Problems in Governmental Finances and Banking in NSW during the Great Depression: Lack of Local Economic Integration in

Frank Cain

Federation for the Australian states was not the great boon some historians have made it out to be. The main disadvantage from federation was that the new Commonwealth government, at a time when the main source of Australian revenue was from customs payments on imports, took over that collection of customs revenues from the states and paid them the reduced amount of 75 per cent while retaining the 25 per cent for itself. This arrangement by the constitution writers was to prevail until 1910 when the federal government changed the payments unilaterally. The Commonwealth employed the retained 25 per cent to finance its new federal parliament, subsidize the post office and telephone systems taken over from the states and in meeting the costs of the mini‐ defence system it had also absorbed from the states. Another disadvantage that federalism imposed on the states was their loss of trade protection from imports of manufactured goods delivered from other states. The smaller economies such as those of and witnessed the closure of many of their industries in the face of cheaper goods flooding in from NSW and previously excluded by the tariff walls. This triggered the commencement of the continuing decline in those state economies. was far worse off from losing its tariff wall and was granted special favours in the new constitution to continue its tariff. ‘Free Trade’ as it was named became the main social and economic cost of converting the six single economies into a national one. The aim for free trade was the unspoken goal of the Constitution writers. The devastating impact it was to have on the state economies may have contributed to the apathy of voters who failed to participate in the associated referendums to confirm the adoption of the new constitution. The voters sensed that free trade was inevitable between the states, however disadvantageous, and in a mood of resignation they refused to vote for or against the adoption of the new constitution

The cost of funding the loans raised over the previous decades by the states was another economic problem that the voters perceived as deeply affecting them. Certainly it was a pressing issue for the state governments at federation about which the constitution writers tended not to grapple with at the planning stage of the constitution. The problem of having to service large debts with mostly small populations was to lay in wait for future state Premiers to have to deal with while also facing reduced revenue collections which was a factor demonstrated in the following table:

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Table 1.1 Essential Statistics of the Australian States 18951

State Population Revenue Expenditure Accumulated Public Debt NSW 1,277,870 9,234,646 9,783,300 58,689,463 Vic 1,181,769 6,712,152 6,760,430 46,939,328 Qld 460,550 3,413,172 3,308,434 30,639,534 SA 357,405 2,433,689 2,533,245 22,536,025 WA 101,235 1,438,717 1,213,314 3,975,677 Tas 160,834 690,795 789,805 7,414,345 Totals 3,539,663 23,932,171 24,388,783 28,194,372

Section 105 was added to the constitution by its writers to provide for the Commonwealth to take over a debt of a state or part thereof at its formation in 1901, which held out some hope to the beleaguered Premiers that there might be a financial lifeline to rescue their state from the continuing problem of indebtedness. It would have been better if the constitution writers had reduced the Commonwealth’s take from the customs revenue to 10 per cent in place of the 25 per cent, thus providing more finance to aid the states in meeting their debt obligations. It would have meant that the Commonwealth government would have had to postpone to another decade its heavy investment in establishing the Australian navy and introducing compulsory military training for all Australian male teenagers. Why did the constitution writers establish a Commonwealth government that could prosper at the cost of the states which still had to deliver services with truncated revenues? One answer could be that many of the constitution writers themselves planned to join the new federal parliament and it was in their interests to ensure that the new federal treasury was well filled for them to enjoy the power that adequate finances would ensure. The economic strain that this distortion would impose on their former state parliaments seemed of little consequence to them. In 1910 the states suffered further reductions in their customs receipts from the Commonwealth. In place of receiving 75 per cent of the customs revenue, they were then to receive just £1.50 per head. They had to submit to this serious reduction because it was offered on the basis of take‐it‐or‐leave‐it by the construction imposed by the writers of the constitution. It became known as the ‘per capita payment’ and reduced by an average of 50 per cent the amounts the various states had formerly collected from their tariffs before federation.2. The states accepted this reduction in payments, not only as being the sole option open to them, but also on the assumption that the tariff revenue would not exceed £15,000,000 over the next ten to fifteen years. By 1918 the tariff

1 Summary of Australian Statistics, Victorian Year Book, Melbourne, 1895 2 1. CPD, 7 March 1928, p. 3630.

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revenue was £17,500,000.3 The states had to witness their revenues declining from 75 per cent of federal incomes before 1910 to just 40 per cent by 1913. The Commonwealth now retained the considerable amount of 60 per cent that was spent on expanding the new Australian army and navy and introducing a firmly means‐tested old age pension.4

New South Wale’s State Financing Arrangements

NSW was saved from the same constricted allocations from national customs revenue imposed on Tasmania, SA and WA by the new Commonwealth. NSW earned continuing revenue from the sale of land from its large stock of Crown lands and the annual leasing fee from the non‐alienated land. In addition, it raised loans annually in London and sometimes for amounts of £2,000,000 to £3,000,000 for use indirectly in building the necessary infrastructure of the state. This provided the essential employment in metropolitan and rural areas for tens of thousands of bread winners that helped maintain domestic consumption at a high level. The money raised in London was not sent to Sydney, but used in purchasing such necessary items as machinery, railway engines or school books in Britain and shipping them to Sydney by the state’s agent‐general in London. The London bank that received the borrowed funds, usually the National and Westminster Bank, also arranged the annual interest payments to the buyers of the NSW stock. The revenue raised by the above means was used to finance the public works programmes.

The loans were arranged by NSW’s loan broker in London, Nivison and Coy. The state government loans attracted investors such as the British life insurance companies looking for long‐term investments with assured annual interest payments and the facility to roll over the loans into new ones on expiry. Nivisons were in daily contact with insurance and trustee firms wanting to invest parcels of money in long‐term Australian loans and they decided the time and sequence for Australian governments seeking loans on the London market.5 Some of Nivinson’s lenders favoured certain states over others through knowledge of the state and its leaders. Nivinson’s policy was to insist that all stock from the previous loan be sold before that state government could enter the market again. The lender, or more correctly the buyer of the stock, usually paid 10 per cent on application for the stock and the remainder four to six months later. Three factors had to harmonize in raising a London loan. Nivinsons had to be aware that a large block of trustee money was seeking a sound investment, the underwriters, usually another bank or investment company, had to be convinced that they would be left with no more than half the stock, and the bank had to have the stock certificates printed and ready for distribution. The underwriters were assisted in selling the stock

3 2 CPD 8 March 1927, pp. 193‐4. 4 E. Scott, Official in the War of 1914‐18, Vol. xi, Angus and Robertson, Sydney, 1936, p. 481. 5 Discussion by author with the second Lord Glendyne (John Nivison) in his London office.

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by jobbers attached to the stock exchange. These were often individuals who could place small amounts of stock with investors seeking sound returns. These London financiers and banking firms were well‐rewarded for their brief labours. Out of the final sum collected, Nivinsons paid themselves 0.25 per cent, the underwriters reaped 1 per cent (some of this going to their jobbers) for new loans and 0.75 per cent for renewals.6 The cost of publicity and other incidentals usually amounted to £3,000 on a loan of £5 million. The banks took 0.25 per cent, but the British government gained the biggest reward from these colonial transactions by collecting 1.5.per cent in stamp duty.7

The borrowing by NSW for public works plus the income from the admittedly much reduced tariffs on imports and revenue from land sales ensured a rate of growth in NSW before the First World War that was not to be seen until the 1940s. The average amount of wealth per head of population in NSW grew from £395 to £466 over the first decade of the 20th century.8

The Impact of the Great War 1914 to 1918

The war affected the states as badly as federation in that most public works ceased through lack of loan raisings and the Commonwealth devoting all its revenue to the war. Taken together, this caused a significant increase in national unemployment. However, NSW was able to raise loans in London during the war which greatly annoyed the Commonwealth government who was not able to do the same. NSW thereby emerged from the war with a sounder economy than did the other states. The British government lent funds to the Commonwealth of over £30 million for non‐public works. The intention of the British government was that these loans would be used to persuade the states to continue to meet their interest payments on the loans already raised in London in order that the British holders of that stock would be encouraged to invest in the British government’s war loans. This led to an amazing financial outcome. It was impossible to send cash to Australia and this led to the Australian Treasury simply printing bank notes to that value for distribution to the banks who then provided credit for Commonwealth government’s wartime activities. The intention was to withdraw those notes after the war ended. Conventional economists were shocked at this arrangement and it led to Prime Minister Hughes, leader of the Nationalist non‐ Labor government, stopping such fiscal flexibility in the future. He feared that future Labor governments might exploit the arrangement as a means for getting themselves out of financial trouble by again simply printing more bank‐notes under a departmental direction. Hughes thereupon took the note issuing department from the Commonwealth Treasury and placed it in the conservative hands of the Commonwealth

6 Cable agent‐general to premier, 12 December 1924, file 24/334, State Records Agency of NSW, hereafter SRANSW 7 Sydney Morning Herald, 24 March 1924. 8 NSW Year Book, 1948, p. 639.

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Bank then owned by the Australian government, but working under a Board consisting of conservative commercial men. Indeed they were so cautious that when the real necessity arose to provide greater financial liquidity during a bank crash in NSW, there was a firm disinclination to use the note issuing facility to lighten the economic problem.

The costs of the war varied according to various calculations, but there is an agreement on a sum in excess of £500 million with post‐war costs of over £200 million. The Australian government was surprised to find that it had to meet more than the costs of pay and uniforms for the troops sent overseas. It had to pay the British for transport, food, medical care and most expensive of all the ammunition supplied to the Australians. The war eventually became an artillery war and Australia had to meet the costs of the shells fired away by the Australian troops. Some of these costs could be offset by British purchases from Australia of lead and other minerals used in munitions production, and wheat, wool, butter and frozen meat. But the British were slow to pay and the Australian government had to raise bank loans to pay the local farmers and miners and the costs of shipping to get these commodities to Britain. At the end of the war, there was a settlement of costs borne by each government leaving Australia having to pay the British over £5.5 million. Arrangements were made it to pay this sum off in annual sums.

The repayment of those bank loans and other costs arising from the war had to be paid by the Commonwealth and the Treasurer of the Nationalist government, Dr of the Country Party, wished to stop the states seeking to borrow during the time that the war‐connected loans, then amounting to £228 million, were being renewed. He established what was known as the temporary Australian Loan Council to collectivize the loan raisings of the states which actually had the effect of reducing the number loans raised. 9 When Jack Lang was elected Premier of NSW in 1925, he withdrew the state from the Council because of its hindrance. NSW successfully raised loans in London and Sydney that were used in such undertakings as electrifying suburban rail lines and constructing the Sydney underground railway.

Establishing the Permanent Australian Loans Council

Britain’s return to the gold standard led to it having to purchase large amounts of gold from overseas and to witness the rise in prices of its exports. The London loan market shrank during these times and the Bank of England under Montague Norman and the British Treasury made adverse comments about the level of Australia’s rate of borrowing. These remarks influenced Bruce and Page to convert the Loans Council into a permanent one where the Commonwealth would assume responsibility for the repayment of the loans. Finance for this purpose would come from the Commonwealth

9 CPD, 3 March 1927, p. 82.

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retaining the per capita payments then amounting to £7,584,912. The constitution was to be amended to make the Council a supra government institution. There was also to be a sinking fund to assist in repaying loans when they expired. This change disadvantaged the states because they lost their established share of the customs revenue and still had to meet the costs of interest on all past loans. As consolation, Page offered to hand some of the taxation measures of the Commonwealth to the states, but most though it too difficult for them to handle. Lang complained that the Commonwealth was ‘shackling the states hand and foot’ in the following comments:

The Commonwealth should not ask the sovereign States to give up their rights and hand themselves over, shackled hand and foot, to a Loan Council which, in effect, will be a Commonwealth authority. I judge from what has happened in the past what is likely to occur in the future. If the Commonwealth has these extended powers I do not think it will hesitate to use them. For these reasons I must state definitely that I entirely object to bind to a Loan Council, and for me to agree to the insertion of such provision in the Constitution would be practically to betray the sovereign rights of the State of New South Wales.10

NSW leaders continued the attack Bruce and Page by pointing out that while NSW had reduced it taxes, the Commonwealth had enjoyed the increase in tariff revenue from £27,630,359 in 1922 to £37.2 million in 1926 and a possible £39 million in the following year. This showed, NSW complained, how the states had always faced deficits in their budgets while the Commonwealth enjoyed a surplus of revenue and had to find things to spend it on. The Commonwealth had enjoyed a budget surplus of £7 million in 1924‐ 5, but NSW had a deficit of £3.186 million. Over the previous decades, NSW had an average deficit each year of £531,00011.

Earle Page introduced legislation in 1926 to make these important financial changes on borrowing and amending the Commonwealth Constitution to make it binding on the states. NSW was not the only opponent of the change and was joined by Nivinsons in London. They pointed out that small parcels of money entered the London market seeking reliable investment in long‐term stock. These arrangements suited the requirement of the Australian states which required small amounts like WA or larger and more frequent amounts such as NSW over the year. NSW, for example, sought £10 million annually, but entered the market several times during the year in a manner thus matching the flow of parcels of money onto the London market. Experienced Treasurers and Premiers explained to Bruce and Page that if the Council sought a collective loan of £40 million for all states, it would be too difficult for London to absorb whereas smaller

10 Notes for Loan Council, 4 December 1925, Item 25‐2075, A571, National Archives of Australia. 11 ‘Commonwealth Government’s Memorandum in Report of Conference of Commonwealth and State Ministers, May 26’ in NSW Parliamentary Papers, 1926, p. 38.

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amounts would be easier. Sir Hal Colebatch of WA had long experience in raising loans in London and was concerned that Page’s policy would drive away WA’s loyal London clients as follows:

These investors were customers of ours, buyers of our securities...They will not hold their money back month after month waiting for a big Commonwealth loan, and already have transferred their patronage. If they are to be got back, prompt action is necessary. Will the Loan Council take it, or will power and authority in the Commonwealth, whatever the consequence?12

Lang continued to argue against the Commonwealth’s legislation while being aware of the powerlessness to stop the change as follows:

Unfortunately, the State Governments are powerless to give legislative or administrative effect to their unanimous decisions. In matters of taxation the people are entirely at the mercy of the federal authorities, and must depend upon their sense of honour and respect for moral obligations for a fair deal…When the per capita payments cease the states will be utterly at the mercy of the Federal treasurer. The structure of the State finances will be completely undermined, our credit imperiled, and effective State Sovereignty gone.13

But the Bruce‐Page government ignored the warnings from London and locally about the dangers of collective loan raising and pushed the Financial Agreement Act through parliament. The successive referendum held in November 1928 was also a success for the Commonwealth government. Its success was mainly due there being no opposition to it from the Labor Party nor from any state government. Lang was the main voice opposing it and he had little impact outside of NSW.14

Problems of the London Money Market

The new Loans Council set out in the financial year 1928/29 to raise £35 million in London and failed to raise more that £14.4 million. The Council permitted the states to seek loans using Commonwealth stock, but that only produced £10.5 million. The conversion of a war loan of £21 million was achieved with some effort on the part of Nivinsons. In its second year of 1929/30, the Council aimed to raise £52.78 that included £9.8 million in arrears, but little was achieved. There was a rise in hostility against

12 West Australian, 23 January 1929. 13 Sydney Morning Herald, 20 June 1926. 14 Sydney Morning Herald, 15 November 1928.

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Australia’s borrowing and the London brokers, Schwab and Snelling, announced to their clients that they should abandon their investments in Australian stock as follows:

We have decided therefore to advise our clients who have money invested in Australian State and Commonwealth loans to realize their holdings and re‐ invest in 5 per cent [British] war loan, which can be purchased slightly above par, or some other trust security which would give identical return and offer greater degree of security.15

It was confirmed by the middle of 1929 that the Loan Council was unable to raise new loans in London although it could convert existing loans. The purchases of British machinery and other commodities had to be financed through the sale of Commonwealth Treasury bills and overdrafts from their London banks. But these temporary arrangements could not last for long and Australia had to stop the purchases of British material and raise tariffs on all British imports in order to preserve its limited sterling credits. These credits were obtained from the sale of Australian commodities in London, admittedly at rapidly falling prices, and they had to be allocated to paying the interest on previous loans. The British began importing wheat and butter from the Soviet Union that was being dumped at low prices because the USSR sought to obtain foreign currency to fund its imports of machinery for use in expanding its manufacturing economy.

Then the most unexpected political event happened in Australia. The Bruce‐page government resigned and an election was held for the House of Representatives while the Senate stayed intact. In retrospect it was a wise decision of Bruce to resign because the financial future looked very uncertain. The Labor Party, led by , was elected to office with a good majority. Scullin raised the tariff levels to assist in the expansion of Australian manufacturing to replace British imports and preserve sterling currency for use in meeting the interest payments on British loans. British imports to Australia slowed to trickle with little sterling to pay for them. The British economy was also sinking through its refusal to abandon its long attachment to free trade in favour of protectionism as most of the industrialized European countries had done. Reduction in British lending of funds to the Dominions such as Australia meant that these monies could be used for financing public works in the British regional cities that assisted a small proportion of the unemployed in those regions.

Reflationary Programmes of the New Lang Government

Elections were held in NSW in October 1930 when the shortage of loan monies and falling revenues plus tumbling commodity export prices depressed the local economy.

15 Coded cable, Harvey to Niemeyer, 25 July 1930, file G1/921, Bank of England Archives, London.

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Australia’s wheat had sold for 5 shillings per bushel early in 1930, but the price had been slashed to 2s2d per bushel by January 1931. Lang made great promises to reflate the state’s economy and introduce socio‐economic changes such as leaving the Loan Council and preventing the unemployed being ejected unfairly from their homes all of which helped him win a large majority from a desperate electorate. On taking office he was alarmed to find that the departing Bavin Nationalist government had left a debit balance of £2,219,895 and overdrafts and advances in London and Sydney of £13,120,894. He approached the Loan Council seeking to be allowed to raise a loan using Commonwealth stock for NSW as had happened previously, but the Labor states who were now well represented on the Council refused permission. Fortunately, the Council’s legislation did not bar local government institutions such as municipal councils and harbour boards from raising loans. This resulted in sums of between £30,000 and £250,000, that together totaled £1 million being raised in London for Sydney and Newcastle local governments.16

The Scullin and NSW Labor governments faced the hostility of Sir Robert Gibson, who had added to his status as Chairman of the Commonwealth Bank Board by becoming Chairman of the Associated Banks, that is the commercial banks who had joined together to present a united front to the Scullin and Lang governments. The Commonwealth Bank had been established in 1912 as part of Labor Party policy to be a savings bank for workers, but during the war it functioned as the banking agency of the Commonwealth government, particularly in its London branch. There it handled the loans and payments to the British government for maintaining the Australian forces and to collect payments from the British for Australia’s war‐time exports to Britain of lead, minerals, wheat, meat and butter. It functioned as a form of central bank without being acknowledged as such. It was managed by a board of government appointees and Gibson, a metal manufacturer in Melbourne, was its Chairman. All these members were of a highly conservative inclination and were dominated by the even more conservative Gibson.

The Premiers met in conference on 6 February 1931 and were informed by Gibson that their plan to borrow £6 million to aid wheat farmers would be refused. He then refused to pay £542,875 owing in interest payments to the Loans Council saying that it was more important to feed the unemployed and that arrangements could be made with the British to gain a moratorium on interest payments. Lang claimed that providing sustenance for the unemployed was his first priority. He had recently increased unemployment taxation paid by wage and salary earners and corporations, including overseas ones, of one shilling in the pound. He introduced work rationing on public works giving unemployed people one week in five. He reduced the working week to forty‐four hours in place of forty‐eight hours in the expectation of creating more jobs.

16 Treasury Minute, 24 November 1930, Treasury Correspondence files, file no. 1930/17176, SRANSW

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He produced the Lang Plan that included the reduction of interest payments on local and overseas loans from 5 per cent to 3 per cent and the extension of the term of the loan beyond its agreed date. He sought what he termed as a moratorium on payments to the British and Australian bond holders for two or three years until Australia could rehabilitate itself. Back interest would then be paid: it was not a matter of repudiation, but simply a halt in payment so that the scarce funds could be used to provide food for the unemployed, a figure that was then approaching 30 percent of the work force. There was a significant reaction from Sir Robert Gibson, but the Commonwealth government paid the amount owing by NSW and then began action in the High Court to recover the sum from the NSW government. The Treasurer in the federal Labor government, Edward Theodore, pursued radical solutions to lessen the impact of the Depression, one of which was to raise investment and consumption by means of a fiduciary issue in the form of unsecured credit from the Commonwealth Bank. Passage for this legislation was defeated by the Nationalist majority in the Senate.

The Collapse of the Government Savings Bank of New South Wales

In the midst of Lang applying his unorthodox plans for softening the harsh impact of the Great depression on the people of NSW, the Government Savings Bank of New South Wales collapsed and shut its doors on 22 April 1931. It held deposits of over £72.8 million but there were several runs on the Bank which absorbed all its cash reserves and it had to cease trading with its deposits having decreased to £58.8 million. This was held in mortgages and other investments that could not be liquidated. The bank had commenced in 1871 as the state saving bank based in the NSW post offices and after federation in 1901, when the post offices were taken over by the Commonwealth, the bank commenced trading in is own premises which it then expanded to number 192 bank‐owned premises by 1931. It issued its own banknotes which it ceased to produce in 1910 when the Fisher government authorized the Commonwealth Treasury to be the sole issuer of banknotes.17 Its depositors numbered 1,329,801 in April which represented 50 per cent of the state’s population.

Much of the run on the bank was linked to the NSW’s elections in October 1930. The Nationalist Party leaders, then in government, alleged that if the Labor Party won it would commander funds from the CSB to finance its recovery programme. The Bank protested and asked for a withdrawal of the comment which helped stem the rush.18 After the elections, the Nationalist’s leader, Tom Bavin now the leader of the Opposition, continued his attack in March 1931 by saying that Lang’s promise to reduce interest rates would damage the GSB. The run recommenced and ended in the closure of 22

17 Noel Griffith, A History of the Government Savings Bank of N.S.W , Baker & Co. Sydney, 1930, p. 52. 18 Copies of the letters of protest by Hall sent to NSW Treasury, 19 January 1931, in Government Savings Bank Special Bundle 37/1669, Item 211, SB, State Records Agency of New South Wales,

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April. The GSB’s management asked the Board of the Commonwealth Bank for assistance, but it refused.19 Sir Robert Gibson could see that his smaller bank would benefit if it obtained the GSB at a fire sale price. The two federal parliamentary leaders, Prime Minister James Scullin and Treasurer, Edward Theodore were deeply opposed to fellow‐party leader, Jack Lang, over his demand for NSW federal Labor members to support Lang’s radical policies on national financing on pain of losing NSW Labor endorsement in their federal seats. Theodore thus stood to lose Party endorsement for his seat of Daly in NSW.20 These two federal leaders could have demanded that the Commonwealth Bank use its note issuing powers to rescue the GSB knowing that the notes could be withdrawn after the emergency ceased. In place of finding a quick solution, the CSB remained closed for eight months. The hope of merging with the Commonwealth Bank remained a distant wish while Sir Robert Gibson dallied. Gibson disliked Lang and his radical financial policies and he was in no haste to rescue the bank and assist the stressed financial situation in NSW. In any case, Gibson’s Bank was benefiting from the GSB’s closure because it seems that much of the £41million cash withdrawn from the GSB before its closure was lodged in branches of the Commonwealth Bank in NSW. Unfortunately for the depositors of the GSB, the £60 million worth of deposits in the bank remained beyond their reach in the middle of the Depression when they had most need of it.

Re‐Opening the GSB

With little possibility of a favourable GSB merger with the Commonwealth Bank in offing, the Bank’s closure began to have a depressing effect on the NSW’s business community. The emergency helped turn many minds towards exploring how the GSB holdings could be tapped to assist the continuation of business. The Commonwealth Bank arranged for the ‘necessitous depositors’ to withdraw a maximum of £3 per week on condition that the total withdrawals from all branches did not exceed £25,000 per week. That amount was to be recovered from the depositors when the GSB reopened and legislation was passed to allow the Commonwealth Bank to become the preferential creditor of the GSB. However, the Bank withdrew from this plan after it had paid out the amount of £1,724,635 by 27 July 1931. The GSB branches remained open to make these payments and receive deposits from the Bank’s borrowers, but the staff members were not paid.

The Commonwealth Bank continued to inspect the GSB’s books with a view to a merger, but it refused to include the Rural Bank Department and the Advances for Homes Department and in addition wanted the funds used by the GSB initially to establish those Departments, which amounted to £14 million, to be repaid by the NSW government commencing from September 1931. In addition it wanted the £7 million at‐

19 Hall to Lang, 9 April 1931, ibid. in ibid. 20 Sydney Morning Herald, 6 April 1931.

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call funds lent to the NSW Treasury to be repaid at the same time. It was an impossible demand given that the state of the Treasury, and Lang rejected the proposal. Prime Minister Scullin wrote to Gibson asking when a solution would be reached and Gibson replied with more extreme demands which the GSB commissioners were prepared to accept on the assumption that the alternative would be the liquidation of the GSB. The NSW Treasury Department assessed the long term cost of the merger and rejected it in favour of making an agreement with the locked‐out depositors which drew on the model for the recovery by the commercial banks following the 1893 bank crashes. Marketable certificates could be given to the depositors to tide them over until the bank reopened. This was not advanced and the NSW government examined selling the Commonwealth stock of £29.5 million it was holding even at a discounted price to provide the cash to reopen the Bank if only on a restricted basis.

By July 1931 it was dawning on the Sydney commercial men that neither the Commonwealth Bank nor the Commonwealth government would help the GSB to reopen. The possible loss of the Rural Department concerned many country people and several lobby groups were formed to press for the re‐establishing the Bank and these led to talks between the government and business interests. On 7 August the Premier announced legislation to provide for the establishment of a New Business Division of the GSB while the remainder of the GSB continued to be closed and named the Old Business Division. One month later, the New Bank opened after legislation was passed to be received with wide support. It converted the £29.5 million Commonwealth stock into a new conversion loan of the Commonwealth and this amount was admitted as guilt‐edged stock against which the Bank could draw notes from the Note Issuing Branch. Over 50,000 new accounts aggregating £800,000 were opened including 2,394 by school children. Debts to shop keepers could be settled if the customer held funds in the Old Division by making a simple transfer. These sums could be re‐transferred and businesses and insurance companies favoured the scheme so that much of the commercial life was restored.

Just at this time the Western Australia Savings Bank collapsed and Sir Robert Gibson rushed to incorporate it into his Bank by accepting all liabilities and assets at their book value in spite of them being mainly rural investments. The staff was taken over by the Commonwealth Bank and there was no suspension of withdrawals. The speed and ease of this absorption of this event could be explained in the Perth bank being smaller than the GSB and it was a National‐Country Party Coalition government then in office in WA. The New GSB continued to flourish so that it held deposits of £1,111,371 and with the possibility that Note Issue might be made available, new negotiations began between the Lang government and the Commonwealth Bank so that legislation was passed allowing the merger resulting in the GSB branches reopened as branches of the Commonwealth Bank. The rural and housing departments continued to operate under the NSW government and after some years the Rural Bank of NSW was established as a

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functioning bank. Some decades later it became NSW’s leading savings bank to almost match the financial role which the GSB had played.

The 1931 Premiers Plan

The Premiers Conference in May and June 1931 adopted much of what Lang had been urging following its subjection to close examination by state solicitors, Attorneys‐ General and professors of economics. It was agreed to reduce by 22.5 per cent interest on loans and mortgages. All adjustable government expenditure, including wages, was to be reduced by 20 per cent. All lenders to the state and federal governments, then totaling £500 million, were to accept longer terms with a minimum of ten years and a maximum of forty years with a maximum of 4 per cent interest. Most bond holders agreed to convert which amounted to a sum of £487 representing 190,016 people. Revenues were to be increased by increasing income taxes by £1.5 million and raising sales taxes to 5 per cent and primage duties lifted by 10 per cent. This would raise revenues by £6.4 million. Budget deficits were then estimated to be £39 million and increased revenue would provide £26 million making the deficit £13 million.

The Last Banking Crisis for NSW

By early December 1931 the important changes introduced through the Premiers’ Plan were working. Gibson had become sickly and irascible and this led to him being unpredictable in matters of finance and banking, but economic condition continued to deteriorate. Events took a new turn when Scullin suddenly called a snap election for 19 December although knowing that it would produce a stunning defeat for his Party. A new coalition government was elected led by Joe Lyons of the assisted by Jack Latham as Attorney‐General who was nicely positioned to implement the major policy of enforcing the Premiers’ Plan and pursuing NSW to pay all the back interest it owed. Lyons called a Premiers Conference to handle the continuing budget deficits incurred by the states. NSW sought £3.4 million to maintain its government plus £9.37 to meet its budget deficit. Other states sought similar comparative amounts. The meeting concluded on 5 February 1932 with no proposal to seek a loan.

The Lyons government immediately introduced to parliament a bill titled the Financial Agreement Enforcement Act that was related to the Bruce‐Page Financial Agreement Act of 1929. When a state defaulted a certificate would be prepared and presented to the High Court and then after adoption by parliament, the judgment would be enforceable against the state and the funds held in its banks would be seized by the Commonwealth. The bill was passed quickly and just as it was assented to, the NSW government emptied its bank accounts amounting to £1 million and placed the sum in the Treasury vault. Because the Commonwealth could seize NSW funds lodged in banks, the NSW government instructed that no payments be made to it by bank cheque. The state thereby became a cash economy. NSW was found to be in default by £924,082 and

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Lyons arranged to seize £1 million from NSW. NSW appealed to the High Court against the seizure, but its appeal was dismissed leading it to appeal to the High Court to appear before the Privy Council, but that was lost as well. The Commonwealth then demanded NSW surrender it income taxation revenue, but the government sealed the Taxation Office to stop the Commonwealth seizing the assessment files. Lyons issued a proclamation declaring that the default had increased to £2,021,390 and it could seize all revenue from tramways, railways and road tolls. NSW responded by converting the Treasury vault into a bank which would receive cash revenues and pay out the wages of the public servants. School teachers had their wages paid through their union, railway and tram workers were paid from the revenue of he ticket sales. The butchers and grocers associations immediately offered their bank account systems for payment of the various shops participating in the relief schemes. The Commonwealth sought to impose heavy fines on the NSW public servants who refused to pay revenue to the Commonwealth, but they refused to comply and supported the Lang government at some financial risk.

Although the Commonwealth was making economic difficulties for NSW, it was not winning the war. Just £7,311 had been handed to the Commonwealth by the banks while NSW’s debt to the Commonwealth had increased to over £2.7 million. NSW’s loan debt amounted to £270 million on which annual interest charges amounted to £13 million. When another interest payment of £655,086 fell due in London on 1 May 1932, the Commonwealth quietly paid it using treasury bills.21 This was a further demonstration that the Commonwealth’s agenda against NSW represented a diminishing return for the energy exerted. The trading banks lost considerable business under these circumstances because shopkeepers, tradesmen and government suppliers failed to receive their payments. The banks approached the government and by the middle of April 1932, they agreed to accept cheques drawn on the Treasury for their customers and clear such cheques through clearing houses. By such procedures, the government cheques became a form of currency convertible to cash on presentation to the Treasury bank which was then holding £4 million in currency. Similarly the NSW food coupons had already become a substitute for money.22

The Commonwealth’s action had become one of the main drivers of the Depression in NSW. Taxes were not being collected, the banking system was under strain and all financial flows were impeded. The economic madness had to stop sooner than later. During the federal parliamentary debates on he various Enforcement debates, opposition voices called for a compromise or establishing a tribunal to settle the disputes, but nothing came from them. The NSW Treasury staff was eager to demonstrate that their new processes met accounting standards and the Auditor‐

21 Answer by S.M. Bruce in Parliament, 4 May 1932, p. 328, CPD. 22 Circular, ‘Orders on the Treasury to Take the Place of Cheques on the Various Banks’, file no. 32/6160, Treasury Correspondence files, SRANSW.

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General was invited to inspect the financial procedures. His report was presented to parliament showing his approval of the new system and remarked on how revenue was not placed in banks because of the Commonwealth’s Enforcement Act. In presenting the report, Lang added that section 27 and 28 of the Audit Act, not referred to by the Auditor, already gave power to the Treasurer to order monies to be paid into the Treasury or the banks.

Lyons and his senior ministers must have pondered how this affair would end. Other than the Commonwealth backing down and allowing NSW to return to raising its own loans backed by Commonwealth stock, the only other solution, unlikely as it first appeared, was to have Lang or his government somehow removed from office. Other governments in the British Empire such as in Canada had been dismissed by the provincial governors and it was not impossible that the same could be repeated in NSW. The NSW governor was Air Vice‐Marshal Sir Philip Game whose patron was Lord Trenchard, the founder of the Royal Air Force, and enjoying close connection to the royal family. Game too believed that he had close affiliation to the King and that the governing model for NSW was one centered on himself through the powers endowed on him by the King to authorize legislation. He outlined this model he had invented to a surprised Premier saying that ‘I feel it is my bounden duty to remind you at once that you derive your authority from His Majesty, through me’.23 Lang might have replied that his government drew its authority from its election by majority vote of the electorate. Game argued that the Audit Act was breached by not paying monies into a bank and at 5.00 p.m. on a Friday afternoon when parliament was not sitting, he unconstitutionally dismissed the Lang government and appointed Bertie Stevens, the leader of the opposition to become Premier and immediately prorogued parliament. With Stevens occupying the Premier’s chair on the Saturday morning 14 May, the economic problems of NSW miraculously disappeared. The Commonwealth paid NSW’s interest on the London loans and the cash held in the Treasury vault‐bank, then amounting to £4,769,502, was lodged in the NSW’s bank account on Monday morning.24 The election was arranged for four weeks hence and the Commonwealth made grants to assist NSW in budget deficits so that it enjoyed a credit balance of £11.8 million. More funds poured into NSW from the Commonwealth Bank via the Loan Council. The election resulted in a good win by the Stevens‐led UAP government.

Thanks to Scullin’s increased tariffs, the Commonwealth enjoyed increased revenues and added a petrol tax that collected £5 million by 1934. By 1932/33 the states had deficits of £8.8 million, while the Commonwealth had a surplus of £3 million which would have been larger if it had not paid £2.2 million as relief to wheat growers. The

23 Copies of this correspondence between Game and the Premier was published in the Sydney Morning Herald, 14 May 1932. 24 Treasury Banking Operations Accounts, Trial Balance, 13 May 1932, file 10/22297, Treasury Correspondence files, SRANSW.

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states continued to labour under the necessity to deliver a range of services with shrinking revenues and the Premiers seriously considered the replacement of the federal structure by a unitary government. WA pushed the concept further by attempting to secede from the federation and fund itself with the monies from its customs and excise income. The poorer states did receive some aid after July 1933 when the Commonwealth Grants Commission was established to make payments under section 96 of the constitution. Local economic integration was lacking during these years and for the succeeding decades as the federal system failed to operate for the benefit of the Australian people because the wealth and resources were not divided equally within the artificial boundaries imposed on the continent. The Commonwealth’s undertaking to assume the costs of a wide social welfare scheme after the Second World War helped greatly in advancing economic integration, but the adoption of the GST system, even though it was an unfair tax, did assist the states in gaining some financial independence.

Dr Frank Cain is Visiting Fellow in the School of Humanities and Social Sciences at the University of New South Wales in Canberra.

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