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Labor and financial deregulation: the Hawke/Keating governments, banking and new labor Stephen Martin University of Wollongong
Martin, Stephen, Labor and financial deregulation: the Hawke/Keating governments, banking and new labor, PhD, Department of Economics, Department of History and Politics, University of Wollongong, 1999. http://ro.uow.edu.au/theses/319
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LABOR AND FINANCIAL DEREGULATION
The Hawke/Keating Governments, Banking and New Labor
A thesis submitted in fulfilment of the requirements for the award of the degree
Doctor of Philosophy
from
University of Wollongong
by
Stephen Martin
B.A. (Australian National University) M.A. (University of Alberta, Canada) M.T.C.P. (University of Sydney) Dip. Ed. (University of New South Wales)
December 1999
Department of Economics Department of History and Politics
ACKNOWLEDGEMENTS
I wish to acknowledge and express my sincere thanks and appreciation to my supervisors, Professor Robert Castle and Associate Professor Andrew Wells, who provided guidance and encouragement throughout the writing of this thesis. Their suggestions and comments were invaluable.
I convey my thanks to Ms Alison Byrnes, who assisted in computing and administration needs over the entire process of producing this study.
My appreciation to Mr Bernie Fitzpatrick for his proof-reading skills.
My special thanks to my Parliamentary colleagues, both present and former, who, knowingly and unknowingly, contributed in a variety of ways, their knowledge and insights.
To my understanding staff, thanks for their patience during a long and seemingly interminable journey producing this thesis.
Finally, to my wife Carol and my children, Kiley, Cassandra, Luke and Tegan, to whom this thesis is dedicated, my thanks.
iii ABSTRACT
This thesis is an insider’s analysis of the decision-making processes of the Australian Labor Party in dealing with substantive economic issues during its tenure in office between 1983 and 1996. It presents a study of how the Party “reinvented” itself as a “New Labor” Party during this time, how this process occurred and who was most responsible for this fundamental change in the Party’s philosophy.
As a necessary precursor to examining these two central themes, an analysis was undertaken of the foundations and philosophy of social democratic parties. In particular, the unique type of social democratic party that evolved in Australia, based on the notion of Labourism, is outlined. Through this examination, an appreciation emerges of the philosophical underpinnings, historical evolution and policies of the Australian Labor Party from its creation.
Any study of Australia’s economic history must consider the relationship between banking and the Australian Labor Party. Accordingly, the evolution of Australia’s financial system, and how Labor’s policies and platforms for decades reflected outright antagonism towards banks, is presented. Issues such as the Money Power, creation of the Commonwealth Bank, bank nationalisation and financial deregulation all provide a background to Labor’s modernising agenda in the 1980s and 1990s.
The thesis uses financial deregulation to examine how and why Labor embraced non- traditional, market-oriented economic policies during the Hawke/Keating Governments. It considers three case studies of financial deregulation in detail: the float of the dollar, the entry of foreign banks, and the sale of the Commonwealth Bank. In doing so, this analysis concludes that financial deregulation became part of a wider process of modernising the Australian Labor Party.
Each of the case studies examines the roles of various actors along this modernisation path to elicit an understanding of the magnitude of the changes to the Party’s economic policy. The roles of Cabinet, Caucus, National Cnference, National Executive and the factions presents a unique insight into a Party embracing fundamental change.
Using the writer’s inside knowledge as a member of the Hawke/Keating Governments, and drawing on the recollections of past and present Parliamentary colleagues, bankers, Party officials and advisers, the study concludes that Labor’s embrace of deregulatory economic policies did create a “new-style” Labor Party. Most credit for this philosophical leap of faith is given to Paul Keating, whose intellectual drive and sheer persistence saw Labor become a modern, outward-looking and relevant political party.
iv The study has taken many secondary accounts of the ways in which policies were developed under the Hawke and Keating Governments and subjected them to rigorous analysis. The writer’s position as a participant in the government, as an author of elements of financial deregulation policies, and as a person with access to many of the major actors, ensures that the study makes a unique contribution to the understanding of policy development processes in the Labor Governments of the 1980s and 1990s.
v TABLE OF CONTENTS
DECLARATION ...... ii
ACKNOWLEDGMENTS ...... iii
ABSTRACT ...... iv
TABLE OF CONTENTS...... vi
LIST OF TABLES ...... ix
ABBREVIATIONS ...... x
CHAPTER 1 – INTRODUCTION
1.1 Background to the Study ...... 1 1.2 Scope of the Study ...... 4 1.3 Methodology ...... 10
CHAPTER 2 – SOCIAL DEMOCRACY AND LABOR
2.1 Introduction...... 13 2.2 Social Democratic Parties...... 14 2.3 The British Experience...... 27 2.4 The Australian Context ...... 31 2.5 Emergence of the Australian Labor Party ...... 34 2.5.1 Unions, Labor and Labourism ...... 36 2.5.2 Political and Economic Change……………………… 41 2.6 The Whitlam Years ...... 45 2.7 1975–1983 – Labor Pragmatism Emerges ...... 50 2.8 1983–1996 – Labor’s New Age...... 56 2.8.1 Factions in the Modern Labor Party ...... 56 2.8.2 Policy Development ...... 65 2.8.3 The Hawke/Keating Governments – Contemporary Assessments...... 67
vi CHAPTER 3 – THE AUSTRALIAN BANKING INDUSTRY – AN HISTORICAL OVERVIEW
3.1 Introduction...... 75 3.2 Australia’s Financial System – The Early Years ...... 77 3.3 The Money Power – Shaping Labor’s Ideology ...... 81 3.4 The Twentieth Century – Seeds of Regulation ...... 84 3.4.1 Central Banking and Nationalisation ...... 85 3.4.2 Reserve Bank, Private Banks and Beyond ...... 90 3.4.3 Growth of Non-Bank Financial Intermediaries...... 94 3.4.4 Forces of Change in the 1970s...... 96 3.4.5 Declining Effectiveness of Monetary Controls...... 100 3.4.6 1980s – Moves Towards Deregulation...... 102 3.4.7 Consolidation Into the 1990s...... 103 3.5 Banking and the ALP Platform...... 106
CHAPTER 4 - FINANCIAL DEREGULATION
4.1 Introduction...... 115 4.2 Why Financial Deregulation?...... 116 4.3 Deregulation in Australia – Practical Realities ...... 120 4.3.1 The Campbell Committee ...... 122 4.3.2 Consequences of Deregulation...... 129 4.4 Deregulation and the Labor Party...... 140 4.4.1 Keating and Hawke – Champions of Deregulation...... 145 4.4.2 The Keating Philosophy of Deregulation...... 156
CHAPTER 5 - THE FLOAT
5.1 Introduction...... 160 5.2 Financial Deregulation and the Float ...... 162 5.2.1 Background to the Float...... 165 5.2.2 The December Float ...... 169 5.2.3 The Consequences...... 172 5.3 Caucus and the Float...... 175 5.4 Keating or Hawke: Whose Baby? ...... 181
vii CHAPTER 6 - ENTRY OF FOREIGN BANKS
6.1 Introduction...... 194 6.2 Campbell and Foreign Banks...... 195 6.3 Foreign Bank Entry and the ALP ...... 198 6.3.1 The Process...... 201 6.3.2 Post-National Conference Implementation...... 215 6.4 Martin Committee Report 1991...... 218 6.5 One Nation Response 1992...... 223 6.6 Consequences...... 224
CHAPTER 7 - SALE OF THE COMMONWEALTH BANK
7.1 Introduction...... 227 7.2 Historical Outline of the Commonwealth Bank...... 228 7.3 Deregulation of Banking ...... 237 7.4 Labor’s Road to Privatisation...... 241 7.4.1 Party Response ...... 245 7.4.2 Caucus Views ...... 249 7.4.3 Cabinet Discussions...... 251 7.4.4 Leadership ...... 255 7.5 1990 Restructure of the Commonwealth Bank ...... 257 7.6 The 1993 Sale ...... 259 7.7 The 1995 Sale ...... 263 7.7.1 The Approval Process...... 265 7.7.2 Reaction to the Sale Announcement ...... 269 7.7.3 ALP Reaction ...... 273
CHAPTER 8 - CONCLUSION ...... 278
BIBLIOGRAPHY
APPENDICES
viii
LIST OF TABLES
TABLES
1. Backgrounds of Members of Labor Caucus, as measured by their former occupations.
2. Average age and gender of Members of Labor Caucus.
3. A selection of Campbell Committee Recommendations.
4. Selected events in the evolution of the Australian financial system.
ix ABBREVIATIONS
ABEU Australian Bank Employees Union ACTU Australian Council of Trade Unions AFR Australian Financial Review AGC Australian Guarantee Corporation ALP Australian Labor Party ANZ Australia and New Zealand Bank ES&A English, Scottish and Australia Bank GBE Government Business Enterprises GDP Gross Domestic Product GSB Government Savings Bank GST Goods and Services Tax LGS Liquid Assets and Government Securities NAB National Australia Bank NBFIs Non-Bank Financial Intermediaries (Institutions) OECD Organisation for Economic Co-operation and Development RBA Reserve Bank of Australia SBV State Bank of Victoria SRD Statutory Reserve Deposits TAA Trans Australia Airways WATLC West Australian Trades and Labor Council
x CHAPTER 1
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
This study is an insider's analysis of the decision-making process by which a social democratic government, the Australian Labor Party, dealt with substantive economic issues during its tenure in office between 1983 and 1996.
It is a study of how agendas were set, who the prime agents for changing the structure of the Australian Labor Party were, whose advice was sought, and how the Party “reinvented” itself as a “New Labor” Party.
Analysing change in a political party, its organisation and philosophy, and the practical implications for public policy, poses questions of 'agency versus structure' in any explanation. In this thesis the question relates to inevitability, timing and personalities in a major policy reorientation. In this study, the question hangs on whether the creation of a "New" Labor Party, reflected in the economic policies associated with financial deregulation was an inevitable consequence of, amongst other things, the global market and the pressure of international competitiveness (inevitable forces) or whether it occurred because of the influences of various personalities in the Australian Labor Party (human will). Even if the process was inevitable, the issue of timing and leadership remains.
Chapter 1 Introduction 2
Consequently, arguments are examined which implicitly contrast both interpretations. Much of the policy background indicates that within the Labor
Party there was no inevitable response, and indeed the bureaucracy was divided. The need for Labor to embrace modern, forward looking agendas and policies, as well as a need to learn from past mistakes, was fundamental to the
Hawke/Keating Governments. Thus the decision by Keating with his political and bureaucratic allies to embrace financial deregulation invites close analysis.
Globalisation ensured that Australia in the 1980s would have to change, but how far and how quickly was always a moot point. Responsibility for controlling this process, working out its timing and implementation in the face of a traditional Labor platform and policies therefore became central to Labor's modernisation program. This thesis seeks to provide an explanation for these changes.
A number of accounts have been written about the period of the Hawke/Keating
Labor Governments. However, most have reflected a particular view by authors wanting to emphasise their place in history as former Cabinet Ministers1, Prime
Ministers2 or political insiders.3 Each has put a spin on the way in which decisions in government were made, who drove each critical issue, and the role played by various groups and individuals in influencing the policy-making process of a Labor government.
1 See Richardson, Graham, Whatever It Takes, Bantam, Sydney, 1994 and Button, J, As It Happened, Text, Melbourne, 1998. 2 Hawke, Bob, Memoirs, William Heinemann, Melbourne, 1994. 3 Edwards, John, Keating: The Inside Story, Penguin, Ringwood, 1996. Chapter 1 Introduction 3
In each account, and in concert with other contemporary writers, it is suggested that a new approach to government was adopted. Whilst consensus-style politics was the appearance, the reality was very different. Discussion of policies through branches, State and Federal Conferences, Caucus and its committees, was regarded as old-style Labor.
This study endeavours to draw on insider knowledge to bring together and analyse these various views, and to present an alternative and detailed account of how and why a “new style” Labor Party was created during the
Hawke/Keating years. Its basis is an examination of economic policy changes, specifically with regard to financial deregulation, as an illustration of the way in which the process of policy development also reflected “New Labor” philosophy.
The author was a member of the Hawke/Keating Labor Governments between
1984 and 1996. During that time, he held the position of Chairman of the
House of Representatives Finance and Public Administration Committee, and was Parliamentary Secretary for Foreign Affairs and Trade. He was Speaker of the House of Representatives between 1993 and 1996. As such, he was well- placed to provide an insider’s account of the evolution of Labor during the
Hawke/Keating years.
This study describes and analyses this process through a consideration of the historical and philosophical underpinnings of Labor's platform and policies, from its early days through to the end of the Keating Government. The roles played
Chapter 1 Introduction 4
by the parliamentary leadership, ALP National Executive, Caucus, the factions, bureaucrats and Party apparatchiks are all examined. How the broad Party responded to these changes to long-held "Labor" beliefs provides a real insight into the inner workings and directions of the modern Party.
Financial deregulation is used as a case study to examine how and why such changes eventuated in the 1980's and 1990's. As a direct consequence, the study describes the relationship between the Australian Labor Party and the
Australian banking industry. It seeks to define how the forces of financial deregulation were unleashed under the intellectual drive and sheer persistence of Labor’s leadership, particularly that of Paul Keating. The float of the
Australian dollar, entry of foreign banks, and the sale of the Commonwealth
Bank are used to analyse whether financial deregulation was part of a wider process of modernising Labor.
This determination to modernise both the Party and the country, and to embrace policies far removed from traditional Labor, elicits the fundamental question as to whether a Party, described in modern terminology as "New
Labor", was created.
1.2 SCOPE OF THE STUDY
The study examines these issues in a thematic way. By first outlining some major trends in social democratic thought in Europe and Australia, an Chapter 1 Introduction 5
appreciation is gained of the underlying philosophy of the Australian Labor
Party.
Political theorists and historians have often analysed the theory and practice of the Australian Labor Party in terms of class struggle. Their emphasis has been on the interrelationships between social and economic forces, which were reflected in policy development. From its very beginning, Labor actively pursued policies that were on the left of the political spectrum: that is, using the state to both change and regulate class relations.
Similar developments occurred in other social democratic parties around the world, particularly in Europe. Because of Australia's British colonial history and the impact of that history in creating class relations, the Australian Labor Party fashioned its platform and policies with more than a passing interest in transforming the legacy of its colonial heritage. Labor's views on economic and social issues reflected deeply-held convictions and prejudices, no more so than with respect to banks and the country's financial system.
To understand this process, it is necessary to examine the philosophical underpinnings of European social democratic parties, and to ascertain the importance of class, socialism, and Parliamentary structures as key elements in their formation. How this was applied in an Australian context, and its manifestation in the creation of the Australian Labor Party, is the subject of critical inquiry.
Chapter 1 Introduction 6
In Australia, the foundation of social democracy was Labourism, a doctrine which provided a particular structure, ideology and leadership that involved a strong role for the unions. Its philosophy and platform generally reflected a view that governments had a responsibility to intervene in the market place to ensure that appropriate economic and social objectives could be sustained. This study, therefore, reviews the way in which Labor created itself as a peculiar type of social democratic party, and how, until the 1970s, its underlying policies reflected deeply-held beliefs that mirrored its formative years.
Having considered the fundamental way in which the Party developed its ideology, the study examines the process by which Labor modernised itself post-Whitlam. In particular, it seeks to understand and explain how and why the free-market ideals were embraced by the Australian Labor Party. In endeavouring to explain this radical departure from traditional Labor ideology, the study considers the influence of a number of factors. These include international pressures on the Australian economy, structural changes to the working class, the weakening of Labor’s trade union base, and the creation of new leadership style, characterised as presidential in nature, beginning with
Whitlam and flourishing under Hawke and then Keating.
As a consequence, the study asks what effect these changes subsequently had on the Caucus, the Party’s National Conference, and the social base and ideology of Labourism. It seeks to explain why these were replaced by an entrenched factional system, Cabinet control, and a new policy agenda very much tied to the market and public opinion. Chapter 1 Introduction 7
This represented a substantial ideological shift, as reflected in the relationship between the public and private sectors of the economy. Accordingly, it raises questions as to how policies were framed to react to this new relationship.
Labor's policies towards the Australian financial system provide a useful tool to analyse this change. As Labor’s view of banks had been a significant element of the Party’s approach to economic policy since its formation, the study outlines the evolution of the Australian banking system, and examines the concept of financial deregulation.
Having established the fundamental tenets of Labor’s traditional approach to economic policy using banking as an illustration, the thesis examines three case studies of financial deregulation and privatisation. These studies are undertaken from the perspective of Labor’s new approach to economic policy- making.
When the Hawke Labor Government was elected in March 1983, it inherited an economy that was essentially inward-looking and in need of major reform. The inheritance of double-digit unemployment, double-digit inflation, and a large domestic deficit both reflected and masked deeper structural problems. One of the greatest structural problems was a financial system in desperate need of rejuvenation and re-shaping.
Deregulation, the concept of market forces being freed from government control or restraint, was a trend sweeping the developed economies in the late 1970s and early 1980s. That Australia should be immune to this trend was a naive but Chapter 1 Introduction 8
widely-held belief. Surprisingly, the free-market notions of competition found a home more easily in the modern Australian Labor Party than in the conservative
Coalition parties at that time.
Financial deregulation became a symbol of the economic policies of Labor in the 1980s and 1990s. It helped define the party as a radically different organisation from its predecessors and made it comfortable in government. It was seen by many, and its leaders fostered this view, as the natural party of government for a modern, outward-looking, self-confident, responsible and economically-modernising nation state.
The foundations and philosophy of Labourism provide a useful starting point to understand the way in which Labor and its supporters developed their views on banking. The cooperative relationship between the political and industrial wings of the Party is considered as an explanation for appreciating how the
Hawke/Keating Labor Governments, predisposed towards reformist economic policies, were able to abandon long-held traditional policies with respect to banking. It is necessary to examine these issues in an endeavour to formulate a wider perspective on how and why Labor, in its many guises, was able to change its traditional approaches to economic policy under both Hawke and
Keating.
Labor's role in, and support for, the formation of the Commonwealth Bank, its suspicion of the Money Power, Chifley's attempt to nationalise banking in the
1940s, the creation of a Central Bank in the 1950s and the Party's policies Chapter 1 Introduction 9
following major inquiries into banking in the early 1980s provide the background to Labor's modernisation of the Australian economy. An insight into the relationship between Labor and the banking industry is provided to explain why
Labor's leadership favoured change.
The factors that led both Hawke and Keating to pursue the policies of financial deregulation and privatisation are examined to explain this philosophical leap of faith. The way in which the leadership was able to manipulate the Party to achieve its ends is examined by analysis of the interaction between the major personalities involved and their relationship with the broader Party.
Of the three case studies, the float of the dollar is considered first as this was the earliest manifestation of the need to change government policy and processes of decision-making. It provides a clear insight into how and why
Labor, in its many parts, was prepared to adapt to change. The entry of foreign banks, and then the sale of the Commonwealth Bank, are examined to illustrate the evolution of control and dominance of a few key individuals in Labor’s approach to government. They are an intrinsic part of the explanation as to how a Labor government could change economic policies so dramatically, to make them virtually unrecognisable to traditional Labor supporters. Keating’s drive to have the Party embrace free market financial deregulation and privatisation policies is analysed in detail as this illustrates the scope and nature of the changes to the Party’s traditional decision-making processes.
Chapter 1 Introduction 10
1.3 METHODOLOGY
This study has taken a number of secondary accounts of the ways in which policy was developed in the Hawke/Keating Governments and challenged a number of the underlying conclusions. In this regard, a unique methodological approach enables the writer to present a new and different perspective on the creation of “New Labor”.
This is achieved through a methodology that relies on a number of fundamental characteristics. In the first instance, contemporary accounts of major players are analysed, and similarities and differences of opinions noted. The writer’s first-hand knowledge as a participant in the Labor Government provides one basis for assessing the reliability of these accounts. Additionally, the writer was an author of elements of the government’s policies on financial deregulation through his role as Chairman of the Banking Inquiry in the early 1990s. These provide a unique insider’s understanding of how the process worked, who was responsible, and what effect this ultimately had on the policies, platform and philosophy of the Australian Labor Party.
Having collated this information, the writer was then able to revisit many of the major actors, providing them with an opportunity to contradict, embellish, or comment on the conclusions that this analysis had drawn. This access to former Prime Ministers, Cabinet Ministers, bankers, advisers and the like, ensured an analysis that provides unique insights into the central themes of this study. Chapter 1 Introduction 11
As a basis for this study, two questions were posed at the outset. The first centred on how and why decision-making during the Hawke/Keating
Governments was different from traditional Labor administrations. The second posed the question as to whether the Australian Labor Party remade itself as
“New Labor”.
An extensive literature search and review was undertaken as an important first step. Initially concerned with financial deregulation in Australia, this was broadened to include issues concerning the historical evolution of Australia’s financial system. Similarly, the development and philosophical base of the
Australian Labor Party was researched, specifically with respect to its democratic socialist and union background, and its relationship over time with the Australian financial system.
A necessary extension of this literature search and review was the development of social democratic thought in Europe and Australia. Chapters detailing each of the above researched issues were written. The three case studies analysing the float of the Australian dollar, the entry of foreign banks, and the sale of the
Commonwealth Bank were also written as individual chapters based on the literature review.
The study utilised primary and secondary sources, many previously unpublished. Minutes of caucus deliberations, Treasury documents and historic papers from Labor contemporaries provided valuable insights into Labor’s decision-making processes. Chapter 1 Introduction 12
A significant component has been interviews with many of the major players.
Former Prime Ministers Keating and Whitlam, previous Ministers in the Whitlam,
Hawke and Keating administrations, banking industry representatives, factional leaders, Party officials, and former advisers offered detailed recollections of
Labor’s embrace of economic and social change. Specific questions were developed for each of the interview subjects dealing with decision-making in government, the roles of factions, perceptions of Caucus, how personalities helped shape policy development, and who was considered the main intellectual driving force behind Labor’s changing ideology.
Other sources of information included records of ALP National Conferences, historical records of banks and contemporary accounts published as books and manuscripts. Insights are also provided by contemporary writers who have researched various aspects of the Hawke-Keating years, in particular a comprehensive analysis of how and why financial deregulation occurred during the life of a Labor government.
This information was integrated into each of the chapters. Each chapter was then extensively reviewed and rewritten to ensure that the two fundamental questions underpinning the thesis were addressed and reflected in the concluding chapter.
CHAPTER 2
SOCIAL DEMOCRACY AND LABOR
THEORETICAL FOUNDATION AND PRACTICAL
EVOLUTION
2.1 INTRODUCTION
Social democratic political parties had their genesis in Europe towards the end of the Nineteenth Century. Essentially created by labour movements to fight for social and economic change in the aftermath of the Industrial Revolution, they were fundamental to the development of philosophies of equity, economic fairness, and social justice. While these parties were developing in Europe, their influence was also being felt in Australia.
An examination of the emergence of social democratic parties, their philosophical foundations and basic structure is instructive in understanding how the Australian Labor Party evolved and moulded itself to changing economic and social circumstances of the Twentieth Century.
Any consideration of policy development, support base and electoral fortune must necessarily approach this task from an historical as well as political perspective. Chapter 2 Social Democracy and Labor 14 Theoretical Foundation and Practical Evolution
It is, therefore, important to briefly identify how this ideology emerged in
Western Europe. Such an examination seeks to identify how these parties, particularly labour parties, developed, and how state intervention was considered fundamental to the well-being of the working class. How the parties attracted other classes and professions, and how the internationalisation of world economies affected the parties, is also relevant.
In Australia, Labor was a distinctive member of the wider family of social democratic parties. How this peculiar philosophy developed presents an historical view of Labourism, and its relationship with trade unions also provides an insight into how modern Labor has coped with government, and social and economic change.
At the same time, Labor's creation of a modern Australian banking system provides a useful case study as to the way in which the Party adapted to these changed circumstances.
2.2 SOCIAL DEMOCRATIC PARTIES
Most social democratic parties in Western Europe developed during the “Great
Depression” of 1873-95. All had a parliamentary orientation from the outset.
Their major strategic objective was universal suffrage on the assumption that its achievement would enable fundamental social change. Social democracy was described as a movement pursuing civil emancipation for the working class.1
1 Van der Linden, Marcel, Metamorphoses of European Social Democracy, Socialism and Democracy, vol 12, 1998, pp 161-186. Chapter 2 Social Democracy and Labor 15 Theoretical Foundation and Practical Evolution
Class was an important ingredient in the emergence of social democratic parties. ‘Class’ or ‘social class’ was used to describe individuals who possessed within the framework of society or community, the same amounts of power, income, wealth or prestige or some loosely formulated combination of these elements.2 More strictly in Marxist terms, class has denoted those holding a common ownership position. Often expressed in terms of their relationship to the mode of production, the capitalist class owns the means of production and the proletariat sells its labour power.3 The emergence of labour unions and social democratic governments provided countervailing forces to offset the dominance of the owning class.4
Socialism and its various derivatives were the foundation stone upon which social democratic parties in Europe were built in the last century.5 It emerged as a distinctive doctrine and movement in the 1830s, but spread rapidly in
Europe. By the end of the century, large socialist parties had developed in several countries, notably Germany, Austria, Sweden, France and Italy. Whilst they emerged at different times, had different relations to social classes, followed different ideologies and had different relations with trade unions, the question of their relationship to Marxism was fundamental.
2 See for example Weber, M, From Max Weber: Essays in Sociology, Gerth, H, and Mills, C, trans and eds, Oxford University Press, New York, 1946. 3 See Marx, Karl, Capital: A Critique of Political Economy, Kerr, Chicago, 1925/26 and Marx, Karl, and Engels, Friedrich, The Communist Manifesto, Washington Square Press, New York, 1964. 4 See Weber, Max, The Theory of Social and Economic Organisation, Free Press, Glencoe, 1957; Webb, Sidney and Beatrice, The History of the Trade Union Movement, Longmans, London, 1950; and Dahrendorf, R, Class and Class Conflict in Industrial Society, Stanford University Press, Stanford, 1959. 5 Outhwaite, William, and Bottomore, Tom, eds, The Blackwell Dictionary of Twentieth-Century Social Thought, Oxford, Blackwell, 1993. Chapter 2 Social Democracy and Labor 16 Theoretical Foundation and Practical Evolution
Marxism was the main intellectual foundation of socialism, combining a theory of society which explained the development of modern capitalism, the division of society into two main classes, and the emergence and growth of the socialist movement itself, with a sociopolitical doctrine concerning the organisation, aims and tactics of socialist parties.6 Throughout its history, socialism has emphasised the claims of man as a productive member of society rather than his claims as an individual consumer. This fundamental idea has found expression in many forms – in Anarchism, Syndicalism, Guild Socialism,
Christian Socialism, Menshevism and Bolshevism, to name only some of the more important. Each is a study in itself, but their shared objective has been to create society responsible for the way in which the means of production are used.7
While there have been differences of view as to the method by which this goal could be realised, there are common elements in all of the versions of socialist thought: opposition to capitalist individualism, embodied in the very term
‘socialism’ which emphasised community and the well-being of society as a whole, commitment to equality and to the idea of a future ‘classless society’; and an assertion of the character of the socialist movement as a continuation of
6 See Ostorgorski, M, Democracy and the Organisation of Political Parties, Macmillan, London, 1902; and Marx, Karl, and Engels, Freidrich, Selected Works, Foreign Languages Publishing House, Moscow, 1962. 7 For a history of the development of socialist thought, socialism and the creation of socialist democratic parties see, Mill, J S, Principles of Political Economy, With Some of their Applications to Social Philosophy, 7th edn, Ashley, W, ed, Kelley, New York, 1961; Michels, Robert, Political Parties: A Sociological Study of the Oligarchical Tendencies of Modern Democracy, Dover, New York, 1959; Cole, G D H, A History of Socialist Thought, 5 vols, Macmillan, London, 1953-60; Saint-Simon, Selected Writings, Markham, Felix, ed and trans, Blackwell, Oxford, 1952; Schumpeter, Joseph, Capitalism, Socialism and Democracy, Harper, New York, 1950; Koutsky, Karl, The Social Revolution, Chicago, Kerr, 1916; and Landauer, Carl, European Socialism: A History of Ideas and Movements from the Industrial Revolution to Hitler’s Seizure of Power, University of California Press, Berkeley, 1959. Chapter 2 Social Democracy and Labor 17 Theoretical Foundation and Practical Evolution
the democratic movement of the Eighteenth and Nineteenth Centuries. All the
European parties, indeed, were particularly active in the campaigns for universal suffrage, which they were largely instrumental in achieving, and some of them adopted the name ‘social democratic’ to express their aim of proceeding beyond political democracy to establish economic or industrial democracy.
Central to social democratic parties was the commitment to parliamentary politics. Duverger noted that in Western European social democratic parties, two types generally could be identified.8 “Old” parties were usually parliamentary groupings with a fictitious existence outside parliament. “New” parties, representing the masses, have both parliamentary and non- parliamentary components, each suspicious of the other. They often adopted compromises in an effort to suppress or ignore party doctrines.
Duverger makes an interesting observation regarding leadership and the organisation of political parties. In leftist parties, young bourgeois were likely to become leaders sooner than members of the working class. Democratisation of the education system resulted in the intellectually brightest children of the working class being drawn into the middle class. Also, growth in party power and discipline occurred because of a leadership vacuum. Where natural leaders existed, however, the party system was weak.
Growing centralisation is increasingly diminishing the influence of members over leaders, while strengthening the influence of leaders on Chapter 2 Social Democracy and Labor 18 Theoretical Foundation and Practical Evolution
members. Parliamentary representatives are compelled to an obedience which transforms them into voting machines controlled by the leaders of the party.
The organisation of political parties is certainly not in conformity with orthodox notions of democracy. Their internal structure is essentially autocratic and oligarchic; their leaders are not really appointed by the members, in spite of appearances, but coopted or nominated by the central body; they tend to form a ruling class, isolated from the militants, a caste that is more or less exclusive. In so far as they are elected, the party oligarchy is widened without ever becoming a democracy, for the election is carried out by the members, who are a minority in comparison with those who give their votes to the party in general elections. 9
European social democratic parties were also distinguished by their reformism, their view that the state could be harnessed for progressive ends and their anti- communist foreign policy. At the heart of this conception of politics was a connection to a working class constituency, consisting of both branches and unions, with a mass party attempting to use the state machine to regulate capitalism.
As noted by Duverger, Michels and others, this created an emphasis on party structure, a kind of formalised democracy and a distinctive organisational life compared with parties of the political right. On the extreme left of the spectrum, the party organisation exhibited an even more machine-like structure.
8 Duverger, Maurice, Political Parties, Methuen and Co, London, 1954. 9 Ibid, p 442. Chapter 2 Social Democracy and Labor 19 Theoretical Foundation and Practical Evolution
A distinction should also be made between Labour parties and Social
Democratic parties.10 A Labour party is defined as a party to which trade unions are affiliated, such as in the United Kingdom, Sweden, Norway, Australia and
New Zealand, whereas Social Democratic parties have a less formal relationship.
Only with extraneous parties [such as Labour parties] do we find organisations which consider it necessary or desirable to become openly involved in the foundation of a party and so to assume responsibility for its existence. In most cases they become its sponsors in the sense of openly accepting a position of influence within, or in relation to, the party, which involves them in some continuing responsibility for its actions.11
Rawson notes that Labour parties, as well as being dependent on trade unions for their existence, also exhibit a degree of working-class consciousness which is expressed through political affiliation and predisposition. In many cases however, class motivated parties existed well before Labour parties, and the success of the later was often related to the peculiar socio-economic characteristics of the countries concerned.
Contrary to popular belief, West European social democratic parties were not revolutionary before World War One. Policy was based on a basic program, such as the provision of social services or universal suffrage, combined with the ultimate socialist objective – “the ownership or control of the means of
10 Rawson, D W, The Lifespan of Labour Parties, Political Studies, Vol 17, No 3, 1969, pp 313- 33. 11 Ibid, p 315. Chapter 2 Social Democracy and Labor 20 Theoretical Foundation and Practical Evolution
production – capital, land, property, etc – by the community as a whole and their administration in the interests of all”.12
From the end of World War One however, the development of socialist ideas and movements was dominated by the division and antagonism between communism and social democracy, which passed through various phases and generated many new problems. The rise of social democratic parties represented not only winning votes primarily from the working class, but also a transformation in the nature of the party system and the political structure of each country. It also endeavoured to build a complete working class culture, a social world of its own, independent of the official culture of the society. While the German socialist movement was the model for all other socialist parties, it was by no means the only one.13
In England, for example, the transition to a modern industrial society was accomplished peacefully by the economic, and to some extent social, blending of the rising plutocratic groups with the gentry, while a set of political compromises brought all sections of the country, including the working class, into the society. In Germany, the older feudal elements, using the state, had created powerful industries and maintained a political hegemony over the subordinated middle class. The working class, excluded socially, had built its
12 Sills, David, ed, International Encyclopedia of the Social Sciences, Macmillan, New York, 1991, p 670. 13 See Morgan, Roger, The German Social Democrats and the First International 1864-1872, Cambridge University Press, Cambridge, 1965; Bernstein, Edward, Evolutionary Socialism: A Criticism and Affirmation, Independent Labour Party, London, 1909; and Lowenthal, Richard, The Principles of Western Socialism, Twentieth Century, 150, 1951, pp 112-119. Chapter 2 Social Democracy and Labor 21 Theoretical Foundation and Practical Evolution
own institutions, but paradoxically these very institutions had facilitated the integration of the workers into the society.14
France lacked any such unifying features. Economically, it was a two-sector society with a large peasant and artisan class alongside a modern industrial economy. Politically, the feudal structure had been broken, but the bourgeois parties were never able to establish their unambiguous control; the unstable balance of forces periodically opened the way to an adventurer attempting to seize power. The working class itself was split.
In Germany and England, the trade unions were part of the organised socialist movement because they hoped to achieve most of their aims through political concessions by the government rather than through direct economic bargaining.
But in France, the trade unions were completely independent of the socialist parties.
Economic decline in Western Europe in the late 1920s led to the second great depression and consequently the search for a different political practice. Some argued that the disorderly nature of unbridled capitalist competition needed to be replaced by a systematic planned economy, such as the five year plans of the Soviet Union. It was however, the publication of Keynes’ General Theory of
Employment (1936) that was seized upon by supporters of social democratic principles.15
14 Ibid. 15 Keynes, J M, General Theory of Employment, Interest and Money, Macmillan, London, 1936. Chapter 2 Social Democracy and Labor 22 Theoretical Foundation and Practical Evolution
Increasingly, anti-cyclical economic intervention by the state was viewed as the salvation of the problems of unemployment, investment and consequential improvements in the standard of living of the working class. Features of this policy prescription included increased state spending in areas such as housing and road construction, the requirement of funding through loans, strict price control, and an effective customs and import policy. These measures were designed to reduce unemployment considerably while stimulating purchasing power and the economy.16
From a social democratic perspective, Keynesianism offered four major advantages. It advocated control over the economy via the state from above.
Reconciliation between socialism and the market became possible by managing the unemployment rate and the income distribution, notwithstanding the continuance of private ownership of the means of production. Second, it justified the egalitarian outlook by showing that increasing consumption among broad segments of the population stimulated economic growth. Third, it provided for capital accumulation and reconciliation between entrepreneurs and workers. Finally, it enabled governments to spend part of the social product on expanding social services. Accordingly, it focussed policy on national growth and distribution and away from finance, capital and international speculation.
The practical and theoretical adoption of what Van der Linden called “social
Keynesianism” dramatically changed the nature of European social democratic parties. They had evolved from reformist workers’ parties into reform parties
16 See also Hobson, J A, Imperialism: A Study, 3rd edn, Allen & Unwin, London, 1948 and Hobson, J A, Confessions of an Economic Heretic, Macmillan, New York, 1938. Chapter 2 Social Democracy and Labor 23 Theoretical Foundation and Practical Evolution
with worker support. They even abandoned in some cases the idea of a socialist goal beyond capitalism. During their reformist stage, however,
European social democratic parties established a broad network of affiliated organisations such as sports clubs, consumer co-operatives and theatre groups and maintained close links with social democratic trade unions.
Accordingly, five features were identified by Sills as being common to almost all the democratic socialist parties of Western Europe which marked this new phase in socialist doctrine:
1. The abandonment of the idea of revolutionary methods and violence as a
means to power, the complete acceptance of parliamentary means, and
the complete readiness to participate in non-socialist coalition
governments. The anguished theoretical debates which had earlier split
the French, Belgian, Austrian, and other parties on the question of entering
“bourgeois governments” had vanished.
2. The transformation of the socialist and labor parties from class-parties,
speaking only for working-class interests, to people’s parties seeking a
more inclusive concept of general welfare. In some instances, as in
Germany, there was the realisation that as a working-class party the Social
Democrats would be consigned to being a permanent minority; in other
instances, as in England, there was the recognition that the changing class
structure of society, particularly the rise of a technical and salaried middle
class, made it imperative for the Labour party to speak for these social
groups as well as for the working class. Chapter 2 Social Democracy and Labor 24 Theoretical Foundation and Practical Evolution
3. The recognition that the definition of socialism as a social and economic
ideal was inseparable from the idea of democracy, both as a means and as
an end. The Marxist concept that lingered through the 1930s – that
democracy was a “bourgeois” concept and only a mask for class rule – was
rejected. By democracy as a means, the socialist parties meant the full
guarantee of the rights of free speech and free assembly, and the
maintenance of political rights for the opposition. As an end, democracy
was defined as the free consent of the governed.
4. The surrender of the idea of nationalisation or state ownership of the
means of production as a “first principle” of socialism, and the substitution
of public control of enterprise and planning as the means of achieving
economic growth and equitable incomes. The sectarian orthodoxy that
within a capitalist state one could not plan for social ends was replaced by
the theory that governmental powers could be used for the gradual
transformation of the economy and that a “mixed economy” of public and
private enterprise was the most desirable solution.
5. A complete opposition to totalitarianism.17
Van der Linden claimed that a second metamorphosis occurred with respect to social democratic parties from the early 1970s. Economic internationalisation, manifested by the continuously growing importance of cross-border trade, migration and capital transfers, reduced the control of national governments over their economies. At the same time, declining economic growth considerably reduced the share of the social product available for redistribution.
17 Sills, David, Op Cit, pp 524-5. Chapter 2 Social Democracy and Labor 25 Theoretical Foundation and Practical Evolution
Decreasing taxation revenues and increasing government spending gave rise to a fiscal crisis.
Other effects included the collapse of associations, such as in sport and the arts, while shifts in class structure changed the social composition of members and voters. Party involvement decreased among the rank and file; television was preferred to party education in the town hall. A rift also occurred between parties and trade unions, whereby the latter sought recourse to more militant methods to achieve what they perceived as the party’s embrace of issues less relevant to trade unions. As union numbers declined, and as parties recognised the need to pursue modern philosophies to appeal to a greater cross-section of the community, the new policies often disturbed traditional supporters.
Social Keynesianism similarly collapsed at this time. New political issues began to emerge with the rise of the green movement and feminism. Social democratic parties were forced to seek new ways to retain their reformism despite the diminishing policy scope for ‘nice things and good deeds’. The influence of their traditional proletarian members virtually disappeared.
Part of this process involved the concept of market socialism – combining planning and markets and a mixed economy of private and public enterprise.18
Economic growth in capitalist countries has created more prosperous, mass consumption societies, and a very different class structure. However, the cyclical character of economic development persists, and will continue to
18 See Elson, D, Socialisation of the Market, New Left Review, 197, 1988, pp 2-44; and Mandel, E, The Myth of Market Socialism, New Left Review, 169, 1986, p 108-21. Chapter 2 Social Democracy and Labor 26 Theoretical Foundation and Practical Evolution
generate conceptions of an alternative economic and social order in which they might be overcome.19
These broad trends were experienced in all social democratic parties at similar times. An essential feature of this process was the changes to the working class which became variously less industrial; less homogeneous; more white- collar, educated, feminised and ethnically divided; and increasingly casual, part- time and heterogeneous. Other changes included the decline in trade union membership and power, loss of the social institutions of working class life, a rise in consumerism and individualism and the loss of national insularity. All these features had distinctive national characteristics. At the same time the communist left was in terminal decline (intellectually from the late 1950s, in terms of membership in the 1960s, and organisationally and ideologically in the
1970s). This kept radical pressure on the social democrats.
The international economy suffered a major crisis of accumulation (share of
National Income to capital) in the 1960s. This created a major problem of stagflation. Thatcherism, Friedmanism and Reaganism simply personalised an international ideological, political and economic lurch to the right. The essence of this change was a major re-distribution from labour to capital, a reduction in the scope and financial basis of the state, a reduction in public welfare and increased deregulation to assist capital mobility.
19 Outhwaite, William, and Bottomore, Tom, Op Cit, P 619. Chapter 2 Social Democracy and Labor 27 Theoretical Foundation and Practical Evolution
Van der Linden concluded that these characteristics gave rise to widespread dissent and insecurity within social democracies. He notes that there has been a shift in support for social democratic parties, a shift from diffuse to specific support. Diffuse support means that people vote for social democracy out of party loyalty, possibly because of Left wing tradition or because the party has always done so much for common folk. Specific support involves examining whether the party supports the right causes at each election. Accordingly, social democratic parties are assiduously searching for a new identity.
2.3 THE BRITISH EXPERIENCE
Socialism, and the creation of a social democratic political party, took on a different form in Britain compared to its European neighbours.20 Hobsbawm traced the development of social democracy in Britain over one hundred years from the 1850s21. He noted that, as the industrial revolution was extremely undeveloped and labour intensive, the relative backwardness of technology gave skilled workers considerable strength in collective bargaining, and supported the growth of a strong trade union movement. Although craft unions and the bigger general unions existed side by side, mass unionism generally came through the craftsmen.
Stratification of the working class occurred, and whilst the backbone of trade unionism remained the unskilled workers, this progressively changed over time.
20 Beer, M, A History of British Socialism, 2 vols, Allen and Unwin, London, 1948. 21 Hobsbawm, Eric in Jaques, Martin and Mulherin, Francis, eds, The Forward March of Labour Halted?, New Left Books, London, 1981.
Chapter 2 Social Democracy and Labor 28 Theoretical Foundation and Practical Evolution
Through education, tertiary employment, and modern technology replacing manpower, the professional and technical class was created. These conditions created a common style of British proletarian life and contributed to the rise of socialism and the emergence of the Labour Party.
In Germany, a rigid class structure, reinforced by a militaristic code of honour, excluded the workers from society and led to a counter stiffness of doctrinal Marxist orthodoxy. In Great Britain, by contrast, the intelligence of an old gentry class, a deep tradition of liberty and of political rights, the lack of a militaristic tradition and even of a standing army, the long-established supremacy of Parliament over the monarchy, and the deep-rooted empirical conception of politics, which rendered ideological “all-or-none” terms distasteful – all made for a civil polity, one that accepted the existence of the socialist movement as a legitimate part of British society.22
The British Labour party came into being in order to realise the rights of the working class in society. It included intellectuals and middle strata progressives, attracted by education, social justice and peace. From 1918, the
Party was also committed to the socialist objective. It was never Marxist in a theoretical sense, though it was based on strong class feeling and loyalties.
This was so because of three reasons. First, there existed a deep and persistent strain of non-conformist Christian evangelism, which saw equality as a moral imperative.23 Second, there was the influence of the Fabians, principally Sidney and Beatrice Webb, who were described as social engineers
22 Sills, David, Op Cit, p 514. 23 See Tawney, R H, Equality, 4th edn, Barnes and Noble, New York, 1965 and Tawney, R H, The Acquisitive Society, Harcourt, New York, 1920. Chapter 2 Social Democracy and Labor 29 Theoretical Foundation and Practical Evolution
for whom socialism was a tidy answer to the waste and disorder of the capitalist world.24 Finally, there was the large trade union movement, which saw in the
Labour Party a means of influencing the course of favourable legislation.25
The British Labour Party has been unique among socialist parties, not only because of its open emphasis on “gradualism”, but also because of its structure.
Unlike the Continental socialist parties, based on individual membership, the
British Labour Party originated as a federation of unions and constituent socialist societies, and its funds were raised principally through levies on the union members.
After 1918, the membership system was changed in order to organise local
Labour Parties directly in each constituency, but the federated structure remained. The formulation of policy has therefore been a complicated affair.
Since the trade unions have traditionally constituted the largest group in the
Party and vote en bloc in the Labour Party conventions, the annual Trades
Union Congress is an important arena for adopting resolutions. The annual
Labour Party conference of unions, affiliates (such as the consumer-cooperative movement), and local constituency parties sets policy. But this policy is only morally binding on the parliamentary Labour Party. In office, the Labour Party is responsible only to the parliamentary party, not to the Labour Party as a whole.
In this crucial respect, once again, the British Labour Party is shaped by the
24 Webb, S & B, Op Cit; Wells, H G, The New Machiavelli, Duffield, New York, 1927; Cole, G D H, Op Cit; and Shaw, G B, The Fabian Society: The Early History, Fabian Tract No 41, London, 1892. 25 Outhwaite, William, and Bottomore, Tom, Op Cit, pp 513-14. Chapter 2 Social Democracy and Labor 30 Theoretical Foundation and Practical Evolution
structure of British politics and not by the conventional theories of socialist organisation.
Whilst changes were occurring in labour, Hobsbawm notes that capitalism was changed by the transformation of the production system through technology and by the enormous concentration of productive units. The rise of monopoly capitalism was characterised by a massive public sector that further concentrated employment. Political and not profit decisions determined market conditions, and workers’ standards of living improved. It was argued that the
Labour Party consequently should give up the shibboleth of nationalisation, and in economic matters, promote the modernisation of industry in whatever social form it could best be done, whether private or public.26
Over time there was also a feminisation of the workforce. Demarcation disputes intensified stratification and immigration divided the workforce. There was a division of workers into sections and groups each pursuing their own economic interests irrespective of the rest. The sense of universal class solidarity was weakened, while “identity politics” grew.
A major consequence of these changing circumstances was that trade unions weakened in numbers and their composition changed. Blue collar unions were progressively being replaced by white collar unions as employment characteristics changed. Additionally, the political expression of class consciousness, reflected in support for the Labour Party, also fell. Economic
26 Crosland, C A R, The Future of Socialism, Macmillan, New York, 1957. Chapter 2 Social Democracy and Labor 31 Theoretical Foundation and Practical Evolution
militancy increased in the 1970s. Often the union movement pursued their own narrow interests irrespective of government.27
However, Hobsbawm complains that the old calls for socialism do not have the same resonance today as in the past. He contends that there are no really Left wing socialist programs in the party’s armoury, and traditional Labour Party voters are not the same as previously. To progress, the party must recognise the need for changed policies to reflect a changed electorate. In order to achieve this, it is argued that a broad party leading a broad movement is needed. The Left and Right in the party must work together, and policies must appeal to those outside the party. These policies must also be in the interests of working class opinion, but appeal to everyone - men, women, blue collar, white collar, and no collar.
Interestingly, this process was started under the leadership of Neil Kinnock, and accelerated by John Smith. It was however, Tony Blair who would be most credited with adapting a new, politically attractive path for British Labour, described as "New Labour".
2.4 THE AUSTRALIAN CONTEXT
The mobilisation of Australian workers in the late Nineteenth Century, and the emergence of a cohesive political party to represent their interests, reflected
27 Hobsbawm, Op Cit. Chapter 2 Social Democracy and Labor 32 Theoretical Foundation and Practical Evolution
many of the same traits associated with social democracies in Europe.
Macintyre succinctly described this process.28
Up until the 1890s, workers had relied primarily on direct bargaining with their employers. The onset of mass unemployment in the depression of the 1890s, and the defeat of the unions in the series of nation-wide disputes exposed the limitations of relying on such tactics. After the maritime, pastoral and mining unions were defeated, workers in these industries and others lacked industrial protection. The experience of the 1890s accelerated labour’s entry into politics, and seek, through political action, what it could not win by industrial action.29
A dramatic and almost immediate result of defeat in the Maritime Strike was that many trade unions abandoned their faith in parliamentary representation by ‘good as labour men’. In each of the capital cities affected by the Maritime Strike, the trade unions established labor parties; the behaviour during the strike of those who had formerly claimed to represent ‘the labouring interests’ had demonstrated that ‘only those who labour can understand the needs of labour’.30
Their experiences reinforced a collective identity, a consciousness of their interests as a class. This sometimes found expression in the rhetoric of socialist solidarity, but it was neither universal nor absolute. The unions themselves were as much concerned with protecting their members from
28 Macintyre, S, The Labour Experiment, McPhee Gribble, Melbourne, 1989. 29 Nairn, Bede, Civilising Capitalism: The Beginnings of the Australian Labor Party, ANU, Canberra, 1973. 30 Hagan, Jim, The History of the ACTU, Longman Cheshire, Melbourne, 1981, p 8. Chapter 2 Social Democracy and Labor 33 Theoretical Foundation and Practical Evolution
competition from other wage-earners as they were with advancing the interests of all workers.31
At the same time, capital growth also reflected changes in Australia’s economic and social circumstances. There was clearly a British influence, with considerable investment in gold, pastoral and mining activities.32 Banks began to consolidate at this time, largely as an extension of the British banking system.
Capital, like labour, took on coherence as a class. A clear link existed between financial capital, as represented by banks, and Britain.
One reason for the mobilisation of labour and capital was that both sought to influence state activity.33 In response, the leading capitalist countries, including
Australia, developed a range of measures including industrial regulation, old- age pensions, and provision of housing, education and health services.
Macintyre notes that they did so not merely to allay discontent but to strengthen the national fabric in an era of increased international rivalry. Such expansion of state activity into areas of social welfare also brought about a revision of political and economic doctrine. The earlier ideology of laissez-faire liberalism, which enshrined the freedom of the individual to arrange their affairs free of state intervention, gave way to a more collectivist ‘new liberalism’, which encouraged the state to assist and empower its citizens.
31 See Connell, R W, and Irving, T H, Class Structure in Australian History, Longman Cheshire, Melbourne, 1980. 32 See Fitzpatrick, Brian, The British Empire in Australia: An Economic History 1934-1939, Melbourne University Press, Melbourne, 1941 and Fitzpatrick, Brian, British Imperialism in Australia 1783-1833, Sydney University Press, Sydney, 1939. Chapter 2 Social Democracy and Labor 34 Theoretical Foundation and Practical Evolution
The new circumstances of the Twentieth Century embraced the theory and practice of ‘mixed economies’, that combining private, capitalist sectors and a public sector consisting of state enterprises and services. Australia already had such a public sector and the history of state involvement was extensive. As a settler society, the state had played a crucial role in constituting economic and social relations generally, according to goals that emerged from widespread public debate. Whereas labour movements in other countries regarded the state as oppressive, and argued long and hard over the dangers of concentrating their political efforts on state activity, there were few such reservations in Australia. The early labour movement assumed that it could employ its electoral strength to wrest the state away from the control of its enemies and use it to bring about a new economic and social order.
2.5 EMERGENCE OF THE AUSTRALIAN LABOR PARTY
It was against this background that class became the chief organising principle of Australian politics as labour and capital both established national party structures.34 First came the Australian Labor Party.35
From the beginning, the Party was not merely a ‘class persuader’ but showed signs of being a ‘catch-all’ party.36
33 Murphy, D J, ed, Labor in Politics, University of Queensland Press, Brisbane, 1975 and Loveday, P, Martin, A W, and Parker, R S, The Emergence of the Australian Party System, Hale and Iremonger, Sydney, 1977. 34 Gollan, Robin, Radical and Working Class Politics, Melbourne University Press, Melbourne, 1960. 35 For detailed history of the Australian Labor Party see McMullin, Ross, The Light on the Hill – The Australian Labor Party 1891-1991, Oxford University Press, Oxford, 1991; Crisp, L F, The Australian Federal Labour Party 1901-1951, Hale and Iremonger, Sydney, 1978; and McKinlay, Brian, The ALP - A Short History of the Australian Labor Party, Drummond/Heinemann, Richmond, 1981. Chapter 2 Social Democracy and Labor 35 Theoretical Foundation and Practical Evolution
Labor entered federal politics with a mixture of both class and national objectives.37 It sought better pay, shorter hours, and security of employment and it called for a White Australia and a citizen’s army. Before long it spelled out the means to pursue its class interests within a national framework: progressive taxation, old-age pensions, New Protection, arbitration, state enterprise, and nationalisation of monopolies were adopted as planks of the
Party’s platform.
There was a protracted debate about whether the Australian Labor Party should embrace socialism.38
Australian socialism is distinguished from Continental socialism by the same features that distinguish the Magna Charta and the Bill of Rights from the crystallisations of political theory in the documents of the French Revolution. It has been called a 'socialism without doctrines'. Its object is to secure instruments by which workers may control industry. It seeks tools rather than proclaims theories, and does not try to harmonise practical attainments with a preconceived ideal of society.39
This equivocation reflected an uncertainty about whether the Labor Party was the party of the working class or whether it should project a wider appeal for broader support and electoral success. In its search for office, it courted farmers, shopkeepers and other small proprietors. It did so partly by identifying
36 Hagan, Jim and Turner, Ken, A History of the Labor Party in New South Wales 1891-1991, Longman Cheshire, Melbourne, 1991, page xi. 37 See Macintyre, S, The Labour Experiment, Op Cit, p 33 and Murphy, D J, Joyce, R B, and Hughes, C A, eds, Prelude to Power, Jacaranda, Brisbane, 1970. 38 See Macintryre, S, The Oxford History of Australia Vol 4 1901-1942: The Succeeding Age, Oxford University Press, Melbourne, pp 87-88 and Fitzpatrick, Brian, A Short History of the Australian Labor Movement, Wilke, Melbourne, 1944, pp 109-110. Chapter 2 Social Democracy and Labor 36 Theoretical Foundation and Practical Evolution
itself in aggressively national and indeed racial terms, as the Australian Labor
Party, and by emphasising the common interests of ‘the people’, ‘the battlers’, or the ‘real Australians’.40
Such populist rhetoric was expressed in the economic doctrine of Money
Power.41 According to this doctrine all who earned their living through their own efforts, whether by hand or brain, were productive. However, the bankers and foreign bondholders – known collectively as the Money Power – battened onto the wealth producers and robbed them of the “just fruits of their labours”.
Immigration control, tariff and arbitration could all be presented as measures that served to create a popular national alliance, but socialism, as the nationalisation of industry, was played down.
2.5.1 UNIONS, LABOR AND LABOURISM
Similar pressure bedevilled relations between the Labor Party and the trade unions. The unions had brought the Labor Party into being to represent their interests and to correct an imbalance of industrial power between employers and workers.42
The establishment of courts of compulsory arbitration and wages boards also compelled the trade unions to take a closer interest in parliamentary
39 Clark, V, The Labour Movement in Australasia: A Study in Social-Democracy, Burt Franklin, New York, 1906, p ix. 40 Macintyre, S, The Oxford History of Australia, vol 4, 1901-1942, The Succeeding Age, Op Cit. 41 See Macintyre, S, The Labour Experiment, Op Cit, p 34; Macintyre, S, The Oxford History of Australia, ibid, pp 257-8; and Love, Peter, Labour and the Money Power: Australian Labour Popularism 1890-1950, Melbourne University Press, Melbourne, 1984. 42 Fitzpatrick, Brian, A Short History of the Australian Labor Movement, Op Cit, Chapters 2-8. Chapter 2 Social Democracy and Labor 37 Theoretical Foundation and Practical Evolution
parties … their effectiveness was now substantially subject to legislation.43
As the unions grew so did their expectations. They were antagonised when
Labor parliamentarians allowed electoral considerations to prevail and moderate union demands.
A good example of the tension this caused is provided by arbitration. The Labor
Party was an early advocate of arbitration, and Labor governments consistently sought to settle workers’ claims without recourse to industrial action. The advocacy of compulsory arbitration by the Labor Party helped it “to present itself as a party not tied to the interests of the trade union movement, but one able to govern in the interests of the public and the nation”.44
By 1910, when the Labor Party won office in New South Wales and the
Commonwealth, trade unionists generally had little trouble in accepting that the
Labor Party was essentially a populist and not a class party.45 Events since
1890 had made them more aware of themselves as members of a working class; that consciousness did not, however, include a belief in necessary conflict. They believed in what has sometimes been called Labourism.
The tenets of Labourism were White Australia, tariff protection, compulsory arbitration, strong unions, and the Labor Party. White Australia kept out Asiatics who threatened the standard of living and the unions’ strength; tariff protection diminished unemployment and kept
43 Hagan, Jim, Op Cit, p 12. 44 Ibid, p 14. 45 Ibid. Chapter 2 Social Democracy and Labor 38 Theoretical Foundation and Practical Evolution
wages high; compulsory arbitration restrained the greedy and unfair employer; a strong trade union movement made it impossible to enhance and supplement arbitration’s achievements; and Labor Governments made sure that no one interfered with these excellent arrangements. Labourism held that fair dealing was available and obtainable in a capitalist society. Its vision was still that of a nation built by Labour about to enter the Paradise of the Working Man.46
Labourism represented a distinctive form of social democracy, and created a unique structure, ideology, leadership and form of politics. It was most distinctive on three fronts: it lacked theory and intellectual support (socialism without doctrine); it had greater faith in the reforming potential of the state (for historical reasons and as a function of Australian prosperity); and, it was more strongly integrated into a reformist, craft-based trade union movement. In so far as it embraced class struggle, it was muted and linked to the idea that the economic ruling class was found in British financial institutions. The banks were stigmatised as the tool of not just the bourgeois class but a foreign ruling class.47
Labourism was not without its critics. From the 1890s, a score of socialist groups and parties had argued that the emancipation of the working class lay not in its adaptation to capitalism but on its rejection of it. For example, the
Victorian Socialist Party argued that the Labor Party threatened workers’
‘political freedom and right to strike’ by suffocation with ‘bureaucratic rule’.48
Serious challenges to Labourism also appeared within the unions themselves.
46 Ibid. 47 See Fitzpatrick, Brian, A Short History of the Australian Labor Movement, Op Cit. 48 Hagan, Jim, Op Cit, p 14. Chapter 2 Social Democracy and Labor 39 Theoretical Foundation and Practical Evolution
The advent of the Industrial Workers of the World in Australia in 1907, and the drive to create One Big Union, caused problems for the Labor Party.
The outbreak of World War One saw vigorous prosecution of the war effort by
Labor governments. Industrial confrontation, the anti-conscription movement, and the 1917 General Strike were but some of the issues that tested the concept of Labourism in the early Twentieth Century.
The Australian Labor Party in government felt itself responsible for a nation, not for a social class.49
Labourism and socialism were both influential doctrines in Australia.50 From different perspectives they converged in shaping the class identity of the movement and its ethos of collective endeavour. The difficulty was that neither provided a coherent strategy for gaining and exercising power within a democratic parliamentary framework.51
This weakness was especially marked because of the speed with which the
Labor Party came to power. In Europe, where the labour movement was established on a wide basis well before the Twentieth Century, it was able to thrash out its methods and objectives during a long apprenticeship. When
Labor first won office in Australia, in Queensland in 1899, many of its overseas counterparts still struggled under conditions of semi-legality. In 1904, when
Labor first attained federal office, Australia, New Zealand and Norway were the
49 Ibid, p 15. 50 Macintyre, S, The Labour Experiment, Op Cit, p 35. See also Clark, V, Op Cit. Chapter 2 Social Democracy and Labor 40 Theoretical Foundation and Practical Evolution
only countries with social democratic governments elected by free, universal and equal franchise. Such striking success probably owed as much to the fragmentation of the national ruling class as it did to the labour movement.
Tension between the pragmatism of the politicians and the principles of the party membership provided another area of uncertainty. While parliamentarians sought the greatest possible freedom of manoeuvre, the party imposed a close discipline. Hence, when the workers entered politics, they brought with them their symbolic rituals of working-class life – the ballot, the pledge and the caucus – as expressions of a tribal solidarity. The selection of candidates by rank-and-file ballot, the insistence that members of parliament be bound by pledge to carry out the platform, the control of parliamentary leaders by caucus and the provision for caucus election of ministers were all intended as safeguards against the temptations of careerism and opportunism.52
However, Macintyre also points out that Australian political economy in the first half of the century encompassed agencies other than the labour movement.
The importance of H B Higgins as president of the Commonwealth Arbitration
Court from 1907 to 1921 in enunciating the principles of industrial justice and wage determination cannot be understated.53 Also significant were the experts, the advisers, the senior public servants and bureaucracies they set in motion so that the expanding state could discharge its new functions.
51 See Rawson, D W, Labor in Vain?, Longmans, Croydon, 1966 and Childe, V G, How Labour Governs, Labour Publishing Company Ltd, London, 1923. 52 Macintyre, S, Oxford History of Australia, Op Cit, p 88. 53 See Hagan, Jim, Op Cit. Chapter 2 Social Democracy and Labor 41 Theoretical Foundation and Practical Evolution
2.5.2 POLITICAL AND ECONOMIC CHANGE
Australia was not immune from the winds of economic malaise that swept the world at the end of the 1920s. The Great Depression, and its after-effects in the decade that followed, saw a fall in union militancy and a reduction in union membership in the early 1930s. Conservative parties generally ruled Australia.
In terms of political change, the growth of the Left was confined for the most part to a restricted industrial base.54 In mining, transport and heavy industry, a particular brand of militancy was bred: robust, forthright and aggressively masculine. The objectives of decasualisation, better pay and safer working conditions determined workers’ conditions, as did their friendships, interests and values. Other sectors of the workforce were more divided and less responsive to unionisation. Moreover, it was far more difficult to maintain a sense of camaraderie and common purpose outside the workplace.
Labor returned to federal government in 1941, and remained so until December
1949. Between 1946 and 1949, Labor’s policies under Prime Minister Ben
Chifley reflected a sense of pragmatism, hope and socialist ideology.
Labor adopted a policy of full employment, and the Commonwealth Treasury developed methods of monitoring and "fine tuning" the economy by adjusting taxation and public expenditure, and by regulating bank lending.55 There were also significant changes in occupations. The working class became the urban
54 Macintyre, S, Oxford History of Australia, Op Cit, pp 295-6. Chapter 2 Social Democracy and Labor 42 Theoretical Foundation and Practical Evolution
office worker or factory worker. Union membership was retained, but not with the same intense commitment. The craft-based culture slowly disappeared.
During the Chifley Labor Government, the need to maintain a firm hold on the economy became of paramount concern.56 Legislating for the welfare of
Australian workers was useless if international financial pressures gave rise to inflation, unemployment, or high interest rates. After the experiences of the
1930s, Labor was not prepared to trust market forces.57
At the heart of the issue lay control over banking and the financial system.
Although a bi-partisan Royal Commission in 1935-36 recommended that the federal government must have ultimate power to control monetary policy, this was not pursued until the introduction of wartime national security regulations.
These enabled the government to hold down interest rates and to set up a mortgage division within the Commonwealth Bank, but stronger powers were required to achieve the aim of a stable economy as a necessary pre-condition of social welfare.
Early in 1945, Chifley restructured the Commonwealth Bank to consolidate its position as Australia’s central bank. Its tasks were defined as the maintenance of a stable currency, full employment and national prosperity. Most wartime controls on the private trading banks continued except for restrictions on profit.
These banks would be required to operate under licence and to keep a stated
55 See Shann, E, An Economic History of Australia, Cambridge University Press, Cambridge, 1948. 56 Bolton, G, The Oxford History of Australia, vol 5, 1942-88, The Middle Way, Oxford University Press, Melbourne, 1990, p 43. Chapter 2 Social Democracy and Labor 43 Theoretical Foundation and Practical Evolution
proportion of their reserves in a special account controlled by the central bank as a crucial instrument of economic management. In addition the
Commonwealth Bank was empowered to compete with them in housing finance and other new fields. Authority over banking was transferred from parliament to the government of the day.
In 1947, the private banks challenged part of the 1945 banking legislation. The
High Court subsequently rejected that section of the Act requiring local authorities to transact their business exclusively with the Commonwealth Bank.
Chifley immediately announced that the government would nationalise the entire Australian banking system.58
They challenged the bank law and Chifley was fearful that the whole of the system that controls banking would vanish. He then proposed bank nationalisation almost out of the blue. He did it pretty well single-handed. There was no Caucus discussion or anything. Because Chifley said it they were prepared to go along with it.59
This decision was perceived as over-reaction, as only the least significant part of the 1945 legislation was invalidated. No disposition was shown to strike down the central banking system as a whole. Private banks were prepared to work within that system, though they failed to provide Chifley with assurances that they would never challenge the critically important requirement to deposit part of their funds in a central special account.
57 See Crisp, L F, Ben Chifley, Longmans, Croydon, 1961. 58 See Coombs, H C, Trial Balance, Macmillan, Melbourne, 1981, pp 159-84 – case for Chifley. Chapter 2 Social Democracy and Labor 44 Theoretical Foundation and Practical Evolution
Bolton argues that Chifley's decision was a mistake. The public was unprepared, and the government’s announcement of its plans was off-hand and unconvincing. Many businesses, small and large, owed their survival from the
Depression to competitive private banking. Small clients, such as home owners and tradespeople, saw the banks in terms of the helpful local manager rather than as faceless agents of monopoly capitalism. Above all, a job as a bank clerk was one of the most respected careers for white-collar workers. Their families did not wish to see them become public servants or restricted in their opportunities. Bank officers, accordingly, threw themselves with enthusiasm into the determined and well-funded campaign which was at once mounted by the banks in resistance to nationalisation.60
The Act to nationalise banking passed through parliament, and the private banks appealed to the High Court. In a majority judgement, it was held that nationalisation was invalid because it interfered with the right of the banks to conduct interstate commerce. The Government appealed to the Privy Council, ensuring that this contentious issue was kept alive for a further two years. The banks poured money into an endless barrage of anti-Labor propaganda. During
1947, Labor lost office in Western Australia and Victoria, and in 1949 at the federal level.
The next two decades saw Labor consigned to opposition. Labor had to grapple with policy development in a tense atmosphere following the great split
59 Crean, Frank, Personal Interview, 17 July 1998. 60 Bolton, G, Op Cit, pp 45-47. Chapter 2 Social Democracy and Labor 45 Theoretical Foundation and Practical Evolution
in the mid 1950s.61 With little direction, leaders who were fairly pedestrian, and policies which were unappealing, the Party seemed to drift. In banking, the enactment of the Commonwealth Bank Act by the Menzies Liberal Government essentially achieved many of the objectives Chifley had wanted, and it was a fairly benign period of consolidation. Much of that changed with the election of the Whitlam Government.
2.6 THE WHITLAM YEARS
Gough Whitlam brought Labor to power on 2 December 1972 after twenty-three years in the political wilderness. Labor’s commitment to change and reform was summed up in the campaign slogan, It’s Time. This reflected a number of deep-seated views within the Party.
The follies of the previous two decades and a half, which included the great split of the 1950s, the emergence of the Democratic Labor Party, and the way the
Parliamentary Party was perceived to be directed by “faceless men” of the
National Executive, needed to be expunged. Changes to policy, such as the elimination of the White Australia policy and revitalising Australia’s international relations, were also driven by a Party desperate to reconnect with the electorate and to present as an organisation capable of governing. It also reflected
61 See Murray, R, The Split, Cheshire, Melbourne, 1970 and Freudenberg, G, A Certain Grandeur, Sun, Melbourne, 1978. Chapter 2 Social Democracy and Labor 46 Theoretical Foundation and Practical Evolution
attempts to modernise the Australian economy, to ensure it was enmeshed in the real world.62
What needs to be remembered about the Whitlam Government is that many of its Ministers had been in opposition for a considerable part of the preceding twenty-three years. When the Holy Grail of government was finally achieved in
1972, many of these Ministers felt compelled to put in place as quickly as possible their social and economic reforms.
Whitlam’s first Ministry, which consisted of himself and the Deputy Prime
Minister Lance Barnard, is a case in point. Not content to wait for a full
Parliamentary Party meeting to elect the Ministry, Whitlam and Barnard were sworn in as Ministers for every Department between them63. The appearance and reality was that there was little time to wait; seize the moment. After so long in opposition there was an unbridled enthusiasm to achieve reform.
Whitlam’s election and the subsequent three years of heady and at times ill- directed government meant the Labor Governments of 1972 to 1975 would be remembered within the Party and by the community at large in both a negative and a positive sense. The championing of education, health reform and social justice are still perceived as enduring legacies of Labor’s commitment to the basic and fundamental principles of Labourism which have underpinned Labor’s philosophical base since the creation of the Party.
62 See Oakes, L, Crash Through or Crash, Drummond, Melbourne, 1976; Fabian Papers, The Whitlam Phenomenon, McPhee Gribble, Melbourne, 1986; and Whitlam, G, The Whitlam Government, Viking, Melbourne, 1985. Chapter 2 Social Democracy and Labor 47 Theoretical Foundation and Practical Evolution
The Whitlam credo was belief in state power and central government, in racial and sexual equality, social progress, economic justice, ethnic pluralism, nationalism at home, internationalism abroad, and government intervention to secure better education, health and welfare. Whitlam’s philosophy was enshrined in the idea of equality of opportunity for all Australians.64
Less flattering is the Party’s memory of the Whitlam Government’s contribution to economic policy.65 Essentially, in economic terms, Whitlam was the last
Keynesian, imbued with a 1960s agenda which he endeavoured to translate into the 1970s. However his government’s efforts suffered because of unforeseen international events. For example, the oil price crisis of 1973 was neither expected nor predicted.
A succession of failed grand schemes, like those floated by ministers such as
Rex Connor and the subsequent Khemlani affair, coupled with the failure of
Federal Treasurers to rein in inflation and sustain economic growth and employment are often spoken of with derision within the modern Labor Party.
An exception was the valiant but belated attempt by Bill Hayden in 1975.
To a newcomer the Whitlam government seemed something of a mess. There was an air of magnificent chaos. Observing it at close quarters one hovered between admiration and dismay. Key ministers, sometimes very good ones, were constantly changing positions. Others were dropped altogether. Newcomers of mediocre calibre were brought in. In
63 See Department of the Parliamentary Library, Parliamentary Handbook, 27th edn, AGPS Canberra, 1996, pp 468-9. 64 Kelly, Paul, The End of Certainty: Power Politics and Business in Australia, Allen and Unwin, Sydney, 1994, p 21. 65 See Sexton, M, Illusions of Power, Allen and Unwin, Sydney, 1979 and McMullin, Ross, Op Cit. Chapter 2 Social Democracy and Labor 48 Theoretical Foundation and Practical Evolution
caucus there were frequent brawls between ministers. Only six ministers out of twenty-seven kept the same job for the entire three-year period. Manufacturing industry was not a priority. It had four ministers in succession. The government seemed to lurch from crisis to crisis. The progressive foreign policy decisions, the establishment of a national health service, the sweeping reforms in education were lost sight of.66
Frank Crean was a former Victorian Member and Minister in the Whitlam
Government. He briefly held the Treasury portfolio, and as such was well placed to comment on how the Whitlam government operated during its three years.
In a way Cabinet meetings under Gough were pretty haphazard affairs. They were usually held Tuesday morning and usually finished abruptly at twelve. Quite often what was thought the press would say would be the major matter to be discussed wasn’t discussed at all, because Gough didn’t want it to.
And he’d let things ramble on and ramble on and then he’d say at twelve, well he said ‘I’ve got luncheon appointments’. Then one of his favourite lines was ‘Of course you know, we only survive because of me’. That was the attitude and then he formed what we used to call the kitchen cabinet. He’d get a group of one or two and they varied from time to time and refer matters to … we used to call them IDC. I used to call them Instant Death Committees. Now that was the attitude of our Cabinet meetings to start with.
There was very little time for serious consideration. I was the first Treasurer, but the New South Wales mob were always pushing that Jimmy Cairns because he was Deputy Prime Minister. Finally Gough
66 Button, John, As It Happened, Text Publishing, Melbourne, 1998, p 160. Chapter 2 Social Democracy and Labor 49 Theoretical Foundation and Practical Evolution
was persuaded. I think he was only persuaded because he was frightened that they had the numbers against him. He dropped me off all economic committees there were. I mean, I’m not bragging but I still reckon I was the only bloke who knew the realities of what the Treasury was about.67
Whitlam, of course, totally discounted these views on his government’s economic credentials. He believed his Treasurers in the main were not up to the job, and that they found the demands of government totally removed from what was required as Opposition spokesmen.68 Crean was perceived as a suburban accountant. Jim Cairns finally got the Treasurer’s job because he had a doctorate in economic history. 69 This appealed to what Keating described as
Whitlam’s intellectual snobbery since Cairns was the only Labor
Parliamentarian with an academic background. Of Bill Hayden Whitlam said:
The best Treasurer was the last.70
The process of economic policy development at this time has also been described by Crean.
I was Chairman of the Economic Committee really from its inception. I think it started in about the mid-50s thereabouts. Mick Young used to call it "the powerful and influential economic committee" and really that was the source of policy thinking in the Labor Party and you know the minutes of that show. But I had to write most of the individual papers on it, you know, and well also present an economic report every Federal
67 Crean, Frank, Op Cit. 68 Whitlam, Gough, Personal Interview, 26 June 1998. 69 Latham, Mark, Personal Interview, 15 July 1998. 70 Whitlam, Gough, Op Cit. Chapter 2 Social Democracy and Labor 50 Theoretical Foundation and Practical Evolution
Conference. It was mainly accepted without discussion. Charlie Oliver used to say ‘oh well if Frank Crean endorses it, that’s OK by me’. And that was really the attitude of the Party as a whole. Nobody wanted really to be bothered. It was all left virtually to the economic committee and one or two of us to go it alone. 71
With respect to banking, Labor had become more pragmatic, and many of the old socialist objectives antagonistic to the Australian banking industry had been put aside. This is not to say that elements of the Party, particularly older
Parliamentarians and elements of the far Left, modified their commitment to the nationalisation of the banking sector.
Well, we wanted once to take out of the Platform the thing about nationalisation and particularly the banks. But because of noises made by Eddie Ward and a few others, we had to leave it in. There was no intention ever to nationalise the banks after ’45 you know. But that in a way was the nature of economic policy in the Labor Party. It was ad hoc at times.72
2.7 1975 – 1983 – LABOR PRAGMATISM EMERGES
Following the Whitlam Government’s sacking, and defeat in the subsequent election of 1975, Labor’s federal representation was reduced to a mere rump.
Some in the Party felt there was a real chance that Labor would cease to exist as a major political force. Around the country, State Labor Governments were similarly being rejected.
71 Crean, Frank, Op Cit. 72 Ibid. Chapter 2 Social Democracy and Labor 51 Theoretical Foundation and Practical Evolution
In New South Wales, and many would believe in Australia as a whole, salvation came for the Australian Labor Party in the form of Neville Wran. In winning the narrowest of victories in 1976, Wran clearly instilled within Labor the view that the Party could rebuild and succeed again.73 The “Wran-slide” of 1978 confirmed that trend.
The period 1977 to 1983 was subsequently characterised at the national level by the departure, from Labor’s stage, of Whitlam and many of those who had served with him in Opposition and in Government. It saw the rise in Australia of a new generation of Labor politicians. In 1977, Bill Hayden replaced Whitlam as
Leader of the Opposition, and the process of change within the Party began in earnest.74
It meant a new kind of opposition: still depleted in numbers, but able to embrace a forward-looking agenda. Hayden was relatively young. He had a questioning mind and attractively moderate expectations of what the political process could achieve. He and his deputy Lionel Bowen and the Senate leader Ken Wriedt had survived the Whitlam period with good reputations. As the recently elected deputy leader in the Senate I was the new boy. No-one carried much baggage from the past. It was a new team prepared to try new ideas.75
73 Steketee, Mike, and Cockburn, Milton, Wran – An Unauthorised Biography, Allen and Unwin, Sydney, 1986. 74 See Stubbs, J, Hayden, Melbourne, Mandarin, 1990 and Parkin, A, and Warhurst, J, eds, Machine Politics in the Australian Labour Party, Allen and Unwin, Sydney, 1983. 75 Button, John, Op Cit, p 181. Chapter 2 Social Democracy and Labor 52 Theoretical Foundation and Practical Evolution
Internationally, this period saw the rise of “New Right” economic policies, which in the 1980s were characterised under the heading of Thatcherism.76 Australia and its political parties, including Labor, could not be immune from this new phase in the international economy. In Opposition then, Labor began redefining its policies to reflect these changed economic conditions.
A new leader and a new leadership team were not, however, enough. We needed new policies and a modernised party structure. In January 1978, at the instigation of Bill Hayden and myself, the national executive of the ALP set up a committee of inquiry into the structure and functioning of the Labor Party. Australia’s social, economic and demographic structure was changing. The Labor Party had to change too. The idea was to make the party more relevant, more modern, more democratic.77
At the same time as policy directions changed, Labor's internal make-up began to reflect a new breed of Labor politician (see Tables 1 and 2). They represented a new generation – younger, often highly educated, some from non-traditional Labor backgrounds. Unlike many of their predecessors, these
Members did not enter Federal Parliament after a career in traditional labour occupations. A number of individuals were elected to the Federal Parliament in
1975, 1977 and 1980 who went on to make major contributions to Labor’s policies, the policy formulation process, and ensuring Labor could be comfortable in government.78 Outstanding among these individuals were Paul
76 This was a term which grew from the economic policies of Prime Minister Margaret Thatcher in Great Britain. Its agenda included privatisation of government assets such as airlines, electricity and telecommunications, and the smashing of union power. 77 Button, John, Op Cit, p 182. 78 Kelly, Paul, The Hawke Ascendancy, Angus and Robertson, Sydney, 1984. Chapter 2 Social Democracy and Labor 53 Theoretical Foundation and Practical Evolution
Keating, Bob Hawke, John Button, John Dawkins, Brian Howe, Graham
Richardson, Gerry Hand and Kim Beazley.
A number of these new members also were drawn from the organisational and industrial wings of the Party, signalling a changing emphasis and more formal relationship between them and the Parliamentary Party. Kerry Sibraa, Bruce
Childs, Leo McLeay, Graham Richardson and John Faulkner (NSW), Gerry
Hand (Victoria), Chris Schacht (South Australia), Bob McMullan (National
Secretary), Bob Hawke (ACTU President), Peter Cook (WATLC
Secretary/ACTU Vice President), Simon Crean (ACTU President) and John
Dawkins (union secretary) were recipients of this largesse.
Chapter 2 Social Democracy and Labor 54 Theoretical Foundation and Practical Evolution
Chapter 2 Social Democracy and Labor 55 Theoretical Foundation and Practical Evolution
Chapter 2 Social Democracy and Labor 56 Theoretical Foundation and Practical Evolution
2.8 1983-1996 – LABOR’S NEW AGE
Success for Labor was achieved in March 1983 with the election of the first
Hawke Government. Hawke had entered Federal Parliament in 1980 from a background as President of the ACTU. He was also a very popular non- politician, a popularity which he maintained in Parliament for nearly a decade.
In 1983, on the same day Prime Minister Malcolm Fraser called a general election, Labor met in Brisbane and orchestrated Hayden’s replacement by
Hawke as Opposition Leader. Three weeks later, Australia had a new Labor
Government, a new Labor Prime Minister and a new determination to modernise the economy whilst maintaining the principles of social justice.
Hawke regarded economic management as paramount.79 During the life of the
Hawke and Keating Labor Governments, this policy ensured the success of the government in many areas. Financial deregulation was one prime example.
This success however, was achieved with careful management of factions,
Cabinet, Caucus and Party Conferences, and through a close working relationship with the trade union movement.
2.8.1 FACTIONS IN THE MODERN LABOR PARTY
From its inception, different groupings contributed to the development of the ideological philosophies of the Australian Labor Party. For much of its early existence, these groupings did not consider themselves as rigid factional
79 See McMullin, Ross, Op Cit, p 412 and Kelly, Paul, The End of Certainty: Power, Politics and Business in Australia, Allen and Unwin, Sydney, 1994, Chapter 1. Chapter 2 Social Democracy and Labor 57 Theoretical Foundation and Practical Evolution
blocks. Labor was, after all, a Leftist party established to address the concerns of the working class.80
With the passage of time, the need to address broad social and economic issues became more pressing. Changing world circumstances, exemplified by the emergence of a new phase of globalisation, contributed to the need for the
Party to be more embracing. Middle Australians, intellectuals and academics were increasingly attracted to the Party, and contributed to its policy development.
A consequence of this was the emergence of more defined, philosophically bound groups within the Party. Such was the creation of the formal faction system. Significantly, the two traditional factions of the Left and the Right were joined in 1983 by a third faction, the Centre-Left, and in the 1990s, by the
Independents.
The Left wing is often characterised as being representative of the more traditional base and concerns of the Party – trade unions, women, Aborigines.
It is perceived to be the champion of social justice policy but conservative and resistant to change in respect of economics. Hence, deregulation, privatisation and market efficiency were anathema to the Left. Left factional leaders during the Hawke/Keating years included Arthur Gietzelt, Brian Howe, Gerry Hand,
Bruce Childs and Stewart West.
80 Mullins, Ross, Op Cit, p 411. Chapter 2 Social Democracy and Labor 58 Theoretical Foundation and Practical Evolution
The Right wing was perceived as more pragmatic in its approach to economic issues, often socially conservative. These characteristics are not immutable.
Many conservative trade unions, for example, support the Right. In its later history, it was the Right which provided the Party’s leadership. It can be argued that it was the Right which provided much of the intellectual drive which modernised Labor’s policies and broadened its appeal to the Australian electorate. This certainly was the case in terms of financial deregulation.
During the Hawke/Keating years, this faction was led by Graham Richardson
(NSW) and Robert Ray (Vic). Alan Griffiths (Vic), Leo McLeay (NSW) and Gary
Punch (NSW) also were major players.
In 1983, more as a consequence of the disappointment of Bill Hayden losing the leadership of the Party, a new faction emerged. Called the Centre-Left, its base and membership was confined largely to the smaller populated states such as
Tasmania, South Australia and Western Australia. Through this faction, the influence of the smaller State Branches over the bigger states and the Left and
Right wings of the Party was anticipated.
Dubbed ‘the marshmallows’ or ‘soft-centres’ by the other factions, the Centre-
Left was often dismissively described as the faction that ‘thinks Left, votes
Right’. In terms of financial deregulation however, its influence was substantial.
Bill Hayden (Qld), Mick Young (SA), John Dawkins (WA), Peter Walsh (WA) and Chris Schacht (SA) were the leading figures in this group.
It really was a collection of people who felt sorry for Bill Hayden or who couldn’t quite bring themselves to join the Right. Mick Young was really Chapter 2 Social Democracy and Labor 59 Theoretical Foundation and Practical Evolution
the leader in a very real sense and it was Mick Young who gave that faction the status and clout that it enjoyed for some years. Once Mick Young retired, the Centre-Left’s days were always going to be numbered.81
In the early 1990s, individuals within the Federal Parliamentary Caucus who had previously seen themselves as factionally unaligned, created a more formal grouping known as the Independents. More for protection in pre-selections, this group tended to support the Left on most occasions.
Gary Punch was a Minister in the Hawke/Keating Governments and a factional negotiator on behalf of the Right. He is able to provide an interesting insight into the factions in the early days of the Hawke Government.
Well basically it was like a collection of tribes. And the tribes delegated certain braves, roughly proportional to their standing in the Caucus, to go to the negotiations. It started I guess, or had its infancy, the night before the first Caucus meeting of the new Hawke Government. Those braves, which at that stage were the actual factional leaders like Richardson, Robert Ray and Gerry Hand from the Left, were called to pow-wow about who was going to get which job. Caucusing about jobs in the Labor Party usually takes up the first few items on any inter-factional agenda.
As a natural consequence of that grew the need and recognition that regular consultation between the factions could solve a lot of fights before they started. The Right factional negotiators were there, not exclusively, but in very large measure, on behalf of the “government”, that is, Hawke and Keating, to test how far they could push the Left. Whether the Centre-Left would be supportive of certain policy initiatives
81 Punch, Gary, Personal Interview, 8 January 1999. Chapter 2 Social Democracy and Labor 60 Theoretical Foundation and Practical Evolution
and whether over time it was saleable to the Party and the trade union movement. It was almost a testing kit for economic reform and other policy initiatives that the Right was delivering for the government.
Of course over time, the Left came to see that the more it could convince and talk as opposed to threatening the Right the more influence it actually had in the decisions. And so, by I guess 1990, when I was in full swing as a factional convenor in my own right, one found that it was not unusual that the Right and the Left had similar views and concerns about how far deregulation and other policy initiatives could be pushed at the expense of losing our working class base.
And the irony of that atmospheric was that it was the Right and the Left in almost a traditionalist factional garb covering both that found itself often at odds with the Cabinet and the economic rationalist nature of the Centre Left and some of the Independents.82
Robert Ray was a former Cabinet Minister, and, with Graham Richardson, the chief factional negotiator for the Right. He was also Hawke's numbers man and closest ally. His assessment of the role he and other factional negotiators played was a little more colourful. He clearly believed the factional negotiators were perceived by the ruling elite of the government as no more than troubleshooters, hired guns brought in when necessary to avert potential trouble in the Caucus.
It was the view of those who were in the intellectual glitterati that read the Fin as the first paper every morning to make these decisions and then the shitkickers were brought in to enforce it. That was basically the attitude. You know. ‘Oh look mate. We’re just having a spot of trouble
82 Ibid. Chapter 2 Social Democracy and Labor 61 Theoretical Foundation and Practical Evolution
getting this through. Let’s ring up the shitkickers and get them around to see if they’ll come.’83
In a practical sense though, the factional negotiators and the factions themselves played a pivotal role in the prosecution of Labor policy.84 Whilst
Ray in hindsight might reflect with some bitterness on the way he believed he was forced to operate, the fact is he and Graham Richardson were two of the most powerful people in the Hawke/Keating Governments.
Both had unfettered access to Hawke and Keating. As chief number crunchers for the Right, they were expected to deliver for the government. It was a role both revelled in, and both were rewarded with senior Cabinet positions. The
Left and Centre-Left negotiators were not given such access in an informal sense. Audiences with the ‘oval office’ or with the Treasurer, for them, were much more formal affairs.
Brian Howe was one of the better performers within the Left, achieving Cabinet status. He became Deputy Prime Minister under Hawke. He recalled that in
1984, a special meeting was held between the factional chiefs and the Party leadership at Kirribilli House to discuss the processes of government in the first year or so of the Labor administration.
Process, however, meant that factional negotiators developed and played crucial roles in determining the fate of policies within the Caucus. The drive and
83 Ray, Robert, Personal Interview, 23 March 1998. Chapter 2 Social Democracy and Labor 62 Theoretical Foundation and Practical Evolution
dominance of the leadership and Cabinet meant as Labor became more comfortable in government, fewer factional brawls erupted. The elevation of more Left wing members to Cabinet in subsequent years also helped.
Stewy [Stewart West] was the only [Left] Minister in Cabinet between ’83 and ’84. I joined the Cabinet in ’84 and then we got a few more people, we got a broader deal after ’87. The kind of battle that took place in ‘86/’87 was about how to position ourselves within the government so we were seen to be having a few wins and not all losses. I mean, in the earlier period, it seemed like the Left was always on the losing side.85
Punch has provided a further interesting example of how the factions interplayed and had a subsequent positive effect in the achievement of appropriate policy. He has suggested that Brian Howe was identified as a voice of reason in the Left, and that Howe was deliberately positioned by the Right very early during Labor’s tenure in government.
I recall quite distinctly in the Old House, Leo McLeay and I had a deliberate conversation with Howe where we said to him that we saw him as a Deputy Leader under a Keating Prime Ministership. We sowed that thought some years before that. The disappointment about Howe was that he never really had the courage to do what he ought to have done. He never had the courage to support Keating even though he knew it was the right thing to do.86
84 See Cavalier, Rodney, ALP’s Flawless Faction System Strained, Australian Financial Review, 13 June 1989, p 13 and Kitney, Geoff, Labor Puts To Rest the Ghosts of 36 Faceless Men, Australian Financial Review, 10 June 1988, p 1. 85 Howe, Brian, Personal Interview, 13 May 1999. 86 Punch, Gary, Op Cit. Chapter 2 Social Democracy and Labor 63 Theoretical Foundation and Practical Evolution
Whilst the Right failed to get Howe’s support for Keating during the leadership challenges, nevertheless Howe’s relationship with Keating was to play an important part in the achievement of major financial deregulation, and his own acquiescence on issues previously considered sacrosanct by the Left.
As far as the Caucus was concerned, the factions were a necessary part of life.
They dictated everything from Chairmanships of Committees through to places on overseas Parliamentary delegations. Each of the factions met on a reasonably regular basis, most often during Parliamentary sitting weeks. The
Left seemed to meet almost daily, the Centre-Left every other day, and the
Right only when the government needed support on a big issue. Most of the time however, the Caucus would go about its everyday functions oblivious to any dramas in government or confident that their factional leaders had things under control.
Punch provided an insight into this aspect of the factions. When major issues were to be the subject of discussion in Caucus, it was necessary to ensure the respective factions came to a consensus position and voted accordingly. The techniques used to achieve the outcomes desired by the leadership were themselves interesting.
It was a pyramid structure of bluff. Those at the top would bluff those at the next rung, usually the Right factional leadership who would then bluff the next layer. That, of course, is a technique that can only last so long because it creates antipathy and suspicion. It creates an air of broken promises, broken undertakings, unreliability in terms of people’s word.
Chapter 2 Social Democracy and Labor 64 Theoretical Foundation and Practical Evolution
And over time I think that left a great toll on Hawke. My own perception of Hawke by the end of the decade was that this was really an abuse of process and that you could no longer trust what you were told and that the ground kept shifting.87
The change in the way the factions within the Caucus operated during the life of the Labor government between 1983 and 1996 is a fascinating aspect of decision making within government at the time. Faction leaders were able to achieve compromise positions or total support for the government’s wishes.
The factions generally fell into line, with one or two minor outbreaks of hostilities, often more to do with extraneous factors such as union patronage or local branch support during pre-selections.
The post-1990 era was a much more fluid Caucus where friendships forged in the heat of the leadership battle, supplemented and in some instances overtook what had been the pre-1990 Caucus factional make- up whereby it was discernible block versus discernible block versus discernible block. There was now an undercurrent of change. And that made it easier to sell concepts and ideas than post-1990 era I think. It took a lot of the tension out.
I recall in that period up till the '84 election it was not uncommon that we would be on the phones outside the Caucus room making sure that our every last number was there. In the post 1990 era people tended to vote less along factional lines in the Caucus on day-to-day issues and even some major issues than what they had previously.
It was not until post 1990 when the factions became much more willing to stand the government up. That the factional system actually worked as
87 Ibid. Chapter 2 Social Democracy and Labor 65 Theoretical Foundation and Practical Evolution
well as I think we’ve ever seen it work in the Labor Party. One of the interesting by-products I must say in the post 1990 environment was the fact that the Hawke/Keating split added a completely different dimension to the Labor Party Caucus and elements of the Right became quite close to elements of the Left in the respective camps.88
2.8.2 POLICY DEVELOPMENT
Whilst the characteristics of the individual Labor Parliamentarians were changing and the formal role of factions enmeshed in the workings of the Party during this period, so too was the process of policy development. In the past,
National Conferences of the Party reflected, in the main, broad views of delegates. These views had been shaped by State Conferences and by general democratic socialist ideals which had been a reflection in turn of the working class roots of the Labor Party.
However, with the rise of the new educated elite, many of whom were attracted to the Labor Party, the process of discussion, development and refinement of policy changed.
The traditional view of the Labor Party branch was that it was not only a forum for political discussion, but it was also the hub of social activity for many
Australians. Labor Party branches in rural Australia in particular could be characterised in this way. With the advent of modern communications and the general economic and social development of Australia, the role that these branches played in the development of policy diminished. Party members
88 Ibid. Chapter 2 Social Democracy and Labor 66 Theoretical Foundation and Practical Evolution
simply had other opportunities and calls on their leisure time. As a consequence, the existence of local branches as forums for intense and informed debate dissipated.
At the national level, Party Conferences eventually moved in the 1990s from being bi-annual to tri-annual affairs. This was seen by the Parliamentary wing of the Party as a better way of dealing with policy issues during the three year cycle of a Parliament. The reality was that the Parliamentary Party, or more particularly the Cabinet, could not be subject to intense scrutiny at Conferences if they were held less frequently. It also meant that “tricky” issues could be resolved at the National Executive level where it was far easier to gather the numbers in support of the Parliamentary wing’s views.
Traditionally at Conference, platform resolutions and rules were adopted after some debate by the delegates who had been elected from the various State and Territory branches. From the later 1970s, opportunities for open debate have been limited to a more pragmatic acceptance that Party Conferences are more for the media and for conveying a sense of unity in policy development.
Their timing has often reflected a need to present a unified Party immediately prior to a general election.
The general process of policy development, characterised by the supremacy of the Parliamentarians over their supposed ‘machine’ masters, acquiescent
National Executives and stage-managed National Conferences, clearly had begun in the 1960s, but accelerated in the Hawke/Keating years. The Chapter 2 Social Democracy and Labor 67 Theoretical Foundation and Practical Evolution
formalised Standing Committees of the Conference, first established in the
1960s, created a practical role in assisting the development of policy.89
However, even these were subject to the tight control of the Parliamentary wing, particularly Ministers and Shadow Ministers.
2.8.3 THE HAWKE/KEATING GOVERNMENTS – CONTEMPORARY
ASSESSMENTS
Defeat for Labor in 1996 ended a period which was certainly its most successful electorally. Yet fundamental changes to structure, composition and policy had created a Party quite different to that formed in the last century.
Jaensch has argued that the Party itself has moved from being a “mass party” with a clear ethos and doctrine to a pragmatic, “catch-all party” aiming to move with the opinions and moods of the majority.90 Critics from the Left, such as
Peter Beilharz, have argued that the Labor Party has been most successful in an electoral sense in the 1980s and 1990s at the precise time the Party abandoned its traditional approach, as articulated in the 1890s and brought to its apogee by Curtin and Chifley: that is, at the historical moment when it had turned itself into something else.91
Beilharz concedes that the Labor decade 1983–1993 was a time of dramatic change, but not necessarily for the better. The Australian Labor Party and the
89 See Crisp, L F, Australian National Government, Longmans, Croydon, 1965, p 164 and Dunstan, Don, The Federal Executive of the ALP, Australian Quarterly, June, 1964, pp 9-16. 90 Jaensch, Dean, The Hawke-Keating Hijack, Allen and Unwin, Sydney, 1989. Chapter 2 Social Democracy and Labor 68 Theoretical Foundation and Practical Evolution
labour movement both enacted this change and reflected it. Ongoing electoral success, the Accord, deregulation of financial and labour markets, and the primacy of the economy over all became hallmarks of the Hawke/Keating
Governments. But, Beilharz argues, from a classic Leftist perspective, as Labor modernised and globalised, many of its traditional values and priorities were forgotten or ignored. He questions whether a Labor vision can be reinvented for the future.
The Labor decade 1983-93 is thus most accurately viewed as symbolically closed, whatever the subsequent electoral fortunes of Labor into the 1990s. For Labor has earned its managerial credentials at the cost of emptying out of the Labour tradition, even while constantly appealing to it. It can no longer claim any purpose or vision beyond efficient managerialism with a social justice gloss. Its access to the turnstiles of parliamentary power has been dramatically increased because it no longer has any purpose beyond holding the fort.92
Castles raised similar concerns.93 He compared the way in which Australia and the smaller European states responded to the vulnerability forced on them by world markets. Europe's social democratic parties have developed policies of domestic compensation - industrial restructuring, wage flexibility, labour retraining, and income maintenance within a strong welfare state.
He concluded that it is immediately apparent that the strategy of domestic compensation has an inherently more dynamic economic growth potential than
91 Beilharz, Peter, Transforming Labor – Labour Tradition and the Labor Decade in Australia, Cambridge University Press, Melbourne, 1994, p 4. 92 Ibid. Chapter 2 Social Democracy and Labor 69 Theoretical Foundation and Practical Evolution
that based on domestic defence. Grabbing competitive niches in new markets is built into the former whilst tariffs serve, precisely, to insulate the economy from competition. This is the basis of domestic compensation, building a dynamic economy within which governments can redistribute the benefits of economic growth.
Johnson contends that Hawke’s and Keating’s views, which emphasised the role of the private sector, saw public sector activity as posing dangers to growth and the expansion of that sector.94 She claims that underneath the Labor government’s failures to implement a major expansion of the Welfare State and more interventionist industry policies lies a real belief in the private sector’s ability to generate higher standards of living for all. Consequently, Labor governments advocated “economic rationalist” solutions to Australia’s economic problems – a lean public sector, narrowly targeted services, privatisation of some government functions and assets, and selective deregulation.95
Stutchbury notes that the Hawke Government was not as zealous in its pursuit of market liberalisation as the New Zealand Labour Government under Finance
Minister Roger Douglas.
It shied away from privatisation of government trading enterprises such as airlines, banking and communication. Instead, it was in the mainstream of structural adjustment policies in the OECD countries.
93 Castles, Francis, Australian Public Policy and Economic Vulnerability, Allen and Unwin, Sydney, 1988. 94 Johnson, Carol, Labor Governments 1891-1991 Then and Now, Current Affairs Bulletin, vol 67 (5), October 1990, pp 4-13. 95 Johnson, Carol, The Labor Legacy: Curtin, Chifley, Whitlam, Hawke, Allen and Unwin, Sydney, 1989. Chapter 2 Social Democracy and Labor 70 Theoretical Foundation and Practical Evolution
Australian-style this translated into financial deregulation, lower marginal tax rates financed by government spending cuts and a broader tax base, lower border protection for industry and parts of agriculture and liberalisation of product markets and distribution.96
Keating, however, was more radical. The early financial deregulation policy changes such as floating the dollar and admitting foreign banks, were followed with the privatisation in stages of the Commonwealth Bank. Consequently, at the end of the Keating Government, Labor was every bit as zealous as other governments convinced of the merits of the dominance of market forces in economic policy.
Langmore and Quiggin, in their fundamentally Leftist explanation of the defeat of Labor in 1996 – emphasised the “errors” in economic judgment made by the
Hawke/Keating Governments, particularly regarding financial deregulation and privatisation.
The Hawke-Keating Government’s policy on privatisation was a political disaster and an economic failure.97
They contend that the privatisation of both the Commonwealth Bank and
Qantas was one of the biggest factors contributing to the erosion of the core
Labor vote, and called for Labor to return to its traditional view that unfettered markets rarely deliver optimal outcomes and that extensive government intervention is both necessary and desirable.
96 Stutchbury, Michael, Macroeconomic Policy in Jennett, Christine and Stewart, Randal, eds, Op Cit, pp 54-78. Chapter 2 Social Democracy and Labor 71 Theoretical Foundation and Practical Evolution
Jones adds that belief in the market was part of the bureaucratic credo in
Canberra – and views were held with a quasi-theological fervour. He noted that the achievements of the Hawke and Keating Governments are based on their own thinking.
They owe little or nothing to past Labor history or policy.98
Brugger and others believed the Hawke Government had to respond in this way because of particular problems faced by the Australian economy in the international context. These developments in the international economy included financial deregulation and labour market flexibility.99
Australia’s vulnerability in the world economy caused economic cycles which continually generated new problems: current account deficits, balance of payments problems, foreign debt, and inflation. The governments of Hawke and Keating coordinated their economic response with a sensitivity to the political impact of these cycles by carefully choosing the time of elections.100
It was the expression of economic liberalisation as a political program, crafted by Keating, which melded the Cabinet together. However, Jennett and Stewart argue that Labor’s success was confined to a narrow band of policy arenas. 101
97 Langmore, John and Quiggin, John, Future Directions for Labor in The Evatt Papers, Evatt Foundation, Sydney, Vol 4 (1), 1996, p 78. 98 Jones, Barry, Of Sacred Cows and China Shops, Labor Forum, No 1, May/July 1991, p 6. 99 See Brugger, Bill, A New Style For Labor, Current Affairs Bulletin, vol 63 (6), 1986, and Lougheed, Alan, Australia and the World Economy, McPhee Gribble, Fitzroy, 1988. 100 Stutchbury, Michael, Op Cit. 101 Jennett, Christine, and Stewart, Randal, eds, Hawke and Australian Public Policy – Consensus and Restructuring, Macmillan, Melbourne, 1990. Chapter 2 Social Democracy and Labor 72 Theoretical Foundation and Practical Evolution
These areas were those requiring sophisticated economic knowledge but not complex social considerations. Financial deregulation was one such area.
The agenda was always dominated by Paul Keating. His successful policies in financial deregulation, industry policy, and taxation are highly technical and marked by elite insularity. He was backed by a powerful trinity – the Treasury, the Reserve Bank, and the ACTU – rather than sizeable groups of voters.102
It was the remarkable relationship between the unions and the Labor governments of Hawke and Keating that delivered the opportunities for the restructuring so urgently needed to modernise Australia. At the centre of this process was the Accord through which real wage growth was traded off for a raft of social and economic measures. These included Medicare, superannuation and family packages.103 The government also gained support from business, and developed a management style for Cabinet and the various factions within the Party, sometimes described as “new corporatism”.104
As well, the old arguments as to whether the Labor government’s policies were
Left wing or Right wing became increasingly meaningless in the sophisticated policy environment of the 1980s and 1990s.105 As noted earlier and in the subsequent case studies of financial deregulation, Labor in government between 1983 and 1996 saw entrenched factional positions modified and in some cases dissipated entirely. Similarly, it is argued that it was no longer a
102 Ibid, p 7. 103 See Punch, Gary, Labor’s Achievements Are Rock Solid, But Where’s the Passion, Weekend Australian, 7-8 November 1987. 104 Jennett and Stewart, Op Cit, pp 5-6. 105 Maddox, Graham, The Hawke Government and Labor Tradition, Penguin, Ringwood, 1988. Chapter 2 Social Democracy and Labor 73 Theoretical Foundation and Practical Evolution
major issue as to whether Labor did or did not follow Labor tradition, whatever that might be.106
The irony for the Labor Party was that in addressing the issue of international competitiveness it was destroying the ethos and institutional pillars on which Labor's support had always been based. This was the cruel historical paradox for Labor in the 1980s. The more successful it was the more it destroyed the basis of Laborism.107
From the luxury of Labor in opposition, a number of commentators have in recent times sought to re-address some of these fundamental issues. Assisted by a media insatiable for any semblance of internal Party rumblings about leadership or policy direction, these individuals have seized the opportunity to raise questions about party democracy, the future of the faction system and
Labor's policy direction.
Latham has criticised Labor for adopting too readily a backward-looking economic and social agenda.108 His embrace of market economics in adopting policies from taxation to social welfare, while couched in terms of globalisation and competition policy, is often advocating radical policy prescriptions clearly at odds with so-called traditional Labor values. His is described as the "Third
Way".
106 See Jennett and Stewart, Op Cit, Kelly, Paul, The End of Certainty: Power, Politics and Business in Australia, Allen and Unwin, Sydney, 1994; and Johnson, Carol, Op Cit. 107 Kelly, Paul, Op Cit. 108 Latham, Mark, Civilising Global Capital: new thinking for Australian Labor, Allen and Unwin, Sydney, 1998. Chapter 2 Social Democracy and Labor 74 Theoretical Foundation and Practical Evolution
Tanner, similarly has advocated reasonably radical approaches to policy for a
Labor Party.109 As a champion for the modern Left, his views are refreshingly open and recognise the real world in which Australia must operate today.
Conversely, Thomson is more concerned to ensure policies, particularly those within the Labor Party, reflect the class-based society of yesteryear.110 Whilst agreeing that the process of economic reform during the Hawke/Keating years was necessary, he argues that social justice imperatives fell by the wayside and must be integrated again to deliver appropriate policy outcomes.
This debate within the Labor Party is healthy. There is no doubt that after its most successful period electorally since it was created, an opportunity must be taken for reflection, regeneration and renewal.
109 Tanner, Lindsay, Open Australia, Pluto Press, Sydney, 1999. 110 Thomson, Michael, Labor Without Class: the Gentrification of the ALP, Pluto Press, Sydney, 1999. CHAPTER 3
THE AUSTRALIAN BANKING INDUSTRY
AN HISTORICAL OVERVIEW
3.1 INTRODUCTION
Banking is critical to the functioning of any economy. No other sector, perhaps, can demonstrate how governments must develop economic policy which ensures a nation’s financial system is efficient and safe. When viewed from the perspective of major government change to such policy, it is important to have an understanding of the historical development of the system itself. Case studies of policy change, such as the float of the dollar, entry of foreign banks and sale of the Commonwealth Bank, further illustrate the processes involved.
It has been said that those who do not learn from history are doomed to repeat it. Looking at the history of Australian banking, it is noticeable how many of the issues relevant during the period of the Hawke/Keating Governments of 1983 to
1996 were evident as far back as the mid-Nineteenth Century. It is also apparent that government bodies have sought to play a significant role in the financial system, both in direct and indirect ways. Accordingly, notions of regulation and deregulation emerge as important elements in understanding and appreciating the creation of a modernised Australian financial system over time. Chapter 3 The Australian Banking Industry 76 An Historical Overview
For these reasons, it is instructive in this chapter to review the emergence of the
Australian banking system to describe its earliest colonial foundations, and to consider the experiences of the 1890s which were to shape the banking environment for much of the subsequent Century.
A further critical aspect of this examination centres on the emerging relationship between Labor in its various manifestations and the Australian banking industry.
Deep-seated resentment towards financial institutions, often as the result of perceived and actual injustices perpetrated against the working class, became endemic and remained a feature of this relationship. The philosophical underpinnings of the demonising of "money power" are considered as an explanation of the emergence and perpetuation of these views by Labor.
Consideration of issues such as bank nationalisation, the development of a central bank, the growth of non-bank financial intermediaries, and the acceptance of the need for financial deregulation also provides an historical background to the evolution of Australia's banking industry. These issues set the scene, showing how Labor's policies and prejudices were developed, and how, over time, by economic necessity they changed.
This chapter therefore, provides an understanding of the relationship between
Labor and banking. Through an appreciation of history, the task of changing attitudes, perceptions, and core relationships between Labor and the financial institutions can be understood and measured. Chapter 3 The Australian Banking Industry 77 An Historical Overview
3.2 AUSTRALIA’S FINANCIAL SYSTEM - THE EARLY YEARS
In the earliest days of European settlement Australia’s financial system was rudimentary.1 However, as the free settler component of the colony of New
South Wales grew, so did the need for a banking system. The first Australian bank was the Bank of New South Wales, established in 1817 with the support of
Governor Macquarie, who gave it the (illegal) privilege of limited liability.
During the next few years, other banks such as the Waterloo (1822) and the
Bank of Australia (1826) began competing against the Wales.
For the most part these banks facilitated commerce rather than the needs of the small saver. This reflected the nature of the colony of the day as the potential for an expanding commercial class was only beginning to be realised. The New
South Wales Savings Bank, more commonly known as Campbell’s Bank, was established in 1819. Because of concerns related to one individual effectively having an unregulated monopoly over their savings, the New South Wales
Legislative Council subsumed the operations of Campbell's Bank and established the Savings Bank of New South Wales in 1832. Savings banks were established in the other colonies over the next two decades.
The economic slump of the early 1840s saw a number of banks fail, including the Bank of Australia, the Sydney Banking Company and the Port Phillip Bank.
As they were generally well-capitalised, their depositors lost little.
1 The discussion from here draws heavily on the definitive analysis by S.J. Butlin, Foundations of the Australian Monetary System 1788-1851, Sydney University Press, Sydney, 1953. Chapter 3 The Australian Banking Industry 78 An Historical Overview
In 1840 and 1846 the British Government circulated to colonial Governors
Colonial Bank Regulations. They included the following requirements: non- deposit debts owed by the banks were not to exceed three times their capital; a bank could not hold its own shares or lend against them; loans to directors or officers must not exceed one-third of total loans; dividends could be paid only from profits and prescribed returns were to be supplied half-yearly for publication. The extent to which these prudential guidelines were heeded varied, but New South Wales had substantially adopted them by 1850.
The boom that followed the gold rushes of the 1850s and the steady expansion of the 1860s further developed the market for banking services. However, only a few minor Australian banks emerged to meet this need. Instead, British investors established banks such as the Union and the Bank of Australasia, which spread branches across the country.
Concern continued to be expressed about access to banking services for a broader range of the community. The Savings Bank of New South Wales had grown to only sixteen branches by 1870, in large part because of onerous strictures on its operations. To fill the gap, a number of “Penny Savings Banks” were established. These sought to encourage thrift among the young and the poor, but their future was questionable once their original sponsors retired. As a consequence, the New South Wales Government established the
Government Savings Bank, which took over the penny savings banks and eventually merged with the Savings Bank of New South Wales.
Chapter 3 The Australian Banking Industry 79 An Historical Overview
In 1888 there were forty-three banks operating in Australia.2 The thirty-three trading banks had total liabilities of around 100 million pounds and they paid interest on about two-thirds of their deposits. Ten savings banks, the majority of which were owned by the State Governments, had total liabilities of only 13 million pounds. The four largest banks had about a third of the market amongst them. About thirty per cent of bank assets were controlled by banks with head offices outside Australia. Unlike some other countries, notably the United
States, many Australian banks had already developed branch networks. In some cases, this reflected British banking practice. This diversification enabled them to compete with some of the small local banks established in regional areas, many of which they subsequently absorbed. In the case of savings banks, the widespread branch structure often reflected government ownership.
While the 1880s was a time of excessive optimism, harsh realities emerged in the early 1890s. With the onset of the depression in 1891 came the collapse of most Australian financial institutions. While external factors were important, a large measure of the blame for this lay with the lax lending standards adopted by the banks.3
2 As there were no bank licences or restrictions on the use of the term “bank” at this time, the numbers in the paragraph are not precise. The judgements of S. J. Butlin, A. R. Hall and R. C. White, Australian Banking and Monetary Statistics 1817–1945, Reserve Bank of Australia Occasional Paper, No 4A, Sydney, 1971, as to which institutions to include have been followed and their work is the source of the data. 3 Manning Clark describes it thus; “all through the 1880s government and private enterprise expanded economic activity recklessly...the colonial governments raised loans in London in excess of their immediate requirements, and their ultimate capacity to pay, to build railways, roads, schools, and other public works. Investors advanced money to joint stock companies. Companies were formed in the wake of the boom in Melbourne to invest in real estate that was quickly forced up much beyond its real value...In July and August 1890 a financial crash occurred in Argentina, which had been a centre of world speculation. In November Barings failed in London and this in turn led to the rapid withdrawal of deposits from Australian financial institutions. Public works stopped, as did most private building...in the country districts the farmer and the squatter were hard hit by falls of up to fifty per cent in the prices of their produce. Clark (1986), pp 150-1. Chapter 3 The Australian Banking Industry 80 An Historical Overview
The simple explanation was that a boom, which had disregarded all caution, had out-built conceivable demand, and, stoked as it had been by blind assumption of continually rising prices, it crumpled when that assumption was first clearly falsified in 1888.4
Of importance too, particularly for the rural areas of the colonies, were the pastoral mortgage companies. Dalgetys and similar institutions provided finance for the agricultural pioneers in wheat, sheep and cattle. Whilst not strictly banks, most performed similar functions in the late Nineteenth Century.
A number of these companies still survive.
Only nine banks remained open continuously through the 1890s. Some of the others failed outright, some were absorbed and others re-opened and survived, although often with depositors “reconstructed” into reluctant shareholders. The fringe financiers fared even worse; thirty five “mortgage and land banks” closed, most of them permanently and most in discreditable circumstances. The worst and most extensive failures were in Melbourne. A number of building societies also collapsed.5
The Bank failures of 1893 and the spurious reconstructions which followed permanently tarnished the reputation of the banking community. They lost the high position of political, commercial and social prestige that they had enjoyed before the crash...the great wave of antagonism towards the banking system in the 1930s had its origin in the ‘nineties.6
4 Butlin, S J, Australia and New Zealand Bank, Longmans, Melbourne, 1961, p 280. 5 Ibid. 6 Quoted in Butlin, S J, Ibid, pp 80-81. Chapter 3 The Australian Banking Industry 81 An Historical Overview
3.3 THE MONEY POWER - SHAPING LABOR’S IDEOLOGY
From the earliest days of an organised labour movement in Australia to the eventual formation and entrenchment of the Australian Labor Party, distrust of banks became synonymous with the plight of the working class. This distrust became manifest in much of the writings of reformers, unionists and Labor parliamentarians. Its embodiment was a theory of capitalist finance called The
Money Power.
Love has traced the changing complexion of this theory from the bank crashes in 1893, through two world wars and the great depression, to its culmination in the bank nationalisation campaign of 1947-49.7 An explanation is offered of the way that significant sections of the labour movement formed a particular view of capitalism and the means of transforming it into a people’s democracy. Existing ideas about nationalism and imperialism, monopoly and democracy, class and race were woven into an elaborate conspiracy theory, which served to focus and mobilise the discontent of a “generation that copped the lot” in a succession of major crises.8
There is little doubt that labour ideology in the 1890s was shaped by a belief in a conspiracy between capitalist greed and imperialist ambition to dispossess the Australian people. It was moulded in part by visions of a new society that might be built in a vast, uncorrupted continent by people whose independent and egalitarian spirit enshrined the rugged virtues of popular mythologies. In
7 Love, Peter, Labour and the Money Power: Australian Labour Popularism 1890-1950, Melbourne University Press, Melbourne, 1984. Chapter 3 The Australian Banking Industry 82 An Historical Overview
this context, it is not surprising that there were many people in the labour movement who listened when they were told that the bank crashes of 1893 were yet another episode in the familiar story of capitalist greed and imperial design in which the unbridled avarice of predatory monopolies was exemplified by the Money Power.9
The depression of the 1890s left a profound impression on the minds of a whole generation of Australians and accentuated a number of concerns that helped shape the nation into the new century. The widespread unemployment and social distress occasioned by the slump added an urgency to the existing belief that it was the proper role of governments to intervene in the economy to mitigate the worst excesses of late Nineteenth Century Australian and Imperial capitalism. The partiality of governments and the courts in favour of the employers during the maritime and shearers’ strikes sharpened the labour movement’s sense that Australian society was divided along class lines. Ethnic tensions, particularly between the English and Irish migrants, supported notions of class. Although these notions were rough-hewn, the experience was sufficient to accelerate labour’s entry into politics in an organised and formal way.
The bank crashes were the result of structural weaknesses in the colonial economies, compounded by drought, encouraged by careless borrowing, and precipitated by reckless speculation. During the 1880s, the Australian colonies had come to depend increasingly upon external funds, which disguised a large
8 Ibid, p 1. 9 Ibid, pp 18-19. Chapter 3 The Australian Banking Industry 83 An Historical Overview
deficit in the balance of payments on current account and helped to sustain domestic liquidity. This dependence was such that, during the 1880s, capital inflow equalled almost half of Australia’s merchandise imports and the massive program of public and private investment combined, which made the economies particularly vulnerable to external factors. In the latter half of the decade, for example, the level of debt service charges accounted for over one-third of export revenue.
Nevertheless, very little was done to halt the gathering momentum.
Governments had few powers of intervention, as each colony had its own rudimentary laws and relied heavily on British law in respect of banking matters.
The first wave of financial collapses occurred between 1889 and 1892. The institutions concerned were mainly building societies and mortgage and land companies, whose precarious liquidity was seriously undermined with the sharp fall in foreign investment. Almost all had wildly over-extended themselves, and as a result, when land prices fell the whole basis of their credit collapsed. This first bout of failures weakened many of the stronger banks that had invested funds in such companies. It also weakened public confidence in the banking system. From 1891 onwards the desire of depositors to withdraw their money snowballed until it assumed the proportions of a run on the banks in the first few months of 1893. The crisis came to a head in May, when thirteen prominent banks closed their doors and suspended payment. During this time most Chapter 3 The Australian Banking Industry 84 An Historical Overview
undertook a process of reconstruction with government approval and assistance.10
And yet while economic fundamentals were at fault in causing financial problems, many in the labour movement felt more sinister reasons were the root cause of bank failures and consequent social hardship.
The idea that capitalism consisted of a set of predatory monopoly interests who conspired against the great mass of the people commanded a wide audience.
The events of 1893 had taught them that those monopolies were ranked in a hierarchy of power and moral turpitude, with the Money Power supreme above others.11 The problem remained however, as to what was to be done to solve this problem. The most common proposal was to establish a State Bank.
3.4 THE TWENTIETH CENTURY - SEEDS OF REGULATION
By the turn of the Century, most Labor Platforms called for a State Bank, a national bank, or some form of government control of the monetary system.
The arguments advanced by Labor in favour of a State Bank relied as much upon the alleged sins of private banks as they did upon the virtues of state-run institutions. The idea of a State Bank was also linked to providing cheap credit
10 For assessments of the bank crashes see Blainey, G, and Hutton, G, Gold and Paper; Georgian House, Melbourne, 1961; Butlin, S J., Australia and New Zealand Bank, Longmans, Melbourne, 1961; Gollan, Robin, The Commonwealth Bank of Australia, ANU, Canberra, 1968; Holder, R F, Bank of New South Wales: A History, 2 vols, Angus and Robertson, Sydney, 1970. Reliable economic statistics for the period are available in Butlin, S J, and Hall, A R, and White, R C, Australian Banking and Monetary Statistics 1817–1945, Reserve Bank of Australia Occasional Paper 4A, Sydney, 1971. 11 Love, Peter, Op Cit, p 40. Chapter 3 The Australian Banking Industry 85 An Historical Overview
to small farmers and businesses, two groups badly affected by the financial crisis of the 1890s.
The creation of the Commonwealth of Australia in 1901, and the adoption of a
Constitution which contained a specific Head of Power relevant to banking, provided an opportunity for Labor to create a "people's bank".12 As a consequence, the Commonwealth Bank was created in 1911. The
Commonwealth Bank is considered further in Chapter Seven.
3.4.1 CENTRAL BANKING AND NATIONALISATION
Central banking became a topical issue in the early 1920s. It was argued that private banks and even a government bank should not be singled out for this responsibility. With the growth of international trade, expansion of financial transactions and the growth of domestic economies in developed countries, a central bank to facilitate the stability of the financial sector was viewed as critical. The lessons of the late Nineteenth Century had been learned.
The Bruce Government introduced legislation in 1924 with the declared objective of the “complete transformation of the Commonwealth Bank ... into a central bank”.13 The legislation gave the Bank control over the note issue and required the trading banks to settle through accounts with the Bank.
12 Sawer, Geoffrey, The Australian Constitution, AGPS, Canberra, 1988, p 49. 13 Commonwealth Parliamentary Debates, vol CVI, p 1292. Chapter 3 The Australian Banking Industry 86 An Historical Overview
In 1929 the Australian economy entered the Great Depression. Economic historians are in general agreement there was no way Australia could have avoided being swept into the international economic maelstrom, as the
Australian economy was strongly linked to the economies of Europe and
America.14 Real national income fell by almost ten per cent in 1930/’31. It did not return to 1926/’27 levels until 1934/’35. This was reflected in widespread unemployment, by some estimates up to a third of the workforce.15
By the end of 1929, the banks faced an acute liquidity crisis as deposits dried up and loan defaults rose. Their response was to restrict lending. While this was an entirely appropriate and prudent response for an individual bank, when adopted by all banks it further depressed economic activity and worsened their overall position.
While many banks came under pressure during the Depression, there were not the many failures of 1893. In part this reflected the lessons the banks had learnt from those years and the subsequent caution they had shown.
Banks continued to be unpopular during the 1930s, in part reflecting:
Bitter resentment of the part allegedly played by the banks in the collapse of the Labour governments in New South Wales and in the
14 See for example Schedvin, C B, Australia and the Great Depression, Sydney University Press, Sydney, 1970; Giblin, L F, The Growth of a Central Bank, Melbourne University Press, Melbourne, 1951; Butlin, S J, Australia and New Zealand Bank, Longmans, Melbourne, 1961; and Mackinolty, J, The Wasted Years? Australia’s Great Depression, Allen and Unwin, Sydney, 1981. 15 Martin, S P, A Pocket Full of Change: Banking and Deregulation, House of Representatives Standing Committee on Finance and Administration, AGPS, Canberra, 1991, p 18. Chapter 3 The Australian Banking Industry 87 An Historical Overview
Federal Parliament, the hostility of every debtor who believed his fate could have been avoided with proper bank aid, and of every sufferer from depression who at least half-believed that, even if it had not been caused by the banks, its worst severity could have been averted but for their wickedness or stupidity.16
The Great Depression of the early 1930s showed how severely general economic conditions could be affected by developments in financial markets.
The near collapse of the banking system drew attention to the need to ensure stability in financial arrangements. Not only was there widespread dissatisfaction with the performance of banks during the Great Depression but, as a result of the hardship brought on by economic distress, the climate of economic policy-making also became more interventionist.17
The Federal Government responded to the ground swell of discontent with banks by establishing a Royal Commission into the Monetary and Banking
System which reported in 1937 and concluded:
The most desirable banking system is one which includes privately owned trading banks ... [and] in which a strong central bank regulates the volume of credit and pays some attention to its distribution.18
Accordingly, it recommended the Commonwealth Bank be given wider powers to conduct monetary policy, such as compelling the trading banks to place a specified proportion of their deposits with the Bank.
16 Butlin, S J, Op Cit, p 406. 17 Wallace, Stan, Financial Systems Inquiry – Final Report, AGPS, Canberra, 1997, p 575. 18 Royal Commission Into the Monetary and Banking System, Commonwealth Government Printer, Canberra, 1937, paragraph 669. Chapter 3 The Australian Banking Industry 88 An Historical Overview
It is unusual for a central bank to carry on trading bank activities and to control a savings bank, we consider it is desirable that the Commonwealth Bank should do both ... [as its banking] activities add to its ability to regulate the volume of credit.19
The Commission believed the Commonwealth Bank should have a responsibility for the stability of the financial system. It stated that the failure of one bank to meet demands for the repayment of its deposits, even though it may have ample assets to meet all its liabilities if allowed time, might bring about a serious threat to the stability of the whole system. Accordingly, the
Report recommended:
In the public interest the Commonwealth Bank should take control of the affairs of any bank which is unable to meet its immediate obligations and should be given any additional powers which it may require for this purpose.20
Restrictions on organisations conducting banking business were also recommended. It was suggested that licences from the Treasurer should be required, but that all existing banks should receive one. Only organisations with a licence (and State banks) could use the name “bank”. The Commission was critical of the information the banks disclosed (or rather failed to disclose) in their annual report. It recommended balance sheet and profit and loss data in a standard format be published in the Government Gazette.21
19 Ibid, paragraph 577. 20 Ibid, Recommendation 16 in paragraphs 612-7. 21 Martin, S P, Op Cit, p 20. Chapter 3 The Australian Banking Industry 89 An Historical Overview
The recommendations of the Commission were widely debated during 1938 with the banks vigorously opposing any extension of the Commonwealth Bank’s powers over them. The outbreak of war and changes of Prime Minister, and later Government, drew attention away from financial regulation for a time.
In October 1941, the Curtin Ministry took office and the new Government used the National Security Regulations to license banks, requiring them to place funds in Special Accounts with the Commonwealth Bank, supply it with information, and comply with its policy on advances. The rate of interest paid on the Special Account was set by the Commonwealth Bank to prevent banks’ profits from exceeding the levels of the pre-war years. In February 1942 the
Bank was given powers to set maximum interest rates.22
These regulations were constitutionally valid under the defence powers. At the end of the war they had to be replaced with specific legislation. The Banking
Act, 1945 reflected the wartime regulations, with the exception of the limitation of banking profits, which were themselves largely modelled on the recommendations of the 1935-7 Royal Commission. The Commonwealth Bank was re-organised, with the Board replaced by an advisory council, giving the
Governor a freer hand.
In March 1947, following a successful High Court challenge to part of the banking legislation, the Chifley Labor Government announced that action would be taken to nationalise all the private banks. The banks responded with
22 Ibid. Chapter 3 The Australian Banking Industry 90 An Historical Overview
“probably the most intense and concentrated campaign ever experienced in
Australia”.23 In August 1948 the High Court declared vital sections of the nationalisation legislation invalid, a decision upheld by the Privy Council on appeal. The defeat of the government in 1949 effectively removed bank nationalisation from the agenda, although sections of the Labor Party still believed it was a viable option which should not be entirely discounted in future policy.
3.4.2 RESERVE BANK, PRIVATE BANKS AND BEYOND
As noted previously, there had been a gradual contraction in the number of banks operating in Australia from the 1890s. Mergers resulted in some rationalisation of duplicate branches, a practice encouraged by a 1942 wartime program. In 1955 there were twenty banks operating in Australia. They comprised the Commonwealth Bank, eight private trading banks, three small foreign banks, five banks owned by State Governments and two trustee savings banks in Tasmania. The four largest banks held around two-thirds of the market, double their share in 1888. The government-owned banks controlled almost half the assets.
A recurrent concern of the private banks at this time was that the
Commonwealth Bank was both a competitor and a regulator. The newly-formed
Australian Bankers’ Association launched a strong campaign in 1954 calling for the separation of the central banking functions from the Commonwealth Bank.
23 Butlin, S J, Op Cit, p 430. Chapter 3 The Australian Banking Industry 91 An Historical Overview
Governor Coombs of the Commonwealth Bank, however, preferred the existing arrangements. He argued that they enabled those formulating monetary policy to be in closer contact with the economy, and that the trading sections of the
Bank could be used to directly influence economic activity.
Ultimately, the banks succeeded, and the Reserve Bank of Australia (RBA) was created in 1959. The Bank's charter gave it responsibility for the stability of the currency of Australia, maintenance of full employment in Australia and the economic prosperity and welfare of the people of Australia.24 No guidance was given on the priorities to be attached to these potentially conflicting objectives.
The Reserve Bank was also enjoined to exercise its powers and functions for the protection of the depositors of the several banks, but not to guarantee those deposits.25
As the main banks had been concerned with the needs of commerce rather than of small savers, the bulk of the “savings banks” were owned by governments. Gradually the private banks realised the Commonwealth, which had operated a savings bank division for many years, was gaining a competitive advantage from this.
Between 1956 and 1962, the larger private banks established savings bank and finance company subsidiaries, partly in an effort to avoid some of the existing regulatory restrictions. Their savings bank subsidiaries were also licensed and required to hold minimum ratios of reserves and government securities, but the
24 Reserve Bank Act, 1959, section 10. 25 Ibid, section 12. Chapter 3 The Australian Banking Industry 92 An Historical Overview
finance companies were only lightly regulated. However, even ignoring their subsidiaries, trading banks were clearly the dominant financial institutions in the
Australian financial system until the 1960s.
Through the 1950s, financial policy maintained its focus on the tight control of banks. A typical bank balance sheet of the period saw almost half a bank’s assets invested in government securities or in special accounts with the central bank. By varying amounts held in special accounts - subsequently replaced by
Statutory Reserve Deposits - the central bank could influence the volume of funds available for lending to the private sector. Under the Liquid Assets and
Government Securities (LGS) convention, banks agreed to hold a minimum proportion of their assets in the form of liquid assets and government securities.
With interest rates controlled, but entry to the sector tightly restricted, bank profitability grew steadily through the 1950s and 1960s.26
In addition to trading banks, the major institutional players in the 1960s were the life insurance companies. They held assets around eighty per cent of the value of those held by trading banks, including substantial holdings of residential mortgages. Life companies enjoyed concessional tax treatment relative to that faced by banks. This was extended in 1961, when the superannuation business of life companies became entirely tax free, on condition that life companies held thirty per cent of the assets securing their superannuation business in the form of government securities, and twenty per cent to be in the form of Commonwealth securities. Chapter 3 The Australian Banking Industry 93 An Historical Overview
Whilst government regulation and intervention in the market had been the enduring feature of Australia’s financial system up until this time, the decade of the 1950s saw the beginnings of the deregulatory pressures that were to grow in the 1960s.27 By the late 1950s, policy makers had begun to realise that greater interest rate variability was essential for effective monetary policy.28
The authorities also recognised that qualitative lending guidance was unpopular, both in the market and within the central bank.
As a result, in the late 1960s, the balance between the SRD and LGS ratios was altered, allowing larger holdings of LGS assets returning market-related rates of interest. Institutional changes to facilitate a larger bank share of financing also occurred; for example, the Australian Resources Development
Bank was established in 1960. The development of the bank-accepted commercial bill market, beginning in the mid-1960s, was yet another attempt to stem the tide of finance sourced outside the banking system.29
These efforts amounted to tinkering at the edges however. Realistically, they could not be described as ‘deregulation’ of the financial system, but rather government and government agency responses to particular problems.30
Wholesale changes to the financial sector, where the market played a larger role, did not occur until some decades later. What is important is to recognise
26 Edey, M, & Grey, B, The Evolving Structure of the Australian Financial System paper presented at the conference on The Future of the Financial System, 8-9 July 1996, Sydney Reserve Bank of Australia, p 23. 27 Grenville, S A, The Evolution of Financial Deregulation in Macfarlane, I, ed, The Deregulation of Financial Intermediaries, Reserve Bank of Australia, Sydney, 1991, p 11. 28 Ibid, p 12. 29 Ibid. Chapter 3 The Australian Banking Industry 94 An Historical Overview
that there was a growing body of opinion, both in Australia and other OECD countries, that regulation of the financial sector was becoming irrelevant as economies experienced the effects of what is today described as globalisation.
What began as a trickle in the 1950s turned into a flood in the 1980s.
3.4.3 GROWTH OF NON-BANK FINANCIAL INTERMEDIARIES
Tight control of the banking system encouraged the growth of non-bank financial intermediaries (NBFIs), which began in the 1950s and continued through the 1960s.
The Capital Issues Regulations, a wartime power, had allowed the government to fix maximum interest rates for pastoral companies and building societies but with its expiry in 1952, there were only the powers under the Banking Act.
These referred only to banks. So from this period on, there was a tendency for non-bank financial intermediaries, including some owned by the banks, to meet demand for credit unable to be satisfied by the banks.
Life companies were actively engaged in mortgage lending to satisfy demand unmet by banks, which were constrained by quantitative lending guidelines.31
The growth of instalment credit saw the rapid development of specialist finance companies such as AGC and Esanda, which were often wholly-or partly-owned subsidiaries of the major banks.
30 See Hall, M, Financial Deregulation: A Comparative Study of Australia and the United Kingdom, Macmillan, Basingstoke, 1987 and Holmes, A S, Some Developments in the Australian Financial System Since 1937, Economic Papers, No 39, February. 31 Edey and Gray, Op Cit, p 3. Chapter 3 The Australian Banking Industry 95 An Historical Overview
Building societies prospered in the 1960s, meeting the demand for housing finance that interest rate limits and quantitative lending guidelines prevented the banks from serving. They could afford to charge a little extra for their loans and so tended to pay more on deposits. As co-operatives they could not be taken over by the banks.
The building societies are able to charge and pay higher rates because savings banks have been unable to satisfy the demand for housing finance and have often resorted to rationing which [has] led borrowers to enter complicated and expensive second mortgage commitments. The market has thus intruded through the back door.32
Building societies benefited particularly from the government requirement that savings banks hold more government securities than housing advances, and from the provision of housing mortgage insurance after 1958.33
The process of growth in financing outside the banking system continued through the 1970s. Building societies and credit unions grew very rapidly to meet demands for household finance while money market corporations, often called “merchant banks” or “development finance corporations”, met the needs of corporate borrowers. As with the finance companies, both foreign and domestic banks often held large stakes in the money market corporations. In many cases these took the form of consortia to meet foreign investment guidelines.
32 Sanders, D N, Australian Monetary Policy: Recent Blueprints and Current Thinking, published in Neville, J W and Stammers, D W, eds, Inflation and Unemployment, Penguin, Melbourne, 1972, pp 162-163. 33 Grenville, S A, Op Cit, p 13. Chapter 3 The Australian Banking Industry 96 An Historical Overview
In 1963, the Government commissioned an extensive review of the economy by a Committee led by Dr James Vernon, which reported in 1965. One of its terms of reference was “the availability of credit”. The Committee noted that the growth of non-bank financial intermediaries, particularly finance companies, reduced the effect of monetary policy decisions and accordingly a means of formal regulations should be devised.34 It recommended that “the subject [of banking and finance] warrants a full-scale study in its own right ... [as since the
1936 Royal Commission] changes in the monetary field have been very marked”.35
3.4.4 FORCES OF CHANGE IN THE 1970s
The postwar period up to the start of the 1970s was one of gradual evolution.
Financial services changed little and were delivered largely by institutions insulated from competition by regulations designed to promote stability, albeit at the cost of efficiency. While the regulatory constraints imposed on banks had spawned the growth of less heavily regulated specialist financiers, the system was still relatively sheltered from competition, both domestically and internationally.
In 1970 the ANZ Bank absorbed the ES&A Bank, and in 1977 the combined bank switched its domicile from London to Melbourne. Between 1976 and 1981 the proportion of its shares listed on Australian registers rose from three per
34 Vernon, J, Report of the Committee of Economic Enquiry, Wilke, Melbourne, 1965, paragraph 10.59. 35 Ibid, paragraph 10.96. Chapter 3 The Australian Banking Industry 97 An Historical Overview
cent to seventy per cent. For the first time since ANZ’s predecessors entered
Australia in the 1930s, every large bank, and almost all the others, operating in
Australia was Australian-owned. Foreign interests however, were maintained through foreigners acquiring Australian-listed shares.
The last move to reinforce the regulatory system was the passing of the
Financial Corporations Act, 1974 by the Whitlam Labor Government. There was an expectation that this would reflect Labor’s views on the financial system formed after twenty-three years in Opposition. It was becoming increasingly apparent that a system of implementing monetary policy through tightly- regulated banks, while there were relatively free non-bank financial intermediaries, was leading to the banks losing business to their competitors.
This was not only viewed as unfair to the banks but was weakening monetary policy.
Its use increasingly had the effect of squeezing the banking sector at the expense of the fringe banking sector which could not similarly be regulated. The result was a proliferation of non-bank financial institutions. Indeed, the proportion of the total assets of the financial sector controlled by non-banking financial institutions rose from eight percent to 23 per cent between 1952 and 1972. Most of these expanding corporations were foreign-owned. 36
36 Whitlam, Gough, The Whitlam Government 1972-1975, Viking, Ringwood, 1985, p 218. Chapter 3 The Australian Banking Industry 98 An Historical Overview
Many economists saw the solution in deregulating the banks and moving to a more market-based monetary policy.37 The logical alternative was to attempt to bring the non-banks within the regulatory net.
The Financial Corporations Act established machinery to enable the Australian
Government to obtain information about the activities of different classes of financial corporations and then regulate their credit policies by setting financial ratios, much as was already done with banks. The legislation was drafted with the aim of covering existing major borrowing and lending institutions – such as finance companies, permanent building societies, merchant banks, and money market groups – and any similar institutions that may have arisen in the future.38
Whitlam and Crean disagree as to whose idea this legislation actually was.
Whitlam maintains the idea, like most of what occurred with his government was his.39 Crean remembers it differently.
The NBFI was one of our promises in the election. We believed that non-banking should be regulated just the same as banking because banking had become a lesser proportion of the totality of credit extensions. And most of the banks anyway had those hire purchase companies as direct adjuncts. You couldn’t borrow from the banks, but you could borrow back-hand at one or two per cent higher than the banks would have given you overdraft. That’s what we wanted to get in the net. That was the purpose of the NBFI and again that largely arose from
37 See for example, Argy, Viking, International Financial Deregulation – Some Macroeconomic Implications, ANU, Canberra, 1989; Harper, I R, Why Financial Deregulation?, ANU, Canberra, 1985; and Perkins, J O N, The Deregulation of the Australian Financial System: The Experience of the 1980s, Melbourne University Press, Melbourne, 1989. 38 Whitlam, Gough, Op Cit, p 218. 39 Whitlam, Gough, Personal Interview, 26 June 1998. Chapter 3 The Australian Banking Industry 99 An Historical Overview
suggestion from our economic committee which used to meet regularly in those days and when we were in Opposition.40
The legislation, however, was never proclaimed. Whitlam blames Treasury for influencing subsequent governments not to put the controls in place.41
A sharp increase in oil prices in 1973 put immediate upward pressure on inflation as well as pressure on governments worldwide to accommodate price increases to mitigate their impact on unemployment. With both prices and quantities of financial services constrained by regulation, the banking system lacked the flexibility needed to meet rapidly-changing consumer needs in the mid and late 1970s. For example, in an inflationary environment, consumers demanded savings products that would at least maintain the real value of their savings. This was not possible for banks, which were unable to pay market rates of interest because of ceilings imposed on their deposit liabilities.
The immediate impact on regulated financial institutions was an erosion of their competitive position relative to institutions with greater price flexibility. Inflation lowered the real return on savings instruments whose nominal interest rates were capped by regulation. By the late 1970s, the market share of banks had reached historically low levels.42
The market disruptions of the early 1970s also had a profound impact on the
Commonwealth Government’s fiscal position. Faced with rising unemployment,
40 Crean, Frank, Op Cit. 41 Whitlam, Gough, Personal Interview, 26 June 1998. 42 Wallis, Stan, Op Cit. Chapter 3 The Australian Banking Industry 100 An Historical Overview
the Commonwealth ran large fiscal deficits. At the same time, the RBA attempted to contain the growth of the money supply to counter inflation. The combination of loose fiscal policy and tight monetary policy resulted in the need to sell substantial quantities of Commonwealth Government securities.
This imperative conflicted with the Government’s approach to regulation of the financial system. Indeed, the ability of the RBA to implement monetary policy became increasingly compromised during the 1970s.
3.4.5 DECLINING EFFECTIVENESS OF MONETARY CONTROLS
In the late 1960s and early 1970s, it became increasingly recognised that direct regulation of the banking system was not achieving its objectives.43 In particular, direct controls on banks were thwarting rather than serving the effective operation of monetary policy.
As noted above, the growth of non-bank financial intermediaries was of primary concern. To the extent that financial activity took place outside the banking sector, efforts by the monetary authorities to administer monetary policy via the banks were frustrated. Attempts to constrain financial activity by lowering the volume of bank lending, for example, were increasingly offset by matching increases in lending by non-banks. Regulations on banks were recognised as a primary source of the growth of NBFIs.
43 Ibid, p 582. Chapter 3 The Australian Banking Industry 101 An Historical Overview
In order for policy to influence financial activity in aggregate, a mechanism whose reach extended beyond the banking sector was needed. This suggested a move towards “market oriented” intervention and away from direct controls on the banking system. Market transactions by the RBA operate to change the level of market prices (ie interest rates) rather than the volume of bank lending.
By influencing interest rates rather than the growth of bank balance sheets, the impact of monetary tightening or easing can be felt throughout the financial system rather than by banks alone.
At the same time, the intellectual climate was shifting away from the interventionist focus of the previous three decades as confidence in Keynesian ideas subsided. Thus the stage was set for financial deregulation.44
These changes were reflected in changes to the trading of Treasury notes, the introduction of new technology, and international developments such as the collapse of the Bretton Woods system of fixed exchange rates.
Towards the end of the 1970s and into the early 1980s, the case for floating the exchange rate gained momentum, despite initial opposition by the monetary authorities. Proponents argued that a freely-floating Australian dollar was essential for the RBA to regain a measure of control over monetary conditions.
Floating the Australian dollar meant abandoning exchange controls and permitting the free movement of foreign capital into and out of Australia.
44 Ibid, p 583. Chapter 3 The Australian Banking Industry 102 An Historical Overview
Recognising the inevitability of a market-determined exchange rate for the
Australian dollar was a key step on the road to deregulation. A floating exchange rate could not be combined with heavy controls on domestic financial markets without precipitating sudden adverse movements of the exchange rate.
This issue is examined in detail in Chapter Five.
Developments in Australia were consistent with those elsewhere in the developed world. Liberalisation of financial markets followed the combined impact of inflation, increased public sector borrowing, technological innovation and greater international capital mobility. Most countries began the process of liberalisation in the late 1970s.45
3.4.6 1980s - MOVES TOWARDS DEREGULATION
As noted earlier, there had been some loosening of the restraints on the financial system during the 1970s. Some of the controls on interest rates for larger loans and deposits were removed. Savings banks were given a little more discretion over the composition of their assets. Nevertheless, as examined in Chapter 4, the deregulatory process did not begin in earnest until the 1980s.
Its earliest manifestation came in the establishment of the Australian Financial
System Inquiry, known as the Campbell Inquiry, in 1979.46 With broad terms of reference, it laid down the guidelines and principles upon which financial
45 Hviding, K, Financial Deregulation, The OECD Observer, vol 194, June/July, 1995, p 30. Chapter 3 The Australian Banking Industry 103 An Historical Overview
deregulation could proceed. Issues such as floating the dollar, the entry of foreign banks, and the supremacy of the market were examined.
The election of the Hawke Labor Government in 1983 was widely regarded as likely to slow, or even reverse, the deregulatory thrust. In May 1983, the new government appointed the Martin Review Group to assess the Campbell recommendations, which its December 1983 report broadly endorsed.
The experiences of recent years underline the importance of a responsive and adaptive financial system for the meeting of community needs. The period has demonstrated the benefits which can be secured from the removal or relaxation of unnecessary or out-dated official constraints ... Market-oriented policy ... is seen as having considerable advantages for monetary policy purposes over the use of controls which bear directly on specific financial institutions ... the Group does not consider controls over bank interest rates as appropriate for either monetary policy or prudential purposes.47
The consequent changes to the Australian financial system, including the float of the dollar, entry of foreign banks and other deregulatory issues, are examined in the following chapters.
3.4.7 CONSOLIDATION INTO THE 1990s
The entry of new banks in the 1980s meant that Australia had more banks than it had had since the Nineteenth Century. This did not, however, translate into
46 Campbell, K, Final Report of the Committee of Inquiry into the Australian Financial System, AGPS, Canberra, 1981. Chapter 3 The Australian Banking Industry 104 An Historical Overview
less concentration. Mergers between the larger banks simply consolidated the market position of the big four banks. These mergers were motivated in part by a concern about competing with larger overseas banks that were about to enter the Australian market.
The ANZ had been the first to take this view. Back in 1966 their senior management had seen the potential entry of foreign banks as a prime reason for pursuing the merger with the ES&A.48 Around this time there were discussions about further mergers but it was not until between 1981 and 1983 that the Wales merged with the Commercial Bank of Australia to form Westpac and the National Bank merged with the Commercial Banking Company of
Sydney to form National Australia Bank (NAB). ANZ took over the global operations of Grindlays while NAB bought four regional banks in the United
Kingdom and Ireland. Australian banks also developed significant operations in
New Zealand, Papua New Guinea and the Pacific Islands.
A further significant merger occurred in 1990 when the Commonwealth Bank took over the troubled State Bank of Victoria. This issue, and the subsequent privatisation of the Commonwealth Bank, is considered in detail in Chapter
Seven. The end result of this process was the emergence of four banks of comparable size who between them account for about three-quarters of the
Australian banking industry.
47 Martin, V E, Australian Financial System Review Group, AGPS, Canberra, 1984, pp 358-361. 48 Merrett, D T, ANZ Bank: An Official History, Allen and Unwin, Sydney, 1985, p 256. Chapter 3 The Australian Banking Industry 105 An Historical Overview
Some concerns about concentration developed within the finance industry.
When ANZ sought to merge with National Mutual, the consent of the Treasurer,
Paul Keating, was not given. Rather the maintenance of the “six pillars” policy in respect of financial institutions became virtually immutable. This policy specified that the four major banks and the two major life insurance companies would underpin Australia’s finance industry.
In 1990 the effects of the extravagant lending of the banks during the preceding decade began to emerge in their balance sheets. There were marked increases in bad debts and non-performing loans resulting from the injudicious
“name” lending to prominent speculators. As the effects of the recession spread during 1991, further provisioning became necessary, covering small business and farmers. Yet while many of the new entrepreneurial class, as represented by the likes of Bond, Connell and Skase went under, banks returned healthy and increasing profits. Consequently, calls were made from consumer groups, politicians, and the community for tighter controls on the sector and a review of the pace and breadth of financial deregulation.
In 1990, a Parliamentary Inquiry chaired by this author was established by
Treasurer Paul Keating to examine these issues. It concluded that overwhelmingly, the benefits of deregulation outweighed any perceived or real costs.49 Of its one hundred and seven recommendations, the Government adopted nearly all. As a consequence, it assisted Labor in its continuing drive to modernise its policies with respect to banking.
49 Martin, S P, Op Cit. Chapter 3 The Australian Banking Industry 106 An Historical Overview
Privatisation of State-owned banks continued a pace in the 1990s. The
Commonwealth and the State Banks of New South Wales, South Australia and
Western Australia were the subject of such activity. Consumer groups continued to press the Government over the increasing moves by banks to adopt “user pay” principles. An Inquiry into fees and charges and bank margins resulted.50
By 1996, banking in Australia had been changed considerably. Through mergers and acquisitions, Australian domestic banks maintained their dominance in market share and economic influence. Regional banks, many of which converted from building societies, and foreign banks essentially tackled niche markets. Products offered had exploded in number and complexity.
Automation, plastic cards and shrinking bank branch numbers highlighted an industry still under change.
3.5 BANKING AND THE ALP PLATFORM
The creation of the Commonwealth Bank, legislated for in 1911 and opened in
1912, Chifley’s attempts to nationalise the banks in the 1940s and Whitlam’s efforts in respect of NBFIs in the early 1970s are the only real examples of
Labor Party policy in relation to banks. While the Party was suspicious of the banks, surprisingly when in government, it made little major effort to put banking into the Party’s Platform.
50 Prices Surveillance Authority, Inquiry into Fees and Charges Imposed on Retail Accounts by Banks and Other Financial Institutions and by Retailers on EFTPOS Transactions, AGPS, Canberra, 1985. Chapter 3 The Australian Banking Industry 107 An Historical Overview
Banking policy during the term of the Hawke/Keating Governments provides an interesting contrast with previous Labor administrations. In particular, the way in which the Party’s Platform changed during this period illustrates the changing economic circumstances in Australia, the nature of the subsequent debate on privatisation and the way in which many of the social democratic objectives of the Party became less prominent.
An examination of the Party’s National Platform and Rules confirms that little if any specific mention is ever made of banking matters. Certainly, as discussed in later chapters, any reference to the Commonwealth Bank having to be maintained in public ownership, or reference to nationalisation, had long since disappeared.
A closer examination of the Party's Platform from 1983 to 1996, when Labor was in government, conveys the impression that resolutions adopted in respect of banking were non-controversial and fairly benign. The process to achieve this however, was often somewhat different. The relevant sections of the
Platform are reproduced in Appendix 1, and some of the more salient examples are discussed below.
The 1984 Platform, Constitution and Rules of the Party specified its short term policy objective as:
Chapter 3 The Australian Banking Industry 108 An Historical Overview
Ensure adequate regulatory power is available to the government for control of interest rates and lending policies of financial institutions.51
This conference had followed Paul Keating’s floating of the Australian dollar, and endorsed Keating’s endeavours to allow foreign banks into Australia.
Consequently, a lengthy resolution which set out criteria for additional licences, was adopted in the Foreign Ownership and Investment sub-section of the
Economic Policy section dealing specifically with foreign bank entry. The process involved in changing the Party’s policy is considered in detail in
Chapter Six.
The 1986 National Conference resolutions relevant to banking were contained in the sections dealing with Consumer Affairs and Economic Policy. In respect of consumer issues, these resolutions concerned the development of an appropriate code of practice for electronic funds transfer systems, providing safeguards through national legislation.52
Two resolutions were significant in respect of Economic Policy. The first dealt with what was to be a fading ideal regarding public ownership of assets, committing Labor only to the maintenance of the public sector and referring to the Commonwealth Bank in terms of privatisation weakening the sense of national and public identity. The second resolution was concerned with the operation and establishment of foreign banks. However, rather than raise objections following the government's approval of licences, the resolution called merely for a report card on their operation.
51 Australian Labor Party, Platform, Constitution and Rules, 1984, p 43. Chapter 3 The Australian Banking Industry 109 An Historical Overview
Brian Howe has offered an explanation as to why resolutions of this nature were approved with very little controversy, and subsequently set the scene for later
Conferences and the smoother operation of the Caucus.
We were looking at a very tough budget in ’86. That was really when we were starting to become very much tougher on the fiscal side. A number of us organised a resolution at the Hobart Conference around the theme of social justice and that was more or less passed with broad support. It was very strongly supported by the Left, I suppose, because we were trying to build up some kind of, not opposition necessarily, but some way in which we could fight what was seen to be the economic rationalism within the government.
That resolution then became the basis of a proposal to Hawke that he set up a unit within Prime Minister and Cabinet which was called the Social Justice Unit. I remember when we negotiated with Hawke about that in his office, we basically said ‘Look. We won’t pursue this Wealth Inquiry which has also been agreed to in the resolution, in return for you doing what the Conference has decided and setting up the social justice unit’.
Now I think that was quite important, because it gave people a bit of a sense that the government had an economic and a social side. We gradually broadened that out and I think that helped to settle the Caucus down a lot more in later years because they saw a number of social achievements. They were often not very happy about some of the economic decisions. The government became a bit more balanced towards the end of the 80s and then of course later into the 90s.53
The 1988 Conference restated Labor’s commitment to the maintenance of the
Australian public sector, including the Commonwealth Bank. Again, a minor
52 Australian Labor Party, Platform, Resolutions and Rules, 1986, p 53. Chapter 3 The Australian Banking Industry 110 An Historical Overview
resolution about foreign banks was included, requiring the performance of foreign banks to be regularly reviewed within the prudential supervisory framework of the Reserve Bank.54 Finally, a call was made for the establishment of uniform credit legislation dealing with the debt collection and credit reporting.55
By 1991, the Party’s National Conference had become a tri-annual affair. The
Platform also began to reflect changes with the replacement of cherished ideals by policies that represented a pragmatic approach to government.
Consumer issues were covered in resolutions dealing with the Banking
Ombudsman scheme, legislation to protect consumers, transparency of bank fees and charges and consumer education.56 Foreign banks were still to be subject to Reserve Bank prudential supervisory review.57 The resolution dealing with public sector ownership was greatly weakened. Whereas Labor had previously been “committed to the maintenance of the Australian public sector” and rejected “conservative proposals of privatisation”, new resolutions talked in terms of preventing unwanted outcomes in the event of privatisation.
Obviously, the Party’s Platform now reflected changes already underway in economic policy. The sale of TAA to Qantas, the proposals to part-sell Qantas, and telecommunications policy changes involving mergers and sales of government assets all meant previous Party policy had to be altered.
53 Howe, Brian, Personal Interview, 13 May 1999. 54 Australian Labor Party, Platform Resolutions and Rules, 1986, p 60. 55 Ibid, p 37. 56 Australian Labor Party, Platform Resolutions and Rules, 1991, p 45. Chapter 3 The Australian Banking Industry 111 An Historical Overview
Options for the future of TAA and Qantas illustrate this point. Every time a new jet was acquired by these government-owned enterprises, there was a huge cost to revenue. Trade figures would also be adversely affected. It was argued within sections of Caucus, principally the Right, that these funds could be better spent on health, education or social services. The solution lay in first the acquisition of TAA by Qantas, and eventually the privatisation of the merged airline.
Howe remembers how he tried to convince his Left colleagues about the way in which public assets (such as airlines) should have been viewed. It is a view very similar to that put by the leadership and other factions of the Parliamentary
Party. By extension, his arguments could be translated to other capital-starved assets such as government-owned banks.
I think in the ‘90s the attitude to capital really shifted. In the discussions that I had with Hawke about the sale of the airlines and so on, the special conference and all that, I was really pushing very hard within that line that you could take capital out of one area and put it in to another. And if that’s what we were doing, if we were taking capital out of airlines and putting it into a cities program, well I was not all that unhappy about that. And in fact I argued that at the Left Caucus of the special conference. But there was no support for that in the Left at all, that kind of view.58
This serves to illustrate how the arguments were aligned to achieve a particular outcome. It was a process, including also many of the same arguments about
57 Ibid, p 65. 58 Howe, Brian, Op Cit. Chapter 3 The Australian Banking Industry 112 An Historical Overview
social values and economic principles, that determined the changes to the
Party’s Platform.
In a number of cases, this reflected a formalisation at Conference of decisions already taken by the Parliamentary Party. These decisions were almost all entirely linked to budgetary considerations. And increasingly, the Government relied on the device of requiring the Party’s National Executive to approve changes to Party policy between National Conferences. This also reflected a generally harmonious relationship between the factions at this time, or certainly a greater level of tolerance than perhaps existed in opposition.
Often, these decisions were approved with only token resistance being encountered. When it was obvious Right and Centre-Left votes would ensure the acceptance of any change to Party policy, obstruction became futile.
Notwithstanding, some took the chance to grandstand, while others reaffirmed deeply held philosophical positions as to why governments should own banks, airlines, or other similar assets.
As time went by, Labor became more comfortable in government. As Keating maintained his mastery over economic policy, fewer disputes arose involving policy changes. Questions regarding conformity with the Party Platform became less significant. For example, when Keating resolved to sell the first tranche of the Commonwealth Bank, agreement was obtained within the Party because it was salvaging a financial crisis facing a Left wing Labor Government in Victoria. Chapter 3 The Australian Banking Industry 113 An Historical Overview
Consequently, as explained in Chapter Seven, few in the Party complained.
The Left had to support their factional colleagues in Victoria. The Right and
Centre-Left, in the main, were convinced the privatisation of the bank was long overdue, as it no longer fulfilled its original charter – it was just another bank.
The 1994 National Conference was the last held while Labor was in
Government. It would be four years until the Party next met, and in very different circumstances.
Consumer issues were supplemented with another resolution in support of financial counselling. No changes were made regarding foreign banks.
However, it was again the section dealing with the public sector where significant changes were recorded to reflect changing government priorities, policies and outcomes. No longer was there blanket opposition to privatisation, but if undertaken, then the process should result in net benefit to the Australian community. Employment, debt reduction, increased competition and other factors were laid down as criteria to be met in measuring this net benefit.
In recognition of the changes already implemented in policy, and as a consequence of some public assets having already been partly or fully privatised, a lengthy resolution was adopted on the public sector and privatisation. The language of the resolution was full of qualifications and requirements for further analysis. The Party’s policy regarding privatisation had moved from one of total opposition to one of opposing the privatisation of government-owned businesses that supply essential community services. Chapter 3 The Australian Banking Industry 114 An Historical Overview
These services included gas, water, electricity, Telstra, and Australia Post. No mention was made of the Commonwealth Bank, as by now it was virtually no longer a public asset.
Finally, the need for consultation within the Party was emphasised before privatisation decisions were made. There were some within the broad party structure who resented decisions of such fundamental importance to what had been Labor doctrine, being taken by an aloof elite. Indeed, that elite included the Parliamentary Party, National Executive, and probably most importantly,
Keating. In the broad scheme of things, it was probably too late, and meant very little.
CHAPTER 4
FINANCIAL DEREGULATION
4.1 INTRODUCTION
Perhaps no other issue bound together national economic policy and politics as did financial deregulation in Australia. Its distinguishing features - that of breadth of reform and speed in execution - mean that Australia stands out as a unique example of major change in the sector.
Deregulation in Australia had its roots in similar economic policies in other
OECD countries.1 Yet for what seemed like an eternity, Australian
Governments would not shake off the shackles of interventionism and controls.
They seemed indifferent to modernising Australia's financial system. While tentative steps were taken by the Fraser Coalition Government, it was the
Hawke/Keating Labor alliance that finally saw Australia emerge as an outward looking, dynamic, financially independent nation.
Along the way, the Australian Labor Party and Labor Government had to jettison some of their long-held and cherished beliefs. Deregulatory activities such as floating the dollar, admitting foreign banks, and selling the
1 See Argy, V, International Financial Deregulation - Some Macroeconomic Implications, ANU, Canberra, 1989; Broker, G, Competition in Banking, OECD, Paris, 1989; OECD, Trends in Banking in OECD Countries, OECD, Paris, 1985 and Bisignano, J, European Financial Deregulation: The Pressures for Change and the Costs of Achievement in Macfarlane, I (ed), Chapter 4 Financial Deregulation 116
Commonwealth Bank were undertaken as part of the reinvigoration of Labor’s economic credentials. It was a path which fundamentally changed the face of
Australia, and also that of Labor.
For Labor, the embrace of financial deregulation was essentially the result of the pivotal role played by Hawke and Keating, particularly in the early years of the Hawke Government. The roles played by departmental and political advisers in the private offices of both men was critical. Together, they were instrumental in shaping the intellectual and practical realities of the Party's changed philosophical approach to the Australian financial sector.
4.2 WHY FINANCIAL DEREGULATION?
Financial deregulation is a broad concept that embraces the progressive removal of government control from the finance sector. As noted in Chapter 3, the first tentative steps in government promotion of principles of market efficiency began in Australia in the late 1950s.2 However, deregulation did not mean the total abolition of all government controls. Indeed, even with the enormous changes enacted by the Hawke/Keating governments in the 1980s and 1990s, considerable regulation, particularly in respect to prudential supervision of financial institutions remains a feature of the Australian economy.3
The Deregulation of Financial Intermediaries, Reserve Bank of Australia, Sydney, 1991, pp 246- 90. 2 Grenville, S A, The Evolution of Financial Deregulation, in Macfarlane, I (ed), The Deregulation of Financial Intermediaries, Reserve Bank of Australia, Sydney, 1991, pp 3-35. 3 Graham, Andrew, Deregulation, Competition and Supervision, Economic Papers, 3 (2), June, 1984, pp 77-87. Chapter 4 Financial Deregulation 117
Marked changes in the regulation of Australia’s financial institutions and markets have mirrored developments in Australia’s financial system, changes in global markets and other Western economies, changes in the philosophy of economic policy formulation, and changes in the traditional values of political parties. They have also resulted from evolving views and theoretical changes to economic thought. Throughout the 1950s and 1960s, much was written by
Australian economists about methods to improve the effectiveness of the regulatory framework of the Australian financial system. At that time, they were debating the merits of two diametrically-opposed strategies. Should the authorities seek to maintain direct controls and extend them to the parallel uncontrolled markets? Or should they opt for a market-oriented approach?4
Australian authorities vacillated on these basic questions, even in the face of the rising tide favouring less direct controls. These opinions were built upon several factors, including the growth of parallel markets, where ‘private’ and
‘public’ interests overlapped.5
According to the ‘public interest’ view, financial deregulation is the result of government concern to improve the operation of the financial system and to maintain control over real economic activity and prices through the financial system.6
4 See Harper, I R, Why Financial Deregulation?, Australian Economic Review, 1st Quarter, 1986, pp 37-49. 5 Ibid 6 The OECD in its 1984/85 economic survey of Australia (OECD 1985, p 10 and p 13) presents a ‘public interest’ interpretation of Australia’s experience of financial deregulation. Chapter 4 Financial Deregulation 118
The most telling factor in favour of the ‘public interest’ view of financial deregulation was the negative impact of financial regulations on the effectiveness of monetary policy - at a time when governments, faced with persistent inflation and large budget deficits, most needed an effective monetary policy. The solution was seen to be in the more intensive use of market- oriented controls.
A ‘private interest’ interpretation would seek to identify those private interests which stood to gain from deregulation of the financial system. It would then link the fact of deregulation to the political pressures exercised by potential winners in the face of ineffective opposition by potential losers. Consequently, the
Australian banks supported deregulation, albeit with a gradualist perspective.
Consumer groups, bank employees’ unions, and the Left wing of the ALP were not as supportive.
Lewis and Wallace noted that it was increasingly in the private interest of the regulated institutions to seek a softening of controls as unregulated markets grew.7 At the same time, there was recognition that monetary policy was operating upon a shrinking base, so that controls were becoming self-defeating and no longer in the public interest.
Australian changes were part of a virtually world-wide movement towards the deregulation of the financial system ... which could not readily have been resisted in any economy that did not have detailed central controls over the economic system as a whole ... [T]he integration of world
7 Lewis, M K, and Wallace, R H, eds, The Australian Financial System, Longman Cheshire, Melbourne, 1993, p 6. Chapter 4 Financial Deregulation 119
financial markets meant that controls over the Australian system could fairly readily be avoided by the use of overseas financial markets ...8
Harper has attempted to explain why Australia’s financial markets were deregulated and why it occurred so quickly.9 He concluded there was a changed perception of the usefulness of regulation, and that exogenous developments in the financial environment altered the impact of regulations on financial institutions. These factors included the onset of high and variable rates of inflation and the associated decline in the household saving ratio.
Additionally, the substantial increase in the Public Sector Borrowing
Requirement reflecting a succession of large deficits in the Commonwealth budget. Changes to methods of selling Treasury notes in December 1979 (the
‘tap’ system) and Commonwealth Bonds in June 1982 (the ‘tender’ system) had important implications for the conduct of monetary policy and for the regulation of bank interest rates.
Other factors include the development of stronger linkages between domestic and international financial markets, reflected through an increased presence of foreign-owned financial institutions (principally representative offices of foreign banks and foreign-owned merchant banks) in domestic financial markets; major advances in communications and data-processing technology; advances in communications technology and in the international payments mechanism; and the collapse of the Bretton Woods system of fixed exchange rates.
8 Ibid. Chapter 4 Financial Deregulation 120
Harper concluded that the features of the Australian experience of financial deregulation - the rapid pace and extensive coverage of the process - were the result of a unique conjunction of public interest and private interest in financial deregulation.10 The institutions charged with the preservation of the public interest clearly felt that their responsibilities (power) were being increasingly compromised by the very regulations which had been designed to proscribe those responsibilities. Preservation of the ability of those institutions to administer financial policies in a way consistent with their perception of the public interest demanded deregulation.
At the same time, the private interests of the regulated and unregulated financial intermediaries were directly in favour of deregulation. Both groups saw deregulation as a means of increasing market share at the expense of their competitors. The conjunction of public and private interest on a matter of public policy was considered exceptional.
4.3 DEREGULATION IN AUSTRALIA - PRACTICAL REALITIES
In the period between World War Two and the late 1970s, the Australian banking industry was subject to many direct controls which had, amongst other aims, prudential and monetary policy objectives.11 These controls included ceilings on the interest rates on deposits and charges on their loans; restrictions
9 Harper, I R, Op Cit. 10 Harper, I R, Op Cit. 11 See Davis, K, and Lewis, M, Monetary Policy in Gruen, F H (ed), Surveys of Australian Economies, Allen and Unwin, Sydney, 1978; Holmes, A S, Monetary Policy in Economic Management, Economic Papers, January – June 1972 and Johnson, R A, Monetary Policy – Chapter 4 Financial Deregulation 121
on the activities in which banks could engage; the Statutory Reserve Deposit ratio (SRD); the ‘LGS convention’ which forced banks to hold at least a certain percentage of their deposits in the form of liquid assets and government securities; and restrictions on entry to banking.12
By the end of the 1970s, it was clear to Treasury bureaucrats and the finance sector itself that banking regulation was not achieving its public policy objectives and was creating serious distortions and inefficiencies. In particular, the declining market share of banks was a source of concern for both the banks themselves and the monetary authorities. Tight regulation of the banking system was recognised as a major contributor to the falling market share of banks.
Financial regulation had weighed more heavily on banks than Non Bank
Financial Intermediaries (NBFIs) and this led to business shifting to these organisations. The banks offset this trend to some extent by creating NBFIs on an interest rate basis because of the ceilings on their interest rates. Banks also subsidised customers by developing an extensive branch network. While this served the convenience of customers, it was uneconomic in that this structure did not enable the banks to recoup the costs associated with maintaining it.
The banks also reduced the impact of the limitation on the rate of growth of their lending by moving financing off-balance-sheet, for example, by providing bill
The Changing Environment, T A Coghlan Memorial Lecture, University of NSW, Sydney, May 1985. 12 Kelly, Paul, The End of Certainty - Power, Politics and Business in Australia, Allen & Unwin, Sydney, 1994. Chapter 4 Financial Deregulation 122
lines based on the process of endorsement or acceptance. These bills could be sold in the market so that a bank could provide finance for a customer without taking on an additional loan.
Even so, the demand for loans at the controlled rate almost always exceeded the supply, and banks were usually in the position of credit rationers. It was argued that this made them excessively conservative lenders, causing them to rely unduly on security rather than on cash flow and unwilling to lend on innovative projects. Because of the ceilings on interest rates, the banks could not make higher returns by lending to somewhat riskier borrowers.
4.3.1 THE CAMPBELL COMMITTEE
The Fraser Coalition Government announced an inquiry into the Australian
Financial System in January 1979 against a backdrop of growing dissatisfaction with the performance of financial regulation.13 The Campbell Inquiry was given a wide-ranging brief to recommend changes to the regulatory structure of the financial system so as to promote efficiency and stability.
It was chaired by Sir Keith Campbell, then Chairman and General Manager of the property company, Hooker Corporation Ltd. Other Committee members were: Alan Coates, General Manager of the AMP Society; Keith Halkerston, a financial adviser; Dick McCrossin, General Manager of the Australian
13 Campbell, K, Final Report of the Committee of Inquiry into the Australian Financial System, AGPS, Canberra, September 1981. Chapter 4 Financial Deregulation 123
Resources Development Bank; Jim Mallyon, Reserve Bank of Australia; and
Fred Argy, Treasury.
The members of the Committee had a strong background in finance, mostly in the private sector. Its terms of reference gave a broad hint of the direction it should take. They emphasised the “Government’s free enterprise objectives” and the “importance of efficiency”, but not social equity.
After a mainly descriptive Interim Report in May 1980, the Final Report was delivered in September 1981. It contained some 260 recommendations, covering all aspects of the existing regulatory structure.
While it recommended the removal of many regulations imposed on the financial system, the Committee did not seek to abandon government intervention altogether. It considered the involvement of government in various aspects of the financial system as both proper and desirable. Specifically,
Campbell recommended strengthening regulations designed to uphold prudential standards observed by financial institutions in a newly-deregulated financial environment.
Notwithstanding, the Committee was especially critical of the negative influence of intrusive regulation on the efficiency of the Australian financial system. Many of its recommendations were aimed at increasing the scope for market forces to determine financial market outcomes with appropriate levels of the regulatory oversight. It was concerned to ensure the stability of the financial system and Chapter 4 Financial Deregulation 124
was keenly aware of the potential conflict between the objectives of efficiency and stability.
The community, while recognising a government responsibility to ensure stability and confidence, was nevertheless receptive to the prospect of a more open and flexible financial system, substantially free of intrusive government controls and regulations.14
It described its main concern as being “to promote a financial system that is efficient, competitive and stable”.15 In practice, its recommendations on removing regulatory controls - aimed at efficiency and competitiveness - attracted far more attention than its recommendations concerning prudential oversight - which aimed at stability.
The Committee called for a phased withdrawal of interest rate ceilings, including the prohibition on paying interest on cheque accounts, and of restrictions on the types of lending, including lending to the government through purchases of government securities. It believed that monetary policy should be primarily implemented through open market operations, as their effect was felt more broadly across financial markets, rather than primarily on banks. The
Committee believed foreign banks should be allowed to operate in Australia without any requirements for local equity although their rate of entry should be carefully managed.
14 Ibid, p xxvi. 15 Ibid, p xxvii. Chapter 4 Financial Deregulation 125
On prudential matters, the Campbell Committee believed “capital ... should be seen as the cornerstone of prudential regulation” and capital requirements should be related to the nature of a bank’s assets. It recommended the supervisory efforts of the Reserve Bank should continue to involve close liaison with bank management and place particular emphasis on periodic intensive examinations. It also recommended that a national framework for the prudential regulation of non-bank institutions, which accept deposits primarily from households without issuing prospectuses, should be developed. Table 3 presents some of the main recommendations of the Campbell Committee, and notes progress of implementation by Government.16
16 Wallis, Stan, Australian Financial Systems Inquiry, AGPS, Canberra, March 1997, pp 588- 590. TABLE 3
A Selection of Campbell Committee Recommendations Policy Area Final Report Status and State of Recommendation Implementation Changes to policy Adopt a tender system as the Approved for T-Bonds in affecting preferred system for the June 1982. macroeconomic issue of government management. securities. Remove lending controls Loan Council lifted controls through the Loan Council for from large semi-government ‘commercial’ local and semi- authorities in July 1983. government authorities, that Currently, some are subject to market ‘commercial’ authorities disciplines. exempted, provided that they meet strict commerciality criteria. Dismantle the institutional Implemented from October arrangements for fixing the to December 1983. exchange rate and dismantle exchange controls. RBA intervention in the Since the floating of the A$ forward foreign exchange in December 1983, the RBA market to be consistent with has intervened in spot and principles for intervention in forward markets for the the spot foreign exchange dollar. market. Removal of Abolish quantitative lending Quantitative controls were regulations imposing controls which place ceilings largely removed in June direct controls on on interest rates that could be 1982, although a cap of interest rates and charged to borrowers. 13.5 per cent applied to pre- portfolio composition. existing housing loans until 1986. Removal of A near-market interest rate to In 1993, the interest rate regulations imposing be paid on non-callable payable on NCDs was direct controls on deposits (NCDs) with the alligned with the 13-week T- interest rates and RBA. Note rate (previously T- portfolio composition Note less 5 per cent). In (cont) 1995, the below-market interest rate was re- introduced. The NCD interest opportunity cost is a revenue-raising impost by the Commonwealth Government and does not relate to the direct cost of regulation. Abolish maturity controls, Implemented in August including removal of 1984. minimum and maximum terms on trading and savings bank deposits. Policy Area Final Report Status and State of Recommendation Implementation (cont) Remove portfolio controls. The savings bank specified asset requirement was reduced to allow a free choice tranche of loans in August 1982. Prime Assets Ratio (PAR) replaced LGS convention in May 1985, expanding the range of assets that qualified for inclusion in the PAR ratio. Strengthening of Conduct periodic in-depth RBA announced that regulations to examinations of banks as external auditors would be preserve stability. part of the RBA’s supervisory used in the supervision task effect in April 1986. Subject individual banks to RBA introduced appropriate capital consolidated, risk-weighted requirements, with bank capital requirements for capital to be assessed on a banks in August 1988. consolidated basis. Amend the Banking Act 1945 Banking Act 1945 amended to allow introduction of in December 1989. prudential requirements by regulation. Establish national framework Financial Institutions for prudential supervision of Scheme commenced and State based non-bank AFIC established by the deposit-taking institutions. States and Territories in July 1992 for the prudential supervision of building societies and credit unions throughout Australia. Strengthening of Establish cooperative The Uniform Consumer regulations to scheme to achieve uniformity Credit Code applied from preserve stability. in the regulation of consumer November 1996. credit providers, with credit legislation applying to all institutional providers of consumer finance. Removal of entry Repeal Bank (Shareholdings) Not implemented. barriers. Act 1972 to permit larger individual shareholdings. Remove the embargo on Sixteen new licences issued entry of foreign banks, and to foreign banks in 1985, regulation of new entrants with Chase-AMP becoming that is no more onerous than the first of the foreign banks for incumbents. to commence operations in September of the same year. Policy Area Final Report Status and State of Recommendation Implementation Allow foreign banks to Foreign branches permitted establish agencies which to undertake all banking would be restricted to activities other than the offshore lending. taking of retail deposits from 1992. Foreign bank branches could raise funds in overseas capital markets using a non-bank subsidiary from December 1993, removing a competitive disadvantage relating to withholding tax exemption.
Source: Wallis, Stan, Financial System Inquiry Final Report, AGPS, Canberra, 1997, pp 588-590.
Chapter 4 Financial Deregulation 129
4.3.2 CONSEQUENCES OF DEREGULATION
It is a distinctive feature of the Campbell Report that the great majority of its recommendations were implemented, although a significant number had to wait until the late 1980s or 1990s.
The sweeping changes that have occurred by way of reductions of controls over the Australian financial system during the 1980s changed it from one of the most controlled banking systems in the world to one of the least controlled.17
Recommendations relating to macroeconomic management, direct interest rate controls, and the easing of bank entry restrictions were adopted first. Some deregulatory moves had been made even prior to the release of the Campbell
Report in 1981. These included easing of surveillance on capital inflows from
July 1980, removal of interest rate ceilings on savings and trading bank deposits in 1980, and easing of maturity controls on certificates of deposit in
August 1981 to allow for 30-day issue.
Foreign exchange controls, the remaining quantitative lending controls and restrictions on access for foreign institutions were removed in the mid 1980s.
The detailed steps in the deregulation process are set out in Table 4.
17 Perkins, J, The Deregulation of the Australian Financial System: the Experience of the 1980s, Melbourne University Press, Melbourne, 1989. TABLE 4
Selected Events in the Evolution of the Australian Financial System 1937 Report of the Napier Royal Commission into the Monetary and Banking System. 1941 Banks became licensed and came under the influence of the Commonwealth Bank acting in the capacity of central bank. Profits were explicitly restricted to pre-war levels. 1942 Interest rate ceilings were imposed. 1945 The Banking Act 1945 gave legislative backing to pre-war banking regulations (except restrictions on profits). 1947 The Commonwealth Government attempted to nationalise banks. 1960 The new Reserve Bank of Australia (RBA) commenced operations under the Reserve Bank Act 1959. The RBA was to aim for currency stability, maintenance of full employment, and prosperity for Australians in undertaking its central bank functions. 1963 Savings banks were allowed to offer personal loans. 1965 The RBA lifted qualitative guidelines on bank lending, no longer restricting banks to lend to particular classes of borrower. 1966 Decimal currency was introduced. 1970 Provisions in the Banks (Shareholdings) Act 1972 applied from this time, limiting maximum individual shareholdings to less than 10 per cent of a bank’s capital. 1971 The A$ and NZ$ became linked to the US$ instead of £Sterling. 1972 Trading banks were given increased freedom to negotiate interest rates on deposits greater than $50,000, subject to a maximum rate, for terms between 30 days and four years. The first of the State credit acts was introduced in South Australia. 1974 The Financial Corporations Act 1974 contained provisions which could have enabled federal control of a range of financial institutions other than banks, including finance companies and general financiers. Provisions for direct regulation of non-bank financial institutions (NBFIs) (Part IV) were not proclaimed however, although the Act still required reporting of NBFI data to the RBA. 1975 Sixteen building societies in Queensland were rescued through establishment of Suncorp, a government-owned building society. 1977 The first automated teller machine was installed in Australia. 1979 The Treasury Note (T-Note) tender system was introduced to replace the ‘tap’ system for the sale of these government securities. Price for these securities was now market- determined for each issue. The Australian Financial System Inquiry (Campbell Committee) was established. ANZ Banking Group took over the troubled Bank of Adelaide, after problems with Bank of Adelaide’s finance company subsidiary. 1980 Interest rate ceilings on trading bank and savings bank deposits were dismantled from this time; some limits on minimum and maximum terms of fixed deposits remained. 1981 The final report of the Campbell Committee was tabled. The Commonwealth Government agreed to the mergers of the Bank of New South Wales with the Commercial Bank of Australia and the National Bank of Australasia with the Commercial Banking Company of Sydney. 1982 Savings banks were allowed to accept deposits of up to $100,000 from trading or profit-making bodies. The minimum term on trading bank fixed deposits was reduced from 30 to 14 days for amounts greater than $50,000, and from 3 months to 30 days for amounts less than $50,000. The Treasury Bond (T-Bond) tender system was approved. 1983 The Commonwealth Government announced that it would allow entry of 10 new banks, including foreign banks. The A$ was floated and most exchange controls were abolished. The Treasurer announced the formation of the Martin Committee of Review to assess the Campbell Report. 1984 The Martin Committee of Review endorsed the Campbell Report. All remaining controls on bank deposits were removed. The restrictions that were lifted included minimum and maximum terms on deposits, savings bank exclusions from offering chequeing facilities, and the prohibition of interest on cheque accounts. Foreign investment guidelines on ownership of merchant banks were relaxed. 1985 Sixteen foreign banks were invited to establish trading operations in Australia – the first foreign bank began operations in the last quarter. Electronic funds transfer at point of sale was introduced. 1986 The electronic funds transfer code of conduct was developed. The Cheques and Payments Order Act 1983 was amended to allow NBFIs to issue payment orders and to formalise agency arrangements for cheque-issuing. 1987 A world stock market crash occurred. 1988 The RBA introduced consolidated risk-weighted capital requirements for banks, consistent with Bank for International Settlements’ proposals. Perth-based merchant bank Rothwells collapsed. 1989 The Australian Banking Industry Ombudsman scheme was initiated. 1990 ANZ and National Mutual announced plans to merge; the Commonwealth Government opposed the merger on competition grounds. The Commonwealth Government announced the ‘six pillars’ policy. The Pyramid Building Society failed. 1991 The Commonwealth Bank of Australia acquired the State Bank of Victoria. Commonwealth Bank shares were offered to the public for the first time. The House of Representatives Standing Committee on Finance and Public Administration (Martin Parliamentary Committee) released a report recommending a feasibility study of direct payments system access for NBFIs, establishment of a high- value electronic payments system, a formal Prices Surveillance Authority (PSA) brief to examine the profitability of the credit card business and the establishment of a code of banking practice. 1992 Authorised foreign banks were allowed to operate branches in Australia, but were not allowed to accept retail deposits. Limits on the number of new banks that could be established were removed. The Commonwealth Government One Nation package introduced pooled development fund and offshore banking unit concessionary taxation arrangements. The Australian Financial Institutions Commission (AFIC) was established to administer the new Financial Institutions Scheme. 1993 The Commonwealth Government Banking Policy Statement was announced, which included changes to the interest withholding tax arrangements and a call for the PSA to monitor credit card interest rates and fees. The Australian Bankers’ Association released the code of banking practice to be monitored by the APSC. 1994 The NSW Government sold the State Bank of NSW to the Colonial Mutual Life Association. Two Special Services Providers were issued exchange settlement accounts by the RBA. 1995 The Trade Practices Commission allowed the Westpac acquisition of Challenge Bank, and elucidated market definition criteria for the sector. The South Australian Government sold the State Bank of South Australia to Advance Bank. 1996 The Financial System Inquiry was announced. Banks, building societies, credit unions and life companies were allowed to provide a retirement savings account product from mid-1997. Commonwealth Bank shares were offered to the public for the second time. The Queensland Government announced the merger of Metway Bank and the government owned SUNCORP insurance and finance group. The Uniform Consumer Credit Code applied from November.
Source: Wallis, Stan, Financial System Inquiry Final Report, AGPS, Canberra,
1997, pp 570-574. Chapter 4 Financial Deregulation 135
Following the release of the Final Report of the Campbell Committee in
November 1981, there was considerable debate over the merits of its recommendations.
When the Labor Government took office in March 1983 it promptly commissioned the Martin Review Group to re-examine these recommendations.18 This group consisted of Vic Martin, former Chief Executive
Officer of the Commercial Banking Company of Sydney, economics professor
Keith Hancock and Treasury official Richard Beetham. In general, the Martin
Report supported the Campbell program and Keating proceeded to adopt a large part of it.
The adoption by governments, but particularly the Hawke/Keating Government, of Campbell’s recommendations brought benefits in a number of specific areas.
Treasury’s analysis of the benefits of deregulation has indicated that the removal of bank controls resulted in a rapid expansion in the availability of credit, enhanced competition from foreign banks, and the development of new financing techniques and products.19
By the early 1990s, Treasury's analysis indicated that consumers were seen to have benefited from efficiency improvements resulting from increased competitive pressure. Signs of efficiency gains included reduced operating costs per unit of business, more cost-based price-setting (in line with the ‘user
18 Ibid. 19 Unpublished Treasury information, 1995, p 18. Chapter 4 Financial Deregulation 136
pays’ principle), and an increased sensitivity by banks to consumer concerns and preferences.
The widened choice of products and suppliers, however, resulted in the need for enhanced consumer protection regulation. This saw the growth in regulation governing the provision of credit (in particular the Uniform Consumer Credit
Code), the development of disclosure regulation for banking and insurance-style products and the creation of alternative dispute-resolution schemes.20
Australian markets were opened to international competition through the floating of the Australian dollar and removal of all substantive exchange rate controls, the removal of restrictions on Australian investment overseas, and the relaxation on foreign investment in Australia. This issue is considered in detail in Chapter Five.
Business has also benefited through greater availability of capital and more innovative financing arrangements. The banking sector has become more competitive with the substantial input from foreign banks operating in Australia.
This issue is considered in detail in Chapter Six.
The removal of controls on bank lending, and the resulting problems, led to stricter prudential standards which were enforced through tighter capital requirements, a refocussing of regulatory agencies on prudential issues and better coordination of agencies. The increasingly global focus of suppliers and
20 Wallis, Stan, Op Cit, p 564. Chapter 4 Financial Deregulation 137
customers of financial services, as well as the global integration of economies, led to the emergence of international bodies and agreements aimed at harmonising financial system regulation.
Publicly announced prudential guidelines were established. This included the adoption in 1988 of internationally accepted risk weighted capital adequacy guidelines which sought to ensure that the amount of capital held by a bank was sufficient to protect depositors from loss. The competitiveness of banks was also strengthened relative to other financial institutions. New banks entered the domestic banking market, including several regional banks, most being converted building societies.
Financial deregulation helped to feed into the 1980s sharemarket and investment boom - but this also had its adverse side: a rise in unsustainable private debt, a decline in corporate standards, the technique of the high leveraged buy-out, and the substitution of paper profits for ‘real’ profits.
The freeing of domestic controls helped to trigger a credit explosion as banks and other financial institutions competed for market share - an explosion which involved many poor commercial decisions and led to corporate crashes and damage to Australia’s overseas reputation.
Deregulation changed the rules of monetary policy management by the authorities. Controls were exercised through the price of money - interest rates Chapter 4 Financial Deregulation 138
- rather than by direct controls on the volume of money lent. Deregulation meant that monetary targets were abandoned as strict policy objectives.
Australia’s financial markets became more responsive to investment needs of both Australian and foreign corporations. Financial deregulation has resulted in greater availability of finance at competitive prices, financial products which are varied and flexible and can be tailored to meet specific borrower requirements, and a financial sector which is integrated into the international financial system and able to compete with overseas sources of finance.
The importance of contestable markets in provoking improvements to the financial system has become apparent throughout the period of deregulation.
Governments have responded by giving more attention to competition policy and reducing their own commercial activities in the financial system where such activities were perceived to distort market forces.21 The consequences of this with respect to the Commonwealth Bank are considered in Chapter Seven.
Financial deregulation was driven by the change in the world economy and the integration of international financial markets.22 As noted by Kelly, the revolution launched in Australia was replicated by other Labour and Social Democratic parties around the world – New Zealand, France, Italy, Spain and Sweden.
It was part of an international movement which saw Labour parties admit
that the power of the state to deliver prosperity and justice to its citizens
21 Ibid. 22 Kelly, Paul, Op Cit, p 91. Chapter 4 Financial Deregulation 139
was failing. It was a recognition of the failure of traditional policies and
the embrace of market-based solutions which these Labour parties had
always repudiated.23
Financial deregulation was a phenomenon from which Australia was unable to escape, and had consequences of varying predictability and some that defied prediction. This view has also been echoed by Bernie Fraser, former Governor of the Reserve Bank of Australia. He noted that Australia could not be isolated from events occurring in the rest of the OECD world in terms of financial deregulation.
I think the reformist zeal did have to take account of the reality of world circumstances. The underlying forces are important … seizing opportunities, identifying opportunities depends on the people in charge.24
This indicates that the process of deregulation was not inevitable. It required political will, and in the case of the Labor Government, a series of decisions which not only challenged some fundamental beliefs of the Party, but also the very structure of decision-making within the Party. It also required political leadership to drive the process, leadership provided by Paul Keating.
23 Kelly, Paul, Op Cit, p 31. 24 Fraser, Bernie, Personal Interview, 16 February 1998. Chapter 4 Financial Deregulation 140
4.4 DEREGULATION AND THE LABOR PARTY
The move to financial deregulation was a step of historic significance for the
Australian Labor Party. From the election of the Labor Government in 1983,
Prime Minister Hawke and Treasurer Keating saw financial deregulation as a fundamental element in their economic strategy. Keating described the financial system as the economy’s main artery; improve its efficiency and the body functioned better.25
Financial deregulation was presented by Keating from 1984 onwards as basic to the achievement of economic growth, to the improvement of economic efficiency through restructuring, and to maintenance of an anti-inflationary discipline. Labor drew a new equation: deregulation would promote growth and help to beat inflation.
There has been a revolution in the national attitudes to our existing institutional arrangements. There has been a new acceptance of the need for change - to adapt to new world realities. Australians are dissatisfied with the mediocrity of our economic performance in the post- war years ... I do not think it is particularly surprising that it has been a
Labor Government which has sought most comprehensively to capture this new mood and to express it in policy reforms.26
David Morgan, a senior Treasury official at this time and currently Westpac’s
Chief Executive, offered a number of reasons why Australia embraced financial
25 Kelly, Paul, Op Cit. 26 Ibid, p 93. Chapter 4 Financial Deregulation 141
deregulation with great fervour following the election of the Labor Government in 1983.27 He believed a good blueprint had been provided by the Campbell
Committee Report, that Treasurer Keating and Treasury were ambitious for major change, and that finally, it was a demonstrable fact that the existing regime was not working.
You had a Treasury, and more particularly a Treasurer who, after the completely wasted years of Fraser, the do-nothing years, and the economic carnage of the Whitlam Government, was really wanting to make up for lost ground. We really had a lost decade.
We’d really slipped behind a lot of the more progressive OECD countries so there was a big catch up required in Treasury’s mind. That, combined with someone like a Keating who was really keen to preside over big beneficial change. So you had the confidence of those two forces, plus in those early days of the Labor Government a very effective working relationship between Hawke and Keating.
During that period Australia went from having one of the most regulated financial sectors in the OECD world to having one of the most deregulated and competitive and efficient and modern.28
In terms of philosophy and method, financial deregulation signalled a break with the ALP tradition. Throughout its existence the Labor Party had sought to improve or civilise the capitalist economy through the intervention of the state.
Under Hawke and Keating it sought to improve the economy by unleashing the market to promote competition. This was a fundamental leap in Labor politics, and in some senses a philosophical revolution. It became in fact a theme of the
27 Morgan, David, Personal Interview, 19 December 1997. Chapter 4 Financial Deregulation 142
Labor Government, because deregulation of finance could not be quarantined from other sectors. The ideas underpinning financial deregulation were a belief in markets, a faith in competition, a conviction that the economy must be internationalised.
[Keating] wanted to try and internationalise the Australian economy and I suppose financial deregulation was the only way, the way he did that. But there were some down sides for us and our own rank and file.29
Brian Howe offered one view on how Labor embraced deregulation, and the way in which he as a leader of the Left, perceived the shift in Party policy.
Basically, Hawke and Keating had really argued for what I’d describe as a new paradigm, a new way of approaching economic policy. And that was very different. I mean, I’d been on the National Economic Committee with Hawke when he’d been chairman, before he was Opposition Leader, which is very close to the election. And Hawke had really gone along pretty much with … I mean, I remember Ralph [Willis] and I more or less had most of the arguments in the National Platform Committee. I think what happened, basically, is that Hawke got the
Leadership and Keating got the Treasurership. The direction that Keating pursued was a line that was certainly not the line that we had developed in Opposition.30
28 Ibid. 29 McLeay, Leo, Personal Interview, 26 March 1998. 30 Howe, Brian, Personal Interview, 13 May 1999. Chapter 4 Financial Deregulation 143
Robert Ray was a Minister in the Hawke/Keating Governments and the factional leader of the Victorian Right. He offered a practical insight into the way in which deregulation issues were embraced by the Government:
It was basically driven by the Economic Ministers operating through the various power structures they established in Cabinet. It wasn’t very consultative. It was done through ERC or Economic Committee. And that’s very important to note. There’s not many people that had access then. So basically they saw themselves as sort of an elite … who was more hairy chested.
On certain things like the banks, I mean, we didn’t have any ideological hang ups. Most of us had dealt with the Commonwealth Bank for long enough to know that it was the first one to put up interest rates and the last one ever to bring them down. So there wasn’t much sympathy to protect the existing bank structure, especially Westpac.
We thought competition would basically keep interest rates down. The other thing we were really concerned about at the time was the conservatism of the Australian banks. That they wouldn’t invest unless they had an asset base. They wouldn’t put up any money towards venture capital or slightly risky businesses in contrast to nearly any other banking practice around the world. 31
With the benefit of hindsight some members of the Left, such as John
Langmore, believed deregulation did not achieve its objectives. Essentially, however, the Party was supportive.
I also think that there was generally a view inside the Labor Party that opening up the Australian economy was the right way to go. And so it Chapter 4 Financial Deregulation 144
became, rather than points of general principal, they were basically tactical issues in the sense of how far should you push on the tariff front? What should be your timetable? Not should you push at all. Likewise on competition with the banks.32
Howe has provided an excellent perspective on why Labor, and particularly
Keating and Hawke, supported financial deregulation. It is an interesting perspective in that it is not really a traditional Left view, but provides an insight into how the leadership was able to carry almost all of Caucus with it along the deregulation road.
Keating, basically with Hawke, saw an opportunity. I guess Keating was a very strong figure in that regard, but you’ve got to remember that Hawke was economically literate. He didn’t just learn in the Parliament. Hawke had been academically much stronger in terms of economics and, in a sense, they both saw that the way of the future for Australia was to become more integrated nationally.
I suppose we got persuaded by that over time. You can see that kind of protectionist regime in terms of the heavy emphasis on regulation … Australia paddling its own canoe … rather than recognising it had to compete within the world. I think that became a pretty convincing line. And by the 90s, people saw that a much broader ownership within the Caucus of the fact that this was not only a very different line, perhaps than what we’d talked about in the 70s, but it was a kind of line that you could develop in a way with some integrity. It represented a more internationalist kind of view of the world. So, I think, the Left was less inclined to oppose some of those kind of fundamental reforms.33
31 Ray, Robert, Personal Interview, 23 April 1998. 32 Beazley, Kim, Personal Interview, 16 December 1998. Chapter 4 Financial Deregulation 145
4.4.1 KEATING AND HAWKE – CHAMPIONS OF DEREGULATION
How the newly-elected Labor Government came to these conclusions says much about the two principal architects of deregulation, Prime Minister Bob
Hawke and Treasurer Paul Keating.
John Button provided a useful insider’s view on the relationship between Hawke and Keating.
Bob Hawke and Paul Keating maintained a working alliance which lasted from 1983 to 1988, then tottered on like an exhausted marriage of convenience for nearly three more years. It was a miracle because neither of them ever liked the other much, not an unusual situation in Canberra politics. In the early eighties Hawke regarded Keating as an opinionated upstart. Keating thought of Hawke as an interloper. They both wanted the same job. Publicly Hawke went along with the idea of Keating as his inevitable successor. Privately he doubted Keating’s physical stamina for the job and criticised his indiscipline. Keating regarded Hawke as vacuous, and would say quietly, ‘the trouble with Bob is that he only ever had one idea in his head’. There was always bubbling tension about who was running the country. Mostly it stemmed from Keating’s penchant for grandiose phrases like ‘pulling the levers’ and ‘painting the big picture’, and ultimately ‘the Placido Domingo’ soliloquy in which he reflected on the poor quality of Australian political leadership, by implication including Hawke.34
Yet despite these views of each other, both Hawke and Keating provided the leadership and drive, particularly in the early years of their partnership, to
33 Brian Howe, Op Cit. 34 Button, John, As It Happened, Melbourne, Text Publishing, 1988, p 233. Chapter 4 Financial Deregulation 146
champion deregulation. Stewart and Jennett commented on this in their assessment of the Hawke Prime Ministership.35 Hawke was perceived as a political phenomenon - weak on policy influence but commanding enormous support and respect. He was heavily dependent on 'old mates' and personalised assistance from friends and advisers which verged on sycophancy and made him vulnerable to accusations of being out of touch.36
If Keating has the policy ideas, Hawke has the personal style to get them implemented. When the partnership works, it succeeds brilliantly, but when it does not the government has invariably been plunged into crisis. You’ve got to remember that Hawke and Keating in the 80s rarely disagreed in Cabinet. So they operated in Cabinet very much as a team. Whatever disagreements they may have had were really largely kept out of the Cabinet Room.37
Each had developed his own ideas, and surrounded themselves with advisers who were prepared to buck the traditional Treasury line. In subsequent years, this dichotomy was to play a pivotal role in the decision involving the float, the entry of foreign banks, and the sale of the Commonwealth Bank.
The role of these advisers has been commented on by David Morgan. He believed he and other Treasury officials earned the trust and confidence of
Treasurer Keating very early in the new Labor Government’s administration.
35 Jennett, Christine, and Stewart, Randal, Hawke and Australian Public Policy - Consensus and Restructuring, Macmillan, Melbourne, 1990, p 8. 36 See Ramsey, Alan, Who Has Hawke's Ear, Good Weekend, Sydney Morning Herald Magazine, 7 November 1987; Lyons, John, At the Court of King Hawke, The Weekend Australian, 11-12 June 1988; Cockburn, Milton, Hawke's Grand Illusion, The Sydney Morning Herald, 20 February 1988; and Kelly, Paul, Bob Hawke's Imperial Delusion, The Weekend Australian, 19-20 March 1988. 37 Howe, Brian, Op Cit. Chapter 4 Financial Deregulation 147
But it was Keating with whom this closeness played such a large role in developing Labor’s approach to deregulation.
So we had a close relationship. Ted Evans and Bernie Fraser had a close relationship with him. I think Bob Johnston and him struck up a good relationship. Tony Cole was important early on – Tony was out of the Department and very supportive of Departmental positions. And of course Don Russell proved to be a very influential figure indeed in the second half of the eighties and early nineties.38
Leo McLeay, a former NSW Labor Party official, former Speaker, Government
Whip and factional convenor of the Right wing, was very close to Keating. They had come through the Party together since an early age, and like Keating,
McLeay was politically “street-wise”. He offered an interesting view on these advisers.
The people that Keating had working for him came out of the Treasury and I think he also had an interesting coming of age. The people who were in the sort of upper echelons of the public service by the time we’d come to government were mainly working class people that got good scholarships. The old mandarins had gone and you had people at the Dep[uty] Secretary and FAS[First Assistant Secretary] positions in the Treasury and other big Departments who churned out people at the top like Bernie Fraser. You didn’t have any of the Ed Shann types. I think there was a generational change in the public service. It was also receptive of the views of Keating and vice versa.39
38 Morgan, David, Op Cit. 39 McLeay, Leo, Op Cit. Chapter 4 Financial Deregulation 148
A further perspective on Keating’s relationship with advisers was provided by
Brian Howe. He recalled a conversation between Keating and one of his advisers, John Langmore, who subsequently was elected to Parliament in 1984.
Langmore, from the Left, had endeavoured to dissuade Keating from following the deregulation path.
This was reflected a bit in John Langmore’s case. He had worked for Keating, or worked for Willis and then worked briefly for Keating in government. Keating, more or less, said to Langmore one night, after they’d had one of their fairly regular barneys in these first few weeks, ‘you know, if it comes to a choice between your view John and Treasury, well, I’ll go for Treasury every time because they know what they’re talking about’. You know, one of those Keating smart-arse kind of comments, but nevertheless.40
To complement these technical advisers in Keating’s office various political advisers were employed to ensure one eye was kept firmly on the politics of the crucial decisions the Labor Government made. Seamus Dawes, a former
Assistant Secretary of the New South Wales Branch of the ALP, filled that role as did Stephen Smith, a former State Secretary of the West Australian Branch of the ALP. However both were recruited at a time when, within the broader
Party, there was some concern as to how far Labor was moving from the so- called traditional policies of the Party.
There is no doubt that this was a deliberate move to devise the practical strategies of selling major economic and social change to the Party and the
40 Howe, Brian, Op Cit. Chapter 4 Financial Deregulation 149
Australian public at large. It was virtually forced on Keating by outside forces, particularly Richardson and Party officials, with their motivation firmly fixed on the electoral fortunes of the government.
Hawke on the other hand, relied on different advisers. Peter Baron and Ross
Garnaut were quite supportive of financial deregulation in the early stages.
Later, former ALP National Secretary, Bob Hogg became a major force within
Hawke’s office, as did journalist Barrie Cassidy, who was Hawke's Press
Secretary. Political advice in Hawke’s office, as was the case in Keating’s, was important at a time of great change in the Australian economy. Keating, at one stage, out of a mixture of frustration with the pace of economic reform, and because he wasn’t getting all his own way, referred to Hawke’s advisers as the
“Manchu Court”.
Ray believed that the influence of personal advisers, as distinct from
Departmental advisers, was quite strong.
They also pretty much brought the Department along. Chris Higgins had a big role to play, so Treasury drove a fair bit of it. Finance basically was just being accountants at that stage and didn’t have much to do with it.
The Department of Trade, being an economic portfolio, never made any worthwhile contribution to anything. So it was essentially Treasury Ministerial staffers – staffers is probably the wrong word because they’re really key operatives in both Keating and Hawke’s office – pushing those lines.41
Chapter 4 Financial Deregulation 150
Morgan also offered a view as to who was the driving force behind the Labor
Government’s embrace of financial deregulation, and deregulation generally.
Obviously I was closer to Keating than I was to Hawke. But you know, in terms of getting economic policy changed, I would say in those early days you were 65 per cent of the way there to getting it changed once you got Paul on board, and you were 95 per cent of the way once you got Paul and Bob on board. I think it was a very good partnership early on. I think its probably a pretty ultimately futile thing to say who was first. I mean, they both saw the logic and the need for it and both were very supportive.42
David Murray, Chief Executive Officer of the Commonwealth Bank, offers a similar view.
I can never believe Keating being innocently caught up in something that somebody else was orchestrating. On the other hand, I can’t envisage anybody in the Party being as successful without having the Hawke capacity to deal across groups. So I think, although they wouldn’t like anyone to say this, they seemed to be a perfect team. But I know from watching Keating that he had his own way of knowing the agenda … quite an unusual mind.43
Bernie Fraser believed Keating was largely responsible
41 Ray, Robert, Op Cit. 42 Morgan, David, Op Cit. 43 Murray, David, Personal Interview, 16 December 1997. Chapter 4 Financial Deregulation 151
Keating was someone who was prepared to have a go, unlike his predecessors … he (Hawke) was basically a supporter of Keating in these initiatives.44
Ray’s views as to the roles Hawke and Keating played in deregulation generally, and who could claim the most credit, are balanced. Given he was
Hawke’s main numbers man and factional supporter, this is somewhat surprising.
I think it’s about equal. But, I mean, Hawke’s right about Keating, that he was a bit reluctant early on. But remember, he’d only been Shadow Treasurer for two months before the election. It took him a long while to find his feet, as it would anyway, especially into that area. No-one wanted to rush him. But I think the driving force about equally applies.
But if they were having a pissing competition, Hawke would always have to look at the political consequences more than Keating would and in that regard acted as a brake on some of these things.
It’s hard to say but I think its ironic … Keating became Prime Minister and Dawkins became Treasurer. Dawkins wanted to be the driving force and Keating wanted a political formula put on it.45
Kim Beazley was a Right wing Minister in the Hawke/Keating Governments. He had a particularly close relationship with Hawke, as they were both Rhodes
Scholars and from Western Australia. He suggested that this team approach to deregulation involving Hawke and Keating travelled a bumpy path.
44 Fraser, Bernie, Op Cit. 45 Robert Ray, Op Cit. Chapter 4 Financial Deregulation 152
Well I think the kick off was Bob. Then when we moved over on to the banks, that was Paul. But Paul and Bob worked in tandem very well. Paul for the first year or so was very Treasury. As he was finding his feet he was very Treasury. He was proud of his Treasury officials. He was proud of their professionalism and he tended to be a bit responsive to their conservatism on a lot of these things. Their conservatism vis-a-vis the banks, vis-a-vis the floating the currency and also their suspicion of Accords.
Bob was tempted to be gung-ho on all fronts. Bob was anxious that he shouldn’t have the trade union movement playing the sort of role the trade union had played during Whitlam’s Government. I mean, that was one of the lessons he learnt from Whitlam’s Government. And he was very determined that he wouldn’t be done in the same way.
He became a devoted advocate of financial deregulation. And he was a devoted advocate of tax change. They were working in tandem but of course Paul had the detail problems at hand. It was basically Paul’s papers which would be the papers that would be the point of debate. Whatever Bob’s attitude might be, it was centered. You’d have a debate around the Treasury document on all these things.
So the banks issue was really Paul’s. Bob had a view and that was optimizing competition and the rest of it, but Paul had control of the day- to-day involvement. The Left Ministers had hardly anything to say on that, hardly anything. You get the Left Ministers more actively engaged when you get round to privatisation and then, yes, they did have a lot of views on that. They tended to oppose it.46
Gary Punch was a former Minister and NSW Right factional convenor. He offered another view as to who was the driving force behind financial deregulation and why Labor embraced it. Chapter 4 Financial Deregulation 153
Well I actually don’t think either of them were the real driving force. I think the real driving force in economic deregulation was the very senior levels of Treasury, buttressed by a number of economic writers, who by and large could roughly have been described as modern labor supporters. And I think Keating took up that as one adopted a new fashion. It was Keating who I guess, to use a football analogy, was the front row forward. He carried the ball through the ruck. But the actual manufacturer of the movement was a series of Treasury officials and senior economic journalists.
Max Walsh was most notable in his influence on Keating in the early years. The Financial Review generally had a very heavy persuasion and there was a keenness to collect applause by business. Hawke could never have been seen as being the intellectual driver of that.
What I think was interesting however was that, and this is why people I think quite rightly say they were a good team, without Hawke’s grass roots appeal and common salesmanship, that could never have been carried through. It was a period when Labor was confronting its prejudices and shattering its shibboleths one by one.
In the early days, and I’m talking particularly the period ‘83-‘84 but also the period ‘84-‘87, a lot of reform was slipped through the Caucus and slipped through the Party processes because Hawke and Keating would position, they’d even go so far as to position the Government, its reputation, the Prime Ministerial and Treasurer authority behind certain reform measures, leaving the Right with the choice of either (a) roll the government, or (b) maintaining the authority of the Prime Minister and the Treasurer and hence that authority in leadership in the electorate. And of course in 1983/’84/’85 up to ‘87 the spectre of the Whitlam Caucus rolling the Government and the Prime Minister every second day
46 Beazley, Kim, Op Cit. Chapter 4 Financial Deregulation 154
or as it seemed to us with educated hindsight was of course one that no- one wanted to contemplate.47
McLeay generally supported Punch’s views.
I think Keating was the driver of most of it. I think most of his drive and I think what drove him were the Treasury people. Hawkie went along with things most of the time, that Chairman of the Board attitude. Keating was the engine, Hawkie was a participant.48
Howe suggested that while advisers were important in the offices of Hawke and
Keating, there were other influences shaping the government’s deregulation agenda. In particular, the role of the business community, as reflected through the peak organisation, the Business Council of Australia, was very important.
The Business Council really did have a big influence on the government all the way through. This was a government that in a sense was operating very effectively in the private sector, and of course, the private sector was largely the big end of town. It’s the big financial corporations, and they were focussed in the Business Council. So I think that the direction of the government was in part being set in terms of the kind of advice that Tony Cole or Ross Garnaut or whomever provided. The advisers may have been kind of pushing them along in that direction, but also when they were talking to the Business Council about the kind of direction they wanted to go in, well that would kind of provide reinforcement. So I think you got the sense that the government really needed to pursue … a Labor Government needed to pursue a very different track if it was going to sustain high levels of growth and that was
47 Punch, Gary, Personal Interview, 8 January 1999. 48 McLeay, Leo, Op Cit. Chapter 4 Financial Deregulation 155
really being reinforced by the business sector, and in a sense, the ACTU was going along with a lot of this change, although not initiating it.49
Keating himself offered an interesting insight into the relationship between himself and Hawke, and left no doubt who was responsible for financial deregulation and massive economic change.
The thing about Hawke … Hawke was philosophically a believer in the directions that I believed in as well. And he had a Treasurer who would take risks, but in my case the risks were trying to set the economy up as a true market economy. If you’re the head of a government and your principal economic Minister will put his hand up for the major changes that was a hell of a lot of insurance for you. And that’s what happened in the float and it happened with other things. But I don’t want to diminish his role and say that he was simply a cipher in this. He was an active … he actively supported the policy that I recommended to him. But the philosophy of the policy … the execution of the policy came from me.
The philosophy was a sort of broad canvas both he and I subscribed to. But if he’d been the Treasurer, would we have seen all of this? I don’t think so. But I don’t want to be too hard on him. He was a good hand at that stage. You know we did have a very good conducive relationship really. Our relationship over nine years was probably the best the Commonwealth has ever seen for a Prime Minister and a sort of reformist economic Minister. The fact that in the end it ran out of puff is only a commentary on the stresses and strains on the amount of things that were done in the years, you know what I mean.50
49 Howe, Brian, Op Cit. 50 Keating, Paul, Personal Interview, 26 February 1998. Chapter 4 Financial Deregulation 156
4.4.2 THE KEATING PHILOSOPHY OF DEREGULATION
What drove Keating to pursue financial deregulation with such determination was based on a deeply held belief in the market, and the need to change the economic face of Australia.
This belief was developed from his involvement in the mining industry as
Shadow Minister, and was sharpened in his early months as Treasurer. He explained his personal philosophy in these terms, referring to how he approached the issue with Labor Party colleagues.
Now the philosophical argument ran this way. Do you believe in a central bank? Yes, we believe in a central bank. Do we believe in the charter of a Reserve Bank? Yes. Including the prudentially managed system? Yes. In other words you believe in prudentially centrally supervised institutions? Yes, we do. But how come we’ve supported the banks to grow without any controls? Where there’s no protection for depositors; where there’s no career structures; where managers change four times a year; where there’s no depth to the staff training. But we believe in permanent building societies because we all have a lot of them in our constituencies. But we really shouldn’t be loyal to them should we?
Why do you think a savings bank can’t accept a deposit from a commercial institution ... you tell me? Why can a bank not accept deposits under thirty days? Where do you think the cash management trust has come from, natural evolution? Cash management trusts are the under thirty day deposits of merchant banks. Why should merchant banks have easier resort to under thirty days? In short, why should a Chapter 4 Financial Deregulation 157
prudentially-supervised institution not take their place in the primary financial system?
In the end I wasn’t prepared then to see cash management trusts, merchant banks, permanent building societies, all these shows hit the wall and have all the joy accumulated for the major banks. So I said, we’re going to do two things here. We’re going to let the banks … we’re going to go from rationing credit … which is what regulation stands for, but allow the big institutions to ration credit to their best clients … to let them create growth.
And if they’re going to be creating credit, they’re going to be lifting their risk profile. Therefore the depositors’ risk is greater. Therefore to conclude we should do the following things. If we’re going to give the banks a special deal ... in the sixties banks controlled about two thirds of the deposit base, by 1983 it was down to 40 per cent or 38 per cent and falling. So I said if we’re going to put banks back in a position of primacy in the banking system why don’t we give them some competition. And that can only come from foreign banks. So put them back up at the top but set up a range of competitors.
The philosophy for the banks went then to the next step which was this. If they’re allowed to be creators of credit rather than rationers of credit, if they’re going to grow by picking up the deposit base of the permanent building societies and the merchant banks, and the cash management trusts etc, then we’re going to remove deposit security controls and lending controls but we’re certainly going to increase the prudential supervision. So I formalised all the inflow supervisory arrangements and put them into an Act. In other words, freedom to create credit, freedom to choose your customers, but not freedom to run a bad book.
So you had to account for the asset ratios of a bank. And report big transactions to the central bank etc. Now that could not stop banks from doing silly things as we saw with the State Bank of Victoria. We saw with Chapter 4 Financial Deregulation 158
the State Bank of South Australia, but they were not really supervised by the Commonwealth. Westpac did silly things and so did the ANZ and they were supervised by the Commonwealth. But they also … their ownership was diverse so that when they had capital problems, they were not owned by one institution ... they were broadly owned and they were able to sort of stand it.
So we gave them the competitive freedoms to take deposits and to lend. We diminished their otherwise … we changed the otherwise friendly casual supervisory regime to a formal one. Now being afraid of the foreign banks they then went hell bent for growth. Westpac, ANZ ... and they picked up a lot of rubbish. And in 1988/’89, it might have been ‘89/’90, where credit growth was at twenty per cent and a nominal GDP of ten. So they were putting the economy to the torch. So of course, I hosed them down with the recession we had to have. And as a result we’ve now got a set of banks with proper balance sheets, the economy’s got one per cent inflation. You know, things are structurally better.51
The sheer breadth of Keating’s program should be acknowledged for it included the granting of sixteen foreign bank licences, the deregulation of interest rates, the dismantling of controls on foreign investment and international capital movements, the deregulation of the stock market, alterations to the asset reserve requirements of the banks and insurance industry and the dissolution of the distinctions between savings and trading banks.
In 1991, Tony Cole, an architect of deregulation, then Treasury Secretary said:
It’s true that financial deregulation was oversold at the time. But that’s inevitable when you’re trying to convince people about the need for
51 Ibid. Chapter 4 Financial Deregulation 159
change. The benefits were exaggerated and the negatives were under- estimated. The problem was that nobody predicted the Australian banks would take such risks for market share. They didn’t know how to risk- assess and nobody knew how incompetent they were. The entry of foreign banks came too quickly on the heels of deregulation. The banks didn’t have time to learn the new system. In the old days when credit was rationed you never went near a bank unless you were solid. Back in 1984 and 1985 we kept selling the transforming impact of overseas banks. We got the local banks terrified, convinced that they were going to get creamed. Keating was promising that foreign banks would unclog the arteries of the financial system and some of our banks began to think they’d lose their corporate clients. We all undervalued the traditional retail banking activities and the dominance the established majors had in that area.52
Clearly, financial deregulation changed the economic face of Australia.
52 Cole, Tony, quoted in Kelly, Paul, Op Cit. Chapter 4 Financial Deregulation 160
CHAPTER 5
THE FLOAT
5.1 INTRODUCTION
Labor achieved national office in 1983 after years in the political wilderness, interrupted only by Whitlam’s comparatively brief embrace of government between 1972 and 1975. Having used the post-Whitlam period to rebuild the
Party’s policy base and quality of its representation, it was an opportunity neither the government’s new Prime Minister Bob Hawke nor Treasurer Paul
Keating intended to squander.
In modernising the Party, recognising the emerging issues that globalisation would present and embracing policies which were relevant and politically acceptable, Labor’s leadership embarked upon a task of immense proportions.
It was the embrace of financial deregulation that saw this process eventually create a modern, internationally competitive economy.
The move to financial deregulation was the decisive break made by the Hawke-
Keating Government with Labor dogma and Australian practice. It was based on the belief that deregulation would mean a more efficient financial sector and that market forces, not official intervention, would better direct capital and create a more efficient economy.
Chapter 5 The Float 161
When Hawke and Keating took this decision they sought to expose Australia to the anti-inflationary discipline of overseas forces. Keating believed that financial deregulation would destroy the parochial and conservative mentality of
Australia’s financial establishment, a point he argued repeatedly inside the
Labor Party.
They chose to elevate belief in market forces to an article of faith for their government and the ALP - an historic step.1
The embrace of financial deregulation was generally contrary to Labor philosophy and policy. Labor in opposition tended to subscribe to tight controls and regulation of the financial system. Restrictions on bank numbers and support for the continued ownership of the Commonwealth Bank were the mainstays of Labor’s platform.
Yet rarely has such a reversal of an established philosophy been accomplished so swiftly, so comprehensively, with so little internal trauma. Financial deregulation is the quintessential example of a revolution imposed upon the
ALP by its leaders. It is a classic case study of a new government using its authority and its mystique to overwhelm its own members. It is a clear demonstration of how the ‘agency versus structure’ question was dealt with by
Labor – and how in respect of financial deregulation, Labor’s leadership drove a process that might have been inevitable, but its speed, timing and consequences were a direct response to that leadership.
Chapter 5 The Float 162
The significance of the decision to float the dollar provides a ready insight into process, outcome and consequence for Labor and its leadership.
The float transformed the economics and politics of Australia. It harnessed the Australian economy to the international market place - its rigours, excesses and ruthlessness. It signalled the demise of the old Australia - regulated, protected, introspective.2
5.2 FINANCIAL DEREGULATION AND THE FLOAT
The release of the Campbell Committee Report in 1981 set the parameters for financial deregulation in Australia.3 Treasury, or more correctly its Secretary
John Stone, was opposed to the Report’s core, but the Reserve Bank was equivocal.4 The Fraser Coalition government, which had commissioned the
Report, continued to give credence to financial deregulation, but ultimately lacked the will to implement its recommendations.
Labor initially attacked the Campbell Report, rejecting it as free-market dogma with no place in a Labor administration. Former Cabinet Minister Ralph Willis succinctly described the Party’s attitude at the time.
With the Campbell Committee Report, the general policy approach of the Party which I was Shadow Treasurer in was to fairly strongly oppose - quite strongly oppose - the Campbell Committee recommendations. So
1 Kelly, Paul, The End of Certainty - Power, Politics and Business in Australia, Allen and Unwin, Sydney, 1994, p 77. 2 Ibid, p 76. 3 Campbell, K, Final Report of the Committee of Inquiry into the Australian Financial System, AGPS, Canberra, 1981. 4 Kelly, Paul, Op Cit, p 78. Chapter 5 The Float 163
we were strong advocates of the maintenance of regulation in Opposition.5
But this rejection was a decision made in Opposition by a party removed from exchange rate policy, which was always conducted within a government’s inner sanctum. Exchange rate reform, in fact, was the ideal area for policy change from above.
By mid-1983, just a few months after their election, Hawke and Keating had been converted separately to financial deregulation. This conversion was a function of three factors - an emerging crisis in the management of the
Australian currency; the growing conviction of government advisers that deregulation was the best option; and Hawke and Keating’s desire to free the
Party from what Keating had described as the dead hand of the past.
Achieving this goal required a major review of Labor Party beliefs. Former
Cabinet Minister Graham Richardson recalled the general attitude in the Party at the time.
We were of course fanatical regulators. That was almost our raison d’etre - government involvement, government control. When we got into government we ditched it immediately, which was a hell of a shock for a lot of people in the Labor Party and trade unions, who had just never expected it.6
5 Willis, Ralph, Personal Interview, 4 December 1997. 6 Richardson, Graham, Personal Interview, 28 November 1997. Chapter 5 The Float 164
These were early days in a new Labor Government. Hawke and Keating began to forge a unique leadership team that for several years harmoniously shaped the Labor Government’s fortune. Yet even at this early stage, minor tensions existed between the two. In later years this was to see each claim ultimate responsibility for financial deregulation.
According to Edwards, Hawke encouraged Keating in financial deregulation, although Keating himself had said that he did not want the Campbell Report to
“... simply gather dust on the shelf”.7 He maintained that the Martin Review
Group was appointed entirely at his own suggestion.
I did not consult Hawke. It was set up without Cabinet approval.8
This provides an insight as to how Keating operated within the government even at this early stage. As he became more confident in his role as Treasurer, this trait of "crash through or crash" became a hallmark of his leadership.
Keating disagrees that Labor merely followed a momentum for financial deregulation which was inevitable.
You see, there is this line pushed by people from the Opposition that the Government had to carry on with the thrust of deregulation. When we came to office there was no thrust left. The whole point of the Martin Report was to get the Campbell debate back on the table. I appointed Vic Martin, without a cabinet decision, to freshen up the Campbell
7 Edwards, John, Keating: The Inside Story, Penguin, Ringwood, 1996, p 206. 8 Ibid, p 208. Chapter 5 The Float 165
debate. Forgetting Campbell would have been the easiest thing we could ever have done.9
However, even before the government received the Martin Review Group’s
Report, the state of the economy required Labor to confront deregulation in a concrete, positive manner. Because of events affecting Australia’s currency during 1983, exchange rate control and the float of the dollar became a symbol of this deregulation process and implementing Campbell’s recommendations.
The exchange rate issue is a thread of financial deregulation that runs through all of 1983, leading to the historic decision to float the Australian dollar in
December.
5.2.1 BACKGROUND TO THE FLOAT
The decision to float was not taken in a vacuum. It was a response to a monetary crisis which had its origins in the growing integration of the Australian financial system with the international economy.
Keating returned from the International Monetary Fund (IMF) and Europe in
October 1983 and was plunged into one of the toughest and most controversial decisions the Hawke government was ever to face: whether, or rather when, to float the Australian dollar. The magnitude of this move cannot be underestimated. In one stroke, floating the dollar thrust Australia on to the world economic stage.
9 Ibid. Chapter 5 The Float 166
The float is arguably the boldest but least-understood action taken by the government. It has been misinterpreted, and criticised, as merely a move to woo business, a further embrace in what Labor’s Left perceived as the government’s ‘love-affair with the financial markets’.10
The genesis of the float can be traced to the 1970s, and to the quest throughout the world, as well as in Australia, for an appropriate method of managing the exchange rate following the collapse of the Bretton Woods system. Several nations had experimented with different methods of exchange-rate management.
Some chose to allow their currencies to float - that is, to allow the rate to be determined by the market forces of supply and demand, with minimal intervention by central banks and the minimum of exchange controls. Others chose to tie their currencies to a major world currency, such as the $US.
Australia had tried a succession of systems, first tying its currency to sterling, then to the $US, then to a basket of currencies.
In 1976 the fixed link to a basket was replaced with a variable link known as a
‘flexible peg’. Under this system the $A was valued against a trade-weighted basket of currencies and its daily value was expressed as a mid-rate in terms of the $US.
10 Carew, Op Cit, p 95. Chapter 5 The Float 167
Exchange rate problems occurred during most of 1983. The short-term solution had been the ten per cent devaluation of the Australian dollar in March, a mere five days after the historic Labor Party election win.11 It was inevitable that speculative pressure would mount again.
Keating claimed that he and Hawke took the view that the system of managing the exchange rate was finished after the ten per cent March devaluation.
Discussions with the Reserve Bank followed, mapping out what Keating called an inevitable road, a ‘war strategy’.12
The rationale behind the move to floating exchange rates was that governments were no better equipped than markets to determine the appropriate level for a currency. The Australian monetary authorities - the Reserve Bank, Treasury and Government - were managing the exchange rate but interest rates were determined in the market. Foreign exchange market operators had become skilled at anticipating movements in the exchange rate. Consequently successful speculation on the level of the Australian dollar produced substantial profits at the expense of the Reserve Bank, that is, the Australian taxpayer.
Throughout the world in the late 1970s and early 1980s the mood was shifting in favour of financial deregulation. The Fraser Coalition government had moved some way down that path, having lifted controls from several key interest rates, such as bank deposits and Commonwealth Government securities. But the change could not stop there. The combination of market-determined interest
11 Ibid, p 173. 12 Ibid. Chapter 5 The Float 168
rates and a managed exchange rate created an uncomfortable imbalance in monetary management. Added to this was the increased internationalisation of
Australia’s banks and merchant banks, whose widespread overseas links allowed them, and their corporate clients, to move funds fairly easily in and out of the country.
Responsibility for managing the exchange rate rested with a committee of four: the Governor of the Reserve Bank; the Secretary of the Treasury; the Secretary of the Department of Prime Minister and Cabinet; and the Secretary of the
Department of Finance. Only trading banks were allowed to deal in foreign currencies, at rates indicated by the Reserve Bank, and the banks had to settle any surplus or shortfall with the Reserve Bank at the end of each working day.
This latter rule - that foreign currencies had to be converted back into Australian dollars - was a crucial ingredient in the arguments supporting the shift to a float and the removal of exchange controls. At its simplest, it meant that an inflow of foreign funds became an inflow of Australian dollars, added to domestic money supply, and, left to itself, could be inflationary and push interest rates down.
Conversely, an outflow was a reduction in the supply of domestic dollars, tightening money supply, and possibly causing interest rates to rise. The events of 1983 demonstrated the destabilising effects of inflow and outflow of capital under this system.
Chapter 5 The Float 169
5.2.2 THE DECEMBER FLOAT
The process of ultimately deciding to float the Australian dollar says as much about the way a new Labor Government approached a difficult task as it does about the personalities involved. Clearly considerable pressure had been mounting during 1983 for a decisive policy which would free Australia from the vagaries of the international monetary markets.
During mid-1983, a series of meetings were held within government to debate exchange rate policy. It was in this climate that most, but not all, of the government’s economic advisers began to conclude that the best solution was a float.
Whilst the float was not formal policy within the Reserve Bank, it was its preferred option. Keating’s personal staff of Tony Cole, Barry Hughes, Greg
Smith and Barbara Ward - were committed.
A similar process occurred in Hawke’s office. His advisers - Ross Garnaut, Ed
Visbord and Graham Evans - pushed the deregulation line. Hawke, who had served when ACTU President on the Reserve Bank Board, saw the float as inevitable. It was just a matter of timing.13
The principal opponent of the float was not the Labor Party, but the Treasury
Secretary, John Stone. To isolate Stone, Keating skilfully developed pro-float
13 Kelly, Paul, Op Cit. p 82. Chapter 5 The Float 170
senior Treasury officials such as David Morgan and Ted Evans. Both these men played important roles in supporting financial deregulation, initially from within Treasury and, later in the case of Morgan, in private enterprise with
Westpac.
In late October, Hawke announced the float on the forward rate. This had followed a meeting of government officials, at which Stone was implacably hostile towards a float of any kind. Keating was becoming frustrated with Stone, but still wanted Treasury with him in any final decision.
The turning point came in December. Funds poured into Australia to exploit another revaluation of the $A. International financiers had targeted Australia with as much as $300 million. It was enough to increase the monthly supply by one per cent and smash the Reserve Bank’s efforts to conduct a proper monetary policy to contain inflation. In short, the managed exchange system was falling apart. 14
On the evening of Thursday, 8 December the Reserve Bank received advice from its New York office that a substantial amount of money would flood the
Australian market the following day. The volume would destroy monetary policy, fuelling speculation about the dollar, swamping the system with cash and pushing down interest rates. The monetary system left the Reserve Bank with little opportunity to neutralise the inflow.
14 Carew, Edna, Op Cit, p 100. Chapter 5 The Float 171
This crisis forced a decision from Hawke and Keating. The debate was not over the principle of the float - it was about timing. Advice from Reserve Bank of
Australia Governor, Bob Johnston, and Treasury Secretary, Stone, was sought, with Stone continuing to oppose the float. He agued that the dollar would become a speculator’s toy; Australia was too small to float its currency and the exchange rate was a weapon of policy never to be surrendered to the markets.15
Despite Stone’s views, the decision was taken to suspend trading in foreign currencies. Banks could issue travellers cheques but they could not trade on the wholesale foreign exchange market. Most operators were stunned, because no such step had been taken since the chaotic foreign exchange conditions of the early 1970s.
A series of meetings between Hawke, Keating, their advisers, and Departmental officials occurred. Carew details the manouverings from within the bunker that was Parliament House, Canberra.16
Papers for Cabinet were written, largely based on the Reserve Bank’s ‘war book’ on the float, which had spelled out the main arguments. While the chief focus was the float of the dollar, exchange controls had to be covered too, should they be removed.
15 Kelly, Paul, Op Cit, p 54. 16 Carew, Edna, Op Cit. Chapter 5 The Float 172
The decision was put to Cabinet on Friday morning. Having deliberated during
1983 on earlier changes to the exchange rate, Cabinet was familiar with the problem. There was no time to put the complex issues to Caucus.
Keating convened a media conference at 5pm. He announced that the historic decision had been taken to float the Australian dollar and remove most of the existing exchange controls.
The government has now decided to take these changes significantly further by allowing the spot market, as well as the forward market, to float. The government has also decided to abolish a major part of the existing exchange controls. This means that the Reserve Bank will no longer announce a trade-weighted index or indicative exchange rates for the $A and the $US. Nor will the banks be required to settle their foreign exchange positions at the end of each day. In future, exchange rates will be determined by the market. These reforms of the exchange rate management system will also assist the conduct of the government’s monetary policy ... The new exchange rate system should mean that external transactions are no longer a major aberrant factor in determining monetary growth.17
Stone later called this the most important single economic decision made by an
Australian government since World War Two.18
5.2.3 THE CONSEQUENCES
None of the participants making the decision to float had a clear idea of its consequences. There were no studies predicting its effect. However, Keating Chapter 5 The Float 173
later claimed that he was aware of what the decision would come to mean for the Government’s wages policy.19 Edwards believes that the decision was of monumental significance in other areas. The float meant that currency depreciation, when it began thirteen months later, was resisted much less than it would have been under the old system. Using wage-tax trade-offs, Keating and the ACTU were able to keep wages growth low after the depreciation, allowing Australia’s international competitiveness to increase dramatically.
The removal of exchange controls, which was part of the float and an essential element in removing official control over the rate, might well have been one of the factors assisting Australian corporations and banks to greatly expand their overseas borrowings later in the decade. Some of this borrowing financed the overseas expansion of Australia industry, increasing its global orientation.
Some of it added to Australian savings to allow a higher level of domestic investment. The increased borrowing was represented by the higher current account deficit, which by the mid 1980s had become the most difficult issue for economic management.
Keating had his own views on the removal of exchange rate controls.
The removal of the exchange controls was simply handing the Government the float. You couldn’t run a floating system when you had, you know, four floors of people sitting in the Reserve Bank ticking applications for foreign exchange. It was incompatible. You would either have a floating value or not have a floating value. You couldn’t have a
17 Ibid, p 101. 18 Kelly, Paul, Op Cit, p 84. Chapter 5 The Float 174
floating value and a foreign exchange controlling Department. So I took them away at the same time.20
The most significant impact in the short term was that the value of the
Australian dollar could be immediately and dramatically influenced by the views of participants in the foreign exchange market. This became one of the important influences on the pace of economic reform. Dollar depreciations were interpreted as signals of falling confidence in Australian economic management.
The response of the foreign exchange market also became an important discipline on government spending and on the ACTU.21
Perhaps the most important long-term result of the float, one that Stone attempted to prevent, was that the Reserve Bank became increasingly independent of Treasury. Stone and his Canberra colleagues no longer determined a rate that the Reserve Bank would implement. In a little more than a year money supply targets were also dropped. This took Treasury out of monetary policy formulation except as a junior partner to the Reserve Bank.
Keating’s relationship with the Reserve Bank became stronger and more direct as the Bank itself came out from under the Treasury wing. Though Keating was criticised later for influencing Bank decisions - and he certainly did, and believed he should - the float and the later dropping of money supply targets made the
19 Edwards, John, Op Cit, p 229. 20 Keating, Paul, Personal Interview, 26 February 1998. 21 Edwards, John, Op Cit, p 229. Chapter 5 The Float 175
Reserve Bank a far more powerful and independent institution under Keating than it had been at any time in the past.22
The float of the dollar and removal of exchange controls were generally well received by the media and financial markets. Newspaper headlines were effusive: ‘Labor’s historic switch’, said the Sydney Morning Herald, and ‘A brave new world’, trumpeted the Australian Financial Review. 23
The changes introduced in December 1983 initiated an era in which movements in the Australian dollar often became front-page news. The general public now had a barometer with which to make a financial judgement on the economy and on the government’s success or failure. The verdict of international markets and local foreign exchange traders was clearly seen in the exchange rate, giving a powerful weapon to foreign exchange markets.
The decision to float the Australian dollar and abandon exchange controls pre- empted the findings of the Martin Review Group, which had been due to deliver its report early in 1984. It was also contrary to the policies of the Australian
Labor Party.
5.3 CAUCUS AND THE FLOAT
Within the Labor Caucus, the float represented a substantial break with the expectations of a Labor government. However, recollections of the acceptance
22 Ibid, p 230. 23 Carew, Edna, Op Cit, p 103. Chapter 5 The Float 176
or otherwise of this change in policy vary. Edwards claims that the Left was particularly displeased with this decision. The Left was led at this time by Gerry
Hand and Brian Howe from Victoria, and Stewart West, Arthur Gietzelt and Tom
Uren from New South Wales. Only West was in Cabinet and bound by its principle of Cabinet solidarity. Uren, Gietzelt and Howe had relatively junior ministries.
It was Howe, however, who voiced opposition to the float on behalf of the Left.
On 20 December 1983, he wrote to all members of the Caucus Economic
Committee stating that the decision was in direct conflict with the Party
Platform. In terms almost identical to those of John Stone he complained of undue ‘reliance on international market forces’, which might ‘exacerbate the trend towards foreign control of the Australian economy’. He believed the dollar would move up and that upward movements in the dollar would have serious implications for Australian manufacturing. He warned that the party would need to give careful consideration to the implications of allowing foreign banks access to the Australian financial system. He concluded:
It is difficult not to see this recent decision is at least as risky as the 25 per cent cut in tariffs decision taken by the Whitlam Government. It would appear that on that occasion there was only minimal debate in the government.24
24 Ibid, p 104. Chapter 5 The Float 177
Howe recalled that as a result of him circulating his views to Caucus, he was the recipient of one of Keating’s famous telephone calls to discuss his point of view.
I remember Keating ringing me up in Melbourne. I think I held the phone out, sort of somewhere between myself and the door. And Keating talked for, I’d say, thirty minutes without a breath. He was not at all happy. It was a real absolute Keating charge. You know, kind of a really charged up kind of conversation, because I’d dared to be slightly … well, by circulating this paper, I was effectively criticising that decision. But it seemed to me that it was a decision that was leading us in areas that we weren’t quite sure what the consequences were going to be, that is, risky decisions. I think he probably thought so too, but it was a decision that he was making and he was going to defend it. He wasn’t going to have any Ministers, particularly junior Ministers, basically raising any opposition in the Caucus. So, I suppose, Keating’s attitude to the Left at that time really was that the Left was very traditional. He used to say to us that we were the true conservatives. You know, we were people who were really interested in the status quo.25
Howe’s appeal fell on deaf ears, certainly within the Cabinet and the inner circle of Ministers supportive of the decision to float. In any case, Parliament had risen for the summer recess. There would be no full Caucus meeting until
February. For most of the Caucus, still euphoric yet weary from their first nine months in government, it was a time for family and holidays.
25 Howe, Brian, Op Cit. Chapter 5 The Float 178
Cabinet, and Keating’s subversion of due Party process, was not an issue for
Caucus, a point reinforced by Kim Beazley, a junior Minister at the time of the float.
I don’t think there was anybody who really opposed floating the dollar. It wasn’t done with any consent via Caucus. They weren’t all that interested. It just went through.26
However, Beazley also notes that subsequent banking issues did involve the
Caucus more heavily and that many of its members held strong views on these issues. This essentially concerned the sale of the Commonwealth Bank.
Well I don’t think the Caucus really got up to speed for argument and deliberations until the privatisations. The Caucus were really quite keen on getting involvement in that. We’re talking then into the ‘90s. We were rock solid opposed to the privatisations up until the ‘90s.27
The process to achieve this outcome was a clear signal as to how Keating would operate in later years as the dominant figure promoting Labor’s economic agenda. The significance of the process for contemporary Party policy was either not recognised, or more accurately, not considered important. Hawke and Keating were riding high in Caucus, and Left opposition was considered nothing more than a minor irritation.
As Labor became more confident in government, the traditional Left view of economics, with its emphasis on regulation and government control, could not
26 Beazley, Kim, Personal Interview, 16 December 1998. Chapter 5 The Float 179
be sustained in opposition to the arguments offered by Keating to justify financial deregulation.
It is interesting to note that in subsequent years of government, Howe became an ally of Keating and supported his deregulation program. Graham
Richardson recalls:
Brian Howe, by being in the Cabinet, had been basically a tool of Keating’s. I mean, you know, he supported everything that Keating wanted, basically. Everything.28
Beazley concurs with Richardson’s perceptions.
He [Keating] worked very closely with Howe. I mean Keating was good at that. He certainly picked that up during tax summits, during accords, early privatisations. He worked pretty heavily with Howe … got on well with him.29
Similarly, Uren, West and Hand at different times gave support to Keating.
Hand, as Left factional convenor, helped shore up support for the government during difficult situations when Labor adopted policies which were not strictly (or even partially) in accord with Labor’s Platform. West supported Keating in his leadership challenges to Hawke in 1991.
27 Ibid. 28 Richardson, Graham, Op Cit. 29 Beazley, Kim, Op Cit. Chapter 5 The Float 180
Keating had succeeded in pushing through an economic accomplishment that had eluded the Fraser Cabinet. He had demonstrated that the Hawke Labor government was ideologically independent, carving its own image and not hamstrung by the past. He had also demonstrated that he was assuming control of and responsibility for economic policy. As time went on, Hawke was more than willing to see this process continue, as he saw his role more in foreign affairs.
Kelly believes that the decision to float the dollar was the making of Keating as
Treasurer.30 Keating had outmanoeuvred Stone, backed his own judgement, and no longer needed him. It gave Keating a new confidence. It was the issue on which the loyalty of the ‘best and the brightest’ treasury generation beneath
Stone was transferred from Stone to Keating. The seeds of the remarkable
Keating-Treasury axis began to grow - without Stone.
The decision also gave Keating confidence against Hawke. This is a deep irony since Hawke believed he had dragged a reluctant Keating to the float, a perception based upon Keating’s apprehension before the decision. But
Keating now made financial deregulation the testament of his career. In later years there would be an intense private rivalry between Hawke and Keating over who was entitled to assume the chief credit for this historic decision, with each of them convinced that he had been the driving force.
30 Kelly, Paul, Op Cit, pp 92-94. Chapter 5 The Float 181
5.4 KEATING OR HAWKE: WHOSE BABY?
The float of the dollar has generated a deep and abiding controversy over whether Hawke or Keating deserved credit for the decision. Other than the leadership itself, it is the most enduring of their disagreements, and one way or another it colours most accounts of the decision.
Graham Richardson sheds some interesting light on the controversy.
While it is not fashionable to talk about it now, of course, Keating and Hawke were wrapt in John Stone. They thought he was a great saint. They were very, very keen on John Stone - he was the great financial guru. And so the interesting thing is that he didn’t want it (the float). They rolled him and he fought it. I think it was more Hawke and Hawke’s staff than it ever was Paul, but they overruled Stone on that. That was a great shock to the Labor Party because never in our history had we ever contemplated such a move and we had just come through a Liberal Government with Fraser which had actually been a highly regulatory Government. It had done virtually nothing to deregulate anything. And so for the Labor Party to be the orchestrators of great change and to be the first Government to move into deregulation was quite a shock. I don’t think the Party ever quite digested the first shock - floating the dollar.31
Kim Beazley was a former Minister in the Hawke/Keating Governments. He was responsible for inflicting a rare Cabinet defeat on Keating in respect of telecommunications policy. In the Keating Government, Beazley would go on to become Deputy Prime Minister. He was also close to members of the ruling
31 Richardson, Graham, Op Cit. Chapter 5 The Float 182
elite of the NSW Right, Keating’s base. He was Finance Minister when the decision to sell the last tranche of the Commonwealth Bank was made.
His recollections of the decision to float provide a balanced view of the process and who was responsible.
Well basically Bob drove the currency issue. He was very vigorously opposed by Stone, the Secretary of Treasury. Really Bob, I think, drove it off his experience as a Member of the Board of the Reserve Bank. He saw at that stage the considerable trade benefits that there’d be from a floating currency and the considerable benefits that then come from the government not having to be in cahoots with the Reserve Bank and enter into crisis meetings on devaluations from time to time. So he very heavily drove it.
Paul was quizzical because on the one hand he was there trying to make the best of a Treasury which had not been under Labor control, I suppose, for a considerable period of time, was seen enormously suspiciously by the generation that had regarded Whitlam as having been let down by the Australian Treasury, but at the same time absolutely determined not to repeat what were perceived as the Whitlam mistakes. And therefore very anxious for respectability in financial management. Paul was, I think, very considerably infected with that.
He had of course had the experience of having been just thrown into the Shadow Treasury job really only a view months before the election, somewhat reluctantly on his part, because he was enjoying the Minerals portfolio, and not with the level of confidence that Ralph had had in handling the Shadow portfolio. So he was not actually, at that point of time, we’re talking here of a period of twelve months, he was not at that point of time as gung ho as he subsequently became or as gung ho as Bob was then. Chapter 5 The Float 183
Paul was a bit of a halfway house between where John Stone was at as Secretary of the Treasury and Bob and the Reserve Bank were at on floating the dollar. But you would have to say that the float of the dollar was the first break in the dam if you like of former Labor orthodoxy. And just about everything else flowed from that.32
Brian Howe, whilst acknowledging that he was a junior Minister at the time and consequently removed from Cabinet discussions, believed both Hawke and
Keating shared in the early successes of deregulation. But he also noted that the actual process of achieving the float occurred outside the normal bounds of
Cabinet.
The first decisions weren’t necessarily taken by Cabinet anyway. They [Hawke and Keating] did a lot of thinking about that outside of Cabinet.33
Bob McMullan, former Labor Party National Secretary from 1981 to 1988, and subsequently Senator and Minister in the Hawke/Keating Government, believed that:
It’s clear, at the end of the day, it [the float] could not have been done without them both on board.34
But McMullan also recalled that both Hawke and Keating expressed to him privately the views published in books, and that they were “mutually contradictory”.
32 Beazley, Kim, Op Cit. 33 Howe, Brian, Op Cit. Chapter 5 The Float 184
The one thing that was clear and always consistent in both their accounts was the extent to which John Stone was opposed to it. It was fairly early in the life of a new Treasurer to take on a powerful figure like Stone. It gives you the view that there must have been a significant role by Keating to do that. But some parts of what I’ve read suggest that there were some notable confrontations between Keating and Stone. But I was never able to reconcile the conflicting stories between them.35
David Morgan was a senior Treasury official when Labor came to Government in 1983 and a senior Westpac executive at its end in 1996. He was also very close to Paul Keating, and was perfectly placed as an insider to cast some light on the relationships between political masters and public servants in the early years of the Hawke/Keating Government.
He recalled that Treasury was quite concerned about how it would work with a
Labor Government, given that the Shadow Treasurer for most of the period,
Willis, seemed antipathetic to a number of policies that Treasury was particularly interested in pushing, such as financial deregulation and foreign banks.
We had the change with Keating becoming the Shadow Treasurer shortly before the 1983 Election. Keating, in quite a dramatic gesture, in the first meeting that was ever held between Treasury and the then Labor Treasurer, Keating, he actually came across personally without advisers to the Treasury building and said at our very first meeting, no advisers, that he wanted to really form a productive relationship with Treasury. If you look at one of the great achievements of Keating, it was to really get
34 McMullan, Bob, Personal Interview, 17 November 1997. 35 Ibid. Chapter 5 The Float 185
the full weight of the intellectual horsepower of Treasury behind him, and through him, in the Labor Government.
Now as I said in the Labor In Power series,36 that was a mutually beneficial agenda. Treasury had an agenda, always has and always will have. But the discipline is to harness that agenda to fit the overarching priorities of the Government of the day. Keating himself ... didn’t have a formulated agenda when he came on board, Treasury itself was also split on some policies ... Stone was deeply opposed to the floating of the exchange and to the entry of foreign banks, whereas myself and Ted Evans were strongly in favour.
Keating actually developed early a very strong rapport with myself and with Evans and used to seek our views privately on issues beyond those of our immediate mandates within Treasury, which bore some friction within Treasury, particularly with Stone.
The exchange rate, the pressure on the balance of payments of the exchange rate provided a really early opportunity for moving on the float of the dollar. Stone opposed it. Other people in Treasury, particularly myself and Ted Evans supported it, but it was Keating with Hawke’s support that had a very early major win there ... financial deregulation is not any one measure, it is a whole host of issues that extended throughout the eighties ... but if you had to pick out one measure that was really enormous, the most centre most important one, I’d choose the float. 37
Bernie Fraser, who left Treasury to become Governor of the Reserve Bank, also recalls that Keating in the early days developed a close relationship with his departmental advisers.38 He believed that Keating was prepared to tackle the
36 ABC TV, Labor In Power, 1993. 37 Morgan, David, Personal Interview, 19 December 1997. 38 Fraser, Bernie, Personal Interview, 16 February 1998. Chapter 5 The Float 186
difficult decisions of financial deregulation because of the trusting environment that existed at the outset. Fraser observed:
I can’t talk in detail about the subsequent relationship between Treasury and Treasurer. It did begin to waver a little bit … one of the reasons I think was because of the experience Keating himself had acquired. Whereas in the early days he was a bit reliant on Treasury, in latter days he was more reliant on his own judgement and the people immediately around him. He used to say to me critical comments about my former colleagues in the Treasury.39
Hawke’s version of the sequence of events leading to the float was published in his Memoirs.40 In Hawke’s account, he is the prime mover in the decision, assisted by his office’s economic adviser, Ross Garnaut, and a Deputy
Secretary in the Department of the Prime Minister and Cabinet, Ed Visbord.
Keating is portrayed as a reluctant participant who was unduly concerned about the very strong objections to the float posed by John Stone.
With respect to the Campbell report, Hawke claimed he, John Dawkins and
Peter Walsh had always embraced a market-oriented outlook. Dawkins and
Walsh were senior Cabinet Ministers and aligned to the Centre-Left faction.
They were both ardent deregulators, and very supportive of Keating. Dawkins played a pivotal role in assisting Keating attain the Prime Ministership in 1991.
39 Ibid. 40 Hawke, Bob, The Hawke Memoirs, William Heinemann, Melbourne, 1994. Chapter 5 The Float 187
According to Hawke, Keating was not an ardent deregulator but he had an open mind.41
On the Martin Review Group, Hawke claimed
Our own inquiry into Campbell’s recommendations would give us a chance to dress Campbell in Labor cloth.42
Further, he indicated that this report was an important step in getting the Labor
Party to jettison irrelevant old platitudes.
This was particularly so when it came to changing party policy to allow the entry of foreign banks into Australia. When it came to deregulatory moves that were to revolutionise Australia, events moved too swiftly for philosophical dalliance.43
As the monetary problems leading to the December crisis and decision to float unfolded, Hawke maintained it was his leadership and guiding hand that led to the ultimate resolution. He believed Keating was a captive of Treasury and
John Stone in particular.
Paul was understandably nervous. His instincts were, I think, for what he would call ‘painting the big picture’ and doing the bold thing, but his trepidation and lack of expertise left him still in thrall to this department and confined, for the time being at least, to John Stone’s much smaller canvas.
41 Ibid, p 235. 42 Ibid. 43 Ibid, p 236. Chapter 5 The Float 188
But floating the dollar was a little too ambitious at this stage. One got the impression that Paul Keating wished to take hold of the rope we were holding out, but that John Stone had grabbed his legs and was holding on for grim death. And Paul would not kick free.44
When the decision had to be made, Hawke again indicated it was his leadership and not Keating’s which ultimately resulted in the decision to float.
But underlying the talks was the Treasurer’s reluctance ... My staffers and I continued to confer. At about 1:00am I sent a staffer down to Keating’s office. The message was: ‘We’ve just got to do it’.45
With respect to Keating, Hawke observed that it was only at this point that
Keating was prepared to fully support the decision:
As for Paul, he was now ... prepared to float without the Stone.46
Further, he stated:
Paul at last had the confidence to break free. He was becoming his own man in Treasury and that was a profound relief to those of us who had seen him somewhat daunted by the enormous demands of the job.47
For his part, Keating portrays himself as the prime mover, while acknowledging that Hawke supported him and encouraged a float sooner rather than later.
44 Ibid, p 239-240. 45 Ibid, p 242. 46 Ibid, p 246. 47 Ibid, p 250. Chapter 5 The Float 189
Keating’s version is supported by his then Private Secretary, Tony Cole, who later became Secretary of the Treasury.
According to Tony Cole, who participated in many of the key meetings from early in the year:
I think it is fair to say that both the Treasurer and the Prime Minister had decided a float was on prior to 28 October - from then on it was only a matter of when the circumstances were right.48
There is no doubt Keating and Hawke agreed, and also no doubt that it was not only Keating who was concerned about the opposition of Stone. Cole recalls:
We tried for a float in October, but neither Keating nor Hawke wanted afloat over the dead body of John Stone and Des Moore. We couldn’t even get Bobbie Whitelaw to support it. In October when they floated the forward rate there was an acceptance that the float would have to occur. We had in mind December or January, when the markets would be quiet. The discussion was always over whether you could get Stone on board or do it without him.49
Edwards states quite categorically that while there is no doubt that Hawke,
Garnaut and Visbord supported floating the dollar, Hawke’s account of it in his
Memoirs is certainly quite wrong.50
48 Edwards, John, Op Cit, p 231. 49 Ibid. 50 Ibid, p 217. Chapter 5 The Float 190
Keating wrote his own version of the decision to float which is an Appendix in
Edward’s book. Keating’s account, however, does not include advice he received from the Reserve Bank and Treasury, which is crucial to understanding the sequence of surrounding the decision. Keating’s version also places too little weight on Treasury’s opposition to the float.
Keating’s own preferences were for a float from quite early in the government.
Even by the early 1980s he was inclined to prefer a cheaper dollar, a view he had acquired from the mining industry.
Slowly converted by his experience of the mining industry to market economics, Keating leaned towards the deregulation of financial markets. It was also part of his approach to government, part of the lesson of the Whitlam government, that if he could, as Treasurer, make reforms that business wanted without deeply offending his Labor constituency, he would do so.51
Keating’s explanation of the decision to float sheds an interesting perspective on his motivation.
One of the few recommendations that Howard had adopted as Treasurer from the Campbell Report … was the bond tender program which they implemented just before we came into office. That meant that you pushed all the money into the markets at the best market price. So we started to get the interest rates which actually reflected true market value. Now I then enter the scene.
51 Ibid, p 206. Chapter 5 The Float 191
At that point, I took the view that Australia was uncompetitive, that the exchange rate was overpriced. After the depreciation of ten per cent in the first week of the Government’s office and watching it go back to where it began, under speculation, I realised that the system had had it.
Now that was the float. What the float did was compensate for the loss of competitiveness that we had through inflation and in our terms of trade. We had a trend decline in the terms of trade from 1952-‘53. So from 1983 … the terms of trade were last that bad in 1932 … we had a depression in our terms of trade when we came into office. And that had to be a factor in the exchange rate. In other words, it had to help us compensate to get back on top again by making our goods cheaper. It would take the rate down.
When we floated, we were surprised it took eighteen months for it to drop, but it did because we had preserved the big nominal depreciation by real appreciation of the exchange rate. When we floated that removed all the over-runs to the money supply that would come with capital inflow. It also meant that the Government had a much bigger grip at the time on primary and equity in the economy. There was a 10 per cent increase in nominal GDP which had to be funded. The Reserve Bank would buy bonds and put ten per cent more cash into the economy. So the additions to primary and equity came from the central bank when they should come with a Budget deficit or a Budget surplus, as the case may be. The Budget surplus was taking money out of the economy. So that was the float.
And that was a philosophical thing behind the float. Now, many people said we should tie ourselves to another currency. Now I said, what other country? Who else has got an economy that shifts minerals? No one. You know, the Americans have got an economy that shifts minerals but also have got a major manufacturing sector. We don’t. Major population. We don’t. So we could be tied to no-one. What we had to tie ourselves to was not to another currency, but to good policy. And Chapter 5 The Float 192
that’s what I tried to tie us to through the 80s in fiscal policy. And structural policy. That tie was not to another currency but to good policy.
We never asked the Labor Party whether they wanted a float. It was a fait accompli. A complete necessity.52
Hawke’s account also ignores the role of the Reserve Bank, and particularly its
Governor, Bob Johnston. Without Johnston’s active encouragement it would have been extremely difficult to float. His version also fails to mention that
Keating and Johnston had agreed on the desirability of a float quite early in
1983, and that they - and not the Prime Minister - bore the official responsibility for the management of the currency.
The Bank had supplied material bearing on this as early as July. There is no doubt that by October Keating was vigorously pushing for a float. Equally, however, there is no doubt that he was bothered by Stone’s refusal to agree, took great pains to persuade him to agree, and allowed Stone’s opposition to postpone the float when it was first proposed in October. As a result the float occurred six weeks later than it otherwise might have. The delay, however, was insignificant in the context of a decision of such magnitude.
The float was the big decision of 1983, symbolically if not in actuality, the decisive issue for the Australian economy in the 1980s. It was the most important in the internationalisation of the Australian economy during this
52 Keating, Paul, Op Cit. Chapter 5 The Float 193
period. Reserve Bank governor Johnston called it ‘the decision of the decade’.53
53 Interview with Bob Johnston reported in Kelly, Paul, Op Cit, p 87. CHAPTER 6
ENTRY OF FOREIGN BANKS
6.1 INTRODUCTION
Foreign banks have existed in Australia almost since the beginning of European occupation. They were essentially of British origin, reflecting our colonial history.
Following the establishment of the Australian banking system in the late
Nineteenth Century, consolidation of this sector was both the goal and direction of government policy and the financial markets. Opportunities for foreign banks to obtain licences were restricted. Many of Labor’s prejudices about the banking system applied even more so to foreign banks.
Prior to the introduction of the Banking Act in 1945, three foreign banking groups owned by the governments of China, New Zealand and France, established and maintained limited branch representation, gaining a relatively small share of Australia’s banking business.
The presence of the three foreign banks pre-dated what became longstanding government policy prohibiting the establishment of new banks owned by non- residents, and restricting the participation of non-residents as substantial equity- holders in Australian banks. Foreign interests were allowed to establish Chapter 6 Entry of Foreign Banks 195
“merchant banks” servicing the needs of the Australian corporate finance sector.
Taken together, in 1994 foreign banks and foreign bank-owned merchant banks accounted for around sixteen per cent of the Australian assets of all financial intermediaries operating in this country.1
Accordingly, the general trend of recent policy to one of liberalisation of the extensive controls and restrictions put in place after World War Two, designed to encourage more foreign banks to operate in Australia, was a relatively bold step. Such a policy direction can be viewed as a further stage in the deregulation of the Australian financial system, and an ongoing part of the
Labor Party’s, and Labor Government’s, micro-economic reform program.
6.2 CAMPBELL AND FOREIGN BANKS
The Campbell Committee had examined the issue of foreign banks in terms of the wider issues associated with financial deregulation in Australia.2 Foreign bank entry was seen as a particular aspect of the more general issue of increased participation in the banking system, and consequently of increased and more vigorous competition.3
1 Fraser, B W, Foreign Banks in Australia, Reserve Bank of Australia Bulletin, September 1994, p 16. 2 Campbell, K, Final Report of the Committee of Inquiry into the Australian Financial System, Ch 25, AGPS, Canberra, September 1981, pp 435-450. 3 Davis, K T, and Lewis, M K, Foreign Banks and the Financial System in AFSI Commissioned Studies and Selected Papers, Part 1, AGPS, Canberra, 1981, summarise the benefits perceived by foreign banks as likely to flow from their admission into Australian banking as well as the responses to these views from the Australian banks, other financial institutions and the Chapter 6 Entry of Foreign Banks 196
Campbell concluded that, provided the rate of entry of foreign banks was carefully managed, the move towards the new competitive environment should present minimal disruption to banking operations. Foreign banks would have the advantage of a broad customer base in their home country and, internationally, greater familiarity with other economies, access to foreign capital, and the opportunity to specialise, and exploit their unique skills in limited market segments.
Conversely, Australian banks would not be at a competitive disadvantage over the long term. They would retain their own areas of comparative advantage - their better knowledge of local markets and established customer base - while at the same time sharpening and maintaining their skills in international banking and trading finance. They would also have a strong incentive to adopt and maintain any appropriate new financing technology introduced by their new competitors from overseas and would be able to compete much more aggressively than they had in the sheltered, regulated environment of the past.4
Campbell noted that those who supported a policy of complete prohibition often argued that allowing foreign bank entry would, by increasing the integration of the Australian economy with the international monetary system, generate instability in the domestic economy and impair the effectiveness of economic management. However, the evidence suggested that the Australian economy was already well integrated into the international financial system. Similarly, it
monetary authorities. The authors give their own assessment of the deficiencies in the present competitive structure and the benefits that might flow from foreign bank entry. 4 See Keirnan, E, AFSI Commissioned Studies and Selected Papers, Part 1, AGPS, Canberra, 1981. Chapter 6 Entry of Foreign Banks 197
was not accepted that the entry of a number of foreign banks would weaken the impact of monetary policy.
In summary, it was concluded that provided appropriate prudential funds management standards were maintained to protect the security of Australian depositors, the existing embargo on the participation of foreign banks, as banks, in Australia could no longer be supported. Removal of the embargo was recommended.
Many potential dangers in unrestricted foreign bank entry were noted however.
As a consequence, Campbell recommended that, initially, the rate of entry of foreign banks should be carefully managed.5 Options for restraining foreign bank entry were examined, including auctioning licences, prescribing banking functions such as retail branch banking, and limitations on relative size.
Finally, the Committee concluded that the Government should not impose any differential restrictions on foreign banks. It recommended that foreign participation in domestic banking should be restricted only through the number of licences granted, and that banking licences issued to non-residents should carry no encumbrances additional to those attaching to licences held by residents: both resident and non-resident owned banks should have the same privileges and responsibilities; and banking licences issued to non-residents should not be subject to mandatory resident equity participation requirements.
5 Campbell, Keith, Op Cit. Chapter 6 Entry of Foreign Banks 198
While it was considered that the authorities would need to develop appropriate criteria for choosing between applicants, the foremost objective was to introduce an added dimension of competitive and efficiency stimulus to
Australian banking.
There is no doubt that Campbell’s findings and recommendations were to prove vital in opening up Australia’s financial system, and to become an integral part of the deregulation of Australian banking. Yet as noted in Chapter Four, the
Fraser Coalition Government refused to act on the Campbell Committee Report, and it was Labor which had to respond to the challenge.
6.3 FOREIGN BANK ENTRY AND THE ALP
Labor occupied the Treasury benches in 1983 for the first time since 1975. It was a time of international economic change, particularly in terms of financial deregulation. The new Hawke/Keating Government was confronted immediately with the realities of globalisation by floating the Australian dollar.
With that policy decision behind it, the government set about continuing the process of modernising and internationalising the Australian economy. The issue of the entry of foreign banks was the next hurdle to overcome.
Nineteen eighty-four began with Keating vigorously defending the float of the dollar, and explaining Labor’s plans to free-up Australia’s financial system. He argued that policy could not remain static because the world did not remain Chapter 6 Entry of Foreign Banks 199
static, nor could he or the government wait for a Labor Party National
Conference to change existing policy.
Keating explained the Hawke Government’s embrace of financial deregulation in these terms:
For too long there’s been a view in the Labor Party that what we’ve got to do out there in the community is control everything. In fact, all the regulations we’ve had for years, say, in the banking area, have produced nothing except a great clutch of merchant banks and building societies. People have simply stepped around controls … We have to take the broad view. Government control of economic policy and of the financial system has done what, particularly over the past decade? Only given us a miserable growth rate, one which is not creating enough jobs … What we have to say is that we have to get the private sector in with the government to have, as far as possible, parallel objectives.6
The Martin Review Group, established by Keating during 1983, reported on 22
February 1984. As expected, it supported the Campbell Committee’s recommendations to allow foreign banks entry into the Australian market. The thrust of its recommendations was to remove restrictions on banks to allow them to compete with non-banks.
Martin qualified this support by recommending that the maximum share which could be held by foreign interests should be limited to fifty per cent. This restriction necessitated new banks with foreign equity being incorporated in
6 Carew, Edna, Keating: A Biography, Allen and Unwin, Sydney, 1988, p 106. Chapter 6 Entry of Foreign Banks 200
Australia as subsidiaries rather than as branches. This element was to be hotly debated, resulting in changes to government policy in the 1990s.
Treasury, who provided much of Keating’s economic advice at this time, was supportive of the entry of foreign banks into Australia.
What was in the mind of Treasury was to let in foreign banks to liven up the place. Even the threat of entry of foreign banks achieved the objective. It was part of this general thing of modernising the economy, give the banks some competition, get in some expertise and technology.7
As Richard Beetham, Treasury’s representative on the Martin Review Group, said:
The difficult task of converting such conclusions into positive action was largely due, however, to the personal and political skills of Paul Keating.8
While it was one thing for the Federal bureaucracy and the Party leadership to fully embrace foreign bank entry, it was another thing to obtain Party approval.
The broad Party was still coming to grips with the apparent backflip regarding
Labor’s attitude to the Campbell Committee Report. As well, the decision taken by the Cabinet to float the dollar without subsequent referral to Caucus for approval, was similarly being digested.
However, Labor was in government for the first time in nearly a decade. The lessons of the Whitlam years in terms of economic management were still fresh Chapter 6 Entry of Foreign Banks 201
in the minds of the Hawke Cabinet Ministers. The members of the Federal
Parliamentary Labor Party (Caucus) also had long memories, and were adapting to the realities of being in government. Policies espoused in
Opposition, with its comfort zone of non-accountability, needed to be reviewed in the cold light of government responsibility.
Additionally, Hawke was the most popular Prime Minister in a very long time.
Political realities dictated it was electoral stupidity to rock the boat. Keating too, was perceived as the persuasive intellect, driven by self-belief and a genuine desire to create a more efficient economy. The Party, therefore, was not about to repudiate its two chief generals in the battle for relevance, responsibility and electoral appeal.
6.3.1 THE PROCESS
The process by which Labor endorsed the entry of foreign banks into Australia was a mixture of economic sense and political will. Keating was determined to push for further deregulation following his successful float of the dollar and removal of exchange rate controls in late 1983. Hawke was a more-than-wiling ally. Not all in the Party shared either the enthusiasm or intellectual capacity to understand the need for further change.
7 Fraser, Bernie, Personal Interview, 16 February 1998. 8 Carew, Edna, Op Cit, p 106. Chapter 6 Entry of Foreign Banks 202
In fact, a number of Keating’s detractors took great delight in pointing out that in his previous incarnation, before becoming Shadow Treasurer, he had expressed public opposition to foreign bank entry.
Suspicious of the big commercial banks since childhood, he always wanted competition. It took him a few more steps to favour foreign competition.9
Keating had, however, seen the benefits of deregulating the banking sector well in advance of the decision to float, and in his subsequent strong support for foreign bank entry. As a consequence, in 1984 he sought to gather Party support for this momentous break with Labor tradition.
Even Hawke conceded that Keating was the driving force behind the Party’s acceptance of foreign bank entry. In his Memoirs, he noted that the Party’s ingrained bitterness towards banks, as represented by allusions to Ben Chifley, was not relevant in the world of the 1980s.
The Party Platform had to be changed. Paul Keating rose magnificently to the task. With my backing and his confidence rising, he threw his range of skills – vivid language, charm, derision, humour, hyperbole, hard sell – into turning the Labor Party around on the subject of foreign bank entry.10
Howe noted that while Hawke and Keating, and others in Cabinet, were supportive of foreign bank entry, that was not necessarily the view within the
9 Edwards, John, Keating: The Inside Story, Penguin, Ringwood, 1986, p 206. 10 Hawke, Bob, Memoirs, Heinemann, Sydney, 1994, p 252. Chapter 6 Entry of Foreign Banks 203
Left faction. He recalled being part of a Left delegation to discuss the issue with
Hawke and Keating at Old Parliament House in 1984.
I’d worked out a line that basically I was going to say. “Well, Hawkie, you’re regarded as a great Australian nationalist. This is the opportunity for you to really reinforce your nationalism. The banking system is going to become more and more controlled outside of Australia. If you kind of reconsider this kind of direction you want to go, then you might be able to …” We were talking in that kind of tone, and I remember Keating and Hawke come out and they said “You know mate, you don’t know what dopes … you know the people who are running our banking system in Australia … I mean they’re absolute idiots. They’re drones. They’re people that have … they’ve got all this lazy capital and what we need is a … these people need competition. They need to be you know … competition would get them up off their arses”. I thought God, jeez, our banking people must be … you know, the leaders of the banks must be absolute idiots. So that was kind of the tone of that conversation which would have been down in Hawke’s office.11
Keating’s first foray into ALP territory to sell the entry of foreign banks came at the New South Wales Annual State Conference in June 1984. 12 He was hissed by the Left and cheered by the Right. The former argued that foreign banks would not be interested in retail banking, small business, farm or housing finance; they would not have a branch structure; they would only look after the large slabs of wholesale banking to the top echelon of the corporate sector; and
Australia would lose national autonomy over interest rate policy, monetary policy and exchange rate policy at a time when the international banking system was increasingly unstable.
11 Howe, Brian, Personal Interview, 13 May 1999. Chapter 6 Entry of Foreign Banks 204
Don’t be seduced by politicians talking about growth.13
The ACTU and Australian Bank Employees Union (ABEU) were of the same view. The Right argued that it was surprising that the Left would wish to preserve what its members could normally be expected to see as a cosy and highly profitable capitalist oligopoly. As Keating told his opponents at the
Conference, why would anybody in the Labor Party think it owes anything to
Westpac, ANZ or National Australia?
It’s time the privileged, comfortable and dozy position of our banks is widened up by some real competition.14
Keating told the Conference that foreign banks would ‘breathe life’ into the manufacturing industry, and that opponents of the move were committing
Australia to ‘a low income path’. He said that although financial regulations may have been appropriate in the 1940s they no longer worked because there were no money non-bank financial institutions. It was not good enough for the
Government to leave banking solely in the hands of the four major banks and a few small ones.15
In a portent of what was to come, Keating said that a quiet revolution was overtaking Australia’s economic policy, and that so many changes would be made to the financial system that it would be barely recognisable.
12 The Age, Foreign Banks and the ALP, 7 June 1984, p 2. 13 Senator Bruce Childs quoted in the Sydney Morning Herald, Keating’s Passionate Plea for More Banks, 11 June 1984, p 4. 14 The Age, Keating Condemns Banks, 11 June 1984, p 1. Chapter 6 Entry of Foreign Banks 205
The Left-sponsored amendment to the Conference, which had proposed expressing concern at the Government’s floating of the dollar, deregulating controls over international funds, issuing additional foreign exchange licences, and contemplating the entry of foreign banks, was solidly defeated.
Following this success, Keating moved on to gather support in other ALP forums. He met with the Victorian ALP Economic Policy Committee in mid
June, as the Centre Unity Group (Victoria’s Right wing faction) was divided on the issue, while the Left still opposed it.16 The South Australian Branch
Conference had also voted against foreign bank entry.17
Having originally ruled out any consideration of foreign bank entry, the ABEU appeared to offer some concessions in mid-June, 1984. The union, whilst dangling the affiliation of its 82,000 members as a bargaining chip, met Keating to discuss conditions of new bank licences. The ABEU and Commonwealth
Bank Officers Association received assurances from him regarding union coverage, award conditions, branch structures, retrenchment guarantees and technological change consultations.
This reflected the momentum of internal Labor Party debate. The crucial
Centre-Left faction was set to push for stringent entry criteria to prevent foreign banks from profiteering in Australia. With each passing day, alliances between
15 Canberra Times, Treasurer Attacks Australian Banks, 11 June 1984, p 3. 16 Australian Financial Review, Keating Woos Vic ALP Left, 13 June 1984, p 2. 17 Australian Financial Review, Union Plays Foreign Bank Trump, 18 June 1984, p 4. Chapter 6 Entry of Foreign Banks 206
the Right and Centre-Left factions strengthened, although some alternate views even amongst these groups persisted.18
Finally, Labor’s National Conference arrived, and with it the debate on the future of foreign bank entry. At Conference in Canberra in July 1984, Keating pressed the Party to allow the entry of foreign banks into Australia. Without more competition, he argued, the four major Australian trading banks would dominate the market completely and exploit households and businesses.
Bob McMullan, ALP National Secretary at the time, noted that the entry of foreign banks was a key decision at the 1984 Party Conference.19 He confirmed however, that there was no real involvement of the formal structures of the Party in the lead-up to the Conference, but more a reliance on a series of dialogues between Keating and the other major players such as delegates and the unions.
The foreign bank issue was debated on 9 July 1984. Changes to the Party
Platform had recommended support for the continuing process of financial deregulation and foreign bank entry. It had been drafted by a National Policy
Committee and obviously had been guided by Keating as the chief economic minister.
18 See for example, Australian Financial Review, Fight Over Bank Entry Lingers On, 25 June 1984, p 3. Australian Financial Review, ALP Right Goes Into Battle For Foreign Bank Entry, 28 June 1984, p 2. 19 McMullan, Bob, Personal Interview, 17 November 1997. Chapter 6 Entry of Foreign Banks 207
The Left moved an amendment to delay the foreign bank question for two years. Interestingly, the amendment did not reject outright the process of financial deregulation or the entry of foreign banks as an integral part of that process. Rather it sought to delay implementation.
The Left’s unsuccessful motion was supported by Brian Howe (Minister for
Defence Support) and Stewart West (Minister for Immigration). Historical allusions to past Labor Governments were used in argument, particularly reference to the experience of the Chifley administration.
I would have thought that historically speaking the lesson we could learn from the Chifley era is that in a time of significant, if not mass, unemployment it is extremely important that rather than lessen its control over the financial system and lessen its capacity to intervene in an economy, in fact it ought to strengthen it.20
Howe called for a break in financial deregulation to enable the economy to absorb the ‘radical’ financial policies already implemented by Keating. He said
Keating was:
Getting a well-earned reputation in the financial pages of the papers as being a radical – a radical in the sense that he has moved more quickly in the area of deregulation than his conservative predecessors did. Now, it seems to me, without being an expert in the area of banking, that if one provides further access in terms of banks to operate more comprehensively in the Australian climate that is going to mean accelerated control by those banks.21
20 Howe, Brian, Transcript, ALP National Conference, Canberra, 9 July 1984, pp 158-9. 21 Ibid. Chapter 6 Entry of Foreign Banks 208
Stewart West, the Left’s representative in Cabinet, suggested that the floating of the Australian dollar threatened to boost domestic interest rates in the context of the record US deficit, the overvalued US dollar and the high US interest rates.
He suggested that the present international debt crisis made it a particularly bad time to consider ‘locking us further into the international financial system’.22
Large loans by foreign banks to domestic companies would mean fairly massive doses of overseas funds, an expanded domestic money supply, a tighter domestic money policy and higher housing interest rates in the long run. We have revamped the Loan Council to control the States’ ability to borrow funds for public works. How much more State restraint in employment-creating public works are we going to impose as a result of capital inflow increasing our money supply and thus squeezing further the public borrowing sector? And in what interest will those restraints be imposed?
In fact, I find it quite surprising that here in 1984 we are still considering, as a Labor Party in Government, imposing policies which Adam Smith was propagating in the last century [sic].23
Lindsay Tanner, a senior union official, subsequent Victorian Federal Member of Parliament and leading intellectual of the Left, summed up the faction’s traditional opposition to change.
The real concerns and the reason why people like myself and others oppose further foreign bank entry: the question of whether we internationalise by open slather or whether the internationalisation is controlled and restrained, the loss of economic sovereignty and the
22 West, Stewart, Transcript, ALP National Conference, Canberra, 9 July 1984, pp 146-8. 23 Ibid. Chapter 6 Entry of Foreign Banks 209
potential for reduced control in monetary policy, a greater degree of volatility in the business cycle, accelerated de-industrialisation of our manufacturing and finally the economic philosophy of this Party. If we are going to take positions based on liberal free-market conservative classical economics, then what is going to happen when it starts to spread to some other areas such as industry development and wages policy?24
The Left’s anti-foreign bank rhetoric – which largely rested on a plea to maintain the status quo because of the dangers of the unknown – immediately was confronted by an alliance of the four State Labor Premiers. Like Keating, the
Premiers placed economic growth in front of the claimed dangers of the loss of national financial sovereignty.
Victorian Premier John Cain was blunt in opposing the Left position. He argued that no proposals had been made to increase the efficiency of the banking system in the absence of the spur of foreign competition.
The thing that concerns me is that the traditional banks, the four of them, are on all the evidence reluctant to expand beyond their traditional roles. They have shown a great lack of initiative in small business finance, in high risk projects and venture capital, in trade finance for exports, in project financing, secondary mortgage market and in take-over financing. I suspect the reason is that they have an understanding between themselves which I believe precludes competition and innovation in many of those areas. They have only shown perhaps a little more aggression in recent time because of the threat of foreign bank entry.25
24 Tanner, Lindsay, Transcript, ALP National Conference, Canberra, 9 July 1984, pp 167-8. 25 Cain, John, Transcript, ALP National Conference, Canberra, 9 July 1984, pp 160-1. Chapter 6 Entry of Foreign Banks 210
Prime Minister Hawke’s first major address to the Conference came on the foreign bank issue, with a point-by-point response to the Left position. Hawke argued that greater foreign bank entry would encourage lower and not higher interest rates; was a separate issue to interest rate deregulation; would have to meet social objectives such as branch structures and employment; would have to comply with Australian prudential requirements; would assist the international penetration of existing Australian banks; would require foreign banks to have their own capital base to underpin Australian banking operations; and would not impose any real threat to the existing domestic banks, which were ‘very large by international standards’.26
In summing up, Keating argued that the experience of the Australian Bank, established in 1981, with an asset base of $600 million compared to Westpac’s
$35 billion, showed that ‘you will not get the competition from domestic entrants.’
When you look around the landscape there simply are not major domestic entrants because the people that have the cash – the BHPs, the CSRs, the Western Minings and the others – do not want to be in banking.
The only way that we will get quick and effective competition is by involving financially strong institutions in the trading bank sector, and that essentially means involving foreign banks, many of which are here now, operating as merchant banks and as representative offices.27
26 Hawke, Bob, Transcript, ALP National Conference, Canberra, 9 July 1984, pp 170-76. 27 Keating, Paul, Transcript, ALP National Conference, Canberra, 9 July 1984, pp 181-5. Chapter 6 Entry of Foreign Banks 211
Keating argued that new foreign banks would ‘promote rather than stifle’ companies in the small to medium business area.
How often has anyone been to a bank in this country and felt like a mendicant walking through the door?
If want to see our manufacturing sector grow and we want to see it specialise and find export markets, you need to tie up with institutions which have international linkages to provide business contacts abroad, provide advice, make introductions, and use their international network.
If we are to have institutions here which have led the industrial regeneration of Germany and Japan and operate in 40 and 50 markets around the world, we must be advantaged compared to what we have had with our four major institutions which have operated exclusively in this market.
We have given them a privileged position for 40 years and what have we got in return? A languishing manufacturing sector and no adequate support.
If it was not for the merchant banks, for 15 years gingering them up, we would still be back with quill pens and ledgers, up at the high tables making the folio entries.
It has been the merchant banks that have put the ginger into them. But what we want now is the trading banks, international trading banks, to put some ginger into the Australian banking system.28
28 Ibid. Chapter 6 Entry of Foreign Banks 212
In the final analysis, the combined vote of the Right and Centre-Left delegates saw Keating’s proposal triumphant. The Left amendment was defeated 41 to
56 – a substantial loss indeed.
Gary Gray, McMullan’s successor as ALP National Secretary, succinctly noted the significance of the decision.
Keating carried the line of the economic rationalist and prosecuted his argument with great skill. He dominated Conference and showed that he had really come of age as both a Treasurer and a very significant figure in the Party nationally. The Left really had no key hitters … they didn’t have a well developed view of the economy in order to present a counter-case in the way in which Keating and Hawke wanted to take both the Party and the Government.29
Gary Punch, a former Minister and Right factional negotiator commented on the decision in the following terms.
The working tradition used to hate the banks, now everybody hates the tradition. But to hate the banks and the kneejerk reaction, was seen as being a bad thing. It was only when Keating intellectually was able to espouse the argument that the big four banks in Australia had never been a friend of the ordinary working class person in this country; that the one way to get them to be more consumer friendly was to open them up to more competition and that foreign offshore banking corporations were not tied to the old money establishment families in Australia, particularly the Bank of NSW, and that therefore we were redrawing the financial sector landscape … and once he espoused that argument,
29 Gray, Gary, Personal Interview, 5 December 1997. Chapter 6 Entry of Foreign Banks 213
which I still think today as a very difficult entity, the argument was basically won.30
Graham Richardson also expressed his view on the process and Keating’s role.
The big debate in ’84 was on the entry of foreign banks.
And the thing that surprised me about it was that I couldn’t work out how foreign banks coming in was going to hurt anybody. I fail to see it. And I think there was a lot of Labor stalwarts’ xenophobia in it rather than economics or fear of what might happen. I think the bank industry was putting up a bit of a loss of jobs argument but I couldn’t see much truth in that. And of course in the end the entry of foreign banks was a non- event. They never did try and open up high street banking, they got into, they got into two things, they either disappeared or they got into higher margin merchant banking. They just weren’t around.
So we had this great big debate, this great division, with Keating standing up there. At that stage he was, you know, the boss on economic policy and he made a great speech and all that sort of stuff. And I can remember, he was wrong in what he thought the foreign banks would do. And the Left were wrong, totally wrong, about the effect. But that shows that, that even with something like that which was always going to be comparatively minor in effect, I mean I think what Keating wanted to do was to keep the big four more honest. I think it failed in that respect. And it was only ever going to be successful if foreign banks decided to go into high street operations, which they fairly quickly decided they wouldn’t.31
30 Punch, Gary, Personal Interview, 8 January 1999. 31 Richardson, Graham, Personal Interview, 28 November 1997. Chapter 6 Entry of Foreign Banks 214
Hawke also credited Keating with a strong performance at National Conference, albeit couching his recollections in terms of “our” and “we” to ensure he too reflected in the glory of the decision.
Prior to my Government a change to the Party Platform on this question had been almost unthinkable. Neville Wran, President of the Party and Labor Premier of New South Wales at the time, described the feat as ‘equivalent to stealing the holy water from the church’.32
So it became another of Keating’s great successes in financial deregulation. It should also be noted that this National Conference was held at a time when other major issues were being debated. It was, after all, the first Conference of the Party in government for many years. Issues concerning uranium mining at
Roxby Downs and hosting the joint US-Australia facilities were highly emotive and contentious.
It was also a time when Labor was proposing to increase the size of the
Parliament by twenty-four seats in the House of Representatives. The Hawke
Government clearly had one eye on an early election to capitalise on the increased Parliamentary representation.
Richardson was able to provide some insight into the dynamics of the factional process and also the competing issues at Conference which enabled Keating to achieve his desired outcome. Despite the media speculation beforehand that it may have been a difficult ask, Richardson said:
32 Hawke, Bob, Op Cit, p 253. Chapter 6 Entry of Foreign Banks 215
We never had a real problem getting that up [entry of foreign banks]. The Centre were never against it, because, you know, people like Walsh and Dawkins and Button were all fairly supportive. Also, at a Conference like ’84 when you know that people who want to vote for you are going to vote against you on uranium, because they’re frightened of the consequences of not voting against uranium mining, and there were quite a few of those. You were always going to get the numbers, because having been bludgeoned into doing what they don't want to do on that, there’s no way that the Buttons of the world are ever going to get bludgeoned into, or even a Barry Jones, on other things. So we tended to do much better on that vote. I never doubted that vote and my memory of it was that we did very little arm-twisting or I was sent out to talk hard to anybody. It was a non-event.33
There was great advantage for the Party to ensure Conference ran smoothly and that there were few factional distractions for the country’s media and the electorate at large. This set a pattern for subsequent timing of National
Conferences, with the electoral cycle and the Party’s popularity and chance of re-election in the forefront of consideration.
6.3.2 POST-NATIONAL CONFERENCE IMPLEMENTATION
Following Labor’s National Conference, Treasury and the Reserve Bank called for applications for new bank licences in September 1984. In announcing the decision, Treasurer Keating indicated that the establishment of new banks would bring substantial benefits to the Australian community through the development of a more innovative, efficient and competitive financial sector.34
33 Richardson, Graham, Op Cit. 34 Treasurer, Press Release, No 142, 10 September 1984. Chapter 6 Entry of Foreign Banks 216
Carew makes the interesting observation that the Australian banks, mindful of looming competition, had been preparing their own ground in anticipation of an expanded system. One sign of this had been the mergers in 1981, when the
Bank of NSW and the Commercial Bank of Australia merged to form Westpac
Banking Corporation, and the National Bank of Australasia teamed with the
Commercial Banking Company of Sydney to produce the National Australia
Bank.
This left Australia with four major nationally-operating trading banks – the two amalgamated groups plus the Commonwealth Bank and the ANZ Banking
Group. The state banks at that time operated only in their home states and neither of the two existing foreign banks, the Bank of New Zealand and Banque
Nationale de Paris, provided an extensive branch network. Australia’s youngest bank, the Australian Bank, established in 1981, likewise operated with only a small number of branches.35
The markets, financial commentators and even the Labor Party expected the
Government to proceed slowly, introducing competition by degrees. It was considered four or six banks would be permitted, compared with the ten foreign entrants promised by former Treasurer John Howard in January 1983.
In February 1985, Keating astonished the banking community by announcing that sixteen foreign banks would be licensed to operate in Australia, more than doubling the number of existing banks. Of these, fifteen went on to begin
35 Carew, Edna, Op Cit, p 107. Chapter 6 Entry of Foreign Banks 217
banking operations in Australia through locally-incorporated subsidiaries.
These new banks became subject to the existing range of the Reserve Bank’s regulatory requirements for Australian banks.
The new banks were expected to provide a wide range of banking services and would extend their activities to encompass Australia’s different regions.36
Reinforcing these expectations was the insistence of the Reserve Bank that new banks offer some form of retail operation. It was acknowledged, though, that the new banks might wish to emphasise certain areas of business in which they have special expertise.37
The new entrants themselves had high expectations of their future impact on the Australian market. They expected to secure about twenty per cent of the
Australian banking market within five years of their entry.38
As time passed, it became clear that these expectations were not being met.
The new foreign banks focused their activities primarily in the wholesale or corporate sectors, providing vigorous competition in this area. However, very few established a retail banking presence. Together, they had eighty-nine branches amongst them. Of these, only twenty-one were located outside the eastern seaboard. The foreign banks accounted for a small three per cent of outstanding housing loans, while their total share of the national market for banking services was around ten per cent.
36 Ibid. 37 Treasurer, Press Release, No 142, 10 September 1984. 38 Martin, S P, A Pocket Full of Change - Banking and Deregulation, House of Representative Standing Committee on Finance and Public Administration, AGPS, Canberra, 1991, p 150. Chapter 6 Entry of Foreign Banks 218
The early limited impact made by foreign banks on the Australian market has been attributed to a variety of factors. The number of new banking authorities issued was much larger than originally anticipated, which meant that those entering the market faced more intense competition for market share than was expected when they initially applied for banking authorities.
As well, new foreign banks were required to operate as subsidiaries rather than as branches, which increased the cost of raising funds and created an environment in which they were unable to compete on an equal footing with the incumbent domestic banks. Finally, they faced high barriers to competition, particularly the vast branch and agency networks of the major banks, which were crucial in protecting the market share of the major banks.39
Like most front-line troops, the foreign banks never really had a chance to succeed. The big four incumbent banks had plenty of warning about their arrival and thus had set about preparing for the onslaught ... it is clear that by virtue of their entrenched positions, their preparedness via mergers and spending on raising entry barriers, the big four incumbent banks were very comfortably sitting behind remarkably high entry barriers by the time foreign banks came on the scene in 1985.40
6.4 MARTIN COMMITTEE REPORT 1991
In 1990, Keating established a Parliamentary Inquiry into the Australian Banking
Industry. Known as the Martin Committee, it reported in November 1991 and
39 Ibid (also see The Entry of Foreign Banks, Reserve Bank of Australia Bulletin, August 1985, pp 11-15 and New Banks in Australia, Reserve Bank of Australia Bulletin, November 1987, pp 29-34). Chapter 6 Entry of Foreign Banks 219
was effectively a five-year report card on the success or otherwise of financial deregulation.41 Of continuing interest in that Inquiry was the role and development of foreign banks in Australia.
Two principal issues relevant to the continued presence of foreign banks in
Australia were identified. These were whether restrictions on further foreign bank entry should be removed, including conditions on entry and exit, and whether foreign banks should be allowed to operate in Australia as branches of their parent bank, rather than as subsidiaries.
The Martin Committee concluded that there was widespread support for the removal of existing restrictions on further foreign bank entry into Australia.
Amongst those in favour of such a move were the major domestic banks and the foreign banks which commenced operations in Australia from 1985 onwards.
It was argued that a policy of reciprocal open entry may assist in providing an ongoing spur to the competitiveness of existing banks, because of the threat from new entrants. Given that Australian banks had greater international focus, and given that foreign banks were operating on a more global basis, a policy of reciprocal open entry was important in ensuring that Australia was able to participate fully in the worldwide financial system.
40 Ferguson, R, Foreign Banks in Australia, Economic Papers, September 1990, pp 4-5. 41 Martin, S P, Op Cit, Ch 10. Chapter 6 Entry of Foreign Banks 220
Martin noted that the Industry Commission came to a similar conclusion on foreign bank entry in its draft report on the availability of capital. The Industry
Commission recommended that the restrictions on the number of foreign bank licences be lifted, subject to the maintenance of suitable prudential requirements for new entrants.42 Martin supported this recommendation, on the understanding that the new entrants provide a wide range of banking services, as was expected in 1985.
With respect to the arguments on branch versus subsidiary issues, the Martin
Committee noted that foreign banks operating in Australia since 1985 (except for the three original banking groups) were required to be established as locally incorporated subsidiaries rather than as branches of the parent bank. This requirement arose from a recommendation of the Martin Review Group, which favoured new businesses being subject to Australian law and Australian prudential standards.43
Under the provisions of the Banking Act, 1945, the Reserve Bank was responsible for protecting Australian depositors and for ensuring that banks operate in a sound and prudent way. The decision in 1984 to allow the new foreign banks to enter Australia only as subsidiaries was based primarily on concerns that the Reserve Bank would not have the capacity to fulfil its statutory responsibilities if the new foreign banks were established as branches.
42 Industry Commission, Availability of Capital Draft Report, AGPS, Canberra, 1991, p 115. 43 Martin, V, Australian Financial System Review Group, AGPS, Canberra, 1984, p 71. Chapter 6 Entry of Foreign Banks 221
Allowing foreign banks to operate as branches would mean that the Reserve
Bank would not be the primary supervisor for such banks. This raised questions about the extent to which the Reserve Bank could protect Australian depositors should a foreign bank with an Australian branch get into financial difficulties.
The Martin Committee concluded that there was widespread support for allowing foreign banks to operate in Australia as branches. The major domestic banks and existing foreign banks favoured this approach. The Reserve Bank concurred, noting that its objections in 1984 had been lessened by the development of Basle guidelines harmonising capital requirements.44
Martin considered that there were a range of benefits which could be achieved by allowing foreign banks to operate in Australia as branches. First and foremost of these was the possibility of increased competition in the banking industry. By having a broader capital base and improved fund-raising capabilities a branch of a foreign bank would be in a far better position than a foreign bank subsidiary to compete against domestic banks.
In addition, reciprocal access for Australian banks to overseas markets hinged to a significant degree on the conditions of entry into the Australian market for foreign banks. Allowing foreign banks to operate as branches would bring
Australia into line with the practice of international and regional financial centres. It was an appropriate signal to the international community about
44 Martin, S P, Op Cit, pp 156-159. Chapter 6 Entry of Foreign Banks 222
Australia’s desire to participate openly in the worldwide financial system. There was no doubt that it would improve opportunities for the overseas expansion of
Australian banks, and would contribute towards Australia’s efforts to achieve a more liberal trading regime globally.
The Committee was mindful of the difficulties associated with prudential supervision of foreign bank branches, and the concerns which existed in this regard. It was encouraged, though, by the confidence of the Reserve Bank that satisfactory supervision arrangements could be established. The Committee was adamant that prudential standards should not be sacrificed to the pursuit of improved competitiveness.
Accordingly, the Martin Committee recommended that all foreign banks be admitted into Australia subject to the normal RBA requirements for banking licences which had been applied to Australian banks, provided that the relevant foreign countries gave reciprocal access to Australian banks. Further, the
Committee recommended that foreign banks be allowed to operate as branches of the overseas parent bank, rather than be forced to operate as locally incorporated subsidiaries. This was provided appropriate prudential standards were established, operations monitored, and deposit protection assured.
Chapter 6 Entry of Foreign Banks 223
6.5 ONE NATION RESPONSE 1992
In February 1992, Prime Minister Keating released Labor’s economic blueprint entitled One Nation.45 That statement included the government’s broad, but not complete, acceptance of the Martin Committee’s two recommendations on foreign bank entry.
Foreign applicants were to be given banking licences where the bank and its home supervisor were judged to be of “sufficient standing” and where there was agreement that RBA prudential guidelines would be complied with. No mention was made of the Martin Report’s proviso that the relevant foreign countries provide reciprocal access for Australian banks. This change was presented as demonstration of Australia’s full support for the Uruguay Round negotiations on trade in financial services which were then in progress.
However, foreign banks were to be allowed to operate only as branches in wholesale banking while, as before, retail banking was to be conducted by foreign banks only through subsidiaries. This separation was made in recognition of the reduced scope for RBA supervision and higher risk for depositors in regard to bank branch operations; the commitment to protecting retail deposits was not to be weakened. It was also announced that takeover bids for Australian banks, other than for the Big Four, by foreign banks would be sympathetically considered.46
45 Paul Keating, One Nation, AGPS, Canberra, February 1992. 46 Ibid. pp 68-9. Chapter 6 Entry of Foreign Banks 224
In practice, this general policy stance was translated into rules and concessions dealing with taxation, particularly interest withholding tax, capital adequacy requirements and prudential supervisory arrangements.47
The Government argued that the main benefits of a more open approach to foreign bank entry were: improvements in the international competitiveness of the Australian financial sector; reduced input costs to banks (increased access to cheaper sources of funding); benefits to consumers and businesses (lower costs and improved financial services products) arising out of enhanced competition within the domestic banking system in Australia; and the strengthening of Australia’s position in the context of the GATT Uruguay Round negotiations on trade in financial services, as the changes represent a significant liberalisation in this context.
6.6 CONSEQUENCES
Legislation amending the Banking Act, 1945 to allow foreign banks to operate as branches was passed in December 1992, and to facilitate conversions from subsidiary to branch status in December 1993.
When Caucus considered the legislation in 1992, the arguments over foreign bank entry had long since been won. No objections were raised to the proposal, particularly as it had become part of Labor’s broad economic strategy.
47 Reserve Bank of Australia, Policy Details on Foreign Banks, Press Release no 92-13, May, 1992; The Treasurer (John Dawkins), Banking Policy Statement, 18 June 1993, pp 4-6 and The Treasurer (John Dawkins) and the Minister for Finance (Ralph Willis). Budget statements 1993- 94, Budget Paper No 1, AGPS, Canberra, 1993, Section 4.43. Chapter 6 Entry of Foreign Banks 225
As well, it was only months to the 1993 election, an election being fought on taxation. For Labor, the Goods and Services Tax (GST) was of far greater significance than an extension of existing policy on foreign banks, especially as
Labor’s electoral fortunes were looking pretty shaky.
In 1993, when further legislative changes were made, Caucus was not going to question Keating on this issue. He had, after all, won Labor another term in government, and Richardson’s description of him as “King Keating” summed up his total dominance of the Party at this time. Foreign banks operating as subsidiaries or branches were not a top priority issue for Caucus anyway.
The effectiveness of this policy could be judged by the growth of foreign banks in Australia over the subsequent years. By May 1994 there were twenty-one foreign banks operating in Australia, and six of these were foreign bank branch operations. As well, there were sixty-four foreign banks operating representative offices in Australia. These did not conduct banking business but acted as links between Australian customers and their overseas parent banks and thus sought to generate business for the latter.
When Labor lost office in March 1996, there were thirty-one foreign banks operating in Australia and sixteen of these were foreign bank branch operations.
More than sixty foreign banks maintained representative offices. 48
48 Data supplied by the Reserve Bank of Australia to the Parliamentary Research Service. Chapter 6 Entry of Foreign Banks 226
Perhaps surprisingly, only two foreign banks took up the opportunity created through the One Nation policy changes to acquire an Australian bank: Primary
Industries Bank of Australia is now owned by Rabo Bank Nederland and The
Bank of Western Australia has been acquired by the Bank of Scotland.
The adopted policy on foreign banks might also be questioned because of its neglect of the Martin Report’s proviso that reciprocal access for Australian banks overseas should be granted before foreign banks are admitted to
Australia. As with policy directions on import protection, unilateral liberalisation was chosen instead. This proviso proved correct as Australian banks restored their profitability and began looking aggressively at expanding their overseas interests and operations. CHAPTER 7
SALE OF THE COMMONWEALTH BANK
7.1 INTRODUCTION
Since the early days of banking in Australia, deep-seated resentment towards the financial system became entrenched in society. This was particularly so amongst the working class and rural producers, and was exacerbated by bank failures, foreclosures, high interest rates and subsequent concerns about financial stability and security.
Not surprisingly then, the Australian Labor Party saw an important role for a major bank owned by the Government which would supposedly offer security and protection. Debate raged for years as to how best achieve this aim. In the late 1890s, there was a robust debate about State Banks and Credit Fonciere.
The Commonwealth Bank was established by the Fisher Labor Government with the passage of the Commonwealth Bank Act 1911.
This will be a bank belonging to the people, and directly managed by the people’s own agents. ... [I]t will ultimately become the bank of banks rather than a mere money-lending institution. ... Our chief aim is not to make profits, but to insure safety and security to depositors.1
1 Votes and Proceedings, House of Representatives, Parliament of Australia, Canberra, 15 November 1911, pp 2644-2662. Chapter 7 Sale of the Commonwealth Bank 228
The Bank’s history and development as a symbol of control over the "money power" by the labour movement is one of struggle, necessary change, and finally elimination as a government-controlled instrumentality.
7.2 HISTORICAL OUTLINE OF THE COMMONWEALTH BANK
By the turn of the Twentieth Century, most Labor Platforms called for a State
Bank, a national bank, or some form of government control of the monetary system.
For example, the Labor Party's Victorian Branch manifesto published in 1910 called for a “people’s bank”.
Banking is one of the frauds by which capitalism bleeds the people. The Labour [sic] proposal is not to nationalise the existing banks, but to establish a Commonwealth bank, which will have a branch in every considerable centre in Australia, and will enter into competition with the company-owned banks.2
The arguments advanced by Labor in favour of a state bank relied as much upon the alleged sins of private banks as they did upon the virtues of state-run institutions. A result of the weaknesses of Imperial Banks during the crisis of the 1890s was a deeply-ingrained suspicion of the probity of bankers, and a conviction that private banking, by its very nature, was not serving community interests. This view was sustained by much evidence and experience.
2 Gollan, R, The Commonwealth Bank of Australia: Origins and Early History, ANU Press, Canberra, 1968. Chapter 7 Sale of the Commonwealth Bank 229
At the same time, the idea that capitalism consisted of a set of predatory monopoly interests, as represented by British banks, that is foreign banks, which conspired against the great mass of the people, commanded a wide audience in the Australian labour movement. The events of 1893 had taught them that those monopolies were ranked in a hierarchy of power and moral turpitude, with the Money Power supreme above others.3 The problem remained, however, as to what was to be done to solve this problem. The most common proposal was to establish a State Bank.
With the Federation of the Australian colonies in 1901, the Commonwealth
Constitution firmly established banking as an important element in the economic development of the new Commonwealth. It contained a specific head of power in relation to banking:
51(xiii) Banking, other than State Banking; also State banking extending beyond the limits of the State concerned, the incorporation of banks, and the issue of paper money.
As a consequence, debate continued as to the desirability of the Federal
Government owning its own bank. The Labor Party accepted this opportunity with alacrity, as it offered a chance to shape the country’s monetary system in a similar way to those advocated for State banks. Accordingly, the focus of debate shifted from the State to the Federal arena.
3 Love, Peter, Labour and the Money Power, Melbourne University Press, Melbourne, 1984, p 40. Chapter 7 Sale of the Commonwealth Bank 230
One of the strongest advocates for a Commonwealth Bank was the Labor
Parliamentarian King O’Malley. But while O’Malley was unsuccessful in his attempts, he sowed a seed in the minds of Labor politicians and Party officials which continued to grow in the early part of the century.
O’Malley presented his ideas for a “National Postal Bank” to the 1908
Commonwealth Conference of the Labor Party in Brisbane.4 It was the first really detailed proposal to come before the Party that addressed itself to the technicalities of banking practice as well as the intricacies of Commonwealth-
State financial relations.
Basically, O'Malley's proposal was for a form of central bank, which would act as a stabilising influence on the Australian economy. It would be a bank of deposit, issue, exchange, and reserve, jointly owned by the Commonwealth and
State governments, with the Commonwealth controlling at least half the shares.
It would accept ordinary banking business through nation-wide Post Office agencies.
It would also control the issue of currency, act as managing agent for the national debt, hold the gold reserves of the private banks, and maintain the level of credit in the economy during times of crisis such as 1893. The primary purpose was to give the government effective control over the nation’s monetary system.
Chapter 7 Sale of the Commonwealth Bank 231
Although the scheme went perilously close to being bogged down in the morass of Commonwealth-State financial relations, its “general outlines” were eventually approved by Conference, thus making it the basis of federal policy.5
O’Malley’s claim to be the founder of the Commonwealth Bank has been disputed by Kim Beazley Snr. Beazley argued that O’Malley over-stated his role and that there was little substance in his assertion of reluctant support within the Labor Party. Beazley concluded:
No Labor Government prior to Fisher’s had a majority in both Houses. The Commonwealth Bank was established, without internal controversy, by the first Labor Government which could have established it.6
Leaving to one side O’Malley’s versions of his Homeric struggle to single- handedly establish the Commonwealth Bank, what is accepted is that its establishment in 1912 was a culmination of years of debate within the Labor
Party. Fisher noted that the question of such a bank had been before the people of Australia for over twenty years.7
However, even though the legislation establishing the Commonwealth Bank was passed in 1911 by the first Labor Government to have a majority in both
4 O’Malley’s role in its creation has been subjected to much dispute. One side of the argument is put by O’Malley’s biographer Catts in her 1957 book and the other in an article by Beazley (1963). 5 Australian Labor Party, Official Report of the Fourth Commonwealth Political Labour Conference, Brisbane, 1908. 6Beazley, Kim E, The Labor Party and the Origin of the Commonwealth Bank, The Australian Journal of Politics and History, May, 1963, pp 27-38. 7 Votes and Proceedings, House of Representatives, Parliament of Australia, Canberra, 15 November 1911, p 2644. Chapter 7 Sale of the Commonwealth Bank 232
Houses of Parliament, there were no socialist aspirations in the charter when the bank was finally established.
The Commonwealth Bank Act, 1911 empowered the bank to operate as both a trading and savings bank and guaranteed that the institution would be backed by the Federal Government. The attraction to customers was immediate as, at the time, no other bank was offering both trading and savings bank services under one roof, or a Federal Government guarantee.
The savings bank arm of the new bank was given access to the post office network as agents. This was expected to give it a great competitive advantage over the state banks. Fisher himself said:
I believe that the passing of this Bill will mean that there will be ultimately only one savings bank in Australia.8
It was, however, only half the bank that O’Malley and many others had envisaged. It had trading and savings bank functions but did not act as a central bank, nor did it (at that stage) control the note issue. It was little different to the existing private trading banks and the state savings banks.
Labor had its “people’s bank”, albeit in a much diminished form. Despite some initial disappointment for those who had hoped that it would be an all-out assault on the Money Power, it remained as a tangible symbol of the people’s determination to free themselves from the deprivations of private finance. Chapter 7 Sale of the Commonwealth Bank 233
The first branch was opened by Sir Denison Miller in Melbourne in 1912. At the same time, all 489 post offices in Victoria became agencies for the bank and in the next twelve months capital city branches and post office agencies were opened across the country. In 1916, the bank shifted its headquarters to
Sydney.
With Miller’s death in 1923, control of the bank passed to a board. He had overseen the bank’s amalgamation with the State Bank in Tasmania in 1912 and the State Bank in Queensland in 1920. While it had been planned in 1911 that the Commonwealth Bank would take over the savings banks operated by each State, some continued to resist.
The outbreak of the World War One (1914-18) saw the development of a key role for the Commonwealth Bank in coordinating financial transactions associated with the creation of the national commodity pools (such as grain and wool) as an orderly response to the disruption caused by war. The
Commonwealth Bank became a vehicle for implementing the Government’s war-time financial policies. Its financial soundness enabled it to provide strength to the banking sector at a time of potential panic for withdrawals in the first weeks of the war.9
For the next ten years, the Commonwealth bank grew steadily but unspectacularly - until the Great Depression brought a series of events which
8 Ibid, p 2648. 9 See Commonwealth Banking Corporation, The Commonwealth Banking Corporation: Its Background, History and Present Operations, Sydney, Australia, 1980, pp 28-29. Chapter 7 Sale of the Commonwealth Bank 234
enabled it to suddenly become the biggest bank in NSW and one of the biggest in the country.
On 22 April, 1931, the Government Savings Bank (GSB) - then the biggest bank in NSW and the second biggest savings bank in the British Empire with £90 million in both State and Federal Government securities - closed its doors after a “run”. In the days leading up to the closure, the Commonwealth Bank had refused to help the GSB meet the demands being made by depositors unless it agreed to an amalgamation - something staunchly opposed by the NSW
Premier, Jack Lang.
The GSB was six times the size of the Commonwealth Bank, thus prompting historians to believe that its collapse was the result of some questionable political dealings.10 When the bank closed, amalgamation talks resulted in the
Commonwealth Bank acquiring all the buildings of the GSB at book value, the savings bank deposits and the majority of its staff. At a stroke, the
Commonwealth became the biggest bank in New South Wales.
The Great Depression left a legacy of bitterness and suspicion within the
Australian Labor Party, mainly directed at the banks. A Royal Commission into the Monetary and Banking System was established and reported in 1937.11
The Royal Commission was chaired by Justice Napier and included Ben Chifley who was later to become a Labor Prime Minister and Treasurer. It recommended that private banks continue but they be licensed, and that the
10 For a full account see Gollan, R, Op Cit. Chapter 7 Sale of the Commonwealth Bank 235
Commonwealth Bank should be empowered to implement monetary policies such as directing trading banks to place a proportion of their deposits with the
Commonwealth Bank.12
Chifley, in dissenting comments, argued for government control of banking.
Banking differs from any other form of business, because any action - good or bad - by a banking system affects almost every phase of national life. A banking policy should have one aim - service for the general good of the community. The making of profit is not necessary to such a policy. In my opinion the best service to the community can be given only by a banking system from which the profit motive is absent, and, thus, in practice, only by a system entirely under national control.13
Implementation of the Royal Commission’s recommendations began on a progressive basis but the intervention of World War Two (1939-1945) saw the emergence of different priorities for the nation and for the banking sector.
After the War, the Chifley Labor Government moved to expand the business of the Commonwealth Bank and to nationalise the private banks with the enactment of the Banking Act 1947. The legislation was struck down by the
High Court and by the Privy Council one year later in Bank of New South Wales
11 Report of the Royal Commission into the Monetary and Banking System at present in Operation in Australia, Commonwealth Government Printer, Canberra, 1937. 12 Ibid, p 228. 13 Ibid, p 262, paragraph 6. See also, Commonwealth Banking Corporation, The Commonwealth Banking Corporation: Its Background, History and Operations, Sydney, Australia, 1980, p 45; and Martin, S P, A Pocket Full of Change: Banking and Deregulation. Report of the House of Representatives Standing Committee on Finance and Public Administration, AGPS, Canberra, November 1991, pp 19-20. Chapter 7 Sale of the Commonwealth Bank 236
v. the Commonwealth.14 The legislation was found to be invalid, primarily because it was not a law relating to banking and therefore not within S.51 (xiii) of the Constitution. It was also invalid for seeking to acquire property without payment of just compensation as required under S.51 (xxxi).
The case involved a significant legal contest between leading counsels for both sides, Labor Attorney-General, Dr H V Evatt and future Chief Justice of the High
Court, Garfield Barwick.
It was Garfield Barwick, for the banks, who emerged the victor. The attempted nationalisation of the banks failed, and in the federal election a few months later, Labor was voted out of office, not to return for another twenty three years.15
The 1950s saw debate focus on the need for the central banking function to be established separate from the Commonwealth Bank. In part, the rationale for this move was to reduce the capacity of the Commonwealth Bank to be used as a vehicle for any future proposal for nationalisation of the private banks.
In 1959, Commonwealth banking was restructured to reflect the outcome of this debate. The Reserve Bank of Australia was created as Australia's central bank.
The Commonwealth Bank was restructured into four arms:
• Commonwealth Banking Corporation;
• Commonwealth Trading Bank of Australia;
14 (1948) 76 CLR 1. The Privy Council appeal was Commonwealth Banks v. Bank of New South Wales (1949) 79 CLR 497. 15 Coper, M, Encounters with the Australian Constitution, CCH Australia Limited, Sydney, 1987, p 295. Chapter 7 Sale of the Commonwealth Bank 237
• Commonwealth Savings Bank; and
• Commonwealth Development Bank.
The 1960s and 1970s saw the consolidation of the Commonwealth Bank as it endeavoured to compete with other financial institutions. These included private banks, state banks and non-bank financial intermediaries. A number of private banks merged at this time and the Commonwealth's performance and market share reflected its under-capitalisation and the problems of trying to meet the community’s expectations about a government-owned bank.
7.3 DEREGULATION OF BANKING
When deregulation of the banking industry commenced in earnest in 1983, it posed significant challenges for both the newly elected Labor government and the Commonwealth Bank, and laid the ground for its eventual sale.
In 1987, in a rapid turnaround from his position two years earlier, Prime Minister
Bob Hawke targeted the Commonwealth Bank as being among the Government assets he was seeking to privatise. His views and those of his Treasurer Paul
Keating, were shaped by events that had confronted the government about financial deregulation during their term in office.
Hawke and Keating were opposed by some of their colleagues, including the
Minister for Foreign Affairs, Bill Hayden, who articulated the widely-held view about the sanctity of the bank within the Labor Party. Chapter 7 Sale of the Commonwealth Bank 238
It’s in our history, it’s the psyche of our party, and if there is going to be any debate, all these things must be handled very tenderly in respect for the feelings and history of our party and its traditions.16
Despite these sentiments, Keating raised the possible privatisation with the
Bank’s Board as early as March 1988. In April he argued that the sale of part of the Bank was inevitable because the Government could not afford to give it much-needed capital. But the immediate sale of the Bank was thwarted by traditionalists within the ALP, as represented by the Caucus and the broad
Party. Both Hawke and Keating decided it was not the appropriate time to fight over such an important issue.
As a consequence, they both continued to publicly champion the public ownership of the Commonwealth Bank. Hawke said in his 1989 Light On the
Hill Speech:
What in the name of reason is the justification for breaking up and selling off the great and efficient national assets, like the Commonwealth Bank, Telecom, TAA and Qantas ... But as the people of Australia come to realise the extent of the economic and social vandalism proposed by our opponents - and indeed as party of the process of promoting that awareness - it will be necessary for us - Ben Chifley’s heirs and successors - to keep fresh and green the memory, the example and the experience of this great Australian.17
16 Hayden, Bill, quoted by McNicholl, D D, Labor Icon Lost with Sale of People's Bank, The Australian, 13 May 1995. 17 Votes and Proceedings, House of Representatives, Parliament of Australia, 14 November 1990, p 3998. Chapter 7 Sale of the Commonwealth Bank 239
Privately however there was a completely different agenda for both Hawke and
Keating regarding the Commonwealth Bank.
In 1990 Keating triumphed when thirty per cent of the Commonwealth Bank was sold in a deal to help bail out the financially troubled State Bank of Victoria
(SBV) and the Labor government.
The 1980s had been a time of laxity in terms of lending practices by some financial institutions. Subsequent corporate collapses created a crisis in the banking sector. The State Bank of Victoria sustained heavy losses through its merchant bank subsidiary, Tricontinental Holdings18. The spectre of the instability and panic which had accompanied the crisis surrounding the
Government Savings Bank of New South Wales in 1931 compelled the
Commonwealth Government to act quickly to acquire the State Bank of Victoria through the Commonwealth Bank.
Keating stated that if the public had come to doubt the ability of the Victorian
Government to deal with the enormous financial consequences of
Tricontinental’s losses, confidence in the State Bank would have been undermined.
It is Australia’s fifth largest bank with extensive liabilities overseas and a loss of confidence in it would have threatened the very stability of
18 See Armstrong, Hugo, and Gross, Rick, Tricontinental: The Rise and Fall of a Merchant Bank. Melbourne University Press, Melbourne, 1995. Chapter 7 Sale of the Commonwealth Bank 240
Australia’s financial system. This was a situation which the Commonwealth Government could not allow to occur.19
Consequently, the Commonwealth Bank was restructured to a public company with a combination of majority government shareholding and non-government shareholders. The Commonwealth Banks Act 1959 was amended by the
Commonwealth Banks Restructuring Act 1990 to insert a new section which required the Commonwealth to maintain at least seventy per cent of the voting shares in the Commonwealth Bank.
Keating stated the rationale for this position in the following terms:
The structure we are creating, with the Government as permanent majority shareholder and non-government shareholders as a substantial minority, will give the Commonwealth Bank access to additional capital while preserving its unique quality as a government owned major bank. The Commonwealth Bank as a government owned and government guaranteed bank has a vital place in our financial system.20
This was to be the first of three tranches in the disposal from Government ownership of the Commonwealth Bank.
In 1993, essentially to meet Budget imperatives, the Commonwealth Banks
Amendment Act 1993 amended section 27L of the Principal Act to reduce the statutory requirements for Commonwealth shareholding from 70 per cent to
19 Votes and Proceedings, House of Representatives, Parliament of Australia, Commonwealth Banks Restructuring Bill, 1990. 20 Votes and Proceedings, House of Representatives, Parliament of Australia, Canberra, 8 November 1990. Chapter 7 Sale of the Commonwealth Bank 241
50.1 per cent. On 9 May 1995, in the context of the 1995-96 Budget, the
Government announced that it would sell its remaining shares in the
Commonwealth Bank.
The “people’s bank” was no longer an asset of the people.
7.4 LABOR'S ROAD TO PRIVATISATION
Why Labor sought to dispose of the Commonwealth Bank and the process involved is a fascinating story of economic necessity and power politics.
The competitive environment of Australia’s financial system was becoming more tense in the early 1990s, largely as a result of the Labor Government freeing up the economy through financial deregulation, labour market deregulation, and privatisation. Privatisation was also spreading in developed economies around the world.
Some of the Bank’s insiders knew that it would not survive in its current form.
Changes were required urgently.21
We knew the organisation was becoming moribund in 1992 as a result of the freeing up of our competitors and the freeing up of the market with skilled labour. The pressures of competition were coming not just from Campbell but from the Labor Government freeing up the system. We
21 David Murray, Personal Interview, 16 December 1997. Chapter 7 Sale of the Commonwealth Bank 242
were fundamentally a good bank but we didn’t have the fighting tools. Therefore we saw privatisation as a way of getting those fighting tools.22
Whilst the unions and the then Chief Executive worked tirelessly to prevent any sell-off of the asset, and for a period were successful, Keating ultimately prevailed. It was the problems confronting the SBV which provided Keating with the impetus and opportunity to begin the process of disposal of the
Commonwealth Bank from government ownership. It was also the opportunity for Keating to go much further than most observers thought possible.
Essentially three propositions have been advanced to explain why the Labor
Government began this process. The first proffered the view that the
Commonwealth Bank had wanted to expand its market share into Victoria, a state where it did not have the competitive advantages of NAB and ANZ.
Acquisition of an ailing state financial institution, paid for by its federal government owner by selling one third through a public float, would enable that to happen.
The second centred on the Federal Labor Government's desire to assist a fellow traveller, the Victorian Labor Government, to overcome the problems associated with the SBV. Finally it has been argued that the sale of one third of the Commonwealth Bank was part of a broader Keating agenda to dispose of the total asset. This was in turn part of Keating's "big picture" vision about privatisation of government assets and his desire to ensure other economic
22 Ibid. Chapter 7 Sale of the Commonwealth Bank 243
objectives, such as tax cuts and appropriate budget outcomes, could be achieved.
Explanations offered by the government on the public record were a mixture of the first two positions. However, there is no doubt that it was the third which was the chief, unstated motivation. Arguments about market share and helping the Victorian Labor Government simply provided the cover and an opportunity to try to convince the Party and public of the merits of the sale.
David Murray, now Managing Director of the Bank, encapsulated the argument about the motivation for the sale in the following terms:
It was more to do with the scale of banking in Australia, because inevitably the whole industry was going to consolidate. State Governments would be forced to seriously question whether they could go on with ownership.
So Keating didn’t come into it with a Commonwealth Bank not knowing what they were doing, but he did come at it with that brilliant idea of matching the partial float with the SBV solution. The day we settled SBV there were runs starting on the branches in the street.
This process became more interesting with the fiscal difficulties of the Federal Government, and surely once it had done the partial privatisation, the next step was full on. I mean, I always believed it was inevitable.23
23 Ibid. Chapter 7 Sale of the Commonwealth Bank 244
Murray also indicated that two years before the State Bank of Victoria problem erupted, the Commonwealth Bank was required to submit a corporate plan to
Keating, under the Government Business Enterprise (GBE) policies of the
Government. In that plan, the Bank determined that all of the State Banks would run into difficulty. This was two years before the first clear sign of trouble.
We had a specific reason for arriving at that conclusion. And we said that if this were to occur there was only one of them that we would be interested in, SBV. Now Keating knew this all along and that's why he was, he was kind to us in some respects, but it wasn’t as though he’d been confronted with some opportunists looking for a privatisation angle. We really said we were interested in this asset.24
Bernie Fraser, a former Treasury Secretary and Governor of the Reserve Bank of Australia, has argued that Keating planned from the very beginning the full privatisation of the Commonwealth Bank. He asserted that arguments regarding increasing market share in Victoria were inaccurate, and that:
Keating saw an opportunity to kill two birds with the one stone - selling the Commonwealth Bank and fixing the Victorian banking problem.25
John Button, a former senior Centre-Left Cabinet Minister, believed the sale of the Bank was part of a broader, long-term agenda of both the Hawke and
Keating Governments in respect of the privatisation of public assets.26 He noted that while Labor accepted without debate the Thatcherite view that the private sector was intrinsically more efficient than the public sector, this was not
24 Ibid. 25 Bernie Fraser, Personal Interview, 16 February 1998. Chapter 7 Sale of the Commonwealth Bank 245
the reason for the privatisation of government businesses such as the
Commonwealth Bank.
It was done simply because the government made personal income tax cuts a feature of every election campaign, and proceeded with worthwhile but costly expenditure measures at the same time. The decline in Commonwealth revenue became a matter of serious concern.27
Clearly, Labor's social and economic agenda in the 1990s was dependent upon appropriate budget outcomes. Revenue issues would be the key to many of the government's proposals for the Australian community. The sale of the
Commonwealth Bank was one way in which revenue could be obtained to redirect towards Labor's broader agenda.
7.4.1 PARTY RESPONSE
With such an historical shift in the relationship between Labor and the
Commonwealth Bank occasioned by the Government's decision to sell part of the Bank, it is instructive to note how the broad Party in its various guises responded to the privatisation of the Commonwealth Bank.
Gary Gray became the ALP National Secretary in 1993 with a background in
Northern Territory and South Australian politics. Gray recalls that the Party
Platform contained reference to a "publicly owned central bank" until the early
26 Button, John, As it Happened, Text, Melbourne, 1998. 27 Ibid, p 338. Chapter 7 Sale of the Commonwealth Bank 246
1970s. But the words were “publicly owned central bank”. This had been a major Party commitment following the Depression and had culminated in the bank debates of the late 1940s.
The Reserve Bank of Australia came into existence in 1959 and assumed the functions of a publicly-owned central bank. Consequently when the debate about privatisation was confronted in the 1980s, there was no specific protection in the Platform for the public ownership of the Commonwealth Bank.
However, most Party members believed that the socialist objective at the very least provided a commitment, qualified though some might argue it is, to public ownership of the central bank.28
Although the Commonwealth Bank ceased to be the Central Bank in 1959, a further point of explanation is offered by Gray - what he referred to as the traditional owner’s view of things.
Many Party members just believed that as a matter of faith the argument for public ownership of the Commonwealth Bank was there implicitly in some way, shape or form. And most Party members were surprised when we pointed out to them that, in fact, to sell off part or all of the Commonwealth Bank, it did not require a Platform change - unlike the deregulation of the telecommunications industry in 1990 where we did require a special National Conference to create a Platform to allow that to happen.29
28 Gary Gray, Personal Interview, 5 December 1997. 29 Ibid. Chapter 7 Sale of the Commonwealth Bank 247
In fact, in each of the three tranches leading to the total sale of the
Commonwealth Bank between 1993 and 1996, there was no special National
Conference. There were no conference resolutions passed which supported, or needed to be passed to support, the sale of the Bank. No discussions of the
Bank sale ever occurred at the National Executive level of the Party.
Gray recalled that in February 1990, during the first week of the election campaign, Paul Keating launched his election statement at the National Press
Club and announced the sale of the first slab of the Bank.
That was the first the Party knew of it. No-one in the Party complained. We did not receive any correspondence. We did not receive any complaints from unions, from State Branches, from anyone because it was a statement made at the start of a campaign and I think there’s a lot of political pressure to not create an embarrassment for the Party. When we won the election, there was so much relief and so much of a confirmation of Paul Keating’s leadership that the issue was simply never raised. It only came as successive tranches were sold.30
Gray also saw the partial sale of the Bank in terms of the factional makeup of the Party. Gray believed that although the Party was annoyed at the sale, it never really created a revolt.
Because the Left in the Party, who would normally, one would assume, be in a position of complaining about the sale of such a significant public asset - because it was a Left wing government in Victoria and a Left wing Premier who had requested the Commonwealth Bank buy the State
30 Ibid. Chapter 7 Sale of the Commonwealth Bank 248
Bank of Victoria that really left them politically with nowhere to go.31
Graham Richardson remembers the Party response somewhat differently.
The Branches went birko at the first hint of it, they went completely berserk.32
Button supports Richardson's views.
The true believers were sullen. Long accepted public institutions had disappeared. In the Labor Party branches it was like the abolition of the Latin Mass.33
The response was a mixture of all these views. Certainly during the election campaign, many other issues focussed the mind of the Party, and the need for unity of purpose in defeating the Coalition tended to push this important issue into the background.
After the election, with Labor victorious, elements of the Party began to express some reservations about the sale of the bank. However, because Keating and the government argued their case in terms of rescuing the SBV and the State
Labor government, these arguments quickly dissipated within the Parliamentary
Party. They did not disappear as quickly within the broad Labor movement or its constituency, as attachment to a Labor icon ran deep.
31 Ibid. 32 Richardson, Graham, Personal Interview, 28 November 1997. 33 Button, John, Op Cit. Chapter 7 Sale of the Commonwealth Bank 249
7.4.2 CAUCUS VIEWS
Leo McLeay recalled Caucus' response to the Commonwealth Bank sale in terms of there being a fair bit of unhappiness behind the scenes. But in the end people had difficulty mounting an argument against what Keating was saying.
The people who would normally have been the constituency in the Party who didn't want to sell the Commonwealth Bank were the Left. Because the State Bank of Victoria had gone broke and the State Government didn't have the money to bail it out, Keating did this deal with Kirner to buy the State Bank of Victora, without using any money off the Budget by selling the Commonwealth Bank to pay for it.
This meant he muted this large constituency of the Labor Party Caucus. At the Caucus meeting he unanimously got through the sale of a third of the Commonwealth Bank. At the end of it there was no vote. It was just passed on the voices. So he was lucky in a sense that a bigger crisis elsewhere in Victoria delivered the result. He might say that wasn't luck it was just smart thinking on his part. It might have been a bit of both.34
Richardson recalled that it was Keating's ability to argue the case and to largely assuage any dissent which led Caucus ultimately to support the sale of the first tranche. It was this innate ability to cajole, caress and apply logic which was a characteristic of Keating. It was a powerful tool in his intellectual armoury that
Keating often relied on to achieve his objectives.
34 McLeay, Leo, Personal Interview, 26 March 1998. Chapter 7 Sale of the Commonwealth Bank 250
I actually believed in the Commonwealth Bank, first tranche, because Keating sold me completely on it. I’m not saying in a sense that I’ve now changed my mind. I haven’t. I mean, he sold me completely.35
Robert Ray was more direct in his views on why the bank was sold.
I think the Victorian State Bank was just used as the lever to flog off the Commonwealth Bank. And that was a perfect occasion to do it. Cabinet made the decision without any briefing papers being given out in advance, just told this is the decision we had to make.
There wasn't an enormous amount of commitment around for the Commonwealth Bank. The Commonwealth Bank was sold for one reason, one reason only, to make money to put into the Budget. That was the only reason to sell it.36
Gary Punch offered this view:
I think it was only after a broad cross section of the Caucus realised that the bureaucracy in the Commonwealth Bank made it absolutely no different to the bureaucracy in any of the big banks that privatisation of the Commonwealth Bank became less of a sacred cow in the Caucus. That argument was never successfully translated to the electorate and the broader labour movement.37
Bob McMullan expressed some mixed views about the whole process involving the sale of the Commonwealth Bank. He was, however, convinced that if it had not been for the crisis of the SBV it would have been impossible to get a
35 Richardson, Graham, Op Cit. 36 Ray, Robert, Personal Interview, 23 April 1998. 37 Punch, Gary, Personal Interview, 8 January 1999. Chapter 7 Sale of the Commonwealth Bank 251
majority of any forum of the ALP to vote for the sale of the first tranche of the
Commonwealth Bank.
McMullan believed this was due essentially to the tremendous emotional attachment people had to the Bank going back to its establishment and to
Chifley banking issues and to the fact it had the potential to play a socially responsible role with community service obligations.
However, McMullan noted that no real alternatives to the partial sale of the
Bank in order to rescue the SBV were proposed.
I believed at the time that we did face a situation where no other apparent resolution of the State Bank of Victoria crisis was available and we had to rescue it. Therefore the role of the Commonwealth Bank, or that small part of it, whatever the percentage was, was necessary. I was pretty reluctant, but I thought it was necessary. In hindsight, I’m not so sure.38
7.4.3 CABINET DISCUSSIONS
While the views of the broad Caucus provide an insight into one aspect of the sale of the Bank, the deliberations of Cabinet provide another.
Ralph Willis recalled that Cabinet's general view was that it was a lot better to have the Commonwealth Bank take over the SBV than somebody else like
Westpac. This reflected a collective view in the Caucus that the private banks
38 McMullan, Bob, Personal Interview, 17 November 1997. Chapter 7 Sale of the Commonwealth Bank 252
deserved no special favours. It was a view fashioned from the traditions of the
Party in respect of the relationship between banks and Labor.
We all knew that we were doing something fairly exceptional here because we were doing two things. We were trying to bail out the Victorians because they were in a desperate situation with the loss of the State Bank, which in itself was a devastating blow to the Victorian Government. We were trying to help them out of an extremely difficult situation as best we could and also to ensure that the Victorian State Bank at least remained in more acceptable hands than it otherwise might have been in. We made it easy for the Victorians and I guess for us as well.
At the same time we also knew that we were doing something that we hadn’t contemplated doing before which was to sell the Commonwealth Bank. Of course there were strict promises given that this would only be for this purpose and we had no intention to go any further. It was very much on that basis, I guess, that the decision was taken.39
Kim Beazley recalled the Cabinet discussions in terms of views held by members of the Left faction. He recalled that Brian Howe, one of the leaders of the Parliamentary Left, was very unhappy with the situation.
They tended to blame the Victorian government having got us into that position, but they also tended to see it as a bit of a convenience you know, they tended to see it for what it was. But basically the majority of Cabinet was so hugely for it. There was very little dissidence.40
39 Willis, Ralph, Personal Interview, 4 December 1997. 40 Beazley, Kim, Personal Interview, 16 December 1998. Chapter 7 Sale of the Commonwealth Bank 253
Beazley took this argument further. When considered as part of Labor's continuing embrace of deregulation generally, the privatisation of government assets and the fact that Labor became increasingly more comfortable in government, the idea of the sale of the bank raised no real objection.
You'd really reached the point where people really weren't that interested. The icons were gone or partially gone. The argument for keeping them in public ownership was pretty well gone. None of them were in monopoly positions and everybody sort of opposed to any form of privatisation martialled their forces around Telstra.
The budgetary position was always an effective selling point and that included inside Cabinet. From my recollection, there wasn't any opposition to the full privatisation of the Commonwealth Bank inside Cabinet.41
It is instructive to note however, that with the passage of time, much of the early
Left opposition became muted. This was part of a broader process of inclusion of the Left within government decision-making. This was instrumental in ensuring controversial issues or decisions received factional and Caucus endorsement with minimal internal disruption.
Richardson commented on this, although in true factional warrior tradition, provided a sobering conclusion.
Brian Howe, by being in Cabinet, had been basically a tool of Keating’s, I mean you know he supported everything that Keating wanted basically.
41 Ibid. Chapter 7 Sale of the Commonwealth Bank 254
Everything. And that undermined the real Left attitude. In the Cabinet, you know Bolkus was a genuine Leftie, that was it. Because Howe and Baldwin…I mean bloody Baldwin was much more Right wing than I was I think, much more, and so the Left, in terms of the Left leadership, you know they had Hand and Bolkus. Hand was a wringing hands, bleeding heart Leftie. Bolkus was still a hard-liner. The others had all ratted. But they were still in the team.
They believed in all the principles that they had ever built a career on and so the Left, the hard-line nature of the Left, had simply melted away. It hadn’t really blown up, but it just gradually melted over the course of ten years and so by the early 90s they would put their hand up for pretty well anything. Provided they were consulted and part of the decision.
We no longer had the fights we were having in the eighties and up to 1990. A lot of that was because the Left thought that they were part of the Government. They weren’t.42
This was an argument that surfaced again with the sale of subsequent tranches of the Bank. Generally speaking the view within Caucus was one of acceptance that if part of a government-owned enterprise was sold, it was only a matter of time before all of that enterprise would be privatised.
The thing about the Commonwealth Bank was once you sold a third of it, you had buggered the lot. Once you sell a percentage of a public utility you lose control. Things like Qantas and that. What social good was there in the end for the government owning an airline? I mean there was just none. You don't need to subsidise the financial and telephone companies to get some social benefit out of it.43
42 Graham Richardson, Op Cit. 43 McLeay, Leo, Op Cit. Chapter 7 Sale of the Commonwealth Bank 255
Richardson saw it in the following terms.
I mean, whether we should have gone with other tranches in selling the Commonwealth Bank is a matter of debate. We promised faithfully that we wouldn’t. But I think that everyone knew that once you opened the door, then its not going to stay open that much, its obviously going to keep getting pushed until its open and so that debate moved on.
At the end of the day, you can flog them off, banks are still banks. I think that because of this old the proof of the puddings in the eating argument people had realised that it just wasn’t worth a great fight.
And all the people who said that things would be terrible once we privatised it, I said it turned out to be bullshit I think. Basically people just dropped off, and that helped us a lot. 44
7.4.4 LEADERSHIP
Gordon, in his biography of Keating, discussed the sale of the Commonwealth
Bank in terms of influencing the subsequent leadership battle between Hawke and Keating.45 He noted that the acquisition of SBV saw the beginnings of an alliance between Keating and the then Victorian Premier, Joan Kirner of the
Left, and her Industry Minister, David White, from the Right.
According to Gordon, the Commonwealth Bank deal provided a big morale boost to Keating who, some five months after the election, had still received no indication from Hawke that he intended to honour the Kirribilli promise. The
44 Richardson, Graham, Op Cit. Chapter 7 Sale of the Commonwealth Bank 256
Kirribilli promise was an agreement struck between Hawke and Keating in respect of leadership succession. Hawke had promised in front of Sir Peter
Abeles, former Chairman of TNT, and Bill Kelty, Secretary of the ACTU, to retire in favour of Keating before the 1993 election. It was a promise Hawke had no intention of keeping.
Keating himself saw the sale of the Commonwealth Bank in terms of a number of factors. It would provide much-needed capital to the bank to enable it to compete more favourably in the market. Also important was the need to produce domestic budget surpluses, a reason advanced for the second and third tranches of the sale. But paramount was Keating's belief that the bank did not belong in government hands.
As outlined in Appendix 2, Keating believed that the sale of one third of the
Commonwealth Bank would achieve the aim of assisting the Victorian Labor
Government at a most difficult time. It would also remove the need to provide a cash injection into the bank to enable it to compete on a more equal basis with the other private banks. However, it was the overriding aim to produce a budget surplus through the sale of the bank which really drove the decision at this time.
Hawke played a very minor role in this whole scenario. In his Memoirs, the sale of the Commonwealth Bank is not even mentioned. By 1990, Keating had almost total control of the economic issues facing the government. The close
45 Gordon, Michael, Paul Keating: A Question of Leadership, University of Queensland Press, St Lucia, 1993. Chapter 7 Sale of the Commonwealth Bank 257
working relationship that had existed between the two men had all but disappeared. When the second and third tranches of the Bank's sale occurred,
Keating had replaced Hawke as Prime Minister.
7.5 1990 RESTRUCTURE OF THE COMMONWEALTH BANK
Legislation to enable the first tranche of the bank to be sold, was debated in the
Parliament in November 1990.46 The Commonwealth Bank signed a contract on
8 November 1990 to buy the State Bank of Victoria for $1,600 million.
The Commonwealth Bank was to be restructured as a public company. This would enable the additional capital required for the acquisition of the SBV to be contributed by all Australians as joint shareholders with the Government. The acquisition would bring the Commonwealth Bank the substantial share of the banking market in Victoria, and would make it the largest Australian bank in terms of domestic assets.
Of most significance was the issue of how the bank’s shares would be offered, and any limitations or exclusions proposed. It was stated that the Bank would be able to have its shares listed by the Australian Stock Exchange, thus maximising the tradeability of the shares and focussing analysis on the bank’s performance relative to other listed banks.
46 Votes and Proceedings, House of Representatives, Parliament of Australia, Commonwealth Banks Restructuring Bill, 8 November 1990. Chapter 7 Sale of the Commonwealth Bank 258
Foreigners were specifically prohibited from subscribing to the first public issue of shares in the Bank, to give priority to Australian residents. However, foreigners were not to be prevented from buying shares from subscribers and holding them thereafter. It was considered that this would add substantially to the effective demand for shares, and hence to the prospects of success of the issue and to the market value of the new shares.
Only one member spoke in opposition to the Bill during the parliamentary debates. John Scott, the Left wing Labor Member for Hindmarsh in South
Australia, stated he did not believe the Government had a mandate to sell the
Commonwealth Bank, and that such action “... will stand as one of the greatest betrayals of the Australian Labor Party”.47 Scott rejected the view that funds for salvaging the State Bank of Victoria could only have come from the thirty per cent sale of the Commonwealth Bank.
The $8 billion Budget surplus may make the Treasurer [Keating] look good, but history will judge the Hawke-Keating Government on the sell out of the Commonwealth bank to privateers.48
His was a lone voice and the Bill became law. Scott lost his seat in the 1993 election.
47 Votes and Proceedings, House of Representatives, Parliament of Australia, 14 November 1990, p 4001. 48 Ibid. Chapter 7 Sale of the Commonwealth Bank 259
7.6 THE 1993 SALE
In December 1991, Paul Keating replaced Bob Hawke as leader of the
Parliamentary Labor Party and as Prime Minister. The narrowness of his victory in the Caucus room ballot meant Keating had to initially deal a little more cautiously with his colleagues. Most of Caucus, even those who supported
Hawke in the ballot, believed he was the only one who could win the 1993 election (however remote that possibility seemed at the time).
Keating was Labor's most powerful intellect, certainly its best Parliamentary performer and ruthless in pursuit of his goals.
The Opposition, led by former merchant banker and academic economist Dr
John Hewson, consistently headed the government in the polls between 1991 and 1993. With the release of its social and economic blueprint for a Coalition- governed Australia, Fightback, and still emerging from the deep recession of the late 1980s, Labor found itself staring down the barrel of electoral defeat.
Keating and Labor turned to a mixture of continuing the process of deregulation in a number of areas such as finance and telecommunications, whilst at the same time providing fiscal stimulus through grand economic statements to rescue the country's economic fortunes, and their own electoral chances.
Chapter 7 Sale of the Commonwealth Bank 260
On 9 February 1993, Keating released a major government statement, Investing in the Nation.49 This document was to provide a blueprint for Australia’s continuing economic recovery, and was an adjunct to the government’s other major economic white paper Working Nation.50 As with much of what Keating did however, the devil was in the detail.
Contained amongst its proposals for improving national savings, boosting jobs and improving the social and economic well-being of all Australians was a simple statement concerning the Commonwealth Bank. At page 58, and with no other comment in the document, was contained the following:
Box 11: Commonwealth Bank of Australia
Following the success the Commonwealth Bank of Australia had in raising equity capital from the general public in 1991, the Government has decided to reduce its equity in the Bank from around 70 per cent to 51 per cent. This will not affect the Government’s guarantee of the Bank’s liabilities. It is proposed to sell the shares by way of a public float, as was the case in 1991. This will give small investors, in particular, a further opportunity to acquire shares in the Bank.
The sale of this additional equity to the general public is expected to raise around $1 billion in 1994-95.
Whilst it was obvious that revenue-raising was a prime reason for this decision to pay for a number of stimulatory initiatives, its timing was such that the Party could not, and indeed did not, object. In fact writs for the election were issued
49 Keating, Paul, Investing in the Nation, AGPS, Canberra, 9 February 1993. 50 Keating, Paul, Working Nation, AGPS, Canberra, April 1994. Chapter 7 Sale of the Commonwealth Bank 261
the day before the statement was released. So in effect, this became Labor's response to much of the Coalition's Fightback proposals.
Labor won the unwinnable election, or probably more accurately the Coalition lost the unlosable election. Much of the analysis as to why this was so credits
Keating with a masterful performance in tearing down the heart of the Liberals’ policy - the introduction of a goods and services tax.
This really is only part of the truth. In effect, Australia under Labor had been subjected since 1983 to enormous economic and social upheaval. The economy had been modernised. Deregulation in areas such as banking and the workplace had continued apace. But interest rates had soared, the economy had crashed and it was only just recovering. Realistically, the last thing
Australians wanted was another massive dose of change, but that was exactly what Fightback promised.
Weary from this constant pattern of change, the public said “enough”. Labor's re-election in 1993 was not a resounding vote of confidence in its policies or its leadership. It was simply a cry for Australia "to take a breather".
Having won however, Keating was reinvigorated and pushed forward with his
"big picture" plans. Because he had led Labor to a most unlikely electoral victory, his total dominance of the government and the Party was unchallenged. Chapter 7 Sale of the Commonwealth Bank 262
In terms of continuing financial deregulation through privatisation, it meant the sale of the second tranche of the Bank, and ultimately its total disposal.
Legislation to permit the sale of the second tranche of the Bank was debated in
September 1993.51 The Government argued that the Bill would give effect to decisions announced in the Investing in the Nation statement. Its main purpose was to facilitate a reduction in the Commonwealth’s equity in the
Commonwealth Bank from around 70 per cent to a maximum of 50.1 per cent.
This would not affect the government’s guarantee of the bank’s liabilities.
It was noted that originally the sale was to proceed in the 1994-5 financial year.
However, Ralph Willis, the Minister for Finance, announced on 2 July 1993, the proposed sale was to be brought forward to the 1993-4 financial year. This decision was to enable the Government to mitigate the impact that the postponement of the Qantas float would have had on the 1993-4 Budget. At current share prices, the sale of this portion of the government’s equity in the
Commonwealth Bank was expected to raise $1500 million.
And so the second tranche was sold. By now most of the Caucus had come to accept that the Bank's days in part-government ownership were numbered.
However, for some that did not make it any easier to accept when it happened.
51 Votes and Proceedings, House of Representatives, Parliament of Australia, 18 August 1993, p 161. Chapter 7 Sale of the Commonwealth Bank 263
7.7 THE 1995 SALE
In another exquisite piece of timing, the Keating Government announced on
Budget Night, 9 May 1995, that it would sell its majority shareholding in the
Commonwealth Bank. The process of obtaining Parliamentary Labor Party approval for the sale of the remaining fifty one per cent of the Bank was a mixture of secrecy, economic rationalism, political necessity, and as, some still saw it, a final betrayal of Labor ideals.
Selling the final tranche of the Bank was an idea that had been floating around the senior levels of government for more than a year. 52 David Murray claimed he raised the sale issue with Prime Minister Keating around Christmas 1994.
Keating confirmed that he had first approached the Bank at Christmas 1994 and dismissed suggestions that the sale had been decided at the last moment.
I saw the Managing Director and the Chairman of the Commonwealth Bank over Christmas and I had discussions with them and I had discussions at the same time with the Treasurer. We had discussions perpetually over the period and also with Kim Beazley the Minister for Finance.53
At the time there was immense speculation the Government might announce a
Mini-Budget early in 1995. Murray was concerned such a Mini-Budget might include the sale of the remainder of the Bank, and he wanted to iron-out issues
52 Lewis, Steve, and Boyd, Anthony, CBA’s Board gets the news, Australian Financial Review, 11 May 1995. 53 Ibid. Chapter 7 Sale of the Commonwealth Bank 264
like the gradual phasing-out of the Government guarantee on the Bank’s $54 billion of deposits if such a sale was to occur.
However, it was a study by merchant bank Potter Warburg exploring the implications of selling the bank which began the sale process. Treasurer Ralph
Willis wrote to Keating on 1 May 1995 formally proposing the Government sell its remaining shares in the Bank and that the proceeds be included in the
Budget papers. Keating agreed. At no point in the weeks leading up to the
Budget was the sale of the bank discussed at a formal Cabinet meeting or meeting of senior Ministers.
As noted earlier, Keating also had one eye on the electoral cycle. Although polling for Labor was dismal, Keating continued to have a blind faith in his ability to again pull the proverbial rabbit out of the hat. It was a view unfortunately not shared by the majority of the Labor Caucus or the Party at large.
Yet, as seemed almost always to be the case, Labor looked for any window of opportunity to enable it to slip back into government. The Party seemed at the time to be on constant election alert. Whilst this helped Keating's purpose in enmeshing the sale of the Commonwealth Bank into the Budget as part of an election timetable, it served principally to heighten tensions within the
Parliamentary Party.
Chapter 7 Sale of the Commonwealth Bank 265
7.7.1 THE APPROVAL PROCESS
The sequence of events that led to the formal approval of the sale of the bank says much about Budget processes and the way in which the Keating
Government operated in its last year. What preceded the formal decision was an extraordinarily clandestine process of winks and nods in which the key figures informally knew what they were going to do but were not able to actually say it.54
Late on Budget Day, the Secretary of the Treasury and Commonwealth Bank
Board Member, Ted Evans, formally advised Murray that the Government had decided to sell its controlling share. At 5:45pm Cabinet Ministers were summoned for a special meeting, at which the proposal was outlined. There was almost no discussion, save for questions as to whether the ALP Platform needed to be changed. Advice was to the negative, as the last ALP National
Conference had not insisted that the bank remain in majority government ownership. Consequently, the formal decision was taken to sell the bank.
Robert Ray commented on this process, which he indicated had also occurred at the time of the sale of the second tranche of the Bank.
They were decisions by the Revenue Committee … and their reason for sitting late and making the decisions late well after the expenditure decisions had been locked in, was because of the rubberiness of the forward revenue projections. The massive weakness in the Labor
54 Kitney, G, Wright, T, and Maley, K, Why the People’s Bank Sell-Off Was Kept Secret, Sydney Morning Herald, 11 May 1995. Chapter 7 Sale of the Commonwealth Bank 266
Government was that you had a Revenue Committee that made stupid bloody decisions no-one could have a say in.
The first ninety percent of Cabinet know about a revenue decision is at 6:15pm at the briefing.55
At the same time Cabinet was being briefed by Willis, the Commonwealth Bank
Board met to discuss the issue. The only item on its agenda was whether to support a share buy-back scheme involving about $1 billion of the
Commonwealth’s remaining interests in the bank. After what was described as a “long and serious discussion”, the decision was made to support evaluating the buy-back scheme.56
Despite the secrecy surrounding the Board meeting, it appeared that bank management had already taken steps to ensure that its message of support would be heard. At 6:48pm, less that twenty minutes after the bank board had commenced discussions on the issue, a fax was sent to Canberra. It contained both a lengthy press release from the bank and a statement on the share buy- back scheme. A few minutes later, the Treasurer’s staff handed out their own press statement, plus the bank’s releases, to journalists in the Budget lock-up.
In less than an hour, the deal was wrapped up.
As was customary, Caucus gathered at 6:45pm on the night of the Budget, to be briefed in very broad terms of its contents. Traditionally, these briefings
55 Ray, Robert, Op Cit. 56 Lewis, Steve, and Boyd, Anthony, Op Cit. Chapter 7 Sale of the Commonwealth Bank 267
lasted no more than twenty minutes, as the Treasurer of the day had to prepare himself for the nationally-televised Budget Speech, to be delivered in the House of Representatives at 7:30pm.
The reason for this is argued confidentially. Bullshit. It’s a control mechanism. It's one of the few they had left, where they could totally control the agenda without reference to any political process.57
In practical terms, it also gave opponents to any measure in the Budget no chance to overturn its contents. To do so would be to repudiate the Treasurer and the Cabinet Ministers of the Expenditure Review Committee who put it together. It would also create enormous problems for a Government which in this case had prepared a Budget which was to be the last before the 1996 election.
Nevertheless, it was a tremendous shock to the assembled Caucus when Willis announced that the Government would sell the remaining fifty-one per cent of the Commonwealth Bank. There had been absolutely no media speculation that this might be an option and no informed leaks from Cabinet had occurred.
Willis and Keating, as part of the sales pitch to the Caucus, spoke of the sale and the other Budget measures in the broad context of achieving a Budget surplus, estimated at $700 million, and election timing. A critical factor in the sales pitch which appealed to marginal seat Members was the claim that this was the only way interest rates could be contained. Many in the Caucus had long and bitter memories of the 18-22 per cent interest rates on housing and
57 Ray, Robert, Op Cit. Chapter 7 Sale of the Commonwealth Bank 268
small business engendered by Keating’s economic policies of the late 1980s.
Whilst there was shock and dismay, not one member of Caucus raised an objection, not one question was asked.
A copy of the Minutes of the Special Meeting of the Federal Parliamentary
Labor Party which detailed these discussions is attached as Appendix 3.
In justifying the decision, Willis stated that financial deregulation and the increasing level of competition in the banking industry meant that there was no longer a case for Government ownership of a financial institution.58 This was delicious irony, given that prior to 1983 when Willis was Shadow Treasurer, he was decidedly unimpressed with calls for the deregulation of the banking industry. The sale would make a major contribution to the reduction of outstanding government debt and would provide a further opportunity for small shareholders to increase their sharemarket participation.
Willis indicated further that the sale would be open to foreign investors, as was the case in the 1993 sale. However, the Bank would remain predominantly
Australian owned and would continue to have a widely dispersed shareholding.
Existing government policy in relation to the major banks precluded the possibility of a domestic or foreign takeover of the bank.
58 Willis, Ralph, Media Release, 9 May 1995. Chapter 7 Sale of the Commonwealth Bank 269
7.7.2 REACTION TO THE SALE ANNOUNCEMENT
Obviously, not everyone in the broad community agreed with Willis or the
Government. Reports on the privatisation of the Commonwealth Bank rarely failed to mention that it was a Labor Party “icon”.59 This emotive approach tended to obscure the significance of the decision, particularly as there were implications for policy towards banks in general.
One of the main objectives of the original creators of the Commonwealth Bank was to “keep the bastards honest”. It was hoped both that competition from a publicly-owned bank would discourage private banks from exploiting their customers, and that information gained from the operation of a bank would provide a window into the operations of the industry, and thereby assist regulation.
Neither of these functions made much sense in a deregulated environment and certainly the Commonwealth Bank had not been a conspicuous defender of consumer interests in recent years. However, by selling its remaining stake in the industry, the Government had made a final commitment to deregulation at a time when many in the community suggested the policy had not lived up to expectations.
The special, symbolic position the Commonwealth Bank, the so-called “people’s bank”, held in Labor’s political heartland and the Government’s decision to sell
59 Quiggin, John, Bank Sale Marks Final Commitment, Sydney Morning Herald, 11 May 1995. Chapter 7 Sale of the Commonwealth Bank 270
its remaining shares, was commented upon in an editorial in the Australian
Financial Review (AFR).60 A mere eighteen months before the Budget announcement, the Treasurer was espousing a version of the Labor Party’s commitment to retaining the Commonwealth Bank. On that occasion he argued the case strongly for the Government retaining a majority stake as a way of ensuring there was a standard of integrity which all other banks had to match.
He said this provided additional assurance about the safety of the banking system over and above the Reserve Bank’s prudential requirements.
The sensitive political environment in which the Commonwealth Bank had been operating had increased in recent times. This was due to the emotional debate over the introduction of account-keeping fees and the extent to which the banking system, but particularly the Commonwealth Bank, had a community obligation to assure full banking services were available to everyone, irrespective of their ability to pay.
Similar sentiments were expressed in the Martin Committee Inquiry.61 Each decision by the Commonwealth Bank to close a non-performing branch, particularly in rural Australia, was met with cries of outrage. The concept of community service obligation was clearly alive and well in the minds of consumers. It was partly for these reasons that the existence of alternative financial intermediaries, such as credit unions and building societies, was considered necessary.
60 Bank Sale Carries Some Risk, Australian Financial Review, 11 May 1995. 61 Martin, S P, Op Cit. Chapter 7 Sale of the Commonwealth Bank 271
The AFR however stated that the Government gave little thought to political reality when arguing for the Bank’s sale. Willis in fact commented that the
Commonwealth was just another large commercial bank without any particular social obligations to consumers.
Davidson argued that the bank sale was a last-minute gimmick to produce a balanced Budget which had no real macro-economic significance.62 Rather than “tricking” financial markets into taking a more favourable attitude towards the Budget, in the sense of creating a favourable climate to pushing interest rates down, it was seen as a “trick” to cover the failure to get the deficit down by an acceptable amount. Consequently, the specific reason for the full sell-off of the Commonwealth Bank was that there was no need for a Government-owned bank in a fully deregulated, competitive system.
One of the underlying questions which arose in post-Budget commentary related to commitments given by the Government in the prospectus issued for the second selldown of the Commonwealth Bank in 1993.63 In that prospectus, the then Finance Minister and current Treasurer Ralph Willis, told the media that the sale would reduce the Government’s stake in the bank to “not less than
50.1 per cent”.
The Government has no intentions whatever of further reducing its shareholding.64
62 Davidson, Kenneth, People’s Bank Sale Gives Poor No Cheer, The Age, 13 May 1995. 63 See for example, Bartholemeusz, Stephen, About Face on CBA a Surprise for Investors, The Age, 11 May 1995 and Riley, Mark, Why Labor Did a U-Turn on the Bank, Sydney Morning Herald, 13 May 1995. 64 Bartholemeusz, Stephen, Op Cit. Chapter 7 Sale of the Commonwealth Bank 272
Traditionally Labor believed in the Government maintaining majority ownership in the Bank, although public ownership as a policy in the Party Platform had long been removed. This position had been reinforced by legislation, and investors in that share issue could be forgiven for taking Willis at his word.
In the prospectus for the original float of the Bank the then Treasurer, John
Kerin, said the Government had no plans to reverse or modify its position requiring the Government to hold at least seventy per cent.
Riley noted that Willis was able to refer to a paragraph in the prospectus to prove he had not misled small investors, who had bought into the “people’s bank” under the impression that their holding would be preserved by the maintenance of majority government control.65
It is also possible for the Government to initiate amendments to legislations which, if enacted by the Australian Parliament, could reduce its role or increase it.66
Riley contended that this paragraph did not appear in the prospectus by accident. It was designed by the drafters of the bureaucracy to ensure the
Government had an out clause.
65 Riley, Mark, Op Cit. 66 Ibid. Chapter 7 Sale of the Commonwealth Bank 273
7.7.3 ALP REACTION
While media commentators, financial analysts, and newspaper editors waded in with various views on the Government’s decision, strangely in the view of many, the labour movement remained either silent or restrained. Both the ACTU and finance sector unions immediately announced they would not oppose the
Government’s decision despite the movement’s traditional opposition to the sale of public assets.
The President of the ACTU, Martin Ferguson, although surprised by the decision, said:
The Commonwealth Bank is no longer the people’s bank. It doesn’t care about low income people and pensioners. Well, you might as well sell the lot because frankly they couldn’t give a bugger about ordinary working people.67
The joint national secretary of the Finance Sector Union, Kevin Scott, said the
Government decision ensured the privatisation policies of the ALP and the
Coalition at the next election “would be entirely the same”.
If they felt they needed it for the Budget, and they didn’t get re-elected, the Liberals would sell it off anyway.68
67 Hannan, Ewin, ACTU Will Not Oppose Sell-Off, The Australian, 11 May 1995. 68 Ibid. Chapter 7 Sale of the Commonwealth Bank 274
Senator Bruce Childs, convenor of the ALP Parliamentary Left faction, indicated publicly that the Left decided to go along with the surprise sale rather than risk the Government’s re-election chances by staging a bruising fight.69
But in true ALP fashion, between the public support for the Budget and the apparent acceptance by the Parliamentary Party of the decision, and the introduction of the necessary legislation to enact the Bank’s sale, private anger and sense of betrayal at the passing of yet another Labor icon surfaced.
Gary Punch remembers it in the following terms:
The final stage of privatising the Commonwealth Bank was really done surreptitiously. I mean it was slipped in virtually at the last moment in the Budget. Then the old reliability factor of not rolling the Government, this time on a Budget, was what carried it through.
One has to say financial deregulation to some extent, the final phase of the privatisation of the Commonwealth Bank, was done by an abuse of the factional system, it was kept out of factional discussions until a semi fait accompli had been arrived at. People were boxed in. People were positioned.70
As is customary following the delivery of a Budget, Government members were expected to sell its contents far and wide. After all, it was considered this
Budget would provide a foundation for the Labor Party’s re-election prospects.
Yet it was amongst Party members, and so-called “traditional Labor voters”, that the Bank decision generated tremendous heat for the Parliamentary members.
69 Peake, Ross, Doubts Raised Over Approval, Canberra Times, 11 May 1995. Chapter 7 Sale of the Commonwealth Bank 275
At Branch meetings, through letters received in electorate offices and through discussions with “ordinary Australians”, Members of Parliament quickly got the message that the electorate was not as accepting of the decision as was to be hoped.
Consequently, some members of the ALP Parliamentary Party found new strength in these arguments, and a new commitment to the Party’s traditional policies.
When the Commonwealth Bank Sale Bill 1995 was brought to Caucus for approval on 17 October 1995, the scene was set for a potential good old- fashioned Left-Right factional brawl. However, whilst there was some discussion, the confrontation some had expected did not eventuate.
The first test of strength came when the Left questioned why the Bill had not been referred to the Caucus Economic Committee for consideration and recommendation in accordance with Caucus Standing Orders, prior to submission to full Caucus.71 After some debate, it was resolved that the Bill was of sufficient importance that full Caucus consideration obviated the need to observe customary procedure.
In subsequent debate, speakers raised a number of issues of fundamental importance to Labor’s relationship with the Bank. Charges of political vandalism, alienation of Labor voters because of privatisation, and claims that
70 Punch, Gary, Op Cit. Chapter 7 Sale of the Commonwealth Bank 276
there was an identifiable difference between the Commonwealth Bank and other financial institutions were made by those from the Left faction now opposed to the sale. Speakers included John Langmore, Garrie Gibson,
Barney Cooney and Chris Haviland. Whilst vocal, their arguments were half- hearted and lacked the commitment or passion usually expected of faction members having entrenched views.
These claims were offset by arguments that the Commonwealth was just another bank which no longer had special functions such as Central Bank powers. It was argued that the time to discuss these issues was at Budget time, that it was a Budget measure and as such any change of policy would affect the integrity of the Budget, and that the Bank had no special place in influencing competition in the banking industry. Speakers included Kim
Beazley, Gary Punch and Wayne Swan, largely from the Right faction.
Following a lengthy debate, approval for the introduction of the Bill into the
Parliament was granted. The final vote was 54 For, 27 Against.
Introduced into Parliament on 19 October 1995, the Bill was relatively concise and, as a generalisation, contained the minimum requirements to provide the legislative framework for the sale of the remaining Commonwealth’s shares.
Some key provisions were contained in the Schedule to the Bill, including the removal of the now-redundant restriction on foreign ownership, and the
71 This discussion is based on Federal Parliamentary Labor Party Minutes of the Meeting of 18 October 1995 in Canberra, and the recollections of the writer. Chapter 7 Sale of the Commonwealth Bank 277
statutory obligation on the Government to maintain at least 50.1 per cent of shares.
The legislation was approved, although the actual sale did not occur until after the change in Government in March 1996. CHAPTER 8
CONCLUSION
Since their formation in the Nineteenth Century, social democratic parties sought to ensure economic benefits could be shared by all in society. The creation of parties themselves was based on an ideology that promoted grass roots involvement in policy development, and a belief in intervention in the market by the state as a means of achieving this fundamental objective.
Political parties were seen as necessary to serve working class interests.
The evolution of social democratic parties in Western Europe and Australia followed similar paths. In Australia, the basic tenets of a political party representing the working class, the philosophical foundations provided by
Labourism, the relationship between the political and industrial wings of labour, and the dominance of a leadership group resulting in a unique form of social democratic party, the Australian Labor Party. Class was a defining element, and policy development processes were established to reflect roles for the Party rank and file, National Executive, National Conference and Parliamentary Party.
However, from the early 1970s, social democratic parties slowly recognised that to enjoy electoral success, moderate policies had to be developed. Additionally, in a number of European countries, and in Australia, the adoption of Right wing policies associated with free market economics began in earnest and replaced more traditional approaches based on class ideology. These events were Chapter 8 Conclusion 279
coupled with the collapse of communism in many Eastern Bloc countries, where for some decades the experiment of socialism in its varied forms had not produced the economic and social benefits its architects had predicted.
In the late 1970s and early 1980s, the Australian Labor Party moved perceptibly to the right. In part, this was a genuine effort to exorcise its perceived lack of economic credentials, particularly following the economic difficulties associated with the Whitlam Governments of 1972 to 1975. It was also a response to events occurring in other developed nations where social democratic governments had embraced deregulation policies with alacrity.
With the election of the Hawke Government in 1983, this profound shift in ideology was reflected in fundamental changes in Labor’s approach to economic policy.
Labor’s changing face, in terms of both personalities and policies, reflected a
Party seeking to be relevant in a modern world. The innovative approach adopted by Prime Minister Bob Hawke and Treasurer, then Prime Minister, Paul
Keating was aimed at harnessing the Labor Party at the national level to a modern, globalised economic agenda while maintaining some key aspects of
Labourism. The Accord and the social wage were central to this process, while financial deregulation was embraced with vigour. Of greater significance is the fact that the Party had to weaken its general links to an increasingly heterogeneous working class base, forge a very specific relationship with a part of the union movement (the ACTU leadership), while weakening the role of the Chapter 8 Conclusion 280
Caucus and the Party Conference. This facilitated ideological renovation and wider electoral appeal.
The more traditional process, where Party forums essentially were responsible for policy development, was supplanted in the 1980s by the dominance of the
Parliamentary leadership. Factional manoeuvring, the almost unquestioned sanctity of the Cabinet, and the acquiescence of other elements of the Party such as the unions, National Conference and National Executive, meant a new style of government was created. The leadership became progressively presidential in nature, resulting in the alienation of many of Labor’s grass roots supporters.
The result of this was a highly professional party of government, with reduced mass input. The factional system was institutionalised, the power of parliamentary leaders was greatly enhanced, while Caucus was downgraded in the process of an ideological “make-over”. In turn this brought greater support from business, the media and international bankers and investors. It also left many traditional Labor supporters confused and sometimes angry. Banking deregulation and privatisation were necessary parts of this change.
The acceptance by industrial labour of the need for change was also fundamental to this process. But it was a process driven from the top down, driven by the political elite of the Labor Party who had a belief in their capacity to deliver a better Australia. Contemporary assessments will judge how accurately these policy prescriptions delivered an appropriate outcome. What is Chapter 8 Conclusion 281
undeniable however, is the fact that Labor was different during the
Hawke/Keating years. In pursuing policies in a market-oriented, globalised environment, they would always be subjected to inquiring criticism as to whether they were ‘traditional Labor” governments, or whether the Party created was “New Labor”.
Nowhere was this reflected more completely, nor served more thoroughly as a symbol of the times, than in respect to financial deregulation. This process was assisted through changing technology and a growing recognition that the existing financial system was failing to meet the challenges of globalisation.
The reform process itself, however, would not have occurred at such pace and depth had it not been through the efforts of the parliamentary leadership of the
Labor Party, particularly the role played by Paul Keating.
Labor's deep-seated resentment towards the banks had been exemplified by traditional notions of class antagonisms and an earlier colonial suspicion of
Imperial Banks. The role of Labor's leaders, particularly Hawke and Keating, in changing these views into a philosophy that helped internationalise the
Australian economy, is a fascinating study of power, persuasion, and a shift in fundamental beliefs.
Hawke and Keating, by the way they sought to improve the capitalist system and the Australian economy, had sown the seeds for an internal debate about
Labor’s identity. The principle involved was clear and enunciated by Hawke in his Curtin lecture in September 1983: Chapter 8 Conclusion 282
Social Democrats have no reason to deny the capacity of markets to
allocate resources efficiently … I see no virtue in regulation of economic
activity for its own sake and I believe that where markets are working
efficiently they should be left to do their job.1
This was an ideological leap for the ALP.
The values of the markets were far removed from those of the old ALP. During the 1980s the discipline imposed by the markets through the float and capital movements imposed severe policy changes upon Australia. It forced Labor towards small government, real wage cuts, lower taxation, and industry deregulation.
As a result of the policy changes pursued by Keating, Labor's traditional wariness and suspicion of banks was tempered, although never totally expunged. It could not be said that the broad Party, or even all of its
Parliamentary representatives, entirely embraced this new approach, but much of this opposition was muted. In the end, pragmatism surrounding responsible economic management, the continuing and growing need for budgets to allocate sufficient funds for employment and social justice programs, and political reality concerning remaining in office won out over commitment to a traditional social democratic philosophy. There is little doubt that the changes contributed to Australia's economic awakening to the real world.
1 Kelly, Paul, The End of Certainty: Power, Politics and Business in Australia, Allen and Unwin, Sydney, 1994, p 88. Chapter 8 Conclusion 283
The three case studies of financial deregulation presented in this study provide a clear insight into the process and players on this journey to internationalise the Australian financial system. In doing so, they serve as examples of the broader changes in economic policy and philosophy of the Labor Party which occurred during this period. In each case, the relative roles of Keating and
Hawke, the mechanisms for change, and the subsequent outcomes reinforce the contention that financial deregulation, and the modernisation of the economy and the Australian Labor Party, were part of a broader change to the philosophical foundations of modern Labor.
The significance of the decision ultimately to float the dollar provides a ready insight into the process, outcome and consequence for Labor and its leadership.
The float transformed the economics and politics of Australia. It
harnessed the Australian economy to the international market place – its
rigours, excesses and ruthlessness. It signalled the demise of the old
Australia – regulated, protected, introspective.2
The float had a psychological significance almost greater than its monetary effects. It sealed a de facto alliance between a Labor government and the financial markets and even sections of the corporate sector, notably the “new money”. It revolutionised politics because Labor displayed courage in tackling financial deregulation where the Liberal-National Government of Malcolm
2 Ibid, p 76. Chapter 8 Conclusion 284
Fraser had failed to act decisively on the issue during the previous seven years in government.
Whilst the decision to float, and abolish exchange controls, was the product of a monetary crisis, the crisis itself did not produce the solution. Hawke and
Keating had been charting a path towards deregulation of Australia’s financial system from mid-1983, a conclusion confirmed by their respective advisers.
Because deregulation was contrary to official Labor policy and ethos, their overt support for such a course was hidden from the general Party. But the signs were telling, such as Keating’s creation of the Martin Inquiry, the Reserve
Bank’s ‘war book’ on the float, the October floating of the forward rate and the nature of the debate over the December float. Events shaped the timing of deregulation, not its fact.
Following the float Keating became more independent of both Hawke and then
Treasury Secretary John Stone. At this time both the Prime Minister and
Treasurer gathered close allies around them in their private Ministerial offices, whilst also cultivating close relationships with senior Departmental officials.
Increasingly, Ministerial advisers became powerful individuals within their own right, and in Keating’s case, provided him with the necessary background information to support his intellectual drive for further financial deregulation.
Whilst initially many of these advisers were drawn from the public service, they quickly developed their own independent persona. With each passing year in
Government, their authority strengthened, but so too did their belief in their own Chapter 8 Conclusion 285
abilities and a growing mistrust of Departmental advice. This was particularly so in the later years of Keating’s Prime Ministership.
Additionally, proteges of Keating were promoted to important positions within
Treasury and the Reserve Bank of Australia. Officials such as Ted Evans, Tony
Cole and Bernie Fraser occupied positions of enormous influence and power, and a common bond of intellectual respect and friendship existed between them and Treasurer Keating. Senior Treasury officials such as Don Russell, subsequently appointed Australia’s Ambassador to the United States, supplanted these officials in the Treasurer’s office and provided a continuing conduit between Keating and the bureaucracy.
In February 1984, Keating received the Report of the Martin Review Group, which essentially endorsed the recommendations made by Campbell. The
Report meant that Labor was now its own master and it could claim authorship and legitimacy for its own deregulation policies. This became increasingly important as issues such as the entry of foreign banks and the structure of the banking industry became relevant.
At this time however the internal Australian Labor Party debate was
dominated by the float. The float had never gone to the ALP Caucus for
decision because it was a currency issue. By 1984 when the Caucus
debated deregulation with respect to the entry of foreign banks, the horse
had bolted.3
3 Kelly, Paul, Op Cit, p88. Chapter 8 Conclusion 286
Labor found itself putting aside another long-held suspicion about foreign banks. Initially, not everyone agreed – the Left continued to oppose the freeing- up of the financial system when Keating proposed the entry of additional foreign banks in 1984. However, Keating had cleverly exploited the opportunities provided by the Martin Review Group’s Report, and used his unquestioned intellect to sustain this drive for modernisation and policy relevance within the
Labor Party. Accordingly, he encountered little resistance.
This issue demonstrated a progressive evolution in Keating and the Party.
Whilst dealing with the float of the dollar was a necessity forced on the government by external factors, changing Party policy on the entry of foreign banks was a further step toward the deregulation of Australia’s financial system.
It was deliberate, calculated and ruthlessly prosecuted. Consequently, Keating became the dominant figure of the Party.
The entry of foreign banks had mixed results. The foreign banks did not prove to be effective competitors in retail banking. They became niche marketers, refusing to embrace the conditions of entry imposed on them, such as developing branch networks. Yet it would be disingenuous to suggest this issue compromised financial deregulation. It was symbolic, it was bold, and it bucked tradition. And in a sense it helped cement the Keating philosophy into the psyche of the broader Australian Labor Party.
Because of this, there is no doubt that tackling the third decision in terms of changing Labor tradition, selling the Commonwealth Bank, was so significant. It Chapter 8 Conclusion 287
was significant in terms of Keating’s total dominance of the Party, the acquiescence of the Left wing faction to policy previously sacrosanct, and
Labor’s legacy of financial deregulation which created a dynamic, outward looking, modern economy.
The sale of the Commonwealth Bank was an audacious policy decision that had its genesis in the beliefs of Hawke and Keating that most government enterprises belonged in private hands. The sale did not explicitly contravene
Labor’s Platform or Policy, but there was always an accepted view within the
Party that the Commonwealth Bank had a special place as the “people’s bank”, and would always therefore remain in government control.
The creation of the Bank was a response to entrenched Labor beliefs about the
Money Power and the avaricious nature of private capital. At the earliest opportunity, it was a Labor government that established the Bank. Throughout its history, it was Labor who championed its role.
With financial deregulation in Australia and around the world, the forces of change saw Labor’s political elite embrace the concept of privatisation with vigour. The process of disposing of the Commonwealth Bank from government ownership can be attributed to the needs of Federal Labor to assist State colleagues in a rescue mission involving the State Bank of Victoria and the ultimate need to balance budgets and tie the economic and political cycles together. But it was also a further step in deregulating the Australian financial sector. In this case disposing of a government owned eliminated the continuing Chapter 8 Conclusion 288
need for capital injections to enable it to compete with the other major banks, and it removed any perceived “special advantages” of government ownership to hopefully foster better competition in the market.
The way in which the leadership of the Party dealt with the sale through the factions, Cabinet and the Caucus, clearly demonstrated that Keating had, by this stage, assumed total dominance of the agenda. Cabinet was informed of the inclusion of the first tranche of the sale of the Bank only one and a half hours before the decision was to be announced as part of the Budget. Caucus similarly was given only half an hour’s warning. This says much about the control which Keating and the Party’s leadership had assumed.
The decision to sell each tranche of the bank was not immediately nor subsequently denounced by Caucus members, the union movement, nor most of the broad Party. This did not represent so much a total acceptance of the decision as part of financial deregulation, but more reflected the timing of the decision in terms of Budget parameters and the electoral cycle.
Keating was the driving force. The fortuitous circumstances of the plight of
State Bank of Victoria enabled him to ensure his “big picture” vision could be realised. This gave him the opportunity to progressively dispose of the total asset. Ultimately, whilst the Party reluctantly accepted the Bank’s fate, considerable angst still remained within it and the broad community.
Chapter 8 Conclusion 289
It was Keating’s intellectual drive, self-confidence and mastery of the Labor
Party which enabled these difficult and controversial decisions to be made.
While Hawke was an important partner, it was Keating who led. The raw passion, intellect and persuasiveness of Keating contrasted with the smooth, chairman-of-the-board approach of Hawke. Keating however, played the prime role in financial deregulation and in changing the fundamental economic outlook of the modern Labor Party. One consequence of this process was the acute rivalry that subsequently developed between these two men, as each claimed to be the architect of Labor’s modernised policies.
The role of Cabinet was an integral part of the way Labor governed during this period. With support from a combination of Right and Centre-Left Ministers initially, and increasingly from progressive Left wing Ministers such as Brian
Howe, Keating was able to steer financial deregulation through the Cabinet, the
Parliamentary Party and Party forums such as National Conference.
The role that ALP National Conferences played in effectively rubber-stamping what the parliamentary leadership wanted is important in understanding the context of taking the broad Party along the path to political and economic rejuvenation. Conferences became "stage managed" affairs, with the major policy positions already agreed by the factions. The way in which the policies on financial deregulation were changed before, during and after Conference and over the life of the Hawke-Keating Governments demonstrates that it was the inner circle of Cabinet Ministers who were the most influential in decision- making. Conferences were seen as a necessary evil, with the options of Chapter 8 Conclusion 290
“special conferences” involving largely only the National Executive to approve government decisions as a safe fall-back position.
The role of the ALP National Executive was similarly a significant factor in ratifying the policies of the government. The willingness of the National
Executive to support the parliamentary leadership, often at strategic yet critical times, by endorsing changes to the Party's Platform or policies, was fundamental to ensuring Labor’s agenda for change was not impeded. Timing of those changes to coincide with the electoral cycle, or the need for a positive budget outcome, either in terms of straight numbers that would appeal to the markets, or to enable funds to be spent on employment or social programs, were important considerations.
The pivotal role of the factions, or more precisely the factional negotiators, in securing agreement to changes in Party policy without reference to the broad membership, is a vital element in understanding the practical day-to-day operation of Labor between 1983 and 1996. This role illustrated a Party controlled by a few, mostly all loyal to the leadership, but with one eye fixed squarely on the electoral fortunes of the government. It was characterised by the dominance of the Right wing leadership, the muted opposition and eventual acquiescence of the majority of the Left and the support of the Centre-Left which saw changes in respect of financial deregulation and economic policy generally. Clearly, the factional system was instrumental in ensuring that the
Party became very comfortable in government and so sacrificed much of its previous social democratic political orthodoxy for power and government. Chapter 8 Conclusion 291
Labor's enthusiasm for change and modernisation during the Hawke/Keating
Governments developed from a genuine desire by its leadership to modernise the Party, and in the process jettison much of its old, outmoded philosophical baggage. To jettison the philosophy required new ideas, new structures and coherent policies. It may be argued that the internationalisation of the
Australian economy was inevitable because other Western economies had begun to change and embrace deregulatory economic policies, particularly in the financial sector. This, however, does not explain the timing of the key steps towards deregulation, its breadth and speed, and how it was attached to a wider set of policy ideas and a political "vision" by Keating.
This thesis has demonstrated that the only credible explanation of this remarkable transformation was the determination of ALP leadership, and in particular Paul Keating, to modernise theory and practice. It was Keating who espoused the benefits of internationalisation, whose sheer force of intellect and powers of persuasion were able to convince a sceptical Party of the need for change. It was Keating who badgered and harangued Party forums, Caucus and the Cabinet into supporting the necessary changes for the Party to assume the mantle of "New Labor". It is difficult to envisage any other Labor leader taking such risks towards a new political approach. It has long been a truism of political analysis that Labor is the party of "initiative”: the conservatives the party of "resistance". It appeared that Keating took this idea to heart.
This study, however, has dealt only with economic policy changes wrought by
Labor between 1983 and 1996. During the same period, fundamental change Chapter 8 Conclusion 292
in social policies to reflect the new paradigms of Labor were undertaken. These are important elements in developing a deeper appreciation of how far Labor moved from its traditional social democratic roots, and is suggested for further study. Chapter 8 Conclusion 293
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- Keating Condemns Banks, The Age, 11 June 1984.
- Treasurer Attacks Australian Banks, Canberra Times, 11 June 1984.
- Keating Woos Vic ALP Left, Australian Financial Review, 13 June 1984.
- Union Plays Foreign Bank Trump, Australian Financial Review, 18 June 1984.
- Fight Over Foreign Bank Entry Lingers On, Australian Financial Review, 25 June 1984.
- ALP Right Goes into Battle for Foreign Bank Entry, Australian Financial Review, 28 June 1984.
Bartholemeusz, Stephen, About Face on CBA A Surprise For Investors, The Age, 11 May 1995.
Cavalier, Rodney, ALP’s Flawless Faction System Strained, Australian Financial Review, 13 June 1989.
Davidson, Kenneth, Peoples Bank Sale Gives Poor No Cheer, The Age, 13 May 1995.
Hannan, Edwin, ACTU Will Not Oppose Sell-Off, The Australian, 11 May 1995.
Kitney, Geoff, Labor Puts to Rest the Ghosts of the 36 Faceless Men, Australian Financial Review, 10 June 1988.
Kitney, Geoff, Wright, Tony and Maley, Karen, Why the People’s Bank Sell-off Was Kept Secret, Sydney Morning Herald, 11 May 1995.
Lewis, Steve, and Boyd, Anthony, CBA’s Board Gets the News, Australian Financial Review, 11 May 1995.
Maley, K, Not A Year for Bankers, Sydney Morning Herald, 3 October 1991.
McNicholl, D D, Labor Icon Lost With Sale of People’s Bank, The Australian, 13 May 1995.
Peake, Ross, Doubts Raised Over Approval, Canberra Times, 11 May 1995.
Punch, Gary, Labor’s Achievements are Rock Solid, but Where’s the Passion? Weekend Australian, 7-8 November 1987.
Quiggin, John, Bank Sale Marks Final Commitment, Sydney Morning Herald, 11 May 1995.
Riley, Mark, Why Labor Did a U-Turn on the Bank, Sydney Morning Herald, 13 May 1995.
PERSONAL INTERVIEWS
Beazley, Kim, 16 December 1998.
Crean, Frank, 17 July 1998.
Fraser, Bernie, 16 February 1998.
Gray, Gary, 5 December 1997.
Howe, Brian, 13 May 1999.
Keating, Paul, 26 February 1998.
Latham, Mark, 15 July 1998.
McLeay, Leo, 26 March 1998.
McMullan, Bob, 17 November 1997.
Morgan, David, 19 December 1997.
Murray, David, 16 December 1997.
Punch, Gary, 8 January 1999.
Ray, Robert, 23 March 1998.
Richardson, Graham, 28 November 1997.
Whitlam, Gough, 26 June 1998.
Willis, Ralph, 4 December 1997.
APPENDIX 1
RESOLUTIONS ADOPTED AT ALP NATIONAL CONFERENCES RELEVANT
TO BANKING DURING THE HAWKE/KEATING GOVERNMENTS
1984
Conference noted the Government’s reforms of the financial sector to
improve competition between banks and the need for additional licences in
order to stimulate better services and greater competition in the banking
sector. Such improvement is necessary to facilitate economic, balance of
payments and social performances in Australia.
Conference believed that a part of the need for additional licences should be
satisfied from domestic sources.
New licences should be granted only to applicants having the capacity to
provide new or expanded services. Such services must stimulate,
consistent with the Prices and Incomes Accord, the expansion of industry,
especially manufacturing industry, commerce and exports, and the housing
sector, and in particular, provide adequate housing finance to lower income
groups in the community.
1 The Government will call for expressions of interest in banking licences from
domestic groups and foreign banks. Sufficient time, resources and
encouragement should be given to stimulating domestic applicants in order
to ensure the highest level of competition for licences.
An effective procedure should be established to evaluate licence
applications in order to ensure that licences are offered only to those who
can make a significant, positive contribution to the Australian community.
Accordingly, a Labor Government will not grant trading bank licences to new
groups except under the following circumstances and conditions – a Applications are to be examined on a case-by-case approach involving a full
examination of the benefits and costs to Australia; b Licences will only be considered, in the first instance, for a very limited
number of banks until sufficient time has elapsed to evaluate the
contribution and consequences of new entrants; c Every effort is to be made to achieve a minimum of 50% Australian equity in
each new banking venture; d New entrants must offer significant benefits in the form of innovative
instruments, procedures and facilities which are not available, or likely to be
available, from Australian banks; e The granting of licences must enhance the employment opportunities of
those in the finance sector and, in particular:
2 i. Recognise and facilitate union organisation and award
coverage;
ii. Provide for consultation with unions on technological changes
at all levels;
iii. Ensure adequate health and safety standards;
iv. Provide for equal opportunities for the sexes; and
v. Ensure recruitment and training of Australians in areas where
foreign banks have special expertise. f A subsidiary rather than a branch structure is to be adopted for each new
entrant, in order to insulate the Australian entity from any potential problem
of the parent bank, including exposure to international debt, and from
destabilising flows of funds; g The arrangements for new entrants must ensure that the majority of
Australians have access to the new and expanded services; h All new entrants will be required to comply with domestic banking
regulations and prudential standards as well as taxation, company and
labour legislation; i All licences will be subject to periodic review of the performance of the
respective banks, and compliance with their terms and conditions of entry
will be enforced by the central bank. The reviews will include an evaluation
of how effectively the banks have honoured the promises made in their
licence applications and their contribution to the economic and social
performance of the Australian economy;
3 j In granting licences, the differing demands for banking expertise created by
the regional nature of the Australian economy will be given recognition; and k Special consideration will be accorded to the desirability of the maximum
possible public participation in the ownership of licences.1
1986
29 Labor is committed to the maintenance of the Australian public sector. We
totally reject conservative proposals of privatisation of public enterprises and
services which would lead to –
a Increased prices of goods and services;
b Disadvantaging people on lower incomes and/or those living in
remote areas;
c Weakening the sense of national and public identity associated with
bodies such as the ABC, Qantas and the Commonwealth Bank;
d Significant loss of employment and erosion of working conditions;
e Disposal of public assets at undervalued prices, and further
concentration of economic power in the hands of narrow private
interests;
f A tendency to increase foreign ownership and control of the
Australian economy; and
1 Ibid, p 48-9.
4 g Difficulties in addressing the major structural problems in the
Australian economy.2
77 Labor will institute within two years a rigorous review of the performance of
new entrants to the banking system covering the following issues –
a Adherence to licence conditions;
b Adherence to appropriate labour conditions including recognition of
the rights of trade union membership;
c Financial viability;
d Benefits and costs to the Australian community; and
e Desirable changes to licence conditions and the number of licences.3
1991
97 Proposals to privatise public enterprise should be closely scrutinised to
ensure that they do not lead to –
a An adverse impact on the more disadvantaged people in society;
b Weakening of the sense of national identity associated with bodies
such as the ABC, Qantas and the Commonwealth Bank;
c Significant loss of employment and working conditions;
2 Ibid, p 70. 3 Ibid, p 76.
5 d Disposal of public assets at undervalued prices and further
concentration of economic power in the hands of narrow private
interests;
e A tendency to increase foreign ownership and control of the
economy; and
f Excessive calls on domestic savings leading to major increases in
foreign debt.
98 Labor is committed to the provision of essential community services through
the public sector.
Labor recognises that part or full disposal of equity in publicly-owned airlines, reform of telecommunications and the sale of international, domestic and mobile telephone licences would realise significant one-off proceeds4.
1994
91 Labor is committed to the development and maintenance of a strong public
sector. The public sector plays an essential role in achieving economic,
ecological, structural and social justice policy objectives. Throughout
Australia’s history public provision of infrastructure has been an integral
component of economic growth. The public sector also plays a vital role in
economic restructuring through services to industry, addressing market
failure, and through its role as a purchaser of Australian goods and services.
4 Ibid, p 67.
6 94 Proposals to privatise public enterprise, including contracting out, should be
closely scrutinised to ensure that they result in net benefits to the Australian
community and in particular that –
a They enable the continued cost effective delivery of any community
service obligations to disadvantaged groups;
b They increase the level of effective competition in that particular
industry;
c There is no significant loss of employment, and existing terms of
employment, including pay and conditions which are to be
substantially maintained;
d They result in a fair return to the Government for the sale of public
assets;
e They take appropriate account of concerns about the level of foreign
investment in the particular industry and the economy more
generally;
f The public funds released by privatisation are used to reduce debt
and so enhance the capacity of governments to provide a higher
standard of infrastructure and government services in the future; and
g They do not result in a weakening of the national interest or national
identity associated with any enterprise.
7 95 In addition, Labor will concentrate on using the public sector to offset market
failure through appropriate instruments of intervention. Labor will use
whatever policy instruments are necessary to achieve the desired results.5
Labor is committed to the development and maintenance of a strong public
sector and in particular to ensuring that the public sector retains an active
and significant role in the provision of essential services.
To this end, Labor is committed to ensuring cooperation between all tiers of
Government in Australia – Local, State and Federal – to ensure fulfilment of
this commitment and is opposed to any privatisation proposal which will
adversely effect the economic and social well being of individual states.
In addition to playing an essential role in the development of the Australian
economy, the public sector promotes the social justice objectives of the
government.
Labor therefore believes that any proposals to privatise or corporatise
publicly owned assets, services and government business enterprises
should be closely scrutinised and subject to rigorous analysis to ensure that
Labor’s social objectives are not detrimentally affected.
5 ALP Platform Resolutions and Rules, 1994, p 88-9.
8 Labor recognises there are limits to privatisation, and that privatisation purely for revenue raising without a strategic view of the role of public sector enterprises will create future problems for Australian society on economic and broader social grounds.
Labor opposes the privatisation of government-owned businesses that supply essential community services to the Australian public.
Labor believes that there are certain community services, the privatisation of which would have an adverse economic and social impact on the quality of life of the Australian community. Such services include water, gas, electricity, Telecom and Australia Post. The privatisation of these services will not result in a more efficient or effective delivery of services to private consumers or businesses.
Overseas experience has shown that privatisation of essential services often leads to: a significantly higher charges for domestic customers – particularly
families and businesses; b reduced access for low income consumers and disadvantaged
groups with the consequent risk of serious public health problems; c an erosion of the revenue base of governments; and d windfall salaries and share deals for managers of the privatised
enterprises.
9
Proposals for privatisation should ensure that they do not result in –
a the relinquishing of regulatory responsibilities that are in the public
interest;
b adverse effects on the social justice and/or equity goals of Labor
including the inability of government social justice and economic
development programs and policies to be fulfilled;
c making public access to services inequitable;
d a concentration of economic power in the hands of foreign interests
or the creation of private monopolies;
e reduced employment opportunities or reductions in working
conditions;
f the removal of public assets that are in Australia’s strategic national
interests; and
g degradation of the Australian environment.
Equally, public services and activities must be properly accountable, efficient and competitive (as measured by appropriate benchmarking, reporting and performance indicators).
Labor is committed to the partnership between government and unions within the public sector industries. This partnership recognises that unions and government both have a responsibility to consistently review and evaluate the performance of
10 the public sector. Both partners recognise the need for constant restructuring of the public sector to ensure its long term viability.
Alternatives to privatisation, such as outsourcing or the leasing of a public asset, should be considered in preference to the sale of a public asset.
A Labor Government should undertake consultation within the Labor Party and the broader movement as a first step prior to proposed privatisation. Recognition of existing Party policy is a key element in the consultation process.6
6 Ibid, p 92-5.
11 APPENDIX 2
KEATING’S EXPLANATION OF THE SALE OF THE COMMONWEALTH BANK
Well, a couple of arguments were around at that time. The first was that there was a number of financial circumstances – the imminent failure of the State Bank of Victoria which paper around the world markets which it couldn’t meet. The Commonwealth Bank had been the oldest central bank before the Reserve Bank. It lost its reserve function when the Reserve Bank came in in 1959. From that point on it was basically just a savings cum trading bank. But it was always notionally a savings bank. It was a European type of post office bank. Post office banks are very big in Japan and Europe etc. and that’s really in a sense what it was here, because of the age pension payments and all that sort of stuff.
But it had no real capital, only retained earnings. It never got capital for ventures off the Budget. It only had retained earnings and it couldn’t retain its earnings fast enough to expand its book so it had to be the trailer. So it was called the Commonwealth Bank of Australia and it was the beloved institution of the Labor Party. But it was really a very small show. One that had a very big name, but it really was a reasonably small show in Australian banking terms.
And it was a pity to see its growth stunted because its institutionality came not because the Commonwealth owned it but the fact that it had been around so long and had such customer loyalty. I used to say to the Labor Party in those days: ‘well look, what we want to do is create institutions that have a use of the economy and an intrinsic value that is reflected in their economic merit and their economic impact, not because we owned it’. For the mere fact that we do own it means that we were not giving it capital. I think we put in two lots of capital. Vern Christie came to me once when the bank was in real trouble on something and I gave him $150 million in capital. That was the only capital for twenty years or something. And the retained earnings weren’t enough so I said to some of the people in the Party: ‘Well, we need to give this thing an independent asset base’. It was the only vehicle that I could think of that could take the State Bank of Victoria over, when it was in trouble. The other bidder was Westpac under Eric Neal. But Westpac had some diabolical trouble at the time. It was so glad it lost the bid. It couldn’t have coped with it. It would have brought the whole show down. It would have brought Westpac down and the State Bank down.
The Commonwealth Bank didn’t have the capital to buy the State Bank, which cost more than $6 billion for the goodwill. So I put the lot together into sort of a political cocktail which said to the Party: ‘no-one wants to see the ordinary depositors of Victoria which are not protected by the Reserve Bank’… the State Bank owned the Victorian Development Corporation, that’s where the debts were created… I said ‘none of you people want to see ordinary wage and salary earners lose their deposits in Victoria. The only way of stopping it is to take it over’.
And I had to be pretty secretive about this because I couldn’t say this in public because then we’d get a run on the thing. But I told a few people including the Bank unions. I took them into my confidence and they didn’t split for two and a half months. As a result we were able to say to the Party: ‘look, one, depositors in Victoria are going to be protected, two, it’s the largest savings bank in the country, three its… look at the problem of the Pyramid Building Society in Victoria, imagine what the State Bank would do, a failure there. I mean it would just wipe the whole of Victoria’s economy out. The Commonwealth Bank could take it over but it hasn’t got the capital. Maybe this is a good time that we sell a quarter of the Bank to raise the capital to buy the State Bank and to provision the Commonwealth Bank for better, better capital adequacy’.
There was resistance to that but in the end the argument was won on the basis that the State Bank had to be taken over and two, that we had assets of value that we could bring to the Budget. But we had other priorities in social security and other things – education – that we ought to meet and those priorities took greater precedence to finding capital for yet another simplistic financial institution. Because it no longer had a central banking function.
Now, as a result, we won that at a subsequent Conference after having legislated, I think, first. Now, when we finished, when we sold the last half, which I arranged with the Board and Chairman Besley and the MD over Christmas in 1994, at Kirrabilli, I think. They needed more capital to grow the book to compete with Australia’s new financial market, with the other banks which had essentially reconditioned themselves. We looked at these sort of tricky financial instruments but essentially it was all this sub- ordinated debt, one way or another.
And I thought, I had a Budget coming up. I thought: ‘I’ve got to get the Budget into surplus’. So I brought in Willis and Beazley – who was Finance Minister and Willis was Treasurer – and said: ‘over Christmans, unbeknown to you two, I had a talk to the Commonwealth Bank and asked if we ought to sell the second half of the Bank’. This was after I’d sold the first half in two tranches. But we’d already, after the first quarter was sold, we had a share price set. We had a share price tested in the market and then we had a Board that actually had to work for private shareholders as well as public shareholders. So a whole lot of commercial things were then being done. But not formally being done. And the Bank was run more commercially than before.
I had been at great pains with Doug Sanders to keep it out of heavy lending in the 80s. Sanders was appointed on the basis that he could explode the Bank’s lending base in the way that other people had done in the ANZ and Westpac. So we finished the 80s unlike the State Banks. When I was Treasurer and I finished the eighties, the Commonwealth Bank was in very good shape. So in other words, we were in a position to actually be floated. The long and the short of it was that when I sold the second half I got four times the value we believed it was worth to begin with. It was four times more valuable that what we’d believed. Not because we’d sold a quarter. The first tranche was a quarter of the lot. But the value of the 100 per cent at the start ended up 400 per cent at the end. Mainly because, after having pushed the first quarter into the market place and made the thing focus on what it did well, to understand where its profit centres were, to start cost- cutting, to do all the things that a commercial institution does, it finally started to do better. Then we sold the second tranche and that got us to forty- nine per cent, still fifty-one per cent owned by the Commonwealth.
While there was a case for keeping a public institution in the system it was this. If you go to deposit taking institutions you can say that they are all in some way shape or form supported by the Reserve Bank in some circumstances. But one thing you do know if you’re an ordinary depositor is that the one which is owned – the shareholder is actually the Commonwealth of Australia – it is going to be the most safe. Therefore it put a sort of a high watermark of prudential achievement which the other banks had to get to. That was one argument. That was the argument for keeping fifty-one per cent, but in the end as the other banks repositioned themselves, the whole question of their safeness became academic. And so I let the last fifty-one per cent go.
And that gave a big subvention to the Budget and at the same time we let the Commonwealth become the institution that it now is. Which it would not have been.
I used to say to the Caucus that institution building is a very hard thing to do. In Australia a lot of institutions are in part destroyed, not many are created. I mean, things like the Bank of Adelaide, Elders…you know these sort of businesses go. How many come back and how many new ones are put in their place? We have Qantas, a little limited regional airline, a couple of long routes. We have the Commonwealth Bank which was essentially a post office bank. And while they are near and dear to the hearts of Labor Party people, they weren’t really institutions, full blooded institutions that could support or play an active role in the economy. As a result the Commonwealth Bank now has got a very high stock price. It’s well managed, it’s growing, it can get capital where it needs it and it’s not owned by the Commonwealth of Australia any more but it’s a better institution than it was when we owned it and that was the essential argument. The same is true with Qantas today.
And that began the range of privatisations in Australia. The big ones. Telstra followed that, but the thing about Telstra is that it should have probably gone…the first quarter of Telstra should have gone to a trade sale so that there’s some corporate actually managing it and then after creating a new price, sell it off to the market. I mean, the great condemning fact of Telstra is that John Fahey…it took a hundred years to the Telstra share value to $2 a share, and six or eight months for it to go to $3.70. So there’s one dollar seventy that hasn’t accrued to the people of Australia because the Government of the day priced the thing badly.
We didn’t do the same thing with the Commonwealth Bank. When the underwriters came back to me from the Commonwealth Bank offering some $18 billion, and Beasley and Sanders saying I was after too ambitious a share price because I was independently advised… I had independent advisers to the Treasury. They said: ‘oh well you can get whatever you ask for it’. $5.60 I think, a share or $5.70 and they were talking about $4.80. I said: ‘look my job is not to make you and your cronies look good, any mug can do that’. Any mug can run a bank with its existing earnings reflecting a higher rate of return for low capital value or high capital value. I’m not going to make the underwriters task dead easy.
Then what happened? I left and John Kerin became Treasurer, just at the time and they talked him into the lower price, but not with a four in front of it. But much lower that he should have accepted. But at any rate Australians didn’t get the gain that they did out of Telstra.1
______1Paul Keating, Personal Interview, February 1998. APPENDIX 3
MINUTES OF THE SPECIAL MEETING OF THE FEDERAL PARLIAMENTARY LABOR PARTY, HELD TUESDAY 9 MAY 1995.
The meeting opened at 6.45pm with JIM SNOW in the chair.
APOLOGIES: GEORGE GEAR, STEPHEN LOSSLEY, BOB McMULLAN, ROBERT RAY.
MOTION MOVED: GAVAN O’CONNOR SECONDED: SILVIA SMITH
“That apologies be accepted”.
CARRIED
BRIEFING ON THE 1995/96 BUDGET
PAUL KEATING thanked the Treasurer, the FINANCE MINISTER and other members of the ERC.
RALPH WILLIS outlined the main features of the Budget and thanked those Ministers who had been involved.
CARRIED BY ACCLAMATION
LEGISLATION
Qantas Sale Amendment Bill 1995
MOTION MOVED: KIM BEAZLEY SECONDED: TED LINDSAY
“That the Legislation be accepted and approved for introduction into the House while acknowledging that there exists a commitment to undertake discussions with Gary Gray and the National Executive.”
CARRIED
The meeting closed at 7.20pm