Title Monetary and Banking Systems - Royal Commission - Report - 16th July, 1937
Source Both Chambers
Date 24-08-1937
Parliament No. 14
Tabled in House of Reps 24-08-1937
Tabled in Senate 24-08-1937
Parliamentary Paper Year 1937
Parliamentary Paper No. 74
System Id publications/tabledpapers/HPP052016003213


Monetary and Banking Systems - Royal Commission - Report - 16th July, 1937

1937.

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA.

REPORT

or THr

Royal Commission appointed to inquire into the Monetary and Banking Systems at present in operation in Australia, and to

report whether any, and if so

what, alterations are desirQble in the interests of the people of Australia as a whole, and the

manner in which any such

alterations should be effected.

Presented by Command, 24th August, 1937.

[Cost of Paper.-Preparation, not given; 1,150 copies; approximate cost of printing and publishing, £420 .]

Prin ted and Published fo r t he GovERK:.\I ENT of t he Co:.\L'.IO-N WEALTH o r by J_, . F . JoHNSTON , Commonwealt h Government Printer, Canhen :t.

No. 74. -F.2581.- PmcE, 7s. 6n.

1557

CONTENTS OF REPORT.

TERMS OF APPOINTMENT

INTRODUCTION

PART I.

CHAPTER I. ·The Australian economy

II. The monetary and banking system, 1901-1936 III. The capital reserves and profits of the Australian trading banks 1893-1936. Savings and State qanks.

Bank failures. · IV. The financial system in 1936.'

PART II.

v. Proposals for monetary reform Creation of credit.

PART III.

VI. The desirable objectives, structure, and functions of a monetary and banking system for Australia

VII. The extent to which the existing system conforms to these standards VIII. Conclusions and recommendations

SUMMARY OF RECOMMENDATIONS

APPENDICES, 90NTENTS OF

INDEX

4

5

9

25

94 130 144 153

171 192

201

209 223

275

284

389

559

•

COMMONWEALT'H OF AUSTRALIA.

G!Wli.GE THE FmTH, by the Grace of God of Great Brita-in, Ireland and the

British Dominions beyond the Se-as King, of the Faith, Emperor of

India.

To Our Trusty and Well-·beloved-The Hon ourable JOHN MELLIS NAPIER, a Jndgc of t he Supre me Court of South Australia; EDWIN VAN-DER-VORD Nrxox, JDsquire, C. M. G. ; P.rofessor RICHARD CHARLES MILLS; The Honourable JosEPH BENEDICT CHI.l!'LE Y; AwrHUR Prl"r, Esquire, C. M. G., O.B. K , Dired 0 r of Finance.

Victorian State Treasury; and cTOSEPII PALMEH. ABBO'.rT, Esquire.

Greet'i.ng:

KNOW YE that W e do by these Our Letters P aLent, issued in Our name by Our Governor-General in ancl over Our Commonwealth of A ustndia, acting with the advice of Our Federal Executive Council, and in pursuan ce of tlle Constit ution of Our said Commonwealth, the Royal Com,missions' Act 1902-1933, and all other

powers him thereunto enabling, appoint you to ·be Commissioners to inquire intu the monetary and rbanking systems at -present in operation in Australia, a nd to re,p.ort whether any, and if so what, alterations are d esira..ble in the interests of the people of Australia a s a whole, a nd the manner in which an y such altera t ions should be effected:

AND vVE APPOINT YO U the said JoHN Mb:LLIS NAPIER to he the Chairman of the said Commissioners, and as such to have a deliberative, and , in t he event of an equality of votes, a ca.sting vote, in all matters considered by t h e

Commission :

AND \VE DIRE'01' THAT for the pur.pose or mqmnng into and taking evidence upon any matter entrusted to you, Our said Commissioners, any four of you, Onr said Commissioners, .shall be sufficient to constitute a quorum:

AND WE REQUIRE You with , as littl-e delay as possible to re port to Our

in and over Out said Common wealth the result of your

inq-uiries into the m'atters entruste

IN TESTIMONY WHEREOF \VE have caused these Our L-e tters to be made patent and the Seal of Our said Commonwealth to be thereun.to aflixed.

WITNESS Our Right Trusty a.nd Well-b eloved Counsellor, Sir IsAAC ALFHED IsAAcs, Knight Grand Cross of Ob.r Most Distinguished Order of Saint Michael and Saint George, Governor-General a11d Commander-in-Chief in and over Our Commonwealth of Aust;·alia. this fifteenth dav of November, i.n the year of Our Lonl One nine hund.red ·and

thirty-five, and in the year of Our Reign.

(Sgd.)

B'y His Excellency's Co mmand, ( Sgd.) ,J. A. I..YONS

P1·ime Minister.

ISAAC A. ISAAC.S Governor-General.

Entered on Record by me, in Register of Patents, No. GO , page 339, thi 11

fift.eenth day of November, One thousand nine hundred a nd thirty-five.

(Sgd.) F. SmAH.-I.N.

•

5

To His Excellency the . Right llonotwable

Alexander Gore Ar·ktcright, Bm·on GowTie, a Membe.r of His Majesty's Most Honourable P'rivy Council, Km:ght Grand Cross of the l'llost Distinguished Ordet· of Saint Jlfichael and · Saint George, Companion of the Most Honourable Orde•r of the Bath, Companion of the Distinguished Se.rvice Order, "Upon whom has been conferred the Decm·ation of the Y1:ctoria Cross, Governor­ General and Cornmander-in-Ch1:e f in and ov er the Comrno,nwealth of Australia.

MAY rr PLEASE YouR ExcELLENCY:

\Ve , the Commissioners appointed by J..Jetters Patent dated the 15th day of November, 1935-to inquire into the monetary and banking systems at present in operation in Australia, and to report whether any, and if

so what, alterations are desirable in the interests of the people of Australia as a whole, and the manner in which any such alteratio;ns should be effected, have now the honour to submit our report.

IN,.rRODUCTION.

The first public session \vas held at l\tielbourne on the 15th January, 1936, when we began the hearing of oral evidence, for \Vhich purpose we held 105 sessions. These sessions were held in Sydney, Brisbane, Adelaide, Perth, Hobart and

ceston, and in all 200 witnesses were examined. In 'addition, we have received numerous written communications from individuals and organizations interested in the subject of our inquiry. At the first public session, an announcement was made 1vith respect to the course of our inquiry. Pursuant to this announcement, evidence was taken £Tom representatives of the Commonwealth Bank,

the trading banks, and other institutions concerned with the issue and supply of credit. \Vhen we ·were satisfied that we were in possession of adequate information with respect to the existing system, we proceeded to take evidence from economists, representa­

tives of industry and commerce, and the public generally. In order to give every opportunity to the public to present

criticisms of the system, and proposals for its amendment or reform, an invitation was issued through the press, prior to the sittings of the Commission in each city, to organizations and individuals desiring to be heard. All who intimated their desire to appear before the

Commission were given an opportunity to present their views. We desire to acknowledge the help that we have received from many different sources. Questionnaires were addressed to all the banks, and to other financial institutions and organizations concerned

6

in the issue or supply of credit, including pastor al fi nance ass urance societies and companies, trustee companies, building societies, and stock exchanges in the various S tates. Questionnaire.:; were also addressed to organizations which we r egarded as repre­ sentative of the users of credit, as for instance, to chambers of

commerce and of manufactures, and associations of primary producel'S and of r etailers. Representatives of all these institutions and

oi·ganizations att ended before us, and were examined upon their answers. In addit ion, questionnaires ·were ad dr essed to economists in all States, and we ob tained valuable ass ist ance from their evidence. \Ve are indebted to all thes e and to other witnesses, who attended n t our r equest , or vol untarily, fo r the time and thought devoted to tbe preparation of thei r evidence. To supply the information which we have obtained from the banks and other financial institutions has involved them in detailed investigation and exhaustive analysis. We record the fact that all the information for which we have asked has be en supplied.

'vVe wish t o acknowledge t he se rvices .of lv'Ir. E. R. Reynolds, who

was appointed as Co unsel to assist the Commission, during the early stages of our inquiry.

"\Ve are deeply indebted to our secretary, Mr. W. T. Harris, and

to our economist, )\iir. J . G. Phillips, for their assistance throughout our inquiry and in the preparation of this report, and we desire to express our appreciation of the services rendered by the assistant secretary, lVIr. \V. J. Swan, and the other members of the staff.

•

PART I.

CHAPTER I.-THE AUSTRALIAN ECONOMY.

CHAPTER II.-THE MONETARY AND BANKING SYSTEM 1901 ... 1936.

CHAPTER 'lli.-THE CAPITAL RESERVES AND PROFITS OF THE AUSTRALIAN TRADING BANKS 1893 ... 1936. SAVINGS AND STATE BANKS. BANK FAILURES.

CHAPTER IV.-THE FINANCIAL SYSTEM IN 1936.

9

C.aAPTER I.

THE AUSTRALIAN ECONOMY.

1. In order to understand the working of the monetary and

banking system, it is essential to consider the characteristics of t he Australian economy, of which it forms part. Australia comprises a latge territory with a highly diversified and scattered production. 'rhe main productive areas are: Queensland (south from lat.

16), New South Wales, Victoria, Tasmania, South Australia (as far north as lat. 33), Vilestern Australia (the south-western corner and a belt, 300 miles wide, along the coast northwards, also the gold­ mining area's, which are farther inland), and the Northern Territory

(in a few areas mostly within about 300 miles of the coast). There is a large area in the interior of Australia in which production is negligible. 2. The productive areas differ greatly in soil, rainfall, t empera­ ture and other conditions, and even within these areas there are con­ side:t·able variations. Many of the coastal r egions, especially in the

Eastern States, have a rainfall of about 40 inches or more, but as the distance from the coast increases the rainfall diminishes, and, except in rrasmania, the average annual rainfall in the inner productive ar eas is generally from 10 to 15 inches, with high evaporation. In these inner areas, the rainfall is uncertain, at times there ar e severe

droug·hts, and the r eturn from a given area is much lower than in districts where intensive production is possible. It h as been necessary t o construct many miles of r ailways, carrying but little t r affic , so that marketing of the products of these areas m

1 ay be possible.

The interior is generally best adapted, and is mainly used,

for sheep-raising or wheat cultivation, sometimes for cattle.

Where the rainfall is greater, and other conditions permit, production is more intensive, and dairy products, sugar, tropical and

temperate fruits, and forage, are produced ; also ·fat stock and farmyard products. 3. The minerals princip ally pr oduced are gold, co al, silve r ,

lead, iron, tin and copper, which are obtained as follows:-Gold---..:in all States, but mainly in West ern Australia. Coal-in all States except South Australia, but mainly m New South Wales.

Silver and lead-in New South Wales , Queensland/ and Tasmania. Iron ore-mainly in South Australia. Tin-mainly in New South Wales, Queensland and Tasmania.

Copper-in Queensland and Tasmania.

10

THE A usTuAr_,rAN E coNOMY.

4. A very lar ge proportion of the primary production is

exported, and the value of these exports forms a large proportion of the total value of production . The Australian economy is therefore materially affected by variations in overseas prices. 5. The first settlemen t was in · New South \¥ales, towards the close of the 18th century . Conditions proved to be particularly favoraule for pastoral production, and the foundation was laid of the wool industry, which has since developed into th e valuable export industr y of the Commonwealth.

6. vVool was the principal product of the continent until 1852 , 1vhen gold took the first place. The discovery of gold in New SouH1 Vval es and Victoria att r acted immigr ants--especially to Victoria­ and the pop ulation of the contin en t in creas ed from 405,000 :in 1850 to 1,146,000 in 1860, contained mainly in New South \Vales (349,000) and Victoria (538, 000). F rom 1859, the gold yield began to

decline, and the downwar d trend continued till abou t 1893, when gold was discovered in large quantities in \Vestern Australia. During the ten years 1901 t o 1910, gold production r eached its highest point. Production seriously de c1·easod until 1930, since when there has been a subst antial increase.

7. Shortly after 1860 , the value of wool production in Australia exceeded that of gold, and it has maintained that posit ion ever since. The production of wool is n ow second in order of value, being exceeded hy manufacturing and followed by agriculture.

8. about 1860, demands for closer settlement of the land

becam e insistent. In Vict oria the demands were emphasized by the need to provide employment for those render ed idle by the decline in gold-mining. Since that time increasing attention has been directed to the development of agricultural and pastoral resources. These forms of production in many cases have been extended into marginal areas. The importance of rural industries will be seen from the fact that, according to the census of 1933, the persons directly employed in those industries numbered 548,000, out of a total of 3,156,000 bread­ winners, and that for 1934-35 the net value of rural production was £1 28.72m. out of a total net production of £301.75m.

9. The unemployment resulting from the decline in the gold yield after 1859 was gr eatest in Victoria, and in that State land settlement policies were supplemented in 1867 by tariff measures, designed to oncoura ge the development of secondary industry, and to relieve

unemployment as well as to provide a more balanced economy. 10. Tariffs had also been imposed in the other States prior to l<'ederation, but they \Vere designed more for revenue purposes and less for "protect iYe " purposes than the Victorian tariff. With

11

THE Aus 'l'RALIAN EcoNOMY.

F 1ederation, the power to impose eustoms duties passed to

the Conimonwealth, and the encourageri1ent and protection of manu-· facturing industries has been an important feature of Common­ wealth legislation. l\1anufacturing production has now become in valne the principal form of production in Australia.

11. lVIost of the secondary industries are concentrated in Sydney and Melbourne and adjacent areas. 'rhis development has been due to several causes. These capital cities have always been the most populous centres, possessing a greater supply of labour and a larger local market th'an other places. rrheir growth as manufacturing centres has be en facilitated by Government policy, which has provided for the convergence on them of most of the railway systems com­ municating with the interior, and for their development as ports. The general trend towards concentration of manufacturing units has also strengthened their position. The relative importance of Sydney and Melbourne as manufacturing centres has increased

Federation, and they are the main suppliers of Australian-made goods to the rest of the Commonwealth. In other States the same considerations have contributed towards the establishment of secondary industries in or near the capital cities. About 4 7 per cent. of the population is contained in the capital cities of the States.

12. The establishment of banking and other financial institu­ tions followed settlement in New South Wales and Victoria. The wealth · obtained from wool and gold in those States provided large supplies of capital for the development of Australia, and provided the means for the opening in other States, in addition to the smaller banks established there, of branches of banks vi'11ose head of-fices or chief

Australian offices were in Sydney or Melbourne. Some of thes e smaller panks have since amalgamated \vith the larger institutions, and the importance of Sydney and :Melbourne as banking centrt;s has

thus beeri increased. The factors that have brought about concentra­ tion of banking have also operated in the case of some other financial institutions and these cities have thus become the main centres of the financial system of the continent.

13. The tables in the appendices (pages 347-354) illustrate the growth of the Australian economy during the present century.

Public Fina.nce .

14. The monetary and banking system of Australia is mater1all y affected by government finance. The loan policy of governments, the budgetary position, taxation, interest payments, and sinking fund , provisions and operations, are all of importance to the system.

It is convenient to begin with a consideration of the public

debt. At 30th June, 1936, the debts of the Commonwealth and

1567

12

'l'nE Aus'l'RALTAN EcoNOMY.

States amounted to £A1,403,320,000 (including ov erseas debt at rate of £stg.l00 = £A125), or about £.A207 per h ead of the population . Th e following table shows the interned and external debt at 30t h ,Ju n e, 19 36 :-

Total Debt.

(I n millions of p ounds Australian.)

-

- Au strali:\ . Londo n.

I

)ic w York . Total.

£Am. £Am. £Am. £Am.

Commonwealth . . . . 21 8 .40 195.36 20.44 434 .20

States . . . . . . 447.26 485.72 36 .14 969. 12

Total .. . . 665.66 681.08 56.58 1,403. 32

16 . The overseas debt amounts t o about 53 p er cent. of the

whole. The following table shows the mov ement of this debt over five -yearly per iods since 80th June, 1901.

Overseas D eb t. (In millions of pounds sterling. )

Increase in o ve rseas deLt Total overs eas inde btedness (dec r ease shown-- ). at end of per iod.

-

Common-Stat es . Total. Common- States . Total. wealth . wealth.

£Stg.m. £Stg.m. £Stg.m. £Stg.m. £Stg. m . £Stg. m .

At 30th June, 1901 . . . . . . . . . . 177.89 177.89

Five-yearly Period-1st July, 1901 , to 30th

June, 1906 . . . . . . 12.62 12 .62 . . 190.51 190 .51

1st J uly, 1906, to 30th

June, 1911 . . .. 3.82 -3.64 .18 3.82 186.87 190.69

1st July, 1911, to 30th

June, 1916 .. .. 33.29 46.88 80. 17 37 . 11 233 .75 270.86

1st July, 1916, to 30th

June, 1921 .. . . 65 . 46 35. U 100.60 102.57 268.89 :171 . 46

1st July, 1921, t o 30th

June, 1926 . . . . 43.90 88.86 132 .76 146 . 47 357.75 504 .22 .

1st July , 1926, to 30th

J une, 1931 .. .. 28 . 12 66.79 1 94.91 174.59 424.54 599 . J 3 1st July, 1931, to 30th June, 1936 . . .. ....: I. 95 - 7.06 -9. 01 172.64 4.17.48 590 . 12 The overseas debt outstanding at the end of any financial year r eached its maximum of £601.61m. sterling in 1932. By the 30th June, 1936, it had been r educed by £11.49m. sterling to £590.12m. sterling.

17. The overseas indebtedness at 30th June, 1936, includes £90.74m. sterling on account of the war, of which £79.72m. sterling is dne to the British Government for moneys borrowed and expendi· turc incurrect on behalf of Australia. The debts to the British

13

THE AusTRALIAN EcoNOMY.

Government were consolidated in 1921 under a.n arrangement (the " Funding Arrangement") which fixed the total amount due at £92.48m. sterling, and provided for an annual payment of £5.55m. sterling, to cover inter est and a sinking fund to cancel the debt in about 35 yea rs. By agreement with the British Government, no

payments have be en made sin ce the financial year 1930-31. 'l'he sinking fund payments, made under this reduced the

amoun t owing by £12.76m. sterling to £79.72m. sterling. The remainder of the overseas war debt amounts to £11.02m. sterling.

18. The following statement shows the directions in which loan moneys have been spent:-TOTAL LOAN E XPENDITURE, COMMONWEALTH AND STATES TO 30TH 1936.

GENERA!r-1\ailways Roads, bridges, h a r bour s, riY cr s Tr amways Wn.ter su pply

Sewerage Electricity s up ply Public buildings Post offi ce, telegraphs, t elephones .. Housing

Local Government loans and unem ployment relief Federal Capital Territory Defence Other publi c works

PRIMARY PRODUCTION-,.

Land settlement, in cluding advances W ater conservation, irrigation and drainage Agriculture, including agricultural banking Mines, minera.Js Other prima ry production

WAR l>URPOSES OTH ER PURPOSES

DISCOUNT· AN D FLOT·A'IION ExPENSES FUN DIN G OE' DEF I CI TS

£m.

367.73 85.55 13.76 76.4 3

22.75 25.62 37.36 41.05

19.30 43.50 7.78 7.65 21.25

769.7 3

94.94 28.19 22.28 5.80

6.74

157.95

367.08 27.84 35.47 82.03

J ,440.10

. (NOTE .- 'l'he tot!ll of statement diff ers from th a t of the p ublic debt, as It

t n!!ludes all e.xp end ttu re loa n s, whether the loans h ave bee n paid off, or a re

attll outstandmg. The pu bllc d ebt statement shows onl y t he nmoun t

and each loan is show n therein at the tllll ::>unt r epayabl e n t matu r it y and n ot nt

t h e a m oun t avail able fo r expend itu re.)

1569

14

'rHE AusTRALIAN EcoNOMY.

19. rrhe total annual interest payable on the debt at 30th J une, 1936, was £A50.13m., of which £A24.21m. \:<;·as payable on internal loans and £A25.92m. (£20.74m. sterling) on external loans. The total of £A50 .13m. includes £A7.98m. for interest on war loans.

20. Against the interest bill, however, may be set the excess of receipts over working costs of government enterprises, less sinking fund contributions. In a f ew government undertakings, working expenses and receipts are not brought into the consolidated revenue funds and these figures are n ot available. The figures available f or 1935-36 sho-vv an excess of receipts over working costs of £A20.54m. After deducting £A9.10m. for sinking fund co n tributions (whicb includes contributions on all loan expenditure, whether in r espect of these enterprises or for other purposes), there remains £A11 .44m. · to

be set off against the total interest bill of £A50.13m. This leaves a net figure of £A38.69m. or a little less than £A6 per h ead of p opula­ tion, to be met by taxation and from other sources.

21 . 'l"'he net value of tl1e production'" of Australia for 1935-36 was about £A325m., of which abont 8 per cent. was requir ed to provide the interest payments, amounting to £A25.92m., to overseas bondholders.

22 . Although the direct return from government lo an expendi­ ture as a whole is insufficient to pay the total interest and sinking fund contributions, there are indirect compensations. 'l'he increased facilities and better living conditions provided by means of th is expenditure have enabled the country to increase production an d support a larger population. From a national point of view it has been considered that large areas capable of being made productive could not be left idle, although the direct return might not suffi ce to pay charges on the debt incurred.

23 . It was generally believed that the community's interests could best be served by the State providing facifities, e.g., railways, which otherwise might not have been provided at all, or would not have been provided by private enterprise as rapidly or t o the same extent. B'or these reasons a great deal of capitar which might other wise have been invested in private enterpr ise has been invested in

Australian government securities. The holders of these securities have regularly received inter est on their investment, and their prin­ cipal has been secure.

Where similar activities have been undertaken

* No'rE .-The value of production quoted Is on a. net basis, which is the basis

now adopted by Au stralian statisticians. For t his reason it is not comparable with the value of production pu blished for the year s p rior to 1933-34, wbicb w a s based on gross value (except tor m a nufacturing ) i nclud in g nil costs 1nciuental to production and marketing.

15

THE .A.usTRA.LIAN EcoNOMY.

by private enterprise, investors have, in many cases, suffered a reduction or loss o£ income, or a loss of capital. The security of the capital values of their government investments has given to large Australian institutions a degree of stability which has been of benefit to the

24. The extent of State enterprise in Australia is indicated by the proportion of the total assets of the community owned by the various governments. The latest detailed investigation into the wealth of Australia was published in 1934 bi the Commonwealth Statistician, and relates. to the year 1929. He estimated the priyate wealth in Australia, irrespective of domicile of owner, to be

£A3,351m. The loan expenditure of the Commonwealth and States at that date, excluding war debt and revenue deficits, amounted to about £A790m. In addition, there had been some expenditure from revenue on works fo:r capital, purposes; and also local government capital expenditure to the extent of about £A135m. It is difficult to say what valuation could be placed on the assets represented by the expenditure of Commonwealth and State Governments; some of the

assets .will have depreci·ated, some, such as land, will have appreciated in value'; others will have disappeared. Another factor which has to be taken into account is that the value of money has varied from time to time. Although there must be considerable assumption in making

an estimate, it would appear that in 1929 the total assets in Australia could be valued at about £A4,000m., and that between one-fifth and one-sixtll of the total was then represented by assets directly provided by government expenditure. There is no reason to believe that the proportion has since appreciably changed.

25. s·ome idea of the part played by governments in the economy is also shown by the proportion which the number of government employees bears to the total of breadwinners. According to the census of 1933 the number of breadwinners was 3,155,621. At this

date about 218,000, or 7 per cent. of the total, were employed directly by governments. Statistics are not available to show the comparison between total earnings of government employees and all other recipients of income; but in 1934-35, salaries and wages of government

employees were about £A51m. out of an estimated national income of £A518m.

26. As the loan expenditure of governments forms a very large proportion of the total capital expenditure in Australia, the of interest on government borrowings has an important on

other money rates, which in turn affects them . The following table shows internal loan issues made since June, 1931, and the rate of

151 71

16

THE AusTRALIAN EcoNoMY.

interest paid, together with the ruling rate of inter est on two years' fixed deposits with the trading banks at the time of issue:­ INTERNAL LOANS AND INTEREST RATES, 1932-1937.

Effective Trading Banks'

Amount of Inter es t

yield per Year o! two years ' Date. J,oan. R ate cent. Ma t u rity. F ixed Deposit Per ce nt. including Itedcm ptio n. Rate . £m. Per cen t. £ Per cent.

November, 1932 8.00 3! 3 15 0 1942 3t

May, 1933 . . 8 .46 3! 3 15 0 1942 3

November, 1933 10.32 3t 3 12 5 1943 3

June, 1934 . . 12 .23 3t 3 7 8 1948 2!

November, 1934 15. 05 3 3 0 5 1948 2i

June, 1935 . . 12.51 3i 3 8 5 1949 2i

November, 1935 7.96 3;f 3 15 6 1949 21

June, 1936 . . 9 . 02 3£- 3 17 6 1951 3

November, 1936 7.52 3! 3 19 4 1951 3

May, 1937 .. 7 .50 3t . 3 19 1 1948 3

27. It will be seen that, sin ce Nqvember, 1934, the differ ences between the rates of interest on the loans raised and the rates on the fixed deposits of the trading banks are greater than the differences prior to that date, although the amount s of the loans raised since then have generally been lower and the position of government finances has much improved.

28. rrhe sources of investment in government securities are indicated by the following analysis of the holdings, at 31st December, 1936, of long-term government securities maturing in Australia:-HOLDINGS OF LONG-TERM GOVERNMENT SECURITIES.*

H eld lJy .Amount of holdings

(at face value) . £Am. £Am.

Co mmonwealth Bank-Gen eral Banking Department Savings Bank

Tra ding banks Savings banks, other than Commonwea lth Savings Bank Trustee companies (m ainly t rust fund s ) Insurance companies

Superannua tion funds

27.47 83.83

Governmenta l trust fun ds and semi -governm enta l authorities Friendly soci eties a nd trade unions Ot h er institutions and general public

Bonds- unclassified

Total

111.30 20.26 42.82 38.32 61.98 15.02 20.26

1.40

275.71

587.07 25.09

612.16

* No TE. - Thls t able docs not include treasury-bills and other short-term ness.

. \

17

THE AusTRALIAN EcoNOMY.

29. The monetary and banking system is affected not only by government loans but by government revenue finance. The following table the position of the revenue accounts of the Commonwealth and States from the financial year 1929-30 :- ·

GOVERNMENT REVENUE ACCOUNTS, 1929-30, TO 1936 -37. (Surplus + Deficit-.)

I - 1929-30. 1930-31. 1931-32. 1932-33. 1933-34. 1934-35. 1935-36.

---

£Am. £Am. £Am. £Am. £.Am. £Am. £Am.

Estimate, 1936-37.

£Am.

Commonwealth -1.47 -10.76 + 1.31 +3.54 +1.30 + . 71 +3.57 + . 05

States .. -8.23 -14.90 -18.31 -8.22 -6.87 -3 . 81 -2.44

--------- --- Total .. -9.70 - 25.66 - 17 . 00 -4.68 - 5.57 -3.10 +1.13 - 1.29

30. The effects of the depression on government finances led to the -adoption by the Commonwealth and State Governments, in June, 1931, of the "Premiers' Plan", by which all governments undertook to bring into effect the following measures, with a view to rehabilita­ tion of the finances in such a way as would distribute as equally as

possible the. reductions in incomes involved:- -.

(a) A reduction of 20 per cent. in all adjustable government exp enditure, as compared with the year ending 30th June, 1930, including all emoluments, wages, salaries, and pensions paid by the Governments, whether fixed by

statute or otherwise, such reduction to be equitably effected;

(b) Conversion of the internal debts of the Governments on the basis of a 22! p er cent. reduction of interest; (c) The securing of additional revenue by taxation, both Com­ monwealth and State ;

(d) A reduction of bank and savings bank rates of 1nterest on deposits and _ advances with the co-operation of the banks;

(e) Relief in respect of private mortgages.

'l'hese proposals represented the greatest effort in economy and taxation which it was considered safe to attempt. It was anticipated at the time of the Plan that, as a result of these measures, the total estimated deficits for 1931-32 would be reduced from £A41.08m. to

£A14.65m. It will be seen that the actual deficits for that year

totalled £A17.00m. F.2581.- 2

1573

18

THE A u s TRALIAN EcoNOMY.

31. During the year 1929-30, the Governments issued treasury­ bills in Australia as a means of providing funds to meet revenue deficits as well as for loans for public works. The amount of the treasury-bills outstanding, and the rate of discount at the time of issue are as follows :-

THEASURY BlLLS IN AUSTRALI A.

1930 1931 1932 1933 1934 1935 1936

30th June- Amount outstanding.

£Am. 2.30 20 . 62 44.99 48.87 48.47 45.12 47.01

Per cent . 5t 6

4

2! an d 2f 2l

li li

32. '£he following table shows the combined revenue accounts of Commonwealth and States for the year 1935-36 :-REVENUE. £Am. Taxat ion-

Cust oms dut ies (Common-wealth ) 28.07

Excise dut ies

wealth) t ax

Land tax . .

(Common·

Succession duties · . . Sales tax ( Commonwealth) Unemployment tax (States) Flour tax (Commonwealth)

Other taxat ion

Tot al taxation Territorial (States ) Interest on loans to local borlie8 (States) ..

Other r evenue-States Commonwealth

· Carried forward

13.37 21.72 2.73 5.46

9.43 8.17* l.l5 9.14

99.24 4.20

8.41

7.63 3.33

122.81

EXPENDITURE.

In terest-­ Overseas Australia ..

Sinking Fund Invalid and old-age pensions (Commonwealth ) . . vVar pensions and r epatriation

(Commonwealth) . . Defence (Commonwealth) "fUnem ployment (States) Education ( States) . .

Charitable and health (States) Police and pen al (States) Mines, lands, agricult ure and fore stry (States) ..

Miscellaneous (States) Administrative, bounties, pub! ic miscellaneons

wealt h )

Carried forward

ter ritories, wor k s and (Common ·

£Am.

26.9 1 24. 13

51.04 6.67

12.80

8.55 4.34 5.16 10.22

5.52 3.88

2.89 16.58

8.38

136.0 3

• Excludin g, l n the case of Queen sla.nd, £ 2.'19m. wll!ch wus paid t o a epeclal fund. t in the case o! Queensla!' d, £ 2.95m. which was !)aid from a fu oll .

19

THE AusTRALIAN EcoNOMY. REVENUE. EXPENDITURE .

Brought for ward . . 122.81 Brought forward . . 13(1. 03

Business undertakings-Post Office 14.87

Railways and Tnwnvays . . 45.59 Oth er (States) 6.04

Total Business undertakings ()6.50

Grants and payments by Com-monwealth to States 17.02

206.33

Business undertakings ( exclu­ sive of interest and sinking funds)-Post Office 9.71

RailwH-ys and tramways 33.45

Other (States) • . . 2.80

Total Business nndertakingB 45.9G

Commonwealth Grants to States 17.02 Amount of Commonwealth

grants to States paid by

States to special funds, e.g., Sinking Ftmd 6.19

Total expenditure Surplus

205.20 1.13

206. 33

33. 'fhe proportion of the estimated national income which was taken in the form of income and unemployment relief taxes was as follows:-19 30·31

1031 -32 J 935 -3G

The F -inancial ..clgree.m ent.

Per cent. 7.4 7.2 5.6

34. 'l'h e Financial Agreem ent, of 12th December, 1927, between Commonwealth and State Governments, was the result of efforts,

(; Xtending over several years, to bring about more satisfactory finan­

cial relations between the Commonwealth and the States, and it tllarks an important development in Austr alian government finance. 35. In th e fi rst instance, the scheme WC!S adopted by the governments, and certain of the proposals were brought into eff ect, in r es pect of the period from 1st July, 1927, to 30th J nne, J 929, by

the statutory ratification of the various Parliaments in 1928. But in order to give permanent effect to t he provisions of the Agreement, it was n ecessary to amend the Constitution by conferring upon the Commonwealth the powers n ow g iven by Section 105 A. This amend­

ment of: the Constitution was approved by a refer endum taken in November, 1928, and the Financial Agreement was finally validated by the F-inancial Agreentent Validation A. ct 1929. 36. 'fhe Agreement covers a variety of matter s and has f ar ­

reaching effects. The most important provisions are those which relate to th e consolidation of the public debt, the regulation of

government borrowing, and the sinking funds.

1575

20

THE AusTRALIAN EcoNOMY.

37. The principal p ermanent provisions are as f ollow.-;: -1. Consolidation of public debt.

(a ) On 1st July, 1929, the Commonwealth took ove r u ( i) the balance t hen unpaid of t he gross public

debt of each State existing on 30t h

tTune, 1927; and

( ii ) ail other debts of e·ach State exiBting on the l .st July, 1929, fo r mon eys bo rrowed by that State which by this Agreemen t are deemed t o be moneys borr owed by the

Commonwealth for an d on beh alf of t hat State-and will in r espect of the debts so taken over

assume as bet we en the Commonwealth and the States the liabilities of the States to bondholder s ". 'rhe interest on these d ebts is paid by the Com ­ monwealth and collected from the States, less the sum of £7. 58m. per annum, which is provide d by the Commonwealth f or a p erio d of 58 year s.

IT. The regulation of gover nment borrowing.

(a) The Austr alian Loan Council is established. It

consists of representatives of the Commonwealth and of each State. ( b ) The Commonwealth and t he States agree · that they will f rom time t o t ime submit t o the Loan Council

their loan programmes f or each fi n ancial year. (c) If the Loan Coun cil consider s t hat the t otal amount of the pr ogr ammes cann ot be borrowed at r eason­ able rates and condition s, it determines 1vhat

amount shall be borr owed. By a unanimous

decision, this amount can be allocated bet ween the Commonwealth and t he various States, but in default of a unanimous decision , a formula is

provided for that p ur pose. (d) Revenue defici ts which r equire to be f unded must be included in the lo an programme, but borrowings for " temporary purposes " need not be included.

Borrowing by the Commonwealt h for defence purposes is not subject t o the agreement . (e) Subject to the decision of the Loan Council, the Com­ monwealth is to arrange for all borrowings, includ­

ing those for conversions, renewals, and redemp-

21

'l'nE Aus'l'RALIAN EcoNOMY. tions, but the Commonwealth or a State is at liberty to borrow in the following circumstances:-(i) The Commonwealth or a State may borrow

for "temporary purposes " by overdraft or fixed or special deposit subject to maxi­ mum limits (if any) decided by the Loan Council for interest and other charges. (ij) The Commonwealth may borrow within the

Commonwealth, or a State within its terri­ tory, from authorities, bodies or institu­ tions, or from the public by counter sales of securities, and it may .use any public

moneys which are available. But the

mterest and other charges must not exceed any maximum decided upon by the Loan Council from time to time, and any

amount so borrowed is to be considered as part of the borrowing programme for the year ; any excess is to be considered as part of the programme for the ensuing year.

The securities issued for moneys so bor­ rowed are to be Commonwealth securities, to be provided by the Commonwealth on terms to be approved by the Loan Council. (iii) A State is at liberty to borrow overseas if

the Loan Council by unanimous decision so decides. In that event, the Common­ wealth is to guarantee the performance by the State of all its obligations to its bond­

holders.

Ul. Sinking Fund provisions and other payments. Contributions to the sinking fund in respect of the debts taken over by the Commonwealth and of any other loans raised subsequently by a State or by the Commonwealth

for and on behalf of a State are as follows :-(a) On the net public debt of the States at 30th

June, 1927-£641.35m.-7.s. 6d. per cent. per annum, of which the Commonwealth pays 2s. 6d. and the States 5s. Contributions are to be continued for a period of 58 years co-m­ mencing. on 1st July, 1927, except in the case

of New South Wales, in which that State's contributions commenced on 1st July, 1928.

22

THE AusTRALIAN EcoNOMY.

Where there is an obligation under law or con ­ tract to provide a sinking fund in excess of the r ate of 7s. 6d. per cent. per annum, the

excess is provided out of the National Debt Sinking Fund. (b) On loans raised by a State or by the Common­ wealth on behalf of a State after 30th June,

1927- lOs. per cent. per annum, of which the Commonwealth pays 5s. and the State 5s. Contributions are to continue for 53 years, commencing from the date of the raising of the loan, except in the case of New South vVales, in which the commencing date for that State's contributions in respect of loans raised in the year 1927-28 was 1st July, 1928. Provision is made by which the sinking fund contributions by the States may be increased on loans raised after 30th June, 1927, in the case of expendi­ ture of the loan moneys on wasting assets.

38. In respect of loans raised after 30th June, 1927, by a State, or by the Commonwealth for a State, to meet revenue deficits accruing after that date, the Commonwealth is under no obligation to make sinking fund contributions and the State is required to provide for

the redemption of the loa:·n by making contributions at the rate of 4 per cent. per annum.

'l'he sinking funds established under the agreement are under

the control of the National Debt Commission, an authority constituted under Commonwealth legislation (the National Debt Sinking Fund Act 1923-19a4) and consisting of the 'rreasurer of the Commonwealth, the Chief Justice of High Court, the Governor of the Common­

wealth Bank, the Secretary to the Commonwealth Treasury, the Solicitor-General for the Commonwealth, and a representative of the States. All contributions in pursuance of the agreement are debts payable to the Commission.

40. All moneys and securities standing to the credit of sinldng fundB of a State at 30th June, 1929, were transferred to the National Debt Commission unless there were statutory or contractual con­ ditions precluding the transfer. In that event the funds remained under the control of the State or trustees concerned, and the National

Debt Commission makes to the States or the trustees all future sinking fund payments.

23

'rHE AusTRALIAN EcoNoMY.

41 . Sinking fund contributions made under this agreement, and sinking funds transferred · to National Debt Commission, are not accumulated but are applied to the redemption of the public debts of the States, or to the purchase of securities issued in respect thereof;

but if deemed inexpedient at any time by the National Debt Com­ mission to apply funds in this way, the Commission may

temporarily invest those funds in authorized securities. The purchase of securities by the National Debt Commission is arranged through the Commonwealth Treasury. 42. \ Vhen a security issued in respect of a public debt of a

State or of a lo an raised by the Commonwealth for a State is

repurchased or redeemed by the National Debt Commission, it is 9ancelled. From the date of cancellation and for the full period during which · sinking fund contributions are payable, the State on whose account the security was issued must make a further sinking

fund contribution at the rate of 4i per cent. per annum on the face valu e of the ca ncelled security. 43. 'l 1he terms of the agreement are legal obligations binding on the Commonwealth and the States. These obligations cannot be released or alter ed -vvithont a n ew Agreement which would require the approval of all the Parliaments.

44. The security which the Financial A.gr eement has given to investment in government loans has had a favorable influence upon the terms of new borrowings and conversions. Prior to the Financi;tl Agreement there was no gen e1·al obligation to provide sinking funds

on State loans, and even where sinking fu:nds had been established, the investor did not have t he- security which he now possesses. 45. The establishment of the I10an Council, · its power to dec ide whether the total amount of the Commonwealth and States' loan .J programmes can be borro-vved on reasonable terms, and, if necessary, to decide the total amount to be borrowed, remove the possibility of competition in borrowing between the different governments, which,

if unchecked, would result in higher interest rates. 46. There is no provision in the Agreement to cover loans raised by local government bodies which, under State law, have power to borrow, but the States concerned have now arranged that these loans ::;hall not be raised without Loan Council approval.

47. The amendment of the Constitution in 1928 (Sec. 105A ) enabled the Commonwealth Parliament to make agreements with the States for the conversion of debts, and this power made possible the legislation in 1931 for the conversion of the internal public debt

at lower rates of interest, in accordance with the resolutions under the "Premiers' Plan".

1579

24

THE .Au sTRALIAN EcoNOMY.

Commonwealth Sinking Funds. 48. The )j'inancial Agreement does not apply to sinking f und payments in respect of lo ans raised by the Commonwealth f or its own purposes. Under the National D ebt Sinking Fund .Act and other Acts, the Treasurer is r equired to pay into the National I}ebt Sinking F'und each year in respect of debt, excepting war debt due to t he British Government, contributions of 30s. per cent. · on debt r aised for the P ostmaster-General's Department and lOs. per cen t. on

other debt, together with 5 per cent. on the receipts of the sinking fu nd in respect of contributions on Commonwealth debt .

National Debt Sinking Fu.,nd R eceipts. 49. The r eceipts of the National Debt Sinking Fund to 30th June, 1936, wer;e as follows:-

In r es pect of In respect of

- Commonwealth States ' Total.

d ebt. debt .

I I £l'.m. £Am. £Am.

Prior to lst July, 1930 . . .. 32. 00 8 .1·9 40 . 19

Financial Year-1930-31 . . . . . . 3. 07 3 .51 6 .58

1931-32 .. 0 . . . 3. 37 3 .83 7.20

1932- 33 0. 0 0 . . 3.68 4.08 7 . 76

1933- 34 • 0 . . .. 3 .75 4 .44 8.19

1934-35 .. 0 . 0 . 3. 92 4. 67 8 . 59

1935- 36 . . 0 . 0 0 4. 19 4. 91 9 . 10

Total to 30th June, 1936 . . .. 53 .98 33. 63 87.61

I

In addition t o payments t o the National Debt Sjnking Fund, the Commonwealth has r edeemed debt t o the amount of £A15.6m . out of Consolidated Revenue.

25

CHAPTER II.

THE MONETARY AND. BANKING SYSTEM 1901-1936.

THE CURRENCY SYSTEM 1901-1936.

50. At the inauguration of the Commonwealt h in 190 1, the Australian currency consisted of coins and bank notes, except in Queensland, where 11reasury notes had taken the place of bank notes.

CoiNAGE.

51 . The gold coins were sovereigns and half-sovereigns, which were minted by the Royal Mint in England or by branches of the Royal Mint which, under Imperial Orders in Council, had been opened in Sydney ( 1855), Melbourne ( 1872), and P erth ( 1899 ) . Wherever minted, these gold coins were identical in weight and fine­ ness. rrhose minted in Australia were British currency, and all were legal tender in Australia for the payment of any amount. Token coinage consisted of silver and bronze. The usual silver .coin.s were

the half-crown, the florin, the shilling, the sixpence and the three­ pence. The bronze coins were the penny and the halfpenny. Until 1910 all these were British coins minted in England and imported into Australia.

52. Under th e constitution al p ovver to legislat e with r espect t o coinage, currency and legal tender , the F ederal P arliament passed the Co·inage A ct 1909, which left the gold coin unalter ed, hut provided for the issue, under the control of the Commonwealth Treasurer, of a separate coinage jn silver an d br onze , though with the same degree

of fineness as then existed in the British coinage. In 1910 these . coins, with a distinctive Australian design, were minted in England, but in 1916 the work was given to t he Melbourne J\1:int. The Coinage Act 1909, made no provision f or the half-crown, a,nd this coin gradually

disappeared. The silver coins are legal tender up to 40s. and the bronze to 1s. Under the Coinage Act 1936, provision was made for the issue of a new coin, the crown, which 4as since been minted. 53. When the Australian silver and bronze coinage was intro­

duced in 1910, an arrangement was made with the British Govern­ ment under which British silver coins were withdrawn from circula­ tion in Australia at the rate of £100,000 per annum. The coins were sold to the British Government at their face value and were handed

over to the Australian Mints, where they were melt ed down. The bullion was purchased by the Treasury, and used for minting

Australian silver coins. The arrangement for withdrawal only applied to the British coins which were of the same silver content as the

158i

26

T H E MoNETARY AND BANKI N G SYSTEM 1901-193 6.

Austr alian. Until 1920, British and Australian silver coins -we r e of 925 millesimal fineness. The British coins, issued after that date, were reduced to 500 millesimal fin en es s, but the Aust alian coins have r emained unalter ed.

54. 'rhe disappearance of gold coins during the war, and later the _falling-off in the production of gold, led to the closing of the Sydney Mint in 1926, and in September , 1931, Australian mints ceased to mint gold coins. - In September, 1931, the Commonwealth Bank made an arr angement, which is still in force, wher eby the mints we r e to buy gold as agents of the Bank, at a p rice fi xed weekly by the Bank on the basis of sales effected overseas. At presen t bo th the :Melb ourne and the P erth lVfi nts assay and r efin e gold, and the former provides the token coinage. '£he British Government appoints the office rs of the mints, but th e State Govern men ts of Victor ia an d Western Aust ralia, r esp ectively, own the lands and buildings, receive the revenues, and bear t he expenses of the est ablishments. Owner s of gold pay f or the services of assaying an d refining it, and the

Commo nwealth 'Jlreasury pays for the work of minting the silver and bronze coin. From these sources the two States meet t he cost of the mints and make any pr ofit or loss arising in this way. Since the f ace value of a silver or a bronze coin is gr eater t han t he valu e of the metal from which it is made, a pr ofi t ar ises f r om the token coin age, and this forms part of the revenue of t he Commonwealth Government .

55. The f ollowing procedure is observed in connexion with the minting and issue of t he token coinage. The Treasury estimates the amount of n ew coin r equired for circulation, as well as for any reserve which it de ems necessary to hold. The bullion is t hen

purchased by the Tr easury, an d orders are given t o the Mint f or its coinage. As the coins are minted they ar e deliver ed to the Common­ wealth Sub-Treasury, Melbourne. vVh en coins ar e r equir ed by any bank, it notifies the Commonwealth Bank, which purch ases from the Sub-Treasury any necessary supplies.

NOTES.

56. I n 190 1, the bank note currency consisted of n otes, payabl e in gold coin and issued by trading banks in all States except Queens­ land. Some r estriction upon the .issue, or other p r ovision for the protection of the public, was gener ally contained in the charter or stat ute of incorporation, or in t he general statute law. Bank

notes we r e never legal tender except in New Sou th W ales, where the notes· of certain banks had been made legal tender for a brief period during the crisis of 1893. All the States imposed a tax, upon

27

Tr-IE MoNETARY 1c\ ND BAN KING SYSTEM 1901-1936 .

the issue of the notes, usu ally at the r ate of 2 per cent. per annum upon the average circulation. There was only one form of Govern­ ment pap er currency in circulation, namely, Queensland Treasury notes. These had been issued by the Queensland Government, tem­ porarily in 1866, and continuously from 1893. They wer e legal tender in that State, where they had, from 1893, super se ded bank notes.

57 . In 1910, the firs t step was made from the system under \vhich a number of tr ading banks issued n otes, towards the present system under which a single bank has a monopoly of the note issue. I n September of that year, the Australian Notes Act was passed, pro­ hibiting banks from issuing or circulating State notes as money, and giving the Governor-Gen eral in Council power to authorize the

Commonwealth Treasurer to issue Australian notes. The Act came int o force by pr oclamation on 1st Novemb er, 1910, and notes were issued forthwith. To supplement this Act, and to put an end to t he circulation of bank notes, the Bank Notes Tax Act was passed in

October, 1910, imposing a tax of 10 per cent. per annum "in respect of all bank notes issu ed or re-issued by any bank in the Common­ wealth after the commencement of this Act and not r edeemed " . This Act came into f orce by pr oclamation on 1st July, 1911.

58 . Under the A.·ust,ralian N otes Act 1910, it was provided that the Australian notes should be "payable in gold coin on demand at the Commonwealth Treasu ry at the seat of Government", and that the Treasurer should hold in gold coin a reser ve of an amount

not less than one-fourth of the n otes issued up to £7m., and an amount equal to the excess over £7 m. In 1911, this latter provision was amended, and the Treasurer was required mer ely t o hold in gold coin not less than one-fo11rth of the-total amount o£ Austr alian

not.es issued. Under the A'ustralian Notes Act 1910, notes might be issued in denominations of lOs., £1, £5, £10 or any multiple of £10, and were to be legal tender '' throughout the Commonwealth and throughout all territories under the control of the Commonwealth ".

These t wo Acts effectively put an end to the issue of n ot es

by trading banks and by the Queensland Treasury. I n 1910, contr ol of the issue of Australian. notes was vested in the Commonwealth Treasury. In 1920, control was t ransferr ed t o the Note I ssue Depart­ ment, a separately-managed department of the Commonwealth Bank. It was provided that notes should " bear the promise of the Treasurer

to redeem the notes in gold coin . on dem an d at the H ead

Office of the Commonwealth Bank." In 1924, the Note I ssue Depart­ ment was brought under the author ity of the general Board of the ·Bank. The Treasury, however, continued to control the iSGve of token

/1583

28

rfHE MoNETARY AND BANKING SYSTEM 1901-1936.

coinage. Under the Act of 1920, the Note Issue Department has power to issue 5s. notes in addition to those authorized by t he Act of 1910, but this power has not been exercised.

60. In J uly, 1915, a proclamation was issued by the Governor ­ General pr ohibiting the export of gold specie or bullion from

Australia, except with the consent of the Commonwealth T r easurer. rrhis proclamation was r epeated in February, 1922, bu t both pro­ clamations were revoked in A pril, 1925, when Australia was once mor e on a gold standard. Gold coins, which had ceased to be curren t during t he war, did not, however, return to circulation . The gold standar d lasted only until the end of 1929. The Co mmonwealth Bank Act 1929, gave the Treasurer power to authorize the Bank to obtain particulars of gold coin and bullion held in Austr alia, and t o r equire the exchange of the gold for Australian notes. The rate to be paid by the Bank was one pound note fo r each sovereign , and £3 17s . 101d. per ounce standard of the bullion. A ustr alia once mor e le ft the gold standard and h as not since r eturned.

61 . In J une, 1931, a change was made in the legislative p r o­ visions gover ning the note reserve. In place of t h e statut or y obliga­ tion to hol d in gold coin not less than one-four th of the t otal amount of Australian notes issued, the Cornrnonwealth Bank Act 1931, provided t hat the reserve should be-

( a.) for t he two years ended 30th June, 1933, not less than 15 per cent. ; ( b) t o 30th June, 1934, not less than 18 per cent. ; (c) to 30th June, 1935, not less than 21f p er cent. ; (d ) thereafter , not less than 25 per cent.

62. In May, 1932, a further change was made in the note r eser ve pr ov1swns. 'r he Commonwealth Bank Act 1932, p rovided that the r eserve might be held " in gold or in · English sterling or partly in gold an d par tly in English sterling " . English sterling f or this

purpose " means cur r ency which is legal tend er in the United

Kingdom, and includes-( a) balances standing t o the credit of t he B ank at t he B ank of E ngland or at any other of its banker s in London ; ( b) Bills of exchange, or advances secured by bills of exchange:

which-(i ) are payable in the United King dom in currency which is legal tender in the United Kingdom ; (ii) will mature in not more than three months, and the security for the payment of which bills is, in the opinion of the Bank, satisfactory ; and (c ) Treasury-bills or other securities of t he United Kingdom

which will tnature in not more than t hree month.s."

29

THE MoNETARY AND BANKING SYS'l'EM

'l'he Act also abolished the provision that the } ... ustralian note should bear the promise of the Treasurer to redeem it in gold coin. Notes are now issued without any such promise, and are merely expressed to be legal tender in the Commonwealth and the territories under its control.

63. Australian notes are now printed for the Note Issue Depart­ ment at the Note Printing Branch of the Commonwealth Bank in Melbourne. Notes are not issued directly to the public, but only to the General Banking Department of the Commonwealth Bank. \Vhen, for example at Christmas time, an expansion of the issue is required, the Note Issue Department transfers notes to the Banking Depart­ ment in exchange for Government securities at their nominal value;

conversely, in the case of a contraction, the Banking Department transfers notes to the Note Issue Department in exchange for

securities. After additional notes have been issued, they find their way into circulation when the trading banks, and other customers of the Commonwealth Bank, draw on their deposits with the General Banking Department. Until they find their way into circulation, they

play little or no part. in the monetary system. Notes held by the Note Issue are not included in the note issue. In 39

cities and towns in Australia, there are offices of the Commonwealth Bank, which, in addition to their other activities, serve as note issue branches. Trading banks may, without expense, lodge Australian notes at any of these branches, and immediately withdraw from any

other such branch a corresponding amount.

CURRENCY SYSTEM --SUMMARY.

64. During the period 1901 to 1936, there have thus been severa] changes in the composition of Australian currency. Until 1914 gold coin was the chief form of currency. In Australia, the trading banks' " cash ", and the public's '' cash n also, then included gold, notes, and token coins. Between 1914 and 1929 the note issue became pre­

dominant. Gold ceased to be current, and the circulation of notes was greatly increased, providing not merely a substitute for the gold, but also additional currency. Apart from token coins, the trading banks' holdings of "cash" were still gold and notes, but the latter

had become more important, and the public's holding of " cash " consisted almost entirely of notes. In 1929, however , the Common­ wealth Bank took over from the trading banks most of their gold, and the note issue began to play a less important part in the monetary system. 'rhe trading banks took payment for the gold in the form of deposits with the Commonwealth Bank. Apart from token coins, trading banks' u cash " now consisted mainly of notes and deposits

with the Commonwealth Bank. The public's "cash", as before,

1585

30

'I'HE lvioNETARY AND BANKING SYsTEM 1901-1 936 .

eonsisted almost entirely of notes. Prior to 1929, the obvious way in which an expansion of the "cash" of the system came about was through an increase in the note issue, which would be shown at once. After 1929, however, it was possible for an increase to take place in that part of the trading banks' "cash" which consi ted o.f deposits with the Commonwealth Bank, without affecting the note issue.

65. Changes have taken place, too, in the character of the note issue reserve. It was originally established to ensure a supply of gold to keep the Australian note convertible and to maintain an effective gold standard. The legal requirement t o hold a reserve was faith­

fully met even during the war period, when· the gold standard had been abandoned, for the gold reserve never dropped below 30 per cent. of the total note issue. When, in 1931, the legal minimum reserve was temporarily reduced below 25 per cent., some of the gold was used to meet overseas obligations. The permission given in 1932 to hold the reserve in gold or English sterling enabled the Bank to decide how much gold it would hold for this purpose, and the present f unc tion of the reserve, in relation to the note issu e, is to set a legal limit to its expansion. ·

THE BANKING SYSTE1V11901 'r O 1936. TRADING B ANKS.

66 . Sinee 1817 , when the first A ustralian bank, the Bank of New South Vvales, was founded, private t r ading banks, incorporated by charter or by statute or under the Companies Acts, have carried on the business of banking in various parts of Australia. Some of these banks were incorporated and owned in Australia and others in England, with head offices in London-a distinction which has remained important to the present day. Australian banks adopted the system of branch banking. There was no legal restriction imposed upon the spread of banking, either within a State, or from on e State to another, although some banks confined their operations to on e State. Niost of the banks possessed and exercised the right of issuing notes. I n this respect they were subject to the conditions of their charters or special acts and to the general law, but some provision

was generally made for the protection of note holders. 67. In the 19th century the t rading banks experienced some vicissitudes of fortune such as arose from various crises in the early days, from the discovery of gold in 1851, and from the troubles of the late 'sixties, but it was not until the crisis of 1893 that the banking system was involved in serious difficulties. The preceding boom was associated with a large influx of capital on private account and with

wild speculation in land, to which some banks contributed. The slump was associated with the collapse of the land boom, a serious

31

THE MoNETARY AND BANKING SYsTEM 1901-1936.

decline in export prices, and a falling-off in overseas lending accom­ panied by a withdrawal from Australian banks of deposits owned in the United Kingdom. In New South Wales the Government declared the notes of certain banks legal tender and guaranteed their

payment for a period of about .six months. In Victoria the

Government declared a moratorium of five days from the 1st to 5th M:ay, 1893. The crisis was most severe in these two States. Some banks remained open, but many suspended payment. Of those which closed, a few comparatively unimportant banks failed

altogether, but the majority r e- op ened and subsequently recon­ structed. The period from 1893 to 1901 was one of slow and painful recovery, and at Federation some of the reconstructed banks were still working under their various schemes.

SAVINGS BANKS.

68. Savings banks were established very early in Australia for the encouragement of thrift. For example, Campbell's Bank, the first savings bank, was opened in New South Wales in 1819, in order to remedy "the extravagance and improvidence which the poor settlers, mechanics, and labourers of this Colony have fallen into,

by reason, first of their having , no encouragement to save their earnings, and secondly of their having no place of safe deposit for those earnings ". In 1833, this bank was taken over by the Savings Bank of New South \rvales, established by an Act of Parliament in

1832. In South Australia a savings bank was established in 1848 "for the encouragement of frugality and that persons possessing small sums of money beyond what they require for the supply of their immediate wants, should be afforded an opportunity of

ing the same on good security to accumulate at interest". A feature of this Bank from its inception was that the whole profits of the Bank, after deducting expenses and the sum set apart for the Security . Fund, ·were to be appropriated to the payment of interest at a rate

decided from time to time by the Trustees. In other States, savings banks were established: The Commissioners' Savings Banks of Victoria, which dated from 1842; the two Savings Ba:riks of Tasmania, the Launceston Bank for Savings, 1835, and the Hobart Savings

Bank, 1845 ; and the Queensland Savings Bank, 1865. Some of these were government-owned and controlled, others were managed by Boards of Trustees, over whose appointment governments often ex.ercised some control.

69. Another type of savings bank was the Post Office Savings Bank, first established by Western Australia in 1864, and later in most of the other States. These were separate government institutions except in South Australia where fhe Post Office Savings Bank was

32

'J.1HE MoNE'I'ARY AND BANKING SYSTEM 1901-1936.

merely an agency for the Savings Bank. In Victoria the P ost Office Savings Bank, established in 1865, was absorbed, in 1897, by t he Commissioners' Savings Bank, which became known in 1912 as the State Savings Bank of Victoria. In New South Wales a Post Offi ce Savings Bank was established in 1871.

70 . All these banks made steady progress, and emerged unscathed from the disasters of the 'nineties. The Post Of-fice Savings Bank of New South \Vales had, throughout its existence, been a gover n­ ment bank and its deposits, in 1893, showed an increase over those of 1892. 'rhe Savings Bank of New South \Vales n either sought nor received government assistance, but was able to meet all its

obligations, and its deposits fell only slightly. The Victorian Govern ­ ment guaranteed the Commissioners' Savings Banks of Victoria and the deposits were larger in 1893 than in 1892. In South Australia the deposits of the Savings Bank in 189 3 were .greater than in any ptevious year.

71. The establishment of the Commonwealth Savings Bank Departroent of the Commonwealth Bank in 1912, under t he A ct of 1911, led to consider able changes ,in the system of savings banks in Australia. In the first plCl!ce the . Common wealth Savings Bank decided to use as its agent the Post Office, which had been t r ansferred from the States to the Commonwealth, and the Savings Banks of the States· could no longer carry on business through the Post Offi ce. 'rhey had to fin d other premises, and any bank pr eviously

conducted through the Post Office which was not already a branch or agency of an existing savings bank, became the Savings Bank of the State. The New South Wales Post Office Savings Bank had become, in 1906, the Government Savings Bank. In 1914 this bank absorbed the Savings Bank of New South Wales, which had been established in 1832 . In the next place the Commonwealth Sav{ngs Bank began a process of absorption by taking over, in 1913, the Savings Bank of Tasmania, and, in 1920, the Queen sland Government Savings Bank. Various proposals were made f rom time t o t ime for taking over other Savings Banks, but nothing came of them until

the . r ecent depression, when two State Savings Banks, which fo und themselves in difficulties, were absorbed by the Commonwealth Savings Bank. The first was the \Vestern Australian Savings Bank, which was absorbed in November, 1931. In Nevv South Vlales, the Gover n­ ment Savings Bank was forced to suspend operations on 23rd April, 1931. It was reconstructed and opened for the transaction of new business in September, 1931, and was amalgamated with the Common­ wealth Savings Bank as from 15th December, 1931.

33

'rHE MoNETARY AND BANKING SYsTEM 1901-1936.

R u RAL AND AGRICUL'l'URAL BANKS.

72. These banks were created to promote rural settlement 9-nd development by affording to primary producers financial assistance, by means of long-term loans, greater than is usually obtainable from other institutions, but their activities have been extended also in other directions. 'rhere are two main types, those closely associated with Savings Banks and those established independently. 'rhe Credit

Foncier Department of t he State Savings Bank of Victoria was established in 1896 to give assistance to farmers. In New South \Vales, an Advances to Settlers Board was established in 1899, and its activities I'Vere transferred, in 1906, t o the A.dvance Department of

the Government Savings Bank. In 1920, the Rural Bank Department of the Government Savings Bank was established to take over and extend the scope of the operations of the Advance Department. In both States these were under the control of the Com­

missioners of the Savings Bank, but the accounts were kept separate from those of the ordinary savings bank department. In 1931, when the Government Savings Bank of New South vVales was amalgamated with the Commonwealth Savings Bank, the Commonwealth Bank

took over the liabilit ies of the Rural Bank Department ·which was, in 1933, reconst ituted by the State as the Rural Bank of New South Wales. rrhe other type is t he bank specially created for the purppse. Examples of this type are the State Bank of South Australia, and the

Agricultural Banks of 'rasmaniar Western Australia and Queensland.

73. In 1925, the Rural Credits D epartment of the Common­ wealth Bank was established "to facilitate the marketing of primary produce in an orderly manner". 'rhe department was authorized to make advances for one year, upon the security of primary produce

placed under the legal control of the Co1nmonwealth Bank, to the Commonwealth Bank or other banks, co-operative associations', and corporate or unincorporate bodies _specifi ed by proclamation.

· THE CoMMONWEALTH BAN K oF Aus'rRAIJiil.

74. By the C01n monwealth Bank Act 1911, the Commonwealth Bank was established as a trading bank and a savings bank in com­ petition with the existing trading and savings banks. During several of the crises of the 19th century proposals had been made in Australia

for a public bank which should have sole p o1ver to issu e notes. After Federation, the idea of a Commonwealth Government Bank took form, and some held the view that it should not only be a competitor with the trading banks, but also in some sense a central reserve bank.

For instance, t he scheme adopted by the Brisbane conference of the Labour Party, jn 1908, included the provision "that the bank F .258l.- 3

1589

34

rrHE 111oNETARY AND BA:r-.T KING SYs'rEl\1 1901-1936.

shall be a bank of reserve for the deposit of r eserves of the banking companies operating in the Common'ivealth " . But by the time the bill for the establishment of the bank came before the .B,ederal Parlia­ ment in 1911, the idea of a central reserve bank was less prominent, and the sole pOV\'er to issue notes, usually conferred upon a central reserve bank, had already been vested in the Commonwealth

Treasurer. 75. No Board of Directors was pro .ided for the Bank The

management was left in the hands of a Governor, appointed for a period of seven years, 1vho was not subject to political control except in some minor matters. The Governor appointed in 1911 was l\1r. (later Sir) Denison 1\Iiller, who was re-appointed in 1918 for a further period of seven years, but died in office in .1923.

75A. The powers given to the Bank were the following:­

(a) To carry on the general business of banking; (b) To acquire and hold land on any tenure; (c) To receive money on deposit, either for a fixed term or on current account ;

(d) To make advances by way of loan, overdraft or otherwise ; (e) rro discount bills and drafts; (f) To issue bills and drafts, and grant letters of cr edit; (g) '.ro deal in exchanges, specie, bullion , gold-dust, assayed

gold, and precious metals; (h) To borrow money; and. ( i) 'ro do anything incidental to any of its powers.

'76. The Commonwealth was made responsible fo r the payment of all moneys due by the Bank. The capital of the Bank was fixed at £1 ,000,000, to be raised by the issue of debentures, and the Common­ wealth '.rreasnry was authorized to make advances to· the Bank out of Consolidated Revenue. Authority was also given for the establish­ ment of a Savings Bank Department.

77. The net profits were to be allocated as follows :-(a) Half to the Bank Reserve Fund to be available for pay­ ment of any liabilities of the Bank; (b ) Half to the Hedem ption ] 1und which might be used to

r epay money advanced to the Bank by the Treasury, or t o redeem debentures and stock issued by the Bank, or to r edeem Commonwealth debts or State debts taken over by the _Commonwealth.

78. On 15th July, 1912, the Act came into force by proclamation, and the Bank began savings bank business, but did not commence general bank business until 20th January, 1913. No debentures were issued, but, for the Bank's initial expenses, the rrreasurr made &n

35

THE MoNETARY AN D BANKING SYsTEM 1901-1936 .

. 1dvance of £10,000 which was quickly repaid. On the 20th January, 1913, when the accounts of the Commonwealth Government were taken over, that Government made deposits of £2,327,550. The Government accounts of Tasmania and of vV est ern Australia were taken over

in 1914, those of South Australia in 1916, and t hose of Queensland in 1920. The New Sou th W ales Government do es not bank with the Commonwealth Bank, an d the Government of Victoria divides its accounts between seven trading banks and the Commonwealth B ank.

79 . rrhe Co mmonwealth Bank .fl ct 1914, gave the B ank powe r , with the approval of the Treasurer, t o take ovBr the business of any other corporation carrying on the business of banking. This Act the issue of an additional £9m. of capital, making £10m.

in all, but no action was taken under this authority. Debts due

to the Bank by any co r poration car rying on the business of banking were given t he same priority as debts due to the Co.mmonwealth. 80. rrhe B ank began its car eer shortly befo re the \Var, and the arrangements for 'var finan ce increased the B ank's power, dev eloped its financial technique, and enhanced its prestige . r.rhe Bank assisted

th.e Treasury in the flo tation of Commonwealth loans in Australia . . Since the first f ew .months of 1915, it has managed the Commonwealth fnscribed Stock Registries in Australia, and since 1916, in London. [n addition, the Bank assi.:;t ed in the financing of many -vvar-time

pools and other marketing schemes for primary products. 81. In the first twelve years of its existence, t he net profits of the Bank amounted to over Although it began with no capital

it had the use of current deposits, from the Commonwealth and from some of the State Governments, on which it paid no inter est. · During.the war, and for some years afterwards, these current deposits were largely increased by the balances of loans then floated. The

following table is compiled from figures by the rrreasur y

in the Co rrurwnwealth Gazett e. It shows that from lVIarch, 1916, to December, 1920, inclusive, the quarterly balances in Australia, except on five occasions, never fell below £10m. an d oft en greatly exceeded this amount.

TABL E .

COMM ONWEALTH TREASURY BALAl'rCES WI TH COMMONWEALTH BANK.

19 15-March .. J une ..

September December

1916- March .. June ..

September December

1917-March . . June . .

September December

£m. .6

. 8

3.0 6 . 1

8.8 16. 5 20. 2

. . 19 . 1

. . 22.0

16 .8 9.4

. . 12 . 1

1918-March June ..

September December

HH9-March J une . .

September December

1920- March June . .

September December

£m.

18 . 5

. . 27.6

. . 29 .8

. . 27.8

. . 20 .2

.. 23.2

. . 10.7

11.9 8. 6

. . 10 .2

6 . 0

36

rl'HE MoNE'I'ARY AN D BANKING SYSTEM 1901-1936.

In 1920, a step was taken whic h vrepar ecl the 1\' 11.\" .for t h e

Commomvealt h Bank t o become a cen t r al reser ve bank. It 1va · then decided t o r emo ve the note issu e from t h e co nt rol of the 11 r ea. urer . A Note I ss ue D epartment of t he Co mmonwealt h B ank 1vas establishecl, managed by a bo ard of direct or s composed of the Governor of t ll 1 ' Bank vvho was ex-offi cio ch [t h'man , an of the Common \vealth

Treasury, and t wo oth 12r cbrector3. H s on ly fu n ction \Yas the co ntr ol of the no te jssu e, and the n e1v department of the Bank was eli. tin ct fr om all other departments, whic lt sbJl 1·e wain cc1 in t he sole charge cf the Governor. a ·sets an d habilitics of t l1e Co mmonwealt h

1_ 'reasurer under the Australian l otes -_.:-\_ct 1rer e tran f elT ed to th e )Jote I ss u e Departm ent Heserve · again st the note issue 1vere still l'equired to be gold coin of not than one-fourth of th e amoun t

of the notes issued, but the remaining assets of th dep ar t men t migbt be held ( a ) on deposit ·with any bm1k ; or (b) i n secu1·i t.ie· of tht·

United Kingdom, or of t he Commonwealth, or of a State; or (c) in trade bills with a curren cy of n ot more than 120 days. The net

profits of the note issu e were r equired t o b e paid into the Consolidated Revenue of the and t h e 1 -i.ct provided that in ca e of

emergency the control of the note issu e migh t b e "tran sfened to the Treasurer by p r oclamation, f or the p er iod t o t h e extent specifi ed in t he p roclamation.

83. In HJ24, the A ct was further amended with a vie·w t o p1·oviding the legislative f r amework in which a central r eserve bank could operate. 'l'he amending Act made a r a dical alteration in t he manage­ ment of the Bank by substit uting· con t rol by a boar d f or ·contr ol by a gover nor. E ight directors ·wer e provided f or in the Bill, n amely, the Governor of the B ank, an d the S ecretary to t he Commonwe altl1

Tr easur y, t\vo chosen fo r their knowledge of currency matter s, an d four who wer e or had been associated with some form of commerce or industry. During the pr ogress of the B ill through Par liament, the provision for two "currency" dir ect ors was deleted, and t he Act pr ovides t hat the Boar d shall consist of the Governor , 1vho is the chief executive offic er , the Secretar y to the 'l' r easury, and six ot her s "who are -or have been actively enga ged in agriculture, commer ce, fi n ance or in dustr y " . It was f ur ther p r ovided that these six d irectors

should retir e in r otation. The electi-on of a chairman was left to the members, and up to the present time t h e of-fic es bf governor an d chairman have not been combined. The Board was g·iven authority to appoint an executive committee of any thr ee directors t o carry on the business of the Bank between meetings of the Boar d, and this authority has been exercised. rrhe Act provides also for a B oard of Advice in

37

'fHE MoNETARY AND BANKING SYSTEM 1901-1936.

but no board has been appointed. The Note Issue Depart­

ment was retained, but J.ts management was transf erred to the· Bank Board, and the provision for the transfer of the note issue to the 'rreasurer in case of emergency was repealed.

84. Under the Act, authority was given to increase the capital of the Bank to £20m., but no action has been taken apart from the transfer, as provided in the Act, of £4m. from the Bank Heserve and Redemption Funds to the Capital Fund. The net profits of the Bank, apart from those of the Note Issue Department, which still went to the Treasury, were to be allocated as follows :-Half to the credit of the Bank R es erve Fund, and half to the National Debt Sinking Fund on Commonwealth accaunt. 1'he Act provided that after a date to

be proclaimed, the Board should fix and publish from time to time the rates at which it would discount and r ediscount bills of exchange, but, up to the present, no date has been proclaimed. It was also provided that from a date to be fixed by proclamation the banks · should settle their inter-bank balances by cheques drawn on the

Commonwe·alth Bank, but there was no compulsion on a bank to keep any particular amount on deposit with the Commonwealth Bank. The trading banks voluntarily op ened accounts with the Commonwealth Bank, and no proclamation under this power has been issued. rrhe

Board was given authority to issue Australian notes in exchange for sterling or sterling securities lodged with the London branch of the Bank. All banks were required to furnish to the 'freasurer statistics of quart erly averages of their liabilities and assets wjthin Australia,

on a basis similar to that used previously in ·furnishing statistics to State authorities.

85. By the Commonwealth Bank (Ru'ral Credits ) Act 1925, it was provided that 25 per cent. of the net annual profits of the Note Issue Department should be paid into the Hural Credits Department, until the amount paid reached £2,000,000. 'fhis amount was r eached

m September, 1932.

·86. 'rhe. Commonwealth Bank Act 1927, provided for the transfer of the savings bank business to a separate institution-the Common­ wealth Savings Bank of Australia-which was established by the Act. Provision was made for its management by the Commonwealth

Bank Board until a commission of three should be appointed upon a resolution of both Houses of Parliament. No action has yet been taken for the appointment of the commission, and . the management of the Savings Bank remains with the Board of the Commonwealth

Bank.

3S

THE MoNETARY AND BANKING 1901-1936.

rriiE SYSrr.EM IN OPERATION, 1901 TO 193 6.

(a) PRE-\VAR 1901 TO 1914.

87. From 1901 up to the outbreak of \Var in 1914, credit policy was in the' hands of the trading banks, including the Commonwealth Bank from the time of its establishment. Throughout the war period, and for some time afterwards, credit policy \v as considerably affected

by the Government's methods of war finance. As the influen ce of war finance disappeared in the post-war period, credit policy once more rested with the banks. This continued until 1929, for the Commonwealth Bank eannot be sai d to have become in any r eal sense a central bank before that year.

88 . Throughout the greater part of the period 1901-1936, the international reserves of the banking system were held largely by the trading banks, partly in gold in Australia, and partly in gold or sterling in London. In this respect there was little change until 1929, and, except for the periods 1914 to 1925 and after 19 31, sterling was equivalent to gold.

89 . Until 14th .Tuly, 1915, Australia was on a gold standard. The meaning of this may be::;t be illustrated by a simplified description of the pre-war gold standard in England, and an indication of an;' differences betv,reen it and the Australian gold standard.

_ 90. In England, the monetary unit, the pound sterling, was legally equivalent to 113.1 grains of fine gold, or 123.27 grains of standard gold. rrhe weight of standard gold in a sovereign was 123.27 grains, and an ounce of standard gold, therefore, was worth £8 17s. lOfd. Gom plete freedom was allowed in dealing with gold. There was no limit to the extent to which it might be imported or exported, coined or melted down, sold to or bought from the Bank of England. Gold sovereigns and half-sovereigns were then current in England, but this circulation was not essential to the gold standard. In order to maintain the gold standard it was necessary that holders of notes should be able to get gold for them at the official rate so that the value of the pound should not fall below its official value in gold. Again it was necessary that holders of gold should be able· to get notes for it at the official rate, so that the value of the pound should not rise above its official value in gold. The legal provision iu itself was not enough to keep the value of the pound and the value of the fixed weight of gold equal. Action was taken by the Bank of England to ensure that the standard was effectively maintained. In the first place, the Bank held a stock of gold sufficient to meet and in the next place the Bank took steps to avoid heavy withdrawals of gold or abnormal accretions.

39

THE MoNETARY AND BANKING SYsTEM 1901-1936.

91. The other chief countries of the world were also on .a gold standard. The British sovereign contained 113.1 grains of fine gold, and the American dollar, for instance, contained 23.22 grains. A sovereign was therefore equal in weight of fine gold to 4.866 dollars; and this relation of their respective weights was known as the gold

parity between them, and -vvas the rate at which the pound sterling normally exchanged for dollars. Any serious departure from this rate would make it profitable to ship gold from one country to another. \Vhen, for example, the exchange rate moved so that the pound sterling exchanged for more than 4.866 dollars, it might be profitable

to buy gold in the United States with dollars, and ship it to London where it could be sold for pounds sterling. Conversely, when the exchange rate moved in the other d'irection, it mjght be profitable to ship gold from London to the United States. In either case, the shipment of gold would only be profitable if the difference from the

gold parity was at least enough to cover the cost of the transport, insurance, and loss of interest involved. The rates above and belo1:tl gold parity at which it paid to ship gold were called the gold points . .

92. One cause of a drain of gold from England or of an influx of gold to England, was a movement in English price levels in relation to the price levels of other gold standard countries. If, for example, English price levels moved upwards in relation to those of the United

States, foreign purchases of the highly-priced English commodities would tend to decline, and English purchases of less highly-priced American commodities 1vould increase. This would mean a greater demand for dollars, and unless it were offset, for example, by

American investors wishing to invest funds in England, the exchange rate would fall below 4.866, and, if it fell far enough, gold would be exported from England. Conversely, if prices moved enough in the other direction the exchange rate would rise, and gold would be imported into England.

93. The Bank of England had developed a technique of credit contraction and expansion which enabled it to keep England on the gold standard. The guide followed was the movement in the exchange rate. If, for example, the sterling-dollar rate went to the gold export

point, and a drain of gold was threatened, the Bank endeavoured to check it by initiating a credit contraction. This was usually brought about by raising the Bank rate, i.e., the minimum rate at which the Bank was prepared to discount first class bills of exchange. The Bank sometimes supplemented this action hy the sale of securities

on the open market. The result of such measures 1vas a rise in interest rates, because the hanks were accl.istomed to follow the lead of the Bank of England; a restriction of credit; and a tendency for prices

1595

40

rrr-m I\i[ONE'l'ARY AND BANKING SYS'l'ElVI 1901-1936 .

to fall. The highe1· interest rates tended to encourage foreign inves t­ ment in E n gland, and any fall in prices to discourage imports; the demand for sterling increased, and the rate moved towards parity. If there were an influx of gold the Bank might lo -vvei' the Bank rate, and, if necessary, purcbase securities, leading to a fall in interest rates, an expansion of credit, a rise in prices, and a movemen t of the exchange rate back towards parity.

94. rl1he Australian pre-war gold standard was effective]y maill ­ tained by somewhat different methods. The Australian pound wa" legally equivalent to 123.27 gr ains of standard gold, as Vi7as sterling. rrhe .Australian sover ejgn ·was identical in weight and fineness with the English sovereign, so that the normal rate of exchange between the two currencies was parity. Trading bank notes, Queensland rrreasury note"', and, after 1910, Australian notes, circulated alongside the gold coinage, into 1vhich they were freely convertible. There was no restriction upon the export or the import of gold, nor was therr any limit to the amount of gold which any one could sell to an

.Australian Mint at the fixed price of £3 17s. 10jd. per ounce standard (i.e., 11j 12ths fine ) . .Any one vvho deposited gold at the lVIint, in amounts of not less than 1,000 ozs., could have it minted there, subject to the charges for assaying, r efining and minting. There was a

regular export of gold produced and very little import. No gold points were formally recogniz ed, but the cost of shipping gold wa.-; generally from 30s. to 35s. per cent. rrhere \VaS, however, n o Central bank to take action as the Bank of England did, and Australian banks had developed their ovvn method of maintaining the gold standard, giving parity of exchange .. with England and corresponding rates with other gold standard countries.

95. Until the depression, the .Australian pound and the English pound were generally regarded as identical. In exchange transactions, I-Dnglish sterling was quoted at a premium or a discount. For example, the quotation "Sydney on London. Buying 5s . per cent. discount. Selling· 15s. per cen t. premium ", meant that an Australian bank would buy from a customer £100 sterling for £99 15s. in .Australian currency, an cl would sell to a customer £100 sterling for £100 15s. in Australian currency . 'rhe difference of £1 was the bank's charge on the two transactions. This method of quotation serves to illustrate the fact that parity with sterling was regarded as normal. No

permanent or serious disparity between Australian currency and British currency appears to have been considered possible. The sterling exch ange rate was in some measure controlled by common action on the part of the banks, and was not determin ed in a com­ pletely free market. Had it so determined, the rate must have

41

THE MoNETARY AND BANKING SYs'rEM: 1901-1936.

been more responsive to movements in London funds, as the overseas balances of the Australian banks are usually called. If, for example, the value of exports had r isen, the greater supply of London funds \·vould have tended to :force sterling to a discount. Conversely, a fall in value would have tended to force sterling to a premium. rro prevent such movements of the exchange rate, it essential that the banks should continue to buy or sell sterling in unlimited quantities at the

ruling rates. In order to do this the banks had to allow their London funds to fall when sterling was tending to a premium, and, con­ versely, to rise when sterling was tending to a discount. So long as the banks held sufficient funds in London, and were willing to permit these fluctuations, they could control the exchange market. The

banks had, in fact, developed a technique which enabled them, in normal periods, to maintain adequate funds in London to control the exchange rate, and Australia was thus kept on a gold standard, with­ out special of gold to and from Australia, such as are

usually associated viTith a gold standard.

96. Current Australian banking practice is to pay attention to the r atio of cash to deposits, the ratio of liquid resour ces to total liabilities to the public, and the ratio of advances to deposits. There is no general agreement as to the order of importance of these ratios,

and there is some difference of practice as to what is regarded as cash. While Australia was on a gold standard, cash 1ncluded coin, bullion, and Australian notes. Some banks included money at short call in London, and others did not, just as some now include Commonwealth

treasury-bills and others do not. Liquid resources included cash, British treasury-bills, money at short call and bills receivable in IJondon, British government securities, and Australian government securities. Every bank had its own opinion as to what were satisfac­ t ory ratios from the point of view of profit and liquidity, and shaped its policy accordingly. These ratios were never rigidly adhered to

by the banks. On the contrary, they were prepared to let the ratios alter within wide limits. But in the long run, every bank endeavoured to keep its ratios within fairly well defined limits.

97. In order to meet seasonal requirements, the banks accumu­ lated large sums in London during the export season, and allowed them to decline gradually during the remainder of the year. From the point of view of a single bank, an increase in its London funds • over its normal holding, without a corresponding decrease in Aus­

tralian funds, tended to improve its liquid ratio, and therefore its power to lend; conversely, a decrease in its London funds without . a corresponding increase in A.ustralian funds, tended to r educe its power to lend. If one bank found that its holdings of London funds

42

THE l'viOl'ETA IW Ac-rD BANKfNG SY TEM 1901-1936.

were too large, o1· too !Small, it adjusted the position by selling t o, or buying from, other banks through exchange brokers. In either case. its liquid rcsom ces would remain unchanged in amount.

98. :F'or the Lanks as a whole, of course, it was not possible to meet the position in. this way. A general increasr. in London funds, 'll·ithout a corresponding . decrease in Australian f unds, mean t a general increase in the liquid resources of the system. Since no one

bank knew accurately the amount of any holdings of London funds except its own, it could not be certain as to the extent of the

increase in London funds, but it would b e a matter of common kn owledge, for example, that export values had increased. In these circumstances, generally speaking, the banks, finding their liquid 1·csources increased, were in a position to lend more. Conversely.

when IJondon funds decreased without a corresponding increase in Australian funds, they wer e inclined to lend less. Whenever r eceipt& from exports were high, or government overseas borrm.ving increased. ur imports fell off, tho liqmd resource3 of the system tended to r ise, and an e:xpan ion of credit could be expected. W henever receipts

l'rom exports were reduced, or government overseas borrowing slackened, or imports rose, the liquid resources of the system tended to fall, and a contraction of credit could be expected.

99. If the banks wer e in such a position that their cash ratios. liquid ratios, and ratios of advances to deposits were satisfactory, and a net increase or decrease in I1ondon funds altered them, the steps taken b.r the banks would restore the ratios and lead to the necessary adjustments in IJondon funds. ·when, for example, the course of export values increased the London funds of the b anks, it simultaneously increased the AustraLian deposits, or reduced the

advances, of those customers from whom the banks had bought export bills. The first effect of this was that the ratios of advances to

deposits would fall, and the r atios of cash to deposits and liquid assets to li abilities would r ise. If this change in the ratios were large enough the banks would be prepared to increase their advances, thus r aising the advance-deposit ratios. Any increase in advances would tend to increase deposits. Cash r a tios and liquid r atios would then fall. Further, the expansion of credit in this way would tend to incr ease the aggregate money income of Australia and to stimulate

imports, which would in due course reduce Lond on funds. Con­ versely, a n et decrease in London f unds leading t o a change in t he r atios would generally result in a r estriction of advances, which would tend to restore London funds through a decline in imports.

100. In this way the Australian banks met the strain imposed on t he stability of tbc r,xehange r ate by movements in IJondon f unds, and

4.3

THE MoNETARY AND BA:-

maintained parity between English and Australian currency. So successful were they that up to 1915 , and from 1925 to 1928, there were only very small movements in the rate. Even during the period 1915 to 1925, when Aust ralia and England \Â¥ere both off gold, sterling

was never at a greater discount than £3 lO s. per cent., nor at a greater premium than £2 lOs. per cent. There was, however, no exact relation between an increase or decrease in London funds, and an expansion or contraction of credit in Australia. The banks had no means of estimating accurately how the demand for imports would respond to

the expansion or contraction of credit. At times it might happen, in the case of an expansion, that the effects upon imports would be to reduce I_;ondon funds to a level lower than was convenient; at other times a contraction might have the opposite effect. In either case the movement in London funds would serve again as an indicator

to the banks.

(b) WAR-TIME, 1914 TO 1920.

101. During the war Australia abandoned the gold standard and adopted many financial measures which caused alterations in the monetary and banking system. In July, 1915, the export of gold from Australia without the consent of the 'l'reasury was forbidden by proclamation. It was not found necessary to pass any legislation

giving further power to the Treasury to control the use and disposal of gold. All through the war period, and indeed until the end of 1929, the Australian note was legally convertible into gold, and there was no legal limitation on the freedom to deal with gold other than

the prohibition of export from 1915 to 1925. But the 'l'reasury did not exchange gold for notes, and the Australian note became in practice inconvertible. The banks ceased to cash cheques in gold, and undertook not to present notes to the 'l'reasury for gold. The

general public was refused gold except in small amounts. 'rhe Mints, however, adhered to the practice of buying any gold offered at £3 17s. lO!d. per ounce standard, and of issuing sovereigns to any one who deposited 1,000 ounces or more of gold. In fact, the right to get

sovereigns was exercised only by the banks.

102. 'l'he measures of war-time finance helped to produce an expansion of credit from 1914 to 1920, which was accompanied by rising prices.. The main features of these monetary changes were that notes were substituted for gold held by the public and by the banks, that additional notes were issued and lent to Governments and to banks, and that banks were given the right to get further notes under certain conditions. Much of the gold held by the public came to

the banks and was not paid out again. Immediately upon the out­ break of war the banks voluntarily brought large sums of gold to

1599

44

'l'HE lVIONETARY AND BANKING SYSTE ivi 1001-1936.

the Treasury to exchange for notes. In October, 1914, the 'l'reasury arranged that the banks should surrender 10,000,000 sovereigns in exchange for notes. In Sep tember, 1916, the banks agreed to provide in exch ange for notes a further 5,000,000 sovereigns for export. 'l'he stocks of gold accumulated by the Commonwealth Treasury raised the note reserve from £4.1m. in June, 1914, to £17.7m. in 191 , and to £24.3m. in 1919. 'rhese exchanges of gold for notes clicl not. alter the vo lume of legal tender currency. '_Che notes issu ed m er ely

replaced the sovereigns withdrawn from circulation. But the increased gold holdings of the 'rreasury made possible a consider able jncrease in the volume of legal t ender currency within the limits of the note reserve requirements.

103. The legal power to issue additional n otes backed by thjs additional gold was used very early by the Treasury. In October, 19 14, the Commo·nwealth Government agreed to lend to five of the States (excluding Queensland) £18m. for public works, on co ndition

that they would not raise new loans for a year. In order to make

the loan t he 'J1reasur y increased the n ot e issue by £18m. Subsequ ently , further sums amounting in all to £4m. were similarly lent to the States. The exchange of gold for notes did not directly affect the cash position of the banks, but the expenditure of the loan money by the States increased, sooner or later, both the deposits and cash r esources of the banks, and raised the ratios of cash to deposits. The note issue jumped from £9 .6m. 011 30th June, 1914, t o £32.1m. on 30th .Tune, 1915.

104. A more direct , but in the r esult a less important, means

of increasing the . cash r es ources of the b anks was the grant of r ights to obtain notes from the Treasury. In October, 1914, the Govern­ ment gave to the banks the right to get £3 in notes for ever y sovereign pr esented by the banks at the Treasury. Two-thirds of the amount of the notes so issued were treated as a loan t o the banks, which \Ver e required to pay interest at the rate of 4 p er cent. per annu m , and to repay the principal not later than twelve months after the end of the war. Similar rights wer e given to the banks when they h anded over 5,000, 000 sovereigns for export in September, 1914. In 1919 the banks advanced up to £6m. to provide cash in lieu of 5-.i per cent. war gratuity bonds for special classes of recipients. For this ser vice the banks wer e entitled to obtain advances at the same r ate f r om th e rrreasury up t o the total amount provided. The 1920- 21 h ar vest was financed by the banks in the four wheat-growing States by advances at 6 per cent . interest. E very bank which maae such an advance h a d

the right to borr ow at 51 per cen t . from the T r easury up t o the full outstanding.

45

rl 1 HE l\10NETARY AND BANKING SYS'l'EM 1901-1936.

105 . Another method of finance vvas the arrangement made for the war and peace loans raised in Australia April, 1918, to

September, 1920. The plan as applied to the sixth war loan was as follows. In order to enable their customers to subscribe to the war loan, the banks agreed -to offer overdrafts up to 90 p er cent. of the subscriptions, the rate of interest on the overdrafts to be 4 per

cent. per annum. As the war loan carried interest at or 5 per

cent., the conditions of the ov erdraft proposal were attractive. On its part the Treasury undertook to make to any bank a loan of notes, if n ee ded, up to t he amount of overdrafts granted to customers and still outstanding. The interest to be paid by the banks for these loans

was fixed at 3 per cent. Similar arrangements with different rates of interest applied to the other loans. The. extent to which the banks made use of these various facilities may be gauged from t he fact that up to December, 1920, the stim of £12.04m. had been advanced in

notes by the Treasury to the banks, of which £6.97m. had been repaid. 106. In these ways, during the war period and for som e time afterwards, the effect of movements in London funds on the expan­ sion · and · contraction of credit in Australia was outweighed by governmental action which increased the volume of the cash r esources

of the banks and enabled an expansion of credit to t ake place. This in turn was followed by a rise in prices. During the whole of the war period, and even later, the additional notes issued were backed by gold to considerably more than one-fourth of their value, but this

did not prevent a fall in the purchasing power of money in Australia. A str ain on London funds, due to overseas expenses of war, was prevented by borrowing abroad and by the high prices of exports.

(c) PosT-WAR 1920 TO 1929 .

107. rrhe Board of Directors of the Note Issue Departme nt , or the Notes Board as it was commonly called, took over control of the note issue in December, 1920, and aimed at preparing the way for a return to gold as soon as circumstances permitted. At the time when the Board assumed control the note circulation was £55.24m. ,

and by December, 1923, it had fallen by £3m. rrhe Board had assumed the liability of the Treasury to make notes available to the banks under the various agreements. No rights were cancelled by t.he · Board, hut some expired by eftluxion of time. As wheat and other temporary advances were liquidated, the banks repaid advances to the Board and the --·Pil'Oceeds were available to reduce the note circulation. To assist" in financing exports the Board offered the banks advances to the extent of £3m. in 19 22-23 , £3m. in 1923-24

and £5m. in 1924-25, but only very small advances were actually

160 ··

. '

.

"-

'l1 HE AND BANKING SYsTEM 1901-1936.

made. 'fhe rights under the '\Var gratuity arrangements would have expired in lVIay, 1924, when approximately £4m. in notes had to be paid to the banks in consideration of amounts provided by them. The Notes Board, however, anticipated this payment and issued the notes two or three months earlier, causing a rise of some £4m. in the note issue. The n et effect on the note issue, of all these trans­ actions, was that when the Notes Board was transferred to the control of the Commonwealth Bank Board in October, 1924, the note issue stood at £56 .8 9m.

108. A recession in trade began in 1920, and this was accom ­ panied by exchange and currency troubles. Those who were expect­ ing a revival of trade had placed orders overseas for large quantities of goods, and these, with many orders placed in London before the end of the war, were unexpectedly filled. Imports, which had been £102m. in 1918-19, and £99m. in 1919-20, increased to £164m. in 19 20-21. l1ondon funds were reduced, sterling went to a premium, credit was contracted, and imports decreased.

109. In 1924 f urther exchange and currency troubles arose. Owing to large public borro-vving abroad, the investment of ov e:rseas capital in new industries in Australia, an influx of capital brought by immigrants, and the accumulation in London of Bawra profits for remittance to Australia, the 1920-21 position was reversed. 'rhere was a great increase in London .funds, the exchange rate was altered, and sterling was quoted at a discount amounting in October to a maximum of 3i per cent. It was commonly stated that "money could not be transferred" from to Australia. The fact W

that sterling could have exchanged for Australian currency if only the discount had been allowed to increase sufficiently. The banks, however, did not take course. In lVIay, 1924, they asked the Notes Board to issue notes secured by gold, cash balances in London, or appro"'".re d · British Government securities. The Board offered to do this with a limit of £3m., subsequently raised to £5m. r.rhe banh:s were opposed to any such limitation and negotiations continued. In August, 1924, the banks complained of a shortage of currency, but the Board denied the shortage, and asserted that there was no evidence to support the banks' contention. In October, 1924, when the Commonwealth Bank took over the note issue, it was empowered to issue notes, if necessary, against the security of London funds. The Bank Board offered to issue notes up to £1,5m. on

condition that interest was p aid at the Bank of England rate, that 75 per cent. of the advances should be repaid by 31st August, 1925, and the remaining 25 per cent. at a date to be fixed by further

negotjations. Under this arrangement advances were made by the

47

THE :MoNETARY AND BA:NKING SYs;rEM 1901-1936.

General Banking Department of the Commonwealth Bank without any increase in the note issue. The maximum amount of advances outstanding at any time was £2.8m., and all the advances were repaid by June, 1925. The trading banks also converted some of their London funds into Australian funds by importing approximately £10.5m. in gold between February and May, 1925. This may have

been done because the banks thought the gold would serve as cash if notes could only be obtained i.J. the form of a temporary advance · on conditions; or it may have been a means of replenishing their gold stock in view of the expec.:ed return of Australia to a gold

standard.

110. On 30th April, 1925, ... along with Great Britain

and New Zealand, returned to a gold standard, and the exchange rate moved to parity with sterling. r.rhe new gold standard estab­ lished in England differed in one respect from the pre-war standard. From this time gold could only be obtained from the Bank of England

in the form of bars of not less than 400 fine ounces at the fixed price of £3 17s. 10-!d. per ounce standard. Gold coins, too, which had practically disappeared in war time, remained out of circulation. The new gold standard established in Australia was similar to the old except in one important respect. The prohibition of the export

of gold was withdrawn; but, although the Australian note still bore on its face the promise of the Treasurer to redeem it in gold coin on demand, in practice it remained inconvertible. rrhe lVIints were still prepared to buy gold at the fixed price, and to issue sovereigns

to any one who deposited 1,000 ounces or more of gold. Indeed, this practice was only abandoned in September, 1931, when the Mints ceased to mint gold coins.

111. The period 1919 to 1929 was on the whole one of nsmg industrial activity, which reached its peak in 1927. J\llany indexes show the growth of this activity. Over the period factory employ­ ment substantially increased. Unemployment, as measured by the

Commonwealth Statistician's figures, reached the lowest post-war figure at the end of 1926, although it had risen sharply again by the middle of 1928. Share prices by 1928 had risen to a level

50 per cent. · above the depressed level of 1921-22. From 1919 to 1928 export prices fluctuated, but the average was some 50 per cent. above pre-war prices. Imports and exports both rose in value. For the five years 1919-20 to 1923-24, imports of merchandise averaged £128m. and exports £125m. annually. For the next five years 1924-25 to 1928-29, imports averaged £150m. and exports £141m. annually.

Public borrowing, both overseas and internal, continued on a scale only slightly less than that of war-time borrowing. In the ten years

160·3

48

'l'H E lVIoNETARY AN D BANKING SYs'rEM 1901-1 936.

between 30th June, 1919, and 30th June, 1929, the net addition t o overseas public debt was £225m., and to internal debt £173m. The greater p art of these sums was spent by Australian Governments on public works. rrhere are no fig ures available which show how many p eople were dep endent for their livelihood upon this expendit ur e. B ut, as the annual average of loans raised at home and abroad was approximately £40m., employment dep endent upon public works fin anced by loans must have been considerable.

112. rrhe deposits of the trading banks l 'OSC steadily hom

£1 93.4m., in the June quarter of 1919, to £302.3m. in the June quarter of 1929. 'r his incr ease oc·curred mainly in fixed deposits, which r ose f r om £104.5m. in 1919 t o £192 .1 m. in 1929 . Current deposits, which wer e £88 .9m. in 1919, jumped to £114.3m. in 1920, and thereafter remained f airly const ant, being £110.2m. in 1929. There was an increase in t he tradi ng bank advances from £161.8m. in the June quurter of 1919 to £267.8m. in the June quarter of 1929, about equal to the increase in total deposits. The n ote issue fell f r om £56m. t owards the end of 1925 to £44m. in June, 1928, and £42m. in J une, 1929. It might appear from these fig ures that t he volume of currency had gr eatly decr eased, and t hat, with the expansion of bank deposits

during the period, the banks' cash · position· in Australia h ad

deteriorated. But, after 1924, the note issue occupied a less significant position in the monetary system, and deposits held by t he t r ading banks with the Commonwealth B ank in_ creased in imp ortance. After the p assing of the Commonwealth B ank Act 1924, the trading banks began to settle their clearings through their accounts at the Common­ 'vealth Bank. rrhe banks had previously conducted these clearings, aft er they had ce ased to use gold for the purpose, chiefly by means of £1 ,000 notes . Aft er 1924, these n otes were largely r eplaced by deposits with the Commonwealth Bank, which retired the notes by exhanging them for securities held in t he Note I ssue Depar tment. In this way, between· J une, 1924, and J une, 1928, the issu e of £1,0 00 notes decreased from £21m. t o £7m., a fall of £14m., which was rather more than the tot al decrease in the note issue between these dat es .

One r esult of this process, as of any other which involves a transfer of se curities from the Note Issue Department t o the Gen eral B anking D epartment, was to decrease the revenu·e of the fo rmer an d to increase t he revenue of the latter.

113. In the period 1925 to 1929 , industrial activity in Australia was stimulated by high export prices and heavy over seas borr owing. Neither of these two influences could be relied on to contin ue

indefinitely at the same strength, and some recession was t o be expected when they weakened. This point of view was emphasized by so me obsel:'vers, but f ew fores aw the imminence of depression, an d

. 4:9

rl'HE :MoNETARY AND BANKING SYS'I'EM 1901-1 936.

still fewer contemplated that its severity would be accentuated by a world-wide slump. It has sometimes been claimed that the Australian banks, foreseeing the depression, issued general warnings to the public. There is little substance in this claim, for the warnings

regularly given in the annual speeches of chairmen of some trading banks amounted to little more than protests against excessive public borrowing and governmental extravagance.

(d) DEPHESSION AND R.ECOVERY, 1929 'I'O 1936. 114. rrhe onset of the depression was marked by the complete cessation in January, 1929, of long-term government borrowing from abroad, and by a decline in the prices of Australian exports,

beginning in the middle of 1928, and becoming rapid from the early part of 1929. These changes resulted in a severe drain on London funds. The value of exports of merchandise (excluding gold) fell by £40.3 sterling oetween 1928-29 anc11929-30, but the value of imports fell by no more than £12.5m. sterling, turning an excess of imports

of £5.6m. sterling into an excess of imports of £33.4m. sterling. Over­ seas interest on public debt, including local government debt, to about £28m. sterling. Great difficulty was found in

meeting this obligation, and drastic steps had to be taken to provide the funds n ecessar y to meet the interest and to pay for imports. In October, 1929, and again in April, 1930, the Common-vvealth Govern­ ment, with a view to reducing imports, imposed prohibitions upon a number of imports, and raised the duties on a still greater number;

and in July, 1930, a primage duty of 2t per cent. was imposed on all imports. Gold 1vas mobilized and exported, £27.7m. in 1929-30 and £13m. in 1930-31, dra-vvn mainly from the cash reserves. of the banking system. rrhis process was facilitated by the Act of 1929 which enabled the Commorn'"realth Bank to acquire gold from any

holder; by the Act of 1931 which temporarily r educed the note issue reserve; and by the Act of 1932 which allowed the Commonwealth Bank to hold the reserve in sterling. Other measures were directed towards securing funds in L-ondon for government n eeds, including

r epayment of overdrafts. Although long-term lending had ceased, the Governments were able to arr;;:tnge for short-term loans, including overdrafts, in London amounting at 30th June, 1931, to £38m. sterling.

115 . Towards the end of 1929, the exchange l'ate with sterling had risen above the gold export point, and Australia had definitely left the gold standard. Throughout the whole of 1930, persistent efforts were made to keep the 1 ate as near as possible to par with

sterling. Trading banks were prepared to sell London funds to their customers at a rate somewhat higher t han par, but in the effort to ]!'.2581.- -4

605

50

THE MONETAIW AND BANKING SYS'fElVI 1901-1936.

preserve tl1e rate they rationed exchange. In deciding wha t amounts they would sell to importers, they paid some attention to the kind of imports which the funds were to purchase, but for the most part they exercised a general r estriction, and allowed the importer to decide how to use the limited supply. In August, 193 0, in order to ensure that the r equirements of governments· and local government

bodies for the payment of overseas interest would be met, a voluntary excl1ange mobilization pool was established by agreemen t between the governments, the Commonwealth Bank, and the trading banks. For this purpose each trading bank undertook to hand over mon th by month to the Commonwealth Bank, at slightly less than the publish ed rate, a proportion of its gross cash receipts in London. The Com­ monwealth Bank also contributed to the pool on the same basis as the trading banks. The amount agreed to be provided was originally £3m. sterling a month, but as overseas interest declined it was reduced, and now amounts to £2.4m. p er month. In the first week of eacL

month, trading banks contributing to the pool inform t.he Common­ wealth Dank of the amount of their gross receipts in London for the previous month. On this information the quota for each bank for the month is determined.

116 . Notwithstanding all these measures, it was found impossible to hold the sterling exchange rate, which had moved by slow stages from 101.6 at the end of 1929, to 108.5 in October, 1930. There was great reluctance on all s.iues to admit that the Australian pound was not identical with the English pound. ..i'l..ll the force of tr adition was behind the view that the bvo currency units were one. T he Governments were anxious, too, that no serious disparity between the two pounds should arise, because a higher rate of exchange meant, immediately at least, higher taxation to meet overseas interest. It seemed to many people that an.r serious depreciation· of Australian currency as compared with sterling, would lead directly to uncon­ trollable inflation and precipitate a fl.ight of capital, of which there was already some evidence. In October, 1930, an alteration in the method of quoting the exchange rate emphasized the f act that the two currency units were not identicaL Sterling was no longer quoted at a premium or at a discount, bnt the price of £100 sterling was quoted in terms of Australian pounds. For example, instead of quoting, "Buying per cent. prentium, selling!) per cent. premium", banks quoted "Exchange on J_;oll(lon on the basis of £100 London: Buying £108 lOs ., selling £109 ".

117. Exchange rationing was, in effect, an attempt to control l!oth the price and the quantity of the commodity sold, which in tb is case was sterling. A bank which rationed exchange was willing to sell

\

Trm Mo NETARY AKD BANKING SYSTEM 1901-1936. only a limited quantity to a customer at a flxe

sterlin g found that they could get a better price than the banks were offer ing by selling it to importers, who were u nable t o get fr om th e banks all that t l1ey wanted. In these circumstances, opportunity arose for exchange operator s, outside the banks, to act as middlemen

between exporters and importers, and t o make a free market for sterling outside that cont1·olled by the banks. E xchange rationing broke down because of the in herent d ifficulty when the monopoly of supply is n ot possessed by those who attempt to r ation.

118. In D ecember, 1930, when the banks' buying r ate for £100 sterling was £10 lOs. Australian, the outside market was offering £110 Australian. The disparity between the two prices increased in the early part of January, 193 1, >Yhen the outside rnarket rate was

£116 Austr alian. On 6th J anuar y, the Bank of New South Wales :1 lter ed its l'at e to £115 Australian, the other banks followe d suit , and

the outside market rose still h igher. The banl;:s then vigorously competed \vith the outside market by raising the official rate within three weeks to £118, £125, and, on 29th January, to £130. 'fhe outside market then became quiescent, and the last rate remained unchanged until D ecemb er, 1931.

119. In October and Novemb er, 19 31, it looked as if the rate might c:ome n earer to the old parity . Export prices then were higher than they had be en since H.e middle of 1930 . Imports of merchandise had be en cut in half, falling from £130. 8m . sterling in 1929-30 to £6 0.6m. sterling in 1930-31. E xports of merchandise had only fallen

from £07 .4m. sterling t o £76.3m. sterling, and an excess of imports of £33.4m. sterling had been converted into an excess of exports of £15.7rn. sterling. J..Jondon funds of tlle trading banks were accumulating at a season when, for the past two years, they had shown a tendency to decline. There was some expectation that Eng·

land's f rom gold in September would be followed by a

downward movement in the Australia-London exchange rate. In November, 1931, for example, th e outside market was quoting £127 as compared with the official rate of £130, and forward exchange was being quoted at £1::l6. At the end of the month the outside market

rate bad fallen to £125 5s. In these circumstances, some of the trading banks began to fear that the official rate might fall and involve t hem in loss. 120. A conference was held in Sydney on 23rd Novembel', 193 1,

between the general managers of the trading bc.nks and the Chairman

1607

ll

\.

52

THE lVIoNETARY Al\ID BANKING SYs'rEM 1901-1936 .

and the Governor of the Commonwealth Bank. 'rhe Commonwealth Bank tabled proposals of which the f ollowing wer e the principal:-" (l ) 'rhe Commonwealth Bank, in conjunction with the

trading banks, is prepared to maintain the present telec graphic transfer carded r ates, and will not depart from this arrangement without nobfication and cop.sultation w.ith the trading banks;" '' (2 ) 'rhe undertaking of the Commonwealth Bank in r e pect

of number ( 1 ) is conditional upon all of the trading banks joint ly entering into the same arrangement 1vjth the Comm·onwealth Bank " ; '' ( 5) 'rhe Commonwealth B ank -vvill undertake to continue to

buy exchange from its regular trade customers at carded rates conditionally upon the trading banks agreeing to the same conditions".

After discussion, the trading banks were unwilling to accept Clause No . 5 as it stood, and it was decided that the following amendment should be submitted to the Commonwealth Bank Board at its meeting on 1st Decemb er, 1931 :-

" ( 5) 'J.lhe Commonwealth Bank 1Vill under take t o buy and sell exchange fron1 its r egular customers including the trading banks at car ded rates conditionally upon the trading banks agreeing to buy and sell all exchange offered to them at carded rates".

121. The Board, however, at its meeting·, r ejected the amendment of its proposals and the original offer lapsed. On the following day, the Board announced "that the Commonwealth Bank will buy from the general public without restrictions and from the banks con­ ditionally upon the banks furnishing all returns r equired by the Commonwealt h Bank any surplus of London funds over the amount held by them on 30th Nov ember, 1931, at rates to be fixed by the

Commonwealth Bank from time to time". The underta)\:ing to pur­ chase the surplus London funds of . the trading banks still exists although the basis for Galculating the surplus was later changed to the amount held on 31st August, 1932 . At the same time the B oard announced that it was prepared to buy exchange on L ondon at the· rate of £125 Australian for £100 London, and t o sell at the rate of £125 lOs . Australian for £100 London. Some at least of the

trading banks were surprised by this step . Had the modified pro­ posals proved acceptable to the Bank Board, no alteration in the rate would have been made "without not ification and consultation with the trading banks". The Bank Board claimed that its proposals -were

53

THE AN D BANKING Sys·rE:rvr 1901-1936.

merely tentative, and took the view that the clauses were interdepen­ dent, and that, since clause 5 had not been accepted as originally drawn, the other clauses did not operate. The rates established on 2nd December, 1931, have rernained unchanged up to the present.

Before that date the usual pract ice had been for the exchange rate to be determined by the banks in consultation, and the rate fixed

c.:ontinued to apply until a change was announced. Since that date

t he Commonwealth Bank has announced the rate every Friday without consulting the trading banks.

122. rrhe middle of 1932 is usually recognized to have been the period of deepest depression in Australia. Export prices began to rise in :May, 1933, and, although there was another serious decline in 1934, the tendency since the beginning of 1935 has been upwards.

These movements have be en reflected in exports of merchandise, which ro se from the lowest depression figure of £75.2m. sterling in 1931-32 to an annual average of £83.2m. for the next three years. Imports rose from their lowest figure of £44.0m. sterling in 1931-32 to an

annual average of £62.9m. sterling for the next three years, giving an average annual surplus of exports of £20.3m. sterling. The most r igid item in the balance of payments, namely, interest on overseas debt, was r educed by the suspension of payments of war debt and by

the conversion of overseas debt at lower rates of interest. The

corrective measures taken, and the rise in export prices, have helped to make the problem of the balance of payments no longer acute, _ although · the fluctuation of IJondon funds has at times caused som e uneasiness .

123. The course of the depression dislocated ·public finance, and led to measures which produced important effects upon the monetary and banking system. The fall in the incomes of exporters, the

cessation of public works financed from long-term overseas borrowing, and the consequent decline of other incomes, led to a serious reduction of national income. \Vith prices falling rapidly it was difficult to adjust costs, .and business depression and growing unemployment

added to the difficulties of the Governments. Revenues fell with the decline in national income, but expenditure could not easily reduced. Some of the more rigid items of the Budgets were those sink­ ing fund contributions which since 1928 have been

binding on the Governments, and overseas interest payments. In addition, new responsibilities h ad to be undertaken by Governments such as r elief of unemployment. As a result, the combined deficits . of the Commonwealth and State Governments greatly increaBed

between 1929-30 and 1930-31 .

51

Trm MoNETARY AND BANKING SYSTEM 180 1-1 936.

124. The situation was met by increases in t axation, r educed exp enditure, and by external and internal borrowing. Between June, 1929, and J\1ne, 1931, although several internal loans wer e floated for conver sion purposes, only £12m. of new money vvas raised by long-term loans. In these circumstan ces, reco urse was had to short­ term borrowing from the banks bo th in Australia and in J.Jon don . On 2nd .Ap ril, 1931, the Commonwealth Bank advised the Loan Council that a point was being approached beyond which it -vvould be impossible for the Bank to provide further fi nancial assistance for the Governmen ts. At that date advances on treasury-bills made to t.he Governments by the Commonwealth Bank were £25m. in London

and £23m. in Australia. It was estimated that the combi ned deficits of the Commonwealth and the States wo uld amount t o £31m. in 1930-31 and £41m. in 1931-32. After a series of conferences, the Commo n ­ w·ealth and the Stat e Governments unanimously a dopted, in tTune,

1931, the Premiers' Plan. It was expected that the adoption of the Plan would eliminate deficits within a few years, and borrowing by treasury-bills or otherwise -vvas approved as a method of financing them in the meantime.

125. Treasury-bills are three-month promissory notes issued through the Commonwealth Bank by the Commonwealth Government on ac count of itself and State Governments. In Australia there has never been any system either of tendering or of sale in the open market, but, when an issue of treasury-bills is made, the Common­ wealth Bank discounts the bills at a fix ed rate, using its discr etion as to what volume it will sell to the trading banks, and what volume it vvill retain for itself. There has been no definite basis of allocation to the trading banks, but a rough guide followed by the Common­ wealth Bank is the amount of deposits which a trading bank holds with it. Treasury-bills are not sold to branches of foreign banks such as the Comptoir National d'Escompte de Paris and the Yokohama Specie Bank.

126. The treasury-bills issued prior to October, 1929, wer e all temporary issues, and were r epaid at maturity. For example, in 1927, bills we re issued at a discount r at e of 4 per cent. per annum to provide cash to r edeem the unconverted portion of the Common­ wealth Government loan of £4.25m. which matured at the end of May of that year. For this purpose, the Commonwealth Bank took up bills to the value of £53 0,000, and, subsequently, sold some of them to the trading banks. In February, 1928, a further issue of £1m. at a discount rate. of 4! per cent . was taken up by the Commonwealth Bank in conjunction with the trading banks.

127. In London, short-term accommodation f or the Australian governments was arranged by means of treasury-bills and short-datPd

55

TrrE MoNETARY AN D BANKING SYsTEM 1901-1936.

debentures. 'rhese have undergone various changes as 'to amount, rate of interest, and even form, sometimes being termed treasury-bills and sometimes debentures. The following five original issues were made:-

Original

Time of lssue. Amount. Form. Discount To whom Purpose. Rate per iss ued. cent.

£ £ s. d.

l. September, 5,000,000 Treasury 6 2 8 Public . . } To meet London, • .

1929 Bills quirements of Com-

2. November, 5,000,000 Treasury 5 7 6 Public .. monwea.lth and

1929 Bills cert[tin States .

3. November, 2,950,000 Treasury 5 0 0 Trading To reduce overdraft at

1930 Bills Banks Westminster Bank

r January, 19,:80,0001 De ben- • L 1931 3 and 3-! Common- For overdraft accom- · F ebruary, o45,000 J t ures I per cent:. wealth modation for 1931 Bank Governments £ s. d. 5. April, 1931 5,000,000 Treasury 4 0 0 Westmin- For balance of over-Bills ster :Bank draft Total .. 38,075,000 . 128. The first issue was taken over by the Commonwealth Bank m 1vlarch, 19 31. Six months debentures were issued and were periodically r enewed, the rates being r educed by stages to 2-i per cent. in September, 1932. In December, 1936, the issue was replaced by thr ee-months sterling treasury-bills 1n A_ ustralia at 2± per cent. 129. The seconcl issue was taken over by the Commonwealth Dank in June, 1930, \vhich ::-; o1(1 bills to the public in July . 'rhese were tencwed in December, 19i30, and met in June, 1931, by Commonwealth Bank overdraft. In August, 1931, a six-months debenture was issued to the Bank, payable in l\:Ia r ch, and was r enewed periodically. 'l'he rate of interest was r educed by stages to 2-t per cent. in August, 1932. In F ebruary, 1937, the issue was replaced by three-months sterling treasury-bills in Australia at 2± per cent. 130. 'l'he third issu e was dealt \Vith as follows :-In ,T uly, 1932, the trading banks exchanged one-half of these bills for treasury-bills issued in Australia. The other half was paid to the trading banks in LonJ.on by the Commonwealth Banl-, which received treasury-bills issued in Australia. 'rhus, £2,950,000 was transferred to Australia and became part of the Australian short-term debt to the amount of £3,705,000. 131. Rates on the fourth issue were later increased to and 5 per cent., and still later reduced by stages to 2 and 2i per cent.

56

'l 1HE MoNE'i'A:r,y AND BANKING SYS'l'EM 1901-1 936 . £500, 000 was paid off and £17,134,000 has been replaced by three­ months sterling treasury-bills in Australia at 2i per -9ent .

£2,491,000 remains as short-term debentures in London, at 2 per cent. 132. 'J1he r ate on the fifth issue was increased t o 6i per cent. in September, 1931, and reduced later to 4i, 3f and finally 3 per cent. £1,500,000 -vvas p aid off at differ ent times, and in June, 1934, the balance, £3,500,000, was taken over by the Commonwealth Bank., ln September , 193 4, three-months debentures 1vere issued in Australia at 2i per cent. These have been renewed p eriodically, but £250,000 has been paid off. In September, 19 36, the issue (£3,250,000 ) was replaced by three-months st erling tr easury-bills in Australia at 2:! per cent. Of these £700,000 are held by the National Debt Com­ mission as a temporary investment.

132A. Th e present position i.s-

Sterling treasury-bilJ s in Australia Short-term debentures in JJondon

Paid off Now part of Australian short-term debt

£

30,384,000 at 2:! per cent. 2,491,000 at 2 per cent.

32,875,000 2,250,000

2,950,000

38,075,000

133 . In October, 1929, treasury-bills were issued in Australia instead of a public loan, but at the end of the year a total of £2.5m. was outstanding. In December, 1930, this sum had increased to £9m. At a conference between the Commonwealth Bank and the trading banks in that month it was decided that future banking accommoda­ tion to the Govern ments should be provided only by t reasury-bills issu ed under the authority of the Loan Council. Both Commonwealth and State Governments had previously borrowed money for temporary purposes by means of overdrafts either from the Commonwealth Bank or from trading banks. 'ro the banks which held them, treasury-bills at this time were merely short-term government securities, but in June, 1931, a step was taken which altered their significance for the trading banks. In a;c cordance with the Premiers' Plan, government

deficits continued to be financed by treasury-bills, but in- order to make the bills more acceptable to trading banks, the Commonwealth Bank on 30th June, 1931, under took to meet the bills at maturity if n ecessar y, and to r ediscount them at a rate differing not more than 1 per cent. from the rate at which they were issued. At this date,

the balance outstanding amounted t o £20.6m. It incr eased gradually to about £50m. at the end of 1932, a figure about which it fluctuated

57

Tr-IE :MoNETARY AND BANKING SYs'rEN I 1901-1936.

for the next two years. 'rhe r at of discount, which was 6 per cent. per annum in 1930, was gradually reduced to 1! per cent. by January, 1935, where it has since remained. Treasury-bills were used both for the purpose of government deficits and to provide finance for

government loan expenditure. Since F ebru al'y, 1933 , hmvever, by arrangement with the Loan Council, treasury-bills h ;we not been used for the latter purpose. In June, 1934, the Commonwealth Banl( Board agreed to finance the 1934-35 deficits only on the understanding

that bills of an equivalent amount would be retired durjng t he financial year. At the same time, the Board announced that there­ after it would not be prepared to finance deficits in this -vvay, but only the normal lag in revenue. The Board also withdrew its guarantee

to meet the at maturity and its undertaking to rediscount them at a fix ed r ate. At present the position is that the Bank will quote to the holder of a bill, upon application, a rate at which it is prepared t o rediscount.

134. The conversion of the whole of the internal publjc debt of £558m. had been successfully carried out by September, 1931, r elieving the budgets considerably of payments for interest. One of the items of the Commonwealth Budget was an amount comprising interest and

repayment of principal on account of the war debt owing to the British Government. Early in 1930 the British Government

suspended the repayment of principal, and in 1931, after the Hoover Moratorium, suspended the interest payments as \Vell. rrhe total relief to the Commonwealth Budget on this account -vvas £5 .5m. sterling, or about £A.7m. In October , 19 32, the first. conver­

sion of Australian overseas public debt was negotiated in and since then a sum amounting to £198.5m. sterling has be en converted, resulting in an annual saving of interest of approximately £A4m. As recovery has progressed and national income has grown, govern­ mental revenues have r ecovered. In 1935-36, the combined revenues of Commonwealth and States showed a slight excess over expenditure.

DEVELOPMENT OF CENTRAL BANKI NG.

135 . Central banks ar e of comparatively recent origin, and there is no universally recognized technique of central banking. The first central bank was the Bank of England, which developed powers and practices suitable to the peculiarities of the monetary and banking

system within which it had to work. The chief function of a central bank may be said to be the regulation of the volume of credit,

including currency, and in performing this function the Bank of England made use of the bank rate and of pu r chases or sales of securities on the open market. The successful working of these powers depended upon the existence of a specialized short-term money

58

rrl-IE J\IoxETARY AND BANKING SYSTEM 1901-1936.

market and upon the fact that the banks and the money market responded to action by the central bank. A.s central banks developed on the continent of Europe and elsewhere it was found that the· conditions under which they V\'Orked rendered E nglish practice to some extent inapplicable, and different methods were employed for regulating the volume of credit.

136. The progress of the Commonwealth Dank as a central bank came in great part through the exercise of powers which it possessed under the Comnwnwea.lth Bank Act 1911-1 924, and only in a less degree through powers added by later legislation. No great use was made of these powers until the depression forced upon the banking system a recognition of their necessity, an d the CommonweaJth Bank regards 1929 as the year in 1vhich it began to act as a central bank.

137. In 19 30, J\1r. 'rheodore, Treasurer in the Scullin Government. introduced into the F ederal Parliament a bill to establish a Centra1 Reser ve Bank of Australia. '£he bill proposed to transf er to the new institution some of the Commonwealth Bank's powers and to add other powers considered essential for the purposes of a Central Reserve Bank. The Commonwealth Bank was to be left with its tr ading bank powers unimpaired to compete with the. other trading banks and to be subject, as they ·would be, to the powers of the n ew Central R.eser ve Bank. The Commonwealth Savings Bank was to remain under the control of the Commonwealth Bank The capital of the Reserve Bank was to be £2m., transferred from the Commonwealth Bank. The net profits from the note issue 'Nere still to be paid to the Commonwealth Treasury. All other profits were to be placed to r eserve until the r eserve fund r eached an amount of £2m., and while this snm was maintained half the profits were to go to the Reserve Fund, and ha]f to the National Debt Sinking Fund. The Reserve Bank was to be managed by a Board appointed by the Governor-General, consisting of a Governor, two Deputy Governors, the Secretary to the Treasury, and fiv e other directors "who are or who have been actively engaged in agriculture, commerce, finance , industry or labour". The Governor was to be the Chairman of the Board an d chief executive officer of the bank, and the five other d-ir ectors were to r etire in r otation. Control of the note issue was to to be transferr ed from the Commonwealth Bank to the Reserve Bank, as also was the power, conferr ed on the Commonwealth Bank jn 1929, to require the exchange of gold for notes. Trading banks were to he compelled to keep with the Reserve Bank balances of not les.s than 10 per cent . of demand · deposits and 3 per cent.

of time d eposits. Trading banks were also to furnish, monthly as well as quarterly, returns t o the R eserve Bank, covering,

amongst other matters, particulars of their London funds,

50

THE l\IoNETARY AND BANKIN G SYSTEM 1901-19 36.

and after a date to be proclaimed they were to set tle t heir

clearing balances through the Reserve Bank. Powers were given t o the Reserve Bank to buy and sell exchange and t o buy and sell

securitie.·; to make advances to banks or to r edisc ount for banks ; to accept current deposits without interest; and to make se cured advances to any one, or unsecured ad vances to any Australian g·overnment. 'rhe Board of the Reserve Bank was also required to fix and publish from time to time the rate at which it would discount

and rediscount approved bills of exchange and short-elated govern­ ment secur.ities. rrhe bill passed the House of R epresentatives in ,June, 1930, but in July the Senate r ef erred it to a Select Committee. After taking evidence the Committee, in December, r eported ad versely

upon the BiH. In A.pril, 1931 , the Senate r esolved that the bill be read a second time "this day six mo nths ", and the Bill lapse d. 138. r'n :1!I:arch, 1931, a Fiduciar y Not es BiH was intro duced int o the House of Representatives by the Treasurer, Ivfr. 'rheodore. rrhe

Bill provided machinery to enable the Government to demand from the Commonwealth Bank an issue of additional currency up to the amount of £18m. The issue was to t ake the form of 'rreasur y notes, which would be legal tender for any amount. Not more than £6m.

were to be use d for r elief of wheat-growers, and not more than £12m. for reproductive public works. 'fhe decision as to the time and amount of each issue rested with the Governor-General in Council, but the £12m. f or public works were to be issued at a rate not

exceeding £1m. per month. The Bill passed the House of R epresenta­ tives, but was rejected by the Senate in April, 1931. 139. It may be said that, for Australia, arty powe r which e nables the Commonwealth Bank to exercise control over the volume of credit is a central bank power, irrespective of whether the power in

question has been used by any other central bank, or is appropriate to any other central banking system. It is not to be expected that the regulation of the volume of credit in Australia could be achieved by a central bank which merely copied the methods appropriate to a different and much more highly-specialized monetary and banking system. But it is possible to trace the development from 1929 of the

Commonwealth B ank as a central bank, and show how it has

exercised its powers, without attempting to draw too clear a line of demarcation between power s which are normally considered essential to a central bank and those which are not.

I.-The Note I ssue .

140. The note issue in AustraJia is an essential part of t he

monetary circulation. Consequently, unless it were controlled by the central lJank, steps taken by the bank to increase or reduce the

1.61 ' ,_ . .:1 -, r>

60

rl'l:IE AND BANKING SYSTEM 1901-1936.

cash of the banking system, with a view to regulating the volume of credit, might be nullified by action in the opposite direction by the authority controlling the note issu e. Since 1924, the Common­ wealth Bank has possessed complete control over the note issue, subject only to the statutory r equirements as to reserve . By the legislation of 1931 and 1932, the Commonwealth Bank's control over the note issue was extended. The Bank -vvas free to reduce tem­ porarily the reserve of the note issue and to hold it in sterling or gold. It is to be noted that t he legal maximum of the note issu e

is now affected by the exchange rate with sterling, for if the valu e of gold or sterling included in the r eserve is expr essed i n A ustralian currency (as is the present practice of the Commonwealth Bank), any.rise or fall in the rate automatically varies the legal limit of the note issue.

!I.- Trading Banks) D eposits with the Cent·ra l Bank. 141 . It is usually considered essential to t he success of a central bank that it should hold t he cash r eserves (other than till-money) of the trading banks. It is clearly more convenient f or them t o hold their cash reserves not in the form of legal tender currency, but as deposits with the central bank. Instead of holding large amounts in notes they can draw upon their deposits with the central bank for their cash requirements, and fo r the settlement of inter-bank transactions. The practice increases the prestige of the central bank,

because the trading banks are more likely to regard it as the " bankers' bank", or the "lender of last r esort", if their reserves are held with it. In Australia the form in which the trading banks keep their

reserves is a matter of some importance to the Commonwealth Bank. If they ar e kept in the form of deposits with the Commonwealth Bank, the assets and liabilities of the Bank are then increased. The Bank has, therefore, greater strength arising from its control over the disposal of a larg;er volume of assets and from its increased sources of r evenue. If the trading banks were to hold their r eserves in the fo r m of treasury-bills or of London funds instead of deposits with the Commonwealth Bank, the Bank ·would suffer a loss of assets and. a loss of profits in either case. In one case, too, there would be a loss of a part icularly important form of asset, namely Iwndon funds. If the tr ading banks were t o hold their cash r eserves in the form of notes, the amount of the n ote issue would require to be much larger than would be necessary if the trading banks held deposits with the Commonwealth Bank. W ith a larger note issue, the.

Commonwealth Bank, in order t o comply with the st atutory r equire­ ments, would have to keep earmarked a larger reserve of gold or sterling, which would immobilize more London f unds. Although ,

61

· 'r rm lVIoNE'rARY AND BANKING SYsTEIVI 1901-1936. in this case, the assets and liabilities of the Commonwealth Bank as a whole would remain unchanged, a transfer of London funds and government ecurities would have taken: place within the bank,

causing the Note Issue Department to gain assets and profits at the expense of the General Banking Department. 142. Before 1924, some of trading banks had maintained

deposits with the Commonwealth Bank, but these balances formed a very small proportion of the cash reserves of the banks. The section of the Act of 1924 which compelled the banks to settle their clearings through the Commonwealth Bank has not been proclaimed, but since

the p assing of the Act all the trading banks have held balances there. In 1926 the average balances held by trading banks was £6m., which by 1928 had increased to £11.8m. In 1928 the Commonwealth Bank requested the trading banks to keep their reserves with it, and gave

an undertaking that if this were done, these reserves would not be used ·in competition with the trading banks. A significant increase in these from £9. 8m. in 1929 to £16 .7m. in 1930, came after

the Commonwealth Bank took over £12m. sterling of gold from the trading banks. Since 1930 these deposits h ave formed the chief part of the trading banks' cash in Australia. After gold had been taken over from the trading banks, the Commonwealth Bank held a greater

proportion of the gold and sterling which form the international reserves of the Australian banking system. The trading banks ceased to hold gold and held only their ordinary London funds, while the Commonwealth Bank held in sterling the reserve against the note

issue, and such other London funds as were left to it after the

balance of payments had been adjusted.

!!I.- Relations with Govermne1'ds. 143. It is essential for a central bank that its relations with the Government responsible for monetary policy should be close and cordial in order that there should be consistency between Government financial operations and those of the Bank. It was not until the Financial Agreement concentrated borrowing power in the hands of the Loan Council, from 1927 onwards, and the depression neces­

sitated short-term as well as long-term borrowing, that the influence of the Commonwealth Bank in this respect became important. From 1912 the Commonwealth Bank held the Commonwealth Government account, and by 1920 those of most of the States. By doing so the

Bank was better able to avoid the dislocations which might be associated with large government operations in the money markets and with any lag ·of revenue behind expenditure. By holding the Commonwealth Government account, the Bank was brought into

c1os er relation w]th the Gov ernment respon .. ible for monetary pol1cy.

62

TrrE MoNE'l'ARY AND BANKI NG SYSTE:i'.I 1901-1936.

The legislation of 1929, enabling gold to be mobilized by the Common­ wealth Bank, was introduced on the recommendation of the Bank, as also was the legislation of ·1931 and of 1932, relating to the note reserve.

144. Australian governments have sought to r elieve unemploy­ ment and to hasten recovery by means of long-term internal loans fo r the purpose of public vvorks. 'rhe Bank has acted as adviser to the Loan Council in regard to all lo an finance. It is consulted by the Loan Council as to amount and terms of loans, and the time of issue; but the advice of the Bank has not always been taken. The Loan Council has always looked to the Bank to underwrite govern­ ment loans in Australia, and the Bank has frequently . proposed limits of underwriting which it has subsequently agreed to extend;

but on the whole the Bank has been a most important influence in regulating public long-term borrowing. Between November, 1932, and November, 1936, all but one of the loans flo ated were under ­ writ ten by the Commonwealth Ban k. 'J.1he total amount underwritten was £84.3m., and, together with the Commonwealth Savings Bank, it subscribed £15.2m. to loans in t he same p eriod.

145. Treasury-bill finance affords a good example of the pow er of a central bank to expand credit . A simplified example of move­ ments in the balance-sheet of the Commonwealth Bank, on the supposition of an issue of £10m. of treasury-bills followed by govern­ ment expenditure of the proceeds, and subsequently by the funding of £7m., should make the working of the mechanism clear.

I V:1bilities. . Assets.

. I . I I

ment by, a '.Liabil!· l Liabili· Other Total

!Deposits. ties . ties. Brlls. Assets. Assets. I

Govern- I Other Total , ,

-----=--=--=- £m-. --=--=- Stage I.-Position before any Treasury bills are issued 5 20 55 80 80 80 S tage 2.-Position after the issue of £10,000,000 Treasury bills . . Stage 3.-Position after the Government has ex­ pended the proceeds .. 15 5 Stage 4.-Position after f-loating public loan of £7,000.000 . . . . I 12 Stage 5.- Position aft er £7,000,000 Treasury bills I have been paid off . . 5 20 55 30 55 23 55 55 90 10 80 90 90 10 80 90 90 10 80 90 83 3 80 83

63

'l'HE lVIONETARY AND BANKING SYSTEM 1901-1936.

146. \Vhen the Commonwealth Bank· discounts treasury-bills for the Government, the Bank is lending funds to t he Government, and tal ing in return short-dated government securities . The Bank's assets ancl liabilities both increase by an equal amount, as shown in

tage 2. Government deposits are credited with the value of the tr easury-bills and government secu r ities are increased. rrhe Govern­ ment then has a right to draw cheques on the Commonwealth Bank equivalent to the increased amount of its deposits. As the Govern­

ment proceeds to spend the money either in ordinary expenditure, us when the treasury-bills are used to finance a deficit, or in public works, it pay 1ts creditors by cheque. rrhe creditors pay in the cheques to their account· at t he trading banks, thereby iucreasing the deposits

(or reducing the advances ) of the trading banks. When the trading banks present the cheques to the Commonwealth B ank, the deposits which they hold with the Commonwealth Bank are thereby increased. 'l'he Government's deposits with the Commonwealth Bank are corres ­

pondingly reduced. (Stage 3.) Since the trading bank deposits with the Commonwealth Bank are the equivalent of cash, the cash of the trading banks has been increased when the process is completed. rrhe net result of the issue of treasury-bills has been t hat deposits of the

trading banks have increased (or their advances have been reduced), and their cash has increased, so that they are in a more liquid position than when the process began. 147. Correspondingly the position of the trading banks m.ay be

rendered less liquid by the process of funding treasury-bills, i.e., the substitution of a long-term loan for the short-term bills. If, for example, a public loan is floated in order to redeem treasury-bills, the firct effect is that those who subscribe to the loan pay the Govern­

ment for the new securities by cheques drawn on their deposits with the trading banks, which reduces the deposits (or increases the advances) of the trading banks. \Vhen the Government pays these cheques into the Commonwealth Bank, its deposits there are increased,

and the deposits of the trading banks held there are correspondingly reduced. (Stage 4.) When the bills mature, the Government meets them by a cheque on its account which reduces the government deposits with the Commonwealth Bank, and the bills are cancelled.

(Stage 5.) 'I'he net result of this process is that the dep osit s of the t rading banks have decreased (or · their advances increased) and their cash has decrease d, so that they are in a less liquid position than when the proceSS of funding began. rrhe only case in \Vhich funding

would not render the trading banks less liquid is "private funding", . i.e., where the Commonwealth Bank subscribes the full amount of t he funding loan, and, in effect, takes from the Government the n e-.,v securities in place of the treasury-bills.

64

THE lVIoNE'rARY AND BANKING SYs'.rEM 1901-1 93 6.

148. T'he rate of discount on treasury-bills has been controlled by the Commonwealth Bank, and the bank has secured the reduct ion of_ the rate from 6 per cent. in 1929, which was in line with the overdraft rates of that year, to 1l per cent. in Januar y, 1935. Moreover, t he Bank has been concerned to r estrain any tendency for the issue of treasury-bills to increase beyond what it has considered to be a reason­ able amount. 'Jihis is shown, for example, by its decision in 1933 ,not to discount treasury-bills to finance public works, and by its policy in 1934 in regard to deficits and rediscount. Further evidence is to be found in the Bank's attitude towards funding. In July, 1932, the Bank Board took the view that a beginning should be made in funding the internal floating debt. \Vhen the Loan Council met in October, 1932, the Board, holding that the large volume of treasury-bills menaced its control of currency and credit, offer ed to underwrite a loan of £20m. at 4 per cent. at par, of which £12m. was to be used

for funding treasury-bills and the ·rest for public works. The offer was not accepted, but a loan of £8m. at 3! per cent. at par, under­ written by the Commonwealth Bank in conjunction with the trading banks, was raised, half of which was use d for funding treasury-bills and half for public vvorks. During 1933, the Board continued to urge that the increasing volume of treasury-bills should be checked, and the Loan Council agreed that there should be a gradual funding of the bills by loans raised in the market as and when conditions per­ mitted. Consequently, in November, 1933, £5m. out of a loan of £10m., and in June, 1934, £3 .5m. out of a loan of £12m . were used for fund­ ing, but the amounts· funded were practically offset _by the issue of additional bills for revenue defici ts. In October, 1934, the Bank Board proposed to the Loan Council that treasury-bills should be funded by means of a public loan, and in the alternative offered to fund £5m. of bills by private funding. rrhe Loan Council, however, was unresponsive to this advice, 1:md consideration of the question of funding by either method was postponed.

149. On 28th February, 1936, after discussion with the trading banks, the Commonwealth Bank announced an offer to the public of £1m. t reasury-bills from its m:vn holding. '1.1he bills were r epayable in months, the rate of discount was fixed at the existing treasury­

bill rate of 1:1- per cent., and tenders were to close on 12th J\1arch. At the same time the Bank made the following statement :-Treasury-bins have in the past been issued only t o hanks, but it is now

thought that the opportunity should be given to the public to utilize this form of gilt-edged short-dated investment. The first issue ·will be for £LOOO ,O OO­ at li per cent., and fall rights to re-discount at any t ime will apply, at the

current rate at the date of re·discount. Such rate will be based on market

conditions.

65

THE M :oNETARY AND BANKING SYsTEM 1901-1936.

At the date o£ the offer the r ate allowed by the trading banks for three months deposits was lt per cent. and by the Commonwealth Bank, 1 per cent. On the aame day, 28th February, two conversations t ook place between the Ch airman of the Commmnvealth Bank Board

and the General 1\IIanager of the Bank of New South ·wales with respect to deposit rates, which the latter thought should be raised.. As to the tenor of the first conversation their views differ, the latter holding that he received approval for his proposal to raise the rates,

and the former holding that he gave no approval. We

are satisfied that no approval clearly understood by both

parties to be such was ever given. There is no doubt

as to the tenor o:E the second conversation later in the same

day, when the Chairman of the Commonwealth B ank Board made plain his disapproval of the proposed rise, and the General Manager of the Bank of New South Wales stated that he had already sent out his instructions, and could hardly reverse the decision he had

taken earlier in the day to raise deposit rates. On the 2nd March, the Bank of New South W ales announced a rise of f per cent. in

all deposit rates, bringing the rate for three months' deposits above the rate at '\vhich the treasury-bills were being off ered to the public, and on the 3rd lVIarch the Bank of Adelaide followed. In a press statement of 3rd March, the Chairman o:E the Commonwealth Bank said-

"Until the next meeting of the Board an official pronouncement regarding deposit rates cannot be made. The propriety of any increase or decrease i11 interest rates is a matter of individual opinion, and action by any financial institution must be influenced largely by the particular policy which that

institution desires to adopt."

Bills to the amount of £315,000 were taken up ' by the public and issued on 16th 1\tlarch. On 18th March, the Chairman issued a state­ ment which included the following :-"The Commonwealth Bank does 11ot desire interest rates to rise unless it

is abundantly clear that such increase has become necessary through general economic and financial conditions.

With a view to at least avoiding any rise which can be avoided, and taking into account the above facts, the C'ommonweaith :Bank proposes to refrain from making any increase in either its d eposits or overdraft rates, provided the

trading banks which have already raised their rates will r evert to the former basis. It is obvious that if this is not done those banks which have not

already raised t heir rates will be forced to do so, just as it :iB obviow that

the Gommon·wealth Bank maintahl indefinitely a lower r ate than thn.t

which the banks as a whole are offering for deposits.

With a to bringing about this desirable condition of affairs, representa­ tions have been made to the banks who have no t yet altered their published rates, and an undert aking has been given by them to refrain front taking definite action

F.258l.-5

rrnE MoNETARY AND BANKING SYSTEM 1901-1936. until 23rd March, and thereafter provided the other banks revert to the old rates, flxed deposit rates as ruling on l st March wm be continued, subject, of course, to review from time to time in the light of existing condit ions."

No reduction in rates however was made by the two banks, and on 24th :March the Commonwealth Bank and the remaining t r ading banks raised their deposit rates to the same level.

IV.-The Exchange Rate.

150. It is important that a central bank have power to

regulate the exchange rate, otherwise action which it might take to control the volume of credit might be hindered by an alteration of the exchange rate. The control of the exchange rate assumed by the Commonwealth Bank in December, 1931, gave some control over the volume of credit. For instance, if L-ondon funds \Vere falling, the trading banks would tend to restrict credit. In these circumstances, if the Commonwealth Bank wished to maintain the volume of credit or to expand it, the rate could be raised, for example, from £125 to £130. The effect of such an alteration is to stimulate exports and to discourage imports. Insofar as this occurs, London funds and deposits tend to rise, the ratio of advances to deposits to fall, and the position of trading banh:s becomes more liquid. Correspondingly, a movement of the exchange rate in the opposite direction, vvould, by discouraging exports and encouraging imports, serve to make the position of the trading banks less liquid. The amount of this control over the

volume of credit depends upon the magnitude of the alter ation in the exchange rate. A few points one way or the other would have little effect upon the liqu idity of the trading banks. In pr actice t he Com­ monwealth Dank has not u sed its power over the exchange rate for the purpose of controlling the volume of credit, but, since December , 1931, has maintained complete stability of exchange.

151. \Vhen the serious movement in the exchange rate came in January, 1931, its tei1dency was to assist in adjusting the balance of payments. Exporters' returns in Australian currency were increased, and this encouraged export industries to increase the volume of exports. Imports on the other hand were discouraged because they were correspondingly dearer in Australian currency.

It is always possible for a country, by depreciating its currency ·in the attempt to adjust its balance of payments, to gain for a time a competitive advantage fo r its exports, provided t hat other countries do hot take counteract1ng measures. For some time after January, 1931, some markets were, · because of this depreciation, more readily accessible to Australian exports. The actual rate at which the .

exchange was fixed in January, 1931, was influenced by the rates ruling in the outside exchange market at the time, but the export.

67

THE 1{0NETARY AND UANKI '0 SYSTEM 1901-1936.

season was then at its height, and usc -was being made of holdings of gold, both of \vhich h elped to increase London funds. Had the banks h eld the rate for another three months, and then attempted to the out ide mark"'t at a time when neither of these factors

was operabng, the r::tte might have gone considerably higher tJ1an £130. J --2. \Vhen the rat e ';vas r educecl from £130 to £123 it 1vas jn

eonformity with quot ations of the outside market. TlJC Common­ wealth Bank was afr aid of a" collapse of the exchange", i.e., a large mo'i·ement of the rate from £130 nearer to the old parity, and in its r "port of 9th l\Iarch, 1932, the Bank claimed that it was "instrmnental in pr eYenting the eollapse ·which might otherwise have occurrecl ". T h e Cbairman of the Bank, too, in a letter of 13th J anu ary, 1932, to

the Prime l\Iini ·ter, expressed the fear that the Bank was taking a r isk by accumulating London funds even at the rate of £125 "unless it has a r eliable prospect of being able to dispose of them without serious l oRs ". The \\'eeld y announcement of the rate, and the aban­

donment of the practice of consulting the trading banks were merely incidental changes, an d not r eally r elevant to the fundamental change in December, 193 1, which was that t h e Commonwealth Dank b egan to buy and sell exchange freely at a rate quoted by itself. So long as it can do thisl the. Bank is in control of the rate. It is to be noted

that the outside market was only important while the buying rates quoted by the banks \Vere lower than the buying r ates quoted outside. If the banks offered to buy sterling at £130, vi'hile the outside market offered £125, there would be no difficulty in holding the rate provided

that the banks were prepared to buy at £130 all st erling offered to them. Tbe banks could only lose in this way if it were decided to reduce the rate. The Commonwealth Bank could have h eld the exchange at £130 or higher if it had chosen to take the risk of

accumulating more London funds, which would have meant loss only if the Bank h ad itself subsequently lowered the rate.

V .-Open Market Operations.

153. Open market operations consist of sales ancl pnrcha::> cs of securities by the central bank with a view to contracting or expanding the volume- of trading bank cash. Whenever a central bank sells securities on the open market, those who buy the securities normally

pay for them with cheques drawn on the trading banks. When these cheques are cleared, the deposits of the trading banks are reduced (or their advances increased) and their deposits with the central bank are reduced. 'rhe tendency of such an operation is t o lower t he liquidity of the trading banks. Conversely, where the centrc.l

bank buys securities on the market, the eff ect is to incr ease the t rading

•

1623

68

rrHE lVIoNE'l'ARY AND BANKIN G SYS'l' EM 1901-1936.

bank deposits (or to reduce their advances), and to increase the trading bank deposits with the central bank. The Commonwealth Bank has made little use of open market operations for the purpose of r egulating credit. 'rhe I3ank considers that, in Australia, these operations are difficult because of the sensitive and limited nature of

the bond market, and because of · the risk of affecting the price and yield of government securities.

V 1.-Rediscotmting.

154. The power to vary the rate at which it will rediscount bills is useful to a central bank if it can ther eby bring a.hout corresponding . changes in other interest rates, which will have their effect in expand­ ing or contracting credit. If a central bank wishes to contract credit by this means, the appropriate action is to raise its rate of rediscount, so that those virho wish to borrow from it against bills which they have discounted, will have t o pay a higher rate of interest. Section 29A of the Act of 1924 which would require the Bank to fix and publish from time to time its rates of discount and rediscount of bills of

exchange has not been proclaimed, and a rate has never been

published. Nor would publication of the rate be effective, because there is no internal bill mark:et of importa!1ce in Australia, and no practice of rediscounting by the Commonwealth Bank. The nearest approach t o a rate of rediscount is that on treasury-bills. Occasionall.r small amounts of treasury. bills have been rediscounted by the Com­

monwealth Bank, but neither the rate nor the fact of rediscount has been of any importance.

VII.-Advances to Banks.

155. 'Where it is customary for a central bank to make advances to trading banks, and for · trading banks to borrow from the central bank on any large scale, the central bank has a further means of controlling the volume of credit. Por if the central bank wishes to expand credit, it might ·induce the trading banks to accept further advances. This would have the same effect as an increase in their deposits with the central bank. This increase in their cash would tend to make their position more liquid, and to allow them to credit. Conversely, if the central bank wishes to contract credit, it might withdraw in whole or in part any advances made to the trading lJanks and thereby reduce their cash. A trading bank may borrow from the Common1vealth Bank when it is temporarily short of cash and does not wish to realize assets. Occasionally some trading banks

have obtained advances to finance seasonal or abnormal demands from customers, and to assist in taking up government loans. But, even during the d epression, these advances were negligible, and from 1927 to 1936, the quarterly average has never exceeded £2m.

•

69

THE MoNETARY AND BANKIN G SYs TEM: 1901-1936.

VIII.- Trading Bank Powers.

156. If a central bank possesses trading bank powers, it may make use of them as a me ans of controlling the volume of credit. If it wishes to contract credit, it may attempt to attract deposits f rom the public, for example, by offering a higher rate than that of

the t rading banks. If, as a result, the public transferred deposits from the trading banks to the central bank, the position of the trading banks would be r ender ed less liquid, for the transferor would draw a cheque on his deposit with the trading bank and pay it into the central bank. This would reduce the deposits of the trading banks and also their balances with the central bank. Since cash and deposits are reduced by the same amount, the cash ratios of the trading banks

will fall, and the tendency will be for a contraction of advances. rrhe trading banks may take action to prevent transfers of deposits by raising their rates. In that event, no contraction will occur unlesa the rise in advance rates, which normally follows the rise in deposit

rates, produces a contraction of advances. On the , other hand, if the central bank -vvished to expand credit, it might bring about the transfer of private deposits to the trading banks by offering lmver rates than the trading banks. The central bank might also contract or expand credit by reducing or increasing its advances to the public, An increase in advance rates would tend to reduce advFtnces, and a

decrease tend to expand them.

157. The Commonwealth Bank has taken the view that its cc:atra1 bank activities are of paramount importance, and that its develop· ment as a central bank should go hand in hand with some limitation of its trading activities. Since 1930, at least, it has not been a serious

competitor of the trading banl\:s. Neither has the Bank made much use of its trading activities for the purpose of expanding or contract­ ing credit. It is difficult to analyse movements in the quarterly average figures of private interest-bearing deposits with the Com­

monweaJth Bank from 1929 to 1936, because the deposits doubled in December, 1931, when the Commonwealth Bank took over £11m. deposits from the Rural Bank Department of

the Government Savings Bank of New South Wales. But the general trend has been a slightly upward movement until the end of 1934, and a slightly downward movement since then. The quarterly average figures of private advances before 1931 cannot be separated

from advances to governments, but since that date they bear out the contention that the Commonwealth Bank has not pressed its trading The figures, too, show no trace of expansion during the

early years of the depression and no trace of contraction during the latter part, but rather point in the opposite direction.

70

rrHE rvioNE'rAH,Y AND BANKING SYSTI 1901-1936.

158. A central bank may also exercise some control over credit if it has power to vary rates of interest. If contraction is d esired, the appropriate movement in r ates is a rise, and if expansion is desired, a fall. Variations in rates of interest are likely to follow open market operations or changes in the r ate of rediscount. If, . for example, a central bank buys securities, prices of these securities tend to rise and their yield, or the rate of interest on this t ype_ of investment, to fall. Similarly, sales of securities t end to depress their prices, and to cause their yield to rise. The Commonwealth Bank, as previously pointed out, has rarely undertaken open market operations, or r ediscounting, but has used other powers t o affect inter est rates. If the Bank wishes to contract credit, one of the means at its disposal is to raise the rates of interest which it pays on :fixed deposits. It would be difficult for the tl:ading banks not to follow, and the rise in their deposit rates Y vould in time lead to a rise in advance rates. Corr esp ondingly, if expansion is desir ed, it might be sought by a reduction in deposit rates of the Commmiwealth Bank. This method is slow and some­ what uncertain, because, when times are prosperous, a small r ise in inter est rates will hardly serve to check expansion, and in times of depression a small fall will offer little inducement to enter pr ise.

159 . The Premiers' Plan con templated "a reduction of bank and savings bank r ates of interest on deposits an d advances", but

prescribed neither the amount of reduction nor the machinery by it should be brought about. It was decided at a confer ence

of bankers with the F ederal 'rreasu rer in 1931, that r ates on fixed deposits and on advances should be r educed by an average of 1 per cent. Reductions in the rat es offered f or n ew :fixed deposits wer e to take place at once, and those on advance rates were to be made with reasonable expedition, the method being left to the banks individuallJ.

On 26th Jun e, 1931 , fi x;e d d eposit rates were ·reduced 1 per cent. by the Commonwealth Bank and all the trading banks. In the beginning of July, the Commonwealth Bank r educed its maximum rate on advances from 6f p er cent. to 5f per cent., and by 1st October, 1931, the reduction of 1 per . cent. in the average rate on advances had been completed by all banks. I n the fur ther fall in fixed deposit and advance rates after 1931, the Common·we alth Bank and the trading banks on the

whole moved together, although some banks r educed r ates earlier than others. In December, 1934, when the Commonwealth B ank r educed its thr ee months and six months deposit rates, the trading banks did not f ollow. In March, 193 6, the r ise in fi xed deposit r ates was in itiated by some of the trading banks, and th e Commonwealth Bank antl the other t r ading banks followed. W hen the trading banks increased their advance rates af t er Mar ch, 1936, the Commonwealtla

71

THE MoNETARY AND BANKING SYSTE0.1 1901-1936.

Bank did not raise its .advance rates. The Commonwealth Savings Bank rates, too, 'vere reduced from a maximum of 4 per cent. prior to July, to 3 per cent. on the 1st July, and gradually to 2 per

cent. in June, 1935. rrhe other savings banks follo,ved the -general trend of this reduction.

IX.-Savings Bank Powers.

160. The fact that the Commonwealth Bank controls the Common­ wealth Savings Bank, vvhich is by far the largest savings bank in Australia, gives it no n ew powers to regulate credit but strengthens its existing powers. As has already been pointed out, the Common­

wealth Bank has some rwwer to cause the rates of interest to vary in the direction appropriate to its policy of expanding or contracting credit by altering the rates which it pays on flxed deposits or charges on advances . As a supplement to this action the Bank may bring into line with its policy the rates of interest on deposits ,,vith the

Commonwealth Servings Bank. Further, the control which the Com­ monwealth Bank exercises over the disposal of the assets of the Com­ monwealth Savings Bank is of practical importance in relation to tile . exercise of its central bank powers. The deposits in the Common­

wealth Savings Bank have usually increased each year. and its invest­ ment policy is governed by the Commonvveatth Bank Board. The Commonwealth Savings Bank holds large amounts of government securities, some of whieh could be used for open m arket operations, . and any net addition to deposits may be invested, for example,

in government securities, or be held on deposit with the Common­ wealth Bank The Commonwealth Bank, therefore, has the oppor­ tunity of increasing or dcc.reasing the rate at ·which the Common­ Vi'ea1th Savings Bank will bny government securities or subscribe to

new government loans. If it wishes to contract credit, the appropriate policy is to subscribe less to government loans thrm1gh the Savings Bank, sell securities, allow maturing loans made by the Savings Bank to be repaid, and invest the Savings Bank money, which would

otherwise have gone in these directions, on deposit with the Common­ wealth Bank. The tendency of any of these measures is to reduce the liquid position of the trading banks. The sale of securities, the repayment of loans made by the Savings Bank, and the reduced subscription to new loans, all t end to reduce the deposits of the trad­ ing banks, from which usually comes the money for the purchase of the securities sold, for the repayment of the maturing loans, and for

the subscriptions to the new lo ans. Conversely, if expansion is desired, the Commonwealth Sa-vings Bank etln subscribe more to government loans, renew maturing lo ans, and deposit less with the Commonwealth Bank.

72

THE Ji'IOKE'l'ARY AND BANKING SYSTElVI 1901-1936.

161 : Prior to the Cmnrnonwealth Bank Act 1927, it was the prac­ tice of the Commonwealth Savings Bank to place mo!ley on fi xed deposit with other banks. ·while this practice existed it was poss ib1 e for the Commonwealth Bank to cause these deposits to vary in

accorclauce with its credit policy. But the Act provided for deposits to be placed with the Commonwealth Bank, an d made no provision for deposits with other banks so t hat this practice ceased as the deposits with other banks mat ured.

162. Although little use has been made of op en market operations, in the second half of 1935 t he Commonwealth B ank, through t he Commonwealth Savings Bank, bought securities in the market, mainly to offset the effects on interest rates of sales of securities by tr ading

banks. An examination, however, of the fig ures of the Commonwealth Savings Bank suggests that, at least since 1932, no great use has been made of savings bank activities fo r the purpose of r egulating credit.

X .-Co-opemt-ion .

163. A system of central banking assumes that there arc trading banks as well as a central bank. It is important that a central bank should secure the willing co-operation of the trading banks, because the success ful exercise of many of . its powers n ecessitates action by the t rading banks. If the t r ading banks, for one r eason or another, do not co -operate with it, the central bank will have gr eater difficulty in carrying ont its task of r egulating the volume of cr edit. In Aus­ tralia, ther e has been no form al or regular method of consultation. The Commonwealth Bank ·has met the t r ading banks, either

individually or collectively, as occasion required, and has discussed wi th them matters of · common interest. l:Prom these meetings and discussions, co-operation has frequently r esulted. Recent instances of such co-oper ation have been the action of the t r ading banks in assisting to underwrite government loans, in takin g up t reasury­ bills, in voluntarily maintaining deposits with the Commonwealth Bank, and in contributing to the exchange mobilization pool. The policy of lowering interest rates was followed in co-operation by all banks for the gr eater part of the period from June, 1931, onwards. On the other hand, the conduct of the trading banks in

not reducing deposit rates in December, 1934, and of t hose

banks which initiated the rise in deposit rates m March,

1936, was regarded by the Commonwealth Bank as evidence o! ,lack of co-operation. The Bank states, t oo, that it has

73

TrrE MoNE'rARY AND BANKING SYSTEM 1901-1936.

been hampered in its efforts to build up London funds by refusa lA on the part of some t r ading banks to sell at current rates, but that, in many directions, co-operation has been satisfactory. F'rom time to time since 1931, in view of its additional r esponsibilities as a central bank, the Commonwealth Bank has r equested additional information from the trading banks, which, in most car;es, has been ::;uppliecl.

X I .-General.

164. 'l'he Commonwealth Bank regards its central banking function as being to r egulate, in the interests of the community, the aggregate volume of credit (and currency) in Australia. It dis­ tinguishes between the volume of credit and the base upon which that Yolume is built. 'l'he credit base consists of ''cash, deposits with the

Commonwealth Bank, treasury-bills and London funds, and varies mainly with the rise and fall of London funds". All, in its opinion, that the Bank can do to increase or r educe the credit base is to

" add to or subtract from the effect that movements in London funds have on the credit base in Australia". Further , the volume of creqit is dependent upon other factors than t h e size of the credit base, and it may be affected, for example, by the trading banks allowing their

ratios to vary within wide limits, or by the willingness or unwilling­ ness of borrowers to use bank loans. During the depression, the credit base was expanded by the use of treasury-bills to a size not consistent, in th e opinion of the Bank Board, with a desirable credit

policy for Australia. " The credit policy of the Board since 1929 has therefore been to prevent the credit base from being increased more than was essential to meet the immediate emergency".

165 . 'l'he Commonwealth Bank keeps in touch and exchanges information ·with other central banks such as the Bank of England and Dominion central banks. It receives the confidential fortnightly letter sent by the Bank of England to all the Dominion central banks

containing information as to world monetary conditions, prices, &c. 'rhe Commonwealth Bank seeks, from the best source available, any advice or information which it requires. . 'rhe Commonwealth Bank may ask for th e Bank of England's opinion, and it may or may not act on it. The B ank of England n ever offers the Commonwealth ·

Bank advice, and there are no grounds for the suggestion made in evidence that the policy of the Commonwealth Bank is dictat ed by the Bank of England.

1629

74

THE MoNETARY A.ND BANKING SYSTEM 1901-1936.

'J1RADING BANKS.

166. In a system of central banking the ccutral bank .is respon:-:>ible for regulating the volume of credit and the trading banks are

responsible for distributing that credit amongst different industries. 'rheir obligations to depositors force trading banks to k eep a propor­ tion of their assets in liquid form. In conducting their business, trading banks watch movements in their assets and liabilities, and pay attention to changes in the ratios of cash to deposits, liquid

. assets to total liabilities to the public, and advances to deposits. Banks regard as unsatisfactory too low a cash or a liquid assets ratio, or too high an advance-deposit ratio, because they may be unable to meet the demands made upon them by their depositors. On the other hand, they regard as unsatisfactory too high a cash or a

liquid assets ratio, or too low an advnnce-deposit ratio because r elatively idle money means less profit. · ·

167. There is uniformity in the practice of the banks as to what is included in the items of deposits, advances, liquid assets, and total liabilities to the public, but there are differences in regard to cash. 'rhe deposits comprise both fixed and current deposits. 'rhe advances include bills discounted and some other small items, but by far the greater part of the sums lent consists of advances by way of over­ draft; bills discounted are now only about 1 per cent. of the total, and other items about per cent. For many years there has been

a continuous decline in bills discounted, which fell, for example, from about £10m. in 1926 to about £3m. in 1936. The practice of trading banks in Australia when lending on overdraft is to charge interest only on the debt outstanding at the end of the day. Conse­ quently, if an advance is arranged, only that part actually used by

the borrower will appear in the figures of the advances. At all times, thttrefore, the aggregate amount of advances outstanding is less than thJ amount arranged, but as a rule no attention is paid

to the margin between the amount of advances made and the limits of overdraft allowed. Some banks review the• aggregate limits periodically, others do not, but all agr ee that the r elation between the two is not important.

168. 'rhere is no generq.l agreement as to the items co·vered by the term "cash". All banks include coin, bullion, Australian notes, and deposits with the Commonvvealth Bank. T n addition some inaludP. treasury-bills, some include part of their London funds, and some include both. Some banks which include London funds do not convert

them into their equivalent in Australian currency.

75

T .HE N1QNETARY AND BANKiNG SYSTEJ\1 1001-1936.

169. Liquid assets include cash and all the other assets excep t advances and landed property. All banks thus include in liquid assets Austfalian government securities whether held in London or Australia. rrhere is, therefore, little difference between the banks

as t o what they r egard as liquid assets, but the portion of these which they regard as cash differs materially as between bai1ks. The total liabilities to the public consist almost entirely of deposits, t ogether with a small amount on account of notes and bills in circulation and

balances due to other banks.

170. 'rhe Commission has been furnished with a detailed ment of the assets and liabilit ies in Australia of each of the nine trading banks from 1926 to 193 6 inclusive, and of their London funds. From these items have been calculated certain ratios for each bank and for all the together. In order to examine the opera­

tions of the trading banks during depression and recovery, it is necessary to refer to these ratios, and, if the position as a whole is t o be surveyed, it is necessary to use aggregate figures. No difficulty arises with the advance-deposit ratio, nor with the liquid assets ratio.

The ratio of advances to deposits is the percentage ratio of the aggregate advances to the aggregate deposits. The liquid assets ratio is the percentage ratio of the aggregate liquid assets to the total liabilities to the public. But the "cash ratio" cannot be so simply determined, because of the difference in practice in regard

to what is included under "cash " . We have, therefore, selected as cash for this purpose, those items which are cash in themselves (coin, bullion, and notes) and those which will be turned readily into cash by the Commonwealth Bank (deposits with the Commonwealth Bank,

treasury-bills, and London funds). We h ave not regarded as London funds Australian government securities held in London. The amount of these, however, is so small that their exclusion affects the r atio very little. The London funds included as cash are talcen at their

value in A_ ustralian currency at the time to which they r elate. It is true that no one bank uses precisely these items in calculating its cash ratio, but in our view the ratio which we have adopted is the most important indication of the liquidity of _the system as a whole . It might be confusing to call the r atio either "cash r atio", or "liquid ratio". The items include more than cash in the strict sense of the word, and less than the total liquid assets t aken into

account by the banks for purposes of their liquid assets r atio. For convenience we shall r efer to it as the " cash reserve ratio " and to the aggregate cash, treasury-bills, and London funds as u cash reserves ".

16

76

rr HE MoN ETARY AND BANK ING SYSTEM 190i -1936 .

TABLE.

N I NE TRADI NG BANKS-AU S TRALIA.

J!overnen t 'in P ercc-n t a,r;e R atio of Cash, TYeastl?':ti-b i lls, L onil on F'1"n ds' to• Total D eposits.

IXCR K \BE ( +) OR ])}0CH.ElA RE (-) . :l<'TW .\[ SEC'O?\J) Q 1.' A H TF;;H T O SECO:'\D Q(T_\H'I' EH.

(The banks are arranged differen tly in e&ch year, according to t he m agnit ude of cha nge in ratio.)

1

192 6 1927 1 1928 1 1929 193 0 1931 1932 1933 193-i 1935

1:8 1:9 1:0 1:1 1:2 1: 3 1:· 1 :5 1:6

All Trading

Banks) (aggregate)

- 1. 7 + 14 .4 - 0 .8 + 4.4 + 11 . 4 + 11.2 + 2.2 + 7 .5- 1 . 5 + 3. 3

- 3. 5 + 12 . 3 - 2. 2 + 2 .1 + 11.2 + 11. 1 + 0 . 7 + 3 . 1 - 3. 8 + 1. 8

- 4 . 0 + ll .8- 3 . 7 - 4 . 0 + 11.1 + 9 . 5 + 0 . 1 + 2 . 8 - 4 . 6 + 1.3

- 6 .0 + 5 .9- 4 . 8 - 4 .0 9 . 2 -t- 7.5- 0 .5 + 1 .2- 8.9 + 1. 2

- 6. 4 + 5 .0- 5. 7 - 4. 2 + 8 . 9 + 6 . 9 - 1. 4 + 0 . 9 - 10.2 + 0 .4

- 6 . 8 + 4 .9-9. 1 - 4 .4+ 5 .5 + 4. 1 - 2. 4 + 0.8-11.0-1. 3

- 7. 0 -i- 4.8-9. 8 - 5.3 + 4 .8+ 3.7 - 3 . 1 + 0 .5 -14.1-2 . 8

- 7 . 6 + 1 . 8 - 9 . 9 - 7 . 8 -1- 2 . 8 + 3 . 3 -.- 3 . 6 - I . 0 -15 . 3 - 3 . 2

1 - 8 .5- 0 .4-12.8 - 10 . 9 + 2. 4 + 2 . 3 - 6.6 - 3.3 - 16.5 - 4 .9

5.1+ 5.3+ 8.4 + 1.5 +

Movem en t of Ratio of To t a l A dva-nces, &c ., t o Total D eposits.

INCREASE ( +) OR DECREA SE (- ), F R OM SECOND QUARTER TO SECOND QUARTER.

(T he banks are a rranged differently in each year, a-c{)ordino- to the magnitude o f chang-e in ratio. ) 0

192 6 1927 1928 , 1929 193 0 I 931 1932 1933 1934 1935

-- t o t o to to to t o t o to to to 1927 ' 1928. 1929. 1930. 1931. 1932. 1933. 1934. 1935. 1036, --- -- - ------0 / % % % % % 0/_ Ol % % / 0 ; 0 !o +12.4 + 5 .4 + ll.O + 15 . 8 + 0 .5 - 3 . 9 + 6.2 Nil + 15 . 8 + 6 . 8 + 12 . 2 - 3.9 + 10.5 + 12 . 7 + 0 . 5 - 5.0 + 5.8 - 3 .l + 12.2 + 5.8 + 10 . 7 - 4. 2 + 7 . 2 + 11. 4 - 2 . 0 - 8 . 3 + 3.6 - 3.4 + 8 . 3 + 3 . 9 + 9 . 0 - 4.3 + 5 . 1 + 11 .2 - 2.3 - + 3 . l - 3.5 + 6 . 6 + 3 . 6 + 7.7 - 5 .6 + 5.0 +10. 8 - 4 . 3 - 9 .5 + 2.7 - 3.9 + 4.7 + 2.2 + 7 .5 - 6 . 3 + 4.7 + 9 . 9 - 5.8 -10 . 8 + 2.6 - 5.3 + 2.3 + 0.2 + 6.1 - 6 .8 + 4.3 + 7 . 7 - 8.7 -12 . 2 + 2.4 - 5.7 + 1.9 Nil + 5 .1 - 9 . 5 + 2.2 + 7 . 2 - 9. 2 -12.8 + 2. 1 - 6 . 0 + 1.0 - 0.2 + 1.7 - 11 .0 - 3. 2 + 5.6 -14 .4 -12.9 - 0.9- 7.4 + 0.1 - 3 . 3 ---------- --------- --------- - - All Trading Banks (aggregate) + 6 .6- 7.0 + .5 . 5 +11.1 - 5 . 5 - 10 . 1 + 2 . 6 - 5 . 3 + 7 .3 + 3 . 1

77

rrnE MoNE'rARY AND BANKING SYSTEM 1901-1936.

171. An examination of the ratios of any one bank discloses a wide r ange of fluctuation around the average. A comparison of the ratios of different banks shows that the average ratio differs con­ siderably as banks, and that the :range of fluctuation is

greater for some banks than for others, but on the whole, as the table above shows, the ratios of the banks moved in the same direction. The ratio of cash reserves to deposits is shown by the graph in the appendix, which is based upon the aggregate figures of the nine trad­

ing banks for the period 1926 to 1936. It will be seen that the ratio varies within wide limits. It is to be borne in mind in considering this ratio that the period which the graph covers includes years of acute disturbance. It should not, therefore, be accepted as giving an

accurate view of the limits within which the trading banks' cash reserve ratio has varied in less-disturbed times. If we look, for example, at the years 1926, 1927 and 1928, which preceded the depression and included a period of slight business recession, it -vvill

be seen that the variation is not as extreme as in the later years.

For example, the cash reserve ratio then varied from 24 per cent. to 34 per cent., the Equid assets ratio from 30 per cent. to 41 per

cent., and the advance-deposit ratio from 79 per cent. to 91 per cent., whereas in the succeeding eight years of depression and r ecovery, the cash r eserve ratio varied from 19 per cent. to 39 per cent., the liquid assets ratio from 25 per cent. to 45 per cent., and the adyance-deposit

ratio from 79 per cent. to 98 per cent.

172. For a considerable period prior to 1929 seasonal movements m banking figures had been discernible, due to the production and sale of the principal exports. For example, the cash reserve ratios and liquid ratios were usually at the lowest point in the third quarter

of the year. During that quarter, advances increased, deposits decreased and cash reserves tended to fall. In the first quarter of the year deposits reached their highest point and advances were low. 'rhe expectation arising from these movements was that up to September deposits would gradually decrease and advances be higher,

throughout the fourth quarter deposits and cash r eserves would both be rising, and that in the first quarter the cash reserve position would be restored with the growth in deposits and the slackening off of advances.

173. The changes in the banking figures and ratios before the derression may be illustrated for the thr ee years 1926 to 1928.

163 3

78

T:aE 111oNETARY AND B ANKING S YSTEM 1901-1936. TAB LE. TRADIN G B AN K S-AUSTRALIA.

Total Deposits Cash, Total Total Treasury London \Vi t h Cash Advance-- Quart er . Deposits. Advances . Bills and Funds. Com mon- Go ld. R eserve Deposit London wealt h Ratio. Rat io . F unds. Bank. £Am. £Am. £Am. £Am . £Am . £Am. Per cent. Per cent.

1926-1st .. 259 .3 204 .6 85 . 6 33.1 5.7 24 .0 33.0 78.9

2nd .. 258.2 210 . 6 81.3 32 .4 6 .2 24 .4 31.5 81.6

3rd .. 254.2 220.0 69. 5 19 .5 6.7 24.4 27.3 - 86.6

4th .. 258 . 7 231.0 63. 1 13. 2 7.4 24.8 24.4 89.3

1927-lst .. 266. 1 231.4 73 . 1 20. 0 8.2 25.0 27.5 87.0

2nd .. 263 .4 232.2 69. 6 21. 0 8.2 24 .1 26.4 88.2

3rd .. 258.5 23 4.51 68.0 18.2 9.4 23.8 26 . 3 90 . 7

4th .. 263.4 232.9 74.0 21.7 11.2 23.8 28.1 88.4

1928-l st .. 275.3 223 .4 91. 6 35. 8 13.7 23.7 33.3 81.1

2nd .. 273. 5 222.0 93 .3 41.3 12 .9 23. 5 34.1 81.2

3rd .. 266 . 9 228 .2 78. 6 29 .2 10.4 23.6 29.4 85 .5

4th .. 275 .2 236 .6 80 .4 27.5 13 .0 23.7 29.2 86.0

17 4. The most variable elemen t in the cash r eser ves of the trading banks in pre- depression y ears was the it em of Lon don funds.

Quar terly average figures of L ondon funds f or the years 192 6 to 1928 show a f all between the fi rst quarter and the f ourth quar ter of 1926 f r om £3 3m. to £13m. London funds remain ed low thr oughout 1927, but rose again to £41m. in the secon d qu ar ter of 1928. There were n o offsetting in other f orms of cash reserves, so that these

changes were r eflect ed in ·the ratios of the banks as a wh ole . When London f un ds fall off sudd enly, it is difficult for the banks to effe ct an immediat e reduction of their advances to conform with the fall. The r esult is that the cash r eserve r atio f alls, t he advance-deposit ratio rises, and the pos.ition of t he banks becomes less liquid. When the f all in L ondon funds took place in 1926, the ratio of cash r eserves to dep osits, which had be en 33 per cen t . in the first quarter, fell to 24 p er cen t . in the f ourth quarter , and the advance-deposit r atio rose from 79 per cent. in the fi r st quart er to 89 per cen t. in the fourth · Throughout 1927 , the banks as a whole were f aced with the

position of a high advance-deposit r atio and a low cash r eserve It was some time, however, bef or e t he low level of London funds in 1927 brought about a r eduction in advances . London funds rose again t o £41m. in the sec ond quarter of 1928, and the cash reserve ratio to 34 per cent. Advances wh ich had risen sharply in 1926 from £205m. in the first quarter to £23 1m._ in the f ourth quarter, remained high during 1927, but wer e brought back to £222m. in the second quarter of 1928. Deposits had steadily increased over the whole

79

THE MoNETARY AND BANKING SYSTEM 1901-1936.

period, and the advance-deposit ratio fell to 81 per cent. by the second quarter of 1928 . During the period, t oo, the trading banks increased their holdings of long-term government securities from £11m. to £17m.

1929-FIRST HALF. T .. <\.BLE. TRADING BANKS-AUSTRALIA.

Total Depos1ts Oaeh Tot al Total Treasury London TrJasur y wit h I c .. h Advanee Quarr,er. Ad- Com men- Gold. R eserve Deposit De-posits. vances . Bills and l < 'unds. Hills. wealth R at io. Ratio. Londo n Bank. Funds . --- ------ ------------- - Per Per £Am. £Am. £Am. £Am. £Am. £Am. £Am. cent. cent_ 1928- lst . . 275.3 223.4 91.6 35.8 0 .3 13.7 23 .7 33.3 &1. 1 2nd .. 273.5 222.0 93.3 41.3 0.3 12.9 23 . .15 34 . 1 81.2 3rd .. 266.9 228.2 78.6 29.2 .. 10 .4 23.6 29.4 85.5 4th .. 275.2 236.6 80.4 27.5 .. 13.0 23 .7 29.2 86.0 1929- 1st .. 287.1 239.2 90 .0 34.8 .. 15.1 23.6 31.3 83 .3 2nd .. 284.5 246 . 7 79. 6 32 .6 .. 9.5 23.0 '28.0 86.7 I 175. In the first half of 1929 the outlook for the future showed some disquieting features, but was by no means bad. It is true that no long-term overseas loan was raised after January, 1929, and a decline was already to be noticed in export prices, but it was not yet certain that ov erseas borrowing had ceased entirely, and although the drop of 20 per cent. in export pdces between May, 1928, and May, 1929, brought them to a figure lower t han any since 1922, there was always hope that the trend might be rever sed. Unemployment for Australia as a whole, according to the figures of the Comm on ­wealth Statistician, based upon trade union r eturns, had risen from 6.4 per cent. in tht second quarter of 1927 to 10 per cent. in the secon§. quarter of 1929, but this again was a movement which might be reversed. · ' 176. Bank deposits the first quarter of 1929 were seasonally nigh, and there was the usual drop in -the second quarter. For several years fixed deposits had regularly increased and the seasonal changes took place in current deposits alone. Bank advances had risen from £237m. in the fourth quarter of 1928 to £247m. in the second quarter of 1929, and- there was not the usual seasonal fall in the first quarter. London funds, which had r eached a high point of £41m. h1 th8 second quarter of 1928, dropped to £27m. in the fourth qu:uter, bu t followed the normal upward trend in the first quarter of , 1929 1 and nt £:i:1m. in the second quarter . D ep osits with the Commonwealth Bank, which were not yet an important proportion of the trading banks' cash reserve;,, fell from £13m. in the fourth quarter

-1635

80

THE MoNETARY AND BANKING SYSTEM 1901-1936.

of 1928 to £9.5m. in the second quarter of 1929. 'rhe cash reserve ratio in the first quarter of 1929 was a little over 31 per cent., not as high as in the early part of 1928, but still satisfactory. The advance­ deposit ratio vvas 83 per cent., not high enough to cause any apprehen­ sion. Even in the second quarter of 1929, there was only a slight deterioration in t he cash r ese rve r atio, which fell from 31 per cent. to 28 per cent., and in the advance-deposit ratio, which rose from 83 per cent. to 87 p er cent. 'rhe position of the trading banks was becoming slightly less liquid, but similar movements had occurred before and

had righted themselves.

1929-SECOND HALF. TABLE. TRADING BANKS-AUSTRALIA.

Total Deposits Cash Tot al Total Treasury London Treasury with Cash Advance Quarter. Ad- Co mmon- Gold. Reserve Deposit Deposits . vances. Bills and Funds. Dills. wealth Ratio. Ratio. Lo n don Bank. Funds. ------------------------ Per Per £Am. £Am. £Am. £Am. £Am. £Am. £Am. cent. cent. 1928- 23.6 I 3rd 266.9 228.2 78.6 29.2 10.4 29.4 85.5 4th 275 .2 236.6 80.4 27.5 13.0 23.7 29.2 86.0 1929- 1st 287.1 239.2 90.0 34 . 8 15.1 23.6 31.3 83.3 2nd .. 284.5 246.7 79 .6 32.6 9.5 23.0 28.0 86.7 3rd 277.2 259 .2 61.1 17.6 7.8 21.6 22. 1 I 93.5 4th 275.2 269.5 53.2 I 9.3 1.5 8.6 19.1 19.4 97.9 177. rrowards the end of 1929 it became clear that Australia was entering a depression. Export prices had fallen another 10 per cent. between May and December, and the wool sales had opened badly in September. Unemployment was definitely rising, and the figure of 10 p er cent. in the second quarter of 1929 became 13.1 per cent. in the f ourth quarter. Bank deposits fell f r om £284m. in the second quarter to £277m. in the third _ quarter. This fall might have· been accepted as seasonal, but instead of the usual rise in the fourth quarter, there was a further fall to £275m. Most of this change was due to movements in current deposits, which followed their seasonal trend downwards but did not rise again. rrhere was a slight check, too, in the general upward trend of fixed deposits. Advances rose from £247m. in the second quarter to £269m. in the fourth quarter, a rather steeper rise than usual. The holding of government securi­ties by the trading banks fell off from £17m. in the second quarter to £13m. in the fourth quarter. 178. rrhe chief strain, however, came on London funds, which fell from £33m. in the second quarter to £18m. in the third. In itself, this fall was little worse than had happened in 1926, but in

81

THE :MoNETARY AND BANKING SYSTEM 190L1936.

the fourth quarter there was a further fall to the very low figure oi £9m. 'l'here was also a fall from £23m. to £19m. in the amount of gold held, which occurred before the Act of that year empowering the Commonwealth Bank to acquire had time to take effect.

The cash reserve ratio fell from 28 per cent. in the second quarter of 1929 to 22 per cent. in the third quarter, which was lower than at any time in the past three y ears. But instead of a

recovery in the next quarter the ratio fell again to 19 per cent., which was clearly unsatisfactory to the banks. The · advance-deposit ratio rose from 87 per cent. in the second quarter to 94 per cent. in the third quarter, which was higher than at any time since 1926, and in the fourth quarter it rose to 98 per cent., a fi gure also unsatis­ factory.

179. 'rhe position of the banks at the end of 1929 was extremely illiquid. Deposits and cash reserves were falling, advances increasing. London funds were very low, and were likely to remain low even with the normal seasonal increase to be expected in the new year.

The cash reserve ratio and the advance-deposit ratio were both unsatisfactory, and the problem for the banks in thes e circumstances was how to restore their liquidity. If one bank alone is faced with such a problem, any action which would increase its cash reserves

would help it to become more liquid. The bank m ay refuse to make new advances, or may restrict new advances so as to protect its position from furth er deterioration. It may go beyond this, and attempt to call in advances . T·o the extent to which it is succ essful

in this action its cash reserves will increase, and although it may at the same time cause some in its deposits, the net effect

is an improvement in both its cash r eserve rat1o and its advance­ deposit ratio. Similarly, a bank may sell government securities) which will have much the same effect upon its ratios as a r eduction in advances. Finally, it may use various means of attracting to itself

deposits, and in so f ar as it is successful the increase in its cash

r eserves and its deposits improves bo th r atios. Apart from such methods, unless the Commonwealth Bank is prepared to provide it with more cash, or the public to hold less, a bank cannot bec ome more liquid unless its gold or London funds increase. But while one

bank alone may use any or all of these methods with some degree of success, the same r esults will not follow their use by the tradi11g banks as a whole. If, fo r example, to restore liquidity all the banks try to attract deposits, they are not likely to achieve their aim, because what one gains another loses. Even if some dep osits are attracted

from the State savings banks, liquidity is n ot necessarily improved by this means. Savings banks which hold large deposits with the trading banks may simply draw on these deposits to meet the drain which arises from the transfer of deposits to . the trading banks.

It' .258l.-6

82

THE MONETARY AND BANKING SYSTEM 1901-1936.

Savings banks may also sell securities to provide the cash fo r sucb transfers. In this case, if the buyers of government securities draw upon the deposits of the trading banks to pay for these securities, at the end of the process the trading banks are no more liquid than before. The attraction of d eposits f rom savings banks w1ll help to restore liquidity to the trading banks only if the deposit comes from the Commonwealth Savings Bank, or if securities are sold to buyers who pay for them by reducing their deposits 'vith the Commonwealth Savings Bank or the' Commonwealth Bank. In words, the

increased liquidity has come from an increase in volume of central bank credit. Apart from this, if the Savings Bank met the drain by reducing its cash, ther e might be some gain to the trading banks, but this is unlikely to be of much importance. Generally speaking, too, if all banks sell government securities, attempt to call in advances, or refuse new advances, these efforts to arrive at a more liquid position will not add to their cash reserves unless they can induce the public to

hold less cash or the Commonwealth Bank to provide more. But the general reduction of advances and the sale of securities mean the general reduction of deposits, and although the cash r eserves of the banking system are not increased, yet the cash r eserve ratio and the advance-deposit r atio may improve.

180. During the latter half of 1929, the banks sold securities, reducing their holding of £17m. by £4m. On the other hand, £1.5m. of treasury-bills were taken up by the banks. But at this time some of the banks were chary of lending to the Governments on treasury­ bills, which were not then snbjeet to the Commonwealth Bank's under-. t aking to rediscount them at a fixed r ate and to meet them, if

necessary, at maturity. During 1929, and esp ec ially in the latter half of the year, the auks severely restricted n ew · lendin g, whilst

endeavouring to assist old customers, especially primary producers .

. 1930-FrRST HALF.

T ABLE.

TRADING BANKS-AUSTRALIA.

Total Deposits Cash Total Total Treasury London Treasury with Cash Advance Quarter. Common- Go ld. Reserve Deposit Deposits. Ad- Bills and Funds. Bills. wealth: Ratio. Ratio. vances. London Bank. F unds. ----------------- -------- Per Per £Am. £Am. £Am. £Am. £Am. £Am. £Am. cent. cent. 1929-l st .. 287.1 239 .2 90.0 34.8 . . 15. 1 23 .6 31.3 83 . 3 2nd . . 284 . 5 246 .7 79 .6 32.6 . . 9.5 23.0 28.0 86 . 7 3rd .. 277.2 259.2 61.1 17.6 . . 7. 8 21.6 22.1 93.5 4th .. 276 . 2 269.5 53.2 9. 3 1.5 8 .6 19.1 19 .4 97 . 9 1930- . 1st .. 272.3 264 . 4 60.0 15.7 2.1 14.5 12 .4 22.0 97.1 2nd .. 265.9 260.2 60.4 21.2 2.0 18.7 2.6 22.7 97.8 '

83

THE- ]}'loNETARY .AND BANKING SYSTEM 1901-1936.

l ol. ln the first half of 1930, the depression in Australia

deepened. Export prices fell a fru·ther 14 per cent. from the second quarter of 1929 to the second quarter of 1930, making a total fall of approximately 40 per cent. from Ivlay, 1928. Unemployment rose rapidly from 13.1 p er cent. in the fourth quarter of 1929 to 18.5

per cent. in the second quarter of 1930. Deposits fell again from £273m. to £266m. in the same period, and for the first time for some years the first quarter of the year showed no increase over the

preceding quarter. The slight fall in :fixed deposits from £178m. in the fourth quarter of 1929 to £176.5m. in the second quarter of 1930 continued the reversal of the upward trend which had been for long characteristic of these deposits. Current deposits, too, fell from £97m. to £89m. Recent increases in fixed deposits had been mainly in the three months and 24 months classes. Between June, 1929,

and J·une, 1930, there was a definite shift from the longest term to the shorter term fixed deposits. There was no marked change in the proportions of large and small fixed deposits, but the loss of £Sm. in current deposits was spread evenly over the various categories, being least severe in the very large and in the very small deposits.

Deposits of States savings banks with the trading banks fell from £28.7m. in June, 1929, to £25.2m. in June, 1930, while the total deposits of the State savings banks fe!I from £186m. to £178m. Advances, which had reached their highest point of £269m. in the fourth quarter of 1929, fell in the second quarter of 1930 to £260m., and there was no significant change in the holding of go vernment securities. Changes in the cash reserve position of the banks resulted

in a net increase of some £7m. Between the fourth quarter of 1929 and the second quarter of 1930, London funds rose from £9m. to £21m., which may be compared with the smaller rise in 1926-27 from £13m. to £21m. .Gold fell from about £19m. to about £3m. Treasury­

bills rose from £l..5m. to £2m., and deposits with the Commonwealth Bank from £8.6m. to £18.7m. There was an increase in the cash r eserve ratio from 19 per cent. to 23 per cent., but the latter figur e was still too low to be satisfactory to the banks, and the advance­

deposit ratio r emained in the neighbourhood of 98 per cent., which was much too high to be satisfactory. 182. During this period, the banks surrendered most of their gold and received instead deposits with the Commonwealth Bank. They still maintained their attitude to treasury-bills, which were, from their point of Yi ew, unattractive. At the beginning of 1930, all fix ed deposit

rates were increased by a minimum of -! per cent. and a maximum of ! per cent., and advance rates were also increased. 'rhe same policy was pursued of carrying old customers and restricting new lending, and advances fell sharply. All through the early part

84-

THE lVIONETARY ANP BANKING SYSTEl\i 1901-1936. of 1930 the trading banks were resisting the pressure on the exchange rate, and ·were rationing exchange to t heir customer s.

JUNE, 1930, TO JUNE, 1931 . TABLE. TRADING BANKS-AUSTH.ALIA.

Total Deposits

Total Cash , with Cas It Advance

Quarter. Totn.l Ad- Treasury J,ontlon Treas ury Com mon - Go ld. R.eser ve Deposit Depos its. van ces . Bills and l<'Llnds . Bi'Hs. wealt h R.atio. R atio . London 43:-tnk. Funds . ---- ----- ---------- ------ Per Per £Am. £Am. £Am. £Am. £Am. £Am. £Am. cent. cent. 1930- 1st .. 272.3 264.4 '60.0 15.7 2.1 14.5 12.4 22.0 97.1 2nd . . 265.9 260.2 60.4 21.2 2.0 18.7 2.6 22.7 97.8 3rd .. 259.8 255.0 57.0 19 . 2 2 .4 18.4 0.7 21.9 98.2 4th .. 260 .7 253.2 60 .4 15 . 7 5.3 22.9 . . 23.2 97.1 1931- lst .. 260.6 244.6 76.7 21.6 6.5 31.3 . . 29 .4 93.9 2nd .. 258.7 238 .8 80.5 20.7 6.8 32.1 . . 31.1 92 . 3 183. From June, 1930, t o June, 193l, the depression continued, but the liquidity of the banking syst em increased rapidly after the end of 1930. Export prices -shovved some fluctuation, reaching their lowest point in January, 1931, and rising again by June, but between June, 1930, and June, 193:1, there was a fall of 15 p er cent., making a total fall from .lUay, 1928, of about 50 per cent. Unemployment continued to rise rapidly, and increased from 18.5 per cent. in the second quarter of 1930 to 27.6 per cent. in the second quarter of 1931. Deposits fell from £266m. to £259m., fixed deposits rising slightly and current deposits decreasing from £89m. to £81m. The trend from longest term fi xed deposits to the shorter terms was accentuated. The only significant change in the size of fixed deposits was a slight increase in the lowest class,. while the fall in current deposits was most marked in the largest accounts. Deposits held by the St ate Savings Banks with the trading banks fell from £25m. t o £13m. at a lime \Yhen the t ot al dep osits of the S tate Savings Banks fell by £24m. The heavy withdrawals from the Government Savings Bank of New South Wales were mainly responsible for these reductions. 184. The downward trend of advances continued, and there 1va s a sharp fall from £260m. to £239m. Holdings of long-term govern­ment se curities fell by n early £3m. from £12.4m. to £9. 7m. In the two years from June, 1929, to June, 1931, ;£7m. of g·overnment securities had bee n disposed of by the trading banks, and £11m. by the Savings Banks. I..J.ondon fun ds r·emained at about £20m. , which was still a very low figu:re, especially as the holding of gold in Australia f ell from £2 .5m. to nil. Australian notes in the hands of

85

TrrE :rvroNETARY AND BANKING SYsTEM 1901-1936. the trading banks rose from £14m. to £19m., and treasury-bills from £2m. to £7m. Deposits with the Commonwealth Bank increased by £13m. from £19m. to £32m., due to the expansion of central bank

credit when the treasury-bill issue was increased from £2.3m. in the second quarter of 1930 to £20.6m. in the second quarter of 1931. The net result of these movements was an increase of some £20m. in cash reserves, and a change in the cash r eserve ratio from 23 per

cent. to 31 per cent. This marks the first decided improvement, since the depression began, in the liquid position of the banks. The

advance-deposit ratio, too, fell from 98 per cent. to 92 per cent., and the banks were no longer in a position where a contraction of lending seemed necessary, although London funds were still low. The con­ traction in the international part of the liquid resources of the trading

banks had been offset by an expansion of the Australian part through central bank action. 185. During this period, between June, 19 30, and J nne, 1931, there was no change in the rates of interest either on deposits ·or on

advances. An analysis of classes of borrowers in June, 1927, and in June, 1931, shows that between these dates the amount of advances to primary producers had increased both absolutely and as a propor­ tion of total advances. On the other hand, total. advances to manufac­

turing, commerce, transport, distribution and building, showed a decrease both absolutely and in proportion. These facts confirm the vi ew t hat t he banks, although restricting new lending, were making some advances to enable their primary producer customers to maintain

production. They show, too, that the fall in production, imports, and prices, reduced the demand by some other classes of borrowers for assistance from the banks. In August, 1930, trading banks entered into the exchange mobilization agreement, and in January, 1931,

rationing of exchange was finally abandoned, and the rate allowed to go to 130, which relieved some of the strain on London funds.

JUNE, 1931, TO JUNE, 1932.

TABLE.

TRADING BANKS-AUSTRALIA.

Total I Deposits I Cash, wit h Cash Advance-'-Quarter. Total Total Treasury London Treasury Common- R,eserve De posit Deposits. Advances. Bills and. Funds. wealth R atio. R at io. London Bank. Funds. £Am. £Am. £Am. £Am. £Am . £Am. Per cent. P er cent. 1931- 1st' .. 260.6 244.6 76.7 21.6 6. 5 31.3 29 . 4 93.9 2nd .. 258.7 238 .8 80.5 20 .7 6 .8 32. 1 31.1 92.3 3rd .. 254.5 238.3 78.6 19.8 13.9 22. 8 30.9 93.6 4th . . 267.3 233.7 94.8 31.4 20.7 22 . 1 35.5 87.4 1932- lst .. '281 .2 224.9 108.7 28.8 26.9 32 .8 38.6 80.0 2nd .. 276 . 1 227.1 104 . 1 24 .0 30 .6 28 .9 37.7 82.3

1641

86

T H E MoNETARY AND BANKING S Y ST E M 1901-1936.

186; By the beginning of 1931 it was clear that depression con­ ditions wer e not confi ned t o Austr alia, but that a world depression was developing of different intensity in diff er ent countries. Export prices mo ved irregular ly after June, 1931, first f alling, then rising and later falling again, but behveen June, 1931, and June, 1932, there was a drop of 7 per cent. Un employment rose to its highest level of 30.0 per cent. in the seeond quar ter of 1932. Deposits rose f r om £259m. in the second quarter of 1931 to £27 6m. in the second quarter of 1932, thus r eversing t he t r end which had, been evident since the ear ly par t of 1929. F ixed deposits accounted for £11m. of the

incr ease, r ising from £178m. to £189m., and current deposits f or the other £6m., rising from £81m. t o £87m. Some of the increase in deposits was due to the fact that the movement in the exchange rate in J anuar y, 1931, induced overseas fir ms to allow funds to accumulate in Australia in the hope that the rat e ·would come n earer to par. This "fugitive money", as it has sometimes been called, gradually disappeared after the rat e changed to 125, and showed no sign of further alteration. Accompanying the general rise in fi xed deposits ther e was a noticeable moveme nt from the longest dated deposits

(two years) and the shortest dated (three months) into those of me dium ter ms (six an d t welve months). In t he case of both fixed and current deposits, ' there was a slight movement to the larger deposits. Deposits by Savings Banks with the trading banks

rose from £13 m. t o £15m. Advances continued to fall from £239m. in t he second quar ter of 1931 to £227m. in the second quarter of 1932, but the f all, which had been continuous since the latter p art of 1929, was arrested in the early part of 1932, and the figures for the second quarter showed an increase over the figures for the first quarter. Holdings of long-term govern me nt securities in the hands of the tradi ng banks showed little change. London funds increased from £2 1m . in the second quar t er of 1931 to £31m. in the fourth quarter, when the exchange r ate · \Yas altered from 130 to 125, and fell to · £24m. in the second quart er of 1932. Deposits with the Common­ wealth Bank fell from £32m. to £29m. took on a

new significan ce for the trading banks, after the Commonwealth Bank, in June, 1931 , had an nounced its willingness to rediscount at a fixed r ate, and to meet the bills if necessary at maturity. Before this announcement, some, at least, of the banks were not inclined to hold t reasury-bills, but the change in their attitude is shown by the increase in their holdings from £7m. in the second quarter of 1931 to £31m. in the sec ond quarter of 1932. As a result of these increases in cash reserves t he banks found themselves in a very liquid position, t he cash reserve r atio rising from 31 to 38 per cent., and the advance-deposit ratio falling from 92 to 82 per cent. In each case the position of tbe rntios indicated that lencljng might well be extended.

87

TIIE lvfONETAll.Y AND BANKING SYSTE:M: 1901-1936.

187. Treasury-bill finance, as we have shmYn earlier, has the cited both of adding to the cash of the banking system and to the deposits of the trading banks. It was r esponsible for arresting the decline in deposits . which had been go ing on since 1929. The net increase in

the cash r eserves of the system came not from the increased holding of treasury-bills by the trading banks, but from their increased issue by the Gover nment to the Commonwealth Bank 'l'he trading banks differed in the way in which they regarded treasury-bills, some regard­

ing them in all respects as cash, other as almost the equivalent of cash. But the holding by the trading banks of larger amounts of treasury-bills did not increase their cash r eserves . It merely r epr e­ sented a different and more profitable distribution of a given holding of cash or its equivalent. The r eal addition t o the cash reserves of

the system through the mechanism of treasury-b ills came from the fact that the Commmnvealth Bank took them up, and the total cash reserves o£ the system r emained unaltered whether the Commonwealth Bank held all the treasury-bills or allowed some part of them to be

held by the trading banks. For, if the Commonwealth Bank had held all the treasury-bills, the cash reserves of the trading banks would have been expanded to just the same extent, 'but the increase would have been held in some other form, for example, in deposits

wjth the Commonwealth Bank, or in notes. 'I'his would have meant an increase in the cash reserves of the trading banks, and the amount of this increase -vvould have been unaffected if the trading banks had then been allowed to buy treasury-bills from the Commonwealth Bank,

and pay for them by drawing on their deposits with the Common­ wealth Bank. 188. From January, 1931, when the exchange rate was altered to 130, the banks kept the rate stable. The alteration from 130 to

125 made by the Commonwealth Bank in December, 1931, was carried out without consultation with the trading banks. JUNE, 1932, T'll JUNE, 1934.

TABLE.

TRADING BANKS-A UBTitALIA.

Total D epo">its Cash, with Ca sh Advance- Quarter. Total Total Treasury London Treasury Common· Reserve Advances . Bills and F unds. B ills. wenJth Ratio . Rat io. London Bank. Funds. £Am. £Am. £Am. £Am. £Am. £Am. Per cent. P er cent. 1932- ht . . 281.2 224 . 9 108.7 28.8 26.9 32.8 38 .6 80.0 2nd .. 276 . 1 227.1 104.1 24.0 30 .6 28 .9 37.7 82.3 3rd .. 267.1 229.5 94.4 19.1 34.6 21.4 35 . 3 85.9 4th .. 273.7 231.6 103.0 23.6 38.0 22.9 37.6 84.6

1643

88

THE MONETARY AND BANKING SYSTEM 1901-1936. BA N KS-A US'l' R.ALIA--contiun ecZ.

Tota l Deposits Cas h , wi t h Cash Advance Total Total Treas ury London Treasury Common- R eserve Deposit Depos its . Bills and Funds. Bills . wealth Ratio. Ration. London Bank. F und s. 1933- £Am. £Am. I £Am. £Am. £Am. £Am . P er cent. Per. cent. lst .. 276.8 230 .4 106.4 27.2 35.5 25 . 3 38.5 83.2 2nd .. 273.8 232.3 99 . 3 25.4 33.0 23.2 36 .3 84. 8 3rd . . 267 . 8 235.3 89.3 20 .1 29.2 22.2 33 .4 87 .9 4th . . 277.9 237.5 96.8 26.6 27 .6 24 .8 34.8 85.5 1934- l st . . 290 . 5 233.5 1 112.0 34.9 29 .5 30 .5 38. 6 80 .4 2nd .. 296.2 235.4 112 .5 30.2 29 .3 37 .8 38.0 79.5 189. From the beginning of 1933 there were signs that the worst ' of the depression '\vas over, and evidence of some r ecovery. Expor t prices rose sharply, and in January, 1934, were 60 per cent. above the level of .June, 19 32 . Although they f ell again, they were, in June, 1934, 30 per cent. higher than in June, 1932. Unemployment began to fall steadily from its maximum of 30 per cent. to 20.9 per cent. in the second quarter of 1934. Deposits increased from £276m. t o £296m. Both fixed and current deposits rose, fixed from £189 m. to £195m., current from £87m. to £101m. -'J.lhe increase in fi xed deposits was most marked in the long-term deposits, and ther e was a tendency for the shorter dated to fall. Again there was a definite increase in the large fix ed deposits, and a reduction in the smaller class es, while current deposits showed an increase in all classes, although the proportion of the smallest class to the total dropped slightly. Deposits by State Savings Banks with the trading banks rose from £15m. in 1932 to £20m. in 1934, while the total deposits in State Savings Banks increased by £5m., Advances showed a fairly steady rise from £227m. in the secon d quarter of 1932 to £235m. in the second quar ter of 1934. Holdings of long-term government securities rose from £10m . t o £18m. in the same period. London funds rose from £24m. to £30m. showing in each year a small drop in t h e third quarter, and a seasonal rise in the first quar ter. rr her e was a slight drop in treasury-bills from £31m. to £29m. Deposits with the Commonwealth Bank fell at first from £29m. then r ose sharply in the beginning of 1934, reaching £38m; in the second quarter. rrhis movement was accompanied by a fall in the t r ading banks' holdings of Australian notes from £19m. in t he second quar ter. of 1932 to £13m . in the second quarter of 1934. There wer e some seasonal movements in the cash reser ve r at io, but little signifi cant change, an d throughou t the period the banks were in a ve r y liquid p osition. The advan ce-deposit ratio f ell from 82 per cent . to 79 per cent., which suggests that the banks had difiiculty in finding suitable borr ower s for the money they now wer e willing to lend.

89

THE MoNE'rARY AND BANKING SYSTEM 1901-193 6.

This is borne out by the fact t hat t he banks had almost doubled their holdings of government securities, and the ratio of advances plus government securities to deposits remained constant. 190. This was a period of falling interest rates. 'rhe average

rate ch arged by the banks on advances fell 1 p er cent. from 5.8 per cent. t o 4.8 per cent., while the average inter est paid on all deposits also fell 1 per cent. from 3 per cent. to 2 per cent. The rate of

discount on treasury-bills was r educed from 4 per cent. to 2-:i- per cent. Ther e was some t endency on the part of the trading banks to oppose this latter fall, on the gr ound that by r educing the income which the banks received from treasury-bills, it made it more difficult

for them to reduce advance rates, but the amount involved was not large enough to have much effect.

l

Total Quarter. Deposits.

£Am.

1934-1st .. 290.5

2nd .. 296.2

3rd .. 289.3

4th .. 291.2

1935- 1st .. 292 .1

2nd .. 290.6

3rd .. 282.4

4th .. 288.0

1936- 1st .. 291.8

2nd . . 290.0

3rd .. 282 . 9

4th .. 289.8

I

JUNE, 1934, TO DECEMBER, 1936 . TABLE. TRADING B' ANKS-A UST'RALIA.

Deposits Cash,

Total Treasury London Treas ury with

Advances . Bilts and Funds. Common-

J,ondon wealth

Funds . Bank.

£Am. £Am. £Am. £Am. £Am.

233.5 11 2 .0 34 .9 29.5 30 .5

235.4 112.5 30.2 29.3 37.8

240.9 100 . 1 23 .1 25.5 35.9

246 .8 95.5 24.9 23 . 8 30.9

248 .0 91.2 25.4 24.2 26 . 1

252 .2 84.8 22.4 24.0 23.0

256.6 74 .9 18 .0 22 . 5 19.7

259 .2 79 . 6 21.8 24.4 18.7

256.9 88 .7 30 .2 25.1 18.6

260.7 85.1 29.4 24.9 16.3

264 . 9 75 .2 21.6

23 7 1

15 .9

265.9 81. 0 26.6 23.2 16 . 9

Cash R eserve Ratio.

Per cent.

38 .6 38 .0 34.6 32.8

31.2 29 .2 26 .5 27 .7

30.4 29.4 26 . 6 27.9

Ad van Depo ce­ sit

0. Rnti

Perc ent.

80 79 83 84

84 86 90 90

. 4

. 5

. 3

.7

.9

. 8

.9

.0

88 . 0 9.9 3 . 7 .8

8

9. 91

191. The progress of recovery continued in the n ext two years. Export prices , which had fallen 15 p er cent. from June, 1934, to the end of the year, had recovered the lost ground by J une, 1935, and wer e st eadily rising. Unemployment fi gures showed a steady fall from

20.9 per cent . in the second quarter of 19 34 to 17 .8 per cent. in the second quarter of 1935 . Deposits fell slightly f r om £29 6m. to £291m., current deposits rising from £101m . t o £106m., and fixed deposits falling from £19 5m. to £185m. The long-term fi xed deposits r emained ·

and the fall occurred in the shorter terms, the three

months deposits r ece ding to their pre-depression level, and the six and twelve months deposits r emaining at a higher level than before the depression. In current deposits the main rise was in the medium

'6' ':i tLJ

90

TBE MoNETARY AND BaNKING SYSTEM 1901-1936.

llized classes, and there was a fall in the largest. Deposits by State Savings Banks with the trading banks r ose by £1.3m., from £20.4m. to and total deposits in the States Savings Banks incr eased

by £2.3m . Adva nces showed a sharp rise from £235m. in the second quarter of 1934 to in the second quarte·r of 1935 . Holdings

of long-ter m government securities rose from £18m. to £23m. 'l'he cash r eserve position deteriorated to the extent of £28m. London funds fell from £30m. to £22m., treasury-bills from £29m. to £24m., and deposits wit h the Commomvealth Bank from £38m. to £23m. This was r efl ected in the cash r eserve ratio vvhich fell from 38 per cent . t o 29 per cent., and in the advance-deposit ratio w11ich rose from 79 per cen t. to 87 per cent. In the latter part of 1934 several reductions in deposit rates were made, the last of which, in December , was made by the Commonwealth Bank alone. Between 1934 and 1935, the average interest charged on advances by trading banks fell from 4.81 per cent. to 4.54 per cent., and the average cost of all deposits from 1.98 per cent. to 1.69 per cent With expanding industry, advances had increased rapidly, and once again the banks we re becoming less liquid.

192. E xport prices rose 15 per cent. from J\me, 1935, to June, 1936, and at the end of 1936 bad r.isen to their highest point since ,January, 1929 . Unemployment continued to fall, declining to 10.7 per cent. in the fourth quarter of 1936, which was t he lowest figure since the second quarter of 1929. Deposits r emained fairly constant round about £290m., but with a rising tr end in the latter part of 1936. F ixed deposits f ell slightly, but showed an upward trend at the end of the year. Current deposits rose from £106m. in the second quarter of 1935 , to £109m. in the second quarter of 1936, an d to £113m. in the month of December, 1936. Ther e was a movement away from the long-term. fixed deposits into other terms, the fall in twenty-four months deposits being much gr eater than the total fall. Fixed deposits showed little change in r elative size, but current deposits showe<} an increase in the smaller classes. Deposits by the State Savings Banks with the trading banks increased from £21 .7m. in June, 1935, to £23.4m. in June, 1936, and the total deposits of State Savings Banks increased by £2.4m. Advances continued to r.ise, moving from £252m. in the second quarter of 1935 to £2 61m. in the second quar ter of 1936. Ther e wa;; a seasonal fall in the last two months of t he year rather sharper than that of the p r evious year. Holdings of long-term government securities f ell from £24m. in March, 1935, to £15m. in Mar ch, 1936, and thereafter to the end of the year they have r emained practically stationary. London funds rose from £22m. in the second quarter of 1935 to £29m. in the second quarter of 1936, and fell to £27m. in the fourth quarter. But the

91

THE IliONETARY AND BANKING SYSTE1f 1901-1 93G.

monthly figures show a fairly sharp r ise towards the end of the year, and December, 1936, showed an increase of £6m. over Oct ober, as com­ pared with an increase of £3m. between the same months of 193G. T r easury-bills showed little cha nge, but deposits wit h the Common­

wealth Bank fell by about £6m. 'rhcre was n o appreciable llifl'erence between the cash r eserve ratio in the sec ond quarters of 1935 and 1936, nor between the r eserve r at io for the month of December in those years. The advance-d eposit ratio rose from 87 per cent. to

90 per cent., between the second quarters of 1935 and 1936. The monthly figures show that ·while the ratio for Oct.ober and for Novem­ ber, 1936, was higher than in the corresponding months of 1935, for December it was much t he same as in D ecember, 1935. During this period, the average inter est charged on advances r ose slightly from 4.54 per cent. to 4.5 9 p er cent., and the cost of a ll deposits f ell from

1.69 per cent. to 1.56 per cent. TRADING BANK TNTERES1' RATES, 1931 1·o 1936.

193. In accordance with the agreement under the P remiers' Plan, fix ed deposit rates were, on 26th J une, '1931, r edu ced 1 p er cent. by all the trading banks. The further r eductions in these rates, which followed in the n ext f ew years, appear in the following table:-

T ABLE.

RATES FOR DEPOSITS WITH CHEQUE-PAYL'IG BANKS.

Deposit. lor-

])ates rl urinA which rate3 were j;t !orce.

I Two ycors. Three Six mont hs . Twelve months. montha. P er cent. Per cent. Per cent . Per cent.

per annum. per annum. per annum. per annnm .

19th August, 1927, to 27th January, 1930 4 4 4! 5

28th J a.nuary, 1930, to 25th June, 1931 H 4! 5 5t

26th June, 1931, to 26th November, 1931 3t 3i 4 4t

27th November, 1931, to 7th March, 1932 3 3! 3! 4

8th March, 1932, to May-·J une 1932 (a ) M.ay-J une, 1932 (a ), to 31 st October, 2} B 3!- 4

1932 (c) . . . . .. 2?;- 3 3! 3i

l at November, 1932, to 6th F ebruary, 1933 . . . . . . . . 2t 2.f 3 3t

7th Febrl)ary, 1933, to 11th April, 1934 2 2t 2! . 3

12th April, 1934, to 8th August, 1934 . . 2 2! 2t 2!

9th August, 1934, to lOth October, 1934 1} 2t 2t 2i

11th October, 1934, to 16th December, 1934 .. .. . . . . 1! 2 2! 2!

17th Decomber, 1934, to 23rd March,

\

1936 (b) . . . . . . l n· 2t Zt

From 24th Ma.rch (d) .. . . 2 2t 2! 3

(a) Tlu:i rcdnct10n was not made Slrnu lta ncous1y by aU bank.s. (b) Comw onwcalth }lank only. (c) l3ank of New South \\'ales reduced the rat.es for six, t welve and 2-l raonth.n term" L} onf' 'JUnrter 11 per cent. [l'Om 2:lrd Aul(ilBt, 1932.

{d) B aril\ ui New Scuth 'Vales, 2nd Mitrch and Rank of Ade laide, 3rd ;,.rarch. S..uroo : F inancial B uUeotln No. E6 , p, &7.

'( .

92

'rHE MoNE'rARY AND BANKING SYsTEM 19 01-1 936 .

194. S om e of th e r eductions in 1932 wer e not m a de simultaneously by all the banks, and on one occasion a trading bank reduced deposit rates some two months before the other trading banks followed. But up to December, 1934, a downward trend in these rates was main­ tained by all banks usually moving at the same time. In December, 19 34-, when the Commonwealth Bank r educed its three months and six mont hs deposit rates, the t rading .banks did not follow. 'r he first upvvard movement since 193 1 in deposit rates took place when the Bank of New South \Vales, on 2nd March, 1936, and the Bank of Adelaide on the following day, announced an all-round increase of t per cent. On 24th March, the other trading banks made a similar increase, and the Commonwealth Bank moved its three months and six months rates up 1 p er cent., and its other rates per cent. Since that dat e, the rates of the Commonwealth Bank and of all trading banks have been uniform. ·

195. 'rhe process of reducing advance rates in accordance with the Premiers' Plan was not as rapid as that of reducing deposit rates, and some banks moved earlier than other s, but by the 1st October, 1931, a reduction of 1 per cent. in the aver age rate on advances had been made. Further reductions in advance rates were made from time to time. B efore the change in 1931, 77 per cent. of advances carried rates ranging from 7 per cent. to 8 per cent., the predominant rate being per cent. In 1935, 83 per cent. of advances carried

rates ranging from 5 p er cent. to 5i per cent., the predominant rate being 5 p er cent. All the banks during 1934 and 1935 quoted a

maximum r ate for advances to primary producers, and two of the banks in the same years publicly advertised a maximum r ate of 5 per cent. on all advances. After lVIarch, 1936, when the deposit rates of the trading banks were raised, the advance rates were also raised, and in December, 1936, the predominant rate for advances was 5-! per cent. to 5i per cent.· Some banks increased rates as early as the end of J\1areh, and others in succeeding months, but by the 1st July all the banks had made some increases .

GENERAL.

196. This r evie\v shows that the depression fir st affected the banking system through the serious loss of London funds in 1929, which r educed the liquidity of the banks. They became involved m an effort to restore liquidity which lasted until 1931.

In spite of t heir endeavours the ratios at the end of 1929

went to a point which they r egarded with apprehension. Aggregate advances could not be reduced easily, and indeed increased until the beginning of 1930. In their own interest the banks had to support their old customers, especially primary producers, who were most

93

THE MoNETARY AND BANKING SYS'l'EM 1901-1936.

affected by the fall in export ·prices. The banks severely' restricted new lending and endeavoured to· r educe advances, but there is no evidence that during the depression they forced r epayment of their loans on an extensive scale. It was not until 1931, when treasury-bill

finance and government expenditure expanded their deposits and added to their cash, that the liquidity of the trading banks was restored almost as suddenly as it had gone. In this way, the loss of London funds and of gold from the banking was offset, and

the banks soon r emoved their restrictions on new lending. The improvement in the banking position came about much earlier than the general recovery in trade and industry. ] 1rom 1932 t o 1934, the banks attempted to expand t heir advances, but found at first little

response from borrowers desp.ite the added inducement of Io·w er interest rates . Gradually, however, as recovery proceeded, the banks were able to find more borrowers. Additions to cash reserves and to deposits through treasury-bill finance practically ceased after 1932.,

and changes in the liquidity of the banks again became dependent chiefly on movements in London funds. By the end of 1935, the liquidity of the banks had been r educed, and in 1936 there were signs of a slowing down of advances. It was not until export prices rose sharply, and I.wndon funds increased from the end of 1936, that the

banking position again became more liquid.

CHAPTER III.

THE C.APITAL, RESERVES AND PROFITS OF THE AUSTRALIAN' TRADING BANKS, 1893 TO 1936. THE CRISIS OF 1893 . 197. Duri111g the period 188 6 to 1890, boom conditions prevailed in the eastern States of Australia, and in particular in Victoria. These were brought about principally by the lavish expenditure of money borrowed from British lenders, either by the governments in the fonp of loans, or by private institutions such as land and financ e

companies, building societies, and some of the trading banks in the form of deposits. It is estimated t hat in 1891 British deposits in Australian trading banks and building societies amounted to about £45m.

198. By 1888, experienced bankers in Australia were already predicting a collapse, but the inflow of fresh British deposits enabled this to be avoided for t\vo years longer. But by the end of 1890, these deposits had ceased, and the apprehension in the mind of the British depositor created by unfavorable seasonal conditions in Australia, falling prices, and financial difficulties in London

brought about by the failure of Barings Bank, led to a reversal of the stream. The British depositors began to withdraw their deposits. rrhe strain was felt first by the building societies . The first suspension -that of the Premier Building Association, lVIelbourne-occurred in

December, 189 0. During the next two years, there occurred the failure of no less than 40 building and financial in the

cities of lVIelbourne and Sydney, wit h liabilities of aboHt £25m. As suspension followed suspension the depositors of those institutions 1vhich still appeared to be so lvent became more anxious to obtain repayment immediately their d ep osits matured a'nd this, of course, increased the demand upon the surviving institutions until it could no longer be met.

199 . In the beginning of January, 1893, some of the trading banks began to show signs of weakness. The Federal Bank of Australia Ltd. was the first to suspend payment, closing its doors on the 28th January, 1893. A meeting of shareholders was held on the 17th February following, and the accounts showed that thP company owed approximately £2, 100, 000 to depositors and other creditors. The Chairman stated that the suspension was due to the large and increasing demand for the repayment of deposits. Between l\iarch, 1892, and J anuar:y, 1893, 1vithdrawals had amounted to £7 11,000. An amount of £750,000 was due in the current year and £55 0, 000 jn the year following. Steps had been -taken to get the associated banks to supervise t he winding up with doors open. A lon g inspection and be:d been made by expert bankers

95

THE CAPl'l'AL1 RESERVEs AND PROI<'ITS oF 'l'HE AusTRALIAN TRADING BANKS, 1893 TO 1936.

but they considered it inexpedient, and beyond their to

undert ak e tbe liquidatio1;1 of any bank. He added, however, that the depositors and creditors would be paid in full. 200. The failure of tlle Federal B ank of Australia Ltd. reduced the number of trading banks to 21. rrwo of these were incorporated by charter, and the remainder either by special act, or under the general company law of the country or State in which their head offices were situated, viz. :-

Englan d (including two chartered) 4

New South Wales 4

Vict oria Queensland South Australia \Vest Australia

'rasmania

6

3

1

1

2

21

'rhe total capital, r es erves, and undistributed profits of these banks as shown by their account:; at the date n earest t o the crisis was

approximately £22.4m. Their liabilities amounted to approximately £156m., which included about £139m. of deposits. The shareholders' funds and 'liabilities of each bank are shown in Table 39.'x' it

will be necessary to compare the aggregate r esults of the banks which did not suspend, with the aggregate r esults of those that did, the banks haYe be en arranged in two groups. Group "A" comprises the banks which did not suspend, together with the Commercial Banking Com­

pany of Sydney Ltd., for although the latter suspended payment, it is clear that it \vas never seriously embarrassed. Group "B " comprises the remaining banks, all of which suspended. 201 . In the first quarter of 1893, some of the· other trading banks were feeling the strain. Large amounts, both of British and local

deposits, were \Vithdrawn . rrhe first to admit weakneSS WaS the Commercial Bank of Australia Ltd., which sought help both

from the other associated banks, and from the Government of the State of Victoria. The Government did nothing. rrhe other banks offered some help, but not enough to save the position, and on t he 5th April, 1893, the Bank suspended payment. \ Vithin the six weeks

fo llowing eleven other trading banks closed their doors, p ending reconstruction or arrangement with their creditors. "T.he he ight of tl1e storm occurre-d in t he middle of t he month of May, and a s one bank after another closed its doors the alarm of the depositors grew

to a panic, and it seemed at one time that it was utterly impossible that any bank should he a,ble to stand the pre ssure upon its strength."

* P age 355.

.st'l 65A. ' ' I<

' . "

86

THE CAnTAL, RESEIWES AND PROPITS oP ·rHE Aus TRAI_jiAN TRADING BANKS, 1893 TO 1936.

202. By the 21st August fo llo-vving all had reop en ed for business. The time-table which f ollows shows the date of suspension and, except in the case of the F ed eral Bank of Australia Ltd., the date of

resumption of business :-

J>anks.

Federal Bank of Australia Ltd.

Commercial Bank of Australia Ltd. English, Scottish & Australian Chartered Bank Australian Joint Stock Bank Ltd. London Chartered Bank of Australia National Bank of Australa.sia Ltd.

Colonial Bank of Australasia Ltd . Bank of Victoria Ltd. Queensland National Bank Ltd. Bank of North Queensland Ltd. The Commercial Banking Co. of Sydney Ltd. City of Melbourne Bank Ltd. Royal Bank of Queensland Ltd.

Date of Suspension, 1893.

28th .January

5th April ..

13th April ..

16th April ..

22nd April . .

1st May 6th May lOth May 15th May 15th May 16th May 17th May 17th May

Date of R eo pening, 1893.

(In Liquida-tion) 6th May 21st August 19th .June 10th August 26th .June 10th July 19th July 2nd August

19th July 18th June 19th June 7th August

203. rr he methods adopted for re-organization were generally similar, though the procedure differed in detail, being governed to some extent by the law of the country or State of incorporation. In every case, the scheme of reconstruction or re-arrangement was submitted to and appr oved by the Court in the country or State of incorporation and, where English or Scottish depositors were

numerous, also by the Court in those countries. Each of the hanks incorporated in :mngland; Victoria, and New South Wales, formed a ne-vv limited liability company to take ove1; its business. 'rhe thr ee

banks incorporated in Queensland carried on without formal recon­ s.truction, in accordance· with a scheme approved by the Supreme Court of that State an d by the Court in England. In the case of each of the E nglish banks, the capital of the n ew company was less an d the· uncalled liability on shares greater than that of the old company. In all other cases the capital and uncalled liability were the same as that of the institution which it replaced.

204. 1)1 the course of reconstruction or re-arrangement, share­ holders' funds Y vere drastically writt en down. In some cases it was consi dered that the losses could he met by writing down or writing off r eserves and unaistributed profits without reducing capital. In.

97

'THE CAPI'rAL) REsERVES AND PROFITS OF THE AusTRALIAN rrRADING BANJ).S, 1893 TO 1936.

others, capital also was reduced. At the same time depositors were asked to consent to an extension of time for the · repayment of their deposits. The arrangements adopted for the postponement and repay­ ment of deposits will be considered later.

205. To r einstate the capital written off, and to provide funds for the · additional security of depositors and for carrying on business, calls were made. About £6m. was called up at the time of

reconstruction and made payable by instalments, about one-quarter being due in each of the years 1893 and 1894, and the balance by instalments over the next three or four years. Later, additional calls . amounting to about £500,000 were made.

206. At the time of reconstruction, the banks which suspended (other than the Commercial Banking Company of Syd111ey lAd.) wrote off capital, reserves, and undistributed amounting to

£4,431,009, or approximately 40 per cent. of the total shareholders' funds as shown by their accounts at or about the time of the crisis. 1'he reports of these banks indicate that this provision was then considered adequate to meet all known and expected losses. But the

experience of the years immediately following the crisis showed that the amount required to provide for losses had been seriously under­ estimated. Between 1894 and 1909, further provisions amounting to £7,409,000 were made to meet losses -directly attributable to the crisis.

Details of the total amounts written off in 1893 and subsequently are shown in Table 40. ,;:, In addition, the reserves and undistributed profits of the Australian Joint Stock Bank Ltd., accumulated after 1893, were applied to write off old losses.

207. 'I'he Commercial Banking Company of Sydney Ltd., which also suspended, made no provision to meet losses, for a revaluation of assets .made immediately after suspension disclosed a surplus of £225,000, out of which £160,000 was added to reserves, part of the

balance being used to defray the expenses of reconstruction, and part added to inner r eserves.

208. rrhe City of Melbourne Bank Ltd. was unable to carry

on and went into liquidation in 1895. The trading results of this bank have not been taken into consideration.

* l'ugc 35ti.

F.258l.-7

1653

98

'raE CAPI'.PAL, RESERVES AND PROFITS OF 'l'HE AusTRALIAN TRADING BANKS, 1893 TO 1936.

209. The following statements summarize the capital re-adjust­ ment of the trading banks included in each group in Table 39* :­ GROUP" ..A." NINE B AL\ I

Co. OE' SYDNEY LTD.

I Undlstri-

I

- Caplt.al. lteserves. buted Total.

Profits.

£'000. £'000. £'000. £'000.

Shareholders' funds, 1893

l

6,303 4,306 97 10,706

Added to reserves, 1893-Commercial Banking Co. Ltd. .. .. . . .. 160 . . 160

6,303 4,466 97 10,866

Le.Js amounts writ ten off between 1894 and 1903-Capital .. .. .. 150 .. .. . .

Reserves .. . . . . . . 290 . . 440

Balance after adjustment .. . . 6,153 4,176 97 10,426

GROUP "B."

ELEVEN BANKS WHICH SUSPENDE.D PAYMENT IN 1893 (NOT INOLUDINO

THE COMMER.CIAL BANKING Co. 0.1!' SYDNEY LTD.) .

--

Shareholders' funds, 1893 (Table 39) Less amounts written off in 1893 ..

Balance after reconstruction or arrangement . . .. . .

Calla on Shares . . .. . .

Lesa additional amounts written off after 1893 (all of which relate to

losses arising out of the crisis)-Capital .. .. ..

Reserves .. .. . .

L

B

us nominal value of shares forfeited

alance after completion of readjust-ments . . .. ..

I

Undistri-

Capital. Reserves. buted Total.

rrofits.

£'000. £'000. £'000 . . £'000.

7,735 3,687 239 11,661

1,144 3,081 206 4,431

6,591 606 33 7,230

6,443 . . . . 6,443

13,034 606 33 13,673

-

6,824 . . .. ..

.. 585 . . 7,409

6,210 21 33 6,264

1,445 .. .. 1,445

I 4,765 21 l 33 4,819

210. rrhe amounts written off by the suspended banks either at the time of reconstruction or subsequently do not represent the whole

* Page 355.

T u E UAPI'rAr,, HESERV!l-;s AND PROFITS OF 'l'H E AusTnALIAN rl'l\,ADING BAN K S, 1893 'TO 19:36.

of their lo::;s es. Some \v er e n ever written off. For i nsbmcc, a r evah w ­ tion of th e assets of the Queensland National B ank TAd., HJade in J 897 , disclosed a capital d efi cien cy of about £480,000. A val nation o E the assets _of the Spec ial Asset s rrrust of th e Comm er cial Bank o[

Australia Ltd., made as at 31st D ecember, 1901, showed a capital deficiency est imated at £1 ,53 5, 000. In both instances these defi cieneics wer e mad e good out of snbscqn ent profits or ot l1 er r eceipts.

211 . The previous statements make no provision for the loHses t ained by the banks ' :vhich went into liquiuation, namely, the Fed eral Bank .of Australia Ltd. and the City of lVIelbourne Btm k Ltd. The assets of botlt of these banks ·wer e taken over in 1897 by a company formed to complete the liquidation of several insolvent finaneia l

institu tions. rrhe valuation then made showed in the case of the

Pederal Bank of Australia Ltd. a defici ency of about £1 ,3 60,000, and in the case of the City of Melbourne Bank L td., a deficiency o l: about £2,630,000. The shareholders of both lost all they had i11veste\1.

212. The effects of the crisis upon the banks which did not suspend are not visible in their accounts. rrher e is no doub t that t hey

also experienced losses, and it is clear that for several year s

immediately follo·wing the crisis, current profits were applied t o make these good. But in no case were the losses serious. No adjustments were mad_ e in 1893, but within the n ext few y ears one of the smaJler banks reduced its capital by £150,000, and seYeral others wrote off

reserves aggregating £290,000. These amounts, however, represented less than 5 per cent. of the total shareholders' funds of these banJu; as at the 31st March, 1893.

213. It i os impossible to determine with accurac·y . the tot al losses of the various financial institutions and the banks affected by the cns1s. But in the statement which follows an attempt is made to estimate the direct losses of the shareholders nnd depositors of the

trading banks alone. Obviously, no estimate of the indirect losses . can be made as, for instance, those sustained by depositors of the suspended banks who disposed of their deposit r eceipts f or less than face value.

PROVISION MADE DURING 1892 BY CER·r.UN B A NKS WHICH

S UBSEQUENTLY SUSPENDED-CAPITAL, RESERVES, ANn UNDISTRIBUTED PROF'lTS vVRIT'IEN

OFF-At time of reconstruction 4,431

Between 1894 and 1909 7,400

£'000

660

1!,840

1655

100

Trm CAPITAL, RESERVES AND PROFITS OF THE AusTRALIAN 'fRADING BANKS, 1893 TO 1936.

ESTIMATE OF A]IWUNT PAID IN CAI,LS IN SHARES FORlff<.;ITED

CAPITAL DEFICIENClES NOT vVRITTEN OFF BU'l' SuBSEQUENTLY

MADE GooD ouT OF PROFITs, P'REM I Ul\fS o N SHAREs, AND FROM 0'l'HER SOURCES-Queensland National Bank Ltd. 430

Commercial Bapk of Australia Ltd. (Special Assets Trust) 1,535

AUSTRALIAN JOI.l\T S TOCK BANK LTD.-Hcscn es and p r ofits accumulated after 1893 used to write off losses 132

Profit on deposit receipts r ecleen1etl 242

Amount written off deposit receipts and inscribed stock at the time of tl'ansfer to the Australian Banl\ of Commerce Ltd. 469

EsnMAT·E:v Loss Es DuE TO 1'HE FAILURE oF 'l'I-m FEDERAL BANK OF AUSTRALIA L'r'D. (IN LIQUIDATION) -Capital and Teserves l>eposi tors

liS'l'IMATEn LOSS · OF l'lJE DEPOSITORS OF THE CITY OF

MELBOU RNE BANK LTD. (IN LIQUIDA'l"ION)

ToTAL EsTil\IA1"ED LossEs oF THE SusPENDED BANI

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

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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 '

196

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

197

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

198

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.

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'"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

has been a' considerable development from a system of independent trading banks in 1929 to a system of central banking in 193 6. 567. At the end of January, 1930, the trading banks, along with the Commonwealth Bank, raised the rates of inter est on new fixed deposits, and advance rates rose accordingly. In our opinion this increase was inappropriate. No doubt it was essential for the banks, having regard to their position, to cheek advances, but it would h ave been better to have done this by discrimination between customers

and restriction, without raising the rates.* The process of reducing advance rates in 1931, in accordance with the Prem iers' Plan, took longer than that of reducing rates on new fixed deposits. The Commonwealth Bank and all the trading banks reduced rates for

new fixed deposits on 26th June, 1931, and the Commonwealth Bank reduced its advance rate on 1st July. Some of the trading banks made early reductions in advance rates, ·but the average r eduction - of 1 per cent. was not complete for all of them. until 1st October.

The rates on existing ·deposits were changed only as the deposits matured and were renewed. In our opinion, all the banks should have promptly followed the lead of the Commonwealth Bank in r educing advance rates, as some did, even if this resulted in loss. From June,

1931, to October, 1934, a downward trend in deposit rates was maintained by all the trading banks and the Commonwealth Bank usually moving at the same time. In December , 1934, the trading banks should have followed the lead of the Commonwealth Bank and reduced · their three-months and six-months deposit rate!! accordingly, but we attach little significance to this incident. In March, 1936, apart altogether from the offer of treasury-bills to the

public. the trading banks were expecting deposit rates to rise. especially in view of the fairly steady upwal"d trend of the yield on long-term government securities in Australia. But there was no

220

ExTENT 1'0 W HICII E x iSTING SYSTEM CoNFORMS TO STANDARDS.

sUfficient justification for the rise coming when it did in opposition to the official view of the Commonwealth Bank that the time was not appropriate. 'J.1he rise in deposit rates led to an increase in advance · rates, in which those banks which w ere quicker to move might well have moved at the pace of the slower.

568. It is commonly said that the trading banks do not compete wit h one another. I t would be mo r e correct to say that the trading banks do not indulge in unrestr ained or cut-throat competition with one another. Referen ce has been made in evidence t o a "gentlemen's agreement " between the banks not to compete. Some banks acknowledge the existence of some understanding of this· kind, but

view its obligations differently. Other banks do not recognize any such understanding. It is usual for all the trading banks to publish and quote the same r ates for deposits, but they will in some circum­ stances compete for deposits. Rates on advances are not usualli published by the banks, and they vary according to the nature o£ the advance, the estimation of the t·isk, and the . value of other business brought to the bank by the customer. There are generally, however; ruling rates for advances which are similar for all trading banks and apply to most advances. · It has been said in evidence that the banks do not compete in the rates charged on advances. This state.: ment does not mean· that one bank wilr never offer an advance at a rate lower than another bank is charging. The competition 'for advances at times m ay go to the length of ·rate-cutting ·and taking customers away from another bank. The usual form of competition, however, is not by cutting rates, but by offering other inducements to the borrower. There is no evidence to suggest that there is any organization or association of the trading banks for the purpose · of eliminating competition with one another. There ·is competition between them, of the kind to be expected from semi-monopolistic institutions. Each banK: refrains from unlimited competition because it fears to spoil the market ·and to provoke similar competition from the other banks which might be ruinous.

FIX:ED ' AND LONG TERM LENDING.

569. Our attention has been directed t

221

ExTENT To WHICH ExisTING SYS'l'EM CoNFORMS TO STANDARDS.

on this class of security. In the capitals and the other larger cities there are greater facilities for . the borrower who wishes to obtain money for a term of years than are available to the borrower in

country towns and rural areas. According to the evidence there is a definite reluctance on the part of many of these institutions to lend money in country areas. The reasons are-( a) rrhat it is expensive-and difficult to supervise the securities

in towns and districts far removed from the office of the lender. (b) 1'hat it the borrower fails to meet his obligations, there might be in realizing on the security.

570. In these circumstances, many borrowers in country districts requiring fixed-term loans are forced to obtain accommodation on overdraft from the trading banks or pastoral finance companies. While the overdrafts are repayable on demand, they are in many

cases granted with the knowledge that they may not_ be repaid for several years, and that they are in effect long-term loans. The method of financing by overdraft is not generally appropriate to fixe d capital purposes or term finance, as the term and the rate are both uncertain.

In some cireumstances, t he fact _that the borrower is allowed to pay off his debt in whole or in part, and that interest rates may be easier, is in his favour. But, in other circumstances, the liability of the borrower to have the loan called up, or the rates of interest raised, is,

from his point of view, a very serious matter. It may mean that at the very time when he is unable to make other arrangements, he is burdened with heavier interest charges than he anticipated; and he may even be faced with necessity for realization. In the case

of the individual this may be a matter of hardship, but when these cases are sufficiently multiplied, something more than individual hardship is involved. In other words, there is a strain on the whole system.

571. In the case of the small borrowers other than those resident in large towns, these difficulties are accentuated._ The borrowers need the money for some fixed term with the option of repaying portion of the money annually. This is a class of business in which the banks

do not engage, apart from the fact that t hey do not provide loans on fixed terms. Private investors are reluctant to undertake this class of lending, firstly, because they are uncertain of the value of small holdings outside large towns; secondly, because small sums do not

appeal to them; and, thirdly, because most private investors dislike repayment by instalments. Therefore, it will generally be found that small loans of this type have to bear a high rate of interest.

222

ExTENT TO WHICH ExiSTING SYS'rEM CoNFORMS 'l'O. STANDARDS . . '

572. 'rhere is also a lack of facilities for the provision of long-term capital for persons of limited means who have been successful on a small seale in a secondary industry which is capable of expansion and deserving of encouragement in the public interest. The require­ ments of this type of borrower are too small to justify a public issue of shares, and in most cases a public issue is not likely to , be

successful. Bank advances are usual1y very difficult to obtain for any purpose of this kind, and being subject to repayment on demand are unsuitable in most cases, as there is no prospect of repayment for a period of years. Unless the proprietors are able to raise the money privately, the business can expand only out of re-invested profits. In the initial stages, it is improbable that these would be sufficient to provide for the necessary expansion. It is usually very difficult for such a business to raise money privately, and other facilities should be provided which would enable loans to be made for periods of from three to ten years at appropriate interest rates.

573. At a later stage in our report, we propose to show how further facilities could be provided for fixed and long term lending . .

/

223

CHAPTER VIII.

CONCLUSIONS AND RECOMMENDATIONS.

THE COMMONWEALTH BANK. 574. The full development of the Commonwealth Bank iuto a central bank, which occurred in a few crowded year s, has contributed greatly to the strength of the Austr alian banking system. It was not to be expected that the Bank should have been able, at t he

commencement of the depression, t o _ produce a fully considered and appropriat e policy to meet it. During the next few years, as Bank developed the exercise of its central bank powers, mistakes were made, but this does not detract from our conclusion that the existence of the Commonwealth Bank, exercising central bank powers, has been of the utmost importance to the banking system and t o the

r:l.'HE CoMMONWEALTH BANK B o ARD .

575. rrhe present method of government of t he Commonwealth Bank is by a Board, appointed by the Commonwealth Government , and consisting of a Governor , the Secretary to the Treasury, and six Directors, who hold office for a term of years and r etire in r ot ation. The Board elects its own Chairman. We are of opinion that this

method of government. is generally satisfactory. 576. We recommend-( 1) The Governor should be Chairman of the Board by virtue of his and should possess qualifications and

receive a salary commensurate with the importance of the office. The appointm-ent of the Governor should not be made on the basis of seniority, nor is it

essential that he should already be in the service of the Bank. (2) The six Directors other than the Governor and the Secretary to the Treasury should be appointed for a

term of six years, instead of seven as at present, one should retire each year, and be eligible for re-appoint­ ment, but provision should be made that no director shall continue to hold office after reaching the age of 70. (8) The limitation on the field of choice of directors in

Section 11 (2) (b) of the Act should be removed. The members of the Board should be selected for capacity and diversity of experience and contact, and not as representatives of special interests. t

• The Chairman and Mr. Nixon disgent. t ReservaUon b y Mr. Abbott.

224

CONCLUSIONS AND RECOMMENDATIONS.

(4) The " Commonwealth Bank Act 1911-1932 ", Section 12 s, which provides that there ' ' shall be '' a Board of Advice in London, should be made permissive. This Board is not at pres·ent constituted, and there seems to be no necessity for such a Board in present circum;.

stances. STRUCTURE OF THE COMMONWEALTH BANK.

577. Although it is unusu al for a central bank to car ry on

trading bank activities and to control a savings bank, we consider it desirable that the Commonwealth Bank should do both. Through its trading bank activities it possesses powers of competing with the trading banks which can be exercised as and when r equired. Simi­ larly, its savings bank activities add to its ability to regulate the volume of credit and enable it to compete, if necessary, with the State savings banks. We are of opinion t hat the use of its trading bank activities as an adjunct to central banking policy is in keeping with its central bank functions and is to be approved.*

578. We recommend-,- . (5) The provision in the Commonwealth Bank Act, Section 35E, for the separate cont rol of the Commonwealth Savings Bank, should be repealed. (6) Power should be given to the Comn1onwealth Savings

Bank to make deposits with trading banl{S if the Board so chooses. We consider that the present separation of the Note Issue Department from the General Banking Department, and the present method of

allocating profits, are satisfactory, and should be contin,ued. t

NOTE IssuE REsERVE.

579. The present position is t hat the Commonwealth Bank is compelled by law to hold in the f orm of gold or English sterling a reserve of 25 per cent. of the notes issued. If an emergency arises, as in 1931, in which the Bank wishes to be free from this restriction, legislation is required. Wherever there is a legal restriction of this kind there is a tendency to hold a reserve in excess of the legal

minimum; In the absence of such restriction, the Bank would be able to use these reserves 'in any way it chose. Formerly, when the holder • of a note was entitled to exchange it for gold, it was necessary that some gold ·"backing" for the notes should be kept, and it was customary to limit the amount of the note issue by reference to the gold held. Now, however, that the note carries with it no such obligation, there is no need for such " backing " except as a method of limiting the volume of notes. But for this purpose the reserve limitation, as at

• Mr. Chlfiey makes a reservation. t ProfeS&or MUla, ChHie,. and Mr. Abbott dlsaent.

AND

_present interpreted, is of little use. For if the Bank wishes to

increase the volume of the note issue, it can, by raising the exchange rate, increase the value in Australian currency of the note issue reserve, whilst keeping 1rithin the legal limits. On the other _ hand, the reserve limitation may cause embarrassment to the Bank if circumstances arise in which it wishes to reduce the exchange rate. It is desirable that some limit should Be placed on the note issue, but the issue should be capable of some expansion when necessary.

580. We r ecommend-(7) The statutory provisions which require the Common­ wealth Bank to hold gold or sterling in proportion to the amount of Australian notes on issue should be

repealed .*

(8) The note issue· should be limited by law to a _ fixed maxi­ mum (for example, £60m.) subject to the right of the Bank to exceed the maximum by a stated amount (for example £10m.) with the consent of the 'freasurer.•

PowERS oF THE CoMMONWEALTH BANK. 581. We have pointed out that the chief function of the Common­ wealth Bank, as a central bank, is the regulation of the volume of credit, and for this purpose it is essential that the Bank should possess

adequate power s. Action by the Commonwealth Bank to expand or contract credit mainly depends for success, first, upon the effect which the action has on the cash reserves of the trading banks, and next, upon the response of the trading banks to the movement in cash reserves. 'rhe question arises whetheT the powers possessed by the •

Commonwealth Bank are such as enable it to produce the changes in t he cash reserves, and in the policy of the trading banks, which are requisite to the amount of expansion or contraction desired. In this connexion, the most important powers of the Bank arise from its

relation to the governments, particularly with respect to treasury­ bills, from its ab,ility to buy and sell gov ernment securities on the open market, and from its trading activities. By increasing the issue of treasury-bills on the one hand, or funding them by public lo an on the other hand, the cash r eserves of the trading banks can be

increased or decreased, but although the Commonwealth Bank has . some control over an increase in the issue of treasury-bills, it cannot determine when or by how much that volume shall be decreased by funding. I£ open market operations could be effectively used, this

would be a useful way of increasing or decreasing the cash reserves of the trading banks, but there are limits to the extent of the opera­ t ions which are possible at any one time. The width of the market for government securities is difficult to estimate. Some opinions have

• The Ch a!rmA.n consPnts subject to reservation. Mr. Pitt d!s!l ents. F.258l.-15

1F,.J_ ,s .. .Efjd ' '

226

CONCLUSIONS AND RECOMMENDATIONS.

been expressed io us that the market is wider than the Bank's v1ew would suggest, but other opinions support the Bank . . L1 our view the market is narrow, but its extent depends upon so many circum-. stances that no estimate can safely be made of the amount of securities which could be sold at any time without seriously affect ing their price. :If

582. By the use of its trading bank powers the Commonwealth Bank can decrease the cash reserves of the trading banks, if, for example, it can attract deposits from them. On the other hand, it c.an increase their cash reserves, for by expanding its own

advances. 583. Apart from the direct effect on the cash reserves of the trading banks, the Commonwealth Bank, through its trading bank -and savings bank activities, can bring about alterations in

rates which may supplement other actions to regulate credit. But in Australia the variation of interest rates is probably not so

important in producing either expansion or contraction of credit as is the direct variation of the volume of credit. 584. '\Vhen action taken by the Commonwealth Bank has altered the cash reserves of the trading banks, the extent of the contraction or expansion of the volume of advances will depend on how far the trading banks conform to the Bank's policy, and allow the changes in their cash reserves to affect their policy. If the trading banks adhered strictly to rigid cash reserve ratios, and expanded or con­ tracted advances accordingly, any changes in cash r eserves brought • about by Bank action would be reflected in changes in

the volume of advances. The Australian trading banks, however, have never maintained rigid cash reserve ratios, but have allowed them to vary considerably from time to time. Even though some

of this variation is due to seasonal movements, yet it is possible for the banks to counteract central bank action, which increases or reduces their cash reserves, by allowing their ratios to change, and to that extent the policy of the Commonwealth Bank will be unsuccessful in its object of regulating the volume of credit.

585. In these circumstances, the success attending the attempts of the Commonwealth Bank to regulate credit ultimately depends mainly upon the extent to which the trading banks conform to its policy. One way in which this conformity may be achieved is by · eo-operation. This requires wise leadership on the part of the Commonwealth Bank and its acceptance by the trading banks. The Commonwealth Bank should encourage by making

clear to the trading banks both the aim of its policy and the action proposed. The trading banks should then have the opportunity for • rteservution by Professor Mills Rnd l!.Ir. Abbott.

227

AND HEcOMMENDATIONs.

critical discussion with the Bank, both of the aim and of the means The responsibility of deciding on the policy must then rest with the central bank, and responsibility for assisting to carry out the policy must r e!'-:lt -with the trading banks. If by this method tht: Common­

wraith Bank could be certain of t h e complete co-operatiuu of the trading banl\:s in carrying out its policy, there wouhl be no n ee d for any compulsory powers over the trading banks.

;)86. rl'he Commonwealth Bank Board considers that, in order to make the Bank's powers adequate to its functions as a central bank, it requires in addition to its present powers-( a) An obligation on the trading banks to maintain with the

central bank not less than a fixed percentage of their liabilit ies to the public; and (b) The right t o call upon the overseas f:unds of the Aus­ tralian banking system.

The reasons giveu for the first proposal are-(1) The maintenance of these deposits would ensure that the Commonwealth B ank wot:ld have adequate resources, with which to buy t he funds in London, and the securi­

ties in Australia, required for its control of the exchange rate and internal credit.

( 2) Unless these deposits are required by law, experience shows that some of the banks will hold their liquid

reserves in the form of treasury-bills, or f unds in

London, instead of on deposit with the Commonwealth Bank.

This means: (a ) that the Commonwealth Bank's power to

regulate the rate of interest on treasury-bills in the event of the establishment of an open market may be' less than is desirable ; (b) that the trading banks are enabled to hold

funds in London which would be better held by the Commonwealth Bank ;

( 3) The necessity to maintain not less than a certain fixed percentage of their liabilities to the public with the Com­ monwealth Bank would force the banks to borrow occasionally from the Commonwealth Bank and thus

strengthen the Commonwealth Bank's eontrol llf their credit policy.

CoNCLUSIONS AND REcOMMENDATIONS.

58'7. 'rhe trading banks are unanimous i11 . their opposition to the proposal and . give. the. fol!owing. :- _

(1 ) If fix-ed minimum deposits were compulsory, the trading banks would have to protect their-position by holding d·eposits with the · Commonwealth Bank over and above the minimum. They would therefore hold more idle cash, advance rates would rise, and in the end the

burden would fall on borrowers, and the Commonwealth Bank would have -no more contro1 than at present. (2) -Since eash reserves vary with seasonal movements, the fixed minimum would be ineffective at some times, and a

serious .· burden to the banks. at other times.. Moreover, it would be likely to . be more onerous for some banks than for others.

588. We are of opinion that the' regulation of credit by the Com­ monwealth Bank will in general be best achieved through the exercise of existing powers and the development o( the pra:ctice of co-operation between the Commonwealth Bank and the trading banks. \V e realize, 'however, that there is no certainty that complete co-operation will always be obtainable, and we are of opinion that the situation can best be met, not by imposing a permanent obligz.tion upon the

trading banks to keep fixed minimum deposits with the Common­ wealth Bank, but by the grant of a special power to be exercised only with the consent of the Treasurer. We contemplate that this power will be exercised reasonably and with ·due sense ·Of responsibility, and for that reason prefer riot to specify the percentage that may be required, which should be sufficient only t0 accomplish the purpose sought to be attained, which is that every bank wiil conform to central bank policy.

589. We recommend- . (9) . The Commonwealth Parliament should legislate· to provide that the Commonwealth Bank Board, with the consent of the Treasurer, may require every trading bank to

keep with the Commonwealth Bank a deposit of an amount ·not less than a P'?rc·entage, specified in the _ requisition, of the liability of. that bank to its depositors in Australia.* (10) Each trading bank shou,ld berequired to· keep on deposit

· the same p·ercentage. · The Board should have power .. at its -discretion to vary percentage from time to

time within the limit by the co·nsent of the

·Treasurer. · '

* The Chairman and Mr. Pitt cl isserit.

CONCLUSIONS AND .

(ll) Tbe authority to should not remain in force

for more thatn s.ix :montb.s after the consent of th.e Treasurer b,_ as _ been given, . 'QuJ tbe should

have power to consent to its extension for a further period --riot exceeding twelve months. In any period of two years, the power should not be exercis.ed for a longer period or periods. than eighteen months.

LONDON FUNDS.

590. The London funds of the banks form practically the whole of Australia's international reserves available to meet adverse ­ conditions, such as those arising from a heavy fall in export prices, or a severe drought. Since 1929, most of the monetary gold has left the Australian system, and this loss has not been made good by an increase in London funds. For these reasons it is desirable that London funds should be built up.

591. rrhe Commonwealth Bank holds London funds for the purposes of the note issue reserve and for other Trading

b8:nks hold the rest of the London funds as part· of their own

resources. Even if the Commqnwealth Bank were free to use, fDr other purposes, the London funds now held against the note issue, it appears to us that the total holding of the Commonwealth Bank would still· be insufficient to meet a heavy drain.

592. It is important,- therefore, to consider the methods which can be adopted for increasing the total amount. '"rhe normal way is to take advantage of high prices for exports, and other favorable circumstances, to accumulate and maintain balances, but it would take some. time for this method to bring about any considerable

of London funds. This process involves deliberate action if the balances are to be maintained. Every addition to their London funds increases the cash reserves, and therefore the liquidity, of the trading banks. · This increase in liquidity allows an expansion of advances

which tends to increase imports, and therefore to reduce London funds. If one part of the cash reserves is thus increased, and an expansion of advances is not desired, the remedy is to reduce another part of the cash reserves, for example, by arranging for the funding

of so_ me treasury..:bills. 593. Another method which h as been suggested to us is the flotation by the Commonwealth Government of a loan in London to repay some or all of the short-term debt incurred by the Governments

in London and now owing to the Commonwealth Bank. This would increase the London funds of the Commonwealth Bank, but would not affect the London funds of the trading banks, and would therefore not result in-- an ·expan.si-on of -advances in Austral1a. It. should be

230

CONCLUSIONS AND RECOMMENDATIONS.

pointed out that a loan floated in London and used to finance govern ­ ment expenditure in Australia would be unlikely to serve the purpose of accumulating and maintaining London funds.*

ACCESS TO LONDON FUNDS. 594. 'fhe Commonwealth Bank Board has stated in ev·ideuce thut one of the additional powers which it requires in order to act effec­ tively as a central bank is "the right to call upon the overseas funds of the banking system". The reason given was that the distribution of London funds between the Commonwealth Bank and the trading , banks hampers the effective use of_ the I.1ondon funds of the system.

':The central bank might from time to time be faced with the

embarrassing possibility of its London funds being exhausted whilst some of the Australian trading banks were still more than adequately supplied with funds in London". The Bank does not wish to have access to the whole of the London funds, but only to such portion as it may require, and it must be presumed that the Board, in the

exercise of this right, would act with discretion and not in an

arbitrary fashion. Two other prOJ?OSals have been put to us in evidence. One is that the Commonwealth Bank might be. given the right to demand a loan for a maximum period of, say, six months of a trading bank's London funds in excess of a fixed amount. We

do not recommend this. The other is that the Commonwealth Bank should widen the margin between its buying .and selling rates in order to encourage or discourage offers of London ,funds by the trading banks. The value of this method is clearly limited.

595. We think that · in order to provide fol' the requirements of the Commonwealth Bank, the Exchange :Th1obilization Agreement should be reconsidered and extended. The existing agreement has worked well, but it is terminable by any of the parties at any time, and it makes no pr.ovision for contributions in excess of the amount

required for the oversea debt service. it seems to us that it should be possible for the parties to come to some agreement, binding for a term of years, and providing for the debt service, and also for additional contributions to assist the Commonwealth Bank in the performance of its central bank functions. We contemplate an agreement which would provide for the oversea debt service as at present, and for some additional amount to e'nable the Commonwealth Bank to build up its reserves of !.;ondon funds.

596. It is difficult to specify any definite figure for the latter purpose, but we think it should be possible to provide not less than £500,000 sterling per month. . In the case of the additional amounts --- ------------------------------------------------------ • Mills ms.kes a reservation.

231

. CONCLUSIONS AND RECOMMENDATIONS.

required for building up its reserves, the Commonwealth Bank shoulrl be prepared to pay the trading banks the rates at which they are willing to sell to their most favoured customers. 597. We recommend-

(12) A new Exchange Mobilization Agreement on the lines suggested, binding for a period of ye&.rs, should be entered into between the Commonwealth Bank and the trading banks.*'

PUBLICATION OF LONDON FUNDS. 598. Most of the witnesses who have expressed their views with respect to publishing aggregate figures of the London funds of the banking system agree that regular publication is desirable, but there

is a conflict of opinion as to when the figures should be published. Generally speaking, economists have urged that the figur es should be published as soon as possible. The reasons given are that well­ informed people can · no-vv make a fairly correct guess based on

published information, that it is less dangerous to provide accurate information than to keep people in ignorance, and that, since

speculation is always likely to occur, it is better that it should be based on accurate information. On the other h and, the view of the majorit y of the trading banks is that the figures should not be

published until an interval of at least a year has elapsed. The

reasons given are that the figures are liable to be misinterpreted and may mislead the public, that early publication may encourage speculation, and that if the figures at any time showed undue

depletion, their publication might lead to panic and a flight of capital. 599. We recommend-(13) The aggregate figufes of the London funds ol the

banking system should be published regularly. (14) The fig·ures should not be published until at le.ast six months after the date to which they relate. t

TREASURY -BILLS.

600. The volume of treasury-bills, and the rate of discount at which they are issued, are important both in relation to the monetary and banking system, and in relation to public finance. Treasury-bills are, from the point of view of Governments, a useful method of short­

term borrowing at low rates. The trading banks. r egard them as a convenient method of holding part of their cash r es erves in an interest-bearing security. The volume of treasury-bills is a matter cf some concern to the Commonwealth Bank The Board considers that treasury-bills are a source of weakness in the banking system .

• M:r . Abbott a.nd P rofess or Mi lls dissent. t Professor Mr. Ch!fley an(j Mr. P 1.tt d1ssent.

231

CoNCLUSIONS .AND REcoMMENDATIONs.

because their issue has changed the composition of the cash . ..reserves of trading banks. Before 1929, these cash reserves consisted mainly of international reserves, that' is, gold and London funds, and only to a less extent of .... t\.ustralian reserves, that is, token coins, notes, and deposits with the ·Commonwealth Bank. Owing to the disappear­ ance of gold from the system, and to the expansion of central bank credit through the issue of treasury-bills, the cash reserves of the trading banks now consist mainly of Australian reserves, including treasury-bills, and only to a less ·extent of international reserves. A reduction in London funds will, in the long run, exercise a

restraining influence on the expansion of advances by the trading banim. Before 1929, a reduction which would not seriously affect the aggregate _amount of the international reserves of the Australian banking system-, was nevertheless large enough to cause some restric­ tion of advances. The Board is of the · opinion, however, that the practice of the trading banks, because of the changed composition of their cash reserves, now :results in London funds being reduced to an unduly low level before the banks are forced by their cash position to exercise any restraining influence on the expansion of advances. On the other hand, treasury-bills may serve to strengthen the power of the Commonwealth Bank, because it may be easier to regulate credit by persuading Governments to fund treasury-bills than to achieve the same result by the sale of government securities on the open market.

601. The effects of funding treasury-bills may be considered in so far as they relate first to public finance, and next to the banking system. At present, all Australian treasury-bills are issued on account of the States, and under the Financial _ Agreement new loans for States carry a sinking fund of t per cent. provided equally by the Commonwealth and the States, but those raised to meet a revenue deficit carry 4 per from the State concerned without contribu­ tion from· the Commonwealth. The rate of interest on treasury-bills is usually much lower than that on long-term securities. Where a long-term loan is raised to fund treasury-bills, the Government revenues have thus to meet the additional interest , and have also to provide substantial sinking funds. The e:ff_ ect of funding treasury­ bills, therefore, is to increase the demands on. Government

602. The effects on the banking system will depend in part upon the method offunding adopted,in part upon the amount and in part upon the time at which the funding takes place. If the

method adopted is-" private funding", that is where the Common­ wealth Bank subscribes the full amount of the funding loan and takes new securities in place of the _ treasury-bills, there will be little or . no effect upo.n the banking system . .

CONCLUSIONS AND RECOMMENDATIONS.

603. But if the method of funding by public loan is adopted the result will be that the deposits and the cash reserves of the trading banks are reduced so that they are in a less liquid position than before. If the amount funded is small this is not likely to have any serious effect. If the time chosen for funding is when the cash

reserves of the system are large or are increasing, for example, as the result of an increase in London funds, the loss of liquidity due to funding will have less influence on the banks. 604. Since the funding of treasury-bills means on the one hand

higher interest and other payments for the Governments, and on the other hand a less liquid position of the trading banks, it is easy to see that considerations of public finance and of monetary policy may conflict both as to the time {)f flotation and the amount of funding loans to be raised. The , Commonwealth Bank might be of opinion

that an increase in cash reserves, for example, I..1ondon funds, made it desirable to r educe the liquidity of the trading banks, but the Governments might find it inconvenient t o use loan moneys for fund­ ing. In these circumstances it would be difficult to decide whether

considerations of monetary policy- or of Government finance should prevail.

OPEN 11:ARKET FOR TREASURY-BILLS.

605. At present, treasury-bills are issued at a fixed rate of discount and taken up by the Commonwealth Bank, which uses its discretion as to who should be allowed to purchase them. Practically the whole of the bills sold by the Commonwealth Bank are held by the trading banks. It has been proposed, however, that an open market for treasury-bills should be established. There is some difference of

opinion as to what is necessary to constitute an open market. It has been contended that the three requisites are first, a plentiful supply of bills, such as now exists in the holdings of the Commonwealth Bank and of the trading banks, n ext, a large supply of liquid resources

av]lilable for investment in treasury-bills, and, lastly, the growth of a class of brokers who would bring together the buyer and seller of treasury-bills. In this view, there should be regular tenders by the public in order to establish a market rate of interest, but the

Commonwealth Bank should not make a practice of tendering regularly in such a way as to prevent the. ascertainment of a market price. In the view of the Commonwealth Bank, the two important changes from the present system would be, first, that public tenders should be called regularly, and n ext, that the rate should be deter­

mined by the tenders received. The Bank would then be at liberty to tender under the same conditions as any member of the public for the full issue, for any less amount, or for various amounts at different

1789

' 234

CoNCLUSIONS AND HECOMMENDATIONS.

rates. Usually its tender would be for a substantial part of the

issue, but the fact of its tendering would not necessarily be disclosed to the public.

606. The effects upon the banking system of the establishment of an op en market in either · of these senses would depend upon the extent to which the bills were bought by the general public. If the public invested in treasury-bills, payment would usually be made from deposits with the trading banks, unless money were attracted from overseas, which is improbable. rrhe trading banks, therefore,

would lose cash and deposits, and· to that extent would become less liquid.

607. If an open market were established, and the public as well as the trading baJiks were accustomed to holding and dealing in treasury-bills, the power of the Commonwealth Bank to regulate credit might be strengthened through the opportunity to buy or sell treasury-bills, and through its rate of rediscount. The Bank might buy bills from the public to expand credit, and sell to the public to contract. In the first case, the cash reserves and deposits of the trading banks would be increased when the seller of the treasury­ bills paid the proceeds into his trading bank. In the 'second case, the cash and deposits of the trading banks would be decreased. It would probably be easier for the Commonwealth Bank to buy and sell treasury-bills in this way than to buy and sell other Government securities. rrreasury-bills would be an alternative way of holding resources which might otherwise be held in short-term fixed deposits. A slight change in rates might therefore induce a movement as between these deposits and treasury-bills. Alterations in the rate of rediscount would be an indication of the Commonwealth Bank's view of the direction in which other interest rates should move. It is probable that the. amount invested by the public in treasury-bills would fluctuate over the year. The public would be likely to hold the greatest volume of treasury-bills at the times when their liquid resources, and hence those of the trading banks, were highest. If so, this fluctuating demand would serve to reduce the cash reserves of the trading banks at a time when they were seasonally large, and to increase them when they ·were small, thus reducing the seasonal fluctuations in the cash reserves of the trading banks.

608. The effects of an open market upon Government finance would depend upon the result which it had on the rate of discount. It is very doubtful in the present circumstances whether there would be any appreciable change, although the rate would be certain to fluctuate somewhat.

235

CONCLUSIONS AND RECOMMENDATIONS.

609. In our opinion, it would be desirable to have an oven market for treasury-bills in the form of regular offers of the bills for public tender at rates to be determined by the tenders received. "\Ve think it essential that the Commonwealth Bank should be free to tender for

any amount. Such a market could be established only gradually, and for this purpose the Commonwealth Bank would need thr\ of the Governments.

610. We re£ommenW-(l5) The Governments and the Commonwealth Bank should explore the possibility of establishing an open market for treasury-bills by way of regular offers of bills for

public tender.'*'

RELATIONS WITH GOVERNIVIENTS. 611. In Chapter VI., we have indicated our views as to the

relations which should exist between the Commonwealth Government and the Commonwealth Bank, and we make no further recom­ mendation on this subject. In the same chapter, we point also to the desirablity of preserving close and cordial relations between the

Commonwealth Bank and the Governments of the States, and again \ve make no recommendation, but point out that the relations between them are at present not as close as may be desirable. Since the

successful working of monetary policy in Australia involves co­ operation between the Governments and the Commonwealth Bank, we think there shotild be some permanent machinery for the Loan Council which would enable the Loan Council, the Commonwealth and the State Treasuries; and the Commonwealth Bank, to establish and maintain close contact with one another.

PREVENTION OF BANK FAILURES. ' 612. rl'he solvency of any banking system depends ultimately upon the ability of the banks to repay their call deposits on demand and their time deposits as they become due. The failure of one bank to 1 meet demands for the repayment of its deposits, even though it may

have ample assets with which to meet all its liabilities if allowed time, may bring about a condition which .seriously threaten the

8tability of the whole system. For that r eason it appear to be

t he r esponsibility of the central bank to consider whether the actions of any bank are in conformity vvit h the gen er al interest . . To enable it to discharge this r esponsibility , it is essential that it be regularly supplied with such information as it requires.

613. If, in the opinion of the Board of the Commonwealth B ank, a bank is acting in such a manner as to endanger the whole system, it may be the duty of the Board to intervene and to point out to those • Mr. Pitt dissents.

I . l.

236

CoNCLUSIONS .AND REcoMMENDATIONS.

in control the possible consequen c.es of their actions. It is. probable that this would he sufficient, but if it were not it .might be necessary for the Commonwealth Bank to exercise some of its powers. to. make it difncult or impossible for the offending institution to continue the

..:ourse to ·which objection was taken. 614. We prepose now to consider the action to be adopted in the case of a bank which is unable to meet its immediate obligations . . This may be due t o th e r efusal of that bank to accept t4e advice of the Commonwealth Bank, or it may be due to circumstances beyond its control. In such a case, we are of opinion that the . Commonwealth Bank should take prompt action in order to prevent serious conse­ quences to the whole sys tem. Its first duty would be to make a complete investigation of the affairs of the bank in question, and as

soon as .possible to announce the result of its investigation. If the investigation shows that the bank is in a sound position, though temporarily embarrassed by insufiicien cy of liquid assets, a r eassurance by the Commonwealth Bank to that eff ect tvoulcl probably be $u:ffici ent

to allay public alarm a:nd prevent the development ·of a panic. In a case, the Commomi\realth Bank might go eve:u further and

cllldertake to guarantee the deposits, provided that it were given adequate security and some control over the bank, pending extrication from its difficulties. 615. lf, however, the investigation shows that the Bank is in

an unsound position, other action will be necess ary. In such a case we think that the Commonwealth Bank should take control of the unsound in stit ution, either by the appointment of a person who would stand in the position of a receive r the or b:y the appoint­

ment of some of its own officers to control the affairs of the bank. As soon as it is in a position to do so, it should anuounce its estimate of the amount which the depositors may expect t9 receive, and make arrangements for the release. of part of their deposits to those in need. It might also be practicable to issue deposit r eceipts, which, being n egotiable, could be realized by the depositors,

616. E ach case must, however , be decided upon consideration of t he circumstan ces, and it is impossible to lay down any general rule. vVe desire to emphasize the point that our suggestion is made with the obj ect of safeguarding the banking system as a 'whole. · In our opinion this ca:n best be achieved ·by providing the utmost security for depositors. W e are not concerned with the interests of shareholders, as it is within their power to safeguard their o,Vn. interests. · The failure o£ any business other than a banlc affects mainiy those directly interested and does not threaten the banldng system. We do not, therefore, suggest that the Commonvirealth Bank should intervene except in the case of a ba.nk.

4ND.

617. We r·ecom.mend-(16) In the public interest, the Commonwealth Bank should take control of the affairs of any bank which is unable to meet iis immediate obligations, and should be given

any additional powers which it may require for thiB purpose. STATISTICS. 618. In carrying on its operations as a central bank, the Common­ wealth Bank has been hampered by the scarcity of information upon which to base its judgment. For example, it is essential for the Bank to be able to discern as soon as possible the trend of economic

conditions. For this, accurate figures of employment and unemploy­ ment are necessary, but for Australia as a whole they are lacking. The Bank has in collecting valuable information on business

trends in Australia and elsewhere. For the most part, the figures which it has needed of trading bank activities have been forthcoming on request, but the Bank has no power to require from the trading banks, or from any other authority, statistics which may be necessary.

619. We recommend-(17) The ·commonwealth Bank should be given statutory power, similar to that of the Commonwealth Statis­ tician, to obtain statistics which it requires for its

purposes as a central bank, and it should take steps to obtain such statistics. (18) The· Commonwealth Bank should publish a monthly bulletin containing such statistics as the Board thinks

fit, together with explanatory comment, and other information al!4 advice which may be of value to the public. DISTRIBUTION OF CREDIT. 620 . We have indicated in Chapter VI. that the Commonwealth Bank " should ·pay some regard to the distribution by the banks of the volume of credit amongst different industries". We consider that as the Commonwealth Bank develops its intelligence service, and has

at its disposal a body of useful information, it should be in a position to advise the trading banks as to the directions in which it is

desirable, in the national interest, that advances should be made. For example, when it has regularly before it the analysis of trading bank advances according to industries, together with information as to economic trends at home and abroad, it should be in position to indicate industries which should be encouraged· to expand and others which should not. We do not suggest that the Commonwealth Bank should inteTfere in any way wit h the granting of particular advances by tradjng banks, but . rather that it should advise as to _the general direction of advances.

179 3

238

CoNCLUSIONs AND REcoMMENDATIONs.

621. We recommend-(19) order to promote a wise distribution of credit, the Commonwealth Bank should equip itself with all possible facilities for ascertaining economic trends in

Australia and abroad, so that it can advise ·trading banks as to the directions in which it is desirable in the national interest that advances should be made.

RECRUITMENT AND TRAINING OF STAFF. 622. 'rhe functions of the Commonwealth Bank, as the central bank, are of such importance to the community that it is essential for the Board to take all necessary steps to ensure that the staff of the Bank is recruited from the best material available and is

adequately trained. In our opinion, candidates for the Bank's service should normally have reached a standard of education equivalent to Leaving Certificate. Candidates with higher qualifications should not be barred from entry to the service simply on the ground of age.

623. The Board should give every encouragement to those wishing to continue their studies beyond the standard required for entrance to the Bank's employ, and in particular should train the more promising members of its staff with the object of fitting them

adequately executive positions.

_ TRADING BAN.KS.

624. The system of branch banking in which there are large banks, with a great number of branches and widespread interests, appears to be better than that in which there are a great many

separate and independent banks with mainly local interests. A large institution is able to bear risks which might be too great for .a smaller one, and it is easier in practice for a central bank to deal with a few trading banks as units of a central banking system than with a large number. So far as they have gone, amalgamations do not appear to have lessened the competition between trading banks, which, as we have already pointed out, is in some measure restricted.

THE ACCOUNTS OF THE TRADING BANKS. 625. \iVith the exception of certain statistics relating to the Australian assets and liabilities of the trading banks which are regularly supplied to and published by the Government departments, most of the information available to the public relating to the

position and profits of the trading banks is contained in their

published accounts. These show the total assets and liabilities wherever situated, and the total profits wherever derived. In the case of some of the banks, the ex-Australian and liabilities and

CO:NCLUSIONS AND RECOMMENDA'l'IONS.

profits are substantial; in the case of others whose business is mainly confined to Australia, they represent a comparatively small proportion of the whole. 626. It is sometimes asserted that the published accounts of the

banks do not disclose their true position and results. This is basr.c! on the belief that the banks, or some of them, regularly makt

excessive provision for the purpose of building up their reserves. vVe shall refer to this later, but before doing so, shall comment upon certain characteristics of these accounts which impair their value as a basis for criticism and comparison.

627. The first is that particular assets and liabilities of any bank are not strictly comparable with those of any other bank, owing to the practice of grouping under a general heading a number of assets or liabilities of a similar type, As the classifications adopted are not

uniform, correct comparisons are impossible, and any comparison 0r aggregation of assets or liabilities can be made only under broad headings. For example, some of the banks include in "Deposits" certain other liabilities, and in "Advances" certain other assets.

Provision for doubtful debts and contingencies are in some cases added to "Deposits" or "Other liabilities", and in others deducted from "Advances". Where necessary, the Commission has obtained additional information which is. not disclosed in the published

11ccounts. 628. rrhe second is that the balance-sheets of a number of banks include items expressed in currency units of the same name, but of different values . In the accounts of only one bank is it stated: "The balance-sheet figures are stated in Australian currency." No indica­

tion of the currency in which an item is stated is given in the accounts of any of the other banks, which take into account pounds Sterling, pounds Australian, and pounds New Zealand as being of the same value. ·The sum of a number of items expressed in currency

units of the same name, but or different values, cannot be

nescribed in terms of any currency. It would be reasonable

to expect the banks incorporated in England to express their accounts in sterling, and to expect the banks incorporated in Australia to express their accounts in Australian currency, but the use of different currencies in the same account cannot be justified. The fact that

the banks incorporated in England have made provision in their accounts for the depreciation of Australian currency does not affect this conclusion. If accounts stated in different currencies were conYerted to a uniform currency, some difference would result which

would probably be r elative to the magnitu de of the ex-Australian business. But the lack of information in the published accounts precludes an estimate.

CONCLUSIONS AND RECOMMENDATIONS.

629. ':flh.e third is that the balance-sheets _ are made up .as at varying Two banks balance in March, four in June, and one

each in August, September an d October. Having regard to the influence of seasonal movements on banking figures, it follows that the position disclosed by one bank which balances in October may not be comparable with that disclosed by another which balances in March. Between October and March, consider able amounts will have been received f r om the proceeds of primary products exported, and effect of this will be to reduce advances, convert adyances into

deposits, or increase deposits. In these circumstances it is impossible to prepare an aggregate balance-sheet which will show the position of the trading banks as a whole at the same date. 630. Generally 2peaking, the profit and loss accounts are not informative. Fjour of the banks merely show the net profit for the current year, with the balance brought forward, and appro­

priations for dividend, &c. Some othe.rs show the " gross" profit after deduction of certain undisclosed expenses and provisions for contingencies, and on the other side of the account certain expenses, but as these are different in each case, comparisons cannot be made. Two banks give considerably more information about expenses than any of the· others. Some banks make appropriations to offic,ers' provident funds, and to write down premises, before disclosing their net profit. Others make these appropriations out of their disclosed profits. The amount appr opr iated for either of the pur poses sents a relatively small percentage of the total disclosed profits, but the different methods of treatipg these provisions render exact comparison impossible. Since 1930, the position has been further complicated by the use of different currencies in the accounts.

631. We recommend-(20) In addition to any accounts required by the law of the country or State in which it\ is incorporated, every bank should supply, to a prescribed authority, accounts relating to-

(a) Its liabilities in Australia and its liabilities elsewhere than in Australia incurred in respect of its

Australian business. (b) Its ass·ets in Australia and its assets out of Australia in respect of it s Australian business. (c) Its liabilities elsawhere than in Australia and its assets

els·ewhere than in Au stralia, in either case not being in respect of its Australian business, either in detail or in an aggregate amount. ·

(d) Its capital, reserves, and undistributed profits, and (e) A profit and loss account.

CONCLUSIONS AND RECOMJriENDATIONS.

(21) Such accounts should be in a form to be prescribed, by legislation or regulation made in accordaJnce therewith, and should in the case of the balance-sheet be made up as at the date prescribed and in the case of the profit and loss

ac count cover the' period prescribed, and insofar as the particulars relate to its Australian business shall be

expressed in Australian currency. Where an item is not express,ed in Australian currency, the nature of the currency used should be indicated. These accounts should be published in the " Common­ wealth Gazette ' '.

THE PROFITS Oli! THE TRADING BANKS. 632. Elsewhere we examine in detail the profits of the banks during the period 1893 to 1936. In this part we shall direct our attention to t he profits of the last twelve years, namely, 1925 to 1936. rrhis period

includes the years in which both the highest and lowest profits were earned by the trading banks since 1909. The first five years covered a period of prosperity, and the latte!' years, periods of depression and recovery.

633. \Ve have previously stated that some of the banks deduct from the disclosed profit certain appropriations for provident funds and the writing down of premises, while others make these appropriations before disclosing their profits. The appropriations to provident funds reprBsent a very small percentage of the total disclosed profits,

and call for no comment. The amount appropriated to write down premises varies, being usually small in the years when profits are low, and larger in the years when profits are high. The average percentage of the disclosed profits appr opriated to write off premises during each

of the periods stated was as under:-1915-1919 19 20-1924 1925-1929 1930-1935

Per cent. 1.21 1.93 3.86

2.90

634. I n order completely to eliminate appropriations for these purposes, the amounts disclose d have been deducted from the t ot al p rofits of each year. 635 . The following statement hows the hareho lders' funds, capital, and profi ts of the trading banks as a whole, during t he period

1925-193 6, as shown by their published accounts, and certain. ratio s based thereon. These ratios are, of course, an average of all the banks. rrhe r atios of some banks are higher and of others lower than the average, but unless t he circumstances of a bank are abnormal, the

F.258l.-16

242

CoNCLUSIONS AND REcOMMENDATIONs.

rlifference between its ratios and the average of all the banks wi ll not IJ c considerable, and will indicate only the relative advantages or

STATEMENT OF F UNDS AND CAPITAL USED, AND PERCENTAGE OF PROFIT EARNED AND DIVIDENDS PAID, 1925 TO 193G.

Pre- Pre- I Ordi- Profit I I Ordi-

Y ear.

Total Total Return . ference Rate nary n.v., il- RetUrn Rate Funds . Profits. DlVl - ' · D1n- Capital · dend. Capital. able. dends. - - -------------------- £'000. £'000. % £'000. £'000. % £ '000. £'000. % £'000. 0 ' 7o 1925 55,073 4,822 8 .75 2,534 122 4.81 29,360 4,700 16 . 01 3,442 11.7 2 1926 59,277 5,026 8.48 2,534 126 4.97 30,762 4,900 15.92 3,665 11.91 1927 59,582 4,996 8 .38 2,326 106 4 .51 31,685 4,890 15.43 3,744 11.81 1928 64,063 4,999 7. 80 2, 117 85 4.00 34,241 4,914 14.35 4,090 11.9 1929 68,322 ' 4,943 7.23 2, 117 8514 .00 35,437 4, 858 13.71 4,029 11.37 1930 69,603 4,409 6.33 2,117 85 4.00 35,687 4,324 12 . 11 3,850 10 . 79 1931 70,504 2,963 4 . 20 2, 117 85 4 .00 35,947 2,878 8.01 2,820 7. 84 1932 68,57 1 1,880 2. 74 2,117 85 4.00 35,019 1,795 5.12 1,787 5.10 4 1933 68,550 1,953 2 . 85 2, 117 85 4.00 35,019 11, 868 5.33 1,749 4.99 1934 68,620 1,996 2.91 2,117 85 4.00 35,019 1,911 5.45 1,827 5.22 1935 68,654 1,997 2.91 2,11 7 85 4 .00 35,019 , 1, 912 5.46 1,783 5 .09 1936 68,708 2,098 3 .05 2,117 85 4.00 35,019 2,0i3 5 . 75 1,894 5 . 41 636. For several years after the crisis of 1893, the profits of all the banks were adversely affected, but soon after the commencement of the present century, they began to improve, and up to 1926 the profi ts and the return on shareholders' funds both steadily increased. The maximum return was shown in 1925, when 8.75 per cent. was earned on total shareholders' funds and 16.01 per cent. on ordinary capitaL The maximum profit of £5,026,000 was earned in the following year, but increased shareholders' funds had been used during the year and the r eturn on funds and on ordinary capital was slightly lower. There >vas little variation in the profits of the three years next following, which were in each year a little less than the maximum, but the return on funds and on ordinary capital gradually declined owing to the con­tinued increase o:t shareholders' funds through the introduction of new capital and additions to reserves. The first serious decline came in 193 0, when profits decreased by £534,000. In the following year there was a further decline of approximately £1 ,5 00,000. Profits fell to their lowest point in 1932, when they amounted to £1 ,880,000. During the next three years, they remained f airly constant at a point a little above the minimum, and it was not until1936, when the profits were £2,098,000, that an improvement became obvious. The return on shareholders' funds fell to its lowest point in 1932, when only 2.74 per cent. was earned. Since then, there has been a gradual improvement. The return for 1936 w.as 3.05 per cent. 637. It is customary for a bank to set aside, befor e disclosing its p rofits, certain amounts which ar e used to create or increase reserves, variously described as " Ii:mer Reserves ", "Secret Reserves ",

243

CoNCLUSiONS AND RECOMMENDATIONS.

" Reserves for Contingencies" or " Contingencies." The nature and amount of these r eserves ar e not disclosed in the published accounts. Inner reserves are created by char ging against profits a pro­

for th e depreciation of premises or investments, or for bad and

doubtf ul debts, in excess o£ the amount actually r equired for that purpose. 'rhe · r esult is th at th e asset in question appears in the balance -sheet at less t han it s true value. The accounts may, but usually do not, indicate the exist en ce of inner reserves in r espect of pr emises or investments, but it is the general practice to indicate that provision has been made for doubtful debts or f or " Contingencies ", or fo r both t hese purposoo ._ " Contingencies " is not defined.

638. That provision should be made for any ascertained or even pr ob able depreciation of pr emises and investments, or for doubtful debts, is not arguable. The question arises, however , whether these provisions should no t be shown in the publish ed account s. The

importance of the question is due to the f act that it is easy

to obscure the profits of any year by making proviaion for the IJ Urposes stat ed, or by taking int o profits some of the provisions set

aside in previous year s. It is almost impossible f or any business (including for this purpose a bank) t o continue to build up secret r eserves without ultimately disclosing their existen ce. In our opinion, the account s of any bank over a long p eriod of years disclose a reasonably correct view of th e tr end of its op er ations. _ When L e

fig ures of all the banks for a number of years ar e considered as

a whole, it is possibl e to say wi th a great deal mo r e certainty that the aggregat e r es ults disclose, with a fair degree of accuracy, the

profits and trends of th e trading banks. 639 . In order to ascer tain the extent t o which the t r atliu g banks have made use of inne1; r eser ves during th e period of ten ye ars 192-6-1935, we have obtained f r om each bank a statement showi ng its incom e

fro m all sources for each of these years, which at our instance had been submitted to and certifi ed as co rrect by the F ed eral Deputy Commissioner of Taxation. The income of each bank, as certified, less a deduction for f eder al income tax, has been compared with its

profits as shown in the published accounts for th e same p eriod, and the compari son is sho wn in the fo llowing table :-(Thousands of pounds.)

I

Period. I ncom e: . Federal Ne t Publ L , hed Income Ta x. _ 4. mount. Profits.

1926-1930 .. .. ' 27,007 979 26,028 23,838

1931-1935 . . .. 14,150 1,66 2 12,488 10,951

Total . . .. 41,1 57 2,641 38,516 34,789

17'99

244

CONCLUSIONS AND RECOMMENDATIONS.

640. '£he .following statement show's the ratio of the published profits of each bank to its certified income, less tax. rrhe banks are arranged in a different order in each period according to the

magnitude of the ratio.

1926-1930. 1931-1935.

108.9 111.7

102.0 111.2

100.0 110.3

98.0 96.5

93.9 92.5

91.8 84.8

88.4 75.4

83.1 75.1

75.3 63.1

All banks 91.6 87.7.

641. It should be pointed out that -" income " and " pro:fi,ts" have different meanings. The " profit" of a business is the amount

remaining after allowance has been made fo r all business expenses, but "income " is an amount determined in accordance with income tax law, and only certain expenses are allowed as _deductions. Amongst the expenses which may not be allowed to be deducted are federal income tax, and alterations to and depreciation of buildings. A difference also arises in regard to doubtful debts. A bank may make provision for doubtful debts befo r e arriving at its profits, but in calculating income for purposes of taxation such provisions are

disaJ_lowed and only debts which have found to be bad are

deducted. Several years may elapse between the time when provision j s made for a doubtful debt and the time when it becomes a bad

debt. Adjustments· are also made in re,spect of interest in suspense. In the case of a bank the items referred to usually aggregate a

substantial amount, hence there is always a considerable difference betwee:n " income " and " profits ". 642. We have previously stated that the amount of an inner r eserve js the difference between the book value and the true value of the asset in respect of which it has be en created. But valuations are a matter of individual opinion. The extent to which opinions may fairly differ varies with the nature of the asset.

643. The valuation of premises do es not present any unusual diffi­ culty. There are good reas ons why buildings erected for sp ecial pur­ poses, such as bank premises, should be valued on a conservative basis. To soin e extent the amount expended on premises is in the' :p.ature of

245

CONCLUSIONS AND RECOMMENDATION S.

an. advertisement. A buildin g intended for other purposes could be

erected for less money an d would produce a larger return on the capital cost. When bank premises in. country towns are no longer required, and are offered for ,sale, some loss is u sually made. The same factors may to some extent also affect the value of premises in the cities. It is desir able, t her efo r e, that some provision should regularly be made t o write down the book value of premises to their estimated value. In addition, t her e is, as in the case of any other building, a certain amount of wear and tear for which provision should be made.

644. For many year s it was the practice of some of the banks to 'write down their premises consistently and heavily , and in some cases this was done t o excess. In 1921, the balance-sh eet valuation of the premises in England, Australia and New Ze aland of on e of th e banks · had been r educed to less than £8,000. It is difficult to justify this

course. Other banks have not 1vr itten down the value of their

premises to the same extent. 645. A comparison of the book values of the premises of the trading banks with their J1'ederal Land rrax Returns shows that some of the banks have substantially writ t en down their premises and that others have not. Bu t the amounts writt en off h ave been spread over many years, and in most cases the effect upon the profits of any year would not be considerable.

646. rrhe valuation of investments presents little difficulty, as most of the invest ments held by the banlcs are quoted on the stock exchanges. 64 7. The principal difficulty arises in r espect of the provision to be

made for bad and doubtful debts, including unpaid interest. In considering this question, so many possibilities must be taken into account that only an approximat e estimate can be made. But if an estimat e of bad and doubtful debts is honestly made by those qualified to make it and in possess ion of all the material facts, it is not easy to suggest any grou nds upon which the estimate may be questioned.

The origin and u se of inner r eserves cove r su ch a wide fie ld of

eircumstances, that a decision as t o whether they have been properly or improperly made or used can be arrived at only after full con­ sideration of the facts in each individual case. Where a company carries on an ordinary business, the existence and use of inner

reserves is a matter which p rincipally concerns the shareholders, and if they desire disclosure the remedy is in their hands. But in the case of a bank, other considerations arise, namely, the interests of the depositors, who provide a much larger proportion of the total funds

than the shareholders. The depositors have no voice in the m anage­ ment of the bank, and are powerless to insist upon the disclosure of information which may have a vital bearing upon the safety of their deposits.

246

CoNCI;USIONs AND HEcoM:rviENDATIONs.

649. In recent y ear s, and in particular since the Royal Mail Steam Packet case, in \vhich the question of secret reserves was exhaustively considered, the best modern accountancy practice in England and the Dominions appears to incline towards the view that the amount of the inner reserves is not as important as the extent to which they may be

used to obscure the true r es ult of an accounting period. This was clearly expressed by Lord Plender, a Past President of th .. e Institute of Chartered Accountants in England and vVales, in a paper read before the Insurance Institute of London on the 1st F ebruary, 1932, that is, some months after the decision in the Royall\fail Steam P acket case. H e said-

"I think that in the preparation of the Profit and Loss Accounts certain general principles should be followed in order to .ensure as far as possible that the net results fairly attributable to the year's operations upon a basis com parable year by year should be shmvn and that extraneous and abnormal items should be stated separately."

Applying these principles to the specjal circnmsta])C E'S of tl1e trading banks,

650. We recommend-(22) (a) B€fore arriving at the profits of any accounting period, the directors should be entitled to make reasonable provision for debts which are doubtful, and interest

which may not be received, without disclosure, except in the circumstances referred to in (f) , provided that such provision does not exceed the amount required to cover the anticipated losses under these headings. (b) If the directors desire to make any additional provision

for either of these purposes, or for other contingencies, such additional provision should be made out of dis­ -closed· profits, as is the present practice of one of the trading banks'. (c) Provision for the depreciation of premises or to ·write

down the value of premises or for depreciation of investments should be made out of disclosed profits. (d) Transfers from inner reserves to the credit of the profit and loss account during the accounting period should

be disclosed. ( e) The existence of inner reserves should be indicated in a similar manner in the accounts of aU the banks.

(f) (No'rE.-These recommendations ar e subj ect to our further ·r ecommendation, included in "Banking legislation ", that the Treasurer be given power to direct the Auditor-General to investigate the affairs of any bank.)

247

CoNcLUSIONS AND RECOMMENDATIONS.

REGULATION OF BANK PROFITS. 651. 'rhe statistical tables included in the report show that for many years the trading banks made large profits and built up large reserves. Since the commencement of the depression the profits have

been small and the appropriations to reserves neglic;ible. But consideration of the profits of the years preceding the depression raises the question as to whether it is desirable in the public interest that banking profits should be regulated or

652. The power of the central bank to exercise some control over the interest rates may tend to reduce the profits of the trading banks. But, on the other hand, the position of the trading banks is nmv stronger than when they were acting individually as units of an

uncontrolled system, firstly, because it will be the duty of the central bank to strive to reduce :Suctuations in the Australian economy, and, secondly, because . in the public interest the central bank must use every endeavour to prevent the failure of any bank. 'rhis should enable the trading banks to reduce to some extent their appropriations to reserves.

653. Under modern industrial conditions practically no branch of jndustry can be carried on without adequate supplies of bank credit. In practice this is controlled by the trading banks, and in our opinion, therefore, these banks should be regarded as enjoying a privileged

position which closely resembles that of a public utility. They are entitled to a fair return for the services which they r ender. If our recommendations relating to the statement of the profit and loss account are adopted, the actual profits will be disclosed. If these are. found to exceed what may be regarded as a fair retlun for the services rendered, the Government should consider whether the profits of the

trading banks should be regulated or limited as in the case of some public utilities.* .

STAT-ISTICS RELATING TO TRADING BANKS. 654. At present, the only published statistics relating to the operations of the trading banks, apart from their balance-sheets and profit and loss accounts, are quarterly averages of their assets and liabilities within the Commonwealth and within each State (under

Commonwealth and State law ), and the total of bank clearings (published weekly by the Clearing House in each capital city).

655. are of opinion that thi information is inadequate. 'Vle

suggest that additional statistics should not be limited to the

matters mentioned in our recommendation, but we think that the scope and form of such statistics could best be determined by the Common­ wealth Statistician after consultation with officers of the Common­ wealth Ban1r.

• Ml'. Chifley makes a reservation .

1803

248

CoNcLusiONs AND REcoMMENDATIONs.

656. We recommend-(23) The Commonwealth Statistician should obtain from the trading banks, and publish, statistics covering at least--

(a ) monthly averages of assets and liabilities within Australia, analysed in more detail than the existing quarterly averages, e.g., showing separately treasury-bills, deposits with Com­

monwealth Bank, and advances; ( b) monthly t otals of debits to customers' accounts within Australia; (c) monthly figures of assets and liabilities outside

Australia, in respect of Australian business (subject to our recommendation relating t o the publication of London funds); (d) an annual analysis of total· advances within

Australia, classified according to industries .

BANKING LEGISLATION.

657. We are of opinion that full effect cannot be given to what is recommended in this Report, without further Federal legislation . upon the subject of banking. 65 8. It seems unnecessary to disturb the terms or conditions upon which the various trading banks have been incorporated, or to require

them, or other banks, to be incorporated under Federal law. There are ample facilities, under the existing law, for the incorporation of companies forme d for the purpose of banking. It should be sufficient for the Commonwealth Parliament to legislate for the control of banking (other than State banking) in Australia, and to require cotp.pliance by the banks operating in Australia, wherever and however constituted.

659. For this purpose it should be unlawful to carry on the

business of banking in Australia without a licence . or authority, which would be terminable in the event of any wilful or persistent failure to comply with the pr ovisions of the statute. This prohibition would also serve to give the Commonwealth Government the control, which we think that it should exercise, over tbe establishment of new banks.

660. In the case of the existing banks, the licence should be given, in the first instance, as a matter of course; but any proposal to

est ablish a new banking business should be consider ed upon its merits, whether the company is formed or incorporated in .Australia or elsewhere. Certain conditions should, however, be prescribed. No new banking company should be authorized to carry on business unless it h as adequate capital. We suggest a subscribed capital of at least £500,000, of which at least £250,000 has been paid np in

249

CONCLUSIONS AND RECOMMENDATIONS.

mon ey. In the case of a company incorporated elsewhere than in Australia, provision should be made for t he appointment of an attorney resident in the Commonwealth, and for recording its memorandum and articles of association, or other instrument of incorporation.

661. There may be some difficulty in defining the scope of

the Act. State banks, which do not extend beyond the limits

of the State concerned, will, of course, be excluded pursua_nt to the Constitution, and it may be necessary to provide specific exemptions for the pastoral finance, and other companies and firms, which undertake some banking activities, although their main business is not banking. It will be difficult to frame any definition of banking that does not bring in large pastoral finance companies which take

deposits, make advances, and give their customers the facility of a cheque account, but it is evident that the obligations proposed for the trading banks are unnecessary, or inappropriate, in the

case of these companies or firms, whose banking activities are merely incidental to the carrying on of another business. \Ve think that the prohibition against carrying on the business of banking, without licence or authority, should be directed against cheque-paying banks, and savings banks ; but it should be so expressed as to include any branch opened in Australia by any bank established elsewhere, and

provision should be made for exempting pastoral finance and similar companies and firms from obligations which are only intended to apply to trading banks. 662. It is undesirable that the title "bank " should be use d with­ out authority. 'fhe title should be r eser;ved for the banks authorized

under the statute, the State banks and savings banks established under State law, and mortgage or other banks, if approved by the Treasurer. We think that it should be unlawful for any other

person, firm or company to assume or use the title "bank", or any name or designation representing, or suggesting, that it is a banking institution of any kind. 663. For the purpose of giving effect to what has already been r ecommended, the statute should provide for the f ollowing matters:­

(a) Minimum deposits. (b) The publication of annual accounts and balance-sheets, in the form pr escribed by the Act or by regulation.

(c) A statutory declaration to the effect that-(i) these accounts are true in every p articular ; (ii) any provision which has been made for debts which have become bad or doubtful since the

date of the last preceding accounts does not exceed the amount r equired to cover the loss anticipated;

1805

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CONCLUSIONS AND RECOM MENDATION S .

(iii) the profit s disclosed by the accounts have not been reduced by a·ny other appropriation to, or increased by any appropriation from, any inner or secret r eserve. (d) Power to the 'l 1reasurer to direct the Auditor-General to

investigate the affairs of any bank and to report upon such matters as the Treasurer directs. N e are of opinion that compliance with these statutory provisions nay well be regarded as a condition attaching to the right of any i>ank, whereyer incorporated, to trade in Australia, and, therefore, that there should be power to withdraw the licence or authority to carry on the business in the event of wilful or persistent failure to conform.

664 . Amongst other matter s which might well be included in the ;;tatute are-( a) Provision for the appointment by any bank, whose head office is not in .Australia, of an attorney in .Australia

upon whom any process or notice may be served. ( b) Approval of the Treasurer to the appointment of any official liquidator appointed to liquidate any bank. (c) Power to proclaim bank holidays. (d ) Restrict ion upon loans by a bank to its directors, auditors,

or principal officers. ( e) Provision with respect to unclaimed moneys. 665. Statistics with r espect to banking activities in the various .States are collected under State law. The information may be valu­

able to the States concerned, as well as to the central bank, and there is no r eason why the practiceshould not continue, unless, as a matter of convenience, it is considered expedient to collect the same statistics under the F ederal Act.

666. We recommend-(24) The enactment by the Commonwealth Parliament of banking legislation upon the following lines:-(a ) Prohibit any person, firm, or company, from carrying

on the business of a bank without licence or

authority from the Treasurer of the Commonwealth. For this purpose, include any cheque-paying bank or savings bank and any branch established in Aus­ tralia by any bank founded elsewhere; but exclude any State ban}{ which does not extend beyond the limits of the State concerned. (b) In the case of any institution carrying on the business,

when the Act comes into force, provide for the· authority being given, in the first instance, as a ma.t:;.,r of right.

251

CONCLUSIONS AND 1\ECOMMENDATIONS.

(c ) Give discretion t o grant or !'efuse any a pplication to establish· a new business, but prescribe conditione; (a) as to capital, in the case of a company wherever formed, and (b) as to registration of an attorney,

and of the constitution, in the case of any company formed outside Australia. (d ) Define " trading bank " and " saving·s bank " by

reference to schedules of the existing· institutions, but provide for additions thereto by proclamation. (e) Prohibit the use of title '' bank '' except by-(i ) State banks and trading or savings banks

authorized under the Act; or (ii ) other banks with the consent of the Treasurer. (f) Provide, L'1 the case of trading bank s, for-(i) lViinimum deposits in the circumstances and in

the manner recommended."' (ii) Publication of annual accounts and balance­ sheets in the form prescribed by the Act or by r eg·ulations.

(iii) A statutory declaration in the form pre­

scribed.

(iv) Power to the Treasur er to dir ect the Auditor­ General to investigate the affairs of any bank and to report upon such matters as the Treasurer directs. (g ) Give the Treasurer power to withdraw the licence or

authority in the event of wilful or persistent f8,i lure to comply with the provisions set out under (f).

BANK CHARGES.

667. The scale of charges by the banks for the collection of cheques an d on drafts within the Commonwealth app ears to be a survival of an earlier time when communications were less highly developed, and to be full of anomalies as between State and State and district

and district. It is true that some reductions have been made from time to time, but in our opi.nion a comprehensive and systematic revision of these charges is necessary.

CLEARING POOL.

G68 . In each capital city ther e is a clearing house agreemen t

between the t rading banks, proYid ing, amongst other things, fo r a deposit of notes by each trading bank in a pool as a gu arantee against default in settlement of clearing balan ces. Formerly each bank contributed gold t o the pool , but when the trading banks h anded

• Su bject to rlissen t8 f r0ID th nt recommenda ti on.

252

CoNCLUSIONS AND REcOMMENDATIONS.

over gold to the Commonwealth Bank in 1929, the gold in the pool was replaced by £1,000 notes. .At the end of June, 1936, £2.47m. was held by the pool in the form of these notes, which remain as part of the cash reserves of the banks, but are earmarked for the purposes

of the pool. If the trading· banl{s think it necessary to guard in this way against a default of one of their number on clearing transactions, it seems to us better that. this pool should be kept in the form of

deposits with the Commonwealth Bank, which would allow of a reduction in the note issue.

NATIONALIZATIO'N OF BANKING. 669. We have not entered into the arguments for and against the nationalization of banking in .Australia. By general invitation issued through the press, opportunity was offered to those

interested to give evidence on this and other subjects. But

we have -had no evidence from political organizations, and little evidence from individual witn esses, either for or against

nationalization. 'rhe view of the Commission, as set out

in Chapter V., is that the most desirable banking system in the present circumstances of .Australia is one which includes privately­ owned trading banks. The system which we contemplate is one in ·which a strong central bank regulates the volume of credit, and pays some attention to its distribution. We are of opinion that the

adoption of our recommendations will place the Commonwealth Bank in that position. \Ve are satisfied to leave the distribution of credit to privately-owned trading banks, working for profit, but regulated in the manner indicated in our recommendations. A strong central bank, publicly owned, and not dominated by the desire to make profit, will exercise the necessary control over the activities of the trading banks, and the organization of these banks on a profit-making basis will conduce to efficiency, while the area of choice afforded to borrowers will be greater than if all banking were nationalized and brought under one control. We think that in this way the nationa] interest will best be served. •

SAVINGS BANKS.

670. Savings banks render a valuable service in collecting small savings, and they make part of them available to the banking system · through the deposits which they make with the trading banks. In our opinion certain disadvantages arise from the fact that the

maximum amounts on which interest is paid are high. In the first place this means that large amounts, exceeding what might be con­ sidered thrift accounts, are subject to withdrawal at very short notice. In the next place, the comparatively high rates paid on large sums at call tend to fo rce up interest rates.

• Mt". Chitley dluente.

263

CoNaL usroNs AND RECOMMEND.A.'riON S.

· 671. We recommend-(25) The savings banks should consider the desirability of lowering the ruaximum amounts on which interest is paid for deposits at call or very short notice, and of

encouraging the conversion of any excess over this maximum into fixed deposits with themselves.

THE SAVINGS BANK OF SOUTH AUSTRALIA. 672. Under the State law by which this bank is constituted, the Trustees are required to deal with the profits in each year, by allocat­ ing not more than one-fifth to r eserve, and distributing the balance in the form of interest to t he depositors. We are of opinion that, in

this respect, the power of the Trustees is unduly limit ed. We think that it would be better if the Trustees were given a wider discretion. We think that the amount to be carried to reserves ought not to be limited to any fixed proportion of _ the profits, but left to the discretion

of the Trustees, and, further, that the Tr ustees should be allowed to establish an interest equalization fund, and to declare their rate of interest from time to time, as is the common practice. If this were done, the Trustees would be free t o consider the possible effect of t heir

rate upon the general structure of interest rates. 673. We recommend-(26) The Gov·ernment of South Australia should consider the question of an amendment of the State law for the

purpose of-( a) giving the Trustees of the Savings Bank of South Australia a wider discretion over the allocation of the profits, and (b) authorizing them to declare a current rate of

interest.

MO R'rGAGE BANKING.

67 4. In a previous p art of our report we have shown that there is a lack of facilities for fixe d and long-term borrowing. One method of providing thes e facilities is mortgage banking. A mortgage bank differs from a t r ading bank in that it lends on land for fixed terms,

and for that purpose r aises par t of its funds by issu es of bonds . The t rading bank accepts deposits only fo r short periods or at call, and only lends on overdrafts r epayable on deman d or by discounting bills for short periods.

675. The mortgage bank, t hr ough its large fi eld of investment in mort gages, can spr ead its r isks over a wide ar ea and t he mortgage bond is therefore a good security. I n n ormal cir cumstances these bonds are readily negotiable. The holder of the bonds can r ealize his capital

180::1

25i

CoNcLUSIONs AND REc OMMENDATION S.

promptly by selling his bonds without disturbing the borrowers. 'In other co untries'"' where mortgage banks exist, the procedure generally adopted is t o make the first parcel of ·mortgage loans out of the capital of the bank. The mortgages are then deposited with trustees and bonds are issu ed against them in such denominations and with such maturities as may be convenient. When the money received from the sale of these bonds has been lent, a further issue of bonds is made on the security of the second parcel of mortgages. This process can be repeated until the bonds reach the maximum prescribed by custom or law which is generally from ten to twenty times the capital of the bank. The mortgage bond is repayable on a fixed date, and payment is secured by the mortgages held in trust and the other assets of the bank. An important difference betwee n a mortgage and a mortgage bon d is that whereas the mortgage is secured on a specific

piece of land, the mortgage bond is secured by a general charge over all the mortgages comprised in the security.*

676. There are various types of mortgage bank which might be es t ablished in Australia. These may be divided into three classes-(1) Those in which the capital is provided by a public com­ pany, or by the public. For example, one trading bank

might establish a mortgage bank as a separate unit, using its own offices and staff . Alternatively, several trading banks might combine to establish a mortgage bank, or a n ew company for the same purpose might be

formed, the whole of t he capital being provided by private investors. (2) Those in which the capital is provided by a Government, the Commonwealth Bank, the Commonwealth Savings

Bank, or by a State Savings Bank or State Bank, or by some of these in conjunction. In any of these cases the mortga.ge bank might be administered as a separate institution, or as a department of an existing institution. (3) 'fhose in which the capital is provided partly by any of

the institutions named in paragraphs ( 1 ) and ( 2) and partly by private investors. ·

677. The adoption of one type of mortgage' bank would not neces­ sarily exclude the adoption of others. It might be found convenient to establish a number of mortgage banks, of different types.

67 8. As it is important that the mortgage bonds issu ed by the banks should be regarded as a first class security, thus enabling the

• Ii'or development of llfortga;;e B anlting in various countries, •ee The Jlor"tgago Bank by Joseph L . Cohen (Pitman) 1931.

:t55

CONCLUSIONS AND RECOMMENDA'riONS.

bank to borrow and to lend at the cheapest possible rates, legislation for the regulation of these banks in the following matters is desirable. (1) 'l'he amount of capital to be subscribed and paid up before the bank is permitted to commence operations.

(2) The limitation on the amount of bonds to be issued. 'fhe limit would presumably be some multiple of its sub· scribed capital. (3) 'l'he conditions upon which loal.)s may be made,

prescribing-( a) the minimum and maximum term. (b) that money shall be lent only on first mortgagr. (c) the proportion between the valuation and the

loan.

(d) the remedies of the bank in the event of non­ payment of interest or capital instalments. ( 4) The n ature of the returns to be made. 679. 'l'he bonds might be issued upon the security of all the

mortgages held by the bank, with a collateral security over any other assets of the bank. Alternatively, they might be issu ed in series, in which case it would be necessary to specify the security for each series and the order of priority if the specified security is found to be

inadequate. The bonds might be of different denominations to suit various types of investors. If the bank is a company, its constitution should be such as to comply with the requirements of the stock exchanges, in order that the bonds may be listed and readily

negotiable. The bonds should be trustee securities. 680. We think that if the trading banks were enabled to transfer to a mortgage bank some of their present overdrafts, which are in the nature of long-term loans, and take in exchange the mortgage bonds

issued by the mortgage bank, the position of the trading banks them· selves might be strengthen ed. ·

681. We recommend-(27) A mortgage bank or mortgage banks should be established to provide facilities for fixed and long-term lending.

VARIABLE RATES OF INTEREST. 682. In the course of the evidence, several proposals have been made to us for the adoption of some system of variable rates of interest upon fixed or long t erm loans. It has been pointed out that, particularly in the case of primary producers, a rate of interest which has been fixed in a time of high prices may become burdensome if prices fall, and it has been suggested that there should be some facilities for

borrowing at a rate of interest which would vary with changes in some price index number.

256

CoNCLUSIONS AND REco MMENDATIONS.

683. Another suggestion, which has been made to us, is that other institutions should adopt some such practice as that already instituted by the Commonwealth Savings Bank, in certain cases, of lending for a fixed term at a rate of interest which rises or falls with the rate u pon its deposits.

684. One difficulty will be to find lenders who are prepared to lend upon these conditions. Another is that lenders would be inclined to charge rather more than the current :r:ates of interest. We

think that these suggestions are worthy of consideration by the institutions which specialize in loans for fixed or long terms.

CAPITAL FOR SIVIALL SECONDARY INDUSTRIES. 685. To meet the needs of small concerns in secondary industries, it is desirable to provide facilities either in the form of a new instit u ­ tion specially established for the purpose, or by some adaptation of

an existing institution. It would be necessary for any such to have available the services of technical advisers, :firstly to examine the prospects of the business, and, if a loa11_ is made, to advise the owners on such matters as manufacturing methods, factory lay-out,

costing and marketing. Since the object of the institution is to enable industries to be developed in the national interest, profit should not be its main consideration, but there is no reason why it should not make profits.

686. As the industries we have in mind may be aided as a matter of national policy or local policy, the provision of the necessary machinery and funds might fall to either the Commonwealth or a State Government, according to the circumstances.

687. We recommend-. (28) The Governments, with the assistance of the Common­ wealth Bank, should investigate the problem ·of setting np institutions to supply the needs of small

concerns in second industries.

DECIMAL COINAGE.

688. Too little attention has been given in .the past to the

denomination and forms of our token coinage. In our view, the d,ivision of the pound into twenty shillings, each of twelve pence, is antiquated. lVIost modern currencies are based upon the decimal system, which has great advantages. With its introduction, money calculations of all kinds would be simplified shortened, and a great deal of time and t rouble would be saved in ·industry and in commerce. More of t he time of school children, too, could be devoted to other subjects. The chief difficulties to be overcome are tradition, inertia, and the inconvenience and cost of the tr ansitional period.

257

C ONCLUSIONS AND RECOMMENDATIONS.

Opposition will come from those who prefer the old system because · they are accustomed to it, and from those who would deprecate a brea4: with t he custom followed by Great Britain. On the other hand, some parts of the Empir e have for long used a decimal system of

coinage. rrhe introduction of decimal coinage would provide an oppor tunity for a r econstruction of the whole of the token coinage from the point of view of shape, weight and design. 'J.lhe threepence, for example, is a coin of convenient denomination but inconvenient

size. It would be easy to combine a decimal system with a new

coinage, more convenient t o handle t han the present coinage, even if other metals than silver and bronze, and other shapes, t han the p r esent, wer e introduced .

689. We r ecommend-(29) A system of decimal coinage should be introduced baseq upon the division of t he Australian pound into one thousand part s.

MINTS.

690. 'r he British Government appoints the officers of the Mints, but the Stat e Governments of Victoria and Wester n Australia, respectively, own the lands an d buildings, receive the r evenues and bear the expenses of the establishments.

691. We recommend-(30) The Commonwealth shQuld take ov·er from the States of Vict oria and West ern Australia their interests in the Mints.

692. This report represents the views of a majority of the Com­ mission, and the dissents and r eservations of individual members arc expressed in memoranda attached thereto.

69 3. The report has therefore been signed subject to such dissents and reservations.

W. '1'. HARRIS (Secretary). };' ,_2581.- 17

J . M. NAPIER (Chairman ). E . V . NIXON.

R. C. MILLS.

J. B. CHIFLEY. H. A. PITT. J . P . :ABBOTT.

16th July) 1937.

18] 3

258

DISSENTS AND RESERVATIONS.

MEl\iORANDA OF DISSENT AND RESERVATION BY THE CHAIRMAN.

Relat·ions of the Commonwealth Bank lJoanl l o Gover-nment (para. 530) :

1. I am unable to accept the conclutiion on page

.without some qualification. From tlvery point of view it is highly desirable that the administration of the central bank should be removed from the sphere of party politics. As the law now stands, the Board is bound to form its own opinion, and to exercise discretion, but it is manifest that it cannot disregard the policy or the actions of the Government of the day. If it is unable to move J:he Government by advice or persuasion, the Board will be faced

with a choice of evils. If it insists upon its own opinion, the Board will be brought within the sphere of party politics, and, presumably, into conflict with the Parliament from which its authority is derived. Speaking generally, I have no doubt that the Board must subordinate

its own opinion to the considered policy of the Government. If i t does not, the system of independent control is plainly unworkable, and will break down. The conclusion of the majority of the Com­ mission is, therefore, a sound working rule. But, although it may be difficult to contemplate the circumstances in which the Board might be justified in acting otherwise, I am not prepared to say that they could not arise.

N, r,co·rnm endat-ion (1) --'l'he Commonwealth Ba·nk Board (para. 576 ) :

2. I am unable to agree with the recommendation that the

Governor of the Commonwealth Bank should be, e.x officio, the Chairman of the Board. In my opinion there should be no interference with the present practice by which the Board elects its own Cha,i rman. 'Fhe main ground of my objection to the proposal is that the status and responsibility of the directorate would be seriously impaired by t he alteration.

R ecommendations (7) and (B)-Note R eserve ( pam. 580):

3. I assent to the r ecommendations with respect to the limitation of the note issue; but I am of opinion that the Commonwealth

Bank should be required to hold a reserve, •in gold or sterling, of some stated amount, subject to power given to the 'l'reasm:er to consent to some reduction for a period of (say) six months, r ene wable from time to time, but not for more than (say) two years, without the approval of Parliament. I think that the external value of the currency should be backed by a reserve, which ought not to be expended without Ministerial authority and responsibility.

259

lVIE.MORANDA OF DISSENT AND R ESERVATION BY THE CHAIRMAN.

Hecomm endations (9) and (lO )-Po1ve1·s of the Commonwealth Bank (pam. 589) : 4. 1 cannot agree with these recommendations in their t orm, which would gi\·e power to requisition up to tb.e .full amount of the deposits. I think that this goes beyond the necessities of tl.tl' case, and I am of opin ion tllat it is a power which Par liament ought not to delegate. I think that the line should be drawn between a

power to exert pressure, with a view to control, and an arbitrary power of coercion. It seems to me that this power to require

minimum deposits would be a useful instrument of central bank control if the power to requisition were limited t o a moderate

percentage. In this co nnexion it should be pointed out that, in order to carr y on its business, every t rading bank would have to provide £or a deposit with the Commonwealth Bank in excess of the percentage required, and, in addition, it would h ave to hold till money.

5. Apart from the absence of any limitation upon the amount, r am of opinion th at the power to requisition should be limited by some provision for reasonable not ice.

Rese1·ves (pa1·as . 302-303) :

6. I agree with the views expressed by l\>Ir . Nixon, aud have nothing to add to his 1nemorandum, upon this subject.

,J. M. NAPlER.

DISSENT BY PROFESS OR MILLS, · I't1R . CHIFLEY AND riiR. ABBOTT. Stnwt1t·re of the Commonwealth Bank-Note I ssue Department (para. 578) :

1: ln our opinion, the present separation of the Note issue

Dep artment from the Gener al Banking Department of the Comrnon­ \vealtlt Bank should be discontinued. The Bank could then treat centr al bank activities as one, and wo uld not have to show separately the accounts for each department. "\Ve can sec no good reason why the

profits of the note issue, which is a central bank function, should be separate from the profits of the Ge neral Banking Dep artment. If: it is desired that the pres ent allocation of profits shoulu not be clisturbed, we ar e of opinion that the profits of th e Gen er al Banking

Department, after it has absorbed the Note I ssue Department, should be divided beL ween the National Debt Sinking Fuud and t he r eserves of the Bank in some such proportion as two-thirds and one-third respectively.

R. C. MILLS, J. B . CHIFLEY, J.P. ABBOTT.

260

DISSENT BY PROFESSOR MILLS, CHIFLEY AND MR. PITT. Recommendation (14)-Publication of London Punds (pam. 599) : 1. The majority of the Commission recommends the regular publication of these figures, with an interval of six months after the

date to which they relate. In our opinion, the figures should be

published as so on as they are available. R C. MILLS, J . B. CHIFLEY, H . A. PI'r'l'.

RESERVATION BY PROFESSOR MILLS AND IVIR. ABBOTT. of the Comrno1bwealth Ba-nk-Open Market Operations

(pam. 581) : 1. The Commission has assumed that the purchase and sale of securities by the Commonwealth Bank on the op en market will be a normal method of regulating credit. "\Ve have only to add that, in our opinion,- since this power is one ordinarily associated with cent ral bank action, some opportunity might have been found by the Bank in the past six years for testing the width of the market. Even if the market be as narrow as the Bank's view suggests, this is a gTound for caution rather than inaction.

R. C. MILLS, J. P. ABBOTT.

DISSENT BY PROF'ESSOR MILLS AND MR. ABBOTT. (12)-Exchange Mobilization Ag·reement (pam.

59 7) :

1. The Exchange lHobilization Agreement was arranged to mee t an emergency, and has worked well on a voluntary basis, but now that the emergency has passed it has lost much of its significance. If the banks wish to make a binding agreement covering the debt

service and any o.ther matters, there is, in our opinion, no objection to this course, but we think that the matter should be left to their discretion. The agreement merely relates to the selling by trading banks of London funds to the Commonwealth Bank at a fixed rate, and there n eed be no fear that, even in the absence of an agr eement, funds will cease to be provided for t he debt service .

R. C. MILLS, J. P. ABBOTT.

DISSENT BY MR. E. V. NIXON. R ec ommendation (1 )-Comrnonwealth Bank B oarcl (pam. 576) : 1. I am unable to agTee with the recommendation that the

Governor of the Commonwealth Bank should be , ex officio, Chairman of the Directors.

261

Dl::iSBN'l' BY lVIR. E . v. NIXON.

2. I am of the opinion that the Chairman should be chosen by the Board as the Commonwealth Bank Act now provides. 'l'he Governor should be eligible to be chosen, but should not be entitled to the office as of right.

Inner R eserves (pams. 302-303):

3. I dissent from the decision to disclose the amount of the

inner reserves of the t rading banks without Ruch othet informatiou as will enable these r eserves to be viewed in tl1eir proper perspective. 4. I nner reserves may be considered from two points of view ; first, th eir effect on profits and, next, their adequacy or inadequacy.

5. 'l'he effect on profits cannot be determined without informa­ tion as to the time during which the inner reserves have been accumu­ lating and the sources from which they have been derived. Profits are no t the only source from which inner reserves may be created . A

substantial proportion of those now nxisting is attributable to amalgamations. 6. The adequacy or inadequacy of re::;ene:-; cannot be

determined without a knowledge of the nature and extent of the contingencies for which they .are intended to provide. 7. W ithout all this knowledge any conclusions Lased merely upon the amount of the inner reserves must be worthl ess and may

be detrimental to the bankiJJg system as a whole. 8. F' or these reasons I am n ot convinced that the diflclosure of the amount of the inner reserves, without other information sucl1 as that described, is in the public interest or evrn that it srrvcs useful pnrp ose.

9. I may add that if other recommendations made by this

Commission ar e adopt ed, the effect of inner reserves npon thr profits of any subsequent year will be clearly di scernible. EDWIN V. NIX ON .

DISSENT AND RESERVATION BY PROFESSOR MILLS. Krchange Ra.te, December, 1931 (para . 555 ) : 1. I n dealing with the reduction of the exchange rate by the

Commonwealth Bank in December , 1931, the majority of the Com­ lll ission states: "We think t hat the reduction from 130 to 12(1 was j ustified. in the circumstances, but in the light of subsequent events we think it might have been better to have held the rate at 130 unt il internal conditions showed some more definite signs of improvement' ' I am unable to agree with this view. In my opinion, the circumstances

of the time did not justify the reduction . The ar gument that holding I he r at e at 130 would have allowed an easier adjustment of the Australian economy out weighs, in my opinion , all the ar guments

18

262

DrssEN1' AND RESERVATION BY Prw:rEsson 1\{!LLS.

in favour of a reduction. If the Commonwealth B ank had blwn control, held the rate at 130, and announced its d ete -:. mina to

refrain from any competitive depreciation, any fears on the p art of oYerseas traders and investors would have been allayed.

London Funds (para. 593 ) : 2. 'l'he majority of the Commission has consider ed the proposa l for a loan in London to build up London funds, but has made no further comment. In my opinion, the flotation at an appropriate

time of a loan in L ondon for the sole purpose of paying off short terni debt held by the Commonwealth Bank shou.ld be consider ed as an ad ditional method of increasing the London funds of the Common ­ wealth Bank.

R. C. MILIJS.

DISSENT, RESERVATION AND ADDENDA BY MR. CHIFLEY. Des 1:rable Objech:v es of a 111 onetary and Banking System: Jliethod o.f (pw·a. 517) :

1. In the opinion of the other members of th e Commiss ion ,

the achievement of the objectives of the monetary and

banking system outlined .in the report is most likely to result, "in the present circumstances of Australia", from a system in which there is a government-owned centr al bank, regulating the volume of credit and currency, and, "as an integr al part of the system", privately-owned banks, which distribute that volume, and which may be advised generally by the central bank as to the di1· ectio!l. in which

the distribution should be made. 2. \Vith this opinion I am unable to agree. rl"'he evidence given befor e the Commission, and personal observation and experience, le ad me to believe that there is no possibility of the objec.tiyes being reached, or of any ":'ell-ordered progress being made in the community, under a system in which there are privately-owned trading ban ks which have been established for the purposes of making profit.

3. I realize, however, that a government-owned central bank with ample powers, whose policy is determined and directed wholly to·nrard furthering t he interests of the community by men of capaci ty ?tnd courage, is a most important feature of any banking system. Because of this, I have joined with the majority of the Commission in considering how a system, in which, in addition to the government­ owned central bank, there are privately-owned trad ing banks, can best be

4. The motive actuating those who establish private banks is the making of profit. When bank c1pital is subsc ribed, or bank shares are bought, what induces the investment to be made js not the

263.

DrssENT_ . RESERVA'l,ION AND ADDENDA nY lHR. CHH1 IJEY.

rendering of a service to the community, but the opinion of the investor that there is a financial advantage in this particular invest­ ment over others offering. If the investor were not of that opinion, there would be no private banking. This is not to say that privat(:

banks give no consideration to the public interest, but they do so only under the pressure of public opinion, or from motives •vhicl1 bring to them prestige and confidence and, in the long run, profit. 5. In times of generally adverse conditions the profits o£ trading banks may be reduced through declining business, and the banks

may even be willing to sacrifice some immediate proiit by acting in the jnterest of the community; but they cannot for long continue a policy adversely affecting t.hejr profits. Privately-mvned trading banks will therefore act m.uch as any other com11any of individuals formed for

the purpose of gain. The effect on the comnmnit.y, however, of the action of most companies is of little moment compared with the effects of the actions of banking companies .. 6. Banking differs from any other .form of business> because

any action-good or bad-by a banking system affects almost every phase of national life. A banking policy should have one aim-­ service for the general good of the community. The making of profit is not necessary to such a policy. In my opinion the best service to

the community can be given only by a banking system from which the profit motive is absent, and, thus, in practice , on !y by a systPm entirely under national control. 7. In times of unhealthy boom conditions the trading bank:3 arc

unable individually to check these conditions, and collectively they have never attempted to do so. The fact that they have never even made a collective attempt indicates either a belief that they cannot do so, or that the desire for immediat e profit during boom periods over­ rides any consideration o:E the national interest. The evidence convinces me that the banks, during some years before the depression,

encouraged unhealthy economic conditions by unsound advancing. During a depression or feared slump, the banks, in their own interest, and to protect their depositors, on whose confidence the banks' prestige and solvency depend, adopt a policy of contraction which intensifies

the evil. Contrary to what should be expected in an effective banking system the banks have been capable of creating boom conditions; and they have been ineffective in checking or minimizing a depression. 'l'he facts presented before the Commission show clearly that the

rart played by tile trading banks in enabling a measure of recovery from the recent depression to be achieved has been very small. That measure of recovery has been achieved mainly because of action by Governments and by the Commonwealth B ank, combined with rising prices for exports. Private banking systems make the community

18.1_ )

264

DISSENT, AND ADDENDA BY JYIR. CHJFLEY.

the victim of every wave of optimism or pessimism that surges through the minds of financial speculators. I wish it to be clear that I do not suggest any dishonesty on the part of those who operate private banking in Australia, or that they have been guilty of motives other than those which actuate any other private institutions engaged in _profit-making. My criticisms are directed at the inability of any

system which includes privately-owned banks as an integral part to function in the best interest of the community.

B. The opinions expressed by the majority of the Comniission that a central bank should be responsible for the supply of credit and currency, which should be distributed through the trading banks, seem to mean that the central bank should operate not only in the

interests of the community, but so that the private banks may

continue to make profits. As I have already stated, I think that

banking should be conducted without profit-making considerations.

9. In my opinion, the objectives of a monetary and banking system for Australia, as outlined in the Report, can only be achieved with the Commonwealth Bank functioning in the following way:­ (a) As a central bank controlling the volume of cr edit and

currency. .

(b) The central bank to have a trading bank department through which this volume is distributed direct to industry. (c) The savings bank department of the bank to continue as

an adjunct to its central bank activities. (d) There should be a mortgage bank department for tl1e provision of fixed and long-term lending. (e) There should be an industrial bank department to assist

in providing capital for developing industry. 10. Even under the system of a government-owned central bank with private trading banks, which has been adopted by the

majority of the Commission, I am of the opinion that the trading section of the Commonwealth Bank should be extended, with the ult_imate aim of providing tl1e whole of the services now rendered by privat e trading banks.

11. The present policy of the Commonwealth Bank is to restrict the activities of its trading section, and to r efuse an advance to a customer of a trading bank, unless in the opinion of the Common ­ wealth B ank the customer is no t r eceiving fair and reasonable treat­ ment from the trading bank. It has not been disclosed in t he evidence that the Commonwealth Bank has ever taken a customer on these grounds. P eople should, in my opinion, have the right to obtain advances from the Commonwea lth Bank without question as to

265

DISSENT, R.v;sERVA'l'lON AND ADDENDA BY Mn . CHU"J"EY.

whether they are customers of a private trading bank The only considerations, in my opinion, should be whether they are credit worthy, and whether, in conformity with central bank policy, advances should be made to them. At present, the Commonwealth

Bank, by its self-imposed restrictions as to the extent of its advances, deprives itself of any r eal power to prevent a _rise in rates

advances. Although the Commonwealth Bank did not increase its advance rates in March, 1936, when some trading banks, in opposition to its wishes, increased deposit rates and later advance rates, it was nnable to force the trading banks to respect its wish that rates should

not be increased. rrhat was an occasion on which the Commonwealth Bank, if it desired to enforce its wishes as a central bank, should have intimated that it would seek business at its lower rat e from the t r ading banks who disregarded its wishes.

12. It h as been mentioned, as an objection to the extension of the trailing bank activities of the Commonwealth Bank, that the funds deposited with that bank by t he trading banks may be used to compete with them. I think it would be unfair to make such

a use of these funds, and also that it would be unnecessary. These funds should, and easily could, be separated from the funds of the trading bank section of the central bank.

13. In regard to the control of the trading bank activities, many s ound r easons can be advanced for placing it under different direction from that of the central bank, but after close consideration I have come to the conclusion it is desirable that the central bank, under

its own management, should have a trading bank section.

Interest Rates (para. 567 ) :

14. In my opinion every effort should be made to keep · interest rates low) even if legislation is necessary for this purpose. They are, I consider, too high at present. I disagree with the contention often made that the r aising of inter es t r ates is a suitable or effective method of checking u ndesirable expansion. In my opinion, this end

can better be -achieved by r estricting the volume of advances. It is true that an increase in advance rates has some restrictive effect, but it has another , and undesirable, effect , because when rates on advances rise, these rates influence the rates on fix ed and long-term lo ans, including gover nment securities, and these rates rise also . As these loans are made for lengthy periods, the interest rates cannot

be reduced except by legislation. In times of depression, when wages, prices, and national income fall, and overdraft r ates may be reduced, the r ates on these :fixed loans impose an unfair burden both on governments and individuals.

(

266

DISSENT, RESERVA'rioN AND . ADDENDA BY lVIn.. CrnB'LEY.

15. No better illustration of the weakness of the view that

increased advance rates are a suitable method of checking advances can be given than that shown by the increase in rates in February, 1930. In that month the banks increased the rates on fixed deposits. an.d, generally, on all advances. The for 1929 s}ww that,

during that year, unemployment had risen from 9.3 per cent. in the i\Iarch quarter.· to 13.1 per cent. in the December quarter; the index llgure of export prices had fallen from 95.1 in January to 77.2 per in December; external long-term borrowing had ceased, national

income was falling, and conditions generally were depressed. In spite of these circumstances the banks raised interest rates to check what has been described by some bank witnesses as expansion. The result was that those who were already in difficulties, and who had advances from the banks, had an additional burden imposed upon

them. This action of the banks, in my opinion, was quite 1vrong as far as the interests of the community were concerned, although it did bring some immediate additional profits to the banks.

Comm onwealth Bank Boa1·d (para. 561) : 16. Since 1930, the Commo1nvealth Bank considers that it has frmctioned as a central banl\:. It sbould nm,v· _ . therefore, have a clear conception of its duties and responsibilities. The impression created on me by the evidence before the Commission, hmvever, is that the Banh: still has not assumed that leadership 1vhich its position requires. The instance in 1\[arch, 1936, when it allovi7ed t wo trading banks to increase interest rates against its wishes, seems to me a sign of considerable weakness so far as leadership is concerned. Although the Commonwealth Bank intimated that it did not desire interest rates to rise, two trading banks disregarded its wishes, and increased

their rates, and the Bank itself and .the trading banks subsequently toolc the same action. :More disquieting \vas the statement made by the Chairman of the Bank Board to the press on 3rd 1\1arch, 1936. In regard to the action of one trading bank in raising deposit rates, he is reported to have said-

" The propriety of an increase or decrease in interest rates· is a matter of individual opinion, and action l.Jy any financial institution, and must be

influenced largely by the particular palicy which that · institution desires to adopt. It is a matter which is usually ba.secl on the price and demand for

money, which is in turn based on economic conditions from time to time."

This was apparently an expression of personal opinion by the Chairman of the Board, but it seems remarkable that he did not say that any action in regard to interest rates should be influenced largely by the particular policy which the Commonwealth BGtnk thinks should be followed. If the Commonwealth Bank Board felt

2G7

DrssENT) l"\,EsEnVATION AND A .DDEND.A nY Mn. Cum.LRY.

that i nterest rates should not rise at this time, it should have tal\rn quick and decisive action to bring the ·offending uanll:s int o eon formity with its wishes. It could have done this by using its trading bank activities . If the Common-vvealth Bank is to discharge its central

bank duties properly, it must exercise wise and firm leadership. .Any policy which it desires to adupt must h ave careful consider ation, :ind the views of others affected by its policy should be carefully weighed . But when its policy has been decided, the Bank should take steps

t o see that the policy is carried out, and no bank or banks should be allowed to disregard its wishes or t o take t he leadership.

Profits of 'Trading Banks (paT a. 653) : 17. If private trading banks are to continu e, some limitation should, .in my opinion, be placed on the pr ofits which they, in

their privileged position of semi-monopolistic public utilities, are able to earn. It is recognized in the case of some other public utilities­ for example, gas companies-that in the public interest there should be some restriction on the profit which they are able to make from the supply of n ec essary services that the community is unable to obtain

from other sources . I think there are additional grounds f or the limitation of trading bank profits. In the case of other p ubl.ic

utilities, the funds from which profits are derived are provided by the shareholders, or by debenture-holders whose interests are watched hy trustees. In the case of the trading banks, the gr eat part of

the funds used by them, and from which their profits are derived, are provided by the pub1ic without interest or at low rates, an d the public has no voice in their management. 18. 11he balance-sheets of the trading banks for 1936 show that

the total shareholders' funds were £70,000,000. rrhe Commomvealth Quarterly statistics show that, for the last quarter of 1936, the

sum of £290,000,000 was deposited by the public in Australia witJJ the trading banks. Of this amount £110,000,000 earned no interest fo r the depositor, and 85 per cent. of the interest-bearing deposits of £180 ,000,000 wer e at rates of f rom 2i t o 3 p er cent.

19. During the period 1931 to 1935, the trading banks h ave 11ot made unduly high profits; their total n et income, as determined by the Commonwealth rraxation Commission er, during that period was £14, 150,000, representing an annual aver age of 7.58 per cent. on

capital, and 4.10 per cent. on shareholders' funds. 20. Prior to that period, however , the trading ban ks as a who]e have made large profits. In the p eriod 1893 to 1936-a perioLl of 43 years, including two major depressions, one minor depression , and

the war-the published fi gur es show that they made a total profit of £106,548 ,000, an arm n al aYerage of 10.27 p er on paict

1823-

268

DJSSEN'l' , AND ADDENDA BY lVIR. CHIFI.JEY .

capital, and 6.28 p er cen t . on shar eholders) f u n ds. rrhese figures do not include amounts placed to inner reserves, t hou gh the u se of these reserves contributed to the profits.

21 . Takin g th e published :figures for the year 1910 to 1929- a period of twenty y ears- -the average yearly profi t was £3,480,000, with aver age yearly dividends of £2,525,000. The average yearly amount disclose d as p aid to reserves was £785,000. The total profit fo r all th e trading banks during this period was £69,600, 000, equ al to an annual average of 13.97 p er cent. on paid capital, and 8.24 per cent. on shareholders' funds. These figures do not include amount s

placed to inner reserves. F or t he five years 1926 to 1930, the total n et income of all the banks, as determined by the Commonwealth rraxation Commissioner , was £27,007,000. This r epresen ts an annual aver age of 15.09 per cent. on capital, and 8.42 p er cent . on sh ar e­ holder s' funds.

22. In 1925, the average paid by all banks as dividends to

shareholder s was 16.01 per cent. on paid capital. This r epresen ts 8.75 per cent. on shareholders' fun ds. In addition, some profits were placed to r eser ve .

23 . I n my opinion, legislation should be p assed providing t hat the profits of trading banks should not exceed an amount equal to 5 p er cent. per annum on shareholders' funds, or 8 per cen t . p er

rmnum on paid capital, whichever is !he less . J . B . CH IFLEY.

DISSENT AND RESERVATION S BY MR. H . A . PITT.

Cen;l;ral B ank Objec tives (pa1·a. 527 ) : 1. I accept the objectives of the Commonwealth B ank as suit­ able f or present conditions. It is easy to ove r-rat e the importance of bankin g funetion's, and ther e is a tendency to believe that a centr al bank can effectively check condition s which lead t o un desirable results1 or t hat it can promptly remedy t hose results. The world's monetary system is disorganized. This is largely due t o the policy pursued by leading nations of throttling t r ade and bottling gold. vVhen more f riendly r elations bet ween n ations ar e r estored, it appears likely that gold will resume its fun ction as an international medium of exchange, though not on the same b asis as existed before nations left the gold standard. I f som e form of gold st andard be adopted by leading countries, it will be the duty of the Commonwealth BanJ{ to endeavour to maintain the stability of the currency as part of a general system of avoiding currency fluct uations, and so assisting to ensure a flow of trade between nations.

269

DISSENT AND RESERVATIONS BY MR. H. A. PITT.

Criticisms of Commonwealth Bank (pa1·as. 547, 554 and 555): 2. I dissociate myself from of the conduct of the

Commonwealth Bank during the period of acute depression. My personal view is that the terms of the Commission do not require expressions of opinion of such a nature, and that there is little value in making them. Apart from this, it must be bor ne in mind that

the Commonwealth Bank Board had to face a time of unexampled difficulty. It is quite possible that the Board did not at all times act with perfect wisdom, but on the other hand it is doubtful if any other body of men placed in such a position would have done more effective work for Australia. In particular, I dissent from the

suggestion that the Board unwisely in reducing the exchange rate from 130 to 125. I do not consider that the consequences of this reduction were detrimental.

Dijj'e1·ences of Opin1ion between Government and Co1rnmonwealth Bank (para. 530) : 3. I do not agree that when differences of opnuon are irrecon­ cilable the Commonwealth Bank Board should subordinate its judg­ ment to that of the Government of the day. It is important that the public should not only have faith in the judgment of the Board, but should be satisfied that it will be prepared to preserve its spirit

of independence. Sacrifice of independence will involve loss of prestige. Confidence in the administration of a central bank is essential, and this may be disturbed if it is thought that the

administration is in the hands of a gelatinous Board which may set aside its judgment on pressure from the Government. The Board should not lightly disr egard the views of the Government and should do all it reasonably can to avoid conflict, but occasions may arise

when it considers it essential in the public interest not to sacrifice its judgment. The Bank is the creation of Parliament and not of the Government of the day. Parliament can be asked to give effect to the Government's wishes if a conflict arises.

B eco·rnm endations Nos . ( 7) and (8 )-Note Isstte R ese·rve (pa1·a. 580 ):

4. I think it advisable to retain the existing provision that

a specified proportion of the note issue should be held in reserve in the form of gold or sterling.

Recomrn .. endations Nos. (9) and (10 )-Powers of the Commonwealth Bank (para. 589) : 5. I am of opinion that the legislation on the lines recommended by the Commission should specify a maximum deposit to be lodged

by the trading banks. Th e uncertainty as to possible requirements

1825

270

DrsSEN'l' AND RESERVATIONS BY MR. Prr·r.

may cause some restriction of advances by the trading banks. Pro­ vision should at least be made for r easonable notice in the ev ent of a decision to requisition.

Recom:mendation 1Yo. ( 15 ) -TTeas'u?·y-bills- Op en 111 arket ( para. 610): 6. I diff er from the view that the Common-vvealth B ank BhouJcl make t ests to ascertain the nature of the r esponse to an offer of

treasur y-bills on the op en market . I do not regard the Cornmon­ \ve alth Ban k as an experimental station. Experience gained at one offer might be little guide for a later offer. 'l1he volume of treasury­ bills is large, and ther e has been little evidence of the likelihood of a r egular demand for them. 'rhe present rate of discount for what iB practically a continuing loan does not appear disadvantageous to governments, and there seems little prospect of gain by open market t endering. It would be no advantage to governments to have it indicat ed that the tru e r ate in the public estimation was higher than

the p r esent regulated rate. ..A .. nd it is possible tha t a higher discount r at e might be followed by a general rise in interest rates.

H. A. PI'rT.

RESERVA'I'ION AND ADDENDA BY MR. J . P. ABBOTT. R ec mn mendapion ( 3) -·'Th e Commonwealth Bank Board (pa1·a. 576) : 1. \Vhile I am generally in agreement with the recom­

mendation that the limitation on the fi eld of choice of

directors of the Commonwealth Bank Board should be removed, I fe el that the Government should appoint one director 'vho

js resident in the State of vVestern Australia. After listening to the evidence given in Perth I have come to t he conclusion that th e

problems of that State are in many respects different from those in the eastern States. rrhe distance f r om the eastern States is so great that unless there· is direct r ep r esentation on the Bank Board for 'N ester n .Aust r alia its problems may not have due consideration given to them. Air travel has consider ably shorten ed the time for an

individu al to .travel from the west to the east ern States, so that ther e should be little difficulty for such a director to attend meetings of the Bank Boar d . \Vhile I agree that there should be no special r epre­ sent at ion of accredited inter ests I f eel that the members of the Board

should be chosen as widely as possible from men who are experienced in the problems of the major industries of Australia, and particularly the export ones . I think, too, that some of the members of the Board. providing they have the necessary qualifications, should be drawn from the ranks of younger men . I understand that this is the practice of the Bank of England.

271

RESERVATION AND ADDENDA BY MR. J. P . ABBO'rT.

The A1tstralian Sterling E xchange Rate (para. 527) : 2. W hile I agree with the policy of t he other

of the Commission that the Common wealth Bank should make its chief consideration the r eduction of fl uctuations in general eecmomic activity, and that as part of this policy the exchange rate would generally be kept stable, I disagree along with the

other members in the proposition put forward by 01 e witness that the exchange rate should be kept fixed with sterling and the economy made t o adjust itself to this fixed rate although not at all costs. My view is that the rate would generally be kept stable, but that it should

be used as a means to prevent either excessi·ve boom or depression con­ ditions overseas being carried into the Au[Stralian economy. Just as in the depression the high rate of exchange assisted t he export industries by sheltering them to some extent from the devastating fall in overseas

prices, so I think if the prices of exports are very high in those

markets and appear likely to remain so for some time then the

exchange rate should be lowered. This 1vould have two effects. Firstly, it would bring about some contraction of the Australian credit base, since the London funds of the Australian banking system would be brought into the accounts of the system at a lower valuation than with

a high rate. Secondly, it would act directly U J)Ol1 the export

industries by preventing unhealthy boom conditions from developing in them, and would tend to check an excessive rise in land values ;:md also very high valuation of many types of mining shares .

.Fixed and Long-ter-rn L ending-Jl!I ort gage Banking (pm·as. 569-571) :

3. 'l'he Commission has stressed the lack of facilities which exist, outside the metropolitan and long term borrowing. to add anything.

ar eas in Australia, for fixed term

\V"ith r egard to th is I do not propose

4. In the conclusions of our r eport, it is stated " that if the trading banks were enabled to transfer to a mortgage bank some of their present overdrafts, which are in the natur e of long t erm loans, an (1 take in exchange the mortgage bonds issu ed by the mortgage bank,

the position of the trading banks themselves might be strengthened".

I desire to amplify this statement.

5. There was a gener al concensus of opm1on among the bankers who gave evidence before the Commission, that "the banker mu st keep his funds liquid, and the only way to haYe t hose funds liquid is to have them at call ". Although the trading banks hold this

opinion, and subscribe to it by making all their advances repayable on demand, the fact is that a large proporbon cannot be so r epaid

272

RESERVA'fiON AND ADDENDA BY MR. J. P. ABBOT'!'.

because very many advances are used to purchase land in towns and in rural districts, and r epayment could only be effected by realization of the properties. In times of depr ession even this might not produce sufficient cash fo r the purpose.

6. The following extracts from the evidence of two general managers of banks in diffe rent States illustrate this practice:-* ( 1) " Do you make lo ans on lan d ?-Yes . 'ro buy properties?-Yes, to purchase properties.

Do you consider that is a sound policy?-We consider that land is a prime security. t ( 2) As to the funds you lend on farms, pastoral properties, and leasehold lands, would you lend a man additional

funds to buy another property, if you thought it was a good business proposition?-Yes. We are doing that nearly every week. It is part of our definite policy to do that in this State. Do some · of these farming loans run for years and

years?-Yes, for 10, 15, and 20 years, gradually working down, or sometimes up and down with a certain amount of elasticity.

Although they are ost ensibly loans which are on call, in practice they are long-term loans ?-Yes. Is it a f unction of banking' to lend on long terms on land ?-No."

7. 'l1 he banks' practice of lending money repayable on demand against land and fixed assets seems to have arisen in the early days of .Australia. 'rhe reasons given fo r it by another banker were as follows:-" I think it is something more than tradition, and arises from the necessity that existed in the early history of Australia when the banks found it necessary t o len d against land, which really is against the canons of banking in highly developed countries such

as England for example".

8. '110 the question, "Is the practice not peculiar t o Australia," he replied "Yes ".t

9. Although this method of lending has continued since the days of Australia, I think the trading banks might now consider whether it is not des irable t o incr ease the liquidity of their assets.

• See E vidence, page 340. ·r See Eviden ce, page 518. :1: See Evidence, page 400.

273

RESERVATION AND ADDENDA BY MR. J. P. ABBOTT.

But before giving my views on this, I would like to compare Aus­ tralian banking practice with that of England in the matter of advances to t he pastoral and agricultural industries. The two following tables illustrate the comparison:-

THE REPORT OF THE COMMITTEE ON FINANCE AND INDUSTRY {1931) (THE MACMILLAN REPORT). T .A,BLE 8.

Londo,. Clearing Banks an·d Sco ttish Banks.- Olassification of Advances on Various Dates from 22nd October, 1929, to 19th March, 1930. London Clearing Banks. £

Agriculture and fishing . . 68,630,4 71

Representing 6. 9%

of total advances under all categories 987,7ll,B44

TABLE 10 OF THIS REPORT.

Scottish Banks. £

7,623,448 7.2% 105,179,031

Classification of Advances of AustmUan Trading Banks, 1936. £

.Agricultural and pastoral industries . . 125,048,000 representing 47.7% of all advances.

Total advances under all categories . . 262,233,000

10. It should be remembered that, although there is a great deal of difference between the conditions and circumstances in the two countries, yet agriculture is Britain's third most important industry. After making all allowances the tables show that the Australian banks lend relatively to a much greater extent to the pastoral and agricul­ tural industries than do the English banks.

11. Another factor affects the position of the Australian banks in comparison with the English ones. We have pointed out in our Report that in 1936 the advances of the Australian trading banks represented 67 per cent. of their total assets, while in England for the same year, the advances of the "Big Five" represented only

35 per cent. of their t otal assets. Put in another way, 33 per cent. of the total assets of the banks in Australia is held in cash reserves and investments, while in England the "Big Five" hold 65 per cerit. of their assets in this manner. The differen ce between the Australian banks and the English ones, to use a military expl- ession, is that of a heavily fortified shallow front as contrasted with a defence by depth. 'rhe Australian banks hold a higher per centage of cash r eserves than

the British banks, but the latter hold a far higher percentage of investments. 12. The results which follovv from the Australian practice are, that whenever the banks :find their cash reserves being depleted, they put

up the r ate of inter est o:p_ their advances in order, as one banker put it, u to warn their customers", and they must call on their borrowers to reduce their advances. Both actions impose a strain on the com ­ munity which causes shocks throughout the whole economic structure.

F.2581.- 18.

'1829

274

RESERVATION AND ADDEN DA BY l\1R. J. P. ABBOTT .

.For the banks, the position becomes dangerous if the cash reserves are greatly r educed, as the advances are not liquid, and are very hard to realize in a time of stress. This ·is clearly shown in our

Report in the se ction headed "Bank failures " with regard to the Primary Producers' Bank of Australia. No matter how good the advances on land may be, unless ther e is an orderly r eaLization, in a time of str ess, the banks would stand to make heavy losses.

13. There are not the avenues for investment by banks in Australia that exist in England, but the position here can be remedied t o a very large extent if the banks adopt the recommendation-s in our Report with r egard to mortgage banking. If a trading bank were to form i ts own mortgage bank and is sue bonds against the mortgages, the bank could transfer a large percentage of its advances t o its mortgage bank, and invest a corresponding proportion of its funds in the bonds of the mortgage bank. These bonds would be negotiable securities, and therefore a more liquid form of investment than t he present advances. The issue of bonds would also enable many of the institut ions which do not lend in rural areas t o do so safely, and to avoid the worry and cos t of policing their loans.

14. If conditions became difficult, the central bank would be able to assist any trading bank by buying some of its investments held in the form of mortgage bonds. · On the other hand, by buying or selling mortgage bonds, the central bank would have additional

powers to control fi xed term rates of interest should it desire those rates to change. 15. The trading banks ar e ideally situated to operate mortgage banks through their 2,352 branches in Australia. I believe that t he present position is rather too much one of borrowing short and lending long, and that it would be better both fo r the banking system and fo r the people of Australia if this were altered.

J. P. ABBOTT.

275

SUMMARY OJt' RECOMMENDATIONS. C0)1MONWEAUl'li BANK .

(a) Directom te.

(1) The Governor should be Chairman of the Board by vir tue o.Z his office '" and should possess qualifications and recJive a salary commensurate with the importance of the office. The appointment of the Governor should not be made on the basis of seniority, nor is it even essential that he shoctld already be in the service of the Bank. (Para. 576.) (2) The six Directors other than the Governor and the Secretary

to the Treasury should be appointed for a term of six years instead of seven as at present, one should retire each year, and be eligible for re-appointment, but provision should be made that no director shall continue to hold office after reaching the age of '70 . (Para. 576 .) (3) The limit ation on the field of choice of directors in Section

1l (2) ( b) of the Act should be removed. The :members of the Board should be selected for capacity and diversity of experience and contact, and not as representatives of special interests. (Para. 576. ) ( 4) The '' Commonwealth Bank Act 1911-1932, '' Section 12 s

which provides that there '' shall be '' a Board of Advice in London, should be made permissive. T,his · Board not at present constituted, and there seems to be r.to

necessity for such a Board in present circumstances. (Para. 576.) ( b) Sav·ings Bank. (5) The provision in the Commonwealth Bank Act, Section 35E,

for the separate control of the Commonwealth Saving-s Bank, should be r epealed. (Para. 578. ) (6) Power should be given to the Commonwealth Savings Bank to make deposits with trading banks if the Board so

chooses. (Para. 578.)

(c) lVo te Isstte R esen-c.

(7) The statutory provisions which require the Commonwealth Bank to hold gold or sterling- in proportion to the amount of Australian notes on issue should be repealed. ''' (Para. 580. ) (8) The note issue should be limited by law to a fixed maximum

(for example, £60m.) ·subject to the rig·ht of the Bank to exceed the maximum by a stated amount (for example £10m.) with the consent of the Treasurer.* (Para.

580. )

• :\IRj orftr dec isi cHI.

276

SUMMARY OF RECOMMENDA'.riONS.

(d) Deposits by Trading Banks wdh Comnwnwealth Bank. (9) The Commonwealth Parliament should legislate to provide that the Commonwealth Bank Board, with the consent of the 'I'reasurer, may require every trading bank to keep

with the Commonwealth Bank a deposit of an amount not less than a percentag·e, specified in the requisition, of the liability o:f thaJt bank to its depositors in Australia.':' (Para. 589. )

(10) Each trading bank should be required to keep on deposit the same percentage. The Board should have power at j.ts discretion to vary the percentage from time to time within the limit fixed by the consent of the rrreasurer. (Para. 589.)

(11) The authority to r·equisition should not remain in force for more than six months after the consent of the Treasurer has been given, but the Treasurer should have power to consent to its extension for a further period not exceeding twelve months. In any period of two years the power should not be exercised for a longer period or periods than eighte·en months. (Para. 589.)

LoNDON FuNns oF '.rHE AusTRALIAN BANKING SYS'l' EM.

(a) Commonwealth Barnk)s

(12) A new Exchange Mobilization Agreement on the lines suggested, binding for a period of years, should be entered into between the Commonwealth Bank and the trading banks.* (Para. 597.)

(b ) P'Ublication of Amount of these Funds.

(13) The aggregate figures of the London funds of the banking system should be published regularly. (14) The figures should not be published until at least six months after the date to which they relate.* (Para. 599.)

TREASURY-BILLS.

(15) The Governments and the . Commonwealth Bank should explore the possibility of establishing an open market for treasury-bills by way of regular offers of bills for public tender. * (Para. 610.)

* Majority decisi on.

277

SUMMARY OF RECOMMENDA'I'IONS.

REJJATIONS BETWEEN GovERNMENTS AND THE CoJ\1MONWEALTH B ANK.

There should be some permanent machinery for the Loan Council which would enable the Loan Council, Common­ wealth and State Treasuries, and the Commonwealth Bank to establish and maintain close contact with one another.

(Para. 611.)

PREVENTION OF BANK FAILURES.

(16) I n the public interest the Commonwealth Bank shm.1ld take control of the aff airs of any bank which is unable t o meet its immediate obligations, and should he given any addi­ tional powers which it may requir e for this purpose. (Para. 617.)

STATISTICS.

(17) The Co:rmnonwealth Bank should be given statutory power, similar t o that of the Commonwealth Statistician, to obtain statistics which it requires for its purpos·es as a centr al bank, and it should take steps to obtain such statistics.

(Para. 619 .)

(18) The Commonwealth Bank should publish a monthly bulletin containing such statistics as the Board fit, together

with . explanatory comment, and other information and advice which ma.y be of value to the public. (Para. 619. )

DISTRIBUTION OF CRED['l'.

(19 ) I n order to promote a wise distribution of credit the Common­ vvealth Bank should equip itself with all possible facilities for ascert aining economic t rends in Australia and abroad, 80 that it can advise trading banks as t o the directions in

which it is desirable in the national interest that advances should be made. (Para. 621 .)

T RADING BANKS.

(a)

(20) I n addition to any accounts requir ed by the law of the

country or Stat e in which i't is incorporated, every bank sh ould supply, to a prescribed authority, accounts relating to-( a) Its liabilities in Australia and its liabilities elsewher e

than in Australia incurred in respect of its

Australian business. ( b ) Its assets in Australia and its ass·ets out of Australia in respect of its Austr alian business.

278

SUMMARY OF HECOMMEN DA

(c) Its liabilities elsewhere than in Australia and its assets elsewhere than in Australia, either case not being in respect of its Australian business, either in detail or in an aggregate amount. (d) Its capital, reserves, and undistributed pr ofits, and (e) A profit and loss account. (Para. 631.)

(21 ) Such accounts should be in a form to be prescribed, by

legislation or regulation made in accordance ther ewith, and should in the case of the balance-she·et be made up as at the date prescribed and in the case of the profi t and loss accou nt cover the period prescribed, and insofar as the par ticulars relate to its Austr-alian business shall be expressed in Australian currency. Where an item is not expressed in Australian currency, the nature of t h e

currency used should be indicated. These accounts should be published in the " Common­ wealth Gazette.'' (Para. 631. )

( b ) D1:s closwr e of Profits.

(22) (a ) Before arriving at the profits of any accounting period, the directors should be entitled t o make reasonable provision for debts which are doubtful, and inwrest which may not be received, without disclosure except in the circumstances referred to in (f), provided that such provision does not exceed the amount r equired to cover the anticipated losses under these headings. ( b) If the directors de8ire to make any additional provision

for either of these purposes, or f or other contingencies, such additional provision should be made out of disclosed profits, as is the present practice of one of the -trading banks. (c) Provision for depreciation of pr emises or to write

down the value ·of pr emises or for depreciation of investments should be made out of disclosed profits. (d) Transfers from inner reserves to the credit of the profit and loss account during the accounting period should

be disclosed. (e) The existence of inner r eserves should be indicated in a similar manner in the accounts of all the banks. (Par a. 650.) (f) (Note.-These recommendations are subject to our

further recommendation, included in '' Banking legis­ lation ", that the Treasurer he given power to direct the Auditor- General to investigate the ' affairs of any bank.)

279

SuMMARY oF RECOMMENDA'l'IONS.

(c) Regulat·ion of Profits.

If trading· banks' profits are found to exceed what may be regarded as a fair return for services rendered, the Govern­ ment should consider whether these profits should be regulated or limit·ed.* (Para. 653.)

(d) Statistics.

(23) The Commonwealth Statistician should obtain from the trading banks, and publish, statistics covering at least-(a) monthly averages of assets and liabilities within Australia, analysed in more detail than the exist­

ing quarterly averages, e.g., showing separately treasury-bills, deposits with Commonwealth Bank, and advances; (b) monthly totals of debits to customers' accoun-ts

within Australia ; (c) monthly figures of assets and lia,bilities outside Australia, in respect of Australian business (subJect to our recommendation relating to the

publication of London funds); (d) an annual analysis of total advances vvithin Aus­ tralia, classified according to industries. (Para. 656.)

BANKING LEGlSLATION.

(24) The enactment by the Commonwealth Parliament of banking legislation upon the following lines:-(a ) Prohibit any person, firm, or company, from carrying on the business of a bank without licence or

authority from the Treasurer of the Com mon­ wealth. For this purpose, include any cheque­ paying bank or savings bank and any branch established in Australia by any bank founded

elsewhere; but exclude any State bank which does not extend beyond the limits of the State concerned. (b ) In the case of any institution carrying on the busi­

ness, when the Act comes into force, provid-e for the authority being given, in the first instance, as a matter of right.

• Majority d ecision.

280

SuMMARY oF .RECOMMENDATIONS.

(c) Give discretion to grant or refuse any application to establish a new business, but prescribe conditions (a) as to capital, in the case of a company

wherever formed, and ( b) as to registration of an attorney, and of the constitution, in the case of any company fonned outside Australia. (d ) Define ' ' trading bank ' ' and '' savings bank '' by

reference to schedules of the existing institutions, but provide for additions thereto by proclama­ tion. (e) Prohibit the use of title '' bank '' except

(i) State banks and trading or savings banks authorized under the Act ; or (ii ) other banks with the consent of the

Treasurer.

(f) Provide, in the case of trading banks, for-(i ) Minimum deposits in the circumstances and in the manner recommended."' (ii) Publication of annual accounts and balance­

sheets in the form prescribed by the Act or by regulations. (iii) A statutory declaration in the form

prescribed.

(iv) Power to the Treasurer to direct the

Auditor-General t o investigate the affairs of any bank and to report upon such

matters as the Treasurer directs. (g ) Give the Treasurer power to withdraw the licence or authority · in the event of wilful or persistent . failure to comply with the provisions set out under

(f). (Para. 666.)

BANK CHARGES.

A comprehensive and systematic revision of charges by banks for the collection of cheques and on drafts within the Commonwealth is considered necessary. (Para. 667.)

Cr,EARING PooL.

If continuance of the guarantee provided by each bank by way of a deposit of notes, against default in settlement of clearing balances, is considered necessary, it is thought better that the guarantee should take the form of deposits

with the Commonwealth Bank, which would allow of a , reduction in the note issue. (Para. 668.) •Majority decision .

281

SuMMARY oF RECOM:MENDA'l'IONS.

NATIONALlZA'fiON OF BANKING.

The most desirable banking system in the present circum­ stances of Australia is one which includes privately-ovmed tr ading banks. The system contemplated is one in

which-!. a strong central bank regulates the volume of credit and pays some attention to its distribution; II. the distribution of credit is left to privately-owned

t rading banks, working for profit, but regulated in the manner already (Para. 669. )

SAVINGS BANKS.

(26) The savings banks should consider the desirability of lower­ ing the maximum amounts on which interest is paid for deposits at call or very short notice, and of encouraging the COJ1Version of any excess over this maximum into fixed

deposits with themselves. (Para. 671 .)

'l'HE SAVINGS BANK OF SouTH AusTRALIA. (26) The Government of South Australia should consider the question of an amendment of the State law for the purpose of-

(a) g·iving the 'I'rustees of the Savings Bank of South Australia a wider discretion over the allocation of the profits, and (b) authorizing them to declare a current rat€ of

interest. (Para. 673.)

MoRTGAGE BANKING.

(27) A mortgage bank or mortgage banks should be established to pr ovide facilities for fixed and long·-term lending·. (Para. 681. )

CAPITAL FOR SMALL SECONDARY INDUS'rRms .

(28) The Governments, with the assistance of the Commonwealth Bank, should investigate the problem of setting up institu­ tions to supply the needs of small concerns in secondary industries. (Para. 687. )

DECIMAL Com AGE.

(29) A system of de cimal coinage should be introduced based upon the division of t he Australian pound into on·e thousand parts. (Para. 689. ) M INTS.

(30) The Commonwealth should take over from the States of Victoria and Western Australia their interests in the Mints. (Para. 691. ) •Majority decisi on .

------- ..... .. _.,.,

•.

APPENDICES.

284

APPEND ICES-CONTENTS.

A. TABLES.

l. Commonwealth Bank-Liabilities and assets within Australia-Quarterly averages, 1926-1936 2. Commonwealth Bank-Assets and liabilities in London-Quarterly, 1926-1936 3. Commonwealth Bank-Advances within Australia-Classification'according to

industry . .

4. Commonwealth Bank--Fixed deposits-Classification according to term, 1927-1936 5 . Trading Banks-Liabilities, assets and ratios-Quarterly averages, 1926-1936 6. Trading Banks--Liabilities, assets and ratios-Monthly averages, 1935-1936 7. Trading Banks--Assets and liabilities in London in respect of Australian

business-Quarterly, 1926-1936 8. Trading Banks-Assets and liabilities in London in respect of Australian business-Monthly, 1935-1936 9. Trading Banks-Interest--Average rates on advances and deposits 1926-1936 10. Trading Banks-Advances within Australia-Classification according to

industry . .

11 . Trading Banks-Advances-Classification according to rates of interest, 1927, 1931, 1935, and 1936 12. Trading Banks-Advances--Classification according to rates of interest, 31st December, 1936 13. Trading Banks-Deposits, interest-bearing-Classification according t o term,

1926- 1936

14. (A) Trading Banks--Deposits, interest-bearing-Classification according to size, 1926-1936 (B) Banks-Deposits, not bearing interest-Classification according to size, 1926-1936 15. Trading Banks-Deposits, interest-bearing-Classification nccording to rates

of interest, 1926-1936 16. Trading Banks-Deposits, interest-bearing-Classification according to rates of interest, 31st December, '1936 17. Commonwealth Bank and Trading Banks-Bank clearings and bank debita--­

1935-1936

18. Note Issue-Holdings by banks and public, 1926-1936 19. Commonwealth Bank and 'I'rading Banks- Gold and London fund.B-· Qua.rterly, 1926-1936 20. All cheque-paying banks-Liabilities and assets within Australia, 1901- 1936 . . 2 1. All cheque-paying banks, excluding the Commonwealth Bank- Liabilities

and assets within Australia, 1901-1936 22 . Bank deposits in Australia, per head of population, adjusted for changes in price levels, 1901-1936 23. Savings Banks-Liabilities and assets, 1926-1936 ..

24. Savings Banks-Various classes of assets-Ratios to total assets, 1926-1936 25. Savings Banks-Mortgage loans-Rates of interest charged, 1926-1936

Banks-Deposits-Rates of interest allowed, 1926-1936 ..

28. Savings Banks-Deposits--Classification according to size, 30th June, 1936 .. 29. Savings Banks-Deposits-Classification according to size, at 30th June, 1928, 1934, and 1936 ..

30. Four State Savings Banks-Deposits- Classificat.ion according t o size, 1926-1931 31. 32.

33. 34.

Savings Banks-Branches and agencies, 1926-1936 (A) Trading Banks-Amounts of coin, n otes and cheques paid into- Week ended 25th July, 1936 . . . . . . . .

(B) Savings Banks-Amounts of coin, notes and cheques paid into--Wook ended 25th July, 1936 . . . . . . . .

(C ) Trading and Savings Banks-Amounts of coin, n otes and cheques paid into-Week ended 25th July, 1936 (D) Trading and Savings Banks-Amounts of coin, notes and chequea paid into-On nine specified days Australia-Value of exports, 1901-1936 .Australia-Value of imports, 1901-1936

PAG E

286 290

292

293 294 302

310

312 313

31 4

315

31 7

318

319

320

321

322 323

324 326

328

330 332 334 335

336

339

340

341 342

343

344

345

346 347 348

285

APP:ENDIOES-CONTENrs-continuP.d,

35. Australia-- Population, 1901- 1936, and urban and rural distribution-By States, 1901-1933 350

36. Australia-Population-Distribution according to industry, 1901-1933 349 37. Australia-Value of production, 1901- 1935 352

38. &c., of selected item'l, 1901-1936 . . 354

39. Trading Banks-Shareholders' funds and total liabilities to t he public, 1892-3 355 40. Trading Banks-Capital, &c., written off as result of crisis in 1893 . . 35.6

41. Trading Banks-Deposits of banks which suspended payment in 1893, and how dealt with 357

42. Trading Banks-New capital issues- Individual banks, 1893-1936 358

43. Trading Banks-New Capital issues-By years, 1893-1936 359

44. Trading Banks-Net cash additions to shareholders' funds, 1893-1936 360 45. Trading Banks-Analysis of reserves-I ndividual banks, 1893-1936 361 46. Trading Banks-Analysis of reserves-By years, 1893-1936 362

47, Trading Ba:uks-Aggl·egate profits, and how applied, 1893-1936 363

48. Trading Banks-Shareholders' funds, capital used, profi t s earned, and dividends paid, 1893-1936 . . 364

49. Trading Banks-Allocation of profits, 1893-1936 . 366

50. Trading Banks-Percentage allocation of profits, 1894-1936 368

51. Trading Banks-Analysis of capit al structure, 1936 370

52. (A) Trading Banks--Summary of liabilities, 1936 371

(B) Trading Banks-Summary of assets, 1936 . . 372

53. T rading Banks-Amalgamations, 1893-1936 373

54. Commonwealth Bank of Australia-Liabilities and assets, 1913-1936 3H 55. Commonwealth Bank of Australia-Profits and allocation, each department, 1913- 1936 376

56. Commonwealth Savings Bank of Australia-Summary of balance-sheets and profit and loss accounts, 1928-1936 . . 377

57. Australia- Overseas trade, 1926-1936 . . 378

58. Australia-Commonwealth and State-Net expenditure on works, &c., from loan funds, 1926-1936 378

59. Commonwealth Government securities in Australia- Average yield, 1928-1936 379 60. Australian Treasury Bills--Holdings, 1929-1936 379

B. GRAPHS.

Trading Banks-Deposits and advances, 1926-1936 Trading Banks-Cash reserves-ratios to total deposits, 1926-1936 Australia price index numbers and average wage rates, 1926-1936 Unemployment-Trade union returns, 1926-1936

380 381 382 383

C. WITNESSES ; AND OTHERS FROlVI WHOM STATEMENTS WERE H.ECEIVED. List of Witnesses who appeared before the Commission . . ·. . . . 38-1

List of Individuals, other than those who appeared before the Commission, from whom statement s were received 388

T.4.DL:t

I.-CoMMONWEALTH

BANK

OF

AusTRA.LIA.

.-NoTE

IssuE

DEPA.R

' l'M

ENT

AND

GENERAL

BANKING

DEPARTMENT

'.rAKEN

LIABILITIES

WITHIN

AUSTRALIA.

QUARTERLY

AVERAGES

OF

WEEKLY

]'IGURES. Uabilit

ies .

Quarter

Ended

.

Special

I Deposits

Rearing

Interest

. Deposits

Not

Int .erest.

Notes

R es erve

Other

Tot

al

in

Premium

I

I

Liabiliti es.

Circulation. on Gold Govern-

Others . *

Govern·

Trading

I

Oth

e rs . •

Sold .

ments. ments.

Banks.

£'000. £'000. £'000. £'000.

£'000.

£'000. £'000. £'000.

£'000.

1926-March

..

.. ..

53,890

..

2,269 6,946

10,493

5,237 6,879

630

86,344

June

/

.. ..

53,890

..

2,284 7,135 16,216 6,044 7,142 517 93,228

September

..

..

51,506

..

1,906

7,238 10,879 6,394 7,013 367 85,303

December

..

..

49,890

. .

1,432 .

8,078

9,959 6,902 6,595 443 83,299

1927-Ma.rch

..

.. ..

50,008

..

1,469 7,741 8,611 7,847

7,405

395 83,476

June

..

. .

..

48 , 393

..

1,324 7,843 12,798 7,305 7,637 525 85,825

September

..

..

48,393

..

1,237 8,336

ll,093

8,723 7,406 415 85,603

December

. . ..

48,762

..

1,166

9,096

8,512 10,555 7,748 747 86,586

I

1928-March

..

..

. .

47,322

..

1,423 9,393 9,596

12,706

7,757

503 88,700 Ju,ne

. .

. .

44,806

..

1,536 9,434

7,002 12,054 7,900 500

83,232

September

..

..

44,297

..

1,497

9,907

ll,759

9,732 8,636

598

86,426

December

..

..

45 , 641

..

1,257

ll,232

I

7,406

12,498 8,789 792 87,615

1929-March

..

.. ..

46,095

..

1,462 12,033 6,662 14,196

9,990

919 91,357

June

..

.. ..

43,101

..

1,249 11,765

8,086

9,225 9,393 415 83,234

September

..

..

41,836

..

1,350

12,835 8,376

7,509

8,721 431 81,058 December

..

..

43,212

..

1,057

13,119

6,980

8,413 8,473 527 81,781

1930-Ma.rch

..

..

..

43,095

..

1,291

11,815

6,468 13,476 7,734 458 84,337

June

..

.. . .

44,567

..

1,271 11,819 4,862 16,938 7,417 449 87,323

September

..

..

44,772

..

1,363

12,088

4,975 15,666

I

330

85,824

December

..

. .

45,563

..

903

12,648

I,

121

20,824

6,526

634

88,219

t-:l (Â¥:! C)

li31-Maroh

..

..

. .

46,076

June

..

. .

49,730

Sep t

ember

. .

..

51,523

December

. .

..

52,400

10

32-Ma.rch

..

. .

. .

52,226

June

. .

..

.. .

52,015

September

. .

..

49,669

December

..

..

49,13 0

1933-Ma.rch

..

..

. .

48,092

June

.. .. ..

47,869

September

..

47,051

December

..

. .

47,609

1934-March

..

..

. .

47,282

June

. . . .

..

46,609

September

..

46,473

.

December

48 , 05 0

. .

. .

1936-March

. .

. .

. .

4 7 ,467

June

..

47,358

September

. . . .

47,045

December

..

. .

47 , 949

I

936-March

. .

47,410

June

.. .. ..

4 7 ,506

September

. .

47,039

December

. .

..

47,731

. .

737

13,057 1,330

29,716

. .

732

14,0 5 4 1,702

32,235

..

708

15,974 1,398 22,961

..

712 17,687 937 22,233

. .

672 25,58 2 1,136

32,100

..

365 26,245 1,487 29,119

522 322

26,902 1,031

21,878

649 291

28',940 1,001

23,189

719 312 29 , 869

1,003

25,578

3,667

2 , 230

30,858

1,114 2 3,553

3,895 2,268 29,733

1,082

22,612

3,895

3,099

29,137 1,643

25,059

3,895 2,294 25,572

880

30,875

3 , 895 2,487

26,103

3,823 38,367

3,895

3,430

27,534 1,775 36,559

3,895

4,803

28,259 1,527 31,358

3,895 6,628

27,099

904

26,140

3,895 6,136 27,407 2,554 23,682

3,895 5,973

25 , 303

1,031 20,536

3,895 7,256 2 4

,06 8

1,203 19,509

4,666 7,629 23,276

1,048

19,339

7,753

8,770

24 , 914 1,865 16,938

7 , 753 8,231 24

, 627 2 , 366 16,767

7,753

8 , 1 2 5

2,351 17,738

•

Including

deposits

of

savings bR.nks

and

of

qua.'ll·govarnment

boaie&.

6,577 493

6,726 455

7,415

409

7,994 466 7,907

723

7 , 121 714

4,781 1 , 339

5,089

448

5,248 672

5 ,

229

1,505

5,199 497

5, 597 261

8, 708

353

8,551

420

8 ,614 389 9,003 330 8,978

425

9,204

321

9 , 260

284

10,104

441

10,264 307 10 , 129

463

ll,997

312

14 , 085

515

I

97,986 105,634 100,388 102,429

120,346 117,066 106,444

108,737

111,493

ll6,025 112,337 116,300 119,859 130,255 128,669 127,225

121,536

120,557 113,329 114,425 ll3,939 118,338 ll9

,092

124,4 5 7

t..:l (X)

C/) CJ ,J

T.£.DLB

1.-CoWai

ONWEALTli

BANK

OF

AusTRALIA.-NoTE

IssuE

DEPART

ME

NT

AND

GENERAL

BANKING

DEP.A'B.TMENT

TAXEN

ASSETS

WITHIN

AUSTRALIA.

QUART E RLY

AVE

RAGES

Oll'

WEEKLY

FIGURES.

As s ets .

I

l

S ec uri t ies. A dv an c es ,

Di s coun t s ,

&c.

I

I

S tate

Comm o nwealt h

G overn -

Go v e r

nme

n t.

Q u a r-ter

end e d .

C o in

me nt

a n d

an d

Au s tr

a li a n

Qua s i -

I

Tot

a l

Oth e r

B ullion.

Not

es . Au s

tr a lia n

Mu n i cipa l

G o vern

-

Adva nces ,

Assets . Gov e rn-

and

B anks.

ment

O th

e r o .

Di scounts. m en

t.

Oth er . B o die s

Tr e a s

nr y

&c.

.

(Short

Bil!R.

O t h er .

Term Loans O n ly).

£' 0 00 . £'000. £ '000 . £'000. £ ' 000 . £'000. • £ ' 000.

I

£'000.

£ '000. £'000.

£'000 .

.

------'

l92 6 :_

Marc

h

..

34,241 7,4 58

27,440

..

72 11,859 11,931

3,589

Jun e

..

32,881 12,152 27,411

..

441

ll,908

12,349 3,642

September

26,494 9,5 6 0 28 ,635

..

95

ll,241

11,336 3,162

December

23,130 7,083 29,847

. .

96 12,134 12, 230 3,304

192

7-March

..

23 ,245 5,838 29,613

..

573 15,896 16,469 3,307

June

. .

23 , 1 6 1

7,010

28,359

..

573 15,599 16,172 3,514

.September

22,245 7,5 53

231

600

17, 88 3 1 8,483 2,742

December

21,873 5,911 28,015

305

1,396

19 ,09 7

20,493 2,239

1

928-Ma

rc h

..

22,540

4,024

29,645

300 303

22,184 22,487

2;008

June

..

23,044

29,789

300

128 15,527

15,655 • 1

1,977

September

23,228 4,626 28,41 2 132 . 26 15,466 15,492

1,8 7 0

De cem b

er

22,748

3,720

27,770

..

40

15,626 15,666

2,031

1()29-March

. .

23,218

4,619

26,615

..

!

139 19,371

19,510

1,965

June

23,276 · 4,216

26,526

..

935 14,222 15,157 1,822 .

September

24,460 4,166 26,891 226 416

16.081 16,497

1,714

Dece

mber

22,282

4,150

26 , 124 258

1,829 18,407 20,236

1,921

•

Tot

al

Assets .

£'000. 84,659 88,435 79, 1 87 75,594

78,47 2 7 8 ,216 79,967 7 8,836

81,004 75,192 73,760 71,935

75,927

70,997 73,954 74.971

00

00

1930-

M arch

..

June

..

i--::>

September

"'

December

. , 1931-M

a rch

..

June

. .

September December

1932

-Ma

r ch Jun

e

..

September Dec

ember

1933-

March

..

Jun

e

S epte

mbe

r

December

1934-

Marc h

..

Jun

e

September December

193 5 - March

June

..

September December

193 6-March

..

Jun

e

..

S ept

embe

r

D ecem ber

23,573

4 , 9 4 0

25,946 2 42

I

1,0 89 20 ,7 9 7

21,886

I

1 ,9451

22,175 5 , 744 25 , 848 23 9

I

1 38 15 ,2 9 3 15,431 · 1 ,9 4 8

21,068

6,894

26 , 526 389

..

1 2 ,83 6 12,836 1 ,882

16,889

6,058 26,800

389

44 6 1 4 , 23 7 14,683 2 , 749

,--

16,314

6,050 28,015

389 27 2,649* 6,921 2, 1 75

1

11,797 23,569 2,515

15,876 4 , 136 27,778 389

..

4 ,051

15 , 409 918

I

1 2,02 3 32,40 1

2,225

12,668 4,039 27,952 295

..

4,786 1 0 , 281 681 12,423 28,171

2,027

1 1 ,233 5,633 29,988 469

..

3,440

7,381 323 11,184 22,328 2 , 411

11,23 9

5,712 1 2 9 , 60 9

9,899

..

3,085

7,311 3 15

10,220 20,931

3,291

11,419

6,02 8

28,790 9,734 4

2,706 5,809

325 9,687 18,531

4,0ll

9,852 6,531

!

28,597 9,625

. .

2,913

7,4ll

57

6,417"1"

16,798 2 , 341

9,346

5, 771

27,689

10,153

. .

2,137

6,770

1 25

6,109

15,141 2,569

8,722

5,290 27,208

9,4 15

..

1,650 10,160

344

6,80 8

18 ,96 2

2,097

1,670

5,602 25,959 8,928

. .

1,201

ll,212

15

6,050 1 8,4

'78

2,242

1 , 378 5 , 347

I

2 7,69 4

I

8,968

..

1, 250

8,939 17

5,60

1'

15,807 2,095

1,283

4,70 5

27,2 16

I

8,889

. .

1,175 11,822

. .

5,323

18,320 1,940

5 ,230

I

1,325

27,1

8,898

. .

1,247 9,224 87 5,871 16,429 1,847

1,345 6,387 27,726 8 ,895

. .

1,080 8,032

. .

6;206 15,318 1 , 866

1,334

5, 9 00 2 7, 670

8,836

. .

460

9,929

54

6,173 16,616

1,810

1 ,22 7

5,070

27,221 8,861

..

132 12,822 43 6,08 7

19 ,0

84

1,777

1,3 521

5,384 27,464 8,983

..

170 13,403

346

6,8531

20,772 1,870

1 ,3 20

5,0ll

27,33 9 8,977

30

178 12,932

..

I

6,659 19,799 1,91 8

1,336 5,557 27,484

9,106

286 218 11,985 46 7,169

19,704

1,769

1,241

4,710

27 ,177 8,926

7 54

245 13,246

. .

7,465

21,710 2,209

1,025

4,8 57 27,187

9,033 90

421 13,283 99 8,217

22,110

1,899

1 , 423

5,185 27,188

9,008

346 1

189 12,963

20

8,524

22,042

1

2,107

1,470

5,354

I

27,705 8,9 13

140

154

14,6891

..

8 , 894 23,877 1,891

I

1 ,376

4,310

27,806 8,57 6 125 18 , 728

..

8,94 8

27,801

2,169

I

I

----

*

Prior

t o Mar c h

Quarter,

19 3 1,

it

is not

poss ible

to

separate

Advan

ces, &c.,

to

G overn

me nts

from

Other

Adva

nces,

&e .

"f This

fall

in

bal ances

i s dn e

to

a c

han

ge in

system

whereby

credit

balances a llowed

as set-

off s

are

deducted

f r om

the

gross

advance

s.

78 ,53 2 71 , 3 85 69, 595 67 , 568 7 6,852 8 2,805

7 5 , 152

72,062

80,681

78,513 7 3,744 70,669 71,694 62,879

61,289 .

62 , 353 60t869 61,537 62,166 63,240 65 , 8 25 64,364

64,956 65 , 973

66,111 66,953

69,210 72,038

t..:l 00 (,!:

00 <"

v ··

TABLE

2.--COMMONWEALTH

BA

NK

oF

Aus'l'RA.LIA.

-NoTE

Iss

uE

D EPARTMENT

AND

GENERAL

BANKING

DEPARTMEN'l

'

TAKEN

TOOE'l'HER

.

ASSETS

AND

LIABILITIES

IN

LONDON.

(In

thousands

of

pou

n ds s

ter li ng).

I

I

gx c ess

of As

se ts

o ve r

Li i Lbilitie s .

A . ssets.

_

__

__

_

Date

.

--

I

Government

and

I

.

I

I

O f which:-

Munic i pal

I

::vron

ey at

Securiti e s.

D e posits

I

I

(Last

Mond a y in

Sh c

rt

C all

I

Total

Au s

tralian

mouth.)

on account

(in c lucling

!Government

A ll

Other

Tot

a l of

All

Other

Tota

l

Ex c e

ss of

Government

Briti

s h

Overdrafts . Ass e ts .

As s ets. Conve r sion Liabilit ies . Liabiliti es

. A ss

et s ov e r

and

Other("

Net

. '

Tr e asury

• Aust.ra l

hm

Ot he r I J oans.

lliunicipa l

L ondon

B ills).

Gove

rnm

ent

Govern -

Securities

a nd

Fu n d s

").

and

ment.

Govern m

ent

I Municipa l. Ov e

rdra

f t s .

£St

g .'OOO.

£Stg.'O

OO.

£Stg .

'OOO.

£Stg.'OO

O. £

Stg.

'OOO.

£Stg

. ' OOO.

£Stg.'OOO. £Stg.'OOO.

£Stg.'O

OO .

£

St g .'

OOO

.

£

Stg.'OOO.

£

(a).

(a).

(b).

·,

1026 -

June

. .

13,211

..

84 1,344 2,317 16,956

••

& •

7,062 7,0 62

9,894 1,344

8 , 550

Se ptember

13 ,246 . 244

3,506

..

1,355 1 8,35 1

. .

6 ,06 6 6,066

12, 285 244

12 ,04 1

December

1 2, 122 244 4,871

..

2,8 7 5 20 ,11 2

..

6,238 6, 23 8 1 3,874 244 13,630

I

192

7-March

..

9 ,82 8 244 4,871 296

2,702

17,941

..

6,194 6,194 11,747

540 11,207

June

. .

7,460

244 4,871

2,901

1,9 26 17,402

..

5,119 5,119 12, 283 3,1 45 9,138

September

11,844 244 4,871

. .

1 , 161 18,120

. .

8,040 8,040 10 ,0 80

244 9,836

December

13,837 244 4 ,8

71

1,631 2,511

2a, o 94

I

..

7,689 7,6 89 1 5 ,405 1,875 1 3,530

192

8-lVIarc

h

. .

12,021 244

4,0 8 6

1,236 2,512

20,099

..

8,237 8,237 11,862 1 , 480 10 ,382

June

..

16,092

244 3,823

760 1,308

22,227

..

9,147 9,147

1 3 ,080

1. 0 04 1 2,076

September

25,878

510

3,649

. .

708

30,745

..

7,805

7, 805

22,940

J

510 22 ,430

December

20,825

1,058

3,646

..

852 26,381

..

3,15 6 3,156 23,225

1 , 058

22,167

1929

-lVI

arch

. .

19,518 1,198 3,173

..

735 24 ,

624

..

4,329 4,329 20,295 1 , 198

19,097

June

..

18,923 1,133 3,173

. .

486 23,715

..

5,610

I

5 ,610 18,105

1,133 16,972

September

9,920 1,015

' 3,174 342 324 14,77 5

..

1,899

1,899 1

1 2 ,876

1 ,3571

11,519

December

10,825 1,015 1

3,174 3,867 317 19,198

. .

3,099 3,099

16,099

4, $ 82

11,217

I

to-:> 25

1930-March

. .

7,929

1,019 9,393

204

18, 545 I

4,087

4,087 1 4, 458

10, 412 1

June

..

10,79 4

1,014

15,61 3

410

27 ,83!

..

2,007 2,007

25 ,824 16,627

Septem

b er

6,084 1 , 014 16,6 83 2, 8 75 26,656

..

1,095 1,095 25 ,561 17,697

Decem

ber

12,0

61

1,014 18,865 210

32,150

..

2,755 2 ,75 5 29 ,395

19,879

193 1 -

Ma r ch

..

7,583 25.231 410 471 33,695

..

3,696 3,696 29,999 25,641

June

. .

8,43 2 25;822

. .

270 34,524

. .

4,027 4,027 30,497 25,822

Sept

e mber

6,4 87 3 1,4 4 0

. .

353

38,280

. .

3,321 3,321 34,959 31,440

December

1 3 , 885 31,613

. .

320 45,818

..

6,134 6 , 134 39,684 31,613

1 9 32-M

a r c h

22,075

31,613

1

811

54,499

..

4,754 4,754 49,745 31,613

June

..

1 5,227

31 ,613

..

. .

379 47,219

..

6,070 6,070

41,149 3 1 , 613

Septem

ber

I

15 , 707 3 1,168

..

265 47,140

..

3,65 2 3,652 43,488 31,168

December

20,251 3 1,2 84 272

51,807

..

5,076

5,076

46,731 3 1,2

84

1033 - Marc h

29,271 30,237

31 4 59,822 1,985 4,176 6,161 53 ,661 30,237

June

40,021

30 , 237 294 70,552 5,309 6,340 11,649 58,903 30,237

S

eptem

b er

40 ,379 30,339 393 71,111 6,534

4.350 10,884 60,22 7 30 , 339

D e cember

3 5 ,909 30,339

I

259 66,507 76

4:006

4,082 62,425

30 ,339 •

1934.

- M

arch

42,939

30,339 306

73,584 95 2,827 2,922 70, 662 30,339

Jun

e 48,164

30,339

..

324 78, 82 7 686

4,025

4 ,711 74,116

30,339

September

43,076 30 ,40 4

..

230

73,710

..

2,845 2,84 5

70,8651

30,404

December

35,814 33,204

..

. .

1,294 70,31 2 897 4,138

5,035

65,277 33,204

l93 G - March

. .

46,564

33 , 204

365

80,133

1 4,486 5,582

20,068 60,065

33,204

J

un e

33,31\.J

33 , 204

..

386 66,90 9

307

7 , 459 7,766 59,143 33,204

Se

ptemb

e r 28 , 545

32,954

:3 85

61,884 412 6,512

6,924 · 54,960

32,954

December

25,910 32,954

..

1,710 60,574

. .

4,547 4,547 56,027 32,95 4

1 93

6 - 1 viarch

. .

31,469 32 , 954

..

. .

438 64,861

5,805

4,217

10,0 22

54,839 3 2, 9 G 4

June

28,015

1

32,954

..

. .

1,17 5 62,144 946

I

5,330

6,276 55,868 32,9 5 4

September

27,690

32,905

. . . .

234 60,829

.407

1

4,268 4,675 56,154

32,905

D ec

ember

29,059

32,274

I

.. ..

411

I

61,744

6,190 6,190

55,554 32,274

J

I

---

( a)

Incl

ud ing s h o r t·t. e r m

d e b e n

tur e s

and

money

at

sho r t call

subst

itut

e d f o r Au s

tralian

Government securities

in

conn e xion

with

Conversi o n J

.o a n s.

( b)

In c ludin g

d e p

os i ts off se t

against

Australian

Government

;;cc uri

t i es

in

c onn

ex_ion

wj t h Convers i o n Loan s .

4,046 9,197 7,864 9,516

4,358 4,675 3,5 19 8,071

18,132 9, 536 12,320 15 , 447

23,424 28 ,6 66 29 ,88 8

32,086

40,32R 43,771 40,461 32,073

26,861 25,93H 22,006 23 ,073 21,885 22,9 14 23 .249

23:280

b!l co

· - ex )

292

•

'l'ABLhl 3.- COMMONWEAL'l'H B ANK OF AUSTRALIA .

CLASSI FICATION OF ADVANCES WITHIN AUSTRALIA AT 30TH J UNE, 1929, 1931, 1935 AND 1936.

I

- 30t h June, 30th J une, 30th Juue, 30th J un e, 1929. 1931. 1035. 1936.

£'000. £'000. £'000. £'000.

Government Accounts . . ... 903 .. . ..

Local Go vernment Bodies .. 4,192 6,851 2,875 3,161

Churches, Hospitals, Societies, &c. .. . . . . 471 385 427 515

Mining Interests .. . . 15 67 3 35

Graziers . . . . .. 65 306 205 292

Agriculturalists . . .. 912 1,804 1,378 1,726

Merchants and Storekeepers .. 2,082 2,042 1,765 2,544

Profess ions .. .. 422 452 536 652

Freeholders . . . . 710 501 792 1,092

1\fiscellaneous Companies and

Bodies .. .. . . 1,652 3,227 96 7 l,IIS

Other Advances .. .. 883 732 712 1,079

Total Advances .. ll,404 17,270

I

9,660 12,214

•

293

TADLE EA.L'l'H BANK OF AUSTRALIA.

CLASSIFICATION OF F IXED DEPOSITS L'l' AUSTRALIA ACCORDING TO TERM Of AND AVERAGE RATES OF INTEREST PAID ON FIXED

DEF

A . Govermn-.nt J!'ixed Deposits.

I

I I Average

I

'l'ot nl I Ha t e of

Date (end of 3 wonths . 6 12 lliOBt11S , 2 4 !ll OHthR. GoYermnent Interest morith). ·. Paid on F txcd. I Gover nm enL li' ixed Deposits. -£'000. £'000. £'000. £'000. £'000. per cent. June, 1927 .. .. . . . . I 520 5.00 June, 1928 . . .. 250 . . 770 4.68 June, 1929 .. .. .. . . 520 520 5.00 June, 1930 151 .. . . 522 673 . 5.04 June, 1931 . . . . .. . . 400 400 5. 25 June, 1932 .. .. . . . . .. .. . . June, 1933 .. .. . . . . . . . . . . June, 1934 .. 10 50 20 .. 80 2 .28 1934 4,010 210 20 .. 4,240 1.52 June, 1935 .. 2,750 200 30 .. 2,980 1.03 December, 1935 3,250 200 30 . . 3,480 1.03 June, 1936 .. 5,000 200 .. .. 5,200 i 1.97 September, 1936 5,300 I 210 20 .. 5,530 I 1. 98 December, 1936 .. 5,300 200 10 .. 5,510 1.98 I B. Private J!'ixecl Deposits. I Total A ver age lt ate of Privat,e Interest Date (end of 3 months. 6 months. J2 months. 24 months. Fixed !•aid on month). Deposit.<:; . :Pr ivate lfix ed Deposits . £'000. £'000. £'000. £'000. £'000. P er cent . Jun!l, 1927 .. 71 792 843 3,471 5,177 4 . 75 June, 1928 .. 493 112 1,072 4,811 6,488 4.82 June, 1929 .. 435 99 1,073 6,530 8,137 4.87 June, 1930 .. 801 328 1, 290 7,747 10,166 4 . 95 Ju}\e, 1931 · ·. 1,068 873 1,346 6,408 9,695 5.00 .Tune, 1932 .. 712 1,565 9,735 10,048 22,060 3.94 J'une, 1933 ,. 420 1,817 6,555 14,201 22 ,993 3.39 J une, 1934 .. 682 2,174 7,278 14,064 24,198 2.88 Dooeml.Jer, 1934 1,757 2, 195 7,338 15,009 26,299 2 .67 June, 1935 .. 782 1,046 6,346 14,912 23,086 2.57 1935 350 841 6,896 14,092 22, 179 2.51 June, 1936 .. 477 J,629 7,086 12, 149 21, 341 2.50 September, 1936 574 2,092 7,763 12,52 1 22,950 2.61 Decembor, 1936 825 2,238 7,768 12, 688 23,519 2.65 I

TABLE

5.-TRADING

BANKS(

1 )-AusTRALIA.-ExcLu:oiNG

CoMMONWEALTH

BANK

OF

AusTWALIA.

LIABILITIES(

2 )

WITHIN

AUSTRALIA.

Q U

ART

ERLY

AVERAGES

OF

WEEKLY

FIG

URES

(IN

THOUSANDS

OF

POUNDS,

AUSTRALIAN

CURRENCY).

8

9

10

11

Deposits

Bearing

Interest.

I

Deposits

Not

Bearing

Inter

es t.

I

No t e s (3)

ancl

I

Q.u a r

ter

Bnclecl-

Bills

in

Circulation

Govcrnmont. l

I

Totai.

I

I

ancl

Ba lances

I

I

T o tal.

due

to

Other

O t her.

I

Government. I

Other.

Banks.

I

(5

+

6)

£'000

.

£'000.

I

£'000.

£'000

. £'000. £ ' 000. £'000.

I

1926-March

_

6,800

9;536 133,752 143,288 1,293 114,687

ll5,980

June

..

6,560

9,141

138,049 147 , 190 1,340 109,653

ll0,993

September

6,396

8,869 141,548 150,417 1,272 102,539

103,81]

December

6,355

6,804

14 5,492 152,296 1,319

105,057

106,376

Total

Deposits.

Tot.nl

- ,

Total-.

I

Government

.

Other.

( 8

+

9) _

( 1

----

-

£'000.

£'000

.

£'000.

. £'000 .

10,829

248,439 259,268

266,068

10,481 247,702

258,183

264,7 4 3

10,141 244,087 254,228

260,62 - 1

8,123 250,549 258,672

265, 027

1927-March

. .

6,7 6 6 5,935 147,741

153,67 6 1

1,381 111,076

I

ll2.4

57

June

..

6 , 287 4,951 148,830 153 ,78 1 1,059

108,536

109,595

September

6,412

5,060 1fl2,305

157,365 1,391 99,712

101,103

December

6,652 4,645 154,459

159,104

1 , 419 102,899

104,318

7 ,3 16 258,817 266,]

272 , 899

6,010

257,366 263,376 269,663

6,451

252,017

258,468

26 -!,880

6;064

257,358 263,422 .

270,074

19

28-::VIarc

h

..

6,175

5,054 157,634

162,688 1,413

ll1,233

112,646

June

6,38 9

4,864

159,655 164,519 1 , 568 107,379 108,947

September

5,852

4 , 200

159,972 164,172

1,402 101,305 102,707

December

5,68 0 5,090

163,980

169,0 7 0 1,490 104,645

106,135

......

6,467 268,867

281,509

6,432

267,034:

2n,4M

279,8!15

I

fi,G02

261,277

2611,879

272,731

6,580 268,625

27 [)

,205 280,885

1 9 29-Ma

r c h

. .

6, 11

5

6,033

1 68,108 174 ,

14-1

1,692

111 ,

261)

'

] 12,957

June

..

6,260 5;748

171 , 196 1 7 6,944 1,468

1 06 , 041 107,609

S e ptember

5 , 565 5,204 1 72,467 1 77,671

1,392 98,09.5 99,487

December

:

5, 7 34

3,487 174,915 178,402 875 95,903

I

96,778

7,725 279,373

2R7,098

7,216 277,237

284,153 2 90 , 713

6,5 9 6 270,5G2

2'77 , 158

282,723

4,362

270,818 27fi,l80 280.914

"""

•

..

5,317 4,041

17] ,631 17 5 ,672

1,210

I

95,371 96,581

5,251 267,002

June

5,7 1 0

3,783 172,763

176 , 546

1,137 88,249 89 , 386

4,920

261,012

Septembe

r 4,412 3,755 173,723 177,478

1,015

81,346 82,36 1

4,770

255,069

December

4,823 2,71 3 174,810 177,523 957

82,232 1

83,189

3,67 0 257,042

272,253 277,570

265,932 ' 271,642

259,839 264,251

260

,712

265 , 535

1931-March

4,089 2, 220

174,832

177 , 052 1,030

82,48 3 8 3,513 3,250 257,315

Jun

e 3,987

1,924

17 6,182 178,106 1,141 79,467

80,608

3,065 255 , 649

Sep

tembe

r 3,489 1,358 17 5 ,650

177,008

885 7 6 ,656 77,541 2,243 2.52,306

December

3,882

1,057

1 79,567 180,624

907 85 ,733 8fi,640

1,964

265,300

260,565 264,654 258,714

262 ,701

254,549 258,03 8 267

,264

271,146

1932-March

3,694

1,fifi.5

187,R33

189.388 979 90,836 91,815

2,,1)34

278,6 6 9

Ju ne

3,642

1,042

188,425 1 89,46 7

1,059

85,588 86,64 7

2,101

274,013

Sep

tembe

r 3,511 1,3 73

183,808 1

8fi,l8

1

819

81,069

81,888 2,192 264,877

December

3,865 1,532

l8 f>,

34 0

1 86,8 72

850

85 ,!)

68

86,8 18 2,382

271, 3 08

281 , 203

28 4, 8 97

276,

11 4 279,75 6

267,069

270,58

0

273,690 277,555

19 3

3-Marc

h 4,1

55

1,74 7 185,505 187,252 865 88,705

89,570

2,612

27 4 ,2 10

J ·

une

3,509

1,236

184,026

1 85,262 876 87,710 88,586 2, 112 271,736

Septembe

r

3,3 20

86 7 181,572 1 82,439 785

84 , 685

85,370

1,652

266,157

D ece

mber

3,768

2,6 07

181,353 183,960

860 93,058

93,9 18 3,467 274,411

276,822 280,97 7

273,848 27 7,3 5 7

267,809 271

,1 2 9

277,878 28 1 ,646

1 93

4-Marc

h

..

3, 689 2,771 1 85, 782 188 , 553

820

101, 1

44

101,964 3,.591

286,9 26

June

3,829

3,13!) 1 92,09 7

195,232

901 100,045 1 0 0,946 4,0 36

292 , 142

Septembe

r

3,5 5 3 2,958

1R9, 305 1 92 ,263

763

96,314 97,077

3,72

1

280,619

D ece

mber

3,936 3,12 1 185,851 188,972 826 101,429

102,255

3,947 2

87,280

290,517

I

294.206

296,178 3oo:oo7

289,340

292,893

29 1

,22 7

295 ,163

1935 -

March

3,757

3,8 7 5 182,811 ] 86,686 869

104,593 105,462

4,744

287,404

292,H8

295,90i )

June

3,670

3 ,741

180,760

184 ,50 1 969

105,098 106,067 4,7 10

285 ,858

290,5 68 294,238

Septem

ber

3,612

3,270

177, 11 4 180 ,384

826

101.190 102 ,

016

4,096

278,

304

Decembe

r 4,052 3 ,6 27

17.5,164

17 8,791 932

108,304

109,236 4,559 ' 283,468

282,400

286,0

1 2

288,027

292,07

9

1936-Marc

h

4,085

3,785

174,040

177,825 1

898

ll3,042

113,940

4,683 287,082

June

3,853

4,038

176,976 18 1 ,01 4

947

10'7,996 108,943 4,985 284,972

Septembe

r 3,746 4,599

175,710

180,309

837

101,704

102,541

5,436

277,414

Dec

e mber

4,181 3,889 175,923 179,812

856

109,130 109,986

4,745

285,053

291 ,7 65 295, 850 :289,9 57

293,810

282,850

286,596

289,798

293,979

( 1 )

Th e figures of

the

following

nine

baul{S

are

includ

e d

throughout

this

table

:-Bank

of

Adelaide, B

[l,nk

of

Austra

l asi a,

Bank

of

New

South

Vi-[l,

l es ,

Co r:

J mercla

l Ba.nk

of

A ustru.lia,

Co mm

e r c ial

Banking

C ompany

of

Sydney,

English,

S cottish

anu

A us

t r alian

Bank,

National

Bank

of

Australas

i a,

Queensland

National

Dank,

a wl

Union

Bank

o f

Anst

r a iin..

Tho

s e of

the

fo ll owing

f ou

r

hanks

ar e

included

un til

the

i r

ama

l gam

ation

(date

shown

in

brack

et s)

with

one

of

the

abov!l

:--:\

ud r alian

H ank

of

(NoYe m be r.

1 931 ) ,

l3a nk

of

Victoria

(biarch,

Hl27),

U. o yal

of

Aust

r alia

(April,

1927),

and

\V cstern

Australian

Bank

(IvJareh, Hl27) .

( ' ) E xclu d

ing

s har

e hold e r s '

fu nds

and

pPrp

et ual

or

inte

rm ina

hl c

inscribed

depo

s it

s to ck.

( 1 )

B: .mk

notes

in

oi rculation

have

steadily

declined

from

abou

t

£202

,000

in

lll26

,

to

abo

ut ,

£1(17,000

in

193

6 .

b!) <:.0 Ot

; _

,-:./,'

•

·,

_

• . ;

«.;.

• · · ;.

pd 00 t'i;

Q 11

art e r

Ended-

1926-:M:a

r c h

. .

Jun

e . .

September December

1927- Marc h

. .

June Septe

mber

Decemb e r

1928-March

..

June

. .

Septembe r December

1 921l

-March

..

J une

. .

S e ptembe

r

D ece mbflr

TABLE

5 . -'J.'RADING

BANKS(

1

)-AUSTRA.LI

A. .-EXOLUDING

COMMO

N WEAL

T H

BANK

OF

AUSTB.ALIA---<:<:>Ittinued.

ASSET S

W I T

HIN

AUSTRALIA

AND

LONDON FUNDS.

QUARTER

L Y

AVER

A GES

Oli'

WEEKLY

F IGURES

(IN

THOUSANDS

OF

POUND

S , AUSTll.A.LIA..."f

CURRENCY).

12 Coin and

Bu lli o n .

£'00 0 . 26 ,049 26,426 26,367 26,817

27,033 26,067 25,797 25,790

25,72 8 25,549 25 , 583 25,669

25 , 565 2 5 , 033 2 3,586 21,091

1 3

Austr a

li an

Note

s .

£'000. 20,686 16,262 16, 883 1 5,698

1 7,885 1 4 , 268 14,429

15,356

16,114 13,28 3 13,428

14,179 14,506 12 :4

94

12,153 12,794

I

14

I

15

I

16

1

1 7

I

1 8

I

1 9

I

20

I

21

I

22

r---

2:!

I

I

\Lo ndo n

]'unds

. ( ' )

I .

Cash,

Depos i

ts

with wealth Bank

.

£'000. 5,662 6,236 6,706 7 ,3

67

8 ,160 8 ,15 2 9,438 11,17 4

13 , 671

12 , 850 10 , 366 13 , 046 15,11 3 9 , 451

7 , 803 8,614

Ca.sh

in

Au s tralia . (12+

1 3+ 14)

£'000. 52,397 48,924 49,956 49,882

53,078 48,487 49 ,664 52,320

55 , 513 51,682 49 , 377 52 , 894

55 , 184 46 , 978 1 43 , 5 4 2 42,499

Australian Treasury B il ls. £'000 .

23 108

3 0 0

3.'50

1 470

C ash ulus Tr8 as llry Bilis .

(15

+

16)

£'000 . 52,397 48 ,924 49,9 56 49,882

53 , 078

48,5 10 49,772 52 ,320

55,813

52 ,032 49 , 377 52,894

55,184 46,978 43,542

4 3 969

I I

excluding

Treasury

Aust r alian

Rills and

Sec ur ities

London

(expressed

in

]'undl:5

.

A n stral

ian(')

Cu r rency). £'000.

33,064 32 , 381 19 ,5 39

13 ,171

20,003 21,044 18 ,2 45 21,679

35,813 41,306 29,197 27,474

34,767 32 , 621 17 , 577 9,269

(17

+

18)

£'000. 85,461 81

,3 05 6 9 ,495 63,053

7 3 ,081 69,554 68 , 017 73 , 9 99

91,6 2 6 93, 338 78,574 80,368

89 , 951 79,599 61,119 53,238

Government,

1\Iunicipa l ,

&c.,

Securiti es held

in

Australia

{excluding

Australian Treasury

: B ill s).

Australian Government Securi ties .

£'0 00. ll,Ol9 10, 588 9,944

9,920

9,533 8,962 8 ,989 9,866

17,565 16,475 16 , 352 15,874

16,075 15 , 856

13,960 12,067

Municipal and Other Pablic Secur i

ti es .

£'000.

652 622 594 557

519 665 664 665

637 587 659

668

553

544 543 552

Other Secur i ties. £'000.

60 70

90 100 120

140 140 200

Total. ( 20+21

+

22)

£'000

.

11 ,6

71

11 ,210 10,538 10 ,477 10 ,052

9,627 9,653 10,531 18,262 17

, 132

17 , 10 1 16,642

16,748

16,540 14 , 643 ! 2,819

t-:l <.!:> 0>

1930-Maroh

..

14,416 13,290 14,544

I

42,250

2,050 44,300

15,687

59,987

13,174 473

300

I

13,947

June

. .

4,618 13,848 18,740 37,206

2 , 021

39,227 21,181

60,408

11,718 388

300

12,406

September

2,735 14,342 18,371 35,448 2,374 37,822 19,225

57,047

11,129 386

280

11,795

December 2,135 14,424 22,922 39,481 5,262 44,743

15,69-1

60,437 11,167 386

280

11,833

1931-March

..

2,082 15,308

31,271 48,661 6,466 55,127 21,555 76,682

9,510

385

250

10,145

June

..

1,952

18,805

32,133 52,890 6,845 59,735

20 , 729

80,464 9,118 384

200 9,702

September

1,990

20 , 139 22,840 44,969 13,891 58 , 860 19,786 78 , 646 9,109 382

200

9,691

December

2,072

18,478 2

2, llO

42,660 20,731

63,391 31,378 94,769

8,904

392

200

9,496

1932-March

. .

2,161 17,977 32,762

<' >2,900

2 6,927 79,827 28,837 108,664 9,135

409

200

9,74<1

Jun

e

. .

1,949 1 8,6 9 4 28,898 49,541 30,598

80,139 24,002

104,141 9,135 422

200

9,757

September

1, 8 93 17,372 21,444

40,709

34,559 75, 2

68

19,120

94,388 9,295 422

200

9,917

December

1,910

16,540 22,946 4 1,396 37,961 79,357 23,627

102,984 10,017

433 250

10 , 700

1933-March

..

1,963 16,420 25,321 43,704 35,484 79,188

n.213

106,431

12,808

457

250

13,515

Jun

e 1 ,868 15,87 5 23,229

40,972

32,985 73, 9 57 25,353

99,310

14,169

1,045 205

1 5 ,419

S e

pt e mber

1,8 4 5 15,938 22, 2 17

40,000

29,201 6 9,201

20,120

89, 3

21

15,655 1,123

106

16,884

D e c e

mb e r 1 ,8 54 15,973 2 4 , 7 8 8 42,615 27,642 70,257 26,564 96,821

16,099

679 6 16,784

1934-M a r ch

..

1,937 15,233 30,469 47,639 2 9,479 77,118 34,928

ll2,0

, 16

16,682 772 12 1 7,466

June

1,876 . 13,306 37 , 828

53,010

29 , 313 82,323 30,222 112,545 17,430 786 15 18,231

Se

pt e mber

1,867 13 , 709 35 , 907 51,483 2 5,513 76,996 23,088

100,084

19,462 792 15 2 0,269

D ece

mb e r

1, 8 93

14,091 30,881 46,865

I

2 3,757 70,622 24,878

95,500 20,854 801

6 21,661

! 9 35-Mar

c h

. .

1,905

1 3,701 26,053 41,659 24,157 65 , 816 25,393

91,209

2 3,344

1

820

6

24,170

June

1,895 13,476

23,046

38 , 417 23,952 62,369 22,442

84,8ll

22,530

I

824 7 23,361

S

ept e mber

1,936 12,703 19,734 34,373 22 , 515 56 , 888 18,036 74,924

'>1

762 8 1 6 7 22,585

'

I

Decemb e r 1,995 12,835 18,665 33,495 24,378 57 , 873 21,763

79 , 636 1 8,327

1

721 7

19,055

!936-M

a rch

. .

2 ,091

12,717 18,621 33,429

25,065 5 8,'194

30,227 88,721 15,613 678 8 1 6,299

Jun

e

..

2,012

1 2,485

16,2731 30,770

24 ,948 55,718 29,425 8 5,143 14,174 681

8

14,863

S e

pt e mber

2,023

12,015 15,871 29,909 23,686 53,595 2 1,595 1

75 , 1 9 0 14,209 680

8 14,897

D ec

emb

e r

2,091

. 12,108 16,908

31,107

23,234 54,341 26 , 619

8 0 , 960

13,376

650

8

14,034

--------

(

1 )

Nin e t

ra din g

b a nks ,

including banks subsequently

amalgamated

with

any

of

th e

present

n i ne.

( ' )

SPe

f oot

no tes ('). (

')

an d (

1 )

to

T ab l e

7.

N ote e s pecially

th a t

th es

e

fi g ur

es apply

in g e neml

to

t. hc

e n d

of t he

quart

er, an d

ar e

not

quart

e rl y

a v e rag e s.

(

1

)

The

of

at

w hi c h

ccnve

rsiou

has

be e n

m ade are as follc-ws : - M a rch,

1926,

to

Dece

mb

e r , 1029.

inclusi v e,

£A.

100

:DC

£St

g . 100.

March .

19 j.(},

to

8optem1 Jcr,

19 30

,

I nc lu s iv e,

£A.l0

6 . 1 25

-£ S t

".

100.

Dec e

mber,

1930.

£A .

108.5

=

£Stg.100.

March,

1931,

to

September

,

1931,

Inclus i ve,

£A.1

30

£Stg. 1 00 .

Dece

mb e r ,

1QSI

,

t o D ec e m h e r ,

1 0 36,

inc lu

s i ve,

£ A.

l2 5

=

£St

g .1

00 .

"""

00 CJ1 w

Quarter

Ended-

192 .

&-March

..

June September D e cember

..

1927-March

..

June

..

September December

..

1928-March

..

June

..

September December

. .

1929-March

. .

June

..

September

I

December

..

TABLE

BaNKS(l)-AusTRALIA

. .

-ExcLUDING

COMMONWEALTH

BaNK

OF

AUS'rRALIA-cont!:mted.

ASSETS

WITHIN

AUSTRALIA

AND

LONDON

QUARTERLY

AVERAGES

OF

WEEKLY

FIGURES

(IN

THOUSANDS

OF

POUNDS,

AUSTRALIAN

CURRENCY)

.

I

I I I I

I I

24

25

26

27

28

29

30

31

I

j .

- ·

Advan ces,

Discounts,

and

Oth

e r Asse ts

within

Australia

(excluding

Australian

Ba l ances

due

Total

Landed

and

H ou se

Property).

Securities

from

Other

Uquid

held

in

London

Banks

and

Resources.

I

-----

- -

(

in

Notes

and

Bills

Total.

Australian of

Cther

Advanc e s

to

Other

Bills, & c

.,

Other

Currency(•)

).

Banks.

(19

+

23

+

Governments . Advanc e s. Discounted.

It ems.

(27

+

28

+

24

+

25)

29

+

30)

£'000. £'000.

£'000

.

£' 000. £'000. £'000. £'000.

£'000

.

1,788 4,941

103,861

7 193,289 9,186

2,086

204,568

1,720

4,873 99,108

. .

199,451 9,258 1,876 210,585

1,130

4,431 85,594

. .

208,583 9,498 1,968

220,049

835 4,426 78,791

· , ·

218 , 852 10,188

2,006 231,046

690

5,334 89,157 14 218,909

10,302

2,166 231,391 649

4,280 84,110

399 220,319 9,383 2,119 232,220 - 691 4 ,15 5 82,516 ..

222,551

9,940

1,995 234,486 666 4,793 89,989

..

220,193

10,470

2 ,256 232,919

"

'

..

745 4,776

ll5,409

..

211,691

9,638 2,031 223,360

:

630

4,468

ll5,568

, . , .

d

211,781 8,457 1,772

222,010

655 4,056

100,386

218,798 8,133 1,269

228,200

683 4,483

102,176

:

,)

226,714 8 , 428 1,483

236,625

)

,.,

_,

..

789 4,793 112,281

..

229,707

7,997 1,487 239,191

.,

829

4,307 101,275

. . .

237,860 7,410

1,390

246,660 ' 875

4,081

80,718

..

250,094

7,673 1,433

259,200

869 3 , 971 70,897

109

260,083

8,218

1,055

269,465

I I

32

'r ota

.I

Cnrrent Assets.

!

( 26

+

3l)

, ____

_

I

£'000. 308 , 429 309,693

30 5,643 309,83 7 320

,5 48

316,330 317,002 322 ,908

338, 769 33 7,578

,.

3 28,58 6 33 8,801

351,472 347,935 339,918

340,362

t-:l (1:)

1930-:March

..

June

"

September December

..

1931-JV!arch

·;

June Septemb

e r

December

..

1 93:2-JV!arc h

•'."

June Sept

e mber

D ecember

..

] 933-lVlarch

June Sept

e mber

December

..

1034---Mar c h

J1m e S

ept e mber D e ce

mber

. .

l93 5

-l\1a.rch

\

J · un

e

Se ptembe

r

December

..

1 9 36 - l\'larch

Jun

e

Se ptember

D e ce

mber

..

1,249 3,891

79,074

41

256,174 7,158

f.'

1.056

1,795 3,728 78,337 31 253

,419

<> ,924

81 7

1,788 3,231 73,861 33 249,412

I

5,046

t-

555

1,431 3,287 76,988

169 248,003

4,459

I

<'

525

;

1,659 3,491 91,977 417 239,898 3,474

,.

840

1,659

3,070

94,895 261 234,657 2,883

1,042

1,701 2,684 92,722

lt;.

225 234,708 2,684 713

1,619 2,948 108,832 . .

230,009

2,962

710

1,652

'·

2,85 1 122,911

..

221,68 7

2,640

568

1,648 2,363

117,909

..

'I

22 3,945 2,589

605

1,064

2,3 7 5 107,744

..

I

226,569

I

2,5 ll

409

593 2,739

ll7,016

21

228,180

2,535 869

509 2,740

123,195

..

227,134 2,448 828

571

2,510

117,810

..

229 ,405 2,106 810

506

2,750

109,461

..

232,074 2,231

965

508

3,248 117,361 4 232,880 2,610

508

3,243 133,263

..

229,166 2,423 1, 875

479 3,250

13 · !,505

231,477

2,321 1,648

512 3,027 123,892 237,121

2 , 464

1,363

512

3,403

121,076 242 ,3

50

2,583 1,842

785

3,028

119,192 243,593 2,555 1, 849

650

111,983

24,7,918

2,428 1,883

544

3,366 101,419 252,246

2,721 1,634

377 3,706

102,774

254,194

3,001

1,967

906

3,729

109,655

252

,0 44

2,968 1,845

1,193 3,198 104,397 256,590

2,691'\

1,366

84:{

3,0 4 2

93 , 972

260,701 2,970

I

1,271

749

3,075

99 , 4 18

..

260,973 3,123

I

1,797

(1)

Niue

trading

banks

.

including

banks

subseq

ue ntly

amal

g amated

with.

a n y

of

th e

presen

t

nine.

(' )

For

ra t r.

s

o f

r x c ha.n

ge at

wltieh

c onv

e r s i

on lta

.s been

made,

se e

footnote

(3 )

o n

preYious

page.

264,429 260,191 255,046

244,629

238,843 238,330 233,681

224,895 , 22 7,139 229,489 231,605 2 30,410

232,321 235,270

237,468

I

233,464 235, 4

46

240,948

I

246,775 U7,997 252,229 256,601 259,162

256, 8 57

260,G51

::? 65 , 8 9 3

I ·-

343,503 338,52 8 328,907 330,144 336,606

333,73 8 331,052 342,513

347,806 345,048 337,23:3 348,621

3 , 53,60.5 350,131 344,731

354,829

366,727

369,951 364,840 367,851

367,189 364.212

358,020 361,936

366,5 12

365

,04R

358 , 91-t 3 6 5 , 31]

<:.0 <:.0

00 ()

1:

T ABLE

5. -

TBADING

BANKS(

1 )-AUSTRALIA.

- E

XOLUDING

COMMO

N WEAL'l'H

BA

NK

O F

AUS

'l'RA

LIA--contin

u ed

.

RAT IOS .

QUARTERLY

AVERAGES

OF

'WEEKLY

FIGURES.

33

3 4

uO

36

37

I

38

I

39

40

I

H

I

4 2

43

I

H

I

I

l'cL:.l

T. o n

do n

Cash,

Adv·ances D eposi

ts

Dep

os it s

Aust

, r a.Uan

Cas

h

Tr eas

ur y

To ta

l

Total

&c.,

plus

B ear

ing

Co i n

and

Australia

u

w i th

Cash

in

Treasury

p lu s (e x c l uding

Bill

s

and

Li quid

Advances, Gove r

nment

,

In ter

est B ull

io n Notes

Common -

.'\ u stra

.li a

B ill s

Treasury

Au st

r alia

n

London

Re so

ur ces

&c.

Municipa.l ,

& c

wealth

J 3 ill s

Securit

i e.':!)

Fu nd

s

I

Secur i ties

Qnart

e r E n riPrl -

Bank

he ld

in

Australi

a

to T

otal

to Total to

To tal

to Tota

l

to Totll l t o

Total

to To

ta l to

Tot

al to

Tota

l to

Tota

l to

Total

to

'J'ot . al

I

D e posits. Depo s it s . Depos i ts. Depos i ts . Deposits . D e pos its. Deposit

s.

D epos i ts . De posi t s .

Current

Deposit s .

Deposits.

JJiabilitics .

4

13

H

1 5

16

17

18

19

2G

31 31

+

23

--

-

- -

--

-

-

--

-

-

-

- - -

10

10 10

1 0

10 10

10

10

10

u

10

10

P e r

cent.

P e r

cent.

Per

cent.

Per

cent .

Per

cent .

Per

cent .

P er

cent .

Per

c e nt.

Per

cent .

Per

ce nt

.

Per

cent .

Per

ce nt.

1926--March

. .

55.

27

10.05

7.98 2.18

20 .21

..

20.21

12 .75

32.96

39 .04

78 .9 0

83 .40

June

..

57.01 10.24 6.30

2 . 42

18 .95

. .

18.9 5 12.54 31.49

37 . 44 81. 5 6 85 .

91

September

..

59.

17

:

10.37

6

.. 64

2.64

19 .65

..

19 .65

7.69 27.34 32.84 86.56

9 0 .

70

December

..

58 .88

10.37

6 . 07

2.85

19 .28

..

19.28

5 . 09

2 4 .

38

29 .73

89 .32

93.

37

1927

- March

..

57.74

10.16

6.72

3.07

19.94

..

19.94 7 .52 2 7.46 32.67

86 .95

90.72

June

..

58.39

9.90

5.42

3.10

18.41

0.01

18 .42

7.99 26.41 31.19 88.17 91.83 Sep t e mber . .

60.88

9.98 5.58 3 .

65

19.21

0.04

19.26

7.06

26.32 31.15

90 .72

94.46 Decemb e r

..

60 .40

9.79 5.83 4.24

19 .86

..

19.86 8.23

28 .09

33 .3 2 88.42

92 .42

1928-J\IIarch

..

5 9.09

9 . 34

5 . 85

4.97

20 .16

0.11 20.27

13 .01

33.28

41.00

81.12 87.76 June

60 .16

9 . 34

4

.. 86

4 . 70

18 .90

0.13 19.03

15 .10

34.13

41.30

81 .18

87.45 September

..

61.52

9.5 . 9 5.03

3.88

18 .50

. .

18.50 10.94

29.44 36.81

85 .51

91.91 December

..

'

61.43 9.33 5.15 4.74 19.22

. .

19 .22

9.98

29.20

36 .38

85.98

92 .03

I

1929-March

• . I

60.66 8.90

5.{)5

5.26 19.22

..

19 .22

12 .li

31.33

38 .29

83.31 89.15

J , une

. .

i

62.21

8 . 80

4 . 39

3.32

16 .5

2

. .

16 .52

11.47 27.98 34 . 84 86.71 92.53 September

..

64.10 8.51 4 .

38

2.82

15 .71

..

15 .71

6 . 34

22.05

2 8.

55

93.52

98.80

December . . 64.83 7 .

66

4 . .

65

3.13

I

15.44

0 . 113

15.98

3 . 37

19.35 25.24

97 .92

11\2 fiR

"" 8

130 -M&rch

64.53

June

66 .39

Septe mber

..

68 .30

D ece mb e r

68 .09

1 31 - March

67.95

June

..

68 .84

Se pt

e mber

..

69 .5 4

Decembe r

..

67.58

32 -Ma.rcb

67.

35

Jun

e

..

68.62

September

..

69 . 34

Decembe r

..

68 .28

33 -Ma.rch

67 .64

June

67 .65

Septe m ber . .

68 . 1 2

December . . 66.20

34 -Ma.rch

64.90

J un e

65 .92

Septembe r

..

66.45

December

..

64.89

3 5-Ma.

r ch

63.9 0

June

63 .5 0

September

..

63 .88

De

ce mb e r . .

62 .07

19 36-Ma.rch

'

60 .9 5

,T un e

..

62.43

Septem ber

..

63.75

Decem ber

..

6 2. 0 5

5.

30

4.88 5 .34

15 . 52

0.75

16.27

5.76

22 .03

l.

74 5.21

7.05

13 . 99

0 . 76

14.75

7.96

22 .72

1.05

5.52

7.07

13.64

0 . 9 1

14.56

7.40

21.95

0.8 2

5.53

8 . 79

15.14

2.02

17 . 16

6.02

23.18

0 .8 0

5.87

12.00

18.68

2.48

2 1.

16

8.27 29.43

0 . 75

7.27 12.42

20.44

2.65

23.09 8.01 31.10

0 .

78

7.91 8.97

17 .67

5.46

23 .12

7.77

30 .

90

0.78

6.91 8 .

27

15 .96

7.76

23.72 11.74 35.46

I

0 . 77

6.39

11.65 18.81

9.58

28.39

10 .25

38.64

I

0. 71

6.77

10.47

17 .9 4

11.08 29.02

8.69

37.72

0.72

6.50

8.03

15.24

12 . 94

28 .18

7.16

35.34

0.70

6.04

8.38 15 .

13

13.87

29 .00

8.63

37 .63

0 . 71

5.93

9. 15 15

.79

12 .

82

28.61

9.84

38.45

0 . 68

5.80

8.48

14.96

12 .05

27.01

9 . 26

36.26

0.69

5.95

8.30

14 .

94

10 . 90

25 .8

4 7

.5 1 33.25

0.67

· 5. 7 5 8. 9 2 15 .34

9.9 5 25.28

9.56

34.84

0 . 67

5.24

10 .49 1

6.40

10.15

26.55

12.02

38 .57

0.63

4 . 49

12.77

17. 90 9 .

90

27 .80

10. 20 38.00

0 . 6 5

4.74

12.41 17.79

8.82

26 .6

1

7.98

34.59

0 . 65

4.84

10.60

16 . 09

8. 16

24.25

8.54

32.79

0.65

4.69

8.92

14 .26 8 .

27

22 .53

8 .69 31.22

0 . 65

4.64

7 .93 13.22 8 . 24 21.46 7 .

72

29.19

0 . 69

4.50

6.9 9 12.17 7 .

97

20.14

6.39

26.53

0 . 69

4 . 46 6.48

I

II .63

8.46

20.09

7.56 27.65

0 . 72

4 . 36

6 . 38

11.46

8.59

20 . 0 5 10 .

36

30.41

0 .

69

4.31 5.61

10.61 8 .

60

19.22

10 .15

29.36

0.72

4 . 25

5.61

10 .5 7

8.37

18.9

5 7 .

63

26.58

0.72

4 .18

I

5.83

10 .73

8.02

18 .75

9.19 27.94

(')

Nine

tra d

jng

bank.•,

including

bank

s s ubsequ

e ntly

amalgamated

with

any

o f tho

pr es e n t

n i ne.

28.49 97.13 28 .84

97.

84

27.95 98.16

28.99

97.10

34 .

75

93.88

36.12 92. 3 2

35.93

93.6:1

40 . 14

87.43

43.14 79.98

42.15 82.26

39.82 85.93

42.16 84.62

43.85 83.23

42.4

8

84.84

40.37

87.85

41 .6

7 85.46

45 .30

80.36

44.83 79.49 42.30

83.2

8

41.02

84.74

40.2 8

84.89

38.06

86 .81

35.46

90.86

35.19 89.98 37.06

88 . 04

35 .53

89.89

32.79 93.67

33.82

91.7

5

I

102.25 102.1H 102.69 101.64

97 . 7 8 96.07 97.44 90 .99

83 . 44 85.80 89.64 88.53

88.12

90.47 94.15 91.50 86.37 85 .65 90 .2

8

92.17 93 .16 94 .

85 98 . 86 96

.59

93 .62 95.02 98.94 96 . 59

-

00 m

"" M

ont h.

;

1935-J

a.nuary

. .

February

..

M arch May

·

June July

..

August

•.

September October

..

November December

1936-J

anuary

· ·

February.·

I

March ..

I

TA.BLE

6. -

NINI<

:

TRADING

BaNKs

-AusTRALra.-ExcLUDI

NG

CoMMONWEALTH

BANK

OF

.AusTR

ALI

A.

LIABILI

TIES(

1 )

WITHIN

AUSTRALIA.

MONTHL

Y AVER

AGES

OF

WEEKLY

FIGURES

( IN

1.'HOUSAND S

OF

PO UNDS,

A USTRALIA

N

CURRENCY).

•

1

I

2

nonn ! ;<.

•

:

I '

5

I

U

I

7

-1

8

I

9

I

10

L 11

:Note s

a nd

Depo

s its

.ilea .

u. .....

5

iJ.u

...

,.: :a

c:;::.l;,

D e po s i ts

Not

B ea

ri ng

In te

r es t . Bill s

in

· Circul

ation

and

Balanc

es

du e

to

Ot h

er

B ank

s .

£'000.

3,659 3,909 3,714

3,738 3,365 3,896

3,523

3,520 :3,779 3 , 842 4,ll3 4,175 3,990 4.216 4,052

G over

n ­

ment. £ ' 00 0.

3,602

3,875 4,171

3,455

3,470 4,369 3,407 3,109 3 ,2 67

3,352 1 3,613

3,909 3,702 3,740 3 ,88 9

I

Ot h e r . £'000. 183,146 182,7 5 1 182,534

181,683 180,725 179,659

177,905 176,928 176,471

176,753

17 5,565 173,530

172,973 173,747

175,080

(2

+

3)

£'000. 186,748 186,626 18f.i,705 185 , 138 1 84, 19 5

184,0 28

181,312

180,037 179,738 180,105 179,178 177,439 176,675 177,487 178,969

Govern ­ ment. £ ' 000.

826 918 880 978

963 992

844

808 S41 865 894 1,038 895 907 906

Oth

e r. --

£ '000. 103,922 104 ,82 3 105,073 10 5, 617 105,478 104,027

101,247 100,160 102,005

105,130

109,232 ll0,155 1lJ

,843

ll3,489 113,667

Tot

a l.

(5

+

6)

£'000. 104,748 105,741 105,953

, }06,595 106,441 l05

, 0Hi

102,091 100 ,9 68

10 2 ,846

105,995

ll0,126 111,193 .

112,738 114,396 114,573

Govern

­

ment. £'000.

4 ,428 4,7 9 3 . 5,051 4,433 4,433

5,361

4,251 3,917

4,108 4,217 4,507 4,947

' 4,597 4,647 ' 4,795

Tot

al

Dep

o s it s.

Other

.

£'000

. '

287,068 287,574 287,607

287,300 286,203 283,686

279,152 277,088 278,476

281,883 284,797 283,685

284,816 287,236 288,747

I

T o tal. (8

+

£'000

.

291 ,496 292,367 292,658

291,733

290,636 289,047 283,4oa 281,005 282,584 286,100 289,304

288,632

289,413 291,883

293,!542

1

:- r ota

l

Curr

ent

J ; i abili

t i e s.

(1

+

10 )

£'000. 295,155 2 96,2 76 296,372

295,471

29 4,0

01

292 , 943

286,926 284,525 286,363

289,942 293,417 292,807

293,403 296,099 29 7,594

c.., 0 b:)

April

..

I

. 3,943

4,033

176,832 180,865

8 8 9 1

110,542 111,431 4,922 287,374

292,2961

296,239

May

3,8 5 5 4,130 177,333 181,463

908 109 , 034 109,942

5,038 286,367 291,405

295,260 ·

June

..

3,778 3,983 176,794

180,777 1,023 105,074 106 , 097

.

5,006

281 , 868 286,874

290,652 I

July

..

3,646 5,258 176,124 181,382 848

102 , 070

102,918

6 , 106

278,194

284,300

287,946

August

..

3,816 4,635 175,895

180 ,

530

852

101,430 102,282

5,487 277,325 282,812 286,628

September

'

3,751 3,886 175,095 178,981 819 101,669

102,488 4,705

276,764

281,4@

285,220

178.510

I

104,357 1 0 5,169 O

ct ob

e r

•.

4,174 3,793 174,717

812 1

4,605 279,074 283,679 2 8 7, 8 53

N o v

ember

4,0 8 2

3,774 175,347 179,121 844 110 , 463

1ll,307

4,618

285,810 290,428 294,510

Decem

b er

4,400

4,098 177,933

182,031

912 112 , 327 113,239

5, 010

290,260

295,270

299,670

( 1 )

E xcluding

sh areho

l de r s ' fu n ds

an d

p e r p

et u a l

or

i n termi

n a b l e

in s c r i b e d d

ep o

sit

sto c k.

.

N O TE

. -l'

h e

fi gu r e s

in

th i s

ta bl e

are

compi l

ed f r

om

the

sa m e

w e ekly

fi g ur

e s a s

ar e t h ose

in

Table

5 , b u t

ar e a v e

ra ges fo r

f o u r

or

fiv e weeks, i n s t

ead

of

thir

te en

w ee l

<1< . a s

in

T a b l e 5 .

'l 'he

f iq n r es a r e

p u b

li sh

ed in

t h is f o r m in

ad di t ion t o

the

f or m

i n

T a b l e

5, b

Pc a u s e

the

m onthly

fi g ur

e s ar

e

mo r e

us e f u l i n s howi

ng ea

r li e r a n y

ch a

ng e

of

trend.

o · w

in g

to

the

d i ff

e r e nt

n umbers

of

w e ek

s in c lu d e d i n

t h e

var

i o u s

month

s , a

nd

to

o t h

er

slight

va r ia

ti ons

( e . g . ,

i n

th e figu r es o f

J,o n

don

fund

s, which

a r e

month

ly, i ns t e a d

o f

as a t

t h e e n d

of

th e

qu a r t e r ) t h e ·

a v e r a g e f o r t h e t h r ee

mont

h s in t h e

qu a r t e r

will

n ot

ag r ee

wit h t h e

qua

r te rl y figure s i n

Ta h le

5.

0 c,o

- -r -....,__

CIJ

eii< !,

±·,_ ..

-.=

•• -!;--=·-:rt.

•

...

TABL

E 6.-NmE

TRADING

BANKs-A

u sTRALIA.-ExcLUDING

CoMMO

N WEALTH

BANK

Ol!'

AusTRALIA.--coftti'l\ued.

ASSET S

WITHIN

ACU

STRALIA

AND

LON DO N

FUNDS .

MONTHLY

AVE

RA

GES

OF

WEEKL

Y F

IGURES

(IN

THO

U SANDS

OF

POU

N D S , A

US TR

ALIA

N

CURRE

NCY

) .

I

I

I I I

1 2 1 3

14

1 5 1 6 1 7

18

1 9

2 0

21

22 2 3

Go v

ernme

n t,

Municip

al ,

& c.

,

S ecu

ritie

s

hel d

Londo n

Funds(

l )

in

Aus

tr alia (excluding

A u st

ra li a n

T r easu r y Deposits

ex clu ding

Cash ,

B ill s) .

M o

nth.

C a sh

Coin

Austra

li an

with

Cash in A u

st ra

li an

p l u s A u

st r a l

ian

T r easury

a nd

C ommon

-

Treas

ur y

Sec uri

ti es

Bil ls

an d

I

Buliion .

Notes .

we al

th

Au st

ral ia.

Bills .

Tr eas

ur y

( e

xp r essed i n

E on

don

B an k. Bill s. Au

st r a lia n

(2)

Fund

s.

.

I Mun

ic i pa

l

T o t al.

A u st

r a li a n

a nd

O t h e r

Ot h e r

C urr

e nc y

).

Pu b l i c

S ec uri

tie s.

( 1 2

+1 3+

S e cun

t les.

Se c uriti

es.

(20

+2 1+

14)

(1 5 + 1 6 ) ( 17 + 1

8)

22)

£ ' 000. £ '

00 0 .

£'00

0 . £ ' 000. £'000. £'000.

£'000.

£'000.

£'000.

£'00

0 .

£'000.

£'000.

1935-Jan

u a ry

2 ,0 34

14,57 4 26,311 42,919

24 , 105 67,024 25,350

92,374 23,226

810

40

24,076

Feb

r u a r y 1,872 13,713 26,178

41,7($3 24,190

65,953 26,093

92,046

23,471 819

20

24,310

M a r c h

. .

1 , 80

15

13,50 3 24,944

40,252 24,190

64,442 26,226

90,668

23 , 31 4 8 2 8 7 24,149

A

pril

..

1,8 4 7 13,427

22,340

3 7,614

2 4 ,1IO

61,724 24,980

86,704

22,957

I

826

7

2 3,790

Ma y

. .

1,910 14,013

22,5 2 6 3 8,44 9

24,090

62,539 24, 2 4 8 86,787 22,594 825 7 2 3,426

June

. .

1,941

13,3 08

24,14 4 39,393 23,615

63,008 22 , 290

85,298 21,926 823

7

22,756

Jul y

. .

1,9 42 13,2 7 3

2 0 , 8 89 36, 1

04

2 2,293 58,397

1 · 9,6 2 3 78,020 2 2,770

8 1 9 7 23, 5 9 6

August

1 ,9 37

12,3 8 0 19 , 50 9

33, 82 6 2 2,295 56,121 18,712 74,833

22,018

815 7

22,840

September

1,9 2 9 12,321 1 8,8 3 4

33 , 0 84 2 2,8()2

55,936 16 , 819 72 , 755

20,610

?lll

7

2 1,428

Oc t

ob e r

..

1,943

12,490

1 8 , 572

33,00 5

24,513 57,518 18,329 75,847 19 , 184

809

7

20,000

November

1, 98 5 12,723

20,007

3 4 ,71 5 24,643 59,358 19,422

78,780

18,547 682 7 19,236

December

2 ,05 4

13,513

17, 4 06

I

32 , 973

2 4,092 57,065

21,615

78,680

17,431 682 7 18,120

1936-Janua

ry

2 ,181 13,375

19,052 34,60 8

24,172 1

58,780

26,145 84,925 16, 7 22

6 80

7

17,409

February

2,092

12, 6 3 4 19,182

33,90 8

25,342

59,250 27,2 8 0 86 , 530

15,794

67 8

7

16,479 M

arch

. .

2,017

12,223 17,8 3 1

32,071

25,555 57,6 2 6

30,7 4 8

88,374

.

14,583

676

7

15.266

l'>:l Ot g: . I co 0

Ap ril

..

M a y

..

Juntl

..

July

..

August

..

September October

..

November December

1,996

12,154 16,146 30,295 26,334 1 66,629

31,796 87,426 14,313

676

2,047 12,812 16,019 30 ,8 78 25,653 66,531

31,210

87,741

14,055

681

1,997 12,185 16,877

31,059 24,077

55,136 28,769

83,906

14,162 686

2 , 077 12,446 16,266 30,789 23,887 54,676 25,929 80,605 14,493

686

1,995 11,862

15,720

29,577 23,625 53,202 24,387 77,589 14,359 678

1,999

11,620

15,848 29,467 23,556 53 ,023

21,270

74 ,293

13,742 678

1,985 11,663 16,594 30,242 23,500

53,742.

20,843 74,585 13,399 678

2,086 12,2 8 6 16,608

30,980

23,725

54,705 1

22,9 4 7 77,652 13,232 677

2,2ll

12,275

17 ,580

32,066

22,354 54,420 27,287 81,707 13,530 588

(1)

See

footnot

e (

1 )

to

Table 8 .

Some

of these

fi g ure a

relat

e

to

the

end

of the

month,

and

are

not

a v e rages

fo r

th e

month.

( 1 )

Conve r

ted

at

ra te

of exchange £A. 125

=

£ Stg. 100.

8 8

8

8

8

8 8 8

8

14,997 14,744 14,856

15,187

15,045 14,428

14,085 13,917 14,126

0 0\

00 OJ

M o n

tb,,

193

5-J . a

nuar

y

. .

Februar

y

i\' larch April l\fay .Tu ne July August Sept

er

November

..

D ecembe

r

1936--January

February l\f a rch

TABLE

6.-Nnm

TRADING

B A NKs-AusTRALI

A.-Ex

cLU

Dr N · a C

oMMONWEAr:

r n B aNK

oF

AusTUALi a

--contimt

ed .

ASSE

T S

W IT

HI N

A US

TR.AL

IA

A l>.'D

LOND

ON

FUNDS-conti

n ued .

MON

THLY

AV E R A G

ES

0 1 '

'VEEJIL

Y F

IG UUES

(I N

TH OUSANDS

OF

P OUND

S , AUST

R ALIAN

CU!\UENC

Y ).

24

I

2 G

I

2 ( ;

I

2 7

I

2 8

I

2 9

I

3 0

I

3 1

I

An s tralia n

ho l d in L ondon (e x p r

es sed i n

_..\. u s t r al la n Currency('

)

) .

£'00

0. 5 0 0 51 2 772 635 635 63

5

601 536 532

I

3 62

714

I

871 908

Ba lan

ct:e

du o

from O t h e r l 3ank

s

and

N o tes a

nd B i

ll s

o f Oth er B a n k s . £'000. 3,0 46

3 , 0 83

2, 969 3,023 2, 9 8 2 3,510 3 , 446 ::?,937 3,63 4 3,205 3,551 4,220 3,551 3 ,842

3,781

T ut

nl

J .Ji 4.11

i d

R e s o u r ces .

I

A d van

ce !:>

, D j s r o n n ts , a

nd O th e r .

A. s s ets

'"' "i t il

i n An

st r:tlia

(e .xclurli

ng

l.a n d e d n .

nd H ou s e

Pro

1•ert y ) .

(! 9

+

23

+

2 4

+

2 5}

£ '00 0. W J ,9

9G

ll9,

95 l

11 8,558 11 4, 1 53

J 13, 830 ll2 , 1 99

105,663

101,1 4 6 98 , 349

9 9 , 5 8 3 .

101,929

I

101,382

106,599

107,722 10 8 , 329

A d van c es to O ov

c rm

ne n

t.s.

£'000.

Ot h e r

£'000.

.

242 .

79 7

I

24 3,1 62 24 4,73 8

24 7,4 48

:3 48 , 439 247,954 2 50,649 251 , 9 9 9 . :3

54 ,04 4 2 56 , 427 2 54,885 2 5

1, 935

2 5 2 , 381 25 1,36 2

25 2,2

7\l

Bills ,

& c.,

Disco u nt e d .

£'000. 2, 58 1 2, 5 83 2,555

2 , 5 56

2,502 2,297

2,621 2,6 8 9

2,820 2 ,849 2 ,998 3,043

3,062

2 ,971 2,938

O th e r J tCTIIS , £'0 0 0. 1,80 2 1,8 25 1, 896 .

1 , 9 29

1,90 7 1 , 76 9 1,667 1,622 1,63 6

1,805 1,9 79

2 ,0 66 1, 8 1 9 1,9 22 1,

807

To t al. ( 27

+

2 8

+

29

+

3 0)

£'00

0.

247,18 0 247, 5 7 0 24 9,1 8

!)

2 5 1 ,9 3 3 2 5 2 , 84 8 252,0 2 0 254,937 256,310 258 , 500

26

1, 0 8 1 259 , 8 6 2 257 , 0 44

251,

26 2

I

2 56 , 2 55 257,0 24

r:l T o t a l Cu rr

e n t

... \ s:;cts . ( 2G

+

3 1 )

£'00 0 . 367,1 76 36 7 , 5 2 1 36 7,7 4 7

3 66,085 366,67 8 364 ,21 9 3 6 0 , 6

00

357,456 356, 8 4 9

:l 6l , 79 1

3 58 ,4 26

363 , 8

61

363 ,977 365,353

w 0 0'>

Ap ril

I

1,11 5

2,942

May

I

1,187

3,328 ·

June

I

1 , 19 4 3,293

Jul y

1,201

:?,8 1 9

August

I

1 , 06 5

3, 16 4

I

Sep t embe r

I

843

3, 101

Octobe r

753 3,272

Novembe r

..

753 4,191

Decembe

r

..

7 49 3,416

"

1 06,479

255,51!4

2,654

107,0

00

256 , 784 2,713

103,248 257,107

2 ,7 92

99,812

. .

260,010

2 , 941

96,863 2 59 ,998 2 ,9 42

92,665

..

262,226 3,074

92,695 263 , 8 62 3,091

96,513 2 61,236 3,141

99,998 257 ,7 60

3,098

(')

Conve r ted

a t ra te

of

exc

h ange

£

.. A .

125

=

£Stg. 100.

1 ,499

25!!,737 366,2 1 6

1, 38 0

260,877

3 67,877

1, 275 26 1,17 - 4 364.422

1,246 264, 1 97

364,00£1

1,239 264,179

a6l,042

1,3 2-i

266,624 359,289

1, 685 268,638 361 ,3 33

1, 832 266 ,209

1,899 262 ,757 3 6 2, 75 5

I

------

-

-----

-

B

00 Cs

TABLE

6. -

NINE

TRADING

BANKB-AUSTRALIA.-EXCLUDING

COMMONWEAL'rH

BANK

OJ!'

AUSTRALIA----co!Uinu

w .

RATIOS.

MONTHLY

AVERAGES

011'

WEEKLY

FIGURES

33

I

34

35

31)

37

38

39

40

I

41

42

4 3

H Total

J ,o ndo

n Cas h ,

Depo s i ts

Australi::m

C a s h

l 1'und

s

Tr eas

ury

T ota

l

Tota

l &c.,

plu s

Depo s i ts

Coin

and

Australi

: : m

w i th

Ca s h

in

Trea

s ury

(exc

ludi

ng

Bills

and

Liqui

d

Advanc

e s ,

Governmcnl

nea

rin g

B ulli

on

Not

es

Common·

Austra

. l ia.

Bills

Hill<

·

Aust

r a lmn

T, o n

don

&c.

J\Iuni c

ipal,

&

M o nth

.

we a

lth

- Sec

uritte

s ) l?unds

Se c

uritie

s

nan

]\

he ld

in

I

Au s tralia

to

Tot

a l

to

T ota

l

t.o Total

to

To ta

l

t.o Total

to

'l'ctal

to

Total

to

'l'okt l

to

Total

to

Tcta

l

to

To tal

to

Total

Curr e

nt

D eposits .

D epo

sit. -;

.

Depo s

it s . Deposits. D e po

si ts. Depos i ts . Depos i

ts .

Depo

s it!;.

D e p os it. s . D epos i

ts.

Jsia bil i t

icf.:.

Deposits.

c .

4

12

1 3

H

1 5

16

17 18

1 9

26

31 31

+

-

-

-

- - - - - - -

-

10

LO

JO

10

1 0

10 10 10

10

H

10 10

Per

cent.

Per

cent. Per cent.

Per

cent .

Per

cent .

Per

cent. P e r cent.

Per

cent. P er c e nt. Per cent.

Per

cent .

Per

cent.

193 5--

Januar

y

..

64.07 0 .7 0

5.00

9.03

14 .

72

8.27 22.99

8.70

31.69

40 .

66

84.80

93 .06

February

..

63.83

0.64

4 . 69

8.95

14.28 8.27 22.56

8.92

31.48

40 . 49

84.68 92.99 March

. .

63.80

0.62

4 . 61

8.52

13.75 8.27

22.02

8.96

30 .98

40 . 00

85.15

93 .40

00

April

..

63.46

0.63

4.60

7.66

12 .8 9

8.26

I

21.16 8.56 29.72

38 .6 3 86.36 94.51 May

..

63.38

0.66

4.82 7.75

13 .23

8.29

21.52

8.34

29.86 38.72

87.00

95 . 06

June

'

. .

63.67

0.67 4.60

8.35 13.63

8.17

21 .80

7.

71

29.51

38.30

87 .19

95.06

July

. .

63.98

0.69

4.68 7.37 12.74 7.87

20.61

6.92

27.53 36.83 89.96

98 .28

August

..

64.07 0 .

69

4.41

6.94

12.04

7 . 93

19.97

6.66

26.63 35.55 91.21 99.34 Septembe r

..

63.61

0 . 68

4.36

6.66

11 .71

8.09

19 .

79

5 . 9 5 25.75

34 .34 91.48

99 .06

O ctobe r

. .

62.95

0.68

4.37

6.49

11.54 8.57

20.10

I

6.41 26. 5 1

I

34.35 91.26

98 . 25 November

..

61.93

0.69

4.40

6.92

12 .00

8.52

20.52

6.

71

27.23 34.74

89 .82

96.47

December

. .

61.48

0 . 71

4.68

6 . 03

11.42

19.77 7.49 27.26

34 .62

R!l Oil

"l".J

1936-J

a.nuru:y

..

61.06

0.

75

4 .62 6.58

11 .96

8.35

'ebruary

..

60 .8

1

0.72

4.33

6 . 57 11.62

8.68

[arch

..

6 0 .

97

0.69

4.16

6.07 10.93

8. 71

.pri1

. .

61.88

0 . 68

4 .16

5.52

10.36

8.67

[a.y

. .

62.27

0 .

70

4.4 0

5.50

10.60

8.8 0

une

..

63.02

0.70

4 .25

5.88

10.

83

8.39

uly

. .

63 .80 0 .

73

4.38

6.72

10 .83

8.40

ugust

..

63.83

0 .

71

4. 19

5 .5 6

10.46

8 . 35

ep temb e r . . 63.59

0 . 7 1

4.13

5.6 3

10.47

8.3]

'Ctob

e r

..

62 .93

0 .

70

4. 11

5 . 85

10.66

8 . 28

· avemb e r

..

61.67

0.72

4 . 23

5.72

I

10.67

8. 17

• ecembf'r

..

61.65

0 .

7 5 4 .

16

5.95

10 .86

7.57

20.31

9.03

29. 34

20.30

9.3 5

29.6

5

19.63

10.47 30.

11

19.03 10.88

29.9

1

19.40

10 .71 30.11

19.22

10.03

29 .26

• 19.2

3

9.12

28.

35

18.81

8.62

2 7.43

18.84

I

7.56

26.39

18 .9

4 7.35

26 .2

9

I

1 8.84

7.90

26.74

1 8.43

I

9.24

27 .67

I I

3 6 .

33

36

.38 36.40 36.94 36.24 35.52 34 .

66 33.79 32.49 32.20 32 .77

33.37

88.89 87 .79 87 . 56

88 .86 89.52 91.04 92.93 9

3.41 94.73 94.70 91.66 88 .99

\!4.\Jl 93.44 92.76 93.9

9

94.58 96.22

98.27 98.73 99.85

!!9.66 96.45 93.

77

00 CJ c..

n

-

__

_

...._

·····

-----

.·--

.--

---·

- ·· •

TABLE

7.-TRADINO

BA

N KS(

1 ) -

AusTRALIA.-ExcLUDING

CoMMONWEA.L'rii

BANK

.oF

AusTRALIA.

QUARTERLY ASSETS

AND

LIABILITIES

IN

LONDON

IN

RESPECT

OF AUSTRALIAN BUSINESS.<'>

(In

thousands

o£ pounds

sterling.)

I

I

I ,o ng

Te rm

Asset»

.( • )

I

Tot

a l

Li a biliti e s

Qunr

tc r

Ended('

) -

Short

I

(e x c

luding

Term

· l

I

Total

ca pital) . A ss ets. (

5 )

Au s

tralian

I

O t h er T o

ta l

A ss et

s .

Gov e

rnm

e nt

Gov e

rnm

e n t

TJ o ng

T e rm

Sec uri

t ie s.

S ec

uriti

e s.

Assets.

I

£

Stg.

'000.

£

Stg.

'000 .

£

Stg.

'000 .

£

Stg

. '000 .

I

£

Stg.

'000.

£

Stg.

'000.

£

Stg

. '000.

1926-Mar

c h

. .

25,670

1,788 12 , 791 375 14,954 40,624

5,772

.Tune

..

..

25,834: 1 , 720

12,951 381 15,052 40,886 6,785

September

. .

13,603 1,130

10,967 296 12,393 25,996 5,327

December

..

. .

10,156 835

10,097

239 11,171 21,327 7,321

1927 -

March

..

..

16,337

690

10,393 267

11,350

27,687 6,994

June

..

..

18,011

649 10,131 316

ll,096

29,107 7,414

September

..

..

14,090

691 9,531

309

10,531 24,621

5,685

December

. .

..

17,513

666

10,672 351

ll,689

29,202 6,857

1928-March

..

..

30,370

745

14,242 355 15,34-2 45,712 9,154

June

..

34,214: 630

15,832 142 16,604 50,818 8,882

September

. .

..

22,235 6 5 5

14-,161

216 15,032 37,267 7,415

December

.. ..

22,269

6 83

13,955

•

144 14,782 37,0 51

8,894

1929-March

..

. .

29,049

789

13,332 292 14,413 43,462

7,906

June

. .

..

26,192

.829

13,209 434 14,472

40,664

7,214

September

..

. .

13,278

875 10,492

403

11,770 25,048 6,596

December

..

7,968

.869

8,984 355

10,208

18,176

8,0 38

..

..

13,016

I

1, 176 8,887 399

10,462

23,478

7,520

June

..

..

17,058

1,691 9,871 263

ll,825

I

28,883 7,234

September

..

..

14,040

1,684

I

9,789 233 11,706 25,746

5,946

Decem

her

..

. .

12,126 1 , 319

8,929

330

10,578

22,704 6,921

E xce R s of A s set

s

ov e r Liabiliti es . £ Stg.

'000

.

34,852 34,101 20,669

14,0Q6

20,6!)3

2 1,693 18,936 . 22 ,34 5

36,558 41,936 29,852 28,157

35,556 18,452 10,13 8 15,958 21,6<19 19,800 15,783

c." ,..... 0

r--. i /

193 1

-.March

..

13,181

I

1,276 8,316

377

9,969

23,150

5,293

I

17,857

June

..

..

12,194 1,276 7,968 323 9,567 21,761 4,538 17,223

September

. .

..

10,945 1,309

7,774

530

9,613 20,558 4,031

I

16,527

December

. .

..

l

20,943

I

1,295 8,442 873

10,610

31,553

5 , 155

I

26 ,398

1932-March

. . ..

17,173 1,322 9,136

704

11,162 28,335 3,944 24,391

June

.

. .

..

13,257

1

1,319 9,491 384 11,194 24,451 3,932

I

20,519

September

..

..

7,834 851

10,200

462 11,513 19,347 3,201 16,146

December

..

..

11,354 475 11,152 37 1

ll,998

23,352 3,977 19,375

1933-l\llarch

. .

. .

14,181

407 10,840

377

ll,624

25,805

3,604

I

22,201

June

. .

11,865 456

10,991

·129

11,876 23,741

3,002

20,739

September

. .

. .

8,496

405

10,642 543

11,590 20,086

3,585 16,501

December

..

..

14,133

406 10,956

454 11,816 25,949 4 , 292 21,657

1934-March

..

16,045 4 06 14,983 455

15,84

:1

31,889 3,540 28 , 349

June

. .

..

10,612 383 15,970 749 17 , 10 2 27,71 4 3,153

I

2 4,561

September

..

. .

6,744

410

15,414 498 16,322 23,066 4,187 1 8 ,879

December

..

. .

9,084 410

14,466 283 1 5 ,159 24,243 3,931 2 0,312

I

1 9 35-March

12,019 628 12,170 263 13,061

25,080

..

4, 137 2 0 , 943

June

..

..

8,941

5 20

12, 4

64

30 8

1 3,29 2 22,233

3 ,7 60

I

18, 473

S e p

tembe

r

..

. .

6,743

436

11 , 050

334

11 ,82 0

1 8 ,5 63 3,69 9 1

4,8 64

Dec e

mber

. .

..

9,618

302

11, 5 37 2 48

12, 0 8 7

21,705 3, 993 1 7,71 2

1936-Ma

r c h

..

14,618 7 26 1 3,293 2 77

l4, 2

9G

28 , 914 4 , 0 08

I

24,9 0 6

Jun

e

. .

..

1 7,79 9 954

1 0 ,104

317

11, 3 75

2 9,1 74 4 , 681

I

24 , 493

Septe

mb e r

..

..

12,234

674:

9,10 6 3 73

1 0, 1 53

2 2,3 87 4,436 1 7

,9 51

D ece

mb e r

..

..

16,658

600

I

9 , 040

283 9 ,92 3 26,58 1 4 , 687 2 1,89 4

( 1)

In

addition

to

t h e p r esen t

ni ne

tradin!S

th e

fi g ur

es include

London

funds (pa r

tly

estim:tted)

o f the

Au st

ralian

Rank

of Comme

r ce,

the

B:tnl•

of Victoria,

the

Roya

l

Rank

C"f

Au s tralia,

and

the

W eat.er n

Au st

r a li

:m Bank

until

thei

r

amalgamation

or

absorption.

(')

Thr

e e b::tnks

we r e u

nab

l e to

separate

their

tota

l

V : mdon

funds

int.o t ho se

in re

sper.t

rf

Au s t r

alian

bu!'

and

thme

in

resp

ec t

of New

z:;ealand l!llsiness .

In

these

It h as

bern

::ts s umcd

that

t h e t

ot

l

L oudo

n

f un

c ls :tre

divi

ded

in

a ppr

oxi mately

the

same

p roportions as

the

total

bu s inP

5" c>f

eac h b

an k in

and

in New

Zealand.

The

n mo

un t

of Loudo n

fund

s

thu

s

e3 tima. t

ed to

arise from New

Z e:.hnd

bu siness has

b e en de duc t e d from

the

t o ta

l

by adding

it

to

th e

amount

of liabil iti ' ' S

( " )

The

grea

t e r

par t

of

t he figur es

th r oughout

the

tabl

e

re lat

e

to

the

en d of

the

quart

e r,

but

the

fi g u r es

for

two

ban!

:1re

averages

for

the

qvar

i:i• l'.

(')

For

the

qua

r te r s

M a r ch,

1 9 26

,

to

Ma r ch, Hl27 ,

inc l u s i v e ,

and

D ecem ber,

1935,

to

D ecem ber,

1 930 ,

inclus i ve,

the

of

a sse

t3 b

et weea

crm

and

l o n g-term

ig p

a. rtly

est imated

.

1

5 )

Su ch

money

a, t

ca ll , B riti s h

'r reas

ur y

b ill s ,

b::t lances

with

other

lJ:mks,

and

bill s rec e iYabl e .

NOTE.

-In

view

of t h e a bo v e n o t es , i t

w ill

be seen

that

the

figur

es in

the

tRble

cannot

he r egarded

as c ompletely

aceu

ratR,

but

it

is co n siderPd

that

th e

a ggr e g a

te

gives a

f a . irly

d o se

approximatio

n t o

th e co

rr ect

tota

l

at

the

e nd

of

the

qu:uter.

1-' ,.......

Cl) C)

TABLE

8. -NINE

TRADING

BANKS-AUSTRALIA.-EXCLUDING

COMMONWEALTH

BANK

OF

AUSTRALIA.

MONTHLY ASSETS

AND. LIABILITIES

IN

IN

RESPECT

OF

AUSTR ALIAN BUSINESS<').

(In

thou

s a nds

of

pounds

sterling).

Assets.

-

I

L ong

Term

Assets.(a)

Total

Excess of

Mo n

th.

S.hort

\

-

J,iabili

tie s

Asse t s

Total

(excluding T e

rm

Aust r a

lian

Oth

er

Total

Assets.

capital)

.

over

A ss

ets(').

Government

Government

Other

.

Long

Term

Liabilities .

Securities. Securi t ie s . A sse t s.

-

I

-

£

Stg.

'000.

£

Stg.

'000.

£

Stg.

'0 00.

£

Stg.

'0 00.

£

Stg.

'000.

£

Stg.

'000 .

£

Stg

. '000.

£

Stg.

'000.

1935-J

anuary

. .

..

10,250 400

12 ,5

63

170

13,133 23,383 2, 703

20,680

February

.. . .

10,866 410

12 ,388

171

12,969 23,835 2,551 21,284

March

. .

..

11,832

617 11,779 159 12,555 24,387 2,83 6

21,551 April

. .

..

10,444 508

11 , 978

171

12,657

23,101 2, 609

20,492

May

..

..

9,784 508 11,961

160

12,629 22,413 2,507 19,906

June

..

..

8, , 589

508

11,582

205

12,295

I

20,884 2,545 18,339

July

. .

. .

6,941 48 1

11,039 220 11,740

18,68 1

2,5 02

16,179

August

6,989

1 •

429

10,188

214

10,83 1 17 ,820

2,42 2 1 5 , 398

S eptember

..

. .

5,327 426

1 0,369

231

ll,026

16,353 2,472 1 3,881

October

..

. 6, 65 4 4 25

10 ,795 205 11,425

18,079 2,991 15,08 8 N

ovember

..

. .

7,683

290

10,907

168

11,365 19 , 04 8

3 , 221 15 ,827

December

..

..

9,5 30 29 0 10,605

144

li,039

2 0, 569 2, 987 17 ,582

lQ36--Ja:nuary

..

..

ll,967

572

11 , 696

I

154 12,422 2 4 ,38 9

2,901

21,488

February

..

..

12,548 697 12,163 148

13,008

25,556 3,035 22,5

21

Marc)l

. .

. .

14, 725 727

12, 690 174

13,591 28 ,

31 6 2,992 25 ,324 April

. .

. .

15,607 892 12,8 77

202

13,971 2 9,578

3 ,250

26,328 May

..

..

17,506 9 5 0 10,7 65

187

U,902

29,408

3,491 2 5,917

June

·

..

..

17,195 955

· 9,165 2 14 10,3 34

27,529

3,560

23,969

July

..

..

15,389

96}

8,394 267 9,622

25 ,0ll

3,308

21,703

August

. .

14, 172

8 52 ,

8,34 0 292 9,484 2 3,656 3,295

2 0,361

September

..

..

12,168 674

7, .732

27 0

8,676 20, 844 3,153 1 7,691

October

..

. .

U,941

603

7 ,565 228 8,396 20,337

3,060

17,277

November

..

..

13,761

603

7,609

139 8,351 22,

ll2

3,151 18,961

December

..

..

17,480

600

7,7ll

180 8,491

25,971

3 ,5 43 22,428

(

1

)

Three

banks

were

unab

l e t o

separate

the j r

total

London funds

in t o those .

in

r espect of

Australian

bu s iness

and

those

in

r espect, of New Ze a

land

b u si n ess .

In

these

cases

I' has

been ass

umed

that

t . h e

total

I.-ondon

funds

are

di v ided

in

approximately

t h e

same

proportions

as tho

tota

l business of

each

bank

in

Aus

t r alia

and

in

New Zealand.

The

amouut

of

London

fun

dR thus

estimated

to

arise

from

New Zeal

an d

bu s iness

has

been

deducted from

the

tota

l

by

adding

it

to

the

amount

of l i abilities shown.

( I )

Fo r

e ach

month,

the

dist r

ibution

of as

set s between

short

- term

and

l ong -term

is part

l y est

imated.

( 1 )

Such as money

at

call, Bri tis h

T r easury

bills, balances with

other

banks,

and

bills r ece

iv ab

l e .

NoTE.

In

view of

the

above notes ,

it

will

be s ee n

that

t h e figures i n

the

tab le

cn nnot

be r<"

gn rd e d

ns comp l

et.e l y

accurate,

but

it

is con s idered t

hat

the

ll.ggr

eg ate

give s a

f&l.rly

close

approximation

to

the

correct totaL

c,..)

313

TABLE 9.'-'"NINE TRADlNG

A VERAGE(1) RATES OF INTEREST ON ADVANCES AND DEPOSITS.

NOTE.-ln view of the method of calculation, described in the footnotes, the figures in this table cannot be regarded as completely accurate for any particular year. However, it is believed that they give a good approximation to the trend of bank interest rates over the period.

I. II.

I

III. 1 IV. I

Margin between Interest(•)

Year.(' ) Average ltate of Average Rate of Average Rate charged on

Inter est charged I nterest paid on charged and Advances as a

on Advances . Total Deposits. Average R.ate Percentage of

Paid. Total Advances.

Per cent. Per cent. Per cent.

I

Per cent.

1925 .. .. 6.72 2.62 4.10 3.44

1927 .. .. 6.72 2.79 3.93 3.51

1928 . . .. 6.77 2.83 3.94 3.25

1929 .. .. 6.68 2.93 3.75 3.28

1930 .. . . 6.92 3.19 3.73 3.65

1931 .. .. 6.72 3 .35 3.37 3.07

1932 .. .. 5.77 2.97 2.80 2.115

1933 .. . . 5.22 2.41 2.81 2.36

1934 .. . . 4.81 1.98 2.83 2.31

1936 .. . . 4.54 1.69 2.85 2.58

1936 . . . . 4 .59 1.56 3 .03 2.84

(1) Figures of the average mte of interest charged on advances and paid on total deposits (i.e., flXed plus current deposits) were supplied by each of the nine trading banks . The t otal amounts charged and paid oVer a year were then calculated for each bank by applying these rates to the total advances and total deposits for the quarter ended 30th June in each year. The sum of t hese all? ounts for all the bank:; was then exprcs3e cl as a percentage of the total advances and the total deposits for

the quarter, giving tlJ e ii gu!'l\S Shown in co lumns I . and II. above. The :flgll r es in column III. were obtK'tin ed by subtracting thf! figure in co lumn IT. from the figure in column :r. ( 1

) The periods of the year for which the average rates of interest were suppli ed di ffe red for different

banlm. the average does not r elate exclusively to the year for which it is shown , but may

relate to a part of that year and to a part of the previous year. (") " Net Interest charged " is taken as the excess of the interest charged on advances over the inl;erest paid on deposi ts for the year. The method of calculat ion of t h ese two amounts is described in fo otnote (1) above.

A B c D E

F

T A

TABLE

10 . -

NI N . E

TRADING

BANKS

-AUS"l'RAL1A

.

CLASS

IF ICATION

OF

A D V A

NCES

WI THIN

AUSTJtALIA.

NoTE--T

his

table

cannot

be

regar

d ed

as

more

than

a

rou

gh

indi

cation

of the

distribution

o f bank

ad vanc es .

The

bas is

of

c

la s sification

differ s

from

bank

to

bank,

and

i n some in

sta n ces , considerab l e

estimation

has

been

n ecessary

in

order

to

c ompl

et e

the

tabl

e .

I

J027

.

1931.

J035.

193 6 .

.: \dY an

ces

to l"'e

r h on

s

or I nstitution s

in-

)

I ' er

cent.

\

Per

cen t .

Per

c e nt .

Pe r

£'0 0 0.

I

O [

£'000.

of

£'000.

of

£'000.

o i

To tal.

Total. To tal.

'lo t. .!.

--

-

-

I

Manufac

turin

g

and

Mining

25 , 43 6

11.9

21,744 9 . 6 22,333

8.8

24,145

9 "

..

.

Comme r ce ,

Tr anspor

t

and

Distributi

on

..

.. .

.

4 8,3 07

22.6

46, 114 :w

.4

46,f>59

18 . 3 49,855

19.0

Finance,

&c.

..

9,868

4.6

10,404

4 . 6 14,17 9

5.6

15 ,481

5.9

. Agricultural

and

Pa st

oral

I ndustries

..

88,938 4

1. 5

107 , 000

47.4

126 ,3 7 6 4 9

.8

125 ,048

·47 .'i

Profes s

io ns,

En ter

tainments

and

Person

a l Se

r v i ce

. .

. .

ll,8

53

5.5

1 2,2 19 5 . 4 12,941

5.1

13,13 5

5 .0

Other

Pursu

it s,

including

advan

ces for b u ilding

and

to

public

bodies

..

..

. .

29 ,8 16 1 3 . 9 28 , 425

12.6

31,558 1

2.4

34,569

13.2

Advan

ces

of

Ni n e

Banks

. .

..

..

214,218

100.0

I 225,9 0 6

100 . 0

253,946

100

.0

262,233

100 . 0

dYances

of

Australian

Bank

of

Commer

ce--

Cl a ssification

not

ob t a

inabl

e

..

..

1 2,309

..

\

11,450

. . . .

. .

. .

. .

ota l

Advances-A

ll

Trading

Banks

. .

··

I 226,527

. .

237,356

. .

I 253 , 946

..

I 262,233

. .

I

NOTF..

- (a)

Of

the

total

given

i n

the

tal.J

l e ,

about

h alf r e l atr.s

to

.Jun

o i n

eaeh

yea. r ,

a_ l>ou

t on e · t hi

rd

Lo

Sep t e mb er

o r

Octob e r ,

and

ab out

o n c - 8ixt.h

to

{ b)

. .\.dvan ees

t.o

p ers ons e ngaged

io - the

Pastoral

Tndu

stry

n.re

g i v e n

by

f o nr b a uk s

an d repr ese nt

nl11

1 Ut

ha.lf

t.h e

t. ota

l advances

s h own

t , ho

!; e f ou r

ba nkR

to

A gr i c ult11ral an d

] la sto

r a 1

In du s

tries.

_ (c)

Ad va

n ces

t;o

p e r

sons

enw1

,g e<1

i 11

Dn.i

r ying

are

show

n

hy

two

banks o

nly

,

hnt

t,Jie

fi g nr e s

for

these

two

show

a n J a.rkc

cl i ncre

ase

br.twr.pn

1927

a.n tl

193

1. o n

t , h c

one hand , and 19 35

an

L 93U

on

th e

oth

e r .

(d)

Advanc

es for b u i lding

pur

p o se!'i

are s h v wn

l1y

fiv e ban i

.::,.. , a nd

rt'pr es t •

nt

the

pc r cent

: q.:! e s

oi

the­

tota l

advan ces of th ese

fi\'e

Ua.nks

: -

19 27 193l

4 . 1%

1 9 35 J93G

4. 0% - L l%

vo ...... >!'-

.jl[i

TABLE 11.-TRADING BANKS-AUSTRAT,LL

PERCENTAGE OF TOTAL ADVANCES AT VARIOUS RATES OF INTEREST AT 30TH JUNE,(') 1927, 1931, 1935, AND 1936.

Percentage of To tal Amonnt o f .A.dn,\nccs.

Hate of I nteres t charged-percentage - per annnm. 1927.(' J 1931.('). I 1HB:•.(') 'l !l:lfl.( ' ) I P er cent. Per cent.

I

Per cent. Per cen t ..

No interest charged(') .. 0 . 71 0.74 1.62 1.50

Under 3! . . .. . . 0.09 0.12 1.01 1.03

3! and under 3{ .. .. 0.02 .. 0 .39 l.ll

and nnder 4:} . . .. 0.03 . . 2 .06 1.7-i

·-

'l'otal, 4 and under .. 0 . 85 0.86 5 .08 .38

4± .. . . .. . . .. 0.89 1.22

4! .. . . . . 0.02 .. 3.32 2.74

4! .. . . .. . . . . 3 .86 ·:Ll3

5 . . . . . . 0 .1 2 I 0 .19 68.23 48.23

Total, 5 and under .. 0 .99 1.05 81 . 38 61.()9

5± .. .. . . 0 .02 0.05 6.41 20 .93

5! . . .. .. 0.30 0.08 8.18 11 .58

.. .. . . 0 . 01 0 .06 1.15 3.04

6 .. . . .. 3.43 4.76 2.82 2.60

·------------- Total, 6 and under .. 4.75 6.00 09.94 !:10 .85

6t .. . . .. 0.74 2.31 0.02 0.10

6 ' ;r .. . . . . 20.62 10 . 27 0.04 0.05

6" .- .. .. . . 2.00 3.57 . . . .

7 . . .. .. 47 .96 26. 14 . . . .

Total, 7 and under .. 76.07 48.29 100.00

I

100 .00

7:} and under 7i . . . . 20. 03 41.17 .. . .

7i and under Sf . . . . 3.90 10.12

I

.. . .

8! and over .. .. 0 . 01 0.42 .. . .

Total, all rates .. 100.00 100 .00

I 100.00 100.00

Average rate charged on total advances(') .. .. 6.93 7.12

I

4.92 4 .99

( 1) About two·third.• of the total is for June, the remainder being <:iven as at March or October.

(') Seven ba.nks only. (' ) Bight banks only. (t ) The fact that no interest was charged in any particular year does nnt uecei'sa.ril y iw ply lhat th e right to charge interes t pennancutly ai.Jaudonec1. In rn any cases the right i'l retained to interest to t he account a.t a later dn.te .

( 6 ) These avert"l ges do no t, exactly wi tll lho ;e hown in r.o lumn T of T.tillc 9. pa rt t.v hccausr t iH'

perioJ :; eoverr-d ;He not. identical in t he twr, :wU pArt!_,, lro ru u ll l' or hrHlks

W €' TC not available for inclu--i ion i r1 t.hi .., table.

.. :•

·. ,.

-'

31G

TABLE 12.- NINE TRADING BANKS-AUS'!'RAI.IA.

RATES OF INTEREST CHARGED ON AND ADVANCES AT 318'r

DECEMBER, 1936.

B..ate of Interest Charged-Per cent. Amount of Loans 'Percent.age of Total

per annum. or Advances. Loans or Advancei> .

£'000. Per cent.

No interest charged(1) . . .. 9,442 3 . 61

Under 3! . . .. . . . . 899 0.34

3! .. . . . . . . 722 0.28

3! . . .. . . .. 2,821 1.08

3!- .. . . . . .. 1,353 0.52

4 . . .. . . . . 2,715 1.04

T otal, 4 and under .. .. 17,952 6 .87

4t .. .. . . . . 3,512 1.35

4! .. . . .. . . 8,244 3.16

41· . . . . . . . . 7,168 2.74

5 . . . . . . . . 30,640 11 . 73

Total, 5 and under . . .. 67,516 25.84

5i .. .. . . . . 81,277 31.ll

5t . . . . . . . . 90,852 34.77

5! . . . . . . . . 9,208 3.52

6 . . .. . . . . ll, 786 4.51

Total, 6 and under . . .. 260,639 99.75

6! . . .. . . . . 300 O.ll

6l . . . . . . . . 324 0.12

6.l!. 4 . . .. . . . . 30 0 .01

7 . . . . . . . . 9 ..

Grand Total-all rates . . 261,302 100 .00

Average rate charged on total loans or advances . . . . .. 5.07

( 1 ) The fact that no interest was charged at this p:uticular date does not n ecessarily imply tba.t the

right to charge interest was permanently abandoned. In many cases the right is r etained to charge interP-St to the !lccount at a later elate .

317

TABLE 13.-TRA.DING BANKS*-AuSTRA.LIA..

CLASSIFICATION OF INTEREST-BEARING DEPOSITS ACCORDING TO TERM OF DEPOSIT.t

30th June.t

1926 1927 1928 1929

1930 1931 1932 1933

1934 1935 1936

1926 ..

1927 ..

1928 ..

1929 ..

1930 ..

1931 . .

1932 ..

1933 ..

1934 ..

1935 ..

1936 ..

3 months and under 6 months .

£'000. 2,899 3,520 5,945 8,177

11,291 13,080 10,612 8,886

8,698 5,125 6,329

I

6 months 12 m onths 24 months and under and under and over. 12 months . 24 months.

AMOUNT OF DEPOSITS,

£'000. 9,193 7,621 7,660

7,019

10,527 16,325 19,863 18,233

20,176 17,602 18,839

I

£'000. 26,076 26,589 25,448 25,230

29,391 40,829 48,834 49,335

47,393 42,634 44,794

£'000. 100,674 105,976 ll3,078 125,622

ll6,535 98,257 95,034 95,247

102,615 102,938 96,433

Total-Fixed Terms.

£'000. 138,842 143,706 152,131 166,048

167,744 168,491 174,343 171,701

178,882 168,299 166,395

1----1·----

PERCENTAGE OF ToTAL IN EAcH Cuss.

Per cent. Per cent. Per cent. Per cent. Per cent. 1.9 6.2 17.5 67.4 93.0

2.3 5.0 17.1 68.3 92.7

3.7 4.7 15.7 69 . 5 93.6

4.7 4 . 0 14.4 71.8 94.9

6.4 5.9 16.6 65.8 94.7

7.4 9.2 23.0 55.5 95.1

5.8 10.8 26.7 51.9 95.2

4.9 10.0 27.2 52 . 5 94.6

4.6 10.7 25.0 54.2 94.5

2.8 9.8 23.8 57.4 93.8

3.6 10.6 25.2 54.4 93.8

At Call, Overdue, &c.

£'000. I

10,465 11,370 10,446 9,017

9,314 8,660 8,867 9,726

10,345 ll,036 ll,046

Per cent. 7.0 7.3 6.4 5.1

5.3 4.9 4 . 8

5.4

5.5 6.2 6.2

1 .Cot Depo Bear I nt er

al

sit::< ing ·

est.

£'000. 149,307 155,076 162,577 175,065

177,058 177,151 183,210 181,427

189,227 179,335 177,441

Per cent; 100.0 100.0 100.0 100.0

100.0 100.0 100.0 100 .0

100 . 0 100.0 100.0

• Nine trading banks, including banks subsequently amalgamat ed with any of the pre8ent nine. t Figures for all years except 1934 and 1935 are partly esti mated . t 30th June, or nearest balancing date.

18, g\J

\ I

318

TABLE 14A.-TRADING BANKS*-AUS'l'RAUA.

CLASSIFICATION OF DEPOSITS ACCORDING TO SIZE.i· DEPOSITS BEARING INTERES'l'.

I

I

No t

At 30th June.:j: Bxceeding £500.

£501 to

£1 ,000.

£1,001 to £3,000.

£3,001 to £5,000.

£5,001 to £10,000.

Over £10,000. Tot.al.§

___ J I 1---------1·----1-----1---------AMOUNT OF DEPOSITS. £'000. £'000. £'000. 1926 28,433 23,039 29,068 1927 29,116 24,074 31,0.59 1928 31,176 25,698 33,755 I £'000. I £'000. 10,909 11,301 11,988 12,904 12,865 14,003 £'000. £'000. 46,994 14-9,744 46,367 155,508 46,346 163,843 1929 33,620 27,752 37,154 14,302 15,474 49,018 177,320 1930 34,684 28,138 14,172 14,567 4-9,652 178,686 1931 37,138 28,068 37,573 13,691 13,734 48,755 178,959 1932 36,851 28,088 37,451 14,070 14,657 50,879 181,996 1933 35,802 27,692 36,330 13,768 13,633 54,685 181,910 1934 34,433 26,862 36,209 14,382 14,914 63,773 190,573 1935 32,054 25,844 3fi,068 14,015 15,179 59,800 181,960 1936 30,551 I 25,658 35,959 13,912 14,163 59,180 179,423 PERCENTAGE OF TOTAL IN EACH CLASS. er cen ·1 er cen . er cen . er cen . . er cen . . er cen . er cen 1926 .. 19 . 0 15.4 19.4 7.3 7.5 31.4 100.0 1927 .. 18.7 15.5 20 .0 7 . 7 8.3 29.8 100.0 1928 .. 19 . 0 15.7 20.6 7.8 8.6 28.3 100.0 p t p t p p t p p p t. 1929 .. 19.0 15 . 7 20.9 8 .l 8.7 27 . 6 100.0 1930 . . 19.4 15.8 21.0 7 . 9 8.1 27 . 8 100 . 0 1931 . . 20.7 15.7 21.0 7.7 7 . 7 27.2 100.0 1932 .. 20.2 15.4 20.6 7.7 8.1 28.0 100.0 1933 .. 19.7 15.2 20.0 7.6 7.5 30.0 100 . 0 1934 . . 18.1 14.1 19.0 7 . 5 7 . 8 33.5 100.0 1935 .. 17.6 14 . 2 19 . 3 7.7 8.3 32 . 9 100.0 1936 . . 17.0 14.3 20.0 7.8 7.9 33.0 100.0 • Nine trading banks, including banks subsequently amalgamated with any of the present nin e bil.uks. t Figures for every year are estimated. t 30th .Tune, Clr n earest balancing date. § Totals in this table do not agree exactly with i u Table 13, because tlwy do not in all apply to exactly the same date.

319

TABLE 14B.-TRA.DINO BANKS*-AUSTRALU.

CLASSIFICATION OJ!' DEPOSITS ACCORDING TO SIZE. t DEPosr·rs NoT BEARING INTEREST.

I

I

· Not £501 £1 ,001

£;)00. £1,000. £3,000.

£3,001 to

£5,000.

£5,001 to

£10,000.

Over £10,000. I Tolal At 30th June.t I to . I . to

1--1---,----

1\J2G 1927 1928 1929

1930 1931 1932 1933 .

1934 1935 1936

1926 1927 1928 1929

1930 1931 1932 1933

1934: 1935 1936

£'000. 40,038 38,460 38,523

37,600

33,641 31,001 31,8:18 31,320

33,508 35,141 36,961

AMOUNT OF DEPOSITS.

£ '000. 15,116 14,602 14,182

13,759

10,567 9,726 10,118 10,351

12,172 12,939 13,881

£'000. 21,061 20,100 19,753

]8,941

£'000. 7,727 7,089 7,33:3

7,211

£'000. 9,049 8,344 8,179 7:631

14,678 4,945 5,801

13,099 5,067 5,101

13,914 5,515 5,799

14,568 I 5,321 6,053

, 16,879 I 7,085 7,340

19,614 7,606 7,717

£'000. 21,215 19,361 19,479 21,562

19,504 16,797 17,723 18,662

21,992 21,4f59 21,572

I

. . 19,067 1 7,529 8,M2 I

1--,---1----.---,--------1----1

PERCENTAGE oF ToTAL IN EAcH CLAss.

Per cent, Per cent. 1 Per cent. P er cent. 35.1 13.2 18 . 4 6.8

35.7 13.5 18.6 6.6

35.9 13.2 18.4 6.8

. 35.2 12. 9 17. 8 6. 8

7

38.4 37.5 36.3

33.8 33.6 34.4

11.9 12.0 11.9 12 .0

12 . 3 12.4 12 . 9

16.5 16.2 16.4 16 . 9

17.1 18.2 18.3

5.5 6.3 6.5 6.2

7.2 7 .2 7.1

Per cent. 7.9 7.7 7.6

7. 1

6.5 6.3 6.8 7.0

7.4 8.1 7.2

Per cent. 18.6 17 . 9 18.1 20 . 2

21.9 20 . 8 20 . 9 21.6

22 . 2 20.5 20.1

£'000. 114,206 107,956 107,449 106,704

89, 136 80,791 84,907 86,275

98,976 104,577 107,351

Per cent. 100.0 100.0 100.0 100.0

100 . 0 100.0 100.0 100.0

100.0 100.0 100 .0

* Nine trading banks, including subsequent.ly amalgamated with any of t he present nine banks. t J!'igures for every year are partly estimated. t 30th June, or nearest balancing date.

T.A

BLE

1 5 .-N

INE

T RAD I NG B.A

NKB-A

U S TR

ALIA. .

CLASSIFICATION

OF

INTERE S T BEAR

IN G

DEPOSIT

S.

P E RCENTAGE

OF

DEPOSITS

AT

V .ARIOUS

RAT

E S

OF

INTER

E ST AT

30TH

JUNE*,

19 26

TO

19 3 6 ,

INC

L US

IVE.

I

I

I

I

- -

1 926 . t 1927 . 1 9 28 . 1 92 9 . 19 30 . 1931. 19 32. 193 3 . 1 93 4. 1 9 35 .

1936

.

I

'

Per

cent.

P e r

cent.

Per

cent

.

Per

cent

.

Per

cent.

Per

cent.

Pe r

cent.

P e r

ce n t.

Pe r

cent

.

Per

c ent.

Per

cent.

Under

1!

. . . .

.. ..

. .

0.2

. . . .

. . . .

0.3

1.0

1.5

1.3

1.1

I !

and

un der 2

..

..

..

. .

0 . 1

0.2

0 . 2

0.3

0 . 3

1.1

.

1.1

1.2

4 . 0

1.7

2

and

under

2-!

..

. . . .

..

..

. .

. .

0 . 3

0.6

0.9

0.4

4.7

10 . 0

28.4

22.3

2!

and

under

3

..

.. . .

.. ..

0 . 6

0.6

0.6 0.2

0.4

5.9

22 . 1

36.8

38.4

59.9

3

and

under

3-!

..

..

. . ..

0.2

0.4 0.4 0.2

0.5

1.4

17.3 34.7

41.0

25.1

11.4

3l

and

under

4 . .

..

. .

..

2.2

1.6

0 . 2

0.2

..

4 . 8 16.9

10.4 5

-,. 3

0.1

0 . 2

I

4

and

under

4!

. .

..

. .

..

6.0

6.5

8.0

8.4

1.2

6.8

32 . 2

21.9

1.3

. .

. .

4!

and

under

5 . .

..

. . ..

15.7 15.9 14.8

13 . 4

16 . 7

11.0

0.1

0.1

..

..

. .

5

and

under

5 !

. .

..

..

..

68.9

70.9

72 . 5 1

73 . 0 77.0

71.5 23.3

1.5

. .

. .

. .

5!

and

und

e r 6 . .

. .

..

..

..

0 . 1 0.1 0.1

0.1

0.1

. .

. .

0.1

..

..

6

and

o v er

..

..

. .

. .

0.1

.. ..

..

0.1

0 . 1

.. ..

. . .

.

. .

T otal

of

abov e

. .

..

93.1 96.3 96.8

96.4

96.7 97.3

97 . 5

97 .5

97.2

97 . 3

96 . 6

Un c l a ssi

fi e d

.. ..

. .

..

6.9

3.7 3.2

3 . 6

3.3

2 . 7

2.5 2.5

2 . 8

2.7

3.4

Grand

Total

..

. .

..

100

. 0 100.0 100.0 100.0 100.0

100

. 0 100.0 100.0

100

. 0

100

. 0

100

. 0

A v erage

Rate

of

Interest

paid

on all

Interest-

Bearing Depos i

ts

.. . .

..

4.81 4 .

79

4.81 4 .

81

4.91 4.84 3.97 3 .

21

2 . 80

2.42

!'5

•

Abo

u t

ha lf t h e t

ot a l deposits a r e

as at

M a r c

h,

Sep

tembe

r a

nd

Octo

ber.

t

Elght

b an

k s on

ly.

321

TABLE 16.-NINE TRADING BANKS-AUSTRALIA.

CLASSIFICATION OF INTEREST-BEARI NG DEPOSITS, ACCORDING T O RATE OF INTEREST PAID, AT 31sT DECEMBER, 1936.

Deposits at Call, Total Deposits Bearing

F ixed Deposits. Bearing I nterest. Interest .

Rate of Interest cent.

pet annum. Amount Per cent . Amount Per cent. Amount Per cent .

£'000. of Total. £' 000. of Total. £'000. of Total.

l .. 294 0 . 17 3,097 29. 41 3,391 1.88

li .. .. . . 48 0.46 48 0.03

li . . 9 0 . 01 1,085 10 . 30 1,094 0.61

It .. .. . . 359 3.41 359 0. 20

2 . . 7,582 4.45 905 8 . 60 8,487 4 . 69

2i . . 8,974 5.27 19 0.18 8,993 4. 97

2i .. 70,816 41.59 587 5 .57 71,403 39 .49

21 . . 36,824 21.63 993 9 .43 37,817 20 .92

3 . . 45,541 26.75 394 3.74 45,935 25. 41

3t . . 23 0.01 1 0 .01 24 0 .01

3t .. 70 0 .04 308 2.93 378 0. 21

31 . . 62 0 .04 . . .. 62 0 .03

4 . . 70 0.04 1,079* 10 . 25 1,149 0 .64

5 . . . . . . 66* 0.63 66 0 .04

6 . . . . .. 1,588* 15.08 1,588 0.88

-

Total-All Rates . . 170,265 100. 00 10,529 100 .00 180,794 100.00

Average Rate of Interest Paid 2 . 65 per cent. 2 . 65 per cent. 2 . 65 per cent .

• These amount<> are mainly offict>rs' provident fund deposits and other internal accounts.

Jj' .258 1 .- 21

322

TABLE 17.-CoMMONWEALTH BANK A.ND NINE 'l'RA..DING B.u:.u .

BANK CLEARINGS AND BANK DEBITS.

Average Weekly Value of

Av erage Weekly Am ount of Deb its to Bills, &c.,

Cust.omers' Accounts. Cleared(1)- Six Capital Cities .

-