Problems in Governmental Finances and Banking in NSW during the Great Depression: Lack of Local Economic Integration in Australia 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 Tasmania and South Australia witnessed the closure of many of their industries in the face of cheaper goods flooding in from NSW and Victoria previously excluded by the tariff walls. This triggered the commencement of the continuing decline in those state economies. Western Australia 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: 1 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. 2 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 Sydney 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 History of Australia 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. 3 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.