable member for Kalgoorlie (Mr Collard) is not present at the moment.

Mr McLeay - He is not the only one who is not present.

Mr CREAN - There are a lot who are not present. I am afraid that this is all too true about most of the debates that take place. Many honourable members are here when a fight is on but not many are here when we come to consider reasonably fundamental proposals. Mr Machlup says:

When gold is the only international reserve money, some Africans, Australians, and Asians (and a few North Americans) must work in the mines to dig the stuff out of the ground. When credit entries in the books of an acceptable organisation become substitutes for cold, work on highways, railroads, harbours, power plants, hospitals, and schools of developing countries can take the place in gold mines.

I submit that this is a pretty salutary lesson for most of us.

Mr Bury - Perhaps it is your friend, the honourable member for Kalgoorlie, who should listen to this.

Mr CREAN - I am not trying to secure political capital. I will illustrate what 1 am trying to suggest. I read 2 days ago in the Australian Financial Review' that it may not be long before Australia becomes an importer rather than an exporter of gold. Well, candidly, I hope that we never reach that silly day, but this is the sort of suggestion that is made. It is suggested that we could produce a lot more gold if the price of gold were higher. I think that what the gentleman whom I am quoting is pointing out is that gold is produced only because people, who could well be employed somewhere else, are digging the wretched stuff out of the ground. If it is still thought that it is a systematic sort of economic appraisal to have people digging gold rather than, as the writer says, building highways, railroads, harbours, power plants, hospitals and schools. I think that this shows what curious sort of thinkers we are sometimes. The author says:

.   . provided the countries holding most of the international reserves are willing to pay for the 'perfect substitute' the same price they used to pay and continue to pay for gold reserves. Equal prices for perfect substitutes are the rule, rather than the exception, in competitive markets. The savings in the production of the low-cost substitute must be distributed somehow, and if the producer, in this case the International Reserve Institution, holds a monopoly, the distribution is for the owners of the company lo decide. If they are so inclined, they may well let the developing countries have the lion's share. 1 suggest that this is where we are placed in this situation. Perhaps the gentleman who thought that it was easy to dispose of our surpluses by increasing our aid to another part of the world might have something, but 1 do not think that he had anything like everything.

As I understand it, the difficulty with the SDR system - that is, the special drawing rights system - or the paper gold system, was experienced in providing the greatest potential credit availability not to those who needed it most but to those who needed it least. This, it seems to me, is the sort of dilemma that one has to resolve. I am afraid that, in the long run, the only argument to which we can return in order to try to obtain some sort of rationalisation about this process is to compare the amounts which countries spend on defence with what they spend on economic aid.

At the moment, Australia spends approximately 4% of its gross natonal product on defence. Australia spends less than 1% of its gross national product on economic aid and more than half of that amount goes to the area in which we have great individual responsibility, namely, Papua and New Guinea. I am not arguing about th:s as a proposition, but surely the point that we reach is this: It would be a lot easier from our point of view if we could sell all our wheat, wool and sugar to all countries. As I pointed out in a debate last night, more than half of ail products that we sell other than wool and almost the whole of the wool that we sell, are not sold in this country at all. Those products are sold on external markets. The difficulty in being able to sell those products is the lack of purchasing power of the people to whom we would like to sell. That is why I find at least a little bit interesting

Mr McLeay - That is the problem, not the solution.

Mr CREAN - What is the solution? Some of the honourable member's colleagues showed last night how hillbilly is the approach of honourable members opposite to this problem. Let me illustrate what some honourable members opposite were frightened about last night. I notice that my friend from the bank - the honourable member for Mitchell - is almost rearing to go. He calls himself a practical banker. But. if he is a practical banker, I am sure that one of the terms of his practicality is that he does not wish the mysteries to become available too freely. This, I think, is one of the great difficulties.

If one reads monetary history - one should read it - one would know that 100 or so years ago in Great Britain a great argument took place between what were called the currency school and the banking school. Fortunately for the history of mankind the banking school won. The fact that the banking school won simply showed that, if anything is called a bank, provided those who wish to go to that bank will accept, if honourable members like, the credibility - that is an awful word in 1970; I am sure that the word ought to be creditability rather than credibility in that sense - of that bank and provided they accept the 'creditability' of the institution, it will function.

What happened fortunately for the history of mankind is that it has been realised in most modern communities that unless the total volume of the credit is controlled in the public interest, private manipulators will use it for their own advantage. With all respect to my friend from Mitchell - he and 1 talk in a quite friendly fashion on some things; but we certainly do not agree about the proposition last night - this seemed to me to be-

Mr Kevin Cairns (LILLEY, QUEENSLAND) - Oh, Frank, don't be ridiculous.

Mr Robinson - Are you still friendly?

Mr CREAN - I hope that I am friendly with most people in this audience. What I am trying to suggest is that we have a pretty substantial proposition in front of us. I think that the one thing that the Government does not realise, with all respect to honourable members opposite, is that it has allowed what it calls private enterprise to develop in this field. Candidly, how the Government uses the term 'private enterprise' in a monopolistic kind of system is beyond my ken. 1 think the Government's idea of private enterprise is that there is no difference to be found between the milk bar on the corner that employs a husband and wife and the factory 200 yards away, which the milk bar mainly serves, employing 1,000 people. That is why f think honourable members opposite must rethink some of their propositions.

I am interested lo see the progress thai has been made in the International Monetary Fund by the acceptance of SDRs as a basis for regular expansion of the total availability of international liquidity. The next step that we must take is the one that Mr Machlup points out. We must realise that if we do acknowledge the fact that we can create credit on the international scale as well as the internal scale, the fundamental proposition to be faced up to is: Who gels the availability of the expansion? What he suggests is that it means fundamentally a transfer of resources, if honourable members like, or in terms used by those gentlemen who are sifting on the front bench, the selling of surplus wheat in Australia. I am sure that none of them argues that we can sell our wool and that we can use our wool and wheat in Australia. Those gentlemen ought to be interested in some mechanism that will make the flow of trade better than it is. To my mind, this is what is being attempted. The great struggle still is whether it is controlled in the interests of the majority of people or in the interests of the people who control the total volume of credit at the moment. I have been rather interested in recent days to read about the attempts of Australia to join the Organisation for Economic Co-operation and Development. I hope that in the course of this debate somebody will explain much better than was done in an answer to a question today, which was certainly rather veiled in its implications, whether Australia intends to join this Organisation and what sort of impact it will make if it does join. Surely the impact must be in terms of the expansion of Australia's trade overseas.

It is for these reasons that we on this side of the House offer no objection to the increase of Australia's quota to the International Monetary Fund. I am sure that my colleagues were just as surprised as I was to find that this preliminary essay in terms of the special drawing rights was much more adventurous than was initially thought. We had thought that the expansion would have been in the region of SI billion. Figures can be supplied to show that the availability of total international resources is somewhere in the region of $70m. Mr Lamfalussy's text also stated that the availability of total international resources is far less in terms of gold than it used to be and that a higher volume of international trade is being encompassed with a lesser degree of total reserves than was formerly the case. Although my friend, the honourable member for Kalgoorlie (Mr Collard), is not present I think I must say that the ominous signs are that if special drawing rights become more extensive - personally T hope they will because it simply shows the extension on the international plane of what is done in internal banking - gold will become a less and less important element in terms of international trade. I am afraid that I for one have no tears to shed about this proposition.

If people like to score cheap points about the fact that that means employment in the gold mines in Kalgoorlie will fall, they are quite welcome to score such points. This is not only true of the gold mining industry. I think it is true of many of our primary producing industries. Are we to maintain the same total level of employment in certain industries as we have done in the past? When 1 read the article in the Financial Review' a day or two ago which staled that we may become an importer of gold rather than an exporter. I thought that the writer was becoming a little bit over-enthusiastic about the same point that I am trying to make, and that is that gold will become a less important element. I am sure that the Treasurer reads as I do the various articles that emanate from international sources. In one of those articles someone described what they called the defusing of gold. The more we substitute the capacity of the International Monetary Fund to have its own sort of securities that will be acceptable in the rest of the world, the less will gold become an element. As I said earlier, I will shed no tears about the loss of gold. It seems to me to indicate in its most extreme form the futility of mankind. He will dig out of the ground something that in many respects would be better left there. This is done only on the assumption that unless we dig it there is nothing else more acceptable to promote the flow of trade in the world. If we are to continue to subscribe to that sort of mystification, it seems to me incredible.

As Mr Machlup indicates in the passage that 1 quoted, surely what we are doing when we export gold - the same situation would apply if we export iron ore from Australia - is to get the Japanese, for instance, to pay the equivalent of the labour used in the production of the raw material, whether it be iron ore or gold. The wages that are paid to the Australians in consequence of digging either the ore or gold goes into part of the expansion of the economy of Australia. The wages that are paid become the demand for other industry in Australia. What is earned by the export of gold or iron ore, or any other product, in turn enables Australia to import something else that we are not able to develop for ourselves by reason of the stage of our economy. Surely this is what international trade is. It seems to me to be a healthy move in the long run to support any measure that will increase the total availability of international liquidity. There will still be on the international plane the same sort of difficulty that there is on the internal plane. It is not that there is any limit to the capacity to generate credit, but unless there are some limits set on its generation, the real value of those who own assets, those who own money or those who have claims on the existitng levels of activity in the community will be destroyed.

It took a long time internally to accept this as part of economic reality. It will take a much longer time to extend the same sort of attitudes to what is really there - an ability to do the same thing on an external plane. I think the difficulty is that it has taken us a long time to accept within a community that a lot of redistribution can be done by taxation, by control with the total volume of credit and by other devices. But on the international plane the great difficulty is that people And it hard to comprehend that you are doing anything but give away what it has taken physical resources to compile. I think this is the great problem at the moment. Unless we see through this sort of nexus and realise that unless we sell something to somebody else they will not have the ability to exchange the other way. This is one of the most complex problems, I suppose, in modern economics. In fact, I. think 2 of the most difficult things to comprehend in modern economics are the operations of the tariffs, which are the barrier that countries set to the free exchange of goods, and the level of exchanges which operate between the transfer of those goods. They are 2 of the most complicated propositions in modern economics. Sometimes I am afraid that one is a little bamboozled by the sort of curious characters who think that by some sort of transfer of the pen all these problems can be solved overnight. They cannot be solved internally in that way: less so can they be solved externally.

It seems to me that the SDR scheme is a move in the right direction but the great dilemma that still has not been solved is that it has mainly been confined to what is called the group of 10. I suppose that if the group of 10 had not agreed to it the scheme would not have got off the ground at all. I think that even Australia thought that the group ought to become a group of 11 by the admission of Australia. Unless the group of 10 sees the thing through much more realistically than it has in the pa.-,t, it is likely to get bogged down in what may be called the use of capacity to expand the total availability of international liquidity. The main advantage will go to those who need it least and the least advantage will go to those who need it most. This seems to be the greatest problem that faces the world.

We have a decade of development which which never got off the ground because these propositions were not faced up to. From 1970 to 1980 we hope to do what we did not do between 1960 and 1970. I hope thai we will progress further between 1970 and 1980 than we did between 1960 and 1970. But we will not do this unless we think through a lot of these problems. I ask the Treasurer to make available to the House a lot more of the documentation that is available about these propositions than is currently the case. They are not easy problems to evaluate, and I think he will agree with this. But unless they are thought through we will be perplexed in the next 10 years by even more difficult problems than we have had in the last 10 years.

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