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Wednesday, 10 December 1930

Debate resumed from the 10th July (vide page 3966) on motion by Senator Daly-

That thebill be now reada second time.

Senator Sir HALCOLEBATCH (Western Australia) [4.42]. - The debate on the second reading of this bill was postponed to allow a select committee of the Senate to conduct an inquiry into the desirableness of establishing a Central Reserve Bank in Australia, and to report to the Senate. I trust that I will be pardoned if I transgress for a moment to refer to what, to my mind, is the inconvenient practice we are at present compelled to follow in regard to the appointment of select committees. A select committee appointed to deal with the question of standing committees has submitted two reports to the Senate in which certain issues are raised, but which I cannot refer to at present. I throw out the suggestion that the Standing Orders Committee might consider the advisableness of remodelling the Standing Order relating to the appointment of select committees to deal with bills so that the procedure shall be clarified, and we shall know exactly the course we are to take.

The inconvenient result of the present, procedure is this: The reference of a bill to a select committee has either to be moved early in the secondreading debate, or a majority of the members of the Semiteare debarred from speaking on the second reading after an investigation by a select committee has been conducted. In this instance the honorable senator who moved for the appointment of the select committee automatically became its chairman. He conducted the investigation, and is chiefly responsible for itswork, yet is prevented by our Standing Orders from speaking on the motion for the second reading after the report has been presented. The Leader of the Government in the Senate (Senator Daly) likewise is prevented from speaking, although he has the right to reply to the debate. Senator Pearce, who also spoke on the second reading, is now debarred from taking any part in the debate.

Since the chairman of the select committee is not permitted to speak again on the motion for the second reading of the bill, the responsibility, shall I say, of explaining to the Senate the recommendations of the committee and enlarging upon its report rests with the other members of that committee.

In its first progress report the select committee intimated that it, had considered the subject chiefly underthree headings - (1) Is the establishment of a central reserve bank in Australia desirable? (2) Is the time opportune for the establishment of suCh fin institution? and (3) Is the bill as presented to the Senate suitable to the requirements of Australia? All of these questions were exhaustively dealt with in tlie final report of the committee. The first question as to whether the establishment of a central reserve bank in Australia is desirable is answered, as it was in the preliminary report, in the affirmative. Tlie committee is of the opinion that the establishment of a central reserve bank on sound lines would be a useful adjunct, to our financial structure. Regarding the second proposal as to whether or not the present is an opportune time for the establishment, of such an institution, the committee has endeavoured to set out quite impartially the advantages and disadvantages likely to arise from the adoption of such a policy. As to the third question, whether the bill as presented to the Senate is suitable to the requirements of Australia, the committee answered it very definitely in the negative. It litis given its reasons, which are set out in some detail, so far as principles are concerned, and the amendments that would be necessary to make it suitable to the needs of this country. My own view, which I advance with great, diffidence, is that there can be no doubt, that the establishment of a central reserve bank on the lines provided iti the bill would do an infinite amount of barm to Australia, and would prove more destructive to our credit that any other action that has yet been taken by this Parliament. But while I am convinced that nothing is to be gained by haste in the establishment of a central - reserve bank, even on the soundest possible lines, and that the service of such a bank, if established at. present, would bc very small, indeed, I still think that the sooner it is established in Australia, on sound lines, the better it will be for this country.

I take it that the purposes of a central reserve bank are fairly well understood. They are set. out. fairly fully, and, I think, accurately in paragraphs 23 to 27 of the committee's report. They tire also tersely set out in paragraph 15, which st ti tes that a central reserve bank is intended' to- "-centralize, regulate, and protect the banking and currency reserves of a country. The difficulties attendant upon the establishment of a central reserve bank in times of crisis are set out in paragraph 28, in which it is pointed out that tlie measure of assistance that, a central reserve bank can give in time of crisis largely depends upon the strength of its own position, lt must be obvious to every one that the assistance that such a bank can give to any one. depends upon its own strength. The benefits of a central reserve bank in times of stress arise' chiefly from the strength it has accumulated in times of prosperity. That, has a very important bearing, not only upon whether a central reserve bank should now be established, but also upon the type of bank required. A central reserve bank established in time of crisis has no reserves to contribute to the common fund; it must depend upon the reserves accumulated by other institutions. That being the case, it requires no argument to demonstrate that unless it is established on the soundest possible lines, instead of conserving and using those reserves it will dissipate them.

It has been suggested that during recent years the banks in Australia have accumulated reserves greater than they should have done with their limited capital; that their profits have been too large. 1 shall not enter into a long argument along those lines, but shall content myself by saying that the one saving feature in Australia's financial position to-day is that the trading banks have those reserves. If, as is suggested by those who contend that the reserves and profits of the banks have been too large, the business had been conducted by some government institution, which had so carried on its affairs that those profits had not accumulated and there were no reserves, the position of Australia to-day would be pitiable indeed.

Against the objections to the immediate establishment of this bank, two considerations are submitted by the committee. The first is that most of the more recently established central reserve banks in other countries have been imposed upon those countries -in times of crisis. That means that they have been imposed by influences outside the country. Those influences provided the money that was necessary to stabilize the currency of those countries, and they took control of the banks. The central reserve banks in those countries are controlled from outside. If it is at all possible, it would be preferable that Australia should set up- its own central reserve bank rather than that it should be set up and managed from outside. The second consideration submitted by the committee is that in the Australian crises of 1843, 1866, and 1893, expert investigations were carried out by different authorities - authorities appointed, in some instances, by Parliament - and the experts in each case recommended the establishment is Australia of a national bank. Central reserve banks were unknown in those days; but any one reading the reports of those experts can come to noi other conclusion than that they had in mind an institution very much along the lines of the central reserve banks which have since been established in many countries. What is the comment on those recommendations? As they were put forward in a time of crisis, political opinion said that the time was inopportune, and that nothing must then be done. Directly the crisis was over, the recommendations were forgotten. I am . reminded of a story of a farmer who had a splendid catchment - the roofs of his house and his sheds, and a large underground tank. But he never had any water, because he failed to connect his house and sheds with the underground tank. His excuse for not doing so was that in fine weather there was no water to catch, and that when it was raining it was too wet to do the job. We do not want to imitate that foolish farmer. Whether we finally decide that the time is ripe to take some preliminary steps towards the establishment of this bank or not, let us try to avoid repeating what has happened in the past. In the three previous crises through which Australia has passed, we have realized the necessity for such an institution, but with the passing of the crisis, the need has been forgotten.

In' my opinion, the most important reason for some early - though I emphasize that it must not be hasty or illconsidered - action, is the possibility of co-operation with similar organizations in other parts of the world. That is the thing to which we ought to devote our chief attention, for in that direction we have most to gain. However much opinions differ as to the nature, causes, and cures of the present economic depression, we are all agreed that it is world-wide. It must therefore be world1 wide in its causes and its cures. In 1922, an economic conference was held in Genoa. That conference failed for the reason that, while most of the important countries hastened to perform its first recommendation - that they should establish their internal currency on a gold basis - the second and complementary resolution of the conference for the coordination of gold, so that the holding of gold might be suited to the demands of the currency, has not yet been implemented. In fact, many countries have acted in an entirely opposite direction to the second resolution of the conference. That does not say, however/ that a world remedy will not be found. The work is still going on. The gold delegation of the financial committee of the League of Nations submitted a report a few months ago. I was supplied with a confidential advance copy of that report; but as I naturally was not at liberty to make use of it, I have been trying for some time to secure a published copy. I now have one, which I understand is the only copy in the possession of the Library. I am informed by the Librarian that, to the best of his knowledge, there are only two other copies in Australia. The report is dated Geneva, 8th September, 1930. I desire to read two paragraphs from that report in order to indicate the course which I think we in Australia ought to take at the present juncture. Near the bottom of page 17, the report states -

In recent years an unusual movement of gold has taken place. Thus, in 1929, Prance and the United States of America together increased their reserves by some 540,000,000 dollars, of which probably about 140,000,000 dollars were withdrawn from commercial banks and from private hoards. Ten countries acquired 1,055,000,000 dollars during the three years ending 31st December, 1928 - a sum equal to nearly 90 per cent, of the total amount of new gold mined during this period.

To some extent the acquisition of gold by a relatively small number of countries represented the exceptional movement of gold to reserves which, for one reason or another, had become depleted during or after the war; to some extent it was the inevitable result of the general economic disequilibrium from which the world has been suffering: We cannot shut our eyes to the f act that the question of the most effective distribution of gold is likely to become of steadily increasing importance in future years as the supplies of new gold become smaller. It may, however, be expected that the special causes which have determined the gold movements of the last few years will gradually work themselves out and that the possibility of an optimum distribution being achieved later by means of intelligent cooperation will steadily increase.

In view of all the circumstances to which attention has been drawn above, the probable trend of prices in the future must obviously give rise to some anxiety. We wish, therefore, at once to record our opinion that, if the need is recognized, remedial measures can be found which may be expected, for at any rate the next decade, to correct the consequences wo fear. We proceed to suggest some directions in which these may be sought apart from the problem of distribution, a matter with which we shall deal in a subsequent report.

The subsequent report to which reference is made, has been completed.


Senator Guthrie - It is not yet available.


Senator Sir HAL COLEBATCH -I do not know whether or not it has been printed, although I have seen brief references to it in the press. A few days ago one newspaper contained a cable message intimating that it was expected that the report would be printed and made available next month.


Senator McLachlan - Has not the issue of the report been withheld because of the bankers' conference in New York?


Senator Sir HAL COLEBATCH - I do not know.


Senator Guthrie -Will the report be available in Australia next month?

Senator Sir HALCOLEBATCH.The confidential report to which I have referred was dated June, 1930, whereas the printed copy did not leave Geneva until the 8th September. In view of the great importance of the matter I should not be surprised if there was. also considerable delay in the publication of the other report. The point I make is that these investigators say that a remedy can be found - an international remedy dependent on international co-operation - and that they intend to set out that remedy in a report which will be available next month.

On several occasions reference has been made in this chamber to a memorandum by Sir Henry Strakosch entitled " Gold and the Price Level". I propose to refer to it for two reasons. The whole of the report is devoted to insistence on the international character of any remedy that may be applied. Over and over again it emphasizes the great harm which must result to any country that sets out on a lone course in a matter of this kind. As the trouble is international, so the remedy must also be international. In the closing paragraph of his report, which was written some time before the document to which I have just referred was published, Sir Henry Strakosch said -

We can only hope that the inquiry into the gold question, which is at present being carried on by a delegation of the Financial Committee of the League, will achieve results no less effective than those yielded by the Report of the Brussels Conference, and that the Bank of England will once more lead the other principal central banks along the path of intelligent co-operation towards the common objective - economy in the use of gold, which alone can obviate the otherwise inevitable recurrence of disturbances such as those which are so grievously afflicting the world to-day.

Many of us, including myself, would be inclined to lose faith altogether in the League of Nations if it proved incompetent to suggest some remedy for our present difficulties. Many of them are the outcome of the great war. Payment of the cost of the war in some form or other is inevitable, even as payment for any loss or destruction is inevitable. Most of us are agreed that the difficulty of paying the cost of the war has been greatly intensified by the attempt of some countries to evade payment by inflating their currency. That such attempts have been made is beyond question. But I refuse to accept as inevitable economic conditions which impose, in almost every country in the world, unprecedented unemployment at a time when the one thing necessary is that every person everywhere shall be hard at work in order to repair and restore the material wealth thatwas destroyed during the war. We have to pay for the war, but there must be something wrong with economic conditions which appear to make it compulsory in almost every country in the world, that just when everyone ought to be at work in order to restore the losses of the war, there is absolutely unprecedented unemployment. This is nothing new. It is well to keep in mind that exactly the same condition of affairs prevailed after tlie Napoleonic wars 100 years ago. It is, however, a pity that the world has not grown wiser and that the co-operative spirit which has been developed since the close of the last war cannot find, not a means of escaping payment for the war, but a means by which all of us can get to work to repair the losses that inevitably rose out of it.

J.u the nature of things, there cannot be any quick or complete cure for these economic conditions. Any one who trys a quick cure will only get into trouble. The currency inflation practised in various countries has been a quack remedy. Quick remedies and quack remedies are almost synonymous terms. The cure must be international and all the evidence that the select committee has been able to accumulate on this point, all the authoritative works that it has had an opportunity to study, indicate that when an international remedy is applied it will be by the co-operation of central reserve banks all over the world.

This conviction forces me to two conclusions - that the sooner .Australia has a central reserve bank the better, and that the constitution of that bank must be such that it can readily co-operate with similar organizations elsewhere. The latter requirement is essential. Without it, we should be better off without, such a bank. This similarity for the purposes of cooperation does not necessarily imply rigid uniformity - there is no reason why local conditions and local 'requirements should not have the fullest play - but there must be a measure of uniformity of purpose and in basic principles, which is totally lacking in the present bill. It, is from that standpoint alone that I intend to attack its leading provisions. Whilst every other central reserve bank, without a single exception, has been established to protect, and, in some cases, to restore, the currency of the country and. prevent inflation, this bill would facilitate the debasement of the currency and make easy the practice of inflation. The bill says nothing about it, but we cannot disguise from ourselves the fact that the frankly expressed motive of those who are urging the immediate passage of this bill is that it shall be used for the purpose of inflation. In that fact we have the outstanding and irreconcilable difference between the avowed purpose of this measure and the accepted and universal purpose of every central reserve bank. An institution set up for a purpose diametrically against that" of any other central reserve bank in the world, would be incompetent to co-operate with other institutions in any international movement.

This bill offends against the guiding principle of almost all other central reserve banks. I shall refer more fully to the few and partial exceptions from that principle, which is that in their management and their policy it is essential that they shall be free from government control and the influence of politics, so that their policy shall be continuous. They cannot chop and change with every shift of the political wind. There cannot be a bank of one type with a' certain government in office and a bank of another type when another government is in power. That difference alone, apart from any other, would make the co-operation of such an institution with central reserve banks in other parts of the world entirely impracticable. The bill, as it stands, contemplates a purely government-controlled institution and would make easy the exercise of political influence. In its relationship to the Government, it departs from the accepted traditions of central reserve banking and from the policies of central reserve banks in every other country in the world, with no exception. Its provisions in relation to the making of advances to governments are unique; they have no precedent. There are a few cases to which I shall refer directly of central reserve banks coming, more or less, under government dominance: but it is beyond dispute that in no single instance is the bank subjected to the unrestricted control of a government as is con- templated by this bill.

Regarding this as the most serious defect in the measure, the committee hits cited examples from many authorities. It has failed to find one dissenting voice on this point. In its report it shows that in Great Britain a committee, recentlyappointed by the Labour Government to report upon banking, in the main emphasized the necessity for an organiza- tion that would co-operate with central reserve .banks in other parts of the world. Tlie two most distinguished members of the British Government, which appointed that committee, the Prime Minister, Mr. Ramsay MacDonald, and the Chancellor of the Exchequer, Mr. Phillip Snowden, both emphasized the necessity for keeping the bank entirely free from political influence.

The four main points affecting tlie relationship between the State and the bank, are ownership, management, or control, the power to make advances to the Government or to subsidiary authorities established under laws passed by the Parliament, and the amount and nature of the reserves to be held against the issue of notes. The fourth point is one of r,ne most important. For the convenience of honorable senators an appendix has been included in the report of the select committee on pages 25, 26, 27 and 28, giving the provisions in relation to these four matters of no less than 30 central reserve banks. So far as I have been able to ascertain, there are only 34 central reserve banks in the world. In addition to those mentioned in the table included in the appendix, there will be found on pages 19 and 20 of the evidence given before the committee, details of the reserve requirements against notes, of four other central reserve banks in regard to which, no other particulars were available. I take it. that these four are not banks of the highest importance. They are located in Albania, Ecuador, Egypt, and Uruguay.

The measure of gold reserve against mote issue, in connexion with, the relationship of the bank to the Governanent, should be stressed with the strongest (possible emphasis. On page twelve of its report, paragraph 19, the select committee quotes for the second time, a {paragraph which it included in its first report, and for the sake of giving it emphasis, and in order that it may be included in Hansard, I read it again. It is as follows: -

There can hu no question that thu power nf -Government to force increased loans from the Bank of France intensified the depreciation of the franc and contributed to the financial crisis that culminated in 1926. Such extreme -abuse* nf Government power are, of course, only possible when a. country has ceased to bc on the ;gold basis. As long as convertibility is main tained, the worst evils resulting from Government intervention in bunking and currency control are avoided. Doubtless ibo Governments which have laboriously dragged themselves out of the morass of inflation will not readily slip back; nevertheless if the control of the operations of thu central reserve bank lies directly or indirectly with the Government, it ' becomes fatally easy for the Government to finance itself for the time by means of book entries, a course which is the first step towards currency inflation and inconvertibility.

The position of Australia to-day is that Ave are no longer on the gold standard, inasmuch as holders of our currency cannot demand and obtain gold for the settlement of our overseas debts. That is what is meant by a country having a gold standard. Our notes are not convertible in the true sense of the term; therefore, as set out in this paragraph of the committee's report, .there is nothing in our present Australian position to prevent the worst evils resulting from Government intervention. 'When a bill amending the Commonwealth Bank Act was before the Senate twelve months ago, the suggestion was made, impudently I venture to say, that, we were copying the practice of the Bank of England, whereas on the contrary, we were departing a great deal from, it - we were, setting up an entirely opposite practice. In the case of the Bank of England, no person can go into the bank and demand a sovereign in exchange for his note, a wise arrangement in order to prevent, an altogether unnecessary domestic use of gold, but any person desirous of satisfying overseas obligations may take the currency of the country to the bank and demand his requirements in gold for export purposes. Under the pretence that we were copying tlie practice of the Bank of England, we set up a. practice which of course is not and could not bc carried out, under which any individual having a fi note can go to the Commonwealth Bank and demand a sovereign - exactly the opposite to thu English practice - but no person with overseas debts to settle can take his £4,000 or £5,000 in notes to the Commonwealth Bank and demand to be supplied with an equivalent amount in gold in order that he may send the gold away in settlement of those debts. "We thus look ourselves completely off the gold standard, and it may be within the recollection of honorable senators that the letter from the Chairman of Directors of the

Commonwealth. Bank, which was read in the Senate to induce honorable senators to pass the amending bill, emphasized that he would not in any circumstances, urge a departure from that standard. The effect is that we have departed from the gold standard, that our notes are inconvertible, and that we are to-day in a position to permit the worst possible abuses in the event' of the establishment of a central reserve 'bank under government control. Returning for a moment to the tables which appear on pages xxv. to xxviii. of the report, I invite honorable senators to consider first the question of ownership. Of the 30 banks whose constitutions are 'analyzed in the return, sixteen, or more than half, are entirely owned by shareholders or legal persons, nine others are owned by shareholders and the Government, the interests of the shareholders predominating, and five only are owned by the State, those in Bulgaria, Finland, Latvia, Sweden, and Russia. Later, I shall make further reference to the fact that, even in the case of these five nations, not one contemplates, or would permit, the relationship between government and bank that would be set up by this bill as originally drafted.

The committee feels that it has adopted a sound course in recommending that, if and when this central reserve bank is established, it shall be on the intermediate principle - ownership in part by the Government and in part by the shareholders - and that it shall be provided, 'as is provided in every instance on record in which such banks have been established', that the shareholder influence shall predominate. That provision is necessary if we intend to eliminate political control and secure the continuity of purpose and policy of such a bank. The committee regards this principle as fundamental, and as bringing at once into the foreground the whole ' question of the ownership of money.

That money can be created by a government, or' that money is the property of a government, is a purely -communistic conception which tlie committee has rejected, and which this Senate will reject, unless I am very much mistaken. The purpose of a central reserve bank is not to finance the' Government, or to provide easy methods to meet the expendi- tures of governments. It is not to make possible by devious methods the transfer of private wealth to the Government. Any such policy would surely mean the dissipation of the reserves of the country. 1 think that I mentioned once before in this chamber, and I venture to repeat it, that there is an old definition of a banker which has stood the test of time. It is, " A banker is a man who takes care of other people's money, and lets them have it when they want it." This bill would set up a new definition, " A banker is a politically-constituted authority that takes the people's money, and does what it likes with it." That is something t© which, I fancy, this Senate will not consent. At the present time, if the Government wants the people's money it can get it by borrowing it, or by taxation. The purpose of a central reserve bank is to conserve the reserve wealth of the community, to ensure its employment in a manner best calculated to serve the permanent interests of the entire country. Consequently, the aim in providing for the ownership of a central reserve bank must be to prevent sectional control. For this purpose, whilst there may be individual shareholders, the extent of their holdings must be strictly and very definitely limited. With the committee, I see no reason whatever why any bank, as a bank, should be a shareholder in an institution of this kind. Nor is the purpose of a central reserve bank to make profits for its shareholders. It has been very aptly stated that the bank does not exist for the benefit of its shareholders. The shareholders are there for the interest of the bank, to give it strength and independence. If any other method can be devised by which a central reserve bank can be secured against political control and political influence, I shall be content if the shareholders are wiped out altogether. The committee has failed, as have the people who formed central reserve banks all over the world, to find any means to prevent pernicious political influence, except by giving the balance of power and the management and control of the bank to shareholders. No one would suggest for a moment that the profits of the note issue should go' to the shareholders. The profits of the general operations of the bank cannot be regarded as subject to unrestricted distribution among shareholders. In any circumstances the act should set out the maximum dividend that the shareholder can obtain from the bank, and it should be no more than an investor in Government stocks might expect to obtain in normal times. The first purpose of the hank is to build up reserves, and even the limited distribution of interest on his shares should not be paid until ample reserves have been accumulated.

If after building up all the reserve that is considered prudently necessary, and paying the shareholder the amount of interest that he would have obtained had he put a similar sum into Government securities, there is any balance, it is the property of the people, and should be put into the revenue of the country. So that, in making this suggestion of a shareholder bank, there can be no idea of providing means for people to make money out of the institution.

SenatorRae. - There would not be much inducement for investors to participate in the scheme.

Senator Sir HALCOLEBATCH.The capital of these institutions has been subscribed in other countries of the world. My honorable friend appears to think that a man with money has no other purpose in life except to increase it. Does he not realise that most people who have interests in the country have toiled hard to build up a comfortable provision, not only for themselves and immediate descendants, but also for the country? Is he prepared to suggest that such people are not eager that the finances of the country should be on a thoroughly sound basis, and, that to attain that desire, they are not prepared to invest a certain amount of their wealth in public funds, in a way that will bring to them a reasonable return for their investment? Does he contend also that, when the country is in need of financial stability, such people are not prepared for the time which is occupied in building up the necessary reserve to accept small returns, or even no return at all? There would be no difficulty in finding the comparatively small capital necessary for establishing an institution such as this. In the bill presented by the Government the total capital was stated at £2,000,000 - a comparatively small amount.

I shall pass to the second point, that of control and management. It should follow that of ownership, for the reasons that I have already given, two-thirds of the directors being appointed by the shareholders, and one-third by the Government. Continuity of policy should be preserved by providing that one-third of the total number of directors should be retired every second year, and by making the removal from office difficult. Clause 16 of this bill is, I think, without precedent in any other similar legislation. It reads -

Notwithstanding anything contained in this act, the Governor, a Deputy Governor and a Director shall holdoffice only during good behaviour.

And there it stops. There is no provision such as is made in the case of a Chief Justice, the Auditor-General, and others. If the bill had been passed in its original form the judge of " good behaviour " would be the Government. I am afraid that many of the Government supporters incline to the view that certain of the directors of the Commonwealth Bank are to-day behaving very badly. I should be extremely sorry if the directors of the Commonwealth Bank were subject to a clause of that kind, and their behaviour was to be judged entirely, and without appeal by the Government of the day, with power to act accordingly.

Perhaps the most important feature of the tables to which I have referred is the connexion of the bank with the Government, and the power of the bank to make advances to the Government. If honorable senators turn to clauses 8 and 9 of the bill, they will read that -

8.   The Reserve Bank shall . . . have power - and then they must turn to paragraph (i) which reads - to make advances to the Government of the Commonwealth or of a State or to any authority constituted under the law of the Commonwealth or of any State.

There is absolutely no reference to security, or to the amount or period of the advance. The intention is made clear in clause 9, which reads -

The Reserve Bank may not -

(g)   make unsecured loans or advances except to the Government of the Commonwealth or a. State, or to any authority constituted under the law of the Commonwealth or of any State, or to any corporation carrying on the business of banking.

Those two' clauses read together make clear the intention that the bank shall have authority to make advances to governments and subsidiary bodies formed under the laws of the Commonwealth or a State without security, without any limited time, and without limit to the amount.

I refer the Senate again to the dangers of such a position as set out in the quotation, to which I have referred, at the top of page 12 of the report. Australia is in exactly the position that is visualized there. It is off the gold standard, with an inconvertible note, a position which is aptly described by this authority when lie says, " it becomes fatally easy for the Government to finance itself for tlie time by means of book entries." It is worth while referring for a moment to a point discussed in paragraph 29 of the report, where reference is made to the existing Commonwealth Bank. The committee did not for a moment consider the bill to amend the Commonwealth Bank Act, which has been introduced in another place. I do not know how far the discussion has proceeded; but we cannot be blind to the fact that that bill was intended to be complementary to the one under discussion. Its declared purpose was to permit, the Commonwealth Bank to function freely as a trading bank - that it should reduce interest rates to extend advances. .Rend in conjunction with the closing line of clause 9, paragraph flr, "Any corporation constituted under the law of the Commonwealth or a State for the purpose of carrying on the business of banking," this bill would enable the central reserve bank to make unsecured advances without limit as to amount or period to any corporation carrying on the business of banking. It would mean that the reserves of the private banks might and I venture to say would, if this bill were passed in its present form, be required to bolster up a government banking institution - a policy which would lead quickly to the elimination of those reserves, with most unfortunate results to Australia as a whole.

I now invite honorable senators to turn for a moment to the appendix dealing with the powers enjoyed by other central reserve banks in the matter of making advances to governments, and to com- pare such powers with those contemplated under this bill. Let us consider, first of all, the position of the purely State banks - those in which there is no shareholding control. The first to which I direct attention is the National Bank of Bulgaria. That bank may discount State orStateguaranteed bonds maturing within three mouths .and discount for the temporary requirements of state as authorized by budget bills of not more than threemonths, and totalling not more than 400,000,000 levas. It- may not make ad varices to other public bod ies. For the information of honorable senators, I may add that, although 4.00.000,000 levas mayappear to represent it large sunt of money, actually it amounts to about £750,000. because the value of the leva is about 670 to the £1 sterling. The powers of the next of these government banks - the Bank of Finland - tire not very definitelystated. lt is provided that, the board shall act in such a way that the currency shall maintain its value established by law. The bank must redeem its notes on demand in Finnish gold coin, gold ingots or cheques made out in foreign gold currency payable at sight at the current rate of exchange, but not, exceeding parity by more than 1 per cent. The issue may be 1,200,000,000 marks in excess of ' the aggregate gold reserve. There you have in the provisions for lending, and as to the gold, reserve, a very substantial and complete check against unlimited lending bv the bank to the Government. Another example is the Bank of Latvia. Its power to make advances is limited in such a way that the currency must bc maintained at par established by law. That is to say, the bank must redeem its notes on demand in gold coin. It is specifically provided that deposits with the bank cannot be used to cover the expenditure of the State. Substantial gold reserves are required, namely 50 per cent, of the first. 100,000,000 lats- which are about on a par with the old French franc 25.22 to the £ - 75 per cent, of any excess of "100,000,000 lats up to .150,000,000 lats, 100 per cent, of any excess over 150,000,000 lats. In other words, any excess over £6,000,000 must be covered by 100 per cent, in gold. Then we have the State bank of the Russian Socialist, Federal

Soviet Republic. .lt may grant credits to such government undertakings as are not financed by budget grants. Loans in bank notes made to the Commissariat of Finance are to be secured by precious metals as to a minimum of 50 per cent, of the face value and as to the remainder, by interest-bearing bonds of the Commissariat of Finance. It is required to have a minimum reserve of 25 per cent, of the note issue in gold, precious metals or stable foreign currency. In connexion with this particular bank, I would point out that although hy law there is supposedly absolute protection against inflation or destruction of the currency, the bank is entirely under the control of the State, and the law has not protected the currency.

On this point I refer honorable senators to certain comments which appeared in the London Times of the 1st November, 1930, which came to hand after the committee had prepared its report. [Extension of time granted.'] The Times states -

Thu figures of currency in circulation issued bv thu Statu Bank of thu Soviet Union in its Economic Surrey, aru as follow: -

 

Tin: only later figures are for the treasury note, silver and copper part of the . currency which appear in tlie newspaper, Economic Life. These show, in mie month, an increase nf 240,000,000 roubles in paper (an increase of I5i per cent, in thu month) and an increase in silver and copper of 140,000,000 roubles (155 percent.). Figures of the bank note issue aru not given; but if these have increased proportionately, as has lately been thu case, thu total increase in thu currency between the 1st August and the 1st September has been 890,000,000 roubles, bringing the total in circulation to 4,750,000,000 roubles which means that the currency in circulation lias been nearly doubled in twelve months.

The table included in the Times comment shows that the currency in circulation on the 1st October, 1924, had just about doubled at the corresponding date in the following year. Then it took. three years to again double itself, and at the 1st August, 1930, it had .reached nearly 5,000,000,000 roubles. Officially the exchange is still quoted at nine and a half roubles to thu £.1, but on the 1st November, 1930, its internal purchasing power was down to about one-tenth of its liar value equivalent outside of Russia. The Times comment continues -

On the 1st September inflation was proceeding apace. Whether the authorities will again attempt to stum the outward torrent of currency paper, and temporarily succeed, as they did in thu early part of the year, remains to lie seen. It is believed by many in Russia (and the hoarding of silver coins and foreign currency is a visible effect of some such belief) that by next spring the rouble will be worth only its weight in waste paper, and the country will be again on a. permit and barter currency.

The reason for that is not far to seek. The depreciation of paper currency has various economic and psychological results. The psychological effect cannot be calculated. When people realize thatpaper currency is going steadily down in value, and that they can no longer depend upon any stability between the money value and goods which they have to buy, the psychological effect, is such that it may be likened to the disaster of a bush fire. Mr. J. M. Keynes, who is frequently quoted by those who advocate a "little" expansion of the currency, and as an opponent, of the immediate return to the gold standard by England in 1925, rnakes interesting comments on the psychological effect, of inflation. His remarks are worth noting by all those who favour an inflation in the currency in Australia. Referring to a previous crisis in Russia, Mr. Keynes states -

In Moscow the unwillingness to hold money except for the shortest possible time reached at one period a. fantastic intensity. If a grocer sold a pound of cheese, he ran off with thu roubles as fast as his legs could carry him to thu Central Market to replenish bis stocks by changing than into cheese again, lest they lost their value before he got there; thus justifying the prevision of economists in naming the phenomenon "velocity of circulation"! In Vienna, during the period of collapse, mushroom exchange banks sprang up at every street corner, where you could change your krone into Zurich francs within a few minutes of receiving thom, and so avoid the risk of loss during the time it would take you to reach your usual bank. It became a seasonable witticism to allege that a prudent man at a cafe ordering a bock of beer should order a second bock at the same time, even at the expense ' of drinking it tepid, lest the price should rise meanwhile.

The only other State-owned bank in the world is the Bank of Sweden. In that country the national debt office may be granted a credit not exceeding 1,500,000 kroner without security. The exchange value of the kroner is eighteen to the £1, so the actual amount of the credit is under £100,000. It may issue notes to the value of about £7,000,000, and it has to hold double the metallic reserve, which may not be less than 75,000,000 kroner, for any additional notes it issues.

In all of the State-owned banks to which I have referred there is provision for drastic protection against the banks being made a convenience of by the Government. Obviously, this safeguard is necessary, because a government might come into power on a chance victory at the polls, and if it had authority to make a central reserve bank do its bidding and inflate the currency, the results might conceivably be most disastrous. In effect this authority over a central reserve bank would make the monetary system of a country subservient to the Government of the moment. Thus a government could destroy, and if the Commonwealth Goment operated the system in that way, as it has operated in other countries, it would destroy the value of all investments in government stocks, in savings banks and life insurance societies.,

I do not think it necessary, and I have not the time to review the provisions with respect to the making of advances to governments by the banks that are not under State control. But it may be worth while to point out one or two. For instance, the Austrian National Bank, which is controlled by shareholders, may not grant loans or credit to the State, but it may discount federal treasury-bills up to 75,000,000 schillings - as there are 34£ schillings to the £1, the total amount is about £2,000,000 - if tendered by solvent persons other than the federation, the provinces or their undertakings. The National Bank of Belgium may discount treasury bonds not exceeding ' 100,000,0.00 francs. The position with respect to the National Bank of Copenhagen is worthy of con- sideration. The main object of the bank is to establish and maintain sound finances in the country, and through loans and discounts to improve the circulation of money for the facilitation of production, trade and exchange and by receiving deposits to keep funds liquid. No order from the government of that country shall either, directly or indirectly, interfere with the bank's management or shall any encroachment on the means or money held by the bank be committed. A reference to the central reserve banking system in other countries shows, in case after case, that every central reserve bank has been established with the object of protecting the currency of the country in the interests of the people. This bill contemplates the establishment of' a central reserve bank in order to make governmental finance easy.

Paragraph c of sub-clause 1 of clause 33 of the bill relating to paper currency, brings me to the fourth point which I wish to make concerning the reserve against paper currency. That paragraph reads -

33.   - (1.) Australian notes may be issued in any of the following denominations, namely, five shillings, ten shillings, one pound, five pounds, ten pounds, or any multiple of ten pounds, and shall -

(o)   bear the promise of the Reserve Bank to redeem the notes in gold coin (or, in the case of a single five shillings Australian note, in silver coin) on demand at the head office of the Reserve Bank.

That paragraph shows cynical, indifference to existing circumstances; it provides that the bank shall be compelled to print on its notes the promise to redeem them, upon presentation, in gold coin. The framers of the bill knew perfectly well that such a thing was not contemplated and could not be carried out. As a matter of fact, if it were a bona fide undertaking that could be relied upon, the danger of the association of the Government with the bank would be largely removed. The bank could not issue notes to the Government because it would know that they would come back, and that it would have to meet them. It is not intended to be a bona fide undertaking, and if it were, it would be foolish. It is an archaic notion dug up from some banking system that did not realize the stupidity of allowing gold to be dissipated in domestic circulation. What would happen if the notes of the Commonwealth Bank were truly convertible?


Senator E B Johnston - There would be a rush and a scramble.

Senator Sir HALCOLEBATCH.Yes. The purpose of a reserve is to secure the convertibility of notes. In Australia, that system has -broken down. A comparison with other banks shows that the Australian gold reserve is lower than that of other countries, with the sole exception of Russia, which has also a reserve of 25 per cent, such as we have. Some countries have a reserve as high as 60 per cent., whilst the general standard aimed at seems to be 33-J per cent. In the interim report, which has just come to hand, of the gold delegation of the Financial Committee to the League of Nations, we find the following: -

Tlie amount of cover against notes and sight liabilities which any country needs is determined' by a number of different factors.

In another portion of the report it is made quite clear that the committee regards 33-J per cent, as generally satisfactory, although it strongly urges every country to keep a margin of 40 per cent. The report continues -

An agricultural country or a country whose exports are confined to a small number of commodities, the prices of which are liable to wide variation, will necessarily want a larger proportionate reserve than one which enjoys the more varied economy of a strong creditor position.

It shows quite clearly that a country like Australia should have a larger gold reserve than other countries; but it is proposed that our reserve should be lower than that of any other country except Russia. In most cases a portion of the reserve may be held in foreign exchange, and that is the practice recommended by the select committee in paragraph 45 of its report.

I invite the Senate to make a comprehensive comparison between the central reserve bank proposed in this bill and similar institutions elsewhere. Of the 30 odd central reserve banks, it would be one of six owned and controlled by a Government.' It. would be absolutely the only bank - not excluding any one of the other five Stated-owned banks, not even excluding Russia, with power to advance to governments without security or limitation in time or amount. It would have the lowest reserve against notes held by any country. Two conclusions are inescapable: (1) That such a bank would be a source of national weakness and not of strength. Its only effect would be to dissipate existing reserves; and (2) - which is equally important - that such fundamental differences of purpose and of principles must preclude possibility of co-operation with other central reserve banks in any scheme of international rehabilitation that may be devised.

Another important point that should be borne in mind is that the present crisis in Australia is not a banking crisis. It is a government crisis. We hear no talk nowadays of the Government coming to the assistance 'of the banks. It is the banks - because of the policy they have adopted and the reserves which they have accumulated - that are coming to the assistance of the Government. They are assisting the Government in every way they possibly can. That contention is supported by the statements of the Acting Treasurer (Mr. Lyons), by the directors of the Commonwealth Bank, and it can also be supported by every one who has a knowledge of the position. Instead of the Government coming to the assistance of the banks, as was the case in previous troubles, it is the banks which, fortunately for Australia, are able and willing to give all the help they can to the Government. The shareholders in these banks are numerous. They are not all wealthy people; the bulk of them are small shareholders, and the banks' reserves represent the thrift of the general community, conserved by the banks and made available for the service of the community. To convert these reserves to the uses of the Government would inevitably mean their rapid destruction. A bank formed to bring about such a conversion could not by any stretch of the imagination be regarded as a central reserve bank. The tendency indicated in the bill, and elaborated in speeches by those who are anxious for its immediate passage, is to treat Australia as an isolated economic unit. We are asked why we should allow -ourselves to be inconvenienced because other countries are hampering tlie p roper operation of tlie gold standard. To argue like that is to blind ourselves to the facts. Our troubles are duc to the fall in the values of commodities in tlie world's markets, and any attempt at independent adjustment WON ld mean nothing, perhaps, but a different distribution among sections of our community - taking from one and giving to another. Already we are hopelessly in excess of the general world price level, and only harm can come from accentuating that position. Sound currency and a sound financial policy are essential to any country. The only remedies for our ills tire internal and external. The internal remedy is to decrease the cost of government and of production, so that we can compete in the markets of the world. We have the natural advantages which will enable us to compete with other countries. Senator O'Halloran said the other day that no country could produce wheat at present prices. That is true, lt is also true that, under a sound policy. Australia can produce wheat as cheaply as tiny other colin try. That is our internal remedy. The external remedy must depend upon international action. "We must endeavour to put ourselves in such a position that we can play our part - a small part so far as the rest of the world is concerned, but big so far as we are concerned - in such international action as. is decided upon to remove the present, difficulties. I believe that, following upon the investigations of the financial section of the economic committee of the League of Nations, and the realization by America, France, and, in a minor degree, other countries, that it. is suicidal from their own point of view to continue to hoard up gold that, is earning nothing - that by doing so they are only imposing a. burden upon themselves and bankrupting and destroying their customers - a means will be devised of mitigating the present crisis in world affairs. It seems clear that the instrument to be used in applying the remedy that i? devised will be central reserve banks, ti system already widelydeveloped throughout, the world. This Parliament should, if not immediately, in the very near future, con-

Senator Sir Hal Colebatch.sider the lines upon which such an institution might be set up in Australia, always remembering that it must be so constituted as to be able to co-operate with similar institutions elsewhere. For this purpose it must be free from political pressure. Its purpose must not be to make government finance easy, or to transfer to governmental use the savings of the community. In the main, the savings, as I have already pointed out, are the small accumulations of the many, whether they appear as reserves in the private banks, as deposits in the savings banks, or as policy holdings in insurance companies. To protect these to the people who own them, and at the same time to ensure their best use in the interests of the trade and commerce of the country, should be" the main aim of the bank." I think that if the bill is amended in the direction suggested by the committee, and passed into law only after ample opportunity has been afforded for criticism inside and outside of Parliament, such a bank would be an instrument of good in Australia:

For these reasons I intend to support the second reading of the bill ; but I urge that, before any definite steps are taken, or before we commit ourselves in any way, we should await the final report of the gold delegation of tlie financial committee of the League of Nations to which I have already referred. A central reserve bank will not be of any use to Australia unless it can co-operate with similar institutions in. other countries. Of course, I know there are some persons who profess to completely understand the present, economic muddle: but my experience has been that it is only the entirely ignorant and uninformed who are confident in a matter of this kind. The best authorities in the world are still seeking diligently for a remedy. We all hope that they will find it. The remedy is not in the bill now before the Senate. I submit that we should be entirely false to the obligations we owe to the people of Australia if we permitted a drastic change in finance and currency, and in the whole credit structure of the country to be made without giving. them an ample opportunity to consider it. For that reason, while I support the second reading of the bill, I urge that, in the interests of Australia, this legislation be not enacted until there has been a. full opportunity for its provisions to be considered, not only in Parliament, but throughout the country. We should remember that we are sitting in an isolated spot here in Canberra;we are entirely out of touch with the world of affairs. It is difficult for public opinion to bo brought to bear upon this Parliament. We owe it to our constituents not to do anything that will vitally affect them without first giving them an opportunity for comment. There is this further important reason for a brief delay - I suggest no more than that - that within a month further valuable information will be available to us. We should not act without it.







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