4. T. W. Swan: “Australian War Finance and Banking Policy”

That they have fallen, we know from a verbal statement to that effect made by the Commonwealth Treasurer in May 17 at a public assembly in Sydney. That they have not fallen by very much can be surmised from the information we have as to the balance of payments. The Commonwealth Statistical Bulletin reports for the period an adverse recorded balance of payments of £7.5 m. For the main unrecorded debit item, Commonwealth war expenditure overseas, we know there is a corresponding credit item, since all such expenditure is, according to the Treasurer, covered by arrangements with the British Government for sterling loans. On the credit side, we can safely assume (especially in view of exchange control) that there has been some net import of capital from overseas investments in Australia while previous experience suggests that normal unrecorded current items roughly cancel out. If overseas investment, then, was between £2.5 m. and £5.5 m. Australia’s overseas assets would have fallen by between £5 m. and £2 m.

If it does not represent a net increase, the inference would be that the Commonwealth Bank had been selling long-term securities in London and substituting “sterling reserves and short call” assets in their place, a conceivable motive for this being preparation for drawing on Australian sterling assets for war expenditure overseas (since arrangements for drawing on Australian sterling assets for sterling loans have been made, this will not now be necessary). But the quarterly average statistics, while not conclusive, do not support this view; and we have the Commonwealth Treasurer’s statement (at the public meeting mentioned in the previous footnote) that the recorded rise in the sterling reserve and short call overseas assets of the Commonwealth Bank is “in substance” a transfer from the Trading Banks.

Errors may have been caused by neglect of New Zealand business, shareholders’ funds, funds in transit, or by the use of monthly average figures. In addition, it is quite possible that the published statistics may conceal the true position on account of a revaluation of remaining London assets of the Trading Banks, or because the price at which any transfer of assets to the Commonwealth Bank was affected was substantially in excess of the “book” values of the securities in question.

The general principle of the calculation may be expressed in an identity which is derived from the basic identity of total liabilities with total assets: Net purchase of Government Securities in Australia equals increase in liabilities in Australia minus Increase in assets in Australia other than Government Securities minus Increase in net assets in overseas. Of these three assignments the first two can be established with a fair approach to accuracy: the third may, as we have seen, may lie anywhere between zero and £20 m. Over the period June-March, 1939–1940, aggregate Central Bank liabilities in Australia increased by about £39 m. (neglecting changes in unpublished items, almost certainly insignificant): at the same time, amounts other than Government securities rose by only about 1 m., a fall of 12 m. in Treasury Bond holdings being just outweighed by a rise in advances, discounts, etc.

The Trading Banks have been informed of the lines on which the Capital Issues regulations are being applied, and are expected to cooperate voluntarily.

Wholesale prices of “basic materials and foodstuffs, principally home produced”, measured by the new official wholesale price index, increased by only 2% between June and February: the prices of goods “principally imported” rose by 15%. According to the same index, giving a total increase of about 6%. The official indexes of the cost-of-living and weekly wage rates show negligible increase: but the composition of these indexes almost certainly leads to an understatement of retail price and wage rate movements.

If there occurs any further increase in the incomes of export producers, measures will be required in addition to counteract the resulting increase in their expenditures.

Where “indirect” taxes are employed, it is intended (for simplicity of exposition) that “consumption expenditure” should be taken as measured net of the portion of the tax passed on to the consumer.

It is assumed that State revenue remains at the same level as in 1939–1940. Thus any cut in State expenditure means a reduction in State loan finance.

The statement should be qualified to the extent that the banks voluntarily apply a discretionary control over advances.

The Treasurer lists the chief examples of types of undertaking to which capital losses have been refused, as follows (Press reports): new retail businesses, chain stores, cash order companies, hire purchase finance companies and various amusement undertakings. This list suggests discrimination on the basis of some sort of estimate of “social desirability” rather than the technical requirements of defence. At the same time, the Commonwealth Government has deliberately such an obvious competitor for defence requirements as the motor industry.

See War-time Economics (Angus and Robertson, 1939).

The indirect taxes will, however, extend in their incidence well down the income range: probably only those compelled by inadequate income to restrict their consumption to a very limited regimen will escape much of the effect of the increases—nothing has been heard recently of the once widely publicised argument: (cf. for instance Memorandum by Professor L. F. Giblin to Royal Commission on Wheat, Flour and Bread Industries, 1934) that a sales tax is not regressive since the wage-earner is compensated, under the Australian wage-indexation system, by higher wages: fallacies in this argument cannot be detailed here, but it obviously implies a thoroughly Utopian interpretation of the operation of the wage-fixing machinery.

Treasury Bill borrowing from the Trading Banks is thus very little different in effect from Central Bank borrowing.