How a Great Power Falls Apart
Decline Is Invisible From the Inside
THE view was expressed in these pages not long ago[i] that the future of Australia lay with Mr. Scullin, the Prime Minister. If he sided with the militant left wing of the Labor Party, offering bounties and subsidies to win the support of the impoverished wheat-farmers, a big drive towards socialization would result. If, on the other hand, he sided with the moderate Labor elements and led the party into the paths of financial rectitude, recovery without revolution was still practicable.
Perhaps the writer of the article in question overestimated the influence which one puny mortal may exert upon the mass action of a nation. Mr. Scullin's choice, if it has been made, has not had any such decisive effect. He has broken with the moderates and driven into opposition Messrs. Lyons and Fenton, the lieutenants who led his Cabinet during his absence at the Imperial Conference. Yet today he is presiding over a Premiers' Conference that seems on the verge of agreement to balance within three years the Commonwealth and State budgets and to set on foot a national drive for stability on the long-sought basis of common sacrifice. This is surely a right-wing policy, if not the very policy that Sir Otto Niemeyer advised. None the less the menace of communism very evidently is not laid. Mr. J. T. Lang, the Labor Premier of New South Wales, still mutters thunderously on the extreme left. His consent to the principle of equal sacrifice is cynically formal and evasive. And no one is sure whether the Federal Labor Government in its negotiations with the assembled Premiers seeks financial stability or an electoral opening by which it may destroy the Nationalist control of the Senate and win a new lease of power as well as office. But financial reserves are running low. Default is, at best, but three months off, and every constructive impulse drives the conservative elements in Australian business life to make the most of the preferred basis of reconstruction.
How is one to explain the "stalemate" of the last six months, and this paradoxical regrouping of the center and left in shaping a conservative program? Many and diverse tendencies are joined in the new cult of a via media. In the first place there are strong but elastic ties that operate to reshape the Labor Party itself -- a disciplined loyalty to "the movement" which survives every internal discord, a sensitiveness to electoral trends rather than to political or economic theory. The Labor Party is so truly a movement that at times its followers' greatest trouble is to know just where it is or even which of two claimants is its Executive. Early this year "the movement" was brought up with a round turn from advocating "credit extension," "the goods standard" and all such euphemisms for inflation. It had found them to be the rottenest of platform timber. At Federal by-elections in New South Wales, and later at a general election for the State Assembly in Tasmania, they brought the Labor Party nothing but disaster.
A second factor making for the postponement of decisive steps may be found in the Australian banks' reluctant but powerful support of existing governments, even when exposed to abuse and childish follies at their hands. They have shipped gold to London to the amount of nearly £30,000,000 in eighteen months in support of our overseas credit. They have supported conversion loans totalling £60,000,000 in March and December of 1930. They have conceded to the governments first call upon their London funds to meet interest payments there and in New York. They have found the governments short-term credits of £23,000,000 in London and £26,000,000 in Australia. They have paid out many millions to keep the Government Savings Banks supplied with liquid funds. Both the Commonwealth Bank, the quasi-central reserve bank, and the ten big Australian trading banks have thus used every available means to maintain confidence in the Australian pound and to underpin the structure of government finance. In addition they have extended their advances to private customers to the limit of available securities. Neither vituperation nor downright stupidity on the part of political leaders -- the latter reaching its nadir in Mr. Lang's repudiation plan -- have turned the banks from their duty to the Australian community to maintain the basis of mutual confidence between honest men.
Perhaps this tenacity in the bankers goes far to explain the flexible policy pursued, with one exception, by the Labor governments of the Commonwealth and states. These rulers, though trained as Labor leaders, are but human. Why should they be in haste to dispense with such capable financiers? "So long as this comfortable and well-handled craft will carry us," their actions seem to say, "we need not launch into doubtful weather and uncharted seas on our own, perhaps cranky, vessels."
The third factor in postponing a collapse has been the Australian climate. This capricious mistress has deigned to favor both the tough elasticity of Labor policies and the tenacity of the banks by a continent-wide mood of record productivity which has lasted -- absit omen -- ever since December 1929. Never has Eastern Australia seen such a fruitful fall as that merging, as I write, into a mild winter. The sheep population of Australia has for more than six years exceeded 100,000,000, a feat not achieved before. It has now definitely passed the record of 1891 that stood for 38 years, 106,400,000. A wheat crop of 200,000,000 bushels was harvested last summer (November 1930--February 1931), beating a record of 179,000,000 bushels gathered in 1915--16. The dairy farmers -- "cow cockies" we call them -- are building up an unprecedented output of butter for 1930--31 as the crown of their steady advance from an average production of 197,000,000 lbs. in the five pre-war years (1910--14) to an average of 282,000,000 lbs. for 1925--29. In spite of prices heavily reduced by the slump overseas this abundant production of wool, wheat and butter has maintained the sterling value of Australian exports of merchandise at about £80,000,000 for 1930--31, only twenty percent short of that of the previous year.
In the political spinning of these three strands into a twisted but still unbroken thread Prime Minister Scullin has played a voluble but vacillating part. His debating power, thoroughly attuned to the second-rate caliber of the present House of Representatives, makes him a force of some magnitude at Canberra, the bush capital where the Federal Parliament meets when it must. But in Cabinet and in the party caucus Mr. Scullin is quite overshadowed by the enigmatic and resourceful Treasurer (the Hon. E. G. Theodore) whom he restored to power soon after his return to Australia in January.
A few facts about Mr. Theodore's recent career in Federal politics call for notice. In June 1930 he resigned the Federal Treasurership. Mr. Justice Campbell of the New South Wales Supreme Court, sitting as a Royal Commissioner in Queensland, whence Mr. Theodore had passed into the national arena, had reported in very adverse terms on the purchase, by a Queensland government of which Mr. Theodore was a leading member, of certain mining leases at Mungana. The present (anti-Labor) government of Queensland, however, found legal obstacles to immediate action upon the charges laid in Mr. Justice Campbell's report against Mr. Theodore and his associates. While it was carefully removing them by legislation, Mr. Theodore, despite his resignation of Cabinet rank, continued to play an active part in the inner councils of the Federal Labor Party and is said to have greatly impressed the realist in Sir Otto Niemeyer. Some were surprised when Mr. Theodore espoused in November 1930, during Mr. Scullin's absence, the left-wing policy of inflation or "release of credits." In his first term of office as Federal Treasurer (November 1929 to June 1930) he had rejected such plans with scorn as promising nothing but bad wages to the workers. But a leader without a following and a following without a leader exercise, as is well known in political science, an irresistible mutual attraction.
In resisting inflationary proposals the Acting Treasurer, Mr. J. A. Lyons, had the long-range support of the Prime Minister. By wireless and by cable Mr. Scullin, evidently under British influence, fulminated against "dishonest and disastrous" resolutions in caucus. So supported, Mr. Lyons was able to stand up to the forces Mr. Theodore mobilized against him. But on the return of the Prime Minister in January the backing in the party caucus of the center and all but the extreme tip of the left wing enabled Mr. Theodore to persuade Mr. Scullin that the Mungana charges had fizzled out and that his (Mr. Theodore's) unquestionable talents might again with propriety be employed in the country's service. He was reinstated as Federal Treasurer. Thereupon the moderate leaders, Messrs. Lyons and Fenton, resigned and there came to an end the period of stalemate in Federal politics during which the left wing had vetoed economy to balance the budget and the moderates had vetoed inflation of the note issue.
Yet the unexpected continued to happen. Instead of turning decisively to the left "the movement" split into two violently hostile camps, the one acclaiming Mr. Theodore and his gospel of fiduciary issues, the other announcing a new creed, the Lang plan, and threatening with excommunication every Labor member, federal or state, who refused to pledge himself to that plan. What was this Lang plan?
Australians are children of petulant stocks bred in an impulsive climate. They are capable of magnificent energy when there is nothing else for it. But they have been spoilt too long with "easy money" from an indulgent mother-country. After a generation of prosperity it is not easy to take up the gruelling task of adjusting public and private spending to a suddenly reduced national income. Yet one section after another, since bad times came again, has readily pointed out how all could be set right at the expense of the other fellow. The manufacturer blames the industrial arbitration courts' awards of high wages and easy conditions to his employees. Hence, he says, the high costs and the high protection they necessitate. "Give me freedom of contract and all will be well!" The farmer blames the customs tariff or the railways which charge him high freights on all he buys or sells. "Give me low duties, low freights and a fighting chance!" What, in that event, would be the railway deficits, already above ten million pounds per annum, not to mention the customs revenue? The Lang plan is another such short cut evolved out of the imaginings of city wage-earners and civil servants. Its authors and supporters were too hasty and too blind to the realities of finance to figure out whether it would bring their countrymen inland a new working basis in private and public affairs. Their first concern, confessedly, was to "alter the face of society." But to judge by the state elections in Tasmania and in party conferences generally, Australians in the mass want a fair partnership in recovery rather than an "altered face."
Mr. Lang, as Premier and Treasurer of New South Wales, first propounded his "plan" on February 9 of this year before a Premiers' Conference at Canberra. Let us pay no more interest to British bondholders, he moved, until "Britain" (note his confusion of investing subjects with their government) has dealt with Australian debts as America dealt with hers. Let us reduce the interest on all government borrowings in Australia to three percent and replace the gold standard by "a currency based on the wealth of Australia, to be termed the goods standard."
The Premiers, being assembled at Canberra in search of a plan to balance budgets and to restore confidence both here and abroad, would have none of Mr. Lang's heresies. Even Mr. Theodore, as Federal Treasurer, turned upon his fellow Laborite from New South Wales with an acid prediction of the immediate results of such wild talk. Repudiation, he said, would not only accentuate unemployment and dry up all supplies of loan money.[i] Mr. Lang's proposals would result, said Mr. Theodore, "in financial panic and probably a run on the New South Wales Government Savings Bank, which will be unable to meet all demands unless the Commonwealth Bank comes to its rescue. The financial crisis precipitated in this way will leave the New South Wales Government without financial resources and render it unable to pay anyone."
"Treason to Labor!" cried Mr. Lang, and took the plunge. In full command of the state party machine he solemnly expelled from "the movement" the Federal Labor members from New South Wales constituencies who would not accept the Lang plan. Mr. Theodore as member for Dalley (N. S. W.) was the first to be put out. Then Mr. Lang carried his campaign into the neighboring states of Victoria, South Australia and Queensland in an attempt to capture the whole of the Labor Party. For a time he seemed a victor on all fronts. In the true style of a dictator he amplified his commands. He put forward on March 17 a project of legislation to bring within his plan interest payments under private contracts. This bill proposed, in addition to a reduction of interest on government bonds to three percent, a similar reduction in the rates which banks might legally pay to depositors or charge on advances, and in those which mortgagees might charge for money lent on mortgage. Though passed through the lower house in the New South Wales legislature the bill was promptly rejected by the Legislative Council. But no legislative curb could prevent Mr. Lang, in his executive capacity as State Treasurer, from defaulting in the payment of interest to British and other overseas bondholders. This he did at the beginning of April. The Commonwealth Government at once paid the interest, fulfilling its guarantee of the state debts in terms of the Financial Agreement of 1927 and the constitutional amendment (105A) under which that agreement was given binding force.[ii] Part of the amount so paid the Commonwealth stopped out of moneys due from it to the state of New South Wales. For the balance it sued the state before the High Court of Australia. The case stands part heard and raises the ominous prospect of federal execution upon a recalcitrant state.
As Mr. Theodore had predicted, these alarums and excursions created panic among the depositors in the New South Wales Government Savings Bank. Savings banks in Australia are, with insignificant exceptions, government institutions, repayment of the deposits being guaranteed, in the last resort, out of the Consolidated Revenue. During the almost unbroken run of prosperity enjoyed by Australian communities from 1903 to 1929 they piled up over £200,000,000 of deposits. These they laid out in loans against homes and farms and as advances at call or short notice to State Treasurers or in purchases of government bonds, keeping some twenty percent of their deposit liabilities in liquid assets. But when hard times came again their deposits, as Sir Otto Niemeyer noted in August 1930, began to shrink with the drain on savings that unemployment causes.
Their depositors, moreover, being marginal converts from hoarding to banking, soon showed apprehension when Labor politicians railed against banks and bondholders. Was not the Government Savings Bank the biggest bondholder in New South Wales, having £30,000,000 in the bonds that Mr. Lang was trying to reduce to three percent ? Early in February it was rumored that Mr. Lang was refusing to pay the interest he owed to the Savings Bank on such holdings. The decline in depositors' balances in the New South Wales Government Savings Bank showed unmistakable signs of fear at every fresh revelation of the Lang plan. At Easter Mr. Lang boasted to a conference of his section of the Labor Party that his interest proposals were the first step in the socialization of credit and finance. Withdrawals from the Government Savings Bank at once jumped to half-a-million pounds a day. Very naïvely the Savings Bank Commissioners (the Executive Board) "reassured" the public by double-paged advertisements in the newspapers. Panic gathered fresh volume. On the last day which saw the Savings Bank doors open for business (April 22) a million and a half pounds Australian (nearly $5,770,000) were paid over the counters.
Suspension of payment, affecting a million depositors, was a mortal blow to the Lang plan and to its author's hopes of an Australian dictatorship over the Labor Party. How long, men asked, before the other phase of Mr. Theodore's prediction shall come true and the State Treasury prove empty?
The failure of the New South Wales Savings Bank had a sobering effect on all shades of political opinion. It was a peep over the precipice. For a moment the panic looked like spreading. A run on the Commonwealth Savings Bank, a somewhat anomalous annex of the Commonwealth Bank, began in Sydney and was only checked by the courageous intervention of Sir Robert Gibson, Chairman of the Commonwealth Bank Board.[iii] The Board, announced Sir Robert, would employ all the resources of the Commonwealth Bank, as a bank of issue, to support the threatened institution. The panic was stayed but the prestige of government banking generally was badly hit. When the Senate rejected or shelved a string of federal bills put forward a little earlier by Mr. Theodore, with the object of resuming political control of the Commonwealth Bank and of the note issue, not a dog barked.
In this chastened mood of public opinion it became known that the Commonwealth Bank Board had notified the various governments that short-term credits would not be granted by the banks in excess of the £25,000,000 needed to carry governments to the end of the financial year (June 30). The Loan Council, a joint meeting of Treasurers with statutory control of all borrowing, thereupon appointed a committee to review the economies made and to be made in government expenditure and to report what further steps were necessary to balance the budgets within three years. The committee was empowered to coöpt such expert advisers as it deemed fit.
The terms of reference to this committee marked some advance in the readiness of political leaders to take counsel. An earlier committee had been employed by the Loan Council in January and February of this year "to investigate the financial position of Australia and prepare information for consideration by the Premiers' Conference." But when this committee ventured to draw conclusions from that information and to indicate the lines along which economies in government budgets might be sought its reasonings were ruled out of order by the Prime Minister and its leading official members heavily snubbed by their political chiefs. Decisions about policy were for men of high estate, not for experts and Treasury officials. Yet the terms of reference of the May committee and, a fortiori, to its subcommittee of expert advisers, confined both to the budgetary problem -- not mentioning the wider one of a basis for economic reconstruction applicable in private as well as public finance.
As things turned out at the Premiers' Conference (May 26 to June 10) this was sound procedure. Government budgets may prove the doorway to financial self-reliance. They certainly form a manageable field of investigation and political action, but they do not include all industry. Nor would it be wise to extend their economic or legal influence over it. The myriad problems involved in reducing costs in private industry are probably best handled each in its own setting. A lead, almost certainly a decisive lead in this process, was given in January last by the Commonwealth Court of Arbitration, the leading tribunal for the legal fixation of wages. Wages payable under its awards had for some time been falling automatically each quarter in accordance with the index-numbers registering the fall in the weighted average price of food, groceries and house-room. This process, obviously, left the real incomes of the employed wage-earners unchanged. And the spread of unemployment showed such wages to be above those at which the labor force of the community could be profitably kept at work. To bring such wages as it defined into conformity with the changed purchasing or employing power of the nation, the Commonwealth Court of Arbitration on January 22 reduced by ten percent the real wage payable as basic or minimum wage in the main callings subject to its jurisdiction. Slowly that lead is being followed by State wage-fixing tribunals, excepting in New South Wales. The exception is the kernel of a wider problem.
Let us return to the Loan Council Committee and its budgetary riddle. The following table gathers into a focus the conflict between a declining total of Australian incomes and the scale of public expenditure in which a generally reckless and intractable policy had involved the Commonwealth and States.
|NATIONAL IMPOVERISHMENT AND GOVERNMENT EXPENDITURE|
|(in millions of pounds)|
|National||Government||Interest, Sinking||Total Deficits, Commonwealth|
|Income||Expenditure||Fund, Exchange||& State|
The subcommittee advising the Loan Council consisted of five under-treasurers, from the states other than New South Wales, and four economists. It sat during May in Melbourne under the chairmanship of Professor D. B. Copland, Dean of the Faculty of Commerce in the University of Melbourne. On May 23 it reported that the total deficits of the Commonwealth and states would amount, if they went on as they were doing and overseas prices did not rise, to £31,150,000 for the current financial year and to £39,080,000 for the year 1931--32. But the banks' warning as to short-term credits meant that such continued spending in excess of revenues would not be financed. Any attempt to finance it by new central bank credits would certainly destroy confidence in the Australian pound and renew the flight of capital. Such flight had gathered some volume during 1930 until checked at the end of January last by rising exchange rates, and thereafter by restored hopes of financial reconstruction. A return to inflationary methods would involve, in Australia as in post-war Europe, rising interest and exchange rates and probably a complete collapse of budgetary control. The committee therefore set out various means by which the prospective deficits for 1931--32 might be reduced. The first to be considered were government economies.
Taking as a standard the total reduction in the federal basic wage since 1928 -- twenty percent -- they applied this to wages and salaries in the government services as in June 1930. Some cuts had already been made, notably in South Australia. If such expenditure were brought down by twenty percent in all, including the cuts already made, the saving, together with a smaller fall in the cost of materials used by the departments, would amount to £8,900,000. Pensions, including old-age, invalid and war pensions, could be cut by £4,200,000 and still provide a scale of payments above those obtaining in Canada and New Zealand. Thus economies could provide £13,000,000 to go toward reducing the 1931--32 deficits of £39,080,000. Drastic taxation of incomes and of lower-priced entertainment tickets, still further increases in the sales tax and in primage could, the committee calculated, be made to produce an additional twelve millions of tax-revenue. Even so -- and the imposts involved would be very severe -- the gap remaining would be £14,000,000.
Could so much be asked and so dangerous a deficit left to threaten the stability of the currency while one income-element, interest on bonds, mortgages and other fixed money claims, was defended from loss? Other income-elements were exposed to cuts, taxes and the stress of financial depression. Bondholders and mortgagees might pay taxes, but the fall in prices had increased the real value of their incomes. As they would lose most by a currency collapse it was equitable to ask from their least-affected incomes some contribution to the severe sacrifice needed to ward off that collapse.
The sub-committee applied this reasoning to holders of internal bond issues only. External bondholders they definitely excluded. They have no responsibility as Australian citizens for the financial position. Their relation with Australian governments is purely contractual.
In levying on interest from fixed money-claims it was imperative to find the method which would have least harmful economic reactions. That was where Mr. Lang had blundered to his fall. The sub-committee evidently hesitated between increased taxation of income from property and a reduction, voluntarily initiated, of interest on the internal debt. The method of taxation, though familiar and in accord with the rough modern canon of ability to pay, seemed likely, as a permanent feature of the budgets, to force up rates of interest and to make future conversions possible only at rates that offset the danger of further increase in taxation. Increased rates of interest would be a serious obstacle to recovery in private enterprise and production, without which all efforts to balance budgets may be stultified.
Half the internal debt of Australia, which totals £556,000,000, comes due for conversion within the next six years. This fact seems to have influenced the sub-committee in its decision against annually imposed taxation of all property incomes and its preference for a great conversion of the whole debt. It proposed "a great patriotic movement" to convert the debt into new bonds bearing a rate of interest reduced by 22½ percent. The loss of income by bondholders now paying taxes would be 15 percent, the new bonds being exempt from the 7½ percent extra tax on income from property levied last year when Mr. Lyons was Acting Treasurer, and from future additional taxation. Such new bonds would be, in effect, tax-compounded bonds giving the bondholder security from special burdens for the currency of the loan or for a stated term.
In reckoning the relief to the budget from such a conversion the sub-committee allowed for the loss of income-tax revenue and for reduced interest to be charged by governments to farmers and semi-public corporations which have received advances from governments out of loan money. The net relief to the budget would then be about £5,500,000 -- not a large contribution, it might seem, from the "great patriotic movement backed by a large volume of consent on the part of bondholders" without which, the sub-committee predicted, a successful conversion would be impossible. But that contribution from the bondholders, in the opinion of the sub-committee, would prove the keystone of the arch of sacrifice. "The sacrifices asked from wages, salaries and pensions are so great that they would not be accepted if any other income-element escaped. Nor may the menace of currency collapse be ignored while the deficit to be met by borrowing remains so large."
The plan put forward by the under-treasurers and economists thus provided for: first, a saving of £13,000,000 by cuts in government expenditure on salaries, wages and pensions; second, an additional £12,000,000 from taxation; and third, £5,500,000 by conversion of the internal debt. These gains, totalling £30,500,000 would leave a gap of about £9,000,000 still unprovided towards the hypothetical deficit of £39,080,000 for 1931--32.
This gap, the sub-committee recommended, should if necessary be met by borrowing. Its size might prove less formidable in fact than in anticipation. The basis of the calculation which showed the deficit was hypothetical only. Things could not go on as they had been in 1930--31. And any revival of business confidence as a result of determined measures to balance the budgets would, even in the absence of improved prices overseas, bring with it an adjustment of enterprise to changed circumstances. Lower costs would mean more employment and before long a better balance of trade. With a bigger surplus of exports two elements of public expenditure, namely unemployment relief and overseas exchange, which have been mainly responsible for the stubborn rise shown in the middle columns of the table above, would come under better control. The high value of sterling exchange would not vanish in a night. Indeed, in view of the stimulus it affords to exports it would be well to await rising prices overseas for Australian exports before seeking to bring the rate back to par.[iv] But some relief from the pressure of these items, now costing governments over £20,000,000 per annum, might be looked for soon after the adoption of a plan promising early equilibrium in the budgets.
Such was the Copland Plan, as it has been called after the chairman of the sub-committee which drafted it. Its announcement at the opening on May 25 of the Premiers' Conference, to which the Loan Council referred it, produced a mild confusion of parties. Mr. Lang, seeing in it a proposal to reduce interest payments, claimed it as his own plan, pooh-poohing the excrescences upon it -- economy and taxation. He had, he argued, already made cuts in New South Wales expenditure almost to the standard set by the economists. Indirect taxation and pension reductions were Federal matters. Hurrah for interest reduction ! The Labor Premiers generally were so eager for conversion of the internal debt to lower interest rates that they straightway talked of compulsion to effect it. They met with little opposition and some support from their Nationalist colleagues when they argued for extending this interest reduction to private contracts.
A week's deliberations, however, unearthed difficulties in the way of such an alteration in the scope and method of the plan. The conference found its draftsmen entangled in an all-round reconstruction of private as well as public budgets. The Nationalist leaders in the Federal Parliament, whose control of the Senate makes their coöperation necessary to any legislation needed to implement the plan, wrote to the Prime Minister that they could not countenance a compulsory reduction of interest on government bonds. "This is repudiation and default," they held. They pointed to the sharp fall in the value of Australian government securities on the stock exchanges as evidence of its evil effect on the public credit. "Persistence in the advocacy of this policy will, we fear, make an honorable voluntary conversion impossible and greatly prejudice the success of any new loan to assist the farmers and the unemployed."
Labor Premiers in Australia have been even more inveterate borrowers than the Nationalist. Not having forsworn the habit, they were closely touched by the reference to loans in aid of farmers and unemployed. Moreover, their proposals to cut all interest rates by direct legislation logically implied similar measures cutting all wage rates. Labor supporters would not like that. Towards the end of the second week the Conference had got back to the Copland Plan, voluntary conversion backed by the certainty of heavy taxation of those refusing to convert, together with such economies and taxation as would reduce the deficit to manageable size by June 1932.
At this stage the Prime Minister invited the presence of the Nationalist leaders, as "additional members," at the Conference. They came and, after pardonable reference to the tardy approach of the Scullin Government to the problem of budgetary equilibrium in seeking which they had for ten months offered coöperation, renewed that offer on the basis of the Copland Plan. Mr. Lang grew restive at such agreement amongst his party and class foes. Instead of carrying the Conference and the whole country headlong into his own camp he found himself isolated and his arch-rival in the Labor Party, Mr. Theodore, within "cooee" of success in winning national support on non-party lines for a plan of reconstruction without revolution. The rebel in Mr. Lang sprang to arms when on June 10 the Prime Minister moved the adoption of a short report drawn up by himself and the Commonwealth Treasurer (Mr. Theodore) in consultation with the Opposition leaders. It read as follows:
The conference, including the leaders of the Opposition in the Federal Parliament, having most carefully considered the financial position of the Commonwealth and the states, and recognizing the national inability to meet existing Government charges, is unanimously of the opinion that to prevent national default in the immediate future and a general failure to meet Government payments, all expenditure, including interest on Government securities and other interest and expenditure upon Government salaries and wages, pensions, and other social services, must be substantially reduced. These measures, drastic as they may appear, are the first essentials to the restoration of prosperity, and the re-employment of our workless people. The necessary sacrifice is due to national inability to pay, and it must therefore be shared by all. The conference has accordingly provided a conversion plan under which bondholders may make their contribution to the general sacrifice by themselves accepting the lower rate of interest which the existing position makes unavoidable. The conference, therefore, appeals to all sections of the people to recognize the position, and in the interests of the nation to accept the sacrifices which are involved. A national appeal executive, consisting of the Prime Minister, the leader of the Opposition, and the chairman of the Commonwealth Bank Board, is appointed by this conference to direct the conversion loan.
"But the conversion loan will not succeed unless it is placed on a compulsory basis!" cried Mr. Lang. He would not ask the people of New South Wales to make further sacrifices on the gamble that the conversion might reduce interest. He met with the coldest silence. He and his protégés were in a weak position both inside and outside the Conference. The expert committee had pointed out -- twice over -- that New South Wales had habitually "done herself" rather well in the luxury of government services. She could well, with the same effort, make an appreciably greater reduction than the other states. "The general costs of government in that state have been at least £1 per head higher than the average of the other states. It is clear then that further reduction of expenditure of £2,000,000 to £3,000,000 is possible for New South Wales above that provided by the uniform cut."
General knowledge throughout Australia of this overpaying and overmanning of the New South Wales public service spoilt the appeal of Mr. Lang's loyalty to "the people of New South Wales." The statement of the Conference report that the drastic measures recommended were the first essentials to the restoration of prosperity and the re-employment of workless people could not really be gainsaid. Mr. Lang's contention that the measures proposed were not arbitrary enough carried no conviction in face of the destructive results he had achieved by his own more arbitrary "plan."
Finally Mr. Lang was brought to agree to the adoption of the report, thereby made unanimous, by the acceptance of a reservation which merely saved his face:
That the Government of New South Wales shall not be obliged to take the necessary steps towards the reduction of 20 percent in all adjustable Government expenditure, as compared with the year ended June 30, 1930, including all emoluments, wages and salaries paid by the Government, whether fixed by statute or otherwise, unless and until the conversion loan shall have been successfully and effectively carried out.
The reservation has a double edge. In its first sweep it cuts the ground from under the feet of reluctant converters. It makes them aiders and abettors of the most reckless and shortsighted financier in Australia -- the Treasurer who has lived from hand to mouth without a budget, who has chosen to default and has stood by, helpless, while the bank guaranteed by his government collapsed. It thus adds to the patriotic impulses already ranged behind the conversion loan and the whole Copland Plan every desire to rid New South Wales of a premier who has brought disillusionment and disgrace upon his own state and discord into his party throughout the Commonwealth.
It is notorious that Mr. Lang can obtain no credit from the banks and that his ability to pay his public service depends on his collection of taxes and other revenue. This collection cannot long continue in sufficient volume. Should the plan of reconstruction succeed -- and its success may well be stimulated by Mr. Lang's evident prayers for its failure -- the prestige of the Federal Government will be raised and its power to enforce the decision of the High Court in its suit for the recovery of the interest Mr. Lang has not paid will be thereby strengthened.
Yet there remain many doubts. At the last minute Mr. Theodore revived the project of a fresh loan out of which, now that his "fiduciary issue" is dead and disowned, he hopes to win the marginal farmers to Labor by the bait of a bonus on wheat production. Such a bonus would inevitably be an annual one. It would thus put off the day of balanced budgets to gain which such sacrifices are to be asked, under the Plan, from civil servants, pensioners, taxpayers and bondholders. Was it for the Labor Party's election funds that the Conference toiled? Mr. Lang will no doubt deny the success and effective achievement of the conversion loan until all the bonds of all the governments have been converted and interest cut to zero. Will economic forces bring a speedy reduction in "other interest?" What will be the verdict of the Queensland courts on the Mungana case? Can Australia coerce Sydney out of its extravagant "standard of living?"
But, despite such doubts, there is in Australia today some prospect of a united national effort towards reconstruction. We may be a hard-mouthed people, difficult to guide, but there is a chance that we may take the bit in our teeth and bolt in the right direction. Will we do it with the present Prime Minister still in the saddle? Sometimes a little nervousness on the part of the jockey has that effect. Perhaps with other colors up "the mount" would jib.
[i] "The Australian Crisis," by Q, FOREIGN AFFAIRS, April 1931.
[i] Its first effect had been to spoil Mr. Theodore's hopes of a £12,000,000 loan for unemployment relief and a wheat bonus.
[ii] Commonwealth Statute No. 1 of 1929.
[iii] This Board, on our smaller stage, corresponds to the U. S. Federal Reserve Board.
[iv] It is now £130/10/-- Australian to £100 sterling.