The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
TREASURY INTER OFFICE DEPARTMENT COMMUNICATION DATE: October 12, 1954* TO Mr* Eccles FROM Hr« M i l s t O P Be: The Australian Situation I hare just been cheeking up on the policy followedtoythe Australian Government i n the current depression. The information about Australian budgetary i n f l a t i o n and public works program which Mr* Currie gave you i n the conference we had with him sometime ago was not i n the magnitude that he seemed t o indicate* He t e l l s me that Mr* Copland who was recently i n t h i s country and who was a member of the Government Committee that was instrumental i n formulating the program, had given an erroneous impression as to the extent of the short-term financing operations and the public works spending program of the Government. The inflationary action of the Commonwealth Bank was of rather small, magnitude and was s i g n i f i c a n t i n increasing the deposits of the banks of the country and i n f o r e s t a l l i n g the t e r r i f i c deflationary pressure which a country, that depends very considerably f o r i t s national income upon the export of foodstuffs and raw materials which had f a l l e n so greatly i n price during the depression, would o r d i n a r i l y be subject to* What happened was that the short term debt of the Commonwealth and the various States was increased to take care of the budgetary d e f i c i t and the Commonwealth Bank which i s the central bank of the country i n creased i t s holdings of short term Government loans by about 40 m i l l i o n pounds during the period from 1929 to 1935* An operation of t h i s type has a somewhat similar e f f e c t to that of open-market operations i n t h i s country and the commercial banks of A u s t r a l i a found t h e i r deposits and reserves increased. Of course the d i f f i c u l t i e s of Australia were i n t e n s i f i e d by their unfavorable balance of trade and the necessity of making interest payrants abroad* These payments become such more d i f f i c u l t when the prices of their exports were rapidly declining i n the world market* Under these circumstances the hanks were placed under great deflation* ary pressure and there was a continual decline i n the deposits of the commercial banks u n t i l September 1951* From that time on the action of the central bank i n putting out new funds had the e f f e c t of increasing deposits and improving the l i q u i d position of the Australian commercial banks, consequently these banks started a small expansion of loans and investments* With the expansion of central bank c r e d i t , Increased de- posits i n banks and no public long term borrowing, combined with a heavy decline i n the demand f o r private investment the rate of interest naturally f e l l * Government credit improved but there were no attempts to refund bonds upon a long term basis* In October 1952 the Commonwealth Bank began a funding operation when Government 4% bonds reached par* The e f f o r t , however, was not successful and the loan of 8 m i l l i o n pounds at 5 j which was offered f a i l e d to a t t r a c t s u f f i c i e n t public support and a portion was l e f t with the underwriting banks* Later, however, as the banking situation continued to improve with further purchases of shortterm b i l l s by the Commonwealth Bank and as there was an increase i n general business a c t i v i t y i n the l a s t half of 1952 and early 1955, the Government and the Bank decided to f l o a t a 5 m i l l i o n pound loan f o r publ i e works and t h i s was highly successful at the rate of 5f * I t i s to be noted that these operations were of r e l a t i v e l y small amount and although the expansion of central bank c r e d i t was over 40% during the period of the whole depression, the budgetary d e f i c i t and public work* program war* not of any considerable amount* The budget d e f i c i t i t a a l f amounted to approximately a l i t t l e over 40 m i l l i o n pounds for the 4 years ending June, 1954• The public works fund i t s a l f doea not show up separately i n the figures f o r Government expenditures and the t o t a l expenditures of the Commonwealth and States decreased at the rate of about 5 m i l l i o n pounds a year during t h i s period. The table below shows the deposits and advances of the Australian commercial banks over the period under consideration* CASH DEPOSITS AND ADVANCES OF THE TRADING BANKS Quarter waded Total Deposits Sept. 1929 Dec. 1929 279.5 277.2 Advances and securities & i. 281.9 292.0 Mar. June Sept. Dec. 1950 1950 1950 1950 274*4 268.6 262.5 265.4 287.7 282.0 276.7 278.0 Bar. June Sept. Deo. 1951 1951 1951 1951 265.5 261.4 255.8 268.5 268.9 262.6 268.4 269.8 liar. June Sept. Deo. 1952 1952 1952 1952 285.6 275.0 268.0 274.6 268.2 272.9 279.4 285.8 Mar. June 1955 1955 276.9 274.7 285.0 286.9 £> » . Thus i n general the Australian p o l i c y was not s i g n i f i c a n t l y i n f l a tionary but did i n part o f f s e t the tremendous deflationary pressure that the country was subject to* Also, the Government took certain deflation- ary steps i n t h e i r program by cutting some types of Government expenses ~ 4 and the only r e a l l y I n f l a t i o n a r y p o l i c y was with regard t o t h e i r shortterm borrowing fro® the c e n t r a l bank, which increased reserves of the other commercial banks and kept up Government expenditures t o a higher l e v e l than they otherwise would have been had the Government had to finance through long-term bonds* The c e n t r a l bank p o l i c y lead to lower i n t e r e s t rates and helped the commercial banks but d i d not have an important e f f e c t i n increasing the t o t a l monetary incomes of the country which would be available f o r new expenditure f o r goods and services and increase greatly production and employment* The r e s u l t s of t h e i r p o l i c y isust be considered as negative i n merely f o r e s t a l l i n g d e f l a t i o n rather than p o s i t i v e i n creating recovery* Source of informations " A u s t r a l i a i n the World C r i s i s 1929-1955* By ~ Douglas ®arry Copland Published by Hacmillan Company, Cambridge, Ihgland, 19S4*
@FedFRASER