The Australian Crisis

LIKE other countries, Australia is experiencing difficulties and hardship by reason of the general decline in prices. But in Australia's case the difficulties are increased by three special factors, for two of which she must accept sole responsibility, while the third is due to causes over which she has no control. These factors are: first, the high cost of production in all local industries, whether primary or secondary, due to the prevalence of protection on the grand scale and a rigid system of arbitration or wage-fixing tribunals; second, extravagant overseas borrowing for many years, with a large interest bill payable annually outside the country; and third, the general fall in the price of Australia's two staple products, wool and wheat.

THE PAST

The Australian Commonwealth is a federation (based largely on the United States model) of political entities which prior to 1901 were separate colonies. At the time of federation those colonies were in varying stages of development. New South Wales, the oldest, had received responsible government in 1856, but Western Australia, the largest in area though the smallest in population and wealth, did not receive that inestimable boon until 1891. All the colonies relied largely, even then, upon loan money for their development; apart from this family weakness, there were many divergencies in their fiscal policies. New South Wales was avowedly free trade, and her secondary industries were thriving under that régime. The next most populous colony, Victoria, was as strongly protectionist. The outlying colonies (Queensland, South Australia, Western Australia, and Tasmania) had few secondary industries to foster but imposed tariffs for revenue purposes. These tariffs applied, of course, to colonial neighbors as well as to the British Empire and all foreign countries.

It is some cause for wonder that colonies with such conflicting policies should have thought the time ripe for union. But men of vision had been working steadily for some form of federation since the 'sixties, and the financial disasters of 1893, caused in the first instance by a land speculation boom in Victoria, brought in their train the suspension of every banking house in Australia except one and taught the people of this sub-continent the very salutary lesson that in union lies strength. By 1900 all the colonies had agreed to unite under the style of a "Commonwealth." A federal parliament was created with enumerated and definite powers, of which it is necessary here to mention two. First, the Commonwealth alone was to have power to impose duties of customs and excise (trade and commerce among the states, as they are now called, was to be absolutely free); second, it was to have power to legislate for the prevention and settlement of industrial disputes "extending beyond the limits of any one state." The bad old days of intercolonial tariff wars were to end; those industrial disputes which were likely to affect Australia as a whole were to be within the jurisdiction of the central authority, whose legislation, if constitutional, was to override any state acts inconsistent therewith.

Within a few years the ball of high protection was set rolling in Australia, and it is still revolving merrily and gathering added costs at every turn. At one time the federal Parliament ingeniously sought to make the benefit of tariff protection conditional upon the local manufacturer complying with specified requirements as to payment of minimum rates of wages and so forth, but the High Court promptly declared this device unconstitutional. As the home market was limited, the price of Australian-made articles often could not be reduced to levels enabling them to compete in the open market; but they will always enjoy the indirect protection derived from the fact that Australia is distant from most foreign manufacturing countries, the products of which have to bear the cost of freight and insurance to Australian ports.

At the same time the sphere of federal arbitration was being vastly extended by decisions of the High Court, which in turn inevitably raised production costs and the cost of living. The arbitration clause in the constitution had been framed in such a manner (or so the draftsmen fondly thought) that it would in practice apply to two industries only, shipping and shearing. Coastal shipping is for the most part inter-state; shearers are a nomadic race, moving from state to state, because for climatic reasons the shearing season varies throughout Australia. Disputes in these industries seemed likely to affect Australia as a whole; the states, it was thought, could well deal individually with all other industrial conflicts -- hence the restriction of federal interference to disputes "extending beyond the limits of any one state." But astute labor leaders saw the advantages to be gained from having uniform laws of employment throughout Australia, and the greater bargaining power that would be possessed by a federally organized labor union. They soon created a test case. Employees in a certain industry which was being carried on in several states made simultaneous demands upon their employers for increased wages, which the latter, without any previous consultation among themselves, refused to concede. The labor unions at once approached the federal Arbitration Court, contending that there was a dispute extending beyond the limits of one state. To the surprise of the community in general, the Arbitration Court and later the High Court adopted this view. The way was thus opened for an enormous increase in federal arbitration. Labor unions organized federally and fell over each other in their haste to manufacture disputes for submission to the federal court. Even state employees, such as government railway workers, were not denied access to the Court, so that a state never knew when its budget might not be upset by a federal award of higher wages to its servants.

The general tendency of arbitration courts in Australia, where in theory the strike and the lock-out are illegal and recourse to peaceful methods of settlement is obligatory, has been to increase wages and to decrease hours of work. The system of payment by results is anathema to organized labor, and the courts have not dared to prescribe piecework. What is the result? Tariffs and arbitration have jointly worked havoc with Australian financial stability. The manufacturer first obtains protection for the establishment or continuance of his industry; the price of the article in question, whether local or imported, is raised to the consumer; and the cost of living goes up. Then the trade union seeks from the Arbitration Court an award of higher wages because of the increased cost of living, and gets it. It becomes the turn of the manufacturer again; higher wages without any increase in production have forced up his costs so much that he requires more tariff assistance if he is to survive. He then asks for an increased duty, and gets it; once more the cost of living rises, completing the vicious circle. The combination of tariffs and arbitration has brought matters to such a pass that some industries now require up to 100 percent protection in order to be able to compete with the imported product.

To maintain equilibrium in her overseas trading account Australia depends almost entirely upon wool and wheat, which during the post-war period have represented approximately 78 percent of her exports. The price of wheat has been forced down by universal over-production. For a long time Australian wool seemed to be free from the danger of serious price-fluctuations, but the invention of fabric substitutes such as artificial silk and changing fashions in women's dress have combined to lessen the demand and to force down wool prices.^[i] Two results follow. The sum available to pay for Australia's imports decreases considerably, and it is of little use for the sheep farmer and wheat grower to produce more with the effect of depressing prices further in an already glutted market. Secondly, the margin between production costs and selling price becomes perilously small,' or disappears completely. The margin of safety was never very great; the primary producer sold at world prices, but production costs were relatively much higher in Australia than elsewhere because the tariff-arbitration alliance raised the prices of everything bought by the farmer. Agricultural implements, oil and gasoline for tractors, fencing wire and wire netting, building materials, even food and clothing, all were made dearer by the policy, common to the two major political parties, of spoon-feeding secondary industry. In recent years, too, more attention has been paid to extending the area under cultivation than to increasing efficiency; this was of less importance so long as the price of wheat was high enough to return a profit on an indifferent yield per acre, but with the collapse in prices only the efficient farmer is now solvent -- and he, unfortunately, is in a very small, if select, minority.

The position would be serious enough if the only task for Australia's exportable surplus were to pay for imports. But it has also to pay the annual interest on Australia's overseas indebtedness, or a sum of approximately £30,000,000 each year. Since the war, in particular, all governments, federal and state, have indulged in an orgy of loan raising. As a result, the average annual increase in the load of debt has been about £30,000,000. A great part of this and other loan moneys has been spent on railways, harbors, bridges, roads and other public works; most of the remainder has been squandered on grandiose land settlement schemes, laudable in themselves but so heavily capitalized through governmental inefficiency and corruption that it has been necessary to write off a great deal of the capital cost in order to free the settler from an overwhelming debt.^[ii] In other words, the so-called assets on which loan money has been so lavishly spent rarely earn a commercial rate of interest and contribute nothing to a sinking fund. For many years the drift in the national finances has been obscured by this expedient of borrowing money abroad, and thus an invisible export has been created to help to redress an adverse trade balance and to provide a fund overseas out of which the interest charges could be paid. For many years, all economists (and occasionally a banker) in Australia have warned the politicians and the public that this expedient would sometime fail. But the seed fell on stony ground; at the end of 1929 came the day of awakening and of reckoning.

THE PRESENT

Wool and wheat values have slumped heavily. Exports have diminished in value; imports have constantly risen, despite the tariffs. The faith of the overseas investor has languished, and both the Commonwealth and individual states, when they would a-borrowing go, have found the London money market virtually closed to them. What was to be done? The trade balance was adverse, but interest payments had still to be made. The Nationalist (Conservative) administration chose this very time to make an appeal to the electors for a decision whether the Commonwealth should abandon the field of arbitration to the states. The proposal had been mooted often enough, but no leader had ever gone to the country on it, and no wise leader would have done so at such a time, especially as Parliament had still two years of its natural course to run. The government was badly defeated, and its Labor opponents, after twelve years in the wilderness, were unfortunate enough (as events showed) to be called upon to form an administration under Mr. J. H. Scullin. Its first attempt to correct the trade balance took the form of more protection. Some articles were excluded; on others the rate of duty was enormously increased; everything was made subject to a primage duty of 5 percent and a sales tax of 2½ percent in addition. But without any corresponding fall in Australian production costs, the man on the land -- on whom national salvation ultimately depends -- has found his expenses increased, until every time he ploughs an additional acre he reaps additional loss.

A further check on imports came from the banks, which began to ration out to their customers the limited London credits available. Exchange rates on London also went up; and by November 1930 (i.e. in a little over twelve months) London pounds had risen from par to a premium of 9 percent over the Australian pound.^[iii] Then the banks agreed to give the Government first call on their London balances to the extent of £30,000,000 per annum. The flow of imports has now been checked, but this is counterbalanced to some extent by a further fall in wheat prices.

The position was so acute early in 1930 that after consultations had taken place between the Commonwealth Bank and the Bank of England, the federal ministry thankfully accepted the offer of the latter to send a representative to Australia to confer with the local authorities. In July Sir Otto Niemeyer arrived for this purpose. The full text of his criticisms and recommendations has never been made public; but it is permissible to assume that he blames private and public extravagance for Australia's present parlous condition. The essential parts of his advice, unpalatable as it was to the politician, were given at a meeting of federal and state ministers held at Melbourne in August: "Budgets must be balanced out of revenue in 1930-1931. Australia must set her house in order without assistance from outside." This advice was apparently accepted and taken to heart by the Labor Prime Minister of the Commonwealth, by Labor Premiers in Victoria and South Australia, and by Nationalist leaders in New South Wales, Queensland, Western Australia, and Tasmania, who went from the Melbourne conference to their respective homes full of good resolutions. Australian securities recovered slightly in London; Mr. Scullin, after telling his colleagues to inaugurate a campaign of more taxation and less spending, went off to London for the Imperial Conference.

Most of the state governments waited to see what the federal administration would do, and it was not long before the irrepressible optimism of the politician began to doubt the propriety and the soundness of the advice given by a mere financial expert. A notorious feature of Labor administration is that the Prime Minister is not allowed to select his colleagues; Caucus does that for him, and at the present time Caucus is divided into moderates (politicians who have held office in the states or who represent predominantly agricultural constituencies) and militants (quite irresponsible and for the most part newly elected members from the industrialized states of New South Wales and Victoria, particularly the former). Dissension was bound to appear sooner or later, and now broke out openly. The moderates were in favor of adherence to the Niemeyer program, and proposed the introduction of legislation to increase income tax rates, to reduce the salaries of members of Parliament and of the huge army of federal civil servants, and to effect various administrative economies. The militants demanded the rejection of the Niemeyer plan and the continuance of borrowing, and while avoiding open threats of repudiation talked loudly and violently of refusing to lower the Australian standard of living at the dictation of an "emissary of the English money lender." Parliament was not in session, and both factions decided to play a waiting game until elections should have been held in November in New South Wales, where a Nationalist government had been in office for three years and had recently been taking heroic measures in the effort to balance the budget.

New South Wales has been the worst spendthrift of all the states and has been the more seriously affected by the depression. Unemployment is increasing, governmental salaries have been substantially reduced, and all that the Premier could promise was more economy and retrenchment, which to his everlasting credit he did promise. His opponents, led by Mr. J. T. Lang, who had been in office from 1924 to 1927, were bound by no such restrictions; "work for all, restoration of full salaries, and repudiation of the Melbourne agreement" was their slogan. Mr. Lang also promised to break the trading banks if he were returned to power and were then opposed by them in his lavish spending policy. These specious promises dazzled the bulk of the electorate; a political landslide occurred; Labor regained office and a majority of twenty in a house of ninety members.^[iv]

One of the most amazing features of the election was that some federal ministers, members of the Cabinet which had accepted the Melbourne agreement, appeared and spoke on behalf of Mr. Lang and joined in his condemnation of the agreement. These malcontents naturally regarded the result of the election as the verdict of Australia on the proposed financial reforms, and at once made insistent demands on the federal ministry for: I, pressure to be brought on the Commonwealth Bank to make available credit to the extent of £20,000,000 for governmental services and unemployment relief -- in other words inflation; 2, the immediate withdrawal of the proposal to reduce salaries; and 3, notification to bondholders that £27,000,000 of internal loan, maturing early in 1931, would not be redeemed but that the loan would be forcibly continued for at least another year at the old rate of interest. To the surprise of Caucus, the Treasurer, Mr. Lyons, stood firm and refused to obey the majority; the expectation was that he would resign, but this he also declined to do, and announced his intention of arranging a conversion loan and of proceeding with his measures of financial reform. The possibility of a split in the party gave the militants food for thought, and a few days later a Caucus resolution, said to be unanimous, was announced to the effect that the Labor Party would not consent to any evasion of Australia's obligations and that any suggestion of repudiation was manufactured by their opponents in order to discredit the ministry. No doubt the impending return of Mr. Scullin, who belongs to the moderates, helped to weaken the militant front.

The conversion loan was duly launched by the Treasurer, and was oversubscribed by nearly two million pounds -- a triumph for Mr. Lyons. One of the outstanding features of the loan was the number of small investors (the total number of applicants was 117,006), which seems to show that Australians still have confidence in their country.

THE FUTURE

Though the Treasurer succeeded in putting through the conversion loan he was forced to make concessions in other directions. The salaries of members will be reduced, as well as those of government servants in receipt of £750 per annum or more. A special tax will be imposed on income derived from property (rents, mortgages, dividends, interest), which will pay a higher rate than earned income and will bear an additional impost of 7½ percent of the taxable income. The most disquieting feature is the retention of the proposal to seek credits to the amount of £20,000,000; there is no doubt that the Labor Party as a whole is willing to try a little inflation. Such a policy would require legislation, and the government is in a minority in the Senate (which consists of six members from each state, of whom one-half retire every three years). But if the Senate rejects the governmental proposals to inflate, as it is certain to do, the matter will not end there. There is a constitutional provision for overcoming deadlocks between the two houses by means of a double dissolution. If such a double dissolution occurs, there is a grave danger that if the country were asked to choose between the hard path of honesty and rigid economy on the one hand, and the specious advantages of inflation on the other, it would in its present temper plump solidly for an increased note issue and give Labor a majority in both Houses. The militants are alive to this fact and will no doubt press forward to this end with all the means in their power.

Communism (and probably subsidized Communism at that) exists in Australia, but it does not appear to be numerically strong, judging again by the New South Wales elections, in which Communist candidates contested every seat but in all cases forfeited their deposits because they did not poll the specified minimum of votes. But what it lacks in numbers it makes up in noisiness and pertinacity. Its political power is indirect, being exercised through the left wing of the Labor Party; but if that party as a whole persists in its attitude of refusing to look facts in the face, the moderates may easily lose their present ascendancy and find themselves swept along by a current which they are powerless to control. The party is nibbling at schemes for artificially stimulating agricultural prosperity by means of bounties, advances on wheat disproportionate to ruling prices, etc., and it seems clear from recent events that these schemes have only to be painted in sufficiently attractive colors to attract into the Labor fold the poorer, inefficient farmer. With this added support, Labor would quickly gain power everywhere, and would then proceed to introduce ultra-socialistic schemes for the acquisition and control of all productive agencies "in the national interest," beside which its legislative accomplishments in the past would pale into insignificance.

The future lies largely with Mr. Scullin, whose conduct, since his accession to office for the first time, has gained for him the respect of most sections of the community. Is he strong enough to keep his party together, to face the issue fairly and squarely, and to lead his followers along the path of financial rectitude? No doubt his visit to England, made though it was at an inopportune time from Australia's point of view, will have given him fresh knowledge and fresh experiences with which to fortify his arguments in favor of a return to political and financial sanity. That he will have difficulties to face, no one denies. The power of the Labor machine is enormous, and the threat of expulsion has brought many recalcitrants to yield. The favorites of today are the outcasts of tomorrow; expulsion means political extinction, for the machine is strong enough to prevent the return of the victim as an independent Laborite no matter how popular he may be, and if he turns to his former opponents (as some have done) he receives nothing but abuse and hatred from his old associates and pitying contempt from his new allies. If Mr. Scullin proves strong enough to defy the thunderbolts of the militants, and succeeds in travelling along the path which he has chosen, he will deserve well of Australia. But if he surrenders to the machine and is engulfed in the tide of extremism, both Australia and he will regret the day when his party came into power in face of responsibilities which so far it has only sought to evade.

^[i] In the 1924-1925 sales, greasy merino wool averaged twenty-seven pence per lb.; in the 1930 sales the average price had dropped to slightly less than ten pence per lb. The bulk of the production is merino.

^[ii] The following extract from the West Australian of November 15, 1930, is typical and illuminating: "The eighth report of the Group Settlement Valuation Board was issued yesterday. It deals with 187 holdings, and brings the total number of holdings on which decisions have been made up to 1,602, leaving about 100 holdings still to be valued. The expenditure on the holdings valued totals £4,553,587, and the holdings have been valued at £1,588,505, leaving £2,965,082 to be written off. On the first assessment the amount to be written off averaged £2,243 a holding; on the second, £2,306; on the third, £2,244; on the fourth, £2,118; on the fifth, £1,592; on the sixth, £1,507; on the seventh, £1,385; and on the eighth, £1,336."

^[iii] This was a "pegged" rate, and did not disclose the extreme weakness of the Australian pound. In many quarters it was thought that an open exchange would be more expedient as it would help the exporting industries, i.e. wool and wheat. On January 5, 1931, the Bank of New South Wales, one of the largest and strongest financial institutions in the Commonwealth, made an independent move in this direction by raising its exchange rate to £15 percent.

^[iv] Shortly after taking office Mr. Lang announced that he had discovered a deficit of nearly £12,000,000 in the finances of the state, but his opponents (the late ministry) would admit a deficit of approximately £1,000,000 only, and the latter figure seems the more plausible. It seems that Mr. Lang's assertion was mainly a cloak to cover his inability to redeem his preëlection promises. His government has been forced to increase the unemployment relief tax from 1¼ to 5 percent, and everyone is required to pay, whereas under the previous administration persons in receipt of small incomes (i.e., the bulk of Mr. Lang's supporters) were exempt. A great outcry has consequently arisen in Labor circles. Truly the way of the politician is hard!