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Thursday, 3 March 1932

Mr BRUCE (FLINDERS, VICTORIA) (AssistantTreasurer) . - I agree with the Leader of the Opposition (Mr. Scullin) regarding the desirability of a unanimous endorsement of this bill as an indication to the investing public that, irrespective of party political differences, the whole Parliament affirms the liability of the Commonwealth under the Financial Agreement for all the debts of the States. The Prime Minister has rightly said that this measure is completely severed from the bill for the enforcement of payment to the Commonwealth by a defaulting State. It has no relation to any steps that may be taken to compel a State to honour its obligations ; it merely expresses the direct liability of the Commonwealth for the interest on Australia's public debt. That cannot be regarded by any section in this House as a controversial proposal. We should do everything in our power to allay any doubt that has been raised, and establish beyond question the liability of the Commonwealth. Undeniably, the intention of the Financial Agreement was to consolidate and strengthen the credit of Australia generally, and the people were repeatedly told that the financial strength of the Commonwealth would buttress that of the States, so that subscribers to Australian loans could feel assured that the whole resources of the nation were backing their investment. A further consideration is that under the financial Agreement, every debt as it matures will be converted into a direct Commonwealth obligation. Future borrowing, whether the proceeds are to be used by the Commonwealth or the States, will becovered by Commonwealth securities. Moreover, by the great conversion loan last year more than half the total public debt was converted into Commonwealth securities, for which the Commonwealth is liable to the bondholder. The stage is rapidly approaching when Commonwealth bonds will cover the whole of

Australia's public debt, and it is eminently desirable that any doubts regarding the Commonwealth's liability in the meantime should be removed. Even if the Financial Agreement be not amended as the Leader of the Opposition has suggested, unanimous approval of this bill will give to bondholders an additional guarantee, and an assurance that every party in the Australian Parliament admits the primary liability of the Commonwealth for the payment of both Federal and State debts. That will undoubtedly strengthen Australia's credit. The credit of the nation as a whole is much greater than that of an individual State; that was shown by the improvement in our stocks following the adoption of the Financial Agreement. Investors knew then that the credit of the States was backed by the credit of the Commonwealth. We cannot afford to leave any doubt about that during the critical years immediately ahead. The conversions to which the Leader of the Opposition has referred, will be more easily, cheaply, and satisfactorily effected if our internal and external creditis strengthened by this bill, especially if it is passed with the unanimous approval of all parties.

The Leader of the Opposition has contended that there was no doubt of the Commonwealth's ultimate liability for the payment of the interest on State debts'; that any doubt that may have arisen in the last few weeks was created by the Government, which thereby has done incalculable harm. The right honorable gentleman will agree that if any doubt does exist, it should be removed, and I propose to show that there is a real doubt. The opinions obtained by the Commonwealth from learned counsel vary to some extent, but there is fairly general agreement that in respect of State securities issued prior to the making of the Financial Agreement, and for which State bonds were issiied, the bondholder has no direct right to sue the Commonwealth. The bondholder received from a State a security which represented a promise by the State to pay principal and interest; the adoption of the Financial Agreement did not give to him the right to sue the Commonwealth directly, notwithstanding that under that agree- ment, the Commonwealth had assumed liability in respect of those bonds. Another point generally accepted by our legal advisers is that, whilst the Commonwealth is not liable to be sued directly by the bondholder, it is liable to the States, and any State, other than the defaulter, can take steps to compel the Commonwealth to pay. Apparently, there is a clear liability on the part of the Commonwealth to pay interest in respect of which a State Government has defaulted, and a clear right in the States other than the defaulting State, but not to the bondholder, to sue the Commonwealth if it does not pay. But have the States an unqualified and absolute right to make the Commonwealth pay in any circumstances, and. regardless of whether it has received any of the moneys in respect of which default has occurred?- One interpretation of the law may be that the Commonwealth has an obligation to the States, other than the defaulter, to make good any default.

Mr Scullin - Legal opinions on that point are unanimous.

Mr BRUCE (FLINDERS, VICTORIA) - That has been generally assumed to be the law. But another view is possible, namely, that the other States have power to force the Commonwealth to pay to the bondholder only from moneys receivable under the Financial Agreement from the defaulting State. Doubt upon this point has arisen, and the bill aims to remove it. Clause i, sub-clause 1, provides -

The Commonwealth will pay to bondholders from time to time, interest payable on the public debts ...

That statement is unqualified. In Part III., clause 2, paragraph a, of the Financial Agreement, the. same passage occurs, but it is prefaced by these words : " Subject to this clause." And the clause includes these words -

(c)   Each State shall in each year during the same period of fifty-eight years, pay to the Commonwealth the excess over the amounts to be provided by the Commonwealth . . .

Among the legal gentlemen who have given their interpretation of those words, is the Attorney-General (Mr. Latham), whose eminence as a lawyer entitles his opinion to due consideration. This particular point has been taken by certain persons, including lawyers, and a real doubt, has been created hi the minds Of some investors in Australian bonds as to the liability of the Commonwealth.' We share the view of the Leader of the Opposition (Mr. Scullin) that it is unfortunate there is doubt about the meaning of this clause; but, had there not been rumblings of doubt, this Government would have been the last to refer to the matter.

Mr Hughes - The interpretation of the clauses of the agreement is that the Commonwealth has to pay, subject to the States paying the Commonwealth.

Mr BRUCE (FLINDERS, VICTORIA) - That is the position. The Commonwealth's obligation to pay is made subject to the clause which provides that the State shall pay the Commonwealth.

Mr Scullin - Where did those rumblings start?

Mr BRUCE (FLINDERS, VICTORIA) - Among those whose business it is to advise ^investors whether they should or should not invest in Commonwealth stock. Doubt has only to occur in the minds of those persons to create trouble for us and to undermine our credit. There is a doubt, and the bill has been introduced to resolve it. Personally, I have not the slightest uncertainty as to the intention of the original measure. It was never meant to make the liability of the Commonwealth subject to the .receipt of moneys from the States. The doubt has evidently arisen by reason of the drafting. We cannot, of course, act on what was the intention of Parliament, we must take the actual wording of the clause. It was to remove any doubt that the Commonwealth Government determined to introduce this legislation.

I do not propose to deal with the course taken by this Government on the 1st February, because that has already been the subject of much discussion. The question whether the Government was right or wrong in the action it took to bring home exactly where the default lay, does not arise under this measure at all. What we are now considering is the difficulty that this measure is designed to overcome, and whether it is desirable that we should at this stage take this action to put the position beyond any doubt, and to make clear to the investors in Australian securities the opinion of the Federal Parliament. The Government considers, and the Leader of the Opposition concurs, that this is the most desirable course. I urge upon honorable members the desirability of passing this bill unanimously, to show to those who have moneys invested in Australian stocks that they have behind those stocks the security of the Commonwealth as well as of the States. The passing of this measure will have a material effect upon Australia's credit, and will make easier the big task which we have to face of converting a considerable portion of our long-dated securities which are shortly falling due.

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