did not suspend

525 1,360

l,H65

843

1,885

2,630

20,448

440

20,888

214. We have seen that twelve trading banks with aggregate share­ holders' funds of about £12m. suspended payment and eventually los t almost that amOLlnt. But ten other banks with aggregate shareholders' funds of about £11m . survived, with little visible loss. The cause is, · therefore, not to be found in any fundamental defect in. the banking system. It must be sought elsewhere. One of the most important factors was undoubtedly the inc01npetent direction and management of the smaller financial institutions whose weakness brought about the crisis. But the directors and managers of some of the trading banks were not free from responsibility. 'J1hese banks competed for both deposits and advances and, in addition, provided finance for some of the smaller institutions: Wh en the failed they were

inevitably involved. As the crisis developed, other banks which may have been more wisely managed were unable to stand the strain and were forced to suspend. 215. It is possible that a strong central bank (had such then

existed) ruight have been able to limit the unhealthy expansion

101

'l'HE C APITAL, RESERVES AND PROFITS OF THE .Aus TRALIAN TRADING BANKS, 1893 TO 1936.

that eventually brought about the crisis. It is possible also that when the crisis was imminent prompt and decisive action by a central bank might have limited its effects to those institutions that were .actually insolvent, and have gained time for others that were sound

t o r earrange their affairs in an orderly manner without suspension. But the central bank cannot protect an institution against the consequences of incompetent management, nor can it lost

capital.

THE DEPOSITS THE SUSPENDED BANKS.

216. The aggregate de_P,osits of the banks which suspended pay­ ment (other than the F ederal Bank of .Australia Ltd.) at the

dates of su.spensioh ·amounted to approximately £68.5m. The of these banks were requested, and, by the force of

compelled, to agree to an extension of time for the

repayment of the amounts owing to them . 11here was much similarity between the proposals made by the banks, though naturally they in detail. In nearly every case small deposits not exceeding, say,

£50, or in the case of some banks, £100, were immediately released. In some instances:, depositors were given an option to convert part of their deposits into preference shares, and, in others, were compelled t o do so. Deposit receipts were issued for the balance. 'rhese were payable by annual or half-yearly instalments, the first in most in­ stances about fiv e years after the date of reconstruction or re-arrange­ ment. In this way the depositor r eceived a. n egotiable security which

he could sell either on the stock exchange or privately. The market Yalue of these deposit receipts varied from day to day, being

influenced by the opinion of the buyer as to the ability of the bank concerned to meet its engagements, the ruling rate of interest, and the dates of :repayment.

217. The conditions under which preference shares issued were also similar, thoug•h there were some diffe r en ces in det ail . The following cohditions ,,ret e cornmon :-(a) That the dividend on ordinary shares was not to exceed

a specified rate ( usually 5 per cent. per annum) for a definite period of years after incorporation or until all deposits had matured or been repaid; ( b) That when it became possible for the bank to pay a rate

of dividend on ordinary shares in excess of the minimum specified, the rate of dividend on preference shares · should also be increased. It was usually provided

t hat in that event t he same r ate should be paid on

bot h classes of shares ;

102

THE CAPITAJ,, AN D PROFITS o F THE Aus TRALIAN

TRADING BANKS, 1893 TO 1936.

(c) 'I' hat preference as to dividend should cease when pre­ ference shareholders had r eceived a number of

dividends {usually 10 half-yearly or 5 yearly) at a certain r ate in excess of the minimum provided for in t he agreement.

218. In the case of t he Commercial Bank of Australia Ltd., these provisions were subsequen tly modified, and the dividend on preference shares was limited to a maximum rate of 4 per cent. per annum. In the ca se of all the other banks which issued preference shares, the operations of these provisions eventually r emoved the dis­ tinction between the dividends on preference and ordinary shat·es.

219. Within two or three years, many of the banks found that they weee unable io ca rry out the arrangements they had made for the repayment of their deposits. Between 1895 and 1897, a number of them sought and obtained the consent of their shareholders to a 1ro'dificatiou of the original arrangements. These generally provided for an extension of time for r epayment and a reduction in the rate of

interes t. 220. In the case of three banks, however, the depositors were com­ pelled to Bgree to the conversion of a part of their deposits into interminable sec urit ies variously described as debenture stocks,

perpetual or irredeemable deposits or inscribed stocks. About half the deposits of tb e English, Scottish and Australian B ank Ltd. were so converted. 'l'he deposits of the Queensland National Bank Ltd. were written down by fiv e shillings in the £, and the whole of the balance was conver ted into interminable deposits, provision being made for the repayment out of future profits of the amount written off. Payment of this was completed by 1918. The depositors of the

Australian Joi·nt Stock Bank L td. wer e also required to accept a substantial part of their deposits in the form of inscribed stock. 221: Howeve r describ£d, all these interminable securities had two features in common. The first was that they were repayable only at tbe option of the bank; the second that the low rate of interest :fixed was not subject to revision. In effect, this converted them into :fixed capital, entitle d only to a low rate of interest. The conditions

described are open to adverse criticism on the ground of rigidity. The rate fixed 1nay have been f air at the time and in the circum­ stances, but it became definitely inequitable in later years when hi gher rates of in terest prevailed and the banks concerned earned large profits.

222. Between 1893 and 1901, substantial progress was made in the repayment of the unconverted deposits. The Commercial Bank­ ing Company of Sydney Ltd. released its current accounts

103

THE HESERVES AND PROFITS OF THE AusTRAI,IAN

TRADING BANKS, 1893 TO 1936.

immediately it reopened, and completed the repayment of its fixed deposits within two years. By the end of 1901, the Bank of North Ltd., the National Bank of Australasia Ltd., the Bank

of Victoria lJtd., the Colonial Bank of Australasia Ltd., and the Royal Bank of Queensland Ltd., had each completed the redemption of its deposit receipts. All the other banks had made substantial

progress in this direction. By 1904, the English, Scottish and Aus­ tralia!n Bank lJtd. had redeemed the whole of its "terminable " deposit receipts, and the Commercial Bank of Australia Ltd. its " A" deposit r eceipts. 'l'he liability for the deposit receipts o£ the Australian Joint Stock Bank lJtd. was assumed by the Australian Bank

of Commerce Ltd. on its formation in 190!) , and dealt with in

the same manner as the inscribed stocks of the former which Js described later. 223 . By 1914, the "special assets trust" deposit receipts of the Commercial Bank of Australia T..1td., and the balance of the deposit

receipts of the London Bank of Australia Ltd., had been redeemed. There remained only that part of the deposits of the Queensland National Bank Ltd. which had been writt en off in 1897, ?.nd the redemption of these was completed during 1918.

224. Table 41 ,* which shows the deposits of each of the suspended banks, and the manner in which these were disposed of, may be summa1;ized as under:-DEPOSITS OF THE SUSP ENDED B ANKS,

ToTAL DEPosrrs AT Tnn: OF SusrENSION . . Deduct deposits of the City of Melbourne Ba nk Ltd. (in liquidation)

Deduct AMOUN'l'S CONVl.'R'fiW INTO­ Preference shares .. Interminable de po s its

BALANCE REPAYABLE IN CASH

5,859

PAID BETWEEN-1893-1901 ..

1902-1914 1915-1918

. . 42,212

9,499 789

BALANCF. representing depu:;it receipts of t. hc Juiut

Swc·k Bank Ltd. taken over by t he .<\u st ralian Bank of

Commrrce Ltd.

• P age 3 G7.

£'000 68,576

3,750

04,826

9,175

55,651

52,700

2,951

1.659

104

THE CAPITAL, R ES EIWES AND PROFITS THE AusTRALIAN TRADING BANI

225. 'Ihc following table shows the names of the banks which required their depositors to accept int erminable deposit receipts, the amount so issued, and the redeemed up to 1936.

INTERMINABLE DEPOSIT RECEIPTS I SSUED AND REDEEMED. -- Issued. Redeemed. Outstanding, 1936.

£'000. £'000. £'000.

English, Scottish & Australian Bank Ltd.-4% Debenture stock . . . . 999 15 984

3% Perpetual preferred inscribed deposit stock .. . . . . 944 55 889

Queensland National Bank Lid.-3!% Interminable inscribed deposit stock . . .. . . .. 3,117 366 2,761

-

5,060 436 4,624

A.t1atra.lia.n Joint Stock Bank Ltd.-3!% Inscribed stock . . . . 799 799 ..

5,859 1,235 4,6U

'J'hc liability fo r the inscribed stock and deposit r eceipts of the Aus­ tralian Joint Stock Bank Ltd. was taken over by the Australian Bank of Commerce Ltd. on its formation in 1909 at the rate of 17s. 6d. in the £1. Part was converted into ordinary shares, part into new deposit receipts and the balance into new inscribed stock of the Australian Bank of Commerce Ltd . The deposit receipts were paid off by 31st December, 1911. From time to time thereafter, inscribed stock was r edeemed and in 1925 nearly the whole of the balance out­ standing was converted into ordinary shares at the rate of £2 in shares for £3 in deposits. The redemption of the small amount then remaining was completed by 30th June, 1926.

THE CAPITAL OF THE TRADING BANKS.

226. The aggregate paid up capital of the Australian trading banks at the beginning of 1893 was £14,038,000, consisting wholly of ordinary capital. With the exception of approximately £260,000, which r epresents the value of bonus shares issued out of profits by the Bank or New South Wales between 1848 and 1854, the whole amount had been subscribed in cash. The details of this amount are c: hown in Table 39.*

227. The capital readjustments consequent upon the CriSIS of 1893 are shown in a previous paragraph. On the completion of these adjustments, which extended over a number of years, duritig which

* P age 355.

105

'l'uE CAPiTAL, AND PROF ITS o F THE Aus TRALIAN

TRADING BANKS, 1893 TO 1936.

calls amounting to approximately £5m. were r eceived, 'there remained a total amount of £10,918 ,000, the details of which are shown in Table

228. Between 1893 and 1930, a large amount of new capital was issued. During the same period, however, some capital was extin­ guished as a r esult of amalgamations. The details of these issues and extinctions are shown in Table 42,* which may be summarized as under:-Nmw lSSvES 1893 TO 1936-

Deposit& conve1·t ed in to­ Preference capital Ordinary ca pital P'or cash From reserves From premiums To shareholders of a cquired banks

DeiMict-Capital extingui sh ed by amalgamations

NET PERIOD ..

Ada CAPITA L 1803 ( after completion of readj us tments)

CAPITAL 19 36

£'000

3,316 1,644 23,606 275

1,175 4,625 34,641

8,423

26 ,218 10,918

37,136

229 . Preference capital represents a relatively small proportion of the new issues. Deposits converted into shares in circumstances previously described amount to £3,316,000. The balance of about £70,000 was subscribed in cash between 1903 and 1914, by the shareholders of the Royal Bank of Queensland Ltd.

230. The t erms upon which preference shares were have

been described. As the profits of the banks which had issued

preference shares increased, the right of t hese shar es to priority of dividend became of little practical importance, and after 1910 the same rate of dividend 'vv as paid by all these banks on both preference nnd ordinary capital except in the case of the Commercial Bank of

Australia Ltd., where the rate of preference dividend was limited. The only pref er ence shares now existing are those of the bank named, all others having been extinguished as the r esult of amalgamations.

231. Ordinary capital represented approximat ely 90 per cent. of the total amount of n ew issu es . About t wo-thirds of this amount were subscribed in cash. The balance consists of shares amounting to £1,450,000, which were issued by three banks, between 1920 a.nd

• 358.

:661

106

THE CAPrrArJ, RESEIWES AND PROFITS OF THE AusTRALIAN TRADING BANKS, 1893 TO 1936.

1925, out of the procee ds of premiums previously received in cash, and of sliares issued to the shareholders of acquired banks, or to the holders of inscribed stock converted into shares.

2:32. The additional capital was required to strengthen the cash resources of the banks and enable them to increase their advances to meet the demand resulting from a general expansion of business. At the same time it helped to maintain a reasonably consistent relation between shareholders' funds and the increased volume of deposits.

233. The following table shows how the total liabilities compare with the total liabilities to the public at the time stated:-

Tot.al Total Ratio of

Year. Liabilities Shn,reholders' Shareholdera' l!'unds to Total to the Public . Funds. Liabilities.

£'000. £'000. Per cent.

1914 198,399 33,850 14.57

1919 256,763 37,626 12.78

1921

- 285,482 45,020 13 . 62 1923 300,671 50,785 14.45

1924 303,138 54,401 15.22

1925 320,113 60,962 16.00

1928 343,553 70,305 16.99

1930 333,702 72,168 17.78

1931 318,557 71,767 18.39

1936 345,915 69,818 16.79

234. New capital issues for cash were restricted to shareholders and were made in either of two ways. The :first, which

was more generally adopted, was to offer the shares at a

premium on their nominal value. In some cases the amount

of the premium exceeded the nominal value of the shares.

For example, in 1919, the Bank of Australasia issued shares of a nominal ' value of £40 at a premium of £70, but two years later the same bank issued shares of the same .nominal value at a premium of £20. The Union Bank of Australia Ltd., in 1919, issued shares of a nominal value of £25 at a premium of the same amount. Sub­

sequently; the shares were sub-divided and in 1928, shares of the same bank of a nominal value of £5 were issued at a premium of £6. In the case of other banks, shares of a nominal value of were

issued at premiums ranging from £1 to £3 . The ordinary shares of the Commercial Bank of Australia TAd. have invariably been issued at a premium equal to the nominal value. It is difficult, therefore, to establish the principle upon which the premium is fixed. It is probable that it has usually some relation to the existing reserves, but the instance quoted of the Bank of Australasia shows

107

THE CAPITAr_,} RESERVES AND PROFITS Ol!..., 'l'HE AusTRAIJIAN TRADING BANKS, 1893 TO 1936.

that this principle is not always followed. As the premiums are invariably added to reserves, the effect is that each new share issued increases shareholders' funds, not only by the amount of the share capital, but by the amount of the premiums paid.

235. rrhe second method, vvhich has been followed consistently by the Commercial Banking Company of Sydney Ltd. since 1907, and by .the Bank of New South \Vales since 1912, and at times by some of the other banh:s, is to offer the shares at par, that is 1 withorl1 a premium. Shares issued in this manner added nothing to the

reserves. They conferred on the shareholder, however, a valuable right, that is, to purchase the n e\v shares at a nomi:nal price, usually considerably below that for which they could be bought on the stock exchange. H e could either sell this or retain the benefit by taking up his proportion of the nevv issue. In ·effect, this was equivalen to -the distribution to shareholders of part of the reserve-s of the ban I{

236. The earliest new capital issues during this period were made in 1893 by the Bank of New South Wales and the Commercial Banldng Company of Sydney I.Jtd., the object in each case being to strengthen the position of the bank. During the next fourteen years new capital issues were small, aggregating on-ly £78,000, but

betvv een 1907 and 1919 all of the banks which had not suspended raised additional capital, in most cases, at substantial premiums. None of the banks ·which suspended made any new capital issues for cash until after 1919. After 1919, most of the banks made new issues for cash. The total amount reached a maximum in 1927, when shares having a nominal value of . £3,243,000 were issued for cash.

Details of all issues· made between 1893 and 1931, whether for cash or otherwise, are shown in Table

237. Table 43/' which sh01,vs the net cash additions to share­ holders' fund,s during the period '1893 to 1930 out of new issues and premiums, may be summarized as follows:-NET CASH ADDITIONS TO SH AREHOLDERS' FUNDS, 1893 TO 1930.

£'000

New capital issues for cash Premiums thereon

TOTAL CASH RECEIVE.O

Less cash paid to sharehold e rs of bank::; aeqnire cl

NE'r CASH AnnrriON TO SHAHEHOLDEHS' FuNDS

Since 1930, no new issues h aYc Leen made for cash.

* Page 3fi9.

23,606 10,742

34,348 4,17 0

30,178

108

T HE C APITAL, RESERVES AND PROiciTS OJ<" TI-IE AUS'J' IiALIA N

'rR AmNa B ANI

238. 'rho reser ves of the trading banks have been cr eated princi­ pally by appropriations ou t of proiit, next out of premiums on new capital issu es, and t o a lesser extent from oth er sources, as for

instance, amount s paid on f orfeited shar es and retransf ers from mner reserves . 239. As a gen eral rule, the r eser ves are used in t he business and not separately invested. I n the cas e of some of the banks incorporated in England, part of the r eserves we re at one time specifi cally invested, but in r ecent years the accounts do n ot show whether this is still the case.

240. _ At the t ime of the cns1s in 1893, the total r eser ves of the trading banks amounted to £7,993,000, of which £4,306,000 was held by the banks in cluded in group "A", and £3 ,68 7,000 by those included in group "B " . The r ese rves of the banks inclu ded in group "A " we r e not seriously r educe d by the effects of the cr isis, the net amoun t

written off bei ng only but those of the banks included in

g-rou p "B " were practically extinguished, and after the completion

of th e n ecess ary t eaclj nstm cnts, only £21,000 r emained .

241. 'l'll e r eserves of t he banks included in grbup " A " , which, after r eadj ustment, amount ed to £4,176,000, had be en built up ou t of profits ancl premiums on new capital issues. A bout £1,200,000, or n ear ly 30 pel' cent. of the total can be traced as arising from

such premiums_ No attemp t has been made tb trace t he source of the r eserves of the banks in cluded in group "B ", but as these

di sappeared in 1893, this is of no importance.

242. Between 1893 {lnd 1936 , the n et additions t o reserves amount ed to £2 6,254 ,000. Details are shown in Tables and 46t which ma y be summarized as follows:-A DDITIONS T O l1ES P : IWES­

_ From pr ofits From prem iums other sou rces

T OTAL .A DDITlOJ'\ S

Less D ED UCTJOKS Capi ta lize d Written ofl' Extinguished on a ma lgama tion

N K l' ADDI'I'I ON S TO l1ESERVE S

* Pa g e 3G l. t P nge 362.

£'000

19,717 9,326 233

29,276

275 374 2,373 3,022

26,254

109

'l'HE CA PIT AL, l1,ESERVES AND PROFITS OF THE AUSTRALIAN 'l'RADING BANJ{S, 1893 'l'O 1936.

243 . Between 1893 and 1904, the total additions to reserves were small. The banks which had suspended were unable to apply any considerable part of their profits to reserves, and it is obvious that those that did not suspend were using profits, which in the ordinary

way would have been placed to reserves, to meet undisclosed losses. During the next ten years, the additions to reserves, botll out of profits and from premiums, were large. During· the war period further substantia] additions were made from both these sources, but the maximum was r eached during the period 1920 to 1930 when

about £17m. was added out of profit:;; and premiums. Since 1930, additions to reserves have been small, and during the five years 1932 to 1936 only £75,000 has been added, wholly out of profits.

244. Since 1930, some of the banks have set aside portion of their reserves either to provide for the depreciation in the sterling values their Australian and New Zealand assets or for a reduction in the Australian currency value of their London funds which would

result if the London-Australia exchange rate were reduced. 'l'hese transfers, however, have not reduced their total reserves.

Ol!' 'l'IlE 'l'RADING BANKS.

245. The profits of a bank are derived from interest, foreign exchange, and charges made for the collection of cheques and other services. 'l'he principal part of the profits is derived from interest on advances, after allowing· for the interest paid on deposits. The

margin between the average rates on advances and deposits varies from time to time. It is affected by the proportion of fixed deposits and current deposits resp ectively, and by variations in the average of the deposits. 'T he banks also derive some interest from their

investments in securities and .A.ustralian t r easury-bills and from the temporary investment of their Louden funds, but the amount derived from these sources is relatively small.

246. 'l'he profit on foreign exchange consists of t he bank's charge for negotiating· the transaction. At the present time the maximum rate of profi t · on transactions between Austr alia and Lon don is lOs. per cent., but the average would be lower , as t he full r ates ar e 'not

always charged to custo mers who r egularly remit large amounts. When the exchange transaction is noL completed immediately, the rate is affected by inter es t calculated on the time which will elapse betwee n the date of the transa ction an d th e date of r ece ipt or payment,

as the case may be.

1665 '1. I 1,

110

'l'HE CAPI'l'AI;, AND PnoFrTs o: E' THE Aus'rHAI.IAN

'fRADING BANKS, 1893 TO 1936.

247. \Vith fluctuating rates of exchange, the banks may at times Le in the pof.iition to make substantial profits on the sale of funds accumulated in I;ondon at lower rates. But, conversely, a fall in rates may expose them to the risk of heavy loss. Since 1930, some

of the banks have at times. made substantial profits and at others incurred substantial losses due to vai·iations in the rate of exchange:

248. 'fhe charge made by the banks for the negotiation of inland cheques and bills is sometimes · referred to as exchange, but it may be more properly described as a charge for collection. 'rhe rates are affected to some extent by the time required for collection. 'fhe banks also make a charge for keeping current accounts .

. 249. 'l'he accounts considered cover the period 1893 to 1936 and the results are shown in five- yearly totals or averages, as the case may require. In addition, the figures of each year 1925 to 1936, both inclusive, are also shown.

250. 'I'he events of the cns1s of 1893 have previously been

described. 1'he consequences . of that crisis affected the banks that suspended, and those that did not, in a very different manner. several years the profits of the . former were seriously reduced by the loss of business resulting from the loss of confidence in their solvency and the limitation of their resources, due in part to the losses they had sustained and in part to their obligation to redeem their deposits

at specified dates.

251. Comparison of aggregate results of the banks comprised in group "A" with those of the banks comprised in group "B" shows clearly that the effects of the crisis of 1893 affected the latter for nearly hventy years. :B'or that reason the aggregate results of all the banks for the period 1893-1914 do not give a correct view of the system as a whole. Therefore, for this period, the results of each group, as well as the aggregate results of all the banks, are After 1914, the distinction between groups ceases to be The banks which had suspended had overcome the difficulties resulting from their suspension and although some of them continued for several years to appropriate part of their profits to reinstate lost capital and to provide for the repayment of deposits, the amounts used for this purpose represented a comparatively small percentage of the tot a I profits of all the banks.

111

TuE CAPITAL, RESERVES AND PROI<,ITS OF THE AusTRALIAN 'rnADING BANKs; 1893 To 1936.

202. Table 47'x' shows the aggregate profits of the trading banks for the period 1893 to 1936, and the manner in which these have been applied. vVhile this statement is required as the basis for other figures, it must be realized that it covers a period of 43 years, and

that allowance must be made for the capital employed, which includes not only the capital actually paid up, but any reserves and un­ .distributed profits used in the . business. 'rhe sum of the capital, reserves and undistributed profits constitutes the " shareholders'

funds". The earning capacity of a business is best expressed by stating the profits as a percentage on the total shareholders' funds. 'rhe market valuation of any bank, ascertained by multiplying the total number of shares by the current market price of the shares,

bears a closer relation to the total shareholders' funds than to the actual capital paid up, and the return on shareholders' funds there­ fore indicates more correctly the return to a prospective shareholder . . But it is customary also to state the profit as a percentage on paid up

capital, because dividends are declared on capital. Normally the rate of dividend cannot exceed the percentage of profits earned on capital, unless, of course, part of the dividend is paid out of reserves ·or undistributed profits. \¥here the reserves and undistributed profits

are small, there will be little difference between the · percentage of .profit on total shareholders' funds and paid up capital respectively, but where the reserves and undistributed profits represent a material proportion of the total shareholders' funds, the difference between

these percentages \vill be considerable.

253. Table 48t shows the shareholders' :funds and capital used and percentage of profit earned on each, and also the average rate of dividend paid during each :five-yearly period 1893 to 1934, and for each year from 1925 to 1936 . Tables 48t and 49:j: show the allocation

of the profits during each of these periods of years.

254. For convenience the comparative figures contained in these tables have been summarized in a number of tables which follow. For the period 1894 to· 1914 the fi gures relating to groups "A" and " B " are also shown and vvhere the information is of inte:J>est, the

figures for the last year preceding the crisis ( 1892-3) have also been included.

255. 'rhe tables which follow should be considered together. The first shows the average annual profit (or in so1ne cases the profit of the year) during the whole p eriod, and the second that profit expressed as a percentage on total shareholders' funilil.

• Page 3G3. t Page 3G4. t P age 366.

•

•

112

'ri-m ·CAPITAL, AND PRoFITs Ol" THE Aus TRAIJIAN

T RADING BANKS) 1893 TO 1936.

AVERAGE ANNU AL PROFIT, 1893 TO 1936. -·----- • I

- Group" A". Group" B ". All Banks.

[

'

£ '000. £'000. £'000.

Year 1892- 93 .. . . . . 845 787 1,632

Year 1894 . . .. . . ' 543 342 885

5 Years-1895- 99 . . .. 536 176 712

"

190Q-Q4 .. .. 909 400 1,309

, 1905-09 . . .. 1,191 543 1,734

"

1910-14 .. . . 1,631 764 2, 395

, 1915-19 .. .. .. . . 2,630

1920-24 .. . . . . . . 3,937

Yea;_:_1925 . . .. . . . . . . 4,822

1926 . . . . . . . . . . 5,026

1927 .. .. . . . . . . 4,996

1928 . . . . .. . . .. 4,999

1929 .. .. . . .. . . 4,943

1930 .. .. .. . . . . 4,409

1931 . . . . . . .. . . 2,963

1932 .. . . . . . . . . 1,880

1933 . . .. . . .. .. 1,953

1934 . . .. . . . . . . 1,996

1935 . . . . .. .. . . 1,997

1936 . . . .. .. .. . . 2,098

J.

TO TAL PROFIT EXPRESS E D AS P ID R CENTAGE ON TO'l'AL SHAREHOLDERS' FUNDS.

- " A". Group" R ". All Banka .

Per cent. P er cent. Per cent.

Year 1892- 93 .. . . . . 7.89 6 . 75 7.29

Year 1894 . . . . .. 4 . 97 3.61 4.34

5 Years-1895- 99 .. .. 4.44 1. 46 2.95

"

1900-04 .. . . 7.28 3.77 5 . 67

"

1905-Q9 . . . . 8.55 6.30 7.69

"

1910-14 .. . . 9.09 "7.62 8 .56

"

1915-19 .. . . .. . . 7.56

1920--24 . . . . .. . . . 8 . 77

Y ea1:_:_ 1925 .. .. . . . . . . 8 . 75

1926 . . ... . . . . . . 8.48

1927 . . . . . . . . ' . . . 8 .38

1928 . . .. . . .. . . 7.80

1929 .. . . . . .. . . 7.23

1930 . . . . .. .. . . 6 . 33

1931 . . . . .. . . !• . . 4.20

1932 . . . . . . . . . . 2.74

1933 . . .. . . .. . . 2 .85

1934 . . .. . . . . .. 2 .91

1935 . . . . . . .. . . 2. 91

1936 . . . . . . . . . . 3 . 05

'·

113

rfHE CAPI'l'AL, RESERVES AND PROFITS OF 'l'HE AUS'TRALIAN 'fRADING BANKS, 1893 'l'O 1936.

256. 'l'he full effects of the crisis on the banks included in group "B" are not shown in the accounts for 1894 when the profit s feH from £7 87,000 to £3 42,000. 'rhe average profit for the next five years, however, was only £176,000 (representing only 1.46 per cent. on the

total fun ds), and it was during this period that these banks were to seek a revision of the arrangements they had made

with their depositors. After 1900, the profits gradually improved and by 1914 the aggregate profits of these banks were abou t equal to those of 1892-3. 257 . 'rhe profits of the banks included in gr?UP "A" also

declined, though not to the same extent. '11here is no doubt , however, that t h e confidence created by their ability to avoid su spension en abled these banks materially t o increase their business at the expense of those included in the other group, and for that reason

their r ecovery was more rapid. \i\Tithin ten years they were earning about the same r eturn on their total funds as in 1893 although

sh ar eholders' funds had since been increased. 258. After 1914, and up to 1926, the r eturn on shareholders' f unds and the profits both steadily increased . The maximum return was shown in the period 1920-1924, when 8.77 per cent. was earned on total shareholders' funds and 16.05 per cent . on ordinary capital. 'I'hc maximum profit of £5,026,000 was earned in 1926, but increased share­ holders' funds h ad been used during the year and the return on

funds and on ordinary capital ·was slightly lower. 'rhere was little variation in t h e profits of the three years n ext following which were in each year a little Jess than the maximum, but the return on funds on ordinary gradually declined owing- to the continued

increase of ,shareholders' funds through the introduction of new capital and additions to reserves . rrhe first serious decline came in 1930, when profits decr eased by £534,000. In the following year there was a further decline of approximately £1,500,000. Profits

fell to their lowes t point in 1932, when they amounted to £1,880,000. During the next three yem·s they remain ed fairly constant at a point a little above the minimum, and it was not until 1936, when the profit s were £2,098,000, that an improvement b ec ame obvious. Th e

return on shareholders' funds fell to its lowest point in 1932, when only 2.74 per cent. ·was ea rned. Since then, there has been a gradual improvement. The return for 19 36 was 3.05 per cent. 259. The following table shows the r eturn on ordinary capital as

distin guish ed from total shar eholders' funds. rrhis is calculated by deducting from the total profits t he preference dividends and expressing the remainder as a p er centage on ordinary capital. GeneralJ y speaking, it shows the same trends as profits.

F .2581.-8

1669

114-

TBg CAPITAL) RESERVES AND PROFITS OF 'l'HE TRADING BANKS, 1893 'l'O 1936 .

RETURN ON ORDINARY CAPITAL. - -- ·-

- I Grou p

1 " A". Groap "B " . All Baul( 3.

Per cent. Per cent. Per cent.

Year 1892-93 . . . . . . 13.4 10.17 11.63

Year 1894 . . .. .. 8 .56 3.78 6.22

5 Years- 1895- 99 . . .. 7.29 1.28 4.06

, 1900- 04 .. .. 12.23 4.01 8.31

"

1905-09 .. .. 15.28 9.20 13 . 04

"

1910-14 .. . . 17 .29 11.57 15.22

"

1915- 19 . . .. .. . . 14.30

, 1920-24 . . . . .. .. 16.05

Year- 1925 . . . . . . .. .. 16 .01

1926 .. .. .. .. . . 15 .92

1927 .. . . .. .. . . 15 .43

1928 . . . . . . .. . . 14.35

1929 .. . . . . . . .. 13.71

1930 .. . . . . .. . . 12 . 11

1931 . . . . .. .. . . 8 .01

1932 .. .. .. .. . . 5.12

1933 . . .. . . .. . . 5 .33

1934 . . .. .. . . . . 5.45

1935 .. .. . . .. . . 5.46

1936 . . .. .. .. . . 5.75

260. The maximum return of 16.05 per cent. was reached in the period 1920-1924. Since then it has diminished, falling to 12.11 per cent. in 1930, and to 5.12 per cent. in 1932. E ach y(mr since 1932 has shown a consistent but small improvement, the return for 1936 being 5.75 per cent.

261. rrhe following figures taken from rrable 48 show the benefits to ordinary shareholders arising from the possession of large reserves. They relate to the profits of the banks included in groups "A" and "B " respectively, during the period 1905-'1909. The aggregate capitals of the banks included in each group differed by less than £50,000, but those included in group "A" possessed large reserves,

wh ereas those of the banks included in group "B " were r elatively small. THE INFLUENCE OF RESERVES AND UNDISTRIBUTED ON

EARNINGS.

Period 1905-190!)-0rdinary capital . . . .

Profit available for ordinary shareholders Return on ordinary.ca,pital

Group" A " .

£'000.

7,795 1,191

15.28 per cent.

Group"B ".

£ '000.

4,522 416

9 . 20 per cent.

115

THE CA..PI'rAL, REsERVES AND PROF ITS OF 'rHE AusTRALIAN TRADING BANKS, 1893 '1'0 1936.

That t his difference is largely due to the use of reserves is shown by a comparison of the return on total funds (which includes reserves and undistributed profits and in the case of the banks comprised in group "B ",preference capital) for the same period.

£000 £000

Total shareholders' funds 13,924 8,61 !)

Total profit 1,191 543

EETURN ON TOTAL SHAHEHOLDERS' FUNDS . . 8.55o/c 6.30'%

262. Since 1910, several factors have operated to reduce the profits which the trading banks · \Vould otherwise h ave made. The first in point of time was the substitution of Commonwealth notes for those previously issued by the trading banks. It is probable, however, that

this did not materiaJly reduce their profits, because the t ax payable to the States on note issu es , and the expenses incidental to their use, were not much less than the average rate of interest on deposits. The second, and perhaps the ·most important factor, was the establish­

ment of the Connnonwealth B ank of Australia, which commenced general business in 1913. A third factor, which of course affects business generally, is the increase in expenses and taxation. It is impossible, however, to estimate the extent to which profits have

been affected by the operation of these factors, and the only conclusion that can be drn-vvn is that any r eduction in earning power or increase in expenses has been reflected in higher r ates for overdrafts and, where possible, in charges for services.

How '!'HE PROJ<'l'l'S OF 'l'HE rrnADING BANKS HAVE BEEN DISPOSED OF.

263 . \Ve :shall now consider how the profits of the trading banks have been disposed of. rrable 49;," shows the average amount applied in each period . to the various purposes stated, and Table 50t shows the percentages which each of these amounts bears to the total.

26,! . Except in a limited number of cases where the bank was not free to dispose of its profits as it wished, either because it was

required to set aside })art of its profits for a specific purpose, or because it chose to do so , the greater portion of the profits of each for each year, were distributed as dividends.

265. The circumstances in ·which preference capital was issur:cl have previously been described. The amount reached its maximum 1n 1914, when the total preference capital of five banks amounted to £3,370)000. After 1917 the number of banks 1rv·ith this class of capital

vms gradually reduced as the result of amalgamations, and sjnce 1927 there has been only one bank having preference capital.

* Page 366.

'1671

116

THE CAPI'l'Ar..1) RESERVES AND PROFITS OF THE AusTRALIAN TRADING BANKS, 1893 TO 1936.

266. When the profits are small, payment of the preference divi­ dend may leave very for ordinary shareholders. This occurred during the period 1895 to 1899, when the return on ordinary capital was only 1.28 per cen t . But as the profits increased, preferen ce dividends absorbed a smaller percentage of the total. \Vhere

preference dividen ds are payable at a lo-vv fixed rate, this operates jn favour of ordinary shareholders.

267. Between 1895 and 1900, some of the banks were unable to rnaintain the regular payment of preference dividends, or to pay the minimum rate required by the terms of issue. After 1900, these dividends were regularly paid and as profits increased dividends at

higher rates were paid. For several years, preference shareholder s received dividends at the rate of 7, 8, 9, and in the case of one

hank, 10 per cent. But as the rate of dividend on two-thirds of the preference capital (that of the Commercial Bank of Australia Ltd.) was limited to a maximum rate of 4 per cent., the average rate was r educed, and at no time did it reach 5 per cent.

268. rrhe follo·wing table shows the amount of preference divi­ dends paid and the average rate per cent. on preference capital.

DIVIDENDS PAID ON PREFERENCE CAPITAL, 1893 To 1936 AND THE AVERAGE RATE PER CENT ON PREFERENCE CAPITAL.

Year 1894 5 Y ears-1895-99 1900-04 1905-09

1910-14 1915-19

,, 1920-24

Year-1925 1926 1927 1928 . . . .

1929 to 1936 (inclusive)

Amount.

£'000. 112 67 }28 127 146 163 124 122 126 106

85 85

Averaa.e Rate.

Per cent. 3 . 38 2 . 02 3.86 3.82 4.33 4.95 4 . 83 4.81 4.97 4.51 4 .00 · 4.00

269. Prior to the crisis of 1893, the capital of all the trading

banks co nsisted wholly of ordinary capital. rrhe dividends paid by some of the banks included in group ((A" during the preceding

117

THE CAP['l'AI;, RESERVES AND PROFITS or•' THE AusTRALIAN 1'RADING BANKS, 1893 TO 1936.

yeal'S had been at high rates. ] 1 or many years the Commercial

Banking Company of Sydney Ltd. paid 25 per cent.; the Commercial Bank of Tasmania Ltd., 20 per cent.; the Bank of New South Wales and Western A ustralian Banlc each 17f per cent.; and the Bank of Australasia and the Union Bank of Australia Ltd., 14 per cent. By

1892, some of the banks had reduced their rates, but the average for that year was still 12i per cent. Some of the banks included

in group "B" had also regularly paid dividends at high rates. 'rhe National Bank of A_ustralasia Ltd. for many years paid 15 p er cent. ; the Commercial Bank of Australia Ltd., 12i per cent.; amd the Queensland National B ank Ltd. from 10 per cent. to 15 per cent.

The average for 1892-93 was 9.04 per cent.

270. The average dividend of the banks included in group "A'' fell from 12i per cent. in 1892 to 8.05 per cent. in 1894. But witl1 the exception of the Royal Bank of Australia JAd., which ;:;uspended t he of dividends until 1897, every bank in this group

regnlarly paid dividends after 1893. :rhe average Tate for the period 1895-1899 was 6.82 per cent. 'rhereafter, the rate progressively jncreased, and by 1914 it had Tetnrned to the average of 1892.

271. The average dividend of the banks included in group "B " fell from 9.04 per cent. in 1892 to 2.05 per cent. in 1894. During the period 1895 to 1899 the average 1vas only 0.41 per cent. Thereafter, there was a steady improvement and for the period 1910 to 1914 t he average dividend was 5.04 p er cent. Some of the banks in this

group retained a substan tial part of their profits to make good lost capital or to repay deposits. During the period 1893 to 1921, the Commercial Bank of Australia Ltd. applied the 1vhole of its available profits to make good lost capital. Between 1895 and1918, the Queens­ land National Bank Ltd. paid no dividends, jts profits being applied

to make good lo st capital, repay deposits, am::l build up reserves. Part of the profits of the English, Scottish and 1-\.ustralian Bank I.Jtd. were also used to purchase deposit receipts. This, of course, reduced the average dividend paid 'by the group.

272. After 1914, the average rate for all banks progressively in­ creased, reaching its maximum in the period 1925 to 1929, the highest point being 11.94 p er cent. in 1928. The average dividends paid for 1929 and1930 were at a slightly lower rate. In 1931, the average was only 7.84 per cent. and the decline continued, falling to a minimum of 4.99 per cent. in 1933. During the last three years, the rates have

been respectively 5.22 per cent., 5.09 per cent. and 5.41 per cent.

167 3

118

rrBE CAPITAL} RESERVES AND P IWFITS OF THE A usTRALIA N T RADING BANKS, 1893 'l'O 1936.

RATE OF DIVIDEND ON ORDINARY CAPITAL, 1893 To 1936 .

Oroup "A". Group •• B ". All Ba nks.

- .. -----1 - - ------------

Year 1892- 93

Year 1894 5 Years-1895- 99 1900- 0".t 1905-09

1910-14 1915-19

" 1920 - 24

Year- 1925 1926 1927 1928 1929 1930 1931 19:32 1933 1934 1935 1936

P er cent. 12.5

8.05 6.82 9 . 21 10. 94 12. 20

P er cent. 9 .04

2.05 0.4-1 1. 53 3.78 5.04

Per cent. 10. 58

5 . ll

3 . 38 5.55 8.31 9.61 9.88 11.14 11.72 11. 91 11.81 11. 94 11.37 10 .79

7 .84 5 .10 4.99 5.22 5.09 5 .41

27i3. The per centage of the total profits appropriated foi.· the payment of dividends ( pre£ erence an d ordin ar y) in each p eriod is sho1vn in the following table.

27 4. Next to dividends, ju order of magnitude, are t he a.ppropria­ tions to reserves. rrhe policy of the banks in reg ard to r eserves has varied aL different times. In th e years between 1893 and 18El 9, the banks included in group "A" appropriat ed only a very small prop or­ tion of their profits to reserves. The app rop r ia tions of the . banks included in group "J3 " . were on a lar ger scale, pr ob ably because of the need to replace the r eserves wh ich h ad b eEm \vritten off.

Thereafter, there \vas a general incr ease in t h e per een tage set aside, the maximum being reached in 1924, -vvhen 26.04 per cent. was appropriated. Prom 1925 to 1 929, the proportions progressively diminished to 14.46. The Rppropriations f or the next two years wer e 8.8:1 p er cent. and 5.50 per cent. respectively . Since 1Q31, only one b:mk has r egularly added to its rese rves, and for each of the y ears 1932 to 1936, Jess than three-quarters of one per cent of t he total profd s of th c banks, has bee n qppropr ia ted f or t his p u rpose.

2" ("3. Betwee n 1893 and 1914, a substantial p r opor tion of the profits of some of the banks included in gr oup "B " was applied,

either to r 10 instate los t capital, or t o p r ovide for the r epayment of

119

THE CAPITAJ;) HESEIWES ANn PROPITS OF THE AusTRAI;IAN TRJ:DING BANKS, 1893 TO 1936.

deposits. Although some of these banks continued to make these payments after 1914, the amount so appropriated represented a small and diminishing percentage of the total profits of all the banks. 276 . Appropriations for purposes other those specified m the table which follows were small, and require no comment:-

PERCENTAGE OF TOTAL APPROPRL:\TED FOR THE

PURPOSES STATED.

-

" -4 ..

Group" A Year 189 5 Years-1895-99 1900-04

1905-09 1910-14

" -4 ..

Group" B Year 189 5 Years-1895-99 ,, 1900-04

1905-09 1910-15

All Banks-5 Years-1915-19

Yea;:_19 19 19 19 19 19 19 19 19 19 19

19

1920·-24 25 ..

26 ..

27 ..

28 ..

29 ..

30 ..

31 . .

32 ..

33 ..

34 ..

35 ..

36 ..

Dividends. Resenes.

Per cent. Per cent.

.. .. 94.10 2.40

.. .. 93 . 69 5.30

.. .. 75.35 16 .50

.. .. 71.62 26.53

.. .. 70.52 26.97

.. . . 69.30 10.82

.. .. 58.29 16.36

.. .. 58.00 15 . 75

.. .. 54.90 15.84

.. .. 54.39 26.10

.. .. 71.00 22.39

.. .. 70.34 25.35

.. .. 73.91 23 .04

.. . . 75.42 22.68

.. . . 77.06 18.43

.. . . 83.51 13.50

.. ' .. 83.22 14.46 .. . . 89 .25 8.34 . . . . 98.04 5.50 .. .. 99.57 .79 . . .. 93 .90 .76 ··, .. 95.79 .75 .. .. 93.54 .75 .. .. 94.33 .72 AMALGAMATIONS OF TRADING BANKS.

Capital and Deposits.

Per cent.

..

..

..

..

..

..

28.98 22 .00 26.33 18.07

4.90 2.66 1.67 1.87

1.96 1.20 ..

..

..

..

. .

..

..

..

277 . The aspects amalgamations referred to in this section are those relating to the means employed, the consequences to share­ holders, and the effect upon the shareholders' funds of the banking system as a whole.

278. The first alteration, after 1893, in the trading banks which survived the crisis was the conversion, in 1909, of the Australian Joint Stock Banl\: Ltd. into the Australian Bank of Commerce Ltd. This, however, was not an amalgamation, but a reconstruction. The new

bank merely took ov er the business of its predecessor.

I

I

120

'l'HE CAPITAL, RESERVES AND PROFITS OF' THE Aus'rRALIAN TRADING BANKS) 1893 'ro l_936 .

279. Between 1909 and 1917, there were no changes, but in the next fourteen years, twelve amalgamations or absorptions took place . 'fhese occurred mainly in three well defined periods, namely,_ 1917-1918, 1921-1922, and 1927. Only one ot her a,malgamation has occurred since 1927, namely, that of the Bank of New South \Vales and the Australian Bank of Commerce Ltd., which took place in 1931.

280. The following is a list of the amalgamations and absorptions since 1917. The details of each are shown in 'Jl able .53.:K'

BANK Ai\iALGAMATIONS AND ABSORPTIONS, 1917- 1931.

Name of Bank Absorbed . Amalgamated with or Acquir ed by.

1917-Bank of North Queensland Ltd.· R oyal Bank of Queensland Ltd. } Bank of Queensland Ltd. City Bank of Sydney Ltd. 1918--National Bank of Tasmania Ltd . ..

Colonial Bank of Am;:tralia Ltd. 1921-London Bank of Australia Ltd. Commercial Bank of 'l'as:tnania Ltd. 1922-Bank of Queensland Ltd . . . of Victoria Ltd.

Royal Bank of Au stralia Ltd. Western Australian Bank .. 1931-Australian Bank of Commerce Ltd.

Australian Bank of Commerce Ltd. Commercial Bank of Australia Ltd. National Bank of Australasia Ltd. English , Scottish & Australian Bank LÂ¥1. English, Scottish & Australian Bank Ud. National Bank of Australasia Ltd. Commercial Banking Company of Sydney

Ltd. English, Scottish & Anstralian Ba.nk Ltd. Bank of New South Wales Bank of Ne·w South Wales

281. All these amalgamations and absorptions appear to have been entered into by both parties only because the arrangement was to their mutual advantage. rrhere is no suggestion that any of the banks taken over would have been unable to c arry on business, except in the case of the Australian Bank of Commerce Ltd., which was

amalgamated with the Banlc of New South Wales in 1931. The profits of the Australian Bank of Commerce Ltd. had £alien from £180,000 in 1930; to £85·,000 in 1931. Between June, 1930, and July, 1931, the market value of its shares had failen from 25s. 9d. to

13s. 9d. At the annual meeting held in July, 1931, the Chairman stated that there hacl been a drain on deposits, r esulting in a sub­ stantial reduction in liquid assets. _ In a circular addres.sed to share­ holders, dated 2nd September, 1931, it was furthet stated that the

Directors bad be en examining the general economic outlook in relation to the opel'ations of the bank and had unanimously arrived at the conclusion that owing to the gei1eral outlook and the reduced tum­ over on all financial transactions likely to operate during the next few years, the earning of substantial profits would be somewhat diffi­ cult. H ·aving come to this conclusion, the Board had given some

* Page 373.

121

THE C APrTArj) RESEIWES AND PROFI'l'S m, 'l'HE A us1'RALIAN rfRADING BANKS, 1893 TO 1936 .

thought to an amalgamation as being of advant age t o shar eholders and depositors. From these statements it is fair t o infer that t he bank would have experienced some diffi culty in continuing to carry on its business without assistance .

282. Payment for the shares of a bank acquir ed o1· abso rbed was made in either of three ways-( 1) \Vholly in cash. These amalgamations are more correctly described as

acquisitions or purchases, as the shareholders of the pur­ chased bank acquired no interest in the purchasing bank. (2) Partly in cash and partly in shares of t he purchasing bank. ( 3) Wholly in shares of the purchasing bank.

283, The following statement shows the total shareholders' fun ds of each of the banks acquired for cash, as shown by t he las t pul)lished accounts and the amount paid. <

Vendor Bank.

. '

City Bank of Sydney ..

National Bank of Tasmania Ltd. Commercial Bank of Tasmania Ltd. Bank of Queensland Ltd.

Total

Shareholders' F und;; .

£'000.

458 284 527 522

1,791

CaFJ h Paid.

£'000.

350 264 616 520

1,750

rrhese figures indicate, in the case of the City Bank of Sydney, a substantial deficiency of capital, and in the case of the Commercial Bank of rrasmania Ltd., substantial inner reserves.

284. The amalgamations in 1vhich the consideration was payable partly in cash and partly in shares were as under :-Consideration.

Tot.al Share-

Bank Absorbed . holders'

Funds . Cash. Shares Total. (Nominal). ----

£'000. £'000. £'000. £'000.

Royal Bank of Queensland Ltd. 629 83 288 371

London Bank bf Austl'alia Ltd. 1,272 109 459 568

Ban1c of Victoria Ltd. 2,367

I

1,478 739 2,217

Royal Bank of Australia Ltd. 1,444 750 375 1,125

5,712 -I 2,420 1,861 4,281

122

THE RESERVES AND PRoFrrs OJ<_, '.rHE A us'l'RALIAN

TRADING BANKS, 1898 TO 1936.

285. The next summary relates to the amalgamations where the consideration 1vas payable wholly in shares of the purchasing bank-

Bank of North Queensland Ltd. Colonial Bank of Australasia Ltd. \Vestern Australian Bank Australian Bank of Commerce Ltd.

Total

Sbareho!rlors' Funds.

£'000. 202 761 2,0ll

Share

0onsideration (Nominal).

£'000. 162 4-47 875 1,280

2,764

286. \Vhere the consideration consists wholly of cash, the amount paid may be regarded as the value of the assets purchased, but where the consideration consists partly or wholly of shares, the comparison between the shareholders' funds of the absorbed bank and the nominal value of the shares given in payment does not necessarily indicate the value received by the shareholders of the absorbed bank. In such cases, the real effect of the transaction must be measured by the

market estimate of the value of the shares of each bank, and when this is done a transaction which at first may appear more advan­ tag·eous to the shareholders of one bank, may be found to be equitable to the shareholders of both. The following examples will illustrate this:-

BANK Ol" NEw SouTH \V \VES'l'ERN AusTRALIAN BANK.

rrhe last published accounts of the Western Australian Bank showed capital r eserves and undistributed profits amounting to £2,010,811. The capital consisted of 700,000 shares of £1 which; immediately prior to ·amalgamation, were quoted on the stock exchange at £2 14s. p er share. , On that basis the market valuation of the net surplus assets was £1,890,000. ·The shareholders of the

Vl estern Australian Bank received 43,750 shares in the Bank of New South Wales, fully paid to £20, -vvhich at the time of issue were quoted on the stock exchange at £46 lOs. Applying market values in each case, the transactjons may be stated thus:-

Western Aust?·alian Bank-700,000 shares valued at £2 14s. per share-£17890,000. C onsz.derat1:on--43,750 shares of the Bank of New South Wales, valued at

£46 lOs. per share- £2,034,375.

123

'rHE CAPITAL, REsEiwEs AND PRoFI'l'S oF THE AusTRALIAN TRADING BANKS, 1893 TO 1936.

BANK O:B' N'Ew SouTH VvALEs-AusTRAL .. IAN BANK OF Co:rv1l\1:ERCE L'l'D.

'rhe last published accounts of the Australian Banlr of Commerce Ltd. showed capital, reserves, and undistributed profits amount]ng to £3,346,267. The capital consisted of ' 2,208,000 shares of

£1 each which, immediately prior to amalgamation, were quoted on the stock exchange at about 14s. per share. On that basis the market valuation oj: the net surplus assets \Vas only £1 ,5 45,600, or less than one-half the book value of its shareholders' funds. 'rhe shareholders

of the Australian Bank of Commerce Ltd. received 64,000 shares of the Bank of New South \Vales, fully paid to £20, which at the time of issue were quoted on the stock exchange at £28 lOs. per share. Applying market values in each case, the transaction may be stated

A·ustr·alian Bank of Cornrnerce Ltd.-2,208,000 shares valued at 14s. per share- £1,545,600 . Consideration-64,000 shares of the Bank of Nevv South Wales, valued at

£28 lOs. per share-£1,824,000. In each of these cases, the market value of the shares of the purchas­ ing bank given as consideration is substantially in excess of the market value of. all the shares of the bank absorbed.

287. The following table shows the reduction in the total share­ holders' funds of the trading banks as the result of amalgamation:­ R eduction.

CAPITAL-Capital of the banks taken over New capital issued by the banks in payment

oT part payment therefor ..

RESERVES-Reserves of the banks taken over Accounted for by the purchasing banks

Profit and loss balances of the banks taken OYC'r Accounted for by the purchasing bank

Total reduction ..

£000 £000

8,423

4,625

3,798

5,235 2,861

2,374

245 53

192

6,364

rrhis amount includes some capital losses incurred prior to amal­ gamation by the banks taken over, but not disclosed in their published accounts. A substantial proportion of the total would, however, be represented by assets for which the purchasing banks did not account

124

'l'HE CaPI'l'AL, AND PnOI<'ITS OF THE Aus'ruArJIAN

'rRADrNo BANKs, 1893 'l'o 1936.

by an increase in their paid up capital or disclosed reserves. The amount by which the value of the assets acquired exceeded the nominal value of the consideration therefore constituted an addition to inner reserves of the pul'chasing banks.

288 . The latest amalgamation- that of the Bank of New South ·wales and the Australian Bank of Commer ce Ltd.- r educed the Australian trading banks to nine, and since then there has been no fu r ther reduction in their number. "

THE TRADING BANKS IN 1936. 289. The aggregate assets and liabilities of the nine Australian tniding banks in 1936, according to their published accounts, are shown in t he following table, which summarizes 'rables 52A anr1

52B* :-AGGREGATR Ll ABILI Tn:;s AND ASSETS OF THE NINE AUSTRALIAN TR ADING BANKS, 1936.

LIABILI'riE S-f'Jh areholders' Funds-Capital paid up Hcserves

Undistributed pronts

Liabi lities Ia the Publ·ic­ Notes Bills payable and other liabilities Debenture stocks and interminable deposits .. D eposits

Total iiabilities

ASSETS-Cash, bu ll ion and money a t short call

Securities and investments .. Bills and remitLttnces Advances ..

P remises and real estate

Total assets

£000 l'•• r >'t'UI.

37,130 30,450 2,232

8.93 7.32 .54

69,818 16.7 9

176

18,461 4,624 322,654

.0 4 4.44 l.ll

77.62

345,915 83.21

4 15 ,733

72 ,123 32,020 23,820 278,884

8,886

415,733

100

17 .35 7.70 5.73 67 .08

2.14

100

290. The total amount employed by all the banks is approximately £416,000,000, of which the shareholders have provided · approximately £70,000,000 in the form of paid-u p capital, r eserves and undistributed profits, and t he public approximat ely £346,000,000, mainly in the

* 371 hnd 3i2.

125

THE CAPITAL, RESERVES AND PROF ITS OJ<, THE AUSTRALIAN 'fRADING BANKS, 1893 TO 1936.

form of deposits. Expressed as a percentage, the amount provided by the shareholders r epresents 16.79 and th e amount provided by the public, 83 .21 of the total. In other words, the public has provided approximately £5 for each £1 provided by the shareholders.

291. It should be noted, however, that three of the banks include their provision for. contingencies and doubtful debts with "Bills payable and other liabilities". The effect of this is to understat e shareholders' funds and to overstate liabilities to the public, with the

r esult that ratios based on these amounts are not strictly correct.

292. 'fhe liability t o the public varies within rather wide limits. 'fhe following table shows in the case of each bank the amount owin g to the public for each £1 of shareholders' funds:-AMOUNT PROVIDED BY THE PUBLIC FOR EACH £1 OF

· SHAREHOLDERS' FUNDS, 1936.

The Bank of Adela ide The Union Bank of Australia The Commercia l Bank of Australia Limited The Queensland National Bank L imited

The Bank of Australasia The National Bank of Australasia Limited E nglish, Scot tish & Au str a lian Bank Limited The Commercial Banking Company oi Sydney Limited

Bank of New South Wales

Average all ba nks

£ s.

2 19

3 18

4 2

4 8

4 9

4 10

5 9

5 9

6 6

4 19

d. (i

2

!)

2

0

6

6

8

10

l

293 . In the following table, the shareholders' funds and the liabilities to the public of the nine Australian trading banks for 1936 are compared with the relevant figur es of t he " bi g five" Engli sh hanks for th e same year :-

COMPARISON BBTW.EI:N SHAREHOLDERS' l•' lJNDS AND LIABILI'l'IEi:::l TO THE PUBLIC OF N INE AUSTRALIAN TRADING BA NKS AND THE " BIG FIVE " (ENGLAND), l93G. -

I

...:\. ustra li a11

'l' he "Big F ive " . -- Tradi-ng Banks.

£'000. P er cent. £'000. Per cent.

Total Shareholders' Funds .. 69,818 16.79 11 6,000 5.08

Total Liabilities to t.hc Public .. 345,915 83.21 2,102,880 94.92

- - - -

415,7 33 100 2,21 8,880 100

Amount owing to the Public for £ B. d. £ 8 . d.

each £1 of Shareholders' Funds 4 19 l . . 18 2 5 . .

1681

i· I

i.' 1.,

l'i j• .. ,

' ,,

. 126

rrHE CAPITAIJ, RESERVES AND PROFITS Ol<' THE A US1'RALIAN TR.ADING BANKS, 1893 TO 1936.

294. An examination of the ratios of shareholders' funds to total liabilities shows that, since 1893, the average ratio of shai·eholders' funds to total liabilities of all the banks has varied from about per cent. to about 18} per cent. The ratio of some banks has at

times been higher and at others lo·wer than these averages. 'rhe ratio tends to fluctuate in accordance ·with business conditions. There is a general, though not a fix ed, relation between deposits and advances. An increase in advances due to greater business activity is u,sually r efl ected in an increase in deposits, and as deposits increase, the ratio of shareholders' funds to total liabilities dii11inishes until it is adjusted by the introduction of new capital. But a decrease in

advances due to the falling off in business activity is usually accom­ panied by a r eduction in deposits, and as the banks cannot in practice reduce their shareholders' funds, the ratio of the latter to total

liabilities tends to increase. During the period 1915 to 1936, share­ holders' funds vvere at a minimum o£ 12.78 per cent._in 1919. Between 1920 and 1929, the ratio incraased as the result of the introduction of new and the accumulation of reserves. During the depres­

sion, the additional shareholders' funds could not be fully employed, and by 1931 the ratio had increased to 18.39. Thereafter, until 1934, the average diminished p rogressive]y but since 1934 it has increased slightly.

295. As t he principal part of the profits of a bank is derived

from interest on advances, and as the ability of a bank to make

advances depen ds mainly u pon its deposits, we should expect to find that, other things being equal: the return on shareholders' funds should vary in proportion to the amount of creditors' money u sed by the bank cr, in other words, the bank which uses the largest

amount of creditors' money should earn the largest profit.

Generally speaking, this. conclusion is borne out by the .results of the Australian banks for 1936, and by the results of the English banks subsequently referred to. 296. On the other hand, a bank which u ses a lo1ver proportion of creditors' money is in a better position to meet a sudden demand upon its resources. But while the ratio of shareholders' funds to total liabilities is some indication as to whether a bank is over­ trading, too much reliance must not be placed upon it. In 1893, there was litt le difference between the aggregate ratio of the banks which suspended and of those which did not. Yet those in the first category lost many millions, while those in the second lost practically nothing. A bank which maintains a very liquid position may be justified in increasing the percentage of its liabilities to the public, as the figures of the English banks would appear to indicate. In the last resort, however: the solvency of a bank depends not upon this ratio, upon the soundness of its advances.

127

THE CAPITAL., RESERVES AND OF THE AUSTRALIAN

'rRADING BANKS, 1893 TO 1936.

Liabilit·ies to the Pttblic.

297. 'rhese consist of notes, bills payable and other liabilities, and cleposits. As the banks no longer issue their own notes, this liability is smalL "Bills payable and other lia"9ilities" includes, in the case of three banks, "Provision for contingencies and doubtful debts".

If these were deducted, the remainder wouid be relatively small. The greater part of the liabilities consists of "deposits", of -vvhich £4.6m. are debenture stocks and inter minable deposits, and £322.6m. are current and fix ed deposits. The accounts of some of the banks do

not distinguish between current and fixed deposits, but on the basis of. the Australian deposits only, approximately 40 per cent. would be c.m-rent and 60 per cent. fixed for various terms. The proportion of deposits to total liabilities varies in the case of each bank, the

minimum being 73.10 per cent. and the maximum 82.69 per cent.

Assets.

298. \V e pass next to consideration of the assets. rrhe variation m the ratios of " Coin, bullion and money at . short call" and

''Securities and investments ·", respectively, to total assets, suggests a difference in classification, that is, certain assets are classified by some banks as" Money at short call" and by others as "Investments". The assets included in both groups represent 25.05 p er cent. of the

total assets, but the variation is considerable, ranging from 21.41 per cent. to 31.52 per cent. "Bills and remittances" are relatively

small. 299. Advances.- As six of the banks deduct from their advances the provision for "bad and doubtful debts", and three do not, the aggregate ratio is not strictly correct, nor are the ratios of all the individual banks comparable with each other. Subject to this

qualification, advances represent 67.08 per cent. of the total assets. The ratios of the individual banks range from 61.60 per cent. to 71.82 per cent. 300. The ratios of the Australian banks differ considerably from

those of the English banks. In 1936, the advances of the "big five" represented only 38.5 per cent. of their total assets as compared with 67.08 per cent. in the case of the nine Australian banks. If the

advances are expressed as a percentage of deposits and other

liabilities, the disparity is even greater, the r atios being 38.6 per cent. for the "big five" and 85.21 per cent. for the nine Australian

banks. In comparing the advances of the English and Australian banks, however, allowance should be made f or the difference in business conditions. Some of the funds provided by Australian

banks in the form of overdrafts are provided by the English banks in other forms, as, for example, loans at short call and commercial bills. Therefore, Australian banks are obliged to invest more of their

128

'rHE CAPITAL, REsErwEs AND PRoFITs o F TllE Aus·rRALIAN

'l'RADING BANKS, 1893 TO 1936.

f unds in advances, and, because of some lack of other facilities , bonowers ar e compelled t o r ely to a greater extent for t heir require­ ments on overdrafts. W hile it is not the policy of a t r ading bank t o make loans for fi xed periods, many loans are granted in circumstances

which indicate that both the banker and t he bo rrower understan d t hat repayment will n ot be made , or in deed cannot be made, for som e years. Other advances which, wh en made, wer e r egarded as ordinary commercial lo ans, have bec ome " f rozen " owing· t o circumstances beyond the contr ol ei th er of the borrower or t he bank. Loans in either of these categories, while nominally r epayable on demand, are in eff ect "long-t e1·m " loans, and .should be so r egarded by the banks. 11 is not suggested that these advances may not be fully secured1 but it is obvious that they reduce the liquidity of the advances as a

whole. P rovided, however, that such advances do not constitu te an unduly large p ro portion of the total advances, th ey do not impair the strength of the banks. 301 . P1·ernises ancl othm· 1·eal estat e repr esent 2.14 p er cent. of t he total assets, the variation between diffe r ent banks being from 0.82 per cent. to 3.83 per cent . It is clear tha t, in the case of

some of the banks, these assets have been written down to a fi gure which is far below their true valu e. 'l'his p r actice is discussed in that part of Chapter VIII. which r elat es to "Inn er r eser ves ".

Premises represent 12.73 per cent. of shar eholder s' funds.

Inner R es erves .*

302. The infor mation supplied t o the Co mmission sh ows that the inner r ese rves of all the banks at t he date of the last published

accounts amount to approximately £22m. 'l'he assets, in resp ect of which these an d other r eserves have been provided, are valued in the pnblished accou ntr; at approximately £343m. 303. 'l'hese r eserves ar e not r ep r esented by cas h or notes . They a re, in effect., t he differences between the disclos ed and undisclosed valuations of ce rtain assets. For example, they include provision for loss on advances which are doubtful, and ipter est which may not be received. At the date of the last published accounts, the aggregate debts due to t he t r ading banks amounted t o approximately £302m . In addition, th ese r eserves include provision for the depreciation of investments valued at the sam e date at about £32m. and bank premises valued at about £9m. 'l'he inn er reserves have be en built up over a long period, extending, in the case of some of the banks, for :more

than 50 years, an d in others since their recovery from the depres­ sion of 1893. Our inquiries have shown that little has been added to aggregate inner reserves sin ce 1929, but that on the other hand some l1flnks have drawn upon their reserves since that time.

• Dissent by the Chajrma n a nd by J\fr. Nixon.

..

129

THE CAPITAL, 1-(,EsERVES AND PROF11'S OF THE Aus'rRALIAN TRADING BANKS, 1893 TO 1936.

304. The position in 1936 was that deposits and other liabilities of the nine Australian banks, amounting to approximately £364m. , were protected by assets valued, · according to the balance-sheets, at £416m., and by the undisclosed or inner r eserves of the banks,

together with uncalled capital and reserve liability amounting to approximately £31m. The ability of the banks to realize assets without serious loss, or to reduce advances without causing serious hardship, and a general disloc ation of business, would, of conrse, depend to a very great extent upon conditions which woulcl , in tnrn, be materially affected by cen t ral bank action.

305. 'rhe following table shows the disclose d " Return on share­ holders' funds - and on capital" r espectively of the nine Australian trading banks for the year 1936 :-RETURN ON SHAREHOJ-'DERS' FUNDS AND ON CAPITAL RESPEC'I'IVELY

OF THE NINE AUSTRALIAN TRADING BANKS- 1936.

Shareholden' l lleturu on Return on - ll'und5. Capitnl. Profit. Shareholders' Capital. (Note.) Funds.

£'000. £'000. £'000. Per cent. Per cent.

The Bank of Adelaide .. 2,279 1,250 58 2.54 4.64

The Bank of Australasia .. 9,157 4,500 301 3.29 6.69

The Commercial Bank of Australia Limited . . 6,458 . . . . 3.24 . .

Preference .. . . .. 2, 117 85 4.00

Ordinary . . . . . . 2,000 124 . . 6 . 20

The Commercial Banking Company of Sydney Ltd. 9,160 4,739 273 2.97 5.76

English, Scottish & A us-tralian Bank Limited .. 6,549 3,000 222 3.39 7.40

The National Bank of A us-tralasia Limited .. 8,458 5,000 264 3.12 5.28

Bank of New South Wales 15,050 8,780 470 3.12 5.:l5

The Queensland National Bank Limited . . 2,629 1,750 71 2.70 4 .00

The Union Bank of A us-tralia Limited . . 8,968 4,000 228 2.54 5 .70

- ---

68,708 37,136 2,096 3.05 *5. 75

·- * Tietnrn on Or rlinary Capita l.

(NOTK-" Slulreholders' funds " is the sum o f r coc n ·cs, and

tri-buted profits at the beginning· of t he financial year. le;s n. ppropriation s io r dividends, &c .. m ade out of profits brought forward. i

l<,or comparison we include also the relevi.Jn t figmes o f: the " big five", English banks, for the same year-The " Big Fivo " F.258I.- 9

.. £115 ,145 £6 4,71 6 £9,608 8.34

130

SAVINGS AND STATE BANKS. 306. The purpose of a Savings Bank is to provide for the invest­ ment of small savings; but a useful development, in Australia, has been the direction of a substantial proportion of these savings into loans upon mortgages of homes, farms, ·and the like. This form of invest­ ment is unsuitable for a trading bank, and in entering this field the Savings Banks, in several of the States, have rendered valuable ·service to the community; but as the demand for accommodation has

exceeded the supply, and, as a matter of general policy, most of the States have established public institutions to assist persons of moderate means to acquire or improve their homes or properties. 307. The largest of all the Savings Banks is the Commonwealth Savings Bank, ' vhich operates in all the States. It is now the only Savings Bank in the States of New South· \Vales, Queensland, and

Western Australia, but in the other States it is in competition with the Savings Banks operating under State law. 308. The Savings Banks and other institutions operating under State law are as follows:-

In New South Wales-'rhe Rural Bank of New South Wales, which comprises-(i) ,.rh e Rural Bank Department; (ii ) . The Advances for Homes Department; and

(iii) The Government Agency Department. In Victoria-The State Savings Bank of Victoria, which comprises the Savings Bank proper, and the Credit Fancier Department. In South Australia-The Savings Bank of South Australia,

and the State Bank of South Australia, which comprises the Credit Fancier and the General Banking Departments. In Queensland-'rhe State Advances Corporation. In Tasmania- The Hobart Savings Bank, the Launceston Bank

for Savings, and the Agricu1tural Bank of ':Pasmania. In \V estern Australia-,.rhe .Agricultural Bank o£ Western Australia. ·

11 he Commonwealth Savings Bank of Australia. 309. Under section 35B of the Commonwealth Bank Act 1911-1932, the Commonwealth Sa·vings Bank of Australia has power to carry on the general business of a Savings Bank. Certain investments are specified and authorized, including loans on the security of land, and fixed deposits with the Commonwealth Bank. The Common­ wealth Savings Bank considers that it is prohibited £rom investing upon fixed deposit with other banks. The Statute leaves the rate of interest and maximum amount on which interest is paid to be declar ed by the bank from time to time. The present rate is 2 per

131

SAVINGS AND STATE BANKS.

cent. on deposits up to £500, and 1! per cent. upon any excess up to £1,300, except in Queensland where the maximum was raised to £2,000 upon the ground that there was no other Savings Bank in that State. 310. Under the agreements made with the various State Govern­ ments on the absorption of their Savings Banks, the Commonwealth

Savings Bank is under some restriction with respect to the invest­ ment of its funds. A percentage of any increase in the deposits received in the States of Qu(!ensland, Western Australia, or Tasmania, has to be lent to the Government of the State to form part of itEZ

loan moneys under the Financial Agreement. A similar arrangement with New South Wales expired at the end of 1936. 311. ' Under the same agreements, the Bank's profits or losses in New South "'VVales are shared with the Rural Bank, and in Queensland, \Vestern Australia, and Tasmania, with the Government of the State. The balance ·of the Savings Bank's profits are then distributed

equally be t we en the Commonwealth Savings Bank's Reserve Fund and the National Debt Sinking Fund. In 1935-36, the gross profit of the Commonwealth Savings Bank was £563,000) of which £229,000 was paid to State Governments or institutions, pursuant to the agree­

ments referred to. Of the remainder, half (£167,000) was carried to the Hescrve Fund, and half was paid to the National Debt Sinking Fund on account of the Commonwealth G'overnment's contribution to the fund .

312. Its association with the Commonwealth Bank enables the Commonwealth Savings Bank to carry on its operations with a lower cash ratio than is usual in the other savings banks. On 30th June, 1936, :its balance-sheet stood as follows:-

Reserve Fund

Liabili ties.

Other Liab1lities

£'000. 2,257 133,832 5,506

141,595

Coin, notes, cash balances, and money at short call Government Securities .. Securities of :Municipalities

and other public bodies Mortgages . .

Landed and house

property Other assets

Perce ntage of 'l'utal .Assets.

£'000.

14,828 10 . 5

89,786 63.5

32,696 23.1

. 2,045 1.4

1,008 0 . 7

1,232 0 .8

141,595 100 .0

(NoTE.-A capital reserve of about £3,000,000, taken over from the Government Savings Bank of New South Wales, Is included in" Other Liabilit.ies ".)

The money at short call includes some £7 .3m. in treasury bills, and tabug thes e as cash or liquid assets, the r atio to deposits is about

132

SAVINGS AND S'i'A'l' E BANKS .

11 per cent. 'rhis is much lower than the r atios £01· the other saYings banks in Australia, which range from 26 per cen t . to 31 per cent., but the Commonwealth Bank is able to work on this low ratio by virtue of its close association with the central bank. For this r eason, iJl dealing with the ratios mentioned, we shall h er eafter exclude the figures of the Common1;vealth Savings Bank. 'rhe Bank's loan s

on are a diminishing quantity. In 1931-32, the Banl\:

acquired, from the State institutions which it absorbed, mortgages to the amount of £2,659,000. By June, 1936, thes e had been r educed to £2, 045,000. The fact is that the B9-nk has n ever encou1·aged this class of business, although it assists the Rural Bank of New South

\Vales by financing its operations, as provided by the agreements under which the business of the Government Savings Bank of New South Wales was acquired. 313. In 1929 and 1930, loans 1ve r e made to various "housing authorities" to enable them to carry on operations during the p erioc1 of depression. 'rhe total advanced was £1,365,000 . The Bank is not advancing on this account at the present time. ':Chere has been some overlapr>ing with t he activities of State institutions, and t h e

Bank regards this branch of its business as no longer necessary.

The State Sa_vings Bank of Victoria.

314. The State Savings Bank of Victoria is controlled by

Commissioners appointed by the Governor in Council, without limitation of tenure. 'rhe General lV[anager is appointed by the Commissioners with the approval of the Governor in Council. The Bank has no capital apart from the reserves which have been built u p out of profits. Repayment of the deposits is guaranteed by" the Government of Victoria. Fixed deposits banks ar e made for a period of two years and are so spread that they fall due at regular intervals. Practically . aJl government securities held by the Bank are for periods of fiv e· years. Substantial sums held with various

banks can·y a l01v ra.te of interest, and may be drawn ·on

deJ:?and. 'J.1he Bank is, therefore, well equipped to m ee t Rny

emergency that may arise. Of recent years, it has been the prachce of the Bank to make to the Victorian Government an annual rebate of inter est, amounting to £100,000, which is equal to about i per cent. per annum ori the made to the Government.

315. rrhe Bank is conducted in two departments, namely, the Savings Bank and the Credit Foncier, which present separate aecounts of their transactions. The. Savings Bank Department engages in the ordinary business of a savings bank. It inves ts to a cer·tain ext ent in: lo ans upon fixed mo rtg·age, and to a much gr ea t er ii1 the debentures and stock of the Credit Foncier Department.

133

SAVINGS AND ,S'rA'rE BANKS.

'l'he Cr edit Fancier Department ob tains its capital by t he iss ut; of debentures and stock, of which about 60 p er cent. is held by the

Savings Bank Department, and the balance by the public. 1-,he function of the department is to lend the money raised in this way upon a system of repayment by regular instalments, covering principal and interest, extending over a long period of years.

316. In the Savings Bank Department, the deposits on 30th June, 1936, were £64.4m. rrhe Reserve Fund stood at £3.0m., which together with an interest :fluctuation account, and undistributed profits brought the total of the reserves up to £4.1m. The funds in th]s department

\Vere held as follows :-

Cash on hand and at bankers and fixed deposits with other banks Government securities Securities of public bodies ..

Credit fancier debentures and stock Mortgage securities, &c. Premises

Total

P er centage

£'000 . of Total

Asset s.

20,139 29,866 3,978 13,092

1,717 960

69,752

28.9 42.8 5 .'7 18.8

2.4 1._ 4

100.0

The balance-sheet of the Credit Fancier Depa;rtment at 30th June, 1936, sl10ws debentures and stock with interest to date at £21.5m., including £13.lm. held by the Savings Bank Department. 'rherc is a depreciation fund of £290,000, and a reserve fund of £537,000. 'rhe funds in this department at 30th June, 1936, 1vere held as

follows:-

sec;urities, &c. . . . . . . . .

Cash on hand and at bankl:'rs and on fixed deposits with other banks Other assets

Total

Percentage

£'000. of Total

Assets.

21,.580

1,047 39

22,666

95.2

4.6 0.2

100.0

The extent of the activities is shown by the following figures:­ Farm loans £4.6m., House and shop loans £11.2:m., Housli1g and Reclamation loans £5.2m. The r ate charged upon loans is 41 per cent. 317. The Credit Fancier Department was originally establi$hecl to provide long term capital for the purchase and improvement of

farms. Its activities have been greatly extended, and substantial assistance ]s now given to home builders. \Vaste land close to the

SAVINGS AND STATE BANKS.

City of l\Ielboume has, by the D ep artmen t's over ations, bce u into a "garden city", and a suburban Council has been

financed in the building of dwellings to r eplace dilapidated h omes. Farm loans, which ar e for a maximum period of 31! years, are limited, by law, to £4,000, and cannot exceed 75 p er cent. of the valuation. Conditions vary for loans on dwellings and shops. The maximum cost of a house in respect of which an advance is made is £1,300. The maximum terms are from 20-! to 22 -_t years. Special provision is made for persons with incomes no t exceeding £400 per annum, to whom loans are made up to 80 p er cent. of the value of homes

th ey wish to acquire. The rate of interest in the Savings B ank Dep ar tment is fixed

from time to time by the Commissioner s with the consa!1t of

the Governor in Council. The present r ate is 2 per cent., whi ch is paid upon deposits of £1 to £1,000, but this limit does n ot

apply to f riendly societies. The policy of t l1 e B ank is to off er

a r ate of interest u pon ca ll deposits which is lower than the t wehe months deposit rate of trading banks. The Bank can also accep t fixed deposits up to £1,000, at a higher r ate of interest, but it

is not at present ac cepting fixed deposits.

Sa!l! ings Bank of So·uth

019. Tbe Savings Bank of South Australia is controlled by Trustees appointed by the Governor in Council for a term of six years, and r etiring in rotation. The Bank has no capital, apart

from its r eserves. In the even t of its inability to repay its

deposits, t he 'rreasurer of the St ate, wit h the con se nt of the

Governor, is authorize d to pay the defici ency out of the general revenues of the State. By virtue of this provision in its Sta tute, t he Bank announces that it is guarantee d by the Government. On t he 30th June, 1936, the liability to depositors was approximately

£22 .6m ., and the t otal of its Reserve Fund, Special Appropriation, and undistributed profits, was £1.7m. The funds were held at that time as follows :-

Cash on hand and at bankers and on fixed deposit with other banks . . . . . . . . . .

Government securities ..

Other stoek, debentureH; &c. . . Mortgage loans . .

. .

Interest accrued on investments Other asset s

Total

£'000.

5,887 12,320 512 5,533

245 101

P ercentage of Total Assets.

23 .9 50.1 2.1 22.5

1.0 0.4

100.0

135

SAVIN GS AND S 'l'A'l' E BANKS.

320. The Bank pays interest upon deposits from £1 to £1,000; but the limit does not apply to Friendly Societies and Building Societies. 'l'he Statute provides for an interest rate, which is fixed for each financial year shortly before the end of that year. The

Trustees are authorized to carry to reserve not more than one-fifth of the profits, and are required to distribute the remainder in

the form of interest to the depositors. Generally, the rates have been higher than those paid by similar institutions. 1i' rom 1926 1o 1930, the rate was per cent. on deposits up to £500, and

4-/i per cent. on the excess ov er £500, from 1927, when the

limit was extended up to £1,000. For the two years ending

30th June, 1936, the rate has been 2! per cent. on all deposi ts

up to the limit allowed, except for the year ended 30th June,

1935, when amounts over £500 bore a r at e of p er cent.

Hobart Savings Bnnk.

321. Th e Hobart Savings Bank is under .the rnanagement oi a General Committee, which elects half-yearly si x of its members as an Executive Committee.

322. Deposits on 31st August, 1936, were £2,994,000, and the total of the Reserve Fund and Profit and l;oss Account wn.s

£212,000. At that date the funds wer e held as follows:-

Cash on hand and at bankers n.nd on fixed deposit with other banks . . . .

Commonwealth Government securi t ies Securities of municipalities and pubhc bodies Loans on mortgage ..

Other assets

Total

.1: '000.

A38e ts.

845 26.3

1,276 a9.8

361 11.2

689 21.6

39 1.2

3,210 100.0

Interest at the rate of 2i per cent. is paid on deposits repayable on deinand, and at 3 per cent. on deposits flxecl for twelve

months. The maximum amount of deposit on "·hich in te r est is paid is £300 . 323 . Loans on mortgage are made to approximately 60 per cent. of the Bank's valuations, fo r periods of three years, but

mortgages are allowed to r emain OY erclue on ex piry so long

as circumstances are considered satisf actory. Assistance is gi ven for the purchase of houses and farms. Th P rate of interest

ch arged on mortgage loans is 4± per cent.

169i

136 -

SAVINGS AND S·rATE BANKS.

Launces ton Bank j01· Sa,ving s. 324. The l.Jc.mnc eston Bank for Savings is controlled by a

general committee of thirty m-embers, appointed by a Judge of the Supreme Court. ':Chis Committee elects half-yearly seven of its members as an Executive Committee. D eposits in th e Bank on :31 st August, 1936, amounted to £1,944,000, and the total of its

r ese rve and undistributed profits was £173,000. On that date the funds 1vere held as f ollows :-

Cash on hand and at bankers and on fixed deposit with other banks Commonwealth Government securities Municipal securities Loans on mortgage .. Other assets

Total

Percentage

£'000. of Totar

Asset s .

560 950 126 465

22

2, 123

26.4 44 . 8 5 . 9

21.9 1. 0

100.0

rrhe rate of interest paid is 2-i per cent. on current accounts, and 3 per cent. on deposits fixed for twelve months. These rates are

fixed half-yearly, on the basis of the Bank's profits. The maximu m deposit on which in terest is paid is £300. 325. rrlJC rate of interest for mortgage loans does not at presen t ex:eced 4-Q- per cent. H ome builders are assisted, loans being made for a maximum of six months; but the mortgage is n ot disturbed if conditions are satisfactory-in fact, some mortgages have been in existence for 40 years.

Savings Banks ].92 6-1936.

326. rrable in the Appen dix shows t he movement in the funds of the Savings Banks from 1926 t o 1936 . Durin g the first three years, deposits rose st eadily from £196m. in 1926 to £226m. in 1929. In this period the ratio of total cash, Treasury-bills and deposits with banks and State rrreasuries, to total deposits was allowed to f all slightly., but this 1vas not characteristic of every bank.

327 . After 30th June, 1929, the deposits began to :fall. In 1929-30, the total f ell from £226m. to £218m. · The reduction 1vas subst§nt ial in all the States except Western Australia, v;rher e there was a slight gain, and Queensland a:ud Tasmania, 1vhere t he loss was in significant.

328. The effect of the withdrawals during this p eriod is shown in rr able 23 in the Appendix. Speaking gen erally, th e banks stopped lending; but there was, on t he whole, little r ealization of securities. rr he £8rn . withdrawn by depositor s was taken from th e cash and the

137

'SAVINGS ,AND STATE BANKS.

deposits with other banks, and also, to the extent of £1.4m., from the deposits with State Treas uries . The result was a definite fall in liquidity. The aggregate ratio, excluding the Commonwealth Saving Bank, fell from 20.11 p er cent. to 16.87 per cent. In the

State Savings Bank of Western Australia, the ratio was allowed to fall from 11.86 per cent. to 7.61 p er cent. rrhe fall was not due to any withdra\val of deposits, which increase d by £93,000. 329. In 1930-31, as the depression developed and spread through­

out the community, the rate of withdrawal of savings bank deposits was naturally accelerated; but a contributing factor throughout the Commonwealth was the subscription to internal loans, in the latter part of 1930. For instance, in the Government Savings Bank of New Soutb Wales, the Commonwealth loans accounted for with­ drawals of at least £1.2m. in July and £1.8m. in December, 1930, and in all probability the withdrawals in other States were corr·e­ spondingly large. On 30th June, 193 1, the total deposits had

fallen from £218m. to approximately £194m., a fall of 11 per cent. In New South Wales, the fall ·was about 15 p er cent.; in Victoria and South Australia it was about 10 per cent. In Queensland, W es t ern Australia, and Tasmania, it was less.

330. On 22nd April, 1931, the Government Savings Bank of Ne-vv South Wales suspended payment, and subsequently absorbec't by the Commonvvealth Savings B ank. The circumstances attending the failur e ar e considered in great er detail later in this chapter.

331 . rrhe t otal reduction of savin gs bank deposits in 1930-31 was £24m., . and in order to meet this, up-vvards of £10m. was taken out of cash and deposits, and to provide for the balance, securities were realized to t he extent of about £12,2m. rrhe principal movements in the cash items were that the deposits with the trading banks

were r educed by £11.8m., and the deposits with the Commonwealth Bank incr eased by £2.3m. Ther e was a r eduction of £1.4m. in the deposits held -vvith the Governments of Victoria and South Australia by the Savi11gs Banks in those States, and an increase of £700,000

in th e deposits by the Government Savings Bank with the Govern­ men t of New South Wales . 'Jlh e principal item in the r ealization of investments was the sale or r epayment of Government stock to the value of £10.4m. By 30th June, 1931, the aggr egate rat io" , excluding the Commonwealth Savings B ank, of cash , Treasury-bills and· deposits \vith banks and State Treasuries, ha d f allen to 15 .7 5 per cent.

33 2. In 1931-32, no twithstanding t h e anxiety arising from the f ailur e of the Government Savings B ank in N ew South \Vales, the position was improving, except in W estern Australia, where the State Savjngs Bank got into difficulty, and was absorbed by the Common­ wealth Savings Bank. The main cause was the illiquid position of the

•

•

138

SAVINGS AND STATE BAKKS.

Bank it:;elf, but there is no doubt that t he failure of the Government Savings Bank of New South W ales added t o its difficulties . The ratio of cash and bank deposits to its deposits had been allowed to fall to 6.31 per cent. on 30th J nne, 193] , and it had no reserve to

meet contingencies . 333. On 30th June, 1932, the total savings bank deposits had risen by £4.6m. to £198.5m. and the liquidity had improved. Since that da te, the deposits have r ise n year by year unt il, on 30th June, 1936, they r eached £225.Sm., which is only about £5 00,000 less than the point r eached in 19 29 . On the 30th June, 1936, the aggregate r atio was 29 .82 per cent., which is higher t han before the depression.

33 4. At 30th June, 1936, as com pared with 30th June, 1929, there has been some r e- arrangement of the investment. This is due partly to the absorption by the Commonwealth Savings Bank of two State institutions, and partly to other causes. The Commonwealth Savings Bank holds deposits 'vith the Commonwealth Bank, and Treasury­

bills, and in recent years some of the State Savings Banks have main­ tained deposits ·with the Commm1wealth Bank. The amount held by the savings banks u pon deposit with the trading banks has fallen by £6m. Thei r holding of Australian Government and other public securities h as risen by n early £12m. to approximately £185m., and the

loans on mortgage have fallen by £1.8m. 335. Th e following table shows the total of the mortgage loans of the savings banks at various dates from 1927 to 1936, and the distribu­ tion in ur ban and rural districts. The mortgage loans of the Credit Foncier Depar tment of the State Savings Bank of Victoria are not included in this t able:-SAVINGS BANKS-AUSTRALIA- DISTRIBUTION(a) OF MORTGAGE LOANS

BETWEEN URBAN AND RURAL DISTRICTS.

30th J une, 1927.(b) 30th J une, 1931.(b) 30th June, 1935.(b) 30th .June, 1936.(b)

-

Per- I)er- Per- Per-

Amount. centage A1nount. centuge Anlount. centage Amount. centage

of Total. of TotaL of Total. of TotaL

£'000. £'000. £'000. £'000.

Urban .. 7,783 78 . 8 9,091 77.5 7,887 76 . 2 7,962 76.4

Rural ,; 2,089 21.2 2,641 22.5 2,469 23.8 2,458 23. 6

Total .. 9,872 100 . 0 11,732 100 .0 10,356 100.0 10,420 100 .0

I

( a) Partly estimated. (b) At 31st for Hobnrt Savings Bank and Launceston Bank for Savings.

State m· Rural and .A.gr-icultuml Banks. 33 6. 'fhese State institutions differ widely in constitution and functions. 'fhe State Advances Corporation in Queensland and the Agricultural Bank in Tasmania a re. in effrct. State Government

,

,

139

SAVINGS AN D STATE BANKS.

Departments, cl1argetl " ·ith the administration of public moneys advanced for various purposes, but principally for assisting rural industry or the building or buying of homes. 'l' hese State activities are analogous to those which in other States are under the direct control of the Executive Government.. 'rhe Agricultural Bank of

\Vestern Australia is in mnch the same posit ion. It is concer ned with the administration of funds provided out of the proceeds of government loans. The State institutions which arc engaged in banking, are the Rural Bank of New South vVales and the State Bank of South Australia.

R'nral Bank of New South Wales,

337 . The Rur-al Bank of New South Wales was established in 1933 to take over the Eural Bank DeparLment and the Advances for Homes Department, which were carried on by the Government Savin gs Bank of New South W ales up to the time of its suspension

in April, 1931. It is controll ed by three Commissioners, appointed by the Governor in Council, who are r equired to devote the whole of their time to their duties. 338. P r ovision was made in the amalgamation agreemen ts, to assist the Rural Bank, whicL up to that time had depended very largely upon funds supplied by the Government Savings Bank. Under

the first agreement, the inscribed stock of the Rural Bank Department, which was then held by the Savings Bank Department, was cancelled, :md, in lieu thereof, inscribed stock and debentures of the Rural Bank were issued to the Commonwealth Savings Bank. The aiilount

involved was £14m. At a later stage the Commonwealth Bank agreed to give further assistanc e. Under the second agreement the current and fixed deposits held by the public with the Rural Bank were taken over by the Commonwealth Bank, the deposits h eld by the Rural Bank

with certain trading banks and the State 'rreasury were transferred to the Commonwealth Bank, and inscribed stock and debentures of the Rural Bank, representing the difference between these assets and liabilities, were issued to the Commonwealth Bank. The amount issued under this agreement was £10m., ma.king in all £24m. under

the two agreements. Subject to any agreement which may be made for an extension, this stock is redeemable by 40 half-yearly payments commencing on 30th November, 1936. There is a special provision with respect to the rate of interest, which is 1 per centum above the

high est rate allowed by the Commonwealth Savings B ank to i ts depositors during the half year. 'l'he present rate is th erefore 3 per cent. per annum. Under the terms of the amalgamation, the interest which the Rural Banh allows to its depositors cannot exceed the rate

which the Commonwealth B ank for deposits of the same clasR ,

1695

140

SAVINGS AND STATE BANKS.

339. The busjness of the Rural Bank is transacted in separate departments, which present separate accounts of their transactiops-(1) The Rural Bank Department carries on the business of banking, that is, it receives cle!JOSits for a fixed ter m or

on cur-rent account, and lends for a fixed term or by \Y ay of overdraft. But the advances are restricted to

agrjcultural and primary producers and individuals or societies engaged in or associated with rural pursuits. The Bank does not encourage borrowers who merely r equire fixed loans. It gives preference to customers vi!lw borro\v on overdraft, with or without a fixed loan. ( 2) 'I' he Advances for Homes Department lends money for

the building or buying of homes upon mortgages of the land. ( 3) The Government Agency Department administers funds entrusted to it by the Government of the State. 340 . 'rhe balance-sheet of the Rural Bank Department for 30tli . .June, 19 36, is as follows:-

LIABILITIES .

Stock and debentures­ Commonwea lth Bank and/or Comm om- veal th Bank ..

Other issues Hescne Fund

Sctv ings

Special Reser ve Account Deposits, Fixed Current Ac·cmmt . . Other liabilities Due tc., other departments

Guarantee and other funds

£'000

12,750 1,243 694 (i]3

68

996 415 120 80

16,979

AssETs.

Cash on hand &nd at banker · Investments-Comm on wealth men t sc,cm· i ties

Other securities

Govern-

Resene Fund in.-estm ents-Commonwealth Govern-ment securities Other securit ies Due by other departments .. Loans and advances to cus­

tomers Sundry debtors and other

assets . .

Bank: premises

£'000 509

543 78

598 60 14

l4,5G3

172 442

£16,979

34 1. 'l'he proportion of long-term loans is about 40 per cent. of the total loans and advan ces to customers. 'l1he rate of interest is 4t per cent. on all advances, with the exception of those to some co -op erative and rural societies, which pay 4± p er cent. 'l"'h e main factor vvhich influences the rate charged by the Rural Bank is the rate payable upon the stock held by the Commonwealth Savings Bank and the Common-vvealth Bank, which r epresents 75 per cent. of the total funds of the Rural Bank. The margin between the interest paid on thjs stock 8 nd the interest :vhich the Bank charges is 1 t per cent.

141

SAVINGS AND STATE BANKS.

:342. The balance-sheet of the Advances for Homes Department on 30th June, is as follows:-

LIABILITIES.

Stuck aud debentures­ Commonwealth Bank and/or Common wealth Bank ..

Other i ssues Reserve :F'und

Savucgs

Due to . other Departments .. Other Liabilities

£'000

10,441 1,6 22 719 16

843

£13,6 41

Gash o.n ha.nd and at bankers Commonwealth Government securities Rese,rve Fund investments Other Securities Loans and a dvances

customers

to

£'000 212

74 622 GO

l2,G 73

£l3,64l

The interest charged by the Advances for Homes Department is 4-! per cent., except in the case of loans made out of money provided by the Commonwealth Savings Bank under the C ommonwea1t h Housing Act 1927, for which the Bank pays 3-! per cent., and charges

per cent.

State Bank of South AustTalia.

343. The State Bank of South Australia is controlled by a Board of five members appointed by the Governor in Council for a

term of five years. It was established under the State Advamces Act 1895, as a mortgage bank upon the Credit Foncier principle, but its activities have been extended from time to time. It is

entrusted with the administration of public funds provided for a variety of purposes; but, for the purpose of our report, we are concerned only with the General Banking and the Credit Foncier departments.

344. 'I' he G ene1·al Banking Department was established under the Sta.te Bank Act 1925, which gave the Bank power to carry on the general business of banking, subject to a limitation which is implied in the provision which authorizes it to make advances to

individuals and associations engaged in rural or primary production, or iu- activities concerned vvith the processing or marketing of rural products.

On the 30th June, 1936, the capital was But ther e was on deposit with the State rrreasury the 1inexpended balance of an advance of £500,000 amount­ jng to ..

£

3,476,283

404,240

3,072,043

142

SAVINGS AND STATE BANKS.

This capital had been provided by inscribed stock, deben-tures and mortgage bonds held by­ (a) The Government of the State (b) The Savings Bank of South Australia

(c) Other :financial institutions and t he ge11eral public

In addition to the capital account the Bank had-­ Bank Reserve Fund ..

Bank Redemption Fund

2,132,960 200,000

73 9, 083

3,072,043

276,725 67,118

343,843

The total of these reserve funds iG the balance of accumulated in the Credit Foncier Department (£430,087) less accumulated losses in the General Banking Department (£86,244). The form in which the accounts are presented creates some difficulty of interpretation, and they woulcl be easier to follow if transactions between the different departments were clearly indicated, and if similar terms were employed for similar items in the departmental and the combined accounts.

345. The capital employed in the General Banking Department is £2,000,000 . , At 30th June, 1936, the current and fixed deposits were £450,000 from the public and £107,000 from the other depart­ ments. Cash and fixed deposits with other banks amounted to £129,000. The debts due to the Bank were £2,338,000. 'rhe advances

in this department are upon overdraft; but it is possible for a

customer to arrange for a mortgage, which covers a fixed loan from the Credit Fancier D epartment and an overdraft from the Banking Department. The rates charged upon overdraft allow a margin of 2 per cent. to 2! per cent. above the cost to the Bank of its r.apital funds.

346. The Credit Foncier Department employs a capital of approxi­ mately £1,000,000. Its balance-sheet on 30th .June, 1936, shows-Advances Less repayments

Advan,ces outstanding .. Less instalments due and outstanding

£ £ :!

4,8.51,008 3,781,470

. . 1,069,538

65,299 1,004,239

P,roperties reverted to Board 42,255

Sundry d ebtors for of principal and interest, a nd ·insura1wc 107,600

The Credit Foncier loans to Primary Producers' Department is a recent addition, and its transactions up to the .present are relatively insignificant.

143

SAVINGS AND STATE BANKS.

STA'l'ISTICS.

34 7. 'rhe following tables give aggregated figures for the Rural Bank of New South Wales (Rural Bank Department and Advances for Homes Department) ; the Credit Foncier Department of the State Savings Bank of Victoria; and the State Bank of South

Australia (General Banking Department and the Credit Foncier Department) :-THREE RURAL OR CREDIT FONCIER BANKS- AUSTRALIA. A'GGREGATES OF PRINCIPAL LIABILITIES AND ASSETS AT 30TH JUNE, 1926, TO 1936.

Lia!Jilities . .Assets.

At 30th June-

Debentures and I,oans and

other Securities Deposits.• Advances

Outstanding. Outstanding.

£'000. £'000. £'000.

1926 .. .. .. .. 31,927 5,002 35,839

1927 . . .. .. .. 34,741 6,714 40,102

1928 ... .. .. . . 38,814 8,017 45,674

1929 .. .. . . . . 43,736 9,357 51,406

1930 .. .. .. . . 48,152 10,925 57,352

1931 .. .. .. . . 47,135 11,644 56,538

1932 .. .. . . . . 54,601 661 54,379

1933 .. .. .. . . 52,847 437 52,336

1934 .. .. .. . . 50,960 857 50,846

1935 .. .. .. . . 51,167 1,113 50,920

1936 . . .. .. . . 50,633 1,514 51,672

* Excluding deposits of Credit Foncier Department with Gen eral Banking Department of the State Bank of South Australia.

THREE RURAL OR CREDIT FONCIER BANKS-AUSi'RALIA. AGGREJGATES OF PRINCIPAL LIABILITIES AND ASSETS AT 30TH JuNE, 19t6.

1. Debentures and other securities outstanding­ (a) Held by State Treasury (b) Held by State Savings Bank, Commonwealth Bank, or Commonwealth Savings Bank

(c) Held by public

Total

2. Deposits by the public* 3. funds

4. Loans and advances outstauding 5. Government and other securities held 6. Cash in hand and bank deposits ..

£'000 £'000

2,133

36,483 12,017

50,633 1,514 3,242 51,672

2,06::>

1,897

• Excluding deposits of c·r edit Fonder Department with General Banking D epartment of the State Bank of South Australia.

Of the total loans and advances of nearly £52m. outstanding at 30th June, 1936, it appears that slightly more than half was owing by borrowers in rural areas.

1699

144

BANK FAILURES.

348 . During the year 1931, two banks, and one institution which carried on some banking activities, suspended payment. rrhe Govern­ ment Savings Bank of New S outh \Vales suspended payment on 23rd .April, 1931, the Primary Producers' Bank of .Australia Limited on 24th 1931, and the Pederal Deposit Bank Limited on 4th

September, 1931.

Government Sewings Bank of New South ·wales.

349 . During the year ended 30th J-une, 1930, withdrawals exceeded clcpos.its, but the n et reduction, after crediting interest for the year, 1vas not sufficient to cause any apprehension. In July, 193 0, deposits 1vere reduced by £2.5m., a large part of the withdrawals, estimated at £1.15m., being invested in the Commonwealth loan closing towards

the end of that month. Further reductions occurred in August, and on a smaller scale in September. Towards the en d of the latter

month, a State election campaign com-menced, and in the course of that campaign, statements were made by candidates, and in political advertisements, as to the results which wo uld follow a victory by the l".Jabour party, and these created alarm in the minds of depositors. The net withdrawals for October were approximately £1 .5m. After the election, at which the I-1abour party was returned, withdrawals continued, but not at the previous high rate, and it was concluded that most depositors who had been f earful for their deposits had acted before the election. The withdrawals for December, however, were very large, the net decrease exceeding £2.5m., but nearly £2m. of amount was withdrawn for investment in the Commonwealth

Joan which closed during that month. In January and :B.,ebruary, the. 1vithdrawals continued to exceed deposits, though on a lower scale. In the latter month, the State Treasury defaulted in the pay­ ment of interest due to the Bank on its investments and deposits, and failed to comply with a request for the repayment of some of the call deposits. By some means these facts became known and were

published in the press, and led naturally to a revival of the fears which the election campaign had started months before. About the :same time the State Government put forward financial proposals which so jncreased the alarm of depositors that no re-assurance given by the Bank could allay it. During J'vfarch, withdrawals exceeded deposits by approximately £2.5m. Towards the end of March, the State defaulted in the payment of interest to British holders of New South vVal es Government stocks, and this increased the uneasiness of

depositors and led to a run on the bank. Between the 1st and 22nrl April, the · excess of withdra\vals over deposits amounted t o about .C4m . of which £1,678, 000 was -vvithdrawn on 22nd April. The Bank's

145

BANK F AlLURES.

cash resources · then being exhausted, there was no alternative but to suspend further payments, and it was closed to business after 22nd April, 1931.

350. r.rhe following table shows the withdrawals from the wealth Savings Bank, the Government Savings Bank of New South vVales, and all other savings banks r espectively, during the year ended 30th June, 1931.

ALL SAVINGS BANKS.

ExOJ•:s s OF OYKR DEPosrrs, JuLY, 1930, TO J u NE, 1931.

(Excluding deposit interest added on 30th June, 1931.)

1930-July .. ..

August . . . .

September . . . .

October . . . .

November . . . .

December . . . .

1931-January .. ..

February . . ..

March . . ..

April . . . .

·May and June . .

..

Deposits 30th June, 1930 Excess of withdrawals over

Commonwealt h Savings Bank.

Increase. Decreas e.

£'000. £'000.

.. 1,487

.. 55

263 . .

297 ..

.. 369

. . 2,028

. . 293

. . 52

848 ..

1,385 ..

.. 266

2,793 4,550

.. 50,050

deposits

for year ended 30th June, 1931 .. 1,757

Percentage of excess of withdrawals I

deposits 30th June, 1930 3.51

Government Savings Bank of New South

·wales.

£'000.

2,550 528 417 1,472

885 2,594

604 832 2,420 4,085

1,082

17,469

70,633

17,469

24 . 73

All Other Savings. Banks .

£'000.

2,525 15 219 478

900 4,731

278 85 185 801 1,748

11,965

97,409

11,965

12.28

Total.

£'000.

6,562 598 373 1,653 2,154 9,353

1,175 969 1,757 3,501 3,096

31,191

218,092

31,191

14.30

351. It is clear from this table that during this period there

was a general tendency towards the reduction of savings bank deposits throughout Australia. r.ro some ext ent this ·was clue t o the depression,. which compelled depositors to u se their savings. A further part of the reduction is accounted for by investment in t he

Commonwealth loans which closed in July and D ecember , 1930. But jn the case of New South Wales a large proportion of the r eduction F.258l.- 10

14:6

BANK

must be attributed to the apprehension caused in the minds of

depositors by the circumstances previously described. 'rhe net reduction in deposits for the year (excluding deposit interest added on 30th June, 1931), in the case of all other savings banks in all

States, \vas approximately 12 per cent., whereas in New South Wales it was approximately 25 p er cent. It is evident that considerable amounts drawn from the Government Servings Bank of New South \Vales were lodged wit h the CommoiTwealth Savings Bank, ·where the net reduction ·vvas only 3.5 p er cent.

352. 'rhe Commissioners of the Government Savings BanJr of New South Wales fully appreciated the situation. As early as October, 1930, they informed the Board of the Commonwealth Bank that they anticipated something in the nature of a run on the Bank towards the end of that month, and inquired if the Commonwealth Bank would come to their assistance if necessary, and to what extent. It was indicated in the reply that the request was then too nebulous

to be dealt with in a practical manner. rrhe need for assistance, however, did not arise at this stage. Early in lVIarch, 1931, the President of the Government Savings Bank of New South \Vales dre-..v the atten tion of the Commonwealth Bank Board to the serious loss of funds by his institution, and arranged with the Commonwealth Bank to discount fixed deposits of the Commonwealth and other banks, amounting_ to about £3m. Towards the end of lYiareh, the President of the Savings Bank again requested assistance from the Common­

wealth Bank. \i\Then asked to state definitely what he required, he stated that the return of confidence was the first necessity, that as depositors had lost confidence in the State, a statement of the

Commonwealth Bank, supported by financial accommodation, was the only solution. The Governor of the Common-vv ealth Bank replied that the request could not be complied with, as it carried with it guarantee of about· £60m. deposits. A few da.ys later, the Chairman of the Commonwealth Bank (Sir Robert Gibson), speaking unofficially to the President, suggested that, if the State Government approached the Commonwealth Bank with a view to amalgamation, either before. or after stoppage of payment, the matter would be considered subject to the approval of the Commonwealth Treasurer.

353. 'rhe substance of these conversations was reported to the State Premier, and after Cabinet consideration, a letter, dated 21st April, 1931, was sent from the Government of New South vVales to the Common-..v ealth Bank requesting .amalgamation. The publication of this in the pr,ess on the 22nd April, 1931, led to such

heavy withdrawals tlJat the Bank was forced to suspend oavment from that date.

147

BANK E 1 AILURES.

354. The follo·wing table shows the liabilities and assets of the Bank at the 30th June, 1930, and the 30th April, 1931 :­ GOVERNMENT SAVINGS BANK OF NEW SOUTH WALES.

(Thousands of vounds.)

---------------------

- - ---·-·-----------

Liabilities­ Deposits Other Banks

Reserves Mortgages and Investments Depreciatio Guarantee Funds Profit and Loss

Assets­

..

..

..

n ..

..

. .

..

..

. .

..

..

..

Cash in hand and deposits with other ba nks at call .. .. ..

at call ..

ales ..

h .. . .

. . ..

nt . .

Fixed deposits with other banks Deposits with State Treasury, fixed or Government Securities-New South W Government Securities-Commonwealt Other State Government Securities Inscribed Stock, Rural Bank Departme Inscribed Stock, Advances for Homes D epartment . . Deferred Stock Municipal Loans

Mortgages Sundrv Debtors Bank Premises

..

..

. .

. .

..

..

..

..

. .

..

30th June, 1930. 30th April, 19i> 1.

£'000. £'000.

70,6i33 56,098

579 623

------71,212 56,721 1,500 1,500 62 258 76 77 20 264 72,870 58,820 4,903 226 5,464 .. 6,591 7,218 29,211 25,513 3,809 3,798 4 5 4,423 4,190 10,820 10,445 24 23 3,017 2,902 2,834 2,677 20 39 1,750 1,784 72,870 58,820 After crediting interest from the 1st J u]y to the date of sm;pension, deposits had been reduced by approximately £14 .5m. 'ro meet tlw demands of depositors, cash on hand and at bankers had been reduced by approximately £12.5m., and State Government securities by about £3.7m. On the 4th May the Bank re-opened its doors for payment to depositors in necessitous circumstances. Funds were provided by the Commonwealth Bank. 355. On 28th :May, the Commonwealth Bank submitted its views upon amalgamation to the State Premier. Negotiations followed, in the course of which the State Premier suggest ed certain amendments. 'rhese were not accepted by the Commonwealth J? ank, "\vhich sub­mitted counter proposals. Negotiations continued during the n ext few weeks, but, in the words of Sir Robert Gi,bson, then Chairman of the Commonwealth Bank, the matter became "the shuttlecock of politics ". On 21st JuJy, 1931, the Comm.on\vealth Bank Board

·1· .· .. N_J 0 ·. " 3· .. · _ · ' . '

148

BANK FAILURES.

notified the State· Premier that, if acceptance or rejection of the proposed agreement was not received by the 25th July, negotiati,ons v.vould be ended by the Bank Board. No reply having been r eceived, the negotiations were formally terminated on 27th July .

356. During the follovving month a Bill was placed before the Ne ',;ov South Wales P arliament to provide a "uew division n of

the Government Savings Bank of Ne1v South vVal es. The Bill 1:-,·as passed, and the n ew division opened on 7th September, 1931. rrhe volume of business was, however, relatively small, and it was evident that new deposits would not be sufficient to facilitate a r elease of the balances of the old depositors. On 21st October, 1931, ·it 1va s

announced that the negotiations with the Commonwealth Bank would be resumed, and a month later an agreement was reached. Legisla­ tion to ratify this agreement was en acted early in December, and on 15th of that month t h e agr eement became effective.

35 7. An examination of the Bank's position shows that its asset s wer e ample to meet its ·liabilities, although it had insufficient liquid assets to meet the entirely exceptional demands made u pon it . . The failure does not reflect discredit upon the man agement of the Bank The cause of the failure was political rather than financial, and the responsibility must be borne by those whose conduct cr eated apprehension jn the minds of the depositors. The position is aptly summarized in the evidence of the President of the Gov ernment Savings Bank of New South Wales in the following vvords :-

" Looking hack, vvith a calm review, I consider that the tra.gecly of the

closing of the GoYe.r nment Savings Bank can be attributed to a conjunction of forces, some of which were <'conomic and nn avoiclahle, a.nd other s w hkh could ha1·e been avoided h a d poEtical and par ty consid er ations been less short -sighted, 1wd the Governm ent, agai 11 st which suggestions of political interference

IYith t he Bank \Yel·e made, n ot j ustified t hose forecasts by a,cts or proposals IYhich weak ened the B a.nk's r esources and financial stability, and t l1 ere.by pr -ecipitated unnecessary withdra\vals uy t l1e depositors on the principle of safety first."

The P rinw1·y Pt·ocl1t cerrs' Bcmk of Anst·J·a Z.i c[; L tcl . 358. The Primary Producers' Bank of Australia Ltd. was incor­ porated in Queensland in F ebruary, 1923, and was the successor of a .company known as Lands Credits Ltd., formed to make loans to farmers and graziers. ·vVithin twelve months the Bank had estab­ lished 42 branches arid agencies in the various States. At t he t ime of suspension in .August, 1931, the paid-up capital was £449,000, of which all but £22 consist ed of preference capital issued at a premium. There were between 9,000 and 10,000 s hareholders; the shar eholdings were usu-ally smalL No dividends were ever · paid. In April, the Directors interviewed the Commonwealth Bai1k and asked for

149

BANK FAILURES.

assistance to me et the demaYJ.d which they expected in consequencr of the suspension of the Government Savings Bank of New S

was approached and asked to consider absorption, but, after investiga­ tion, the trading bank in question declined to consider the suggestion. Prior to the suspension, some consideration was given by the Co mmon­ wealth Barik to a proposal that it should take some joint action with

the trading banks to prevent closute. Meanwhile, 1vithdrawals continued until, on 24th August, 1931, the Bank was forced to suspend payment.

359. An examination of the accounts of the Bank shows that the deposits reached their maximum in February, 1929. During the following year the changes in the accounts were not significant, but from that time the position rapidly became worse. rrhe fol]owing

table shows the movement in the principal liabilities and assets between :B-, ebruary, 1929, and the date oi PRIMARY PRODUCERS' BANK OF LTD.

'

--

L iabilities-Deposits ..

Bills and other lia bilities Mortgage on premises Bank overdraft . .

. Total Liabilities apital paid-up c R . .

eserves .. . .

Assets-Notes and coin . . Due by other banks Commonwealth bonds

Bills receivable, &c. Money at short ca1l

Total Liquid Assets Advances, &c. ..

Furniture and fittings Bank premises ..

CoMPARATIVE BALANc g-si-IEETS.

I 28th 2Rth 28 th :February, :Fehru ary, .\

February,

1929. 1930 . )931.

£'000. £'000. £'000.

. . . . 1,905 1,896 1,484

. . .. 63 44 48

.. .. 50 45 40

. . . . . . .. . .

. . .. 2,018 1,985 1,572

. . .. 434 439 439

. . . . 90 90 . 91

2,542 2,514 2,102

. . . . 57 47 38

. . .. 140 81 88

. . .. 171 213 145

. . . . 93 60 13

. . . . 208 19 2 92

.. . . 669 593 376

. . . . 1;770 1,805 1,592

.. .. 17 17 16

. . .. 86 99 11 8

2,542 2,514 2,102

28th

September, 1931.

£'000.

1,213 40 40 146

1,439 439 32

1,910

16 154 133 19 ..

322 1,444 21 123

1,910

Betwe en 1st March, 1929 , and 28th September, 1931, deposits fell by £691 ,000, but advances were reduced by only £326 000. The demands

1705

150

BANK FAILURES.

of the depositors were met by realizing liquid assets, and borrowing from the Commonwealth Bank on overdraft on the security of Commonwealth bonds. \Â¥hen further realization or borrowing was impossible, the Bank was forced to suspend.

360. The immediate cause of the failure was the lo ss of nearly 40 per cent. of its deposits in eighteen months, and the inability of the Bank to obtain repayment of its advances. A very large propor­ tion of the borrowers were primary producers, who suffer;ed severely from the fall in the value of their products, and were unable to

diseharge their obligations to the Bank. For the same reason, primary producers, who had money on deposit, were compelled · to withdraw it. Others did so because they had lost confidence in the Bank. 'It appears also that insufficient provision had been made for doubtful debts.

361. r.l'he balance-sheet prepared immediately after suspension showed that the Bank was not in a hopeless position. Its capital was still intact, and some reserves remained. The first report of the liquidators showed an estimated surplus of assets over liabilities of about £379,000 after providing for anticipated losses. No doubt many of the advances "\Vcre "frozen", but had these been nursed, it is probable that a substantial proportion would have been recovered. Had it been possible to allow debtors time to get their affairs :into order, there is no doubt that a larger amount :would have been realized, and that shareholders Vi'ould have received a substantial proportion of their capital. But a liquidator cannot, in justice to the creditors, carry on debtors indefinitely. The debts were t.:1e creditors received 19s. 9d. in the £1, and the shareholders received nothing-. ·

362. 'rhe circumstances of this liquidation show that, if a bank has to be liquidated, it is desirable, in the interest both of the

depositors and of the. shareholders, that there should be an orderly reaUzation under the direction of the Commonwealth Bank.

The Federal Deposit Bank Lim,itecl". 363. This institution, incorporated in Queensland, ::tnd operating in Brisbane, was really a building society, although it carried on some banking functions. It received deposits and made advances. Normally about half its deposits were on current account, and half on fixed deposit for periods not exceeding two years. Its advances were partly on overdraft and partly on fixed long-term loans under building society tables. The latter were estjmated to be between two-thirds and three-fourths of the total advances.

36{ At the 30th September, 1930, the deposits amounted to £986.000. and the advances to £992)000. Having regard to the-terms

151

BANK FArLurms.

on which deposits 1vere accepted, and loans made, there is no doubt the advances were too large. 'l'he general uneasiness caused by

the suspension of the Government Savings Bank of New South -wales, and later by the suspension of the Primary Producers' Bank of Australia Ltd., resulted in an increasing demand for the repayment of deposits, and even where :fixed deposits were not -vvithdrawn on

maturity, they were frequently placed on deposit at call. 365. A few weeks before the suspension the Directors of the Bank sought assistance from one of the large trading banks, which released the amounts which it held on :fixed deposit, and advanced up to se

per cent. of the value of Commonwealth Government securities held by the F ederal Deposit Bank. rrhis proved to be inadequate, and an application for assistance was made to the Commonwealth Bank, which came to the conclusion that the circumstances 1vere not such as justified Commonwealth Bank action. The Federal Deposit Bank

was notified of this decision on 3rd September, 1931 , and payment "vas suspended next day. 366. 'l 1he following table shows the balance-sheets of the Bank at 30th September, 1930, and the date of suspension (4th SepteTnber. 1931) :-

THE FEDERAL DEPOSIT LIMITED.

30th Se pt.err"

------ £'000. £'000. Liabilities-Capital 328 32 8 Reserves .. 85 85 Profit and loss 25 25 438 438 Bank overdraft 165 Deposits 086 690 Creditors 15 6 1,439 1,299 • .o\.ssets- Debtors 2 10 Investments .. l l Government securities .. 218 248 Fixed deposits 94 Bank 5 77 390 336 Loans and advances 993 904 Premises 56 59 1,439 1,299 F,rom these it will be seen that, while deposii.s had been reduced by £295,000, advances had been reduced by only £88 ,000. The

152

BANK F AILVRES.

demands of depositors had been met by realizing liquid assets, and by means of an overdraft of £164,000 granted by one of the trading banks. . Eventually the business of this Bank was taken over by the Brisbane Permanent Building and Banking ·Company Ltd. Arrangements were made to pay the depositors in full by instalments extending over a number of years, and it is expected that, on com­ pletion of these payments, shareholders will receive in cash and shares of the Brisbane Permanent Building and Banking Company Ltd. an amount approximately equivalent to the nominal value of their shares.

153

CHAPTER IV.

THE AUSTRALIAN FINANCIAL SYSTEM IN 1936. 367. The Australian financial system consists of the Common-· wealth Bank of Australia, the trading banks; the savings banks, and a number of other financial institutions of various types. It is

proposed only to indicate briefly the functions of each of the types of banks and other institutions, and to show the part of each in the system. ColVIMONWEAL'l'H BANK Aus1'RALIA.

368. The Commonwealth Bank of Australia is the publicly-ownccl and controlled central bank of Australia. It was established by an Act of the Federal Parliament in 1911. rrhe development of its structure and functions has been traced in Chapter II. It comprises a Ge:rieral Banking Department, a Note Issue Department, and a

Hural Credits Department. In addition, the Commonwealth Savings Bank of Australia, although legally a separate institution, is under the control of the Board of the Commonwealth Bank. 369 . The Commonwealth Bank is governed by a Board of

Directors, consisting of the Governor of the Bank, the Secretary to the Commonwealth rrreasury, and six other Directors appointed by the Common1vealth Government. The management of the Bank is in the hands of the Governor, who is the chief executive officer. rrhc

capital of the Bank is £4,000,000, which was, in 1924, transferred from t he bank Heserve Fund and Hedemption Fund to the Capital Fund. The profits of the General Banking Department are allocated equally to the Bank Reserve and to the National Debt Sinking Fllnd,

and the 11rofits of the Note Issue Department are appropriated to the Treasury. On 31st December, 1936, there were 259 branches in Australia, two in London, and one in Rabaul, in New Britain. The summarized accounts of the various departments of the bank are set

out in tables 54 to 56 of the Appendix.

THE NrNE TRADING BANKS.

370. The following list sho'NS the nin e trading banks in the order of their establishment:-Year. Bank of N ev;r South Wales 1817

The Commercial Banking Company of Sydney Limited 1834 The Bank of Australasia 1835

The Union Bank of Australia Limited 1837

English, Scottish & Australian Bank Limited 1852

The National Bank of Australasia Limited . . 1858

The Bank of Adelaide 1865

The Commercial Bank of Australia Limited 1866

The Queensland Nat ional Bank L imited . . 1872

154:

TnE AusTRALIAN ] 1 INANCIAL SYsTEM IN 1936. 'l'he capital structure of these banks is set out in ,-rable 51, and may be summarised as follows :-

,-rotal authorized capital Less unissued capital ..

CAPITAL SUBSCRIBED

Less uncalled capital ..

CAPITAL PAID UP

£'000 62,030 8,355

53,675 16,539

37,136

371. rrhe uncalled capital of the English, Scottish & .Australian Bank Limited, and of the National Bank of Australasia Limited, may be called up at any time. The uncalled capital of the Commercial Banking Company of Sydney IJimited and the Union Bank of Aus­ tralia IJimited, and the reserve liability of the Bank of Adelai de, the Bank of Australasia, and the Bank of Nevl South \Vales, can be called up onJy in certain contingencies. The words used to describe these differ to some extent, but the general purport is that the

amounts can be called up only in the event, and for the purpose, of liquidation if the proceeds of the assets are insufficient to meet the ljabilities.

372. Ea.ch of these banks is controlled by a board of directors elected by the shareholders. The constitution of the Commercial Banking Company of Sydney Limited, the National Bank of Aus­ tralasia I.Jimited, and the Bank of New South \Vales, provides that no person shall be eligible or qualified to be or to act as a director if he is a director or paid oillcer of any other bank of issue. 'rhis i.e not contained in the constitution of the other banks, but in practice that principle is in that no director of any of the nine

trading banks is also a director of any other trading bank carrying on business in Australia.

373. Some of the directors of each· of the banks incorporated in England, and some of the members of the London Boards of .A.dvice of banks incorporated in Australia, are also directors of British banks which do not carry on business in Australia, including the Bank of England, Lloyd's Bank, the National Provincial Bank, the

Chartered Bank of India, Australia and China, the P eninsular & Oriental Banking Corporation, the Westminster Bank I1td., the Westminster Foreign Bank I1td., and the ·standard Bank of South Africa. lVIa11y of the directors of the barJ\:s incorporated either in Englmid or Australia are also directors of other financial institutions, ::-nr.h as Pastoral Companies, Life Assurance Companies, and Tn1stee

155

THE AusTRAI;IAN FINANCIAL SYs'rEM IN 1936.

Companies . In the case of the banks incorporated in England, control of pol1ey lies with the directors in that country. Extensive po\vers are delegated to the principal officer in Australia, and it is assumed that in determining its poUcy the board ,,vill be guided to a very great extent by his r ecommendation. The policy of the banks incorporated in Australia is determined by the directors in Aus­ tralia. Some of the banks incorporated in Australia have local Boards

of Advice, either in London, or in .A.ustralian capital cities other than that in whjch their head office is situated, but the functions of these are merely advisory.

374. The following table shows the domicile of shareholders and the percentage of the total capital held by each group :--NINE TR.ADING BANKS-AUSTR.ALIA.-DOlVIICILE OF ISSUED SHARE CAPITAL AND OF SHAREHOLDERS, 1985- 36.

-

I Domicil e of Sh:1reholding. Six Hanks with tiead Three Banks with Head

I

Offi ce in Australia. Offi ce in England.

Amount of Capital.•

I

A mount. I en tage Amount. I Percentage of Total. of Total. £A. £Stg.

In Australia . . .. . . 21,550,463 78.6 2,772,420 20.6

In New Zealand . . . . .. 2,642,303 9.6 2,042,980 15 . 1

Elsewhere . . . . .. 3,243,596 11.8 8,684,600 64.3

Total . . . . .. 27,436,:362 1 100 .0 13,500,000 j"loo.O-

Number of Number. I Pm•ntoge I N nmber. Percentage of Total.

I

of Total.

I

In Australia . . . . .. 31,638 68 . 7

I

4,255 17. 0

In New Zealand . . . . .. 6,450 14 .0 5,063 20.2

Elsewhere .. . . . . 7,946 17.3 15,725 62.8

Total . . . . . . 46,034

I

100.0 I

25,043 100 .0

'

Average Nominal Sbareholding per Shareholder. £A. £Stg.

In Aul!tralia . . . . . . .. 681.2 651.6

In New Zealand . . . . . . . . 409.7 403.5

Elsewhere . . . . . . .. 408.2 !552.3

Total .. . . . . . . 596.0 539. 1

• Excluding uncalled capital of the Co mmer cial Banking Compan y of Sydney Ltd . 739,000) a nd of t.r1e Union of Au stralia ] ,t el. (£Stg. 8.000,000), which are r eally in t.he nat ure of reser ve rapital, ln that they may he calle

15G

'rr-rE FrNANcrArJ SYs'l'El\1 r N 1936.

37 5. 'l'JJis table shmvs the analysis of shareboldings, irrespective of domicile-NINE TRADING BANKS- AUSTRALIA.-ANALYS IS OF SHAREHOLDINGS, 1935-36 .

. Number elJOld eJs. Shar eholders .

Nomina l Shar e Capital*

Six BANKS WITH HEAD OFFICES I N A usTnALI.A.

Not exceeding £500 £501 to .£1,000 .. £1,001 to £2,500 £2,501 to £5,000 Exceeding £5,000

Total

Not exceeding £500 501 to £1,000 ..

1,001 to £2,500 £

£

£

E 2,501 to £5,000 xceeding £5,000

Total . .

No. P er cent. £A. Per cent.

34,068 74 . 01 6,086,384 22.18

6,192 13 .45 4,583,613 16.71

4,063 8.83 6,296,372 22.95

1,184 2 . 57 4,077,030 14.86

527 1.14 6,392,963 23.30

46,034 100.00 27,436,362 100.00

THREE BANKS WITH HEAD OFFICES IN

No. Per cent. / £Stg. ' Per cent.

.. 18,830 75. 19 3,869,660 28.66

. . 3,390 13 .54 2,461, 700 18.24

. . 2,067 8 . 25 3,266,380 24;.20

.. 529 2.11 . 1,845,860 13.67

.. 227 0 .91 2,056,400 15 .23

-

13,500,000 1 .. 25,04:3 100 .00 100.00

£A. 178.7 740.2 1,549 . 7 3,443 .4 12,130.9

596 .0

£Stg. ' 205 .5 726.2 1,580.3 3,489. 3 9,059 . 0

539.1

• Excluding uncalled capita l of the Commercial Banldng Company of Sydney Ltd. (£A4, 739,000) and t he Union Bank of Australia Ltd. (£Stg.8,000,000), which are really in the nature of capital in that such may be called up only in the event of, and fo r the purposes of, liqu idation .

The table showing the analysis of shareholdings is, however, subject to the qualification that in every case, shares h eld in trust by the same nominee are aggregated, and included in the class appropriate to that numbr,r. If each of these ben efi ciaries ,,vere regarded as individual owner, the number of sh,a reholders in the lo·wer categories ·would be increased, ancl the number in the higher categories

diminish eel .

376 . In the case of some of the banks, there is a limitation of

the number of shar es ,,vhich any individual shareholders may hold. No memb er of the Commercial Banking Company of Sydney Limited, may hold more than 12,000 shar es (that is, about 3 per cent. of the total number issued) . The largest individual holding is less than 7,000. No member of the Bank: of New South Wales may hold more than 17,560 shares . 'rhe largest individual holding is 2,108 shares. No member of the Queensland National Bank I...Jimited may hold more than 5,000 shar es, or about 1i per cent . of the total number issued. Subject to the foregoing, there is no r es triction on shar e­ holdings; other than the pmver gen erally conferred upon the directors hy the Art icles to decline to register any transfer.

157

'llHE AusTRALIAN FINANCIAL SYs'rElVI IN 1936.

377. The voting rights of members differ in the case of the various banks. The general rule is. that every shareholder present at a general meeting is entitled to one vote. In the event of a poll, share­ holders of the Bank of Adelaide, the Bank of Australasia, the Com­ mercial Bank of Australia Ltd., and the English, Scottish &

Australian Bank Limited, have one vote for eaeh share held. In the case of each of the other banks there is a limitation on the munber of votes lli'hich a shareholder may exercise, namely:-Votes .

rrhe National Bank of 1-l.ustralasia Limited 100

'rhe Union Bank of Australia Liniited 4

. The Commercial Banking Company of Sydney Limited 25

Bank of New South \Vales 200

rrhe Queensland National Bank Limited 10

378. The trading banks are engaged mainly in financing commerce and industry. They receive deposits from many sources, and make loans to persons engaged in trade, industry and finance, and to others.

379. 'l'he banks accept both fixed or term deposits, and free or current accounts. Deposits, · both fix ed and current, represent the -savings and 1vorking capital of many section s of the community. l',ixed deposits are accepted for terms varying generally from three

to twenty-four months. The deposit cannot be withdrawn until the rnd of the term, except with the consent of the bank. The rate of interest is graduated according· to the length of the period for which the money is deposited. Rates are varied from time to time in general

conformity with the rise and fall of other interests rates, but the rate carried by a deposit l·vhen it is lodged applies until its maturity. Current deposits are balances of customers' credit accounts, with­ drawable by cheque, and repayable on demand.

380. Advances are made in the form of overdrafts, which are not granted for definite periods, but are repayable on demand. In practice, however, many overdrafts, particularly those against the security of landed property, are allowed to continue for long periods. It is usual to require security to be lodged for overdrafts, but they are sometimes granted without security. A limit as to amount is

usually arranged, but interest is charged only on the daily balance. Advance rates are not fixed for a definite period, but may be altered by the bank at any time. · The rates vary somewhat, according to the type of account and the class of security held by t he bank, and are influenced by the rates paid on fixed deposits.

158

THE AUS'rRAI,IAK FINANCIAL SYSTE::If I N 1936.

· 381. The trading banks assist in financing overseas trade in several w;;Jys. Through their London office s and their representatives abroad, they issue letters of credit and arrange for the presentation or issue of drafts relating to Australian export or import transactions, in any commercial centre in the world. This enables Australian exporters to obtain payment in Australian· currency immediately goods have been shipped and enables importers to pay for imports in Australian currencv. The corresponding se ttlements overseas are eff ected by the banks in sterling or foreign currencies.

382. As sub-underwriters to the Commonwealth Bank, the trading banks have helped to float public loans, and they par ticipate in the Exchange Mobilization Agreement, by means of which funds are provided in London to meet government commitments there.

383. Among other services t o their customers are the safe custody of securities, the collection of inter est coupons, and assistance to cus tomers in handling their business affairs. They provide cheque facilities, and also facilities for the transfer of funds from one point to another in Australia and between Australia and overseas coun­ tries. The g-reat bulk of the commercial and financial transactions in Australia ar e settled by these means.

384. The business of the trading banks is carried on over a

wide area through branches and agencies. Authority is delegated t o the managers of branches in accordance with their status and ex perience. Agencies ar e under the control of branch managers.· The following table shows the number of branches and agencies within Australia of these banks at 30th June in each year from 19 26 to 1936:-

TRADING BANKS(a)- AUSTRALIA.- EXCLUDING COMMONWEALTH BANK OF AUSTRALIA. NUMBER OF BRANCHES AND AGENCIES WITHIN AUSTRALIA.

A gc11ci es and .

A t 30th June- Branches. ltcceiving

Offices.

Total.

No. No. No.

1926 (b) 00 0 0 0 0 00 2,180 799 2,979

1927 (b) 00 ' ' ' ' 0 0 2,227 840 3,067

1928 (b) .. .. 0 0 0 0 2,317 842 3,159

1929 (b) . . '' .. . . 2,424 917 3,341

1930 (b) .. .. .. . . 2,455 921 3,376

1931 (b) .. 0 0 0 0 .. 2,408 793 3,201

1932 00 ' ' .. 00 00 ' 2,291 709 3,000

1933 0 0 00 00 .. .. 2,300 713 3,013

1934 00 00 .. 00 00 2,305 721 3,026

1935 0 ' .. 00 0' 0 0 2,314 70.5 3,019

1936 .. .. 00 .. 0 0 2,352 717 3,069

(a ) t,ratliJtg banks, in cluding allla.l galll atetl sin ce 1926 with any o f t hese nine.

(b) Figurt'.s for these y ea.re nrc , to " s JJ ght .extent,

159

'I'HE AUS'I'RALIAN FINAKCIAL SYSTEM lN 1936.

385. Inter-bank clearings of cheques are made tluough clearing houses established in every capital city and in some of the larger country towns, and settlements are effected by cheques on the Com ­ monwealth Bank. Each bank contributes to a pool as a guarantee against default in settlements. This is vested in trustees and the

total amount in the various "pools" throughout Australia 1s approximately £2.5m. 386. The organiza tion described as "The Associated Banks of Victoria", consists of the fiv e trading banks which have their head

office or principal Australian office in Melbourne. The Bank of New South Wales and the Commercial Banking Co. of Sydney Ltd. are also members .in respect of their Victorian business. The associa­ tion ha.<; no formal constitution, nor is it registered as an association.

Representatives me et regularly each month, or oftener if necessary, to discuss matters of common interest. Decisions are not binding llpon dissentient members, and the association is not in any sense a controlling body. 'l'here is no association quite similar in any other

capital city, though in some the managers of the banks meet, when required, for the di scussion of local matters of common interest.

OTHER 'l'RADING BAN KS.

387. In at1dition to the nine trading banks there are four other banks which carry on trading bank functions, though on a limited scale:

'l'h e Balla·rat Banking Company L-imited. 388. This Bank carries on business only in Ballarat and the surrounding districts. It is a limited company, incorporated in 1865. At 30th June, 1936, its balance-sh eet showed t he following

particulars :-

Capital paid up lteserves and undistributed profits Deposits Advances Rank of N ew Z ea.land.

£

153,000 107,000 477,000 600,000

389. 'l'his Bank has two branches in Australia, which mainly handle the Australian business of the Bnnk on behalf of its New Zealand and London branches . There is a local director in Melbourne and also on e in Sydney . For the quarter ended 30th June, 1936, the average

advances in Australia ''" ere £1.75rn. and the average deposits in Aust ralia £1.52m.

Compto'ir National D'Escompte de Pat·is. 390. 'l' his Bank is in corpora ted in France. It has two branches in Australia, bu t there are no Aust ralian shareholders or directors. The

171 5

160

']_lHE AUS'l'RALIAN FINANCIAL SYSTEM IN 1936.

Bank accepts but does not seek deposits, and makes few advances. Its main function is to facilitate trade between Australia and F rance. The Bank's rates in Australia for deposits and advances conform to those of the Australian banks. It deposits its available funds with the

Commonwealth Bank

The YokohMna Specie Ba.nk Limited. 391. This Bank is incorporated in Japan. Its only Australian office is in.·Sydney. 'rhe Bank has no Australian shareholders or directors. Its Australian deposits and advances are on a small scale, and most of its customers are J-apanese nationals. Its main function is to facilitate trade between Australia and Japan. It follows the rates of the Australian banks for deposits and advances. It deposits its available funds with the Commonwealth Bank.

392. The figures of the four banks last mentioned have not been use d in any of the statistics included in our Report.

SAVINGS BANKS.

393. 'rhe largest of the savings banks 1s the Commonwealth Savings Bank of Australia, which operates in all the States. In Victoria, South Australia, and Tasmania there are savings banks incorporated under the State law and managed by Commissioners or 'rrust ees appointed or approved by the State Government. -

394. 'l_lhe only funds in the nature of capital consist of accumu­ lated profits which have been carried to reserves. Otherwise, the 'vdwle of the funds controlled by these institutions consists of deposits. 395 . The original function of the savings banks vvas to encourage thrift ahd attract deposits from persons possessing small or moderate means. In recent years progressive increases in the amount of the deposits upo)n ·which interest is payable, have encouraged many persons to place comparatively large amounts of money on deposit with the savings banks: As savings bank deposits are r epayable on demand, or at very short notice, this provides a profitable avenue for the investment of call inoney at a rate of interest close to that paid by the banks on some fixed deposits. In this way savings banks compete with trading banks for short-tern1 deposits.

39 6. The savings banks deposit substantial amounts with the Common·wealth Bank or 1vith the trading banks, usually on fixed Jeposit. In this respect the savings banks play an important part in the general :financial system, because they collect and make avail­ able to the trading banks an aggregation of small deposits. Savings

banks also invest in mortgages · or fixed loans, . direCtly or

through . the medium of a Credit Fancier Department, and in Governm ent or 1\rfunicipal securities.

161

THE AUSTRALIAN FINANCIAL SYSTEM IN 1936.

AND AGH.ICUL'l'URAL BANKS.

:597 . In every State some special type of organization has been established, mainly to provide fixed loans for primary producers. In New South Wales this is done by the Rural Bank of New South \Vales, and in South Australia by the State Bank of t3outh Australia.

Each of thes e banks is controlled by Commissioners appointed by the State Government, and its funds are mainly provided by the issue of debentures guaranteed by the State, or by advances made by the State, and to a small extent by deposits from the public.

398. In Victoria this function is performed by a Department of the State Savings Bank, known as the Credit Foncier Department. Its funds are provided by the issue of debentures, some of which !ire held by the Sa'-'ings Bank and some by the public. In land, Western Australia and Tasmania, the corresponding institu­ tions are, in effect, State Government departments.

399 . Iu addition to the or ganizations described, some of the State Governments have set up departments to make advances to returned soldiers and others for the purpose of establishing and maintaining them on the land. These form no part of the banking system, although

they provide credit which , if they did not exist, would have to be obtained from other sources.

p AS'l'OH.AL FINANCE COMPANIES. 400. The part played by the pastoral finance companies in the financial system may be described as that of providing both and long-term capital for primary producers, mainly to wool-growers.

As the greater proportion of their funds is provided by share or debenture capital and reserves, they supplement the credit facilities provided by the banks. 401. rrhe l> a:sis of the activities of these companies is the sale of

wool, and their financial operations have been built up as a comple­ ment to this. :Most of them act as uge;nts for the buying and

selling of their clients' livestock, and for the sale of station properties. These companies also perform a variety of other services including-( a) Storage and other facilities for the handling and display of 1vool before sale and for shipment after sale. Similar facilities are provided for other commodities, for example, skins, hides, tallow,

grain, live-stock, &c. (b) 'l'he sale to pastoralists, farmers, and others, of station

supplies, farm r equisites, &c ., including a wjde range of general merchandise. 402. The chief A.ustralian pastoral finance companies are twenty in number, and - include some of the large ·t 1 ublic compani et:: in

Australia. Many of the directon are also directors of banks,

insurance companies, and other commercial or trading com1 panies. F.258l.- ll

162

'rHE Aus'rRAUAN li"'rNANCIAL SYS'l'El\t[ IN 1936.

403. Pastoral finance companies borrow on overdraft at certain times during the year when their , customers' demands are at the maximum. 'rhey do not usually seek deposits from the public but accept them from their own customers.

404. Short-term or seasonal advances are made usually to

pastoralists or farmers who will use the services of the companies. rrhese advances are made some time before the produce is sold, and are generally used by the primary producer as working capital. The total amount of seasonal advances outstanding varies considerably during the year, usually reaching a peak in the third quarter, and fa.lljng to the lowes t point during the first three months of the year.

405. It is not the practice of the companies ,. to make long-term loans, but loans r epayable on demand are frequently carried on for an indefinite period. Interest is usually charged on the daily balances, and the rate may be varied from time to time during the currency

of a loan. In this respect, these loans resemble advances made by the trading banks.

406. Some of the companies permit a limited number of their clients to draw orders upon them which, in many respects, are equivalent to cheques, but with the extension of banking facilities the use of these orders is diminishing. l\1ost of the foreign exchange business of the companies is transacted through the banks.

406A. The follo"\ving table s}lovvs the aggregate amount of the chief liabilities and assets of the twenty principal pastoral finance companies for the year 1936 :-TWENTY PASTORAL FINANCE COMPANIES- AUSTRALIA.

PRINCIPAL LIABILITIES AND ASSETS, 1936. (In thousands of pounds.)

Particulars.

£'000.

Total share capital paid up . . . . .. . . . .

Debenture capital-(i) In Australia. .. .. .. .. . . 212

(ii) Overseas .. .. .. .. . . 10,994

Total debenture capital .. .. .. 11,206

Reserves and undistributed profits .. .. .. . .

TOTAL CAPITAL AND RESERVES . . ... . .

Deposits and customers' credit balances-(i) Bearing interest .. . . .. . . 3,842

(ii) Not bearing interest .. . . . . . . 326

Total deposits and customers' credit balances .. A,l68

. TOTAL LOANS IN AUSTRALIA .. ..

1936.

I

I

I I

£'000.

15,802

11,206 9,008

36,016

4,168

25,232

163

THE AUS'l'RALIAN FINANCIAL SYSTEM IN 1936.

LIFE AssuRANCE SociE'l'IES AND CoMPANIES.

407. l\Io.st of the large concerns ·which carry on the bu1:iiness of Lif e assurance are mutual societies or companies, but some have a share capital which is r elatively . small. They are cmitrolled by J.irectors elected by the policy holders or shareholders as their constitution may provide. Many of the directors are also directors of banks and other companies.

408. Life assurance societies differ in certain respects from the iinaucinl institutions previously described. '"fhey regularly receive a large income from premiums and interest on investments which is normally in excess of their immediate requirements. They rely

npon the banks only for occasional overdraft accommodatim1, as fo r example, when large investments have temporarily depleted their banking accounts. 409. The influence of the life assurance societies upon the

fmancial system is due to the magnitude of their funds, which are the amounts retained and invested to provide for the eventual

payment of life and endowment policies. Under normal conditions these funds increase each year and as a result these societies usually have large amounts available for investment. 'rheir investments mainly consist of Government securities, loans on mortgage and loans

on policies. 'l'hey do not, as a rule, make loans repayable on demand. In recent years there has been a tendency to prefer Government securities to mortgages, partly because of moratorium legislation and p artly because of uncertainty in regard to the values of real property;

410. A development in recent year s is a combination of a mortgage loan a life policy. A collateral endo'ivment policy is attached to the mortgage which provides for the repayment of the mortgage at the expiration of a specified term of years, or, in the event of the

death of the mortgagor, if that should first happen. 'rhe t erm may extend up to twenty years, and a lower rate than u sual is charged for the endmvment pobcy. These loans provide the company with an investment and a premium income.

411. Th e accounts of the societies or companies that ca rry on business only in Australia are stated in Australian currency. In the accounts of those that carry on business out of Australia, Australian pounds, English pounds ancl New Zealand pounds are all treated as being of the same value. This is explained on the grounds that

premiums and policies are payable in the currency of the country in 1v liich the policy was effected, and that the assets retained in each

c:ountry bear some relation to the liability of the society under its poli cjes payable in that country. It is considered, therefore, that it is unn ccc:-:;sa ry to convert all amounts to a uniform currency.

1719

164

THE AUSTRALIAN FINANCIAl) S YSTEM 1936 .

411 A. The following tables, compiled from figures published by the Commonwealth Statistician in the Finance Bulletin, show details of the Australian assets, an d of th e Australian ·receipts and expendi­ ture, of these co.mpanies for the years 1926 to 1936.

LIFE ASSUHANCE COMP ANIES- AUSTHALIA.

I Govern-, ,., I m ont and llfort- y · munici pal gages. Securities. ---

I £m. £m.

1926 60.4 24.1

1927 62.2 29 . 1

1928 65.2 32.4

1929 70.6 34.6

1930 72.8 37.8

1931 74.3 37. 4

1932 79.5 36.6

1933 82.3 36.6

1934 88.4

38.5 1 1935 94 . 9 40.9 1936* 99.6 45.1t

• rartly estimated.

(a) AUSTIULI AN A S SE T S, 1926 1'0 1936.

(In millions of pounds.)

I

Ou t -

Loans on Landed Other standing

T

Com - and Invest- premiums, C11.sll . panies' House ments and Int er est, Policies. Property. Loans . Dividends and Rents. - - - -£m . £m . £m. £m. £m. 10 .5 4.1 2 .8 1.9 2.1 11.6 4.5 2. 9 2.1 2.6 12 .7 4.9 3.2 2.3 2 . 7 13 .9 5.3 3.3 2.5 2.0 16.8 5.7 3.6 2.7 2.2 19.1 6.0 3.4 2 .7 3 . 1 19 . 8 6.3 3.9 2 .6 2 .9 20.3 6.7 4.4 2.7 3.2 20.6 7.3 4.6 2 .6 3.7 20.8 8.4 5.6 2 .7 3 .0 21.1 9.8 6.3 2 .7 2.3 .<\ I! Total

Other Australian Assets. Assets.

£m. £m.

3 .1 109 .0

3.3 118.3

3.6 127.0

2.4 134.6

2.4 144 .0

2 .3 148.3

2.2 153.8

2 .2 158.4

2.6 168.3

2 . 8 179.1

3.0 189.9

t About half the mortg11.ge lo ans were in rural di stricts, and about half in urban districts.

Year.

1926 .. . .

1927 . . ..

1928 .. . .

1929 . . . .

1930 . . . .

1931 .. . .

1932 .. . .

1933 .. ..

1934 . .. . .

1935 . ... . .

19.36* .. . . ..

·- -

(b) AusTRALIAN RECEIPTS, 1926 'l' O 1936.

(In millions of pounds.)

I

Assurance, Interest, Endowment, All other and Annu ity Dividends and lteceipts. l'remiums. ltents. £m. £m. £m.

11.5 6.0 0.3

12.1 6.5 0.3

13.1 7.1 0.7

13 .8 7 . 6 0 .3

14.1 8 .0 0 .4

13.6 7.3 0.4

13.6 6.4 0.4

14.1 6.6 0 .3

15.1 6.9 0.3

16 .0 7.2 0.1

17.4 7 .8 0 . 1

• Partly estimated.

Total Austmlian R eceipt s.

' £m.

17. 8 18.9 20.9 21.7

22.5 21.3 20.4 21.0

22.3 23.3

I

25.3

165

'rrm Aus'rRALIAN FINANCLAr, 8YS'1'Elvr IN 1936.

(c) A F STBALIA N ExPENDIT URJJ;, 1926 TO 1936.

(In millions of pounds.)

j J Cash \ I

Claims and . bonuses , , . 1· Total

Year. !\.nnuities Surrenders. \ paid to oft Odt:t1e.r. · 1 Australian

. . nolicv- .1.ana,emen ·1 xpen 1 ·Ill e. E d' t t • . xpen 1 ure.

I

holders.

-------------------- ------·------------

£m. £m. £m. £m. £m. £m. £m.

1926 5.6 1.2 0.4 1.5 1.3 0 . 6 10.6

1927 6 ') 1.1 0.5 1.5 1.3 0 .6 11.2

1928 6.4 1.2 0.5 1.7 1.4 0.8 12.0

1929 6.9 1.4 0.6 1.8 1.4 1.2 13.3

1930 7.0 2.1 0 . 8 1.6 1.4 2 .1 15.0

1931 7.4 3 . 0 0 . 9 1.4 1.4 2.7 16.8

1932 7.6 2 .6 0.7 1.4 1.5 1.8 15.6

1933 7.8 2.3 0.6 1.5 1.5 1.6 15.3

1934· 8.1 2.1 0.3 1.7 1.5 0.8 14.5

1935 8.8 1.8 0.3 1.9 1.6 0.7 15.1

1936* 9.3 1.8 0.3 2.1 1.7 0.7 15.9

. !>ar tly es timated . TRUSTEE CoMPANIEs.

412. 'l'rustee companies constitute an importanS factor in the investment market. They are all limited liability companies,

incorporated under State law. lVIany directors of these companies are also directors of banks and other companies. Th e shareholders' funds of the trustee companies are relatively small. They do not accept and make only occasional use of bank overdrafts.

'rheir importance lies in the large volume of trust fnnds whicb they control; wJ{ich aggregate approximately

413 . 'rhe investment of trust fnnds is governed by the State laws, which prescribe the type of investment allowed. vVh er e the company has discretion, the trust funds are usual1y invested either in

Government securities or upon mortgage. In r ecent years, there has been a tendency to prefer Government securities, partly because of moratorium legislation, and partly because it has been difficult to find an adequate supply of suitable mottgages.

413A. The follo"ring tables sho-vv the liabilities and assets of the twenty-one trustee companies carrying on business in Australia, and the amount an d method of investment of the trust funds which they control , for each of the years 1927; 1931 1935 and 1936 .

172

l GG

T HE AUS'l'RALIAN FINANCIAL SYS'l'El\r JN 193 G.

T RUSTEE COMPANI ES- A (a ) L I AJ3TLI'l'I.ES AN D AssETS OF 1'1-I E C oMPA.:sm s .

(In millions of pounds.)

- - 1927.* 19_3 L*

I 1935.* I

£m. £m . £m .

Liabilities-Capital p aid-up .. . . 1.15 1.36 1. 36

Reserves and undistributed profits .. 0.91 1.08 1.15

Other liabilities .. . . .. -0.14 0.15 0 .16

Total Liabilities . . . . 2 .20 2. 59 2 . 67 /

Assets-Government and Municipal Securi ties 0 .78 0. 79 0 .86

Mortgage and other loans .. . . 0 . 36 0 .48 0 .46

R eal property . . .. .. 0.80 1.05 1.08

Ot her assets . . . . . .

0. 27 0. 27

Total asset s . . .. 2 . 20 2.59 2.67

• Part ly estimated.

1936 .

£m.

1. 36 1.1 9 0.15

2 .70

0 .83 0.50 1.11 0 .26

2 .70

(b) APPROXH 1ATE 1 NV ES'l'l\1E NT OF TRUST F UND S ADMI N I ST ERED BY THE COMPANIES.

(In millions of pounds.)

Trust F und

I

1927. * 19:H .* 1935 .• 1936.*

I

£m. £m. £m. £m.

Government and Municipal Securities 39 47 59 62

Mortgage and other loanst . . . . 28 39 38 37

Real property . . .. .. 30 44 51 51

Other assets (including shares in

companies) .. . . .. 39 56 ... 65 69

Total Trust Frind Assets .. I

136 186

I

213 219

• Figures for each year, especially 1927 and 1931, are partly estimated. t About 45 per cent. of the mortgage loans were in rural districts, and about 55 per cent_ in urban cHstricts.

SociE'l'IES.

414. Building soci eties exist in every State, and are usually incorporated under the statute law of the State co ncerned. 'fheir function is to assist people to acquire homes or business p remises for occupation or investment. The capital provided by the shar e­ holders may be augmented by subscriptions for terminable or participating shares which from time to time are repaid. This results in some variation of the aggregate capital invested in this type- of company. The shareholders are usually small. F ew of the c1 irec tors are also directors of banks or the larger financial institutions.

167

THE AUSTRAI.JIAN FINANCIAL SYSTEM IN 1936.

415. :Most of the capital used by these companies is provided by their shareholders. They make relatively small use of overdraftfl, usually only to meet a temporary emergency. Some seek deposits; others will accept deposits but do not seek them.

416. A low rate oE interest is paid on call deposits. ThA 1·ate on fixed deposits is a little higher than the rate paid by the trading banks for a like term. 1,he rate charged on loans is limited to some extent by the competition of private mortgagees and the credit foncier institutions. Most of the loans are made under Building

Society Tables, that is to say, the amount borrowed, with interest, is repayable by periodical equal instalments (usually fortnjghtly or monthly) over a term of years. rrhe rate of interest charged on thes e loans is usually higher than that charged on other mortgages.

To some extent this is explained by the increased cost of collection and supervision, and by the fact that the private lender does not this class of business owing to the difficulty of r e-investing

the small amounts of capital included in each payment. The

proportion of loans on mortgages, that is, where the wh.ole of the principal is repayable at a fixed date, is relatively small.

416A. The following tables, compiled from figures published by the Commonwealth Statistician in the :B,inance Bulletin, show the magnitude of the operations of registered building and juvestment societies in Australia for the years 1927 to 1935.

BUILDING SOCIETIES- AUSTRALIA.

LOANS MADE .AND REPAID, AND LIABILITIES .AND ASSETS, 1927 TO 1935.

Liabilities. Ass eta.

Loans Repay· Granted ment of Year. during IJoans Capital Other Total Advances during on OtbeJ Total year. and Deposits . Liabili· Liabili· Mort- Assets. Assets. year. Reserves. ties. ties. gages. ------ --------------- ---£m. £m. £m. £m. £m. £m. £m. £m. !m. 1927 .. 2.2 2.0 6.0 2.7 0.5 9.2 8 .6 0.6 9.2 1928 .. 2.5 2.5 9.2 2.8 0.6 12.6 11.4 1.2 12.6 1929 . . 2.8 2.8 9.6 2.9 0.7 13.2 12.0 1.2 13 .2 1930 . . 2.4 2.6 10.0 3.0 0.6 13.6 12.4 1.2 13.6 1931 .. 1.3 2.1 10.1 2.8 0.4 13.3 11.9 1.4 13 .3 1932 . . 1.0 1.8 10.1 2.6 0.3 13.0 11.4 1.6 13 .0 1933 . . 1.2. 1.9 9 .8 2 .5 0.4 12.7 11.0 1.7 12 .7 1934 .. 1.5 2.1 9.8 2.6 0.2 12.6 10.9 1.7 12.6 1935 .. i.s 2 . 2 9 .6 2.5 0 .4 12 .5 10 .8 1.7 12.5

1 . I ' U

168

'l'HE .AUSTRALIAN FINANCIAL SYSTEM IN 1936 .

FIN A'NOE AND CAsE: ORDER CoMPANIES.

417. In r ecent years several types of companies have been

established to provide relatively short-term credit for particul_ ar purposes. These may be divided into two classes:-(a) 'l'he finance companies, which provide funds to finance the sale and purchase of specified goods on hire purchase

terms, as for example, motor cars and tn1cks, radio sets, refrigerators and elec tric domestic appliances. Some of these companies also :finance the purchase of stock for traders, and of plant and machinery for small manufacturer s. They also discount book debts. ( b ) 'E he cash order companies, which provide cash orders

or cash loans on personal security without any

stipulation as to the type of goo ds or services to be

purchased. These loans are repayable by instalments extending over a period usually not exceeding six months. The cash orders are mainly u sed for the

· purchase of drapery, clothing and boots.

418. 'rhe cash order business is . widely diffused throughout Australia and is carried on by a large number of companies and individuals. It is impossible to estimate its volume, but the evidence indicates that it varies with economic conditions, being great er i11 times of prosperty and less in times of depression. The companies included in both these cla.sses provjde most of the funds required out of shareholder s' capital and r eserves, but mAk e some u se of bank overdraft.

THE STOCK ExoHANG.ES.

419. The main function of the Stock Exchanges is to provide f acilities for bringing together those who desire to bny or selJ

Government or other securities, and shares in listed or approved companies. They also provide facilities fo r obtaining subscriptions t o new issues of Government securities and shares in companies. The Stock Exchanges as organisations do not provide capital for industry.

GENERAl_;,

420. :J'viost of the finance required by commerce and industry is provided by the organisations_ described, but there is, in addition, a large volume of private :finance pro"\rided directly by individuals and indirectly by solicitors and agents on behalf of clients. :Most of the pass through the banks, either as deposits or withdrawals)

but the capital thus provided is subject to littJe control or djrection by the banks.

PART II.

CHAPTER V .-PROPOSALS FOR MONETARY REFORM. CREATION OF CREDIT.

'1725

)

171

CHAPTER V.

PROPOSALS FOR l\1:0NETARY REFORM.

421. In the course of our inquiry, our attention has been directed to a number of proposals for the reconstruction, or amendment, of th e economic and financial systems. \Ve have been impressed by the manifest sincerity with which many of these views were propounded. Upon examination, however, we were of opinion that some of the

proposals were out:side the terms of our reference, but, in this part of our report, we deal with the more · important of the proposals that fall within then1.

DOUGLAS SOCIAL CREDIT.

THE 0U'l'LINE 01<' 'I'HE THElORY.

422. In the fu·st instance, we may set out the proposals which it is convenient to group together as "Social Credit", or "the Douglas Social Credit movement". rrhis group covers a diversity of individual opinions, and it ·will be necessary to amplify the outline later, but it appears that the common ground, or basic principles, can be briefly stated as follows:-:-

(a) the advocates point to the "paradox of poverty in the midst of plenty ", and to the wastage and destruction of produce, and the restriction of production, at times when many are in want; (b) they say that this state of affairs is due to a permanent

tendency towards a shortage of purchasing power-i.e., money in some form or other-and that the community is therefore unable to buy all the consumable produced; (c) they mean by this that the aggregate value, at retail

prices, of all the consumable goods and services put on the market, is always-or nearly always-greater than the aggregate money income .received by consumers (for example, wages, dividends and interest) which is

available to purchase the aggregate output. The A + B theorem is offered as a proof of these contentions ; ( cl) they propose that this shortage should be met by govern­ ment control of cr edit, and by either, or both, of the

following methods :-(i) a national dividend in the form of a weekly or

monthly payment to every individual in the eommunity;

172

PROPOSAI,S FOR .MONETARY REFORM.

(ii ) the sale of consumable goods at the " just price", ·which is a priQe less than the cost, including a margin of profit.. 'rhe sellers of such goods

wonld then be comp ensated for the amount lo st by them through selling at this r educed price;

(e) the money or credit for national and compen­

sator y payments would be issu ed by a "National Credit Authority", such as the Commonwealth Bank; (f) Por the purpose of ascertaining the shortage of power in any period, a national accounting would be

undertaken;

(g) rrhe shortage so ascertained would represent approximately the amount of credit or money that would be made avail­ able by the National Credit Authority, either in the form of a national dividend, or compensatory payments,

or by both these methods.

'rHE oF P uRcHASING PowER.

423. 'rhe fundamental idea of social credit is that there is a

permanent tendency t owards a shortage of purchasing power, but the expr ession-shortage of purchasing power-can be used in different 1va;ys 1 and it is n ecessary to have a clear understanding of what is alleged. If purchasing power is used in the sense of money income, nobody denies that, at all times, thc:;re is some shortage of purchasing power, so far as particular individuals are concerned. 'I'here are always some people who never have enough money to buy what is necessary for a r easonable standard of living. It is quite clear, also, that in times of depression, the total purchasj.ng power (or mon ey income of the communi.ty) is less than in times of prosp erity. In this sense, it may be said that ther e is a general shortage of purchas­ ing power in a depression as compared with the amount available in other times, B ut it nmst be clearly understood that the social credit theor y is not concerned with any shortage of money in either of these senses.

424. 'l'he social credit contention is that-save possibly in ;;t p eriod of boom or of exceptional export-the economic system, as a whole, does not, and never can, distribute to individual consumers all the money which the producers have to spend in the course of production. In other 'ivords, it is alleged possibly in these exceptional

periods.._:_the community, as a whole, never gets enough money, in the form of incom e, to buy all the commodities that are produced.

173

PROPOSAI,S FOR lVIONETARY REFORM.

rl'HE NA'l'IONAL CREDrr ..AccoUNT.

425. 'I'he first plank of the social credit platfor m is the " Gov ern­ ment control of credit", or- as some say-- the "National control of money". 'J.lhe advocates of social credit say that in the interests of the community, it is not desirable that banks, whose principal motive for existence is the making of profits, should have the power .

to expand or contract credit--or as the Douglas Credit advocates put it- the power to create money in the form of a debt to the banking :c:ystem, and to destroy it when repaid. This power, it is contended, should be in the hands of a national credit authority.

426. 'l'here seems to be some difference of opinion amongst tltesl' advocates as to how far this particular proposal should be carried. Some would prohibit any trading bank from making advances out of the money deposited with it. But this is not included in the proposal,

as generally outlined in the writings to which we have been referred. In this form, the proposal is that the Commonwealth Bank, or some •1ther authority, specially appointed for that purpose, should keep a national credit account, as the measure of the credit or money

available for issue.

427. This account would be "credited. with the value of the community's assets, both public and private, and with the com­ mercialized value of the population". rrhis means that a

valuation would be made of the capital assets of the country,

e.g. , land, roads, railways, waterworks, drainage, buildings,

plant, and machinery. No distinction would be made between public and private property. Property would be t aken at

replacement value, if in use, or, if not in use, at market value . . To this would be added ·a sum to represent " the commercialized value of the population", or, as we understand it , a capitalization of the earning capacity of every member of the community. On the other side of the account, we gather that there would be a debit for a

sum representing the existing supply of money.

428. From time to time, for example, annually, the nation al credit account would be credited with amounts representing the value of the total national production, which includes-( a) capital goods and consumable goods produced, at co st

includi;ng profit ; ( b ) imports; _

(c) capital appi·eciation (the incr ease in value) of land, \v orks, buildings, and the like,

174

PROPOSAJ.1S FOR l\10NETARY REFORM.

and debited 1vith amounts representing the value of the total national eonsnmption, which includes-( d ) total national consumption; (e) exports;

(f) capital depreciation of land, works, buildings and the like .

. Any money issued from time to time would be debited to this account, and the credit balance would be regarded as a fund from which the national credit authority vi'Ould issue credit or money for-( i) "National dividends"; or

(.ii ) payments to compensate the sellers of consumable goods for selling them at the a just price";

and also (according to some advocates) for-( iii) the finance of national and semi-national- undertakings, and social services; (iv) the reduction of the national debt;

( v) the relief of taxation.

The extent of the issue for any of the last three purposes would be determined by the Government, or entrusted to the discretion of the national credit authority.

THE NATIONAL DIVIDEND.

429. 'rhe national dividend can be briefly explained. It involves the payment of some fi xed sum to every member of the community, weekly, monthly, or quarterly as may be determined. These payments would be made by the national credit authority-presumably the

Commonwealth Bank- in legal tender money, or by cheques or vouchers 'ivhich could qe cashed if required.

'rHE JusT PRrcE SuBsiDY.

430. 'I1 he "just prjce" subsidy requires more detailed treatment. 'rhe proposal is as follows:-(a) the advocates assume that the figures appearing in the

national credit account as the "'rotal National tion" and "Total National Consumption", when taken over any particular period, would show some substantial excess of production over consumption, and this would be regarded as the measure of the shortage of purchas­ ing po"\ver to be made up by the "just price" subsidy, either alone, or in conjunction with some scheme of national dividend.

175

PROPOSALS FOR MoNE'l'ARY REFORM.

(b) taking these figures as a guide, the Government or the national credit authority would then fix some percen­ tage-say 25 per cent.-by which the retail prices of consumable goods would have to be reduced below cost in order to qualify for the subsidy;

rrhe cost referred to, is the cost to the retailer, plus a margin of profit, fixed or regulated by the proper authority; (c) When the goods had been sold to the consumer at this

reduced price, the retailer would, in due course, apply to the . national credit authority for payment of the subsidy. Some system would have to be devised fo;: checking the sales and verifying compliance with the conditions-i.e., that the price had been reduced and the fixed margin of profit not exceeded;

(d) When the national credit authority was satisfied on these points, it would pay to the retailer as subsidy the differ­ ence between his " cost " price and the price at which the goods had been sold ;

(e) the payment would be made by a cheque or order, which might be cashed or credited throu:gh the banking system.

'rhere has been some hesitation, upon the part of some of the

social credit advocates, in regarding these payments as money; but it is clear from the evidence of 1\1ajo.r Douglas before the Macmillan Committee that he regards them as money.

SHOR'rAGE OF PuRcHASING PowER ExAMINEV.

431. Having set out the proposals, we can now proceed to examine the arguments in sr'vport of the theory that there is a perm-anent ·tendency towards a ,....._ortage of purchasing power. No statistics exist which, in our opinion, serve to establish the truth of this theory. We

invited the advocates, who appeared before us, to provide us with such statistics, but they were unable to do so.

THE A+ B THEOREM.

432. 'rhe ordinary view is that ':vhatever is paid out by the

producer as the costs of production must sooner or later be paid to some one who receives it as income, which he can spend, if he so desires, on consumable goods.

433. Major Douglas, the founder of this school of th€> ught, contests this view, and purports, by what is known as t4e A+ 13 theorem,

l N.' 3·" -1 .. I , J..

176

PROPOSALS .FOR lVIoNE'rARY REI•'ORlVI.

to demonstrate that there is a p ermanent tendency ·towards a shortage of purchasing power. His statement is as follows:-A factory or other productive organization has, besides its economic function as a of gogds, a financial aspect-it may be regaTded on t he one hand

as a device for the distribution of purchasing power to individuals, t hrough t he media of wages, salaries, and dividends; and on the other hand, as a

manufactory of prices-financial values. From this stand-point, i ts pa.yments may be divided into two groups-Group A.--All payments made to individuals (wages, salaries, and

dividends) .

Group B.-All payments made to other organizations (raw materials, bank charges, and other external costs) .

Now, the rate of flo w of purchasing power to individuals is r·epresenwd by " A", but .since all payments go into prices, the r ate of flow of prices cannot be les s than "A" plus " B ". Since "A" will not purcha_se "A" plus "B ",

a proportion of the product at least equivalent to " B " must be di stributed by a form of purchasing power which is not comprised in the description grouped under "A".

434. 'rhe first . observation t o be made upon this, as a logical demonstration, is that it lacks precision where precision is essential. The theorem may refer to-( a) 'rhe payments, and prices of the p roducts of only those

factories or which produce consumers'

goods.

(b) 'rhe payments and prices of the products of all factories or organizations irrespective of whether they produce consumers' goods or producers' goods. (c) 'rhe payments of all factories or organizations, but the

prices of the products of only those factories which produce consumers' goods. Consumers' goods or products are the commodities (such as food and clothing) which are purchased by individual consumers- the public---for their own 'consumption or use. Producers' goods are the commodities (such as machinery, tools, and materials) which are purchased by other factories or organizations for the purposes of manufacture of other products for .sale, either to the public or to yet another factory.

435 . It will be easier to follow our interpretation and criticism of the social credit theOl ;;- by reference to the accounts of three associated productive organizations, each of which, convenience, we shall call a " factory ., . The statement which follows is based upon an investigation of the actual accounts of a baker, a flour-miller and a farmer f.or the year ending 30th June, 1936. It shows in a summarized form the cost of manufacturing and selling the bread, the cost of manufacturing and selling the quantity of flour used by

177

PROPOSALS FOR MONETARY REFORM.

the baker to make the bread, and the cost of growing the quantity of wheat used by the miller to make the flour. For the present

purpose a su:rumary is sufficient. In due course these costs will be considered in greater detail.

SUMMARIZED STATEMENT OF COST'S.

- Baker.

I Miller. Farmer. Total.

£ £ £ £

Value of production-Baker-bread .. • 0 .. 9,010 .. . . 9,010

Miller-Flour .. • 0 0 0 .. 2,825 .. . .

Offals . . .. .. .. . . 805 . . 3,630

Farmer-wheat .. . . .. .. .. 2,747 2,747

9,010 3,630 2,747 15,387

Cost of production-" A " payments-Wages and salaries .. .. 2,966 310 345 3,621

Profits .. . . .. 917 226 269 1,412

-

Total " A " payments .. 3,883 536 614 5,033

" B " payments-Flour . . 0 0 • 0 2,825 • 0 .. 2,825

Wheat .. . . .. .. 2,747 . . 2,747

Other .. • 0 .. . . 2,302 347 2,133 4,782

Total" A" + "B" payments 9,010 3,630 2,747 15,387

436. If the first of the · three interpretations of the A. + B

theorem is intended, the statement that the "A" payments from the factories producing consumers' goods are less than the total pt·ices of the goods which they produce, cannot be disputed. The "A" payments of the baker, which amount to £3,883, are in themselves not sufficient to buy the whole of the bread which he produces, valued at £9,010. In fact, this position must always arise, for

it is clear that the "A" payments of any f actory must always be less than the total value of its production. But the "A" payments of any factory do not constitute the whole of the income distributed to consumers and available to purchase its pro uction. Sooner or later ,

its " B " payments will appear as " A " pa ments in some other stage of production. We shall deal with this later.

437. If the second interpretation is intended, the theorem means that the purchasing power distributed by all f act ories to individuals as " A " payments is not enough to purchase all the commodities which these factories produce (that is, both producers' and consumers'

goods). This also is true. For instance, in the example given, the F.2581.-12

178

PROPOSALS FOR MoNETARY REFORM.

total " A" payments amount to £5,033, while the value of the total production amounts to £15,387. But the cost of wheat f o:'ms part of the cost of flour, and the cost of the flour in turn forms part of the cost of the bread. The consumer of bread is not required to pay both for the finished product and for the raw materials from which it is made. Therefore, if the amount paid by the baker to the miller for flour, and by the miller to the farmer for wheat, be deducted from the

value of the total production, the position is as follows:-Value of production­ Baker--bread Miller-offals

Cost of production-

£

9,010 805

" A " payments 5,033

a B " payments (other than wheat and flour) 4,782

£

9,815

9,815

rrhis is exactly the position we shall have to consider when we .discuss the third interpretation in the next following paragraph. 438. vVe come finally to the third interpretation of the theorem. In this, different meanings are given to the letter "A" when it is used alone and when it is used in the expression "A+ B ". vVhen "A" is used alone it r efers to the income, amounting to £5,033, distributed as wages and profits by all the factories. But when "A" is used in the expression "A + B" it refers only to the wages and profits of the baker amounting to £3,883, and, therefore, the expression " A + B " in this case means the prices created only by the factories producing consumers' goods, costing £9,815. \Vhile it is clear that direct payme]Jts of £5,033 will not purchase goods costing £9,815, the truth or falsity of the .assumption made in this interpretation depends, as in the first interpretation, upon the distribution of the "B" costs, and if it is shown that these ultimately become purchasing power, no shortage can arise. If there is a shortage, therefore, it must be due to either or both of the following causes:-

(a) That some of the costs incurred by the factories produci.ng consumers' goods are never distributed as purchasing power to individual consumers. (b) '.I.' hat although all the prices created (or costs incurred )

by the factories producing consumers' goods are sooner or later distributed as purchasing power to individuals, some of the purchasing power distributed in their pro­ duction has been spent by the time the consumers' goods come on the market, and some of it may not then have . been either distributed or spent.

179

PROPOSALS FOR MoNETARY REFOR-M.

439. rl'he questions raised by all of these interpretations may, therefore, be stated as follows:--(a,) Is there any cost which is incurred in the production of consumable goods, or services, which is 1:ot either paid

as income to individuals or else passed on, so that,

ultimately, it appears as purchasing power in the hands of some one? ( b ) Is there a shortage on account of the fact that the pur­

chasing power, distributed as costs, comes into the hands of the consumer at different times, and, therefore, that some of it may be spent before the consumable product is put on the market, and that some of it may not

become available until later? and (c) Does the practice of saving necessarily produce any such shortage as is alleged? \Ve shall consider each of these in due course.

440. \"\' e have now set out what 've consider to be the important questions raised by the A+ B theorem. But some advocates of social credit do not rely entirely upon this theorem. Their views, however, raise the ·same questions, and our examination will cover

both their arguments and the A + B theorem.

rrnE DIS'rRIBUTION OF CosTs.

441. The obvious method of approaching the first question­ whether there is any cost which is not ultimately represented by purchasing power-is to take the items one ·by one and · see .what becomes o:f the money. For this purpose it is convenient to refer to the foregoing "Summarized statement of costs", which covers the

whole of the Gosts relating to the production and sale of bread. It is clear that the H A" payments, consisting of wages, salaries, and profits, are purcl1asing power which recipients can spend as they choose. \"\" e are not at the moment concerned with the fact that some of the

payments may have been made, and the money spent, before the bread is available for sale, or some of it saved, or with the fact that some of the profits may be undistributed. These aspects will be considered later.

442. rl'he " B " payments rriay be considered under two headings. The first group consists of the raw material of the industry, which constitutes the whole or greater part of the income of the factory from which it is purchased. .For example, the amount paid for flour by the baker appears as income of the miller, and the amount paid for wheat by the miller appears as income of the farmer. It is clear,

therefore, that these amounts create purchasing powei· when received

180

PROPOSALS F'OR :MoNETARY REFORM .

by the miller or farmer. Some part of them ·will be paid to

other individuals or organizations for goods or services, and is purchasing power in their hands. The balance will represent the profit of the miller or farmer which he is free to use as he chooses. The question, therefore, resolves itself into an examination of the distribution of the other "B" payments of all the busin esses, which amount to £4,782. These are set out in detail in the t able which follows. 'rhe amount paid by the baker for flour and by the miller for wheat are excluded. The statement does not show the total other " B " costs of the miller and farmer, but only that proportion of these charges which relates to the quantity of :flour sold to the baker, and to the number of bushels of wheat required to make it.

OTHER" B, PAYMENTS, EXCLUDING FLOUR AND WHEAT.

- -

a) Goods-Materials . . ..

Seed wheat purchased .. Superphospha tes . .

Sacks . . . .

Horse feed . . . .

Firewood .. . .

Petrol . . ..

Total goods ..

b) Services-Electric power ..

,Cartage . .

Rail freight .. . .

Insurance . . . .

Telephone .. . .

Travelling expenses .. General expenses ..

Printing and stationery Repairs and ) Rent .. . .

terest . . . .

) Flour tax

(c In

(d L

(e and taxes and rates ) Depreciation . .

Total ..

..

. .

. .

. .

..

..

..

. .

. .

. .

..

. .

. .

. .

. .

..

..

..

. .

. .

. .

..

. .

. .

. .

..

..

..

..

Baker . Mill er. Farmer. Total.

£ £ £ £

457 . . .. 457

. . . . 5 5

. . . . 101 101

. . 41 178 219

285 . . . . 285

227 41 . . 268

. . . . 90 90

969 82 374 1,425

29 .. . . 29

. . 82 52 134

. . . . 392 392

56 14 2 72

17 7 II 35

. . 31 30 61

12 24 96 132

17 1 15 5 37

103 34 129 266

364 6 310 680

28 . . 414 442

555 . . . . 555

51 5 69 125

101 I

47 249 397

2,302 347 2,133 4,782

443. Payments of a similar nature have been cl assifi ed in groups. rrhe first group includes other materials of various kinds purchased by any of the factories. The amounts so paid form part of the income of the person to whom, or organization to which, they are paid, and that income may be dissected into "A" and "B" payments in the same manner as in the account we are now considering. A little C!Onsideratiori will show t hat a large proportion of many of these

181

PROPOSALS FOR lVIONETARY REFORM.

payments must consist of wages. In some cases practically the whole amount· is expended in that manner, as for instance, in the case of firewood. In others, wages may not form such a large proportion, because some of the raw material used has been purchased from other

organizations, which in turn distribute part of their income as wages . Superphosphates, sacks and petrol are in this class. 444. The n ext group deals with services. Her e, the p ercentage of wages is probably higher than in the case of materials, and the

conditions described in the last preceding paragraph apply with equal or even greater force to these payments. Analysis would also show that a substantial proportion of the "B" payments of these organizations will in turn be also eventually distributed to some on e

as wages. 445. 'J.1he third group includes rent and interest. If tliese are paid to an individual, ther e is no doubt that they are purchasing power in his hands. If paid to an organization, they form part of its

income from which salaries and other exp enses are paid. 'rhe

balance is profit, which the proprietors ar e free to use as they

choose. 446. The fourth group includes certain forms of taxation; in this case flour tax, land taxes ana rates. These payments do not result in any wastage of purchasing power. The money provided by taxa­ tion is distributed by the Government or municipality in such forms

as _ salaries, wages, pensions or bounties, or as interest on loans, or payments for materials or services. 447. The last item is the amount of the depreci ation included in the costs of each of these businesses. There appears to be a great

deal of misunderstanding about the effect of depreciation upon pur­ chasing power. The amount charged for depreciation is an estimate of the loss of value in the assets used for production, either by wear and tear or by the passage of time. The effect of charging

depreciation as a cost is to provide that an equivalent amount shall be withheld from distribution, and thus in time provide a fund for the replacement of these assets or for the eventual return of the capital invested in them. It is not usual for the amount set aside for depreciation, or as reserves for other purposes , to be withdrawn

from the business and ·separately invested. In nearly every case the amount is retained in the business, and used as working capital, out of which wages and expenses are paid and materials are purchased. It is clear, therefore, that in these circumstances the amount set aside

for depreciation is not lost as purchasing power. 448. There is, however, another argument which may be used to show that amounts set aside for depreciation do not necessarily reduce pnrchasjng power. In the ordinary course every factory

182

PROPOSALS FOR :MoNETARY REFORM.

is continually r eplacing something, and in any particular year .i.t may spend, in that way, more than it has set aside for out

of the profits of that year. Whilst some factories are spending les" than they are setting aside for depreciation, others will be spending more. The failure to replace may reduce the purchasing power distributed by the industries which supply replacements, but the purchasing power repi·esented by the unspent amount is not lost. It remains in the business, and is used in the manner previously described. If, however, the amount spent upon replacements excee ds the amount set aside, . there is an increase in the purchasing power distributed by the industries which supply replacement goods, but on the_ other hand the working capital of the business is necessarily reduced. If there is a difference between the amount set aside and the amount spent this indicates a transfer of purchasing power, and not a loss. The question of expenditure upon replacements is, how­ ever, closely allied to the larger question of capital expenditure which will be considered later.

449. It is clear, therefore, that, sooner or later, every "B " pay­ ment becomes the income of ·a consumer, which he can spend as he chooses. · The fact that some part of the "B" payments and profits may eventually ·come into the hands of some one in another country does not affect the truth of these statements. In some cases, the change from a " B " to an " A" payment takes place almost

immediately. In others it takes longer, because the payments pass from one factory to another. Th]s brings us to the consideration of :mother factor, namely, the effect of "time" upon the distribution of purchasing power.

THE TIME ELEMENT.

450. \Ve have now to consider whether there is a shortage on account of the fact that the purchasing. power distributed as costs comes into the hands of the consumer at different times, and, there­ fore, that some of it may be spent before the consumable product is put on the market, that some of it may not become available until later.

451. The example we have g·iven can again be used in the

examination of this question. The wages paid by, and the

profits of, the baker, the miller, and the farmer are available

to buy bread. But it is clear that all the wages paid by the farmer while the wheat is growing, and by the miller during the process of producing the flour, and all the P-rofits will not be available to buy the bread when it is offered for sale. If we consider one

industry at a particular moment or period of time, it would no doubt be true that the goods cannot be sold unless the purchasing

183

PROPOSALS FOR 1'10NBTARY REFORM.

power distributed as costs is then in existence and used for that purpose. But that is an unreal position. No industry is self­

contained. It is part of a complicated: continuous, and inter-locking system. 'l'he available purchasing power at any period de pen c13 upon the continuity of industry as a whole. Ii each industry to carry on its operations, the available purchasing power consists

of the whole of its wages, salaries and profits, and these in turn will at least equal the total cost of the commodities produced. A shortage can only arise if there is an interruption in the process, and the factories in the earlier stages either reduce their ".A" payments, or cease production. The conditio11s of any industry, or of industry

as a whole, are subject to fluctuations which operate at times to reduce employment and production, but this does not prove a permanent tendency towards a shortage of purchasing power. 452 . At this stage it is convenient to refer to the question of

borrowed money. Speaking generally, it makes no difference to the purchasing power of the community as a whole · 'vhether a business man uses his own or borrowed money. If he uses borrowed money, he pays interest to the lender. If he uses his OvYn money, his profits

are increased by an amount equa] to the ·interest. The purchasing power represented by the additional profit, or the interest, is differently distributed, but its aggregate volume is not diminished. vVhen money is paid, it makes no difference to the person who receives it whether he has been paid out of a credit balance or an overdraft . The

purchasing power of the money is the same. 453. The aspect with which we are most concerned is the variation in the supply of money available to be borrowed, or, in other words, the contraction or expansion of credit. It is customary for

advocates of the social credit theory to refer to the

ment of a bank overdraft as the " cancellation of credit ". It

is true that the debt of the borrower is thereby reduced or

extinguished, but , the question is not whether individual accounts are cancelled, but whether the total volume of bank credit in use by industry is reduced or any part of it cancelled. Provided that the bank is able and willing to lend the money to some other

borrower, the repayment of a bank·advance or overdraft has no more effect upon the purchasing power of the community as a whole than has repayment to any other lender. If, however, the banks are unable or unwilling to make fresh loans, there is a tendency :for the purchasing power of the community to contract, just as there is a tendency for it to expand when bank advances are increasing. The point is that both of. these are temporary conditions ·which do not

prove the existence of a permanent t endency towards a shortage of purchasing power.

184

PROPOSALS FOR MONE'l'ARY REFORM.

SAVINGS.

454. The last of our three questions is concerned with the question of savings. In the argument presented by l\1:r. J. C. Foley, on behalf of the Tasmanian branch of the Douglas Social Cre'dit Association, it was contended that-

" The total costs of industry can certainly be recovered if the incomes of consumers are sufficient in the ag·gregate to purchase all final products at prices which cover costs of production, and if all incomes are used for this

purpose."

455. It is well known that all consumers do not use the whole of their incomes to purchase consumer s' goods. Some are able to purchase all they require without using the whole of their income. Others can only save by forgoing consumption. Still others require to spend the whole of their incomes on consumers' goods, and cannot save.

456. Savings may be regarded as purchasing power withheld from the market by refraining from consumption. The most common reason for saving is to provide security against the ordinary risks of life. A great part of the savings consists of amounts paid to

life assurance companies, superannuation funds, and friendly societies, or lodged on deposit with banks. Of the amounts paid to the life assurance companies, superannuation funds and the friendly societies, part is distributed in the form of salaries and expenses and benefits. The balance is invested in some form, as for instance in government Joans or other securities, or on mortgages. These amounts furnish the

borrower with funds which are expended to provide employment, or to purchase materials or capital goods. Bank deposits provide a basis for bank which are used for similar purposes. No

doubt part o£ the bank deposits at any time consists of money await­ ing investment, but such amounts are available to the owner either on demand or at a certa'in date. 457. At any given moment, some are saving out of income, others are spending past savings, and others again are borrowing against future income for the purpose of buying consumable goods. At all times, considerable amounts are being distributed to individuals in the form of superannuation allowances, friendly society benefits, and the procee ds of life assurance and endowment policies, all of which

represent savings, or the result of savings, made in the past. These examples show that the supply of purchasing power is affected by many i:nfiuences to which the advocates of the social credit theory do not appear to attach sufficient weight.

458. It is not denied that the relation between saving and spend­ ing may materially increase or decrease purchasing power. If the

185

PROPOSALS FOR MONETARY REFORM.

rate at which purchasing power is being withheld from the market by saving is not equalled by the rate at which it is being put back into the market by the production of capital goods, there will be a decrease of purchasing power and a tendency for prices to fall. If, on the other hand, the production of capital goods exceeds the rate of saving, there will be an increase of purchasing power, and a tendency for prices to rise. But both these conditions are temporary,

and afford no justification for the conclusion that the practice of saving, in itself, creat es a perrn,anent t endency towards a shortage of purchasing power. 459. The f act that some persons enjoy an income which is more

than sufficient to purchase all that they need in the form of consumers' goods, while others cannot purchase the consumers' goods that they require to maintain a reasonable standard of living, indicates an unequal distribution of income. But that is a condition which the social credit proposals do not attempt to alter.

THE REMEDIES.

460. The social credit theory is based on the assumption that there is a permanent tendency towards a shortage of purchasing power. To remedy this it is proposed that purchasing power should be increased either by giving to the retailer, who sells goods at the

"just price", a compensatory payment, or, by the payment of a "national dividend", or by both these means. But as we have shown that this t endency does not exist, we cannot accept the proposed remedies as a solution of the problems which the so cial credit theory

purports to solve. The social credit r emedies are intended to be applied, not only in a depression, but at any time. rrhe amount of credit proposed to be distributed . is not insignificant, for although no attempt has been made to calculate the alleged shortage, -s_ocial credit

advocates speak of a compensatory payment of 25 per cent. of selling prices. The remedies therefore are merely a method of credit expan­ sion, and as this subject is discussed in another part of our report, further comment is unnecessary.

,461. The items included in the national credit account, and the method of its preparation, have been described and need

not be repeated. Our first criticism is that the practical

difficulties which must arise, both in obtaining the necessary informa­ tion, and in measuring the value of each asset, are so gr eat that any result disclosed by the account would be useless for the purpose for which it is intended. Nio doubt some reasonably correct estimate

could be made of some of the items, but any estimate of others would be unreliable, and any attempt to calculate "the commercialized value of the population " would be merely a guess.

186

PROPOSALS FOR lVIONE'fARY REFORM.

462. 'l'he idea underlying the national credit account is that the property of the community may be used as security for an issue of credit up to the full amount of its value. There is no recognition of the fact that some of the property may already have been pledged as security for loans, or that it may be so used subsequently. In that event, the same property would be the security £or two separate and

distinct advances, one being the issue of credit by the national credit authority, and the other any loan arranged privately by the owner.

The National Dividend.

463. The national dividend is proposed by the advocates of social credit as a r emedy for the alleged shortage of purchasing power. There is some similarity between · the national dividend and the social services now provided by the Commonwealth and by the States. In

each case, those who receive the payment have purchasing power increased, but the fundamental difference is that the present social services are provided out of taxation, \vhereas the proposed national dividend would be provided out of an expansion of credit.

The Just Price.

464. According t o the theory, the a just price" would be deter­ mined by reference to the annual debits and credits in the national credit account. But, in practice, it would be impossible to determine the exact amount of the compensatory payment in this manner, and for that reason the advocates of the social credit theory appear to be satisfied to estimate the percentage to be allowed.

465. The difficulties of applying this proposal have been under­ estimated. The variation in the prices at which goods even of the same quality are. bought al}d sold under different conditions, and in the margins of profit, would create many difficulties, and it is probable that it would be necessary to regulate both wholesale and retail prices and therefore the retailer's margin of profit, and to institute, at a considerable cost, an elaborate check over the of the retailer.

CONCLUSIONS.

466. We have given full and careful· consideration to all the material to which our attention has been called, or which we have been able to discover for ourselves, upon this subject. We fully appreciate what has been urged upon us with respect to the problem of poverty, but we are unable to find that the social credit theory offers any solution.

467. Our conclusions are as follows:-( There are always some people in the community who have not enough money to buy what is necessary for a

reasonable standard of living. In this sense there is ,

187

PrwPos Ar.Js FOR MoNIJ}TARY HEPORl\L

p,t all times, a shortage of purchasing power. Th ('

total purchasing po-vver of the community is less at som e times than at others. In times of depression, for

example, the money income of: the community is less, and the number of people unable to purchase necessaries is greater, than ]n times of prosperity. In this sense

there is, at some times, a shortage of total pur(.; hasjng power. ( b) rrhe social credit theory does not ref er to a shortage in either of these senses. It alleges that there is a perma­

nent tendency towards a shortage of .purchasing poi;rer, in other words, that the economic can never

distribute to -consumers all the money which producers have to spend in the course of production. ( C) rrhere is no permanent tendency towards a short Hge of purchasing power.

rrHE l!-,REE lYIOVEl\1EN 'r (GESELL) .

468. Our attention has been called to the proposals f or "free money", as formulated by Silvio Gesell in The Natural E conom1:c Order·, and supported by the Free Economy F ederation in Great Britain and the Australian Free Economy League. The proposals

in The Natural Economic Order fall under two heads, namely "Free I_jand" and "Free :Money"; but the subject of the first part is outside the terms of our reference, and our attention has, ther efor e, been confined to the proposals for free money.

469. The objective of these proposals is to cure in dustrial

depression. In Gesell's view, the real cause of depresBion is th e hoarding of money, which prevents the rate of interest from' falling. He contends that the rate would fall to zero, if people were not allowed to hoid wealth in the form of money, which does not

deteriorate, instead of goods, which do. His remedy is free money, that is, money which would deteriorate as he claims that goods deteriorate. He maintains that this would stop hoarding, allow the rat_ e of interest to fall to zero, an_ d cure industrial depression.

470. In this argument industrial depression is explained as follows:-(a) In time of prosperity there is an increase of capital invest­ ment, i.e. :-

"The greater the production of wares, ·the greater the increase of the means of producing wares (so called real capital)."

(b) As the capital investment increases, the rate of r eturn to the owners of capital diminishes-· "But from these inv.estments, from r eal capital, interes t is expected , an d the rate of interest falls if the proportion of real capital to population

1743

188

PROPOSAl£ FOR MoNE'rARY REl!, ORM.

(c) And then-" As soon as capital ceases to yield the traditional interest, money strikes, and work comes to a standBtill, and depression follows; "

or, in other words-" \;vhen men are industrious and inventive, when harvests are favoured by sun and rain, when many products are available to multiply houses and factories -this is the time that money . . . chooses to withdraw and wait. And

because money withdraws, because demand is Jacking, prices fall and a crisis occurs."

471. Upon this basis, Gesell argues that p eople would still save, but, if there were no money, they would accumulate goods which they would be glad to rend, without any return in the nature of interest. He thinks that they would be satisfied if_ the goods were cared for and returned, in good order, or, in the case of wasting or consumable commodities, if goods of the same quantity and quality were restored

to the lender, at the appointed time. He says that the only reason why the same thing does not happen under a monetary system is that money is indestructible, and that people can hold their 1vealth in the form of money, and refuse to lend it, unless interest is paid. On this argument, Gesell's remedy is free money, or, in other words, he would deprive money of this quality of indestructibility, which gives its owner this advantage over the owner of destructible goods.

He contends that under a system of free money there would be an nninterrupted circulation of currency, leading to a gradual decline in the rate of interest, as money lost its power of exacting interest, until, if free money were adopted universally, interest would entirely disappear.

472. The idea of free money is, therefore, that money should become perishable, and Gesell's plan is to subject it to a tax, in the nature of demurrage. For this purpose, the only legal tender (apart from a token coinage) would consist of currency notes, which would be issued yearly or half-yearly, as determined, and r eplaced by a new issue at the end of that period. Every note would have spaces, marked with the appropriate dates, for stamps to be affixed, weekly

or monthly, as the case might be, and, at each date, the holder would have to attach a stamp for the prescribed amount in order to keep the note at its full face value. The rate of tax or demurrage, as

suggested by Gesell, is approxim?-tely 5 per cent. per annum ; but higher percentages have been advocated.

473. Under this scheme the supply of money would be controlled by a national currency office , which would issue and withdraw currency as required. The supply of currency would depend upon the movement of prices, i.e., currency would be issued when prices tended to fall, and withdrawn when prices tended to rise.

189

PROPOSALS FOR MoNE'rARY REFORM.

474. In Gesell's proposals, commercial banking is not prohibited, and bank deposits, as such, are not taxed; but every bank would be required, as in the case of any other holder, to stamp the notes which might happen to be in its possession, upon every appointed or

" demurrage" day. Gesell does not deal ·with the ques tion of deposits in a nationally-owned central bank; but it is difficult to see how his scheme could be applied if these deposits were not t axed, and some means of charging the tax on these deposits could no doubt be

devised.

475 . Upon this brief survey of the proposals it seems that the following questions arise:-(a) What are the practical difficulties in the application of this scheme to the Australian

( b) Would it effect its purpose in-(i) abolishing interest, and (ii) curing industrial

\Ve propose to examine these questions without entering upon any critical discussion of the theory or the argument, beyond anything that is necessary for that purpose. 476. In seeking to apply this scheme to Australia, we think that its advocates have underestimated the practical difficulties. The

recall and replacement from time to time of dilapidated notes, when par tially stamped, and the replacement of the whole issue, at stated periods, present technical problems which could be overcome; but we think that the expenses of administration, and the inconvenience

to the public, would be considerable. 477. The effect upon trade in normal times is problematical. \V c can safely assume that every one would try to avoid the tax, or else to pass it on. For this reason, we should expect that r etail trade would go by fits and starts as the demurrage days came round. '£raders would no doubt accommodate themselves to the new conditions, but ther e would be some inconvenience to all concerned, and costs might be increased.

478 . So far as the trading banks were concerned, they too wo uld have to adapt themselves to the new conditions, or else go out of business. But we cannot agree with Gesell that the public would voluntarily forgo the convenience of the cheque system. On the contrary, we think that cheques would be used as the most obvious of means for avoiding a substantial proportion of the tax.

479. Business could hardly be carried on, under the conditions of modern industry, without something in t he n ature of a banking system. We should, therefore, assume that the banks would pay

190

PROPOSALS FOR :MoNETARY REFORM;

the tax upon the currency held in reserve to meet the demands oJ their customers, and make an additional charge to their customers covering the proportion of the tax attributable to the deposit of every customer. The result would be that any one who kept hj"i money in the bank would avoid the greater part of the tax. .Any person who d.eposits money in a bank is permitting the bank to :.make a loan to some one who wants to use it. So far as the money is lent out in this way, Gesell's purpose of putting the currency back into

circulation is served. But a point which has to be noticed is that all that free money could force out of the banking system would be the cash reserves held against the deposits, and not the total of the

deposits. The forcing out of this money might have some tendency · to lower the rate of interest, but the result would not be appreciable. 480. Apart from deposits in the banking system, we have no doubt that other means would be devised for avoiding or evading

the tax. For this purpose some people would no doubt seek to convert their notes into token coinage, and it is difficult to see hovir this could be entirely prevented. It is not inconceivable that, in some circumstances, the token coinage might be worth more than its face value in notes. Another means of avoiding the tax would be to buy goods which do not deteriorate rapidly, if at all, e.g., precious stones. Yet another method would be by holding sterling or foreign

currency. 481. In this connexion, it is necessary to notice another practical difficulty in the application of this scheme to Australia. The idea of stabilizing price levels by regulating the supply of currency is not peculiar to Gesell, and we · do not propose, at this stage, to discuss the arguments for, or against, this, as a possible objective of monetary policy. It is sufficient to say that: for the purposes of external trade, it would be uecessary to choose between the stabilization of internal prices and that of foreign exchange. Gesell admits that · under free money the national currency office would be compelled to choose between the policy of stabilizing home prices and that of stabilizing foreign exchange.

482. Passing from these practical difficulties and objections to the scheme, · it remains to consider whether free money would abolish interest or prevent depression. We should say, at the outset, that we see no reason for supposing that money is hoarded to any con­ siderable extent, and it follows that we do not anticipate that any great effect would be produced by forcing the hoarded money into investment. But, assuming that hoarding is far more common than we have any reason for believing that it is, there is no reason why the rate of interest should fall to zero if all opportunity for hoarding

were removed. On the other hand, there are reasons why it should

191

PROPOSALS FOR :MoNETARY REFORM.

not. With a falling rate of interest it is reasonable to anticivate, at the same time, a considerable extension of the demand for capital goods, a disinclination to save, and a tendency for people, who have saved in the p·ast, to spend their savings for current consumption.

In these circumstances of a rising demand and a falling supply, Y: e should. expect a definite resistance to any further fall in rates, \vith the possibility of a reaction towards ·higher rates. 483. If free money fails in this way to effect its purpose of

abolishing interest, it is difficult to see how it would prevent industrial depression. Its use as a measure of recovery from an industrial depression is a different question. Free money is designed to increase the velocity of circulation of money. In some circumstances it may

be possible to give a temporary stimulus to trade in this w?y, and it is not impossible that some use might be made of the principle of free money in a period of depression. But the obvious question would be whether the same or better results could not be achieved

by an expansion of the supply of money, which would not present the to which we have referred.

484. Our attention has been directed to r eports of the application of Gesell's plan at Swannenkirchen, in Bavaria, and at Worgl, in Austria. The information supplied does not enable u s to pronounce any opinion upon the result of these experiments; but we gather

that in each case the free money was issued as a measure of relief in a period of deep depression, and also, as an addition to the

currency then in circulation. If this is so, it was only a partial

·application of Gesell's plan, as the depreciating currency issued did not completely take the place of the existing currency. It was the issue of additional money in the form of a depreciating currency. It is a debatabie question how far the results which were apparently

achieved should be attributed to the expansion of credit, or to the form in which the new money was issued. We have no information which enables us to discuss that question.

OTHER PROPOSALS.

485. It will be sufficient to refer very briefly to other proposals :which were presented for our consideration. In first place,

reference must be made to the proposals submitted by lVIr. A. V . Boisen-the "Boisen plan "-in Queensland, and by lVIr. L. T. Watson -the "vVatson plan "-in New South Wales . The basis of both these plans is the same, and it may be paraphrased as follows. The

principal exportable commodities would be acquired or controlled by some national authority. The internal prices, i.e., the prices to the producer and for home consumption, would be stabilized at som e average level, determined by reference to world prices ov er a period

747

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PROPOSALS F'OR MONETARY REFORM,

of years: 'l1he exportable surplus would be marketed overseas, and any profit or loss upon these operations would be paid or debited to an equalization account established for that purpose. 486. Upon consideration of these proposals, we think that they are outside the scope of our reference. They are essentially schemes for the marketing of exportable products, which, could be carried out without any alteration of the monetary and banking syste:r:qs as now existing.

487. For the same reason, we have not found it necessary to report upon other proposals in which the suggested alterations in the monetary system depend upon, or are merely incidental to, other suggestions for the reconstruction of the whole economic structure. The proposals to which we refer are those made by Mr . .A. V.

Greenwood and the Equation League of Australia, and by Mr. L. G. De Garis.

CREATION OF CREDIT.

488. In the course of our inquiry, stress has been laid upon the fact that the existing supply of money is, from time to time, expanded or contracted the banking system, and in view of the public

interest which has been attracted to this subject, we propose to give a brief explanation of the mechanism of the Australian banking system, and of the manner in which this expansion or contraction takes place. But it must be understood that this exposition is a simplified statement, which necessarily avoids reference to many of the minor complications and qualifications that would require to be · noticed in a more extended treatment. In the first instance, our

attention will be directed to the trading banks.

TRADING BANK CREDIT.

489. The main business of a trading bank is to take deposits and to make advances. The deposits are of two kinds, namely, fixed deposits, and deposits on current account. The fix ed deposits are repayable at the end of the term for which they are made, three, six, twelve or twenty-four months, as the case may be, and interest is paid at rates which vary according to the length of the term.

The convenience of a fixed deposit is that, instead of having to search for another form of investment, any one who wishes to invest money for a short period can leave it with the bank at interest, and receive the same sum at maturity. In the case of a deposit on current

account, the b'anks usually allow no interest, but undertake to repay the money whenever called upon to do so, by meeting the cheques of every customer, upon presentation, up to the amount of his deposit. The convenience of a current account is that money which is not immediately required can be left with the bank, and that payments

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CREATION oF CREDl'r.

oan be made or received by means of cheques, which the bank will pay or collect. By this means the customer can make or receive payments without the trouble and risk involved in handling the cash. 490. 'rhe bank's undertaking is to repay the amount of the deposit in legal tender money upon demand or on the due date; but, in the

meantime, the deposits provide a source from which, within limits, the bank can make advances. In this way the trading banks are a link between the people who have money which they are not using, and the people who want to borrow.

491. In London, where the practice is to make advances in the form of a "bank loan", the whole amount advanced is credited immediately as a deposit to the borrower's account, which is reduced as the borrower draws upon it. In Australia, where the practice is to advance upon the overdraft system under which the borrower is allowed to borrow up to a limit, the advance consists only of the

amount owing to the bank from day to day, and no part of it appears as a deposit to the borrower's account. Under either system, the bank undertakes to meet the borrower's cheques in legal tender money, if required, up to the amount arranged.

492. As a business undertaking, a bank is concerned with making profits for its shareholders, and in the bank's own interest, if for no other reason, it is bound to provide security for its depositors; It must therefore see that its assets are in the long run sufficient to cover its liabilities, and that it holds sufficient "cash reserves"

(that is cash and assets which can be readily turned into cash) to enable it to meet any demand that is likely to be made upon it. rrhe total which can be advanced by .a trading bank is limited by the necessity for keeping these cash reserves.

493. To explain the effects which the making and repayment of bank advances have upon bank deposits, it is convenient to trace what would happen if the whole business of the trading banks were concentrated in a single bank. When an advance is granted, the

borrower is authorized to draw cheques upon the bank. Some of the • cheques so dra"'-n will be paid in as deposjts to the bank by other people. Other cheques will be paid in cash, for example, cheques to pay wages, &c. But much of the cash so obtained wHl, when

spent, be paid in as deposits to the bank, for example, by storekeepers. (In a selected week in 1936, 88 per cent. of the amount paid into trading banks in Austraiia was in the form of ch eques, and 12 per cent. in the form of notes and coin) .• In this way the money

advanced by the bank will tend to return to the bank in the form of deposits. The increased deposits provide a source from which further advances can be made, and the general tendency of an e:xpansion of • See Table 32 in the Appendix.

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CnEA'l'ION OF CREDIT.

advances is to increase the deposits. But the process does not

increase the bank's cash reserves, and the limit of expansiou is set by the necessity for maintaining adequate cash reserves.

494. It is obvious that this - process of expansion requires

customers who deposit, and customers who borrow. The ban1r cannot lend unless credit-worthy borrowers are forthcoming, nor extend its lendings, unless the loans are returned to the bank as deposits.

495. In practice the whole of the loans will not invariably return as deposits. There are several reasons why this would not happen. In the first place, the cheques drawn by the borrower may be used to repay, or reduce, an existing advance. In this case, the loan has had no effect upon the total of advances, and ;has no effect on the

deposits. The liability to the bank has merely been transferred from one borrower to another. Secondly, 1-vhen a cheque is cashed, for ' wages or other purposes, there is no certainty that all the cash will find its way back into the bank as a deposit. Some of it may be held by the public as money in circulation. · In times of prosperity there is a tendency for the public to hold more cash. .And thirdly, there is the possibility that the borrower may use his advance to pay for imports, and that the bank has to provide for this out of English money which it holds in J..Jondon. As this English mcmey is part of the cash reserves the effect of the advance, in this case, is the

same as if the bank had paid out cash which will not reappear as a deposit. It follows that it could never be said of any particulal'

advance that it must necessarily affect .the deposits. What could be sa_ id is that within certain limits the bank, by increasing its advances would, in the course of time, build up its deposits.

496. The converse to this process of expansion is the contraction of deposits which occurs when the total of advances reduced,

whether by the bank calling in its advances or for any other reason. :..-\n advance may be re1)aid by cheque or by cash. Some of these

cheques will be drawn upon deposits, and some of the cash ViT ill com e from deposits. In either case, deposits are reduced and the genera] tendency of a reduction of advances is therefore to decrease deposits. In practice, however, the repayment of an advance may not decrease

deposits for the following reasons. It may have been made out of an advance granted to another customer. It may have been made out of cash formerly held by the public. Lastly, the advance may be repaid with English money, that is money which the customer h_olds in London, usually the proceeds of export, in which case the effect is the same as if the bank has been paid ln cash which does not come from any deposit In all these cases the repayment of an advance does not reduce deposits. In any case, a reduction brought about

196

0REA1'10N OF CREDIT.

by repayment of any aqvance will be merely temporary if the bank is able to restore the total of its advances and deposits by lending to another customer a sum equal to the amount repaid. 497. J.i'or the sake of simplicity, we have omitted any 1·e.ference

to the increase or decrease in the bank's holding of securities, for example, Government stocks. This operates in much the same way as an increase or decrease respectively, in advances.

498. 'fhe fact that the business of banking is in the hands of a

number of banks, and not concentrated in a single bank, does not affect the argument with respect to the influence which any increase or decrease of the total of the advances of all the banks will have upon the total of their deposits. What applies in the case of one bank

applies in the case of a number. 499. When one of a number of banks is advancing to its

customers) some of the cheques drawn upon it ·will be paid into other banks. 'l"'his may increase their deposits, but the lending bank will be called upon to meet these cheques by setting them off against its right to payments in cash from other banks and by settling the balance in cash. \Vhen all the banks are increasing advances, are

following a fairly uniform policy, the deposits of the system can be increased without any one bank losing cash, but if one bank seriously departs from the general policy by advancing more freely than the others, it will be faced by a drain of cash which is. likely to proye

embarrassing. On the other hand, if a bank lends less freely than the others, its accumulation of cash from- other banks will be likely t.o prove unprofitable . .

500. rrhe limit to the process of expanding advances and deposits is set by the necessity for keeping what, in the opinion o£ the banks, are adequate cash reserves. The amount of cash reserves which any bank will hold in proportion to its liabilities, is a matter decided in 'practice from its own experience as to the kind of dem.ands made upon

it in the past and from its expectation as to the future. The practice of the Australian trading banks has been described in Chapter 2. 501. The cash reserves of the trading banks include cash, and assets which ca_n be turned into cash. They consist of:-·

( 1) Coin and notes. (2) Deposits with the Commonwealth Bank. ( 3-) Treasury bills. ( 4) London funds.

Coin and notes, which are cash in the strict sense of the word, are the .only legal tender money. Deposits with the Commonwealth Bank can be drawn at once in legal tender money. Treasury bills are three months promissory notes issued by the Government to the Common­

wealth Bank. Some of the bills are sold to the trading banks, which

175 '

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CREATION OF CREDIT.

can at any time obtain legal tender money for them by discounting them with the Commonwealth Bank. London ft1nds are English money held in J..Jondon by the trading banks for which they can obtain Australian legal tender money by sale to the Commonwealtl1 Bank at the current rate of exchange.

502. 'J1rading banks need cash in order to pay their customers in legal tender money as required. The banks, as a whole, can increase their cash (notes and coin) by drawing on their deposits with the Commonwealth Bank, by receiving notes for their treasury-bills, or by selling London funds to the Commonwealth B ank. Another possible but less important way is to induce the public to hold less cash. Apart from central bank action an increase in the cash

reserves of the banks as a whole can come about only because the public holds less cash, or because cash reserves have come into the system from outside, as when London fuuds increase.

CENTRAL BANK CREDIT.

503. The central bank in the Australian system is the wealth Bank of Australia. This bank is a public institution engaged in the discharge of a public trust. As the central bank, its special· function is to regulate the volume of credit in the national interest,

and its distinctive attribute is its control of the note issue. Within the limits prescribed by law, it has the power to print and issue notes as legal tender money, and every obligation undertaken by the Commonwealth Bank is backed by"lhis power of creating the money with which to discharge it.

504. Because of this power, the Commonwealth Bank is able to increase the cash of the trading banks in the ways we have pointed out above. Because of this power, too, the Commonwealth Bank can increase the cash reserves of the trading banks; for example, it can buy securities or other property, it can lend to the Governments or to others in a variety of ways, and it can even make money avail­ able to Governments or to others free of any charge . .

505. I£ it buys securities, the seller receives a cheque which will .usually be deposited · with a trading bank. When the cheque is presented to the Commonwealth Bank for· payment, whether it is cashed or added to the trading banlr's deposit the Commonwealth

Bank, the cash reserves·of the trading bank are thereby increased. The same follows from the adoption of any of the other methods.

506. On the other ·hand, the power ·of the Commonwealth Bank to increase the cash reserves of the trading banK:s is not unlimited . . 'rhe Bank is bound· to pay in legal tender money whenever ca1led upon. So long as its power to issu·e notes is restricted by law, its power· to ·purchase securities or other prope1:ty, and to lerid or grant

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CREATION OF CREDIT.

money to Governments or others, is limited. Apart from the - legal limitation; there is a practical limit to the note issue, in that the Banle has to consider how far it is in the general interests of the community to expand credit.

507. A bank deposit is a form of bank credit, that is to say,

the banlt undertakes to pay in legal tender, up_ to the amount of the CU!:3tomer's credit with the bank. Anything that is habitually accepted by the public as payment, or in exchange for goods or services, can be termed money, and a bank credit, or, in other words,

the right to obtain legal tender from the bank, is :trlOney in this sense. The expansion (or contraction) of advances and deposits js therefore an . increase (or decrease) in the supply of money in the community.

508. A decrease in the supply of money results in some people having less ability to buy goods and services than they had before. rl,hey are forced to spend less, which results in a reduction of the

incomes of the people from whom they usually purchase. This lessened demand is thus transmitted through the community, and results in some restriction of the total volume of prodnction, and in some unemployment of men and resources.

509. An increase in the supply of money results in some people having greater ability to buy goods and services. If these people spend their increased incomes, the increased demand for goods is transmitted through the community. So long as unemployed men

and resources are available, the increased demand for goods will result in so.me increase of production, with some conse quent increase in the employment of men and resources. 510. A general contraction of advances, however, js sometimes necessary to check the development of boom conditions; and a reduc­

tion in the advances to a particular industry may be necessary to check an unwarranted degree of expansion in that industry. On the other hand, unemployment or depression in a particular in dustry cannot necessarily be cured by a general expansion of advances.

511. But if the increase in the supply of money is continued when there are few unemployed men or resources available, and the expansion of production in some industries makes it necessary to withdraw men and resources from others, higher prices will be offered, and the money prices of labour, materials, and plant will be forced up by this competition. The increase in money may be

carried to such a stage that, although prices ri.se , there is little or no increase in the total volume of production. 512. 'I'he effect on prices of an expansion or contraction of money depends on the particular circumstances and is not easy to predict.

Jn general terms, an increase in the supply of money to

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CREATION OF CR.EDIT.

ratse prices, and a decrease tends to reduce them. But if there

is ·considerable unemployment of men and resources, a large increase in the supply of money may have little or no immediate effect in raising prices. On the other hand, if there is full employment, a s_mall increas_ e in the supply of money may have the effect of raising prices considerably. Conversely, some reduction in the supply of money may not reduce prices at a time when business actiYity is low, or even when it is recovering from a low level.

513. l\fore important than the effects on prices, . are the effects of expansion .and contraction of money on the volume of production, and on the distribution of production between different classes of industry. For example, an jncrease of bank loans is likely to cause au increase in the production of capital goods rather than consumers' goods, and later to cause some disequilibrium. lVIoreover, if money is easy to obtain, the growth of speculative concerns is likely to be encouraged, though their failure may be inevitable. The probability of results such a8 these is the chief reason against an undue of money, for it produces changes in the structure of production which later will necessarily destroy the equilibrium of the economy.

PART III.

CHAPTER VI.-THE DESIRABLE OBJECTIVES, STRUCTURE, AND FUNCTIONS OF A MONE­ . TARY AND BANKING SYSTEM FOR AUS­ TRALIA.

CHAPTER Vll.-THE EXTENT TO WIDCH THE EXISTING SYSTEM 'CONFORMS TO THESE STANDARDS.

CHAPTER Vm.-cONCLUSIONS AND RECOM­ MENDATIONS.

#

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CHAPTER VI.

THE DESIRABLE OBJECTIVES, STRUCTURE AND FUNCTIONS OF A MONETARY AND BA:ti"KING SYSTEM.

514. Our purpose in this chapter is to set out briefly what, in our opinion, is the ideal objective of a monetary and banking system for Australia, and the structure and functions of the system which would best achieve that objective. In the next chapter, we propose to

examine the existing system in . the light of these ideals.

515. In Chapter I., we have called attention to the characteristics of the Australian economy , and the ideal system as we see it is one that takes those char act erist ics into account. Since Australian conditions differ from those of man y other countries, the structure

and functions of other moneta:ry and banking systems cannot safely be accepted as models, although they may offer useful points of comparison or contrast. As we see it, the Australian economy is subject to external influences, such as movements in world prices for foodstuffs and raw materials, which form our chief exports, and · to internal influences in the form of seasonal fluctuations, which affect

the volume of primary production. It is therefore essential that the monetary and banking system which has to serve an economy of this kind should be kept as flexible as possible to allow the necessary response to changes in these conditions.

516 .. Tl1e general objective of an economic system f or Australia should be to achieve the best use of our productive resources, both present and future. rrhis means the fullest possible employment of people and resources under conditions that will provide the highest standard of living. It means, too, the reduction of fluctuations in

general economic activity. Since the monetary and banking system is an integral part of the economic system, its objective will · be to assist with all the means at its disposal in achieving these ends.

517. 'l'he next question is, what kind of monetary and banking system will best achieve this objective. In our opinion this result in the present circumstances of Australia will be most likely to follow from a system of central banking in which trading banks and other financial institutions are integral parts of t he system, with a central bank which regulates the volume of credit and currency. •

518. The question then arises, what should be the ideal structure and functions of the component parts of the central banking system, and their relations one with the other.

• Mr. Chlftey disseat11.

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THE DESIRABLE OBJECTIVES OF A MoNETARY AND BANKING SYsTEM.

I.- TnE CENTRAL BANK.

A.- Organization.

519. The central bank should be the Commonwealth Bank, organized mainly in the form in which it exists at present. · Because its sole concern is the general public l.nterest, the central bank shoulJ be _publicly owned and controlled. It is sometimes said that a central­ bank should not make profits, but we do not accept this view. In choosing and in carrying out its policy, it should pay little regard to considerations of profit, but the central bank should be in such a position that profits will normally arise from its This

should enable it more easily to treat profits as a minor consideration, ahd to carry out operations which it considers will benefit the. community, even though they result in a loss tn the central bank. It would be unfortunate if in any year a. central bank made a net loss, because its prestige might be weakened by the criticism of those to whom profit is the only criterion of success.

520. The members of the Board of . the Commonwealth Bank should be chosen not only for their wide financial knowledge, proved capacity and determination, but als9 for their breadth of outlook, and for those qualities which make it likely that they will obtain the co-operation of other institutions and of governments in their task of administering the affairs of the central bank.

B.-Str-ucture.

521. rrhe present structure of the Commonwealth Bank, consisting as it does of a central bank with trading bank powers and a savings bank, is, in our opinion, essential to the efficient exercise of its functions as a central bank.

0.- .Functions.

522. The function of the Commonwealth Bank should be to regulate the volume of credit and currency in the light of the

general objective of the monetary and banking system. The

Commonwealth Bank should endeavour to regulate the volume of credit to the banks, so that the latter will be induced to maintain a level of advances and deposits which will best serve the general o'bjective of the Australian· economy. Moreover, it is the duty of the Commonwealth Bank to see that the credit provided is made avail­ able at appropriate rates of interest. Although we consider that these should be the main functions of the Commonwealth Bank, we think it desirable that the Bank should pay some regard to the distribution

by the banks of the volume of credit amongst differ ent industries. The Commonwealth Bank should also regulate the currency so that

203

TnE DESIRABLE OBJECTIVEs oF A JYioNETARY .A.No BANKLNG SYSTEM. in kind and in amount it is always adequate to the requirements of the community. The Commonwealth Bank should, therefore, have at its disposal powers sufficient for the discharge of these

responsibilities.

D.- Policy.

523. It has been suggested in ·evidence that the Common wealth Bank should pursue a policy of attempting to stabilize the purchasing power of money, or as it is sometimes put, to stabilize the price level. The idea is that a given level of prices should be selected, and that the aim of monetary policy should be to prevent any departure from

that level. The method usually suggested is to select some price index number, for exa-mple of wholesale prices or of cost of living, and to shape monetary policy according to variations in the pricn index number. If the price index number shqws a tendency to

fall or to rise, the appropriate action is to expand or to contract credit respectively. It is difficult, if not impossible, to choose an inde:x number which ought to be kept stable in all circumstances. Any price index number which purports to show movements in a general

level of prices is only a rough guide. The stabilization of a general price level might be undesirable if it checked a fall in prices which would otherwise have followed more efficient production. More important than this is the practical difficulty that, although expan­ sion and contraction of credit are often accompanied by rising and falling prices respectively, so many factors enter into the determina­

tion of prices that there is no guide as t o ho w much change in the volume of credit will suffice for a given rise or fal1 in the selected price level. We do not think, therefore, that the Commonwealth Bank should adopt a policy of expanding and contracting credit to the movements of some selected price index number.

Price fluctuations are little more thart symptoms, and their prevention or mo5iification is to be sought in other ways. As we point out,

however, the Commonwealth Bank should pay attention to movements in prices, and use thein as one of the guides in shaping and carrying out its policy. 524. Another policy which has been proposed for the Common­

wealth Bank is that of. maintaining stability of exchange. In

practice this means stability of exchange with sterling, and therefore with all currencies which maintain stability with sterling. The policy is not one of stability at all costs. It means that small movements in London funds would not be allowed to affect the exchange rate, nor even large movements if it were expected that they would be

reversed in a reasonably short space of time. But if there are

permanent and decisive changes in economic conditions at home or

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THB DEsiRABLE OBJEcTivEs OF A MoNETARY AND BANKING SYSTEM.

abroad, imposin g a strain on the exchange rate, the policy involves an alter ation of the r ate and its maintenance at the new level.

It is clear that the maintenance of a st able exchange rate with sterling has advantages both to expoi·ters and importers, who are able to carry on their business f r ee from the risk of loss arising from movements in the r ate. The policy of a stable exchange rate is easy to understand, and its success or failure is easily tested, but the steps necessary to carry out the policy may be by no means simple. We think that the maintenance of stability of exchange with sterling Will be, apart from exceptional circumstances, a wise policy for the Commonwealth Bank. But we do not consider that it should he the single or even the central aim of the Commonwealth Bank, and we hold that, with all its importance, it should be subordinate to another policy to which we now turn.

525. 'rhe Commonwealth Bank should make its chief consideration the reduction of fluctuations ,in general economic activity in Australia, thereby maintaining such stability of internal conditions as is con­ sistent with the change which is necessary if economic progress is to take place. Such a policy is less precise than the policy of stability of exchange, and is also one the success of which is much more difficult to test, but we consider that the idea underlying it is of fundamentally greater importance. The policy will demand different action at different times. Expansion of credit is appropriate when it is required to raise the level of business activity and employment, and contraction when it is required to prevent the development of boom conditions which are likely to end in a depression.

526. As part of this policy, the exchange rate would generally be kept stable. The policy is not to fix the exchange rate and req,uire the economy in ordinary circumstances to adjust itself to that rate, but to keep the economy reason'a.bly stable and to move the exchange rate, i! necessary, as one means to that end. The Bank would have to choose, from the information at its disposal, the factors to be considered in deciding what credit policy to pursue. It would require to pay attention to movements, for example, in internal prices, the volume and prices of exports and imports, the balance of payments, interest rates, unemployment, government finance, wage rates, profits, and real and money incomes. The Bank would have to taking all factors into account and allowing

due weight to each, how far its policy should be one of expansion or contraction. For this purpose, it is essential that the Bank should have the fullest information as to general trends in business conditions both at home and abroad, and that it should be able to obtain, from banks and from other sources, any necessary information.

205

'"fHE DESIRABLE 0BJEC'l'IVES OF A 1\:fONET.ARY AND BANKING SYSTEM. '

527. We have drawn a distinction between the policy of stability of exchange and the policy of reducing fluctuations, but in practice there may not be much difference at times between the results of either policy. The policy of exchange stability requires measures to

be taken which will affect the internal stability of the economy. It will sometimes happen that these measures are also those which would have to be taken under the other policy. Under either policy the exchange rate will not vary greatly unless there is a change in the

general situation, but one policy m.ay require an earlier change or a greater change than the other. In other words, the policies may run parallel for some time, but, if they diverge, our preference l.s for the policy of reducing fluctuations.*

E.-Relations with Governments.

528. There are limitations on the power of a central bank to reduce fluctuations and to maintain reasonable stability in the internal economy. Too much should not be expected, even from the most enlightened policy of an all-powerful central bank. lVIuch will depend

upon the relations established between the Commonwealth Bank and the Commonwealth Government, which is responsible for monetary policy. In .Australia the Federal Parliament is given, by Section 51 of the Constitution, " power to make laws for the peace, order and

good government of the Commonwealth with respect to: (xii) Cur­ rency, ·coinage and legal tender; and (xiii) banking, other than State banking; also State banking extending beyond the limits of the State concerned, the incorporation of banks, and the issue of paper money ". In part, the responsibility for monetary policy is

delegated to the Commonwealth Bank by the Federal Parliament in the legislation under this section establishing the Bank and conferring upon it certain powers, but in part the responsibility is with the Commonwealth Government.

529. Where responsibility is divided between two authorities, the question may arise as to which authority is to decide upon monetary policy. .An answer to this qyestion might be to provide that the Commonwealth Bank shall be at all times under the direction of

the Government. In this case there can be no conflict between the two authorities. But where the Commonwealth Bank is not under this direction, the question arises as to which view is to prevail if the Government's view and that of the Bank differ on a matter of monetary policy. .An answer to this question might be that, in exercising the authority delegated by Parliament, the Commonwealth Bank should be entirely independent and should refuse to accept

* Note by Mr. Pitt, page 268, a nd by Mr. Abbott, p age 271.

761

206

Tn:E DESIRABt;E OnJEC'l'IVEs OF A .MoNE'l'ARY AND BANKING SYSTEM.

direction from the Government. Then, if the Government is deter­ mined upon a policy which the Bank Board will not · accept, the Government will have to obtain any legislation required, and if necessary appoint a board which will carry out that policy .

. 530. Neither of these answers commends itself to us. In our view, the proper r elations between the two authorities are these. 'l'he F'ederal Parliament is ultimately responsible for monetary policy, and the Government of the day is the exee.utive of the Parliament.. The Commonwealth Bank has certain powers delegated to it by statute,. and the Board's duty to the community is to exercise those powers to the best of its ability. Where there is a conflict between the Government's view of what is best in the national interest, and the Board's view, the first essentia:l is full and frank discussion between the two authorities with a view to exploring the whole problem. In most cases this should ensure agreement on. a policy to be carried out by the Bank which it can reconcile with its duty to the community, and which has the approval of the Government. In cases in which it is clear beyond doubt that the differences are irreconcilable, the Government should give the Bank an assurance that it ac cepts full r esponsibility for the proposed policy, and is in a position to take, and will take, any action necessary to implement it. It is then the duty of the Bank to accept this assurance and to carry out the policy of the Government.ll This does not imply that there should at any time be interfer ence by the Government or by any member of the Government, in the administration of the Common­wealth Bank. Once the question of authority is decided, there should be little difficulty in preserving close and cordial relations between the Commonwealth Government and the Commonwealth Bank. 531. Although the State Governments are not r esponsible fol' monetary policy, their' operations affect it and are · affected by it. It is therefore desirable that similar relations should be established between them and the Commonwealth Bank. State banking is con­trolled by State Parliaments, and not by the Federal Parliament. The only means, therefore, that the- Commonwealth Bank has of influencing the State savings banks and ·other State banks is indirectly through persuasion and directly through competition. Public borrowing, which is controlled by the Loan Council, represent­ing the Commonwealth and the States, may materially affect the monetary and banking system. It is essential, therefore, that the Commonwealth Bank should have close and cordial relations with the Loan Council as well as with the Commonwealth Government_ • The Cbalrman a ccept• this statement subject to nservntlon. and Yr. Pitt llllll'Dh.

207

THE DltsiRABLE 0BJEC'rivEs m' A MoNB'l'ARY AND BANKING SYS'rEM.

H.-TRADING BANKS.

·532. In a central banking system, the central bank regulates the volume of credit and currency, and the trading banks dist ribute credit to credit-worthy borrowers. In discharging this rec;ponsibility , it is the duty of the trading banks to safeguard the deposits entrusted

to them. 1'he organization of these bank.s on a profit-making ba;;is may be accepted as part of such a system provided that their charges for service to the community are reasonable. But the efficient opera­ tion of a central banking system r-equires some limitation upon the

powers of the trading banks in the general interest of the community . . It may be in the inter est of any trading bank, influenced by con­ siderations of profit and liquidity, to expand or contract credit at a time when the general interest r equires differ ent action. It is not

to be expected that a trading bank will take action entirely opposed to its own interest, especially if it has competitors ready to take business from it. It is for the Commonwealth Bank to regulate credit in such a way as to make the in terest of the trading banks conform

to the general interest.

533. In their function of distributing the volume of credit, th e trading banks play an important part in the economy. They provide · facilities for operating on bank deposits by cheque, and they also collect some of the savings of the community, and lend to commerce and industry for working capital, and to a less ext ent for fixed capital.

The reason usually given for this preference is that they accept deposits either at call or on short t erm, and it is therefore dangerons for them to make long-term loans. lt is, however, a matter for individual banks, subject to the influence of the central bank o':er the

distribution of credit, to decide how far it is wise to make loans for what are, in fact, long periods. 534. If the Commonwealth Parliament. cannot entirely control the assets of any trading bank by reason of its incorporation outside

Australia, it may be necessary to take action to bring such a bank within its control. The trading banks, in our opinion, should disclose in their published accounts information appropriate to their position, which closely approaches that of public utilities. For this r eason, the

published accounts of all banks should be easily comparable one with the other, should be expressed in the same currency, and should refer to the same date and period.

III.-THE SAVINGS BANKS.

535. It is the function of the savings banks to collect the small savings of individuals, and to invest them safely. It is desirable in general that they should be publicly owned and managed. They are

1763

208

THE DESIRABLE OBJECTIVEs OF A I\'IoNETARY AND BANKING SYSTEK.

chiefly concerned with the small saver, who uses them to make provision against the future, and it is important that this type of thrift should be encouraged, but the encouragement should not extend to larger amounts, for which there are more appropriate avenues of investment. The rates on small savings bank accounts should be high , enough to induce saving, irrespective of whether they compete with current deposits or short-term fixed deposits tVith the trading banks. But where the amounts are large, it is not desirable that they should carry rates of interest which approximate to the lowest rate paid on fixed deposits. It might be better for the monetary and banking system of Australia, as a whole, if all the savings banks were subject to more control by the central bank.

IV.-MORTGAGE BANKS AND PROVISION FOR INDUSTRIAL LOANS.

536. One of the functions of the banking should be to

provide fixed and long-term loans. In the Australian system, as we shall point out, the facilities for this type of lending

are insufficient, and in our conclusions and recommendations we propose to indicate how adequate facilities could be provided.

INSTITUTIONS.

537. Credit for industry and commerce is provided otherwise than by banks. 'rhere is no reason why these facilities should not be provided either by public institutions or private enterprise, so long as the Commonwealth Bank is able in general to regulate the volume of credit.

VJ.-RELATIONS BETWEEN THE COMMONWEALTH BANK . AND OTHER BANKS AND FINANCIAL lNSTI'l'UTIONS.

538. 'rhe Commonwealth Bank should be in a position to give a lead which the trading banks and other financial institutions will follow, and if necessary to give assistance in its capacity as the lender of last resort. To do this successfully, it must possess arnple resources . which it can use at its discretion, its prestige must stand high, its

capacity for leadership be proved and recognized, its policy be under­ stood and accepted, and its powers be such that in the last resort it can enforce its policy. On their part, the trading banks and other financial institutions must co-operate with the Commonwealth Bank. It should be open to them to discuss freely with the Commonwealth Bank any matter of common interest, and to make representations or criticisms on the facts disclosed to them, but in the end the responsibility must rest on the Commonwealth Bank to enforce its policy, and on' the trading banks and other institutions to conform to the policy and to assist in carrying it ont.

209

CHAPTER VII.

THE EXTENT. TO WHICH THE EXISTING SYSTEM CONFORMS TO THESE STANDARDS. 539. In deciding how far the monetary and banking system of Australia has confor med to the ideal outlined in the pr eceding chapter, it is necessary to bear in mind several considerations. The period 1929 to 1936 was one in which a severe depr ession was followed by a slow and painful r ecovery. Before the depression, there existed in Australia only t he rudiments of a centr al banking system. 'rhe Common\vealth Bank was performing some central

bank functions, but, apart from its savings bank activities, it was in the main a publicly -owned trading bank. During t he period of stress, which followed the onset of the depression, the Commonwealth Bank developed fully into a central bank, and the trading banks

became component parts of a central banking system. But there is no universally accepted method of central banking; the full develop­ ment of the Commonwealth Bank into a central bank was compressed into a few years; ana the situation in which the Bank found itself was always unprecedented and often acute. In these circumstances,

it was only to be expected that subsequent events should prove the action or inaction of the Bank in some cases to have been unwise. To pronounce a course of action or inaction unwise from the stand­ point of later knowledge is not necessarily to pronounce · it unwise in the circumstances as they appeared at the time.

540. Without attempting an analysis of the causes of booms and depressions, it is imperative, before we comment up on the behaviour of the Australian monetary and banking system, to express our views as to the part which monetary measures played in the depression · and recovery in Australia. No action by the mon etary and banking system of Australia could have avoided some depression, although the system together with the governments, and, indeed, the community as a whole,

must share some responsibility for the extent of the depression. The development of boom conditions could have been checked, and the depth of the depression could have been lessened. Monetary

measures alone did not p roduce recovery, but their effects would have been greater had t hey been taken earlier. 541. 'l"he appropr iat e policy t o prevent or to meet a

depression calls :for the co- operation of other aut horities as

well as those who direct monetary policy. In general, the

proper . policy fo r the governments t o pursue if a depr ession is developing is to expand public works, refrain from increasing t axa­ tion, and avoid a general contraction of go vernment expenditure, even F.258l.- 14

210 '

ExTEN'l' TO WHICH ExiS'l'ING SYSTEM CoNFORMS 'I'O STANDARDS.

although deficits are incurred. When conditions have improved as private enterprise revives and full employment is approached, the proper policy is to contract public works expenditure, maintain or increase taxation, budget for surpluses, and reduce the debt which has been incurred through the depression policy. We emph&size the view that the policy which we have outlined above is one requiring action in prosperous times, as well as in times of depression. It is wholly unwise in our view to wait until a boom or depression occurs

before taking action, and the extent to which measures have to be taken when a depression develops will largely depend upon the extent to which proper action has been taken in the earlier stages. The assistance which can be given by the central bank in meeting or preventing a depression is to expand or contract credit in conformity with the general policy. If an expansion of central bank credit is to

be successful in promoting recovery, the credit must be used, and this comes about mainly through government spending as a

supplement to private spending.

542. The Commonwealth Bank Board-"regards the main central bank objectives as the regulation, within the limits of its powers both statutory and practical, of (a) internal credit and {b) the external value of the curreney ".

In aiming at these objectives, the general monetary policy accepted by the Board is expressed by the res-olution adopted by the World Economic Conference, in 1933, that central banks-" should endeavour to adapt their m'easures of credit regulation, as far as their domestic position permits, to any tendency towards an undue change i11 the state of general business activity. An expansion of general business activity of a kind which clearly cannot be permanently maintained, should lead central banks to introduce a bias towards credit restriction into the credit policy

which they think fit to adopt, having regard to internal conditions in their owll. countries. On the other hand, an undue decline in general business activi.ty in the world at large should lead them to introduce a bias towards relaxation".

'rhese represent the considered views of the present Board,

but it does not follow that they were either recognized or formulated jn an earlier period. This policy is somewhat different in emphasis from the policy we have accepted of reducing fluctuations and main­ taining reasonable stability in the internal economy, but the

fundamental idea is the same.

543. 'fhe proper policy for the Commonwealth Bank, as the depres­ sion developed, was one of expansion, using any necessary powers in that direction, and enabling the trading banks to do their share. As conditions improved, the proper policy was to cease expanding credit, and, if necessary, to contract, using any appropriate po\ver.s to bring the trading ba'nks into line. 'rwo of the most important

2li-

ExTENT TO WHICH ExiS'riNG SYSTEM CoNFORMS •ro STANDARDS.

monetary measures taken during the depression were the expansion of central bank credit by means of treasury-bills in 1931 and 1932, and the mov ement in the exchange rate in January, 1931. In eaeh case, in our opinion, the depression would have been lightened, and some of· its worst effects avoided, if these measures had been taken

earlier.

TREASURY -BILLS.

544. rrreasury-bills 'were used to finance gov ernment deficits, and to provide funds for public works. rrhe expenditure of the proceeds of the bills helped to sustain consumers' incomes, and to stimulate private enterprise. Sucl1 an expansion of central bank credit could

have been brought about by the is,sue of treasury-bills, whether interest-bearing or not, or by the issue of notes. Whichever method was used, the amounts represented by the treasury-bills or notes would have been expended, and the deposits of the public with the

trading banks, and · of the traQ)ng banks with the Commonwealth Bank would have been increased. 545. The method adopted was the issue of interest-bearing treasury-bills to the Commonwealth Bank, which sold some to the

trading banks. This enabled the latter to exchange part of their unproductive balances wi th the Commonwealth Bank for liquid securities \Vhich contributed to their revenues, and probably had some influence ]n r educing t heir advance rates. If, however , the Common­

wealth Bank had chosen to retain all the bills, the revenue of the Commonwealth Bank would have been larger, the revenue of the trading banks would have been less, and their advance rates possibly higher. If trading banks are not allowed to hold treasury-bills, they may choose to hold some of their increased cash reserves in the form

of notes, or Qf London funds. If they hold them in the form of notes the Commonwealth Bank must hold more of its London funds ear­ marked against the note issue. If they hold them in the form of London funds, it may cause some embarrassment to the Common­ wealth Bank. But if the Commonwealth Bank holds ample London funds, neither of these ways of holding cash reserves materially affects

the Bank. 546. If central bank credit had been issued in t he form of an interest-free loan to the governments by notes or treasury-bills, the revenue of the Commonwealth Bank would have been less; next. the trading banks, holding no treasury-bills, would have had less and this might possibly have affected their advance rates. The

banks, too, would have had the option of holding their increased cash reserves in the form of deuosits with the Commonwealth Bank, notes. or London funds. Moreover. i:f notes had been issued. the- increased

212

ExTENT T O WHICH E x i STING SYsTEM CoNFORMS TO STANDARDS.

holdings might have caused some embarrassment by requir ing the Commonwealth Bank to set aside more of its gold or London as a r eserve a gainst t he note issue. One practical objection to issuing notes or inter est-free treasury-bills was that it would have been easier to make these methods appear a dangerous form of than was the case with that adopted.

547. In our opinion, it would have been better had the expansion in central bank credit come earlier . It should have been undertaken as of policy when there was a serious contraction in London

funds at the end of 1929, and should have been continued on a larger sc ale in 1930, when there was a loss of gol d from t he Austr alian banking system.* 548. Between 1929 and 1931, treasury-bills we r e taken up reluctantly by the Commonwealth Bank, which called a halt in the process at t he beginning of 1931, because it feared the effects that mounting defi cits would have on the monetary system. Even after the Premiers' Plan of J une, 1931, j;he Bank, appears to have been rather reluctant in undertaking the required expansion. It would seem that the Bank was inclined to regard treasury-bills much more as a method of assisting governments . than as a method of expanding credit.

549. ]j,rom July, 1932, the Bank urged upon the L oan Council the desirability of funding treasury-bills by public loan, and in 1932-33 and 1933-34 succeeded in bringing about some reduction in the total isspe by this means. The Board may have been more concerned to reduce volume of short-term debt than to contract credit, but the operation of funding contracted credit in the same way as if securities had been sold on the open market. As the trading banks were in a very liquid position at t his time, the contraction of credit meant little to them, but if the amount raised and used for funding the use O'f credit by reducing the amount raised below the

sum which it was then desirable to spend on public works, the process would have retarded recovery. With the possible exception of the funding in November, 1932, it cannot be said that the funding actually carried out retarded recovery.

550. The offer to the P.Ublic in F ebruary, 1936 , of £1m. of

treasury-bills by the Commonwealth Bank from its own holdings would, insofar as the bills were taken up, have r esulted in a con­ traction of credit, f or the transaction was equivalent in its effect to the sale of securities in the open market. There was, moreover, the suggestion of further issues, and these would be likely to afford a regular· investment for _ money which would otherwise have gone into three months deposits with. the trading banks which then carried

• R eseniation by Mr. Pitt.

213

ExTENT 'ro WHICH ExiSTING SYSTEM CoNFORM.S TO S'I'ANDARDS.

a rate of 1 per cent. as compared with the discount rate of 1! per cent. on treasury-bills. rrhe Bank wished to obtain

information as to the possibility of an open market for treasury-bills, and was not averse from any resulting contraction of credit, because it wished for some restriction of imports to lessen the strain on London funds. But the experiment was not likely to give much guidance on the question of an open market, because the offer was at a fixed rate. Even if the public had subscribed the full amount this would have had little direct effect in contracting credit. In fact, only £315,000 of the bills were taken up, but interest rates had risen, and this increase

may have had some indirect effect in contracting credit. The circum­ stances incidental t o the offer indicated no disposition to co-operate with the Commonwealth Bank in this matter, on the part of the Bank of New South \Vales, which first raised deposit rates, and of the Bank of Adelaide, which followed next day.

ExcHANGE RATE.

551. The movement in the exchange 'rate in tT anuary, 1931, was one of the contributions of monetary policy to recovery in

Australia. It increased the r eturns to exporters in terms of Aus­ tralian currency which tended to increase the volume of export production, and it tended to restrict imports. Had the movement come earlier, the fall in the national income would have been less,

and the task of recovery easier. 552. rrhe Commonwealth Bank joined the trading banks in 1929 and 1930 in resisting the movement of the exchange rate. The force of the tradition of equality with sterling was powerful, the reluctance of governments to add to their budget difficulties was great, arid the fear of inflation and flight of capital was strong. The future of

export prices and of prices generally could not be foretold. Weight had to be given to all these considerations, and there was some justifica- · tion in 1929, and in the early part of 1930, for the Bank's attitude to the exchange rate. The arguments for a serious change in the rate were not as cogent as they were later; but, after the middle of 1930, it was unwise for the Commonwealth Bank and the trading banks

to attempt to hold the rate.

553. While it was a wise action in 1929 on the part of the Bank to recommend the mobilization of the monetary gold in Australia, and its use_ as a means of meeting overseas commitments, yet the attitude of the Bank towards gold tended to obscure recognition of the fact that Australia had departed from a gold standard.

554. In the belat ed movement of the official exchange rate to 130 in January, 1931, the initiative was taken by the Bank of New South Wales. By that time, the Commonwealth Bank should have

1· .1

214:

ExTENT TO WHICH ExiSTING SYSTEM CoNFORM S TO STANDAIW::;.

realized the value of exchange depreciation as a means of meeting an emergency, and have rajsed the rate to a height wh ich would .have restricted imports and maintained exports. In the light of events, a higher rate might have been justified, but actually the rate was determined by outside market quotations. The Commonwealth Bank, as the central bank, should have taken charge of the rate at that time, increased it, if necessary, and have been prepared to buy and sell freely.* Then the Bank would have been in a better position to protect and to build up London funds as circumstances permitted, and to replace some of the international reserves (including gold) which had been used. in the crisis. In December, 1928, these reserves in gold and London funds had amounted to some £90m., but· by December, 1930, they had fallen to about £40m. But the Commonwealth Bank, in regard to the exchange rate, merely acted as an ordinary trading bank until December, 1931, when it assumed control, fixed the rate at 125, and began to buy and sell freely.

555. A more difficult question is whether the alteration of the r ate to 125 was justified. The general problem was to hold the rate at an appropriate level having regard not only to the requirements of the internal economy, but also to external relations. .As compared with the lower rate, the maintenance of a rate of 130 would have been better for export production, rendered debt adjustment a less pressing problem, and generally have allowed a somewhat easier adjustment of the Australian economy to the forces of the depression. There was some expectation ·that the rate would fall, as ':vas shown by the outside market quotations. External relations had changed; export prices had risen; imports had fallen off much more than exports, and England had left gold in September. .Any reduction might be taken as a gesture to indicate that, in assuming control over the ,rate, the Commonwealth Bank was setting its face against competitive

currency depreciation. In that event, the reduction would have the effect of reassuring countries trading with Australia, and of

encouraging investment from overseas. On the other hand, it might be interpreted as the first move in an attempt to restore the old parity with sterling. The alteration eased the immediate budgetary problem of overseas payments. Weighing all these considerations, and having regard to the informatioil. then available, we think . that the reduction

from 130 to 125 was justified in the circumstances, but in the light of subsequent events, we think that it might have been better to have held the rate at 130 until internal conditions showed more definite signs of improvement. t But whether the rate were held at 130 or 125, the aim of the Commonwealth Bank should have been to build up its London 'funds and thereby to make its position stronger.*

* R eser vation by Mr. Pit t.

t Prof essor Mills di ssen ts.

215

ExTENT 'l'O WHICH ExiSTING SYSTEM CoNFORMS TO STANDARDS.

556. In a memorandum of 18th December, 1931, the Governor of the Commonwe.alth Bank described the position on 30th November m these words-" The Board. of the Commonwealth Bank was then faced with the alternative

of seeing a complBte -collapse of the ex-change rat€ or of as.snming ful l

responsi'l:lility and fixing a rate at which it might hope to hold the exchangr .''

But the only "collapse" which could have occurred was a movement towards parity with sterling. This could not have happened so long as the Bank was willing to buy all sterling offered at 130. In those circumstances no dealer in an outside market could have bought

sterling for less than this rate. The Commonwealth Bank could have r_naintained the rate at 130 if it had been prepared to buy with Australian currency all sterling offering, as it did with a rate of 125 . At the time, however, the Commonwealth Bank had no confidence

in its ability to maintain the rate without making a serious loss 011 its London funds.

557. The Chairman of the Bank, Sir Robert Gibson, in a letter to the Prime Minister, 1fr. Lyons, on the 13th January, 1932, wrote-" The Bank Board de-cided, so as to prevent a complete collapsB of exchange, to determine the rate of exchange itself, from time to time, and buy or sell

all exchange offering at these rates. This arrangBment came into operation as from 30th November, 1931, with the eonsequence that the Commonwealth Bank is now accumulating London funds, purchased upon the basis of 25 per cent. premium. So long, therefore, as the presBnt policy is maintained and there

is an excess of funds available in London over the demands, the Comm onwealth Bank must continue to a ceumu1ate London funds. ·with the exchange at par there would be no risk to the Common wealth Bank in such an a ccumul ation, and, indeed, it would be in accordance wit h the policy of the Bank to a ccumulate·

funds under such conditions. It will be obvious, however , that the Common­ w-ealth Bank cannot take t he risk of accumulating large funds in London at a high premium, unless it ha s a reliable prospect of being ab1e to dispose of them without serious loss."

558. Since December, 1931, the Commonwealth Bank has kep1· the exchange rate stable. The Bank sfates that for some time the central aim of its policy has been that of preventing undue

fluctuations in business activity rather than of maintaining stability of exchange. This allows to the Bank more freedom to use its power over the exchange rate as an instrument of policy in case of necessity than if it aims merely at stability of exchange. But, during the past

five years, it is probable that , whichever policy had been adopted, much the same stability in internal conditions and in exchange would have been achieved.

lN'l'EREST RATES.

559. Since 1930, the Commonwealth Bank, as a matt er of policy, has restricted its tradjng bank activities. The Bank has not refused

216

ExTENT To WHICH EXIsTING SYSTEM CoNFORMs TO STANDARDS.

credit accounts, but it has not sought clients from a trading bank where it that the latter was giving satisfactory service.

The Bank's view has been that its trading bank activities are ''a favorable adjunct to central bank control in the power they confer to influence interest rates, to expand advances, if necessary, and to provide f acilities which the trading banks may r efuse or may not be in a position to supply". In our qpinion this is a proper practice for a central bank to adopt. =t

560. As the depr ession develop ed, the proper policy, as a supple­ ment to expansion, was for the Commonwealth Bank to use its powers to reduce interest rates. But the Bank, along with the trading banks, raised its deposit rates in February, 1930, although its advance rates remained unaltered, with the exception of advances by the Rural Credits Department, which were raised by i per cent. in July, 1930. After June, 1931, this attitude changed, and the Bank appears to have realized the desirability of using its powers to iower interest The Bank reduced the rate of discount on treasury-bills by

stages from 6 per cent. to 1! per cent. After the Premiers' Plan was adopted in June, 1931, the Bank reduced its rates on deposits and on advances. Since that time it has followed the appropriate policy of assisting expansion by low interest rates. Reductions continued. to be made until December, 1934, and the rates were main­ tained until March, 1936, when the trading banks raised their deposit and advance rat es, and the Commonwealth Bank raised its deposit rates.

561. In our opinion, it is the responsibility of the Commo:nwealth Bank to determine generally in what direction and to what interest rates should roove. On the whole, between June, 193ll and March, 1936, little can be taken to its action in rega;rd to

interest rates. But in March, 1936, the Bank allowed itself to be placed iJl a position in whiGh, wben interest rates ro!:Je against its wish, it to the actions of some of the trading

hanl\:S. If the Commonwealth Bank was firmly of opinion that it was of the utmost importance that a rise in rates should not

occur, :it should have used its central banking powers to compel the trading banks to conform to its policy. If, however, its view was that the rise was not a matter of great importance at the time, there was some justi:ficatio:q for raisin g its own deposit rates: otherwise it would have lost deposits, t

562. A rise in interest rates is sometimes regarded as one of the appropriate methods of checking expansion, but the Commonwealth Bank may have felt some difficulty because of the effect of high interest rates upon government finance. In 1938, and subsequently,

-·

"' :\fr. Chitl ey dissents. t Note by Mr. Chifley, p. 266.

217

ExTENT TO WHICH ExisTING SYSTEM CoNFORMS TO STANDARDS.

considerable amounts of internal loans mature. If rates . of

interest are allowed to rise, the difficulties of renewal will be increased. One of the present problems facing the Commonwealth Bank is how to prevent boom cmJ.ditions arising without taking action which will inevitably raise interest rates.

563. 'fhere is, however, a clear instance where the trading bank powers of the Commonwealth Bank were used to influence certain rates through the financing of some of the pastoral finance companies. The Commonwealth Bank usually quotes a rate for advances lower

than the ruling rate for trading bank advances. In November, 1934, the Bank brought its overdraft rate for all customers down to 4! per cent. Certain pastoral companies were customers of the Bank. When a pastoral company makes a loan to a customer, it is not so much attracted by the rate of interest as by the commission and

other business which the loan brings. It will therefore lend its funds either at cost or with a very small margin. When the Commonwealth Bank lent money to its customer companies at 41 per cent., and this money was re-lent at approximately the same rate, it t ended to bring

down the rate at which money was lent by other pastoral companies. '\Vbile this continues, the Bank influences the r ate of interest on seasonal loans in the pastoral industry. ·where the trading banks make this type of seasonal advance, pastoral companies compete with

them, and in that particular field of their operations the action of the Commonwealth Bank influences their rates, but in relation to other types of loans which the companies do not seek, this form of indirect competition with the trading banks does not operate.

OPEN MARKET OPERATIONS.

564. With the exception of the purchases of securities by the Commonwealth Savings Bank in 1935, the Comm,onwealth Bank has not undertaken any open market operations. \Vhile credit was being expanded, for example, in 1931, through the issue of treasury-bills,

there was no need to supplement this by. the purchase of secu.rities. I;ater, when conditions had · somewhat improved, and the Bank was urging the funding of treasury-bills, some contraction of credit could have been secured, if then thought desirable, by the sale of

There are, however, some difficulties in regard to open market operations. The Bank gives as the reason for not using these powers its view that the market for government se·curities is narrow, and that any extensive operations would affect the prices of government stock and rates of interest. If the Bank, desiring to check incipient boom conditions by contracting credit, were to sell government to any extent, and thereby m :1ke the pof:lition of the trading

218

Ex•rENT TO WHICH ExiSTING SYSTEM CoNFORMS TO STANDARDS.

banks less liquid, the price of government stocks would fall and rates of interest rise, to the possible embarrassmen r of . the

Government.

TRADING BANKS.

565. Along w.ith other parts of the system, the tra

their policy, but, even in its absence, the banks might have taken concerted action which would have helped to check the boom, and thereby have lessened the extent of the depression. At the outset of the depression, the trading banks, in the inter est of thejr depositors and of their own solvency, were forced by the general conditions and

by the reduction of their London funds, due to the fall in export values and the cessation of overseas borrowing, . to adopt a policy of contraction which intensified the depression. As pointed out in another part of our report, ther e are limits to the powers of

trading banks to expand or to contract advances. In the absence of a central bank they can, by concerted action, do more to restrain a boom than to lessen a depression. Fl'om 1932, the trading banks expanded advances, but the increase in cash r eserves which enabled

them to do so came in part from eentral bank credit, and in part from increases in London funds due to higher export prices. There is no justification for the view that the trading banks, in order to enlarge their profits, deliberately expanded credit to produce a boom and then contracted so as to produce a depression. In their efforts to contract advances, the trading banks in some cases caused hardship

by forcing realization of assets, and by refusing credit to some credit­ worthy borrowers, but there was little alternative open to the banks while their cash reserves remained low, and there is no evidence of a general policy of forcing the realization of assets. By the end of 1931, the liquid position of the banks had been restored. After the · mi ddle of 1932, they were granting advances more freely, 11nd, after

the middle of 1933, they adopted an active lending policy. 566. During 1930, the tracliug banks, with the Commonwealth Bank, resisted the pressure on · the exchange rate and rationed exchange; but in J anuary, J931, it was a trading bank which took

the initiative in raising the r ate to 130. The trading banks

participated in other measures taken during the depression. They voluntarily entered into and carried out the exchange mobilization agreement of 1930. · In 1931, t hey reduced deposit and advance r ates under th e Premiers' Plan, and they made further reductions np to ] 934. Bef or e t he alte1·ation, in June, 1931 , which made treasury-bills

219

ExTEN'r To WmcH ExiSTING SYS'rEM C oNFORMS TO STANDARDS.

practically the equivalent of cash, the t rading banks had taken up bills to the extent of some £7m. The trading banks assisted in under­ writing and subscribed to the government loans issued from November, 1932, onwards, which were an essential part of the recovery

programme. At the time, their position was very liquid, an d there was a lack of . other suitable investments. In the dev elopment of the Commonwealth Bank into a central bank r eponsible for the regulation of credit, which may be considered to have been accom­

plished by the end of 1931, the actions of the trading banks

contributed in some measure to the change. Thereafter, for the most part, they co-operated with the Commonwealth Bank. At times there have been differences of opinion with the Commonwealth Bank as to the appropriate course of action, and at times the element of co-operation has been difficult to discover, but on the whole there