The Money Men by Chris Bowen (i wanna iguana read aloud .TXT) 📗

In the United Kingdom, chancellor of the exchequer Winston Churchill was also receiving near-unanimous advice that he should take the pound back onto the gold standard. Despite his lack of economics training, Churchill instinctively felt that this would be a disaster for industry. He was right, but he did not feel able to ignore the verdict of the Bank of England and the Treasury. He instead ignored his better judgement and, in April 1925, took the advice of his advisers.

When Churchill finally relented on the gold standard, he mentioned the fact that Australia and other members of the British Empire had already made this decision. Hawkins believes that the Australian decision put ‘pressure on the UK to follow suit soon after’.13 However, the most comprehensive single-volume biography of Churchill, Lord Jenkins’ Churchill, makes no mention of Australia’s action as a factor in Churchill’s considerations, nor does the most comprehensive multivolume biography of Churchill by Sir Martin Gilbert. Strangely, the otherwise very comprehensive Churchill and Australia by Graham Freudenberg is silent on the entire question of the gold standard. Still, we can conclude that at the very least, Australia’s position provided yet more reinforcement of the consensus advice.

Just as Churchill had initially feared, the decision was a disaster for the British economy. Churchill learnt the same lesson as that learnt by many other treasurers and chancellors: the backlash to a disastrous policy is no less if that decision is taken on unanimous advice and against better instincts. The impact of returning to the gold standard saw the British pound appreciate, industry become less competitive and unemployment increase. The economist John Maynard Keynes issued a devastating critique of the decision in his book The Economic Consequences of Mr Churchill, in which he argued that the disastrous 10 per cent appreciation in the pound that accompanied the return to gold was the result of ‘the deliberate act of the Government and the Chancellor of the Exchequer, and the present troubles of our export industries are the inevitable and predictable consequence of it’.14

Australia’s return to the gold standard was not directly a disaster for our own economy. But Great Britain was by far Australia’s largest trading partner at the time, so Page’s advocacy for a return to the gold standard did adversely affect our own economic interests.

Reforming Commonwealth–State Relations

Page was far from a traditionalist when it came to relations between Australia’s two main levels of government. Although the Constitution had only been in force for twenty-two years when Page became federal treasurer, he believed the case for reform was strong and campaigned to make it easier to establish new states—as he would throughout the remainder of his life.

Page also believed in a more rational financial relationship between the Commonwealth and the states. His experience as a motorist led him to introduce tied Commonwealth grants for road funding, the first of many such grants that would follow later in the century. Other big financial reforms included fixing the mismatch now known as vertical fiscal imbalance (where one level of government has the power to raise most of the funds and taxes but another level of government has the main spending responsibilities) and a more orderly system of coordinating borrowing activities between the states and the Commonwealth. He was more successful in delivering lasting reform in the second area than he was in the first.

Page expressed his concerns about the fiscal imbalance between the levels of government in his first budget speech:

It is most undesirable that one government should be responsible for raising the money required to meet the expenditure of another. A most salutary check against extravagance is provided when the government spending the money has to justify its action to the taxpayers whose money is involved.15

Reaching a settlement between the Commonwealth and state governments on the vexed issue of the distribution of taxing powers had bedevilled Australia since before Federation. The framers of the Constitution had such difficulty in agreeing on the right model that it had threatened the success of the constitutional negotiations. Eventually, the founding fathers, to avoid a delay in forging a federation, agreed to what became known to its proponents as the Braddon Clause, which its opponents called the Braddon Blot (or Plot as it is also known). Sir Edward Braddon, the premier of Tasmania, had suggested that the Commonwealth be empowered to levy customs duties and tariffs, but that three-quarters of the revenue from the tariffs be hypothecated to the states for the first ten years after Federation. For the next few decades, customs duties and tariffs made up the vast bulk of Commonwealth revenue. The amount at stake for both levels of government in overturning the Braddon Clause was therefore substantial.

In 1910, as the Braddon Clause fell due to be renegotiated, it was agreed that the Commonwealth would remit to each state 25 shillings per year per head of population. As discussed in Chapter 1, this was originally to be enshrined in the Constitution, but the referendum to do so failed. Accordingly, the Commonwealth agreed to lock in the 25-shilling payment for ten years and then to renegotiate it. This ad hoc and unsatisfactory arrangement was the funding model that treasurer Page inherited.

The reforming Page was determined to come up with a better model. At the 1923 Premiers’ Conference, Page and Bruce proposed that the Commonwealth vacate the personal income tax space for everyone earning less than £2000 annually. In return for the Commonwealth giving up the ability to levy income tax on 99 per cent of the population, the states were asked to give up their 25-shilling-a-year payment. This was rejected by the states, which instead proposed that the Commonwealth renounce all direct income tax powers and, in return, the states would renounce their claim on 75 per cent of the tariff revenue. This, in turn, was not acceptable to Page. In the end, a modest reform package was agreed to, in which all the states except for Western Australia would collect the Commonwealth income tax