Joseph Lyons and the Management of Debt

Three figures emerged from the fracas in Australia brought on by the stock market crash of 1929 and the Depression which followed. These political players were the federal treasurer “Red Ted” Theodore, Joseph Lyons and Jack Lang. Joseph Lyons, a former Labor premier of Tasmania was made acting treasurer in the Scullin Labor government in 1930, after treasurer Ted Theodore had to step aside and Scullin was absent at an Imperial Conference in London for five months. As the Lang forces pushed the federal caucus towards repudiating Australia’s debts, in the face of credit restrictions and heavy loan repayments, Lyons stood his ground only to resign from the Labor Party in March 1931 – going on the become UAP leader and win government in a landslide in December 1931.To discuss the importance of Lyons and his role in Australia’s depression years, Kevin Andrews, author of Joseph Lyons and the Management of Adversity, addressed The Sydney Institute on Monday 31 July 2017.

 

JOSEPH LYONS AND THE MANAGEMENT OF DEBT

KEVIN ANDREWS

 

The one constant in the public leadership of Joseph Lyons was the management of debt. From the outset of his parliamentary career in Tasmania, he spoke about the challenges of state debt and the cost of repaying it. His message was that unproductive debt was a drain on the economy through higher interest payments and higher taxes that ultimately fell upon workers. 

By 1922, Tasmania was paying a third of its revenue in interest on debts. The Labor newspaper, The World, estimated when Lyons became Premier in Tasmania in 1923, that half of the government’s revenue was being paid in interest. He had to draw on loan money just to pay the ordinary expenses of government.

J A Hart summarises the achievements of Lyons within his first two years in office:

Taxation was reduced and more equitably imposed, loan expenditure reduced, all public service salary cuts restored, and the State’s Shipping Line, established with Labor’s approval in 1920 to provide transport to the mainland, was hastily sold, as it had proved an expensive liability. Although expenditure increased, the state of the economy improved, and in 1925 Lyons produced the first budgetary surplus for years.

The seeds of the Great Depression were already growing in the 1920s as the economic historian, C B Shedvin observed:

The economy stagnated: real national product fell gradually, and product per head more rapidly, so that by 1927 – well before the overseas collapse – Australia was already in a state of serious recession.

The Great Depression

Economic and political storm clouds were already gathering on the horizon when Lyons was sworn into the Australian parliament in 1929. The new Scullin Labor government was confronted with a deteriorating financial crisis. For a decade, the Commonwealth and State governments had been reliant on overseas loans. The accumulated deficit was about 12 per cent of the Commonwealth’s revenue.

Commodity prices were falling and unemployment growing at an alarming rate. UK credit was becoming more difficult to obtain, as banks in the old country gave preference to domestic requirements. Australia was already in a significant slump before the 1929 stock market crash that signalled the Great Depression. The nation faced the perfect storm of crippling debts compounded by a global credit crisis.

By early 1930, the chairman of the Commonwealth Bank warned that it would be difficult just to meet the funds required to support the nation’s debt and interest payments, leaving no funds for any other purpose. The nation was in a dire situation as national income fell from £640 million to £560 million.

While Scullin, Theodore and Lyons – the leaders of the Commonwealth government – believed that the nation was living beyond its means, and savings had to be made, other voices, particularly in New South Wales, were advocating credit expansion.

At the 1929 national elections, New South Wales swung significantly to Labor, with almost half of the new caucus from the state.

The election the following year of the Lang government created an explosive situation.

Although Scullin, Deputy Prime Minister Jim Fenton, Lyons and – at that stage – Treasurer Ted Theodore had steadfastly rejected credit expansion and insisted that the nation had to pursue savings, including the reluctant decision to reduce wages and lay-off public servants, the rampant Lang presented a new threat as he railed against the banks and called for the repudiation of the nation’s loans.

As early as 1924, John Maynard Keynes used Australia – New South Wales in particular – to argue that the Dominions were able to borrow “too cheaply resources which we [the UK] can ill spare”. That warning went unheeded. By the end of the decade, Australia’s debt binge was exacerbated by the credit crisis of the Great Depression. It was a difficult situation for the new government, made worse by the political infighting from Lang and his supporters in the federal caucus.

Responding to national debt

Prime Minister Scullin was out of the country for five months in 1930, attending the Imperial Conference in London. Ted Theodore was also sidelined while an investigation occurred into the collapse of a mine in which the Queensland government had invested while he was Premier of the northern state. In the absence of Scullin and Theodore, Jim Fenton was the Acting Prime Minister, and Lyons became the Acting Treasurer.

The 1930 visit to Australia by Sir Otto Niemeyer, a representative of the London financiers, was the catalyst for the dramatic events that followed in 1931. For Scullin and Lyons, who knew that Australia would require more loans in the future to avoid bankruptcy, his message to the Premiers’ Conference in Melbourne to balance budgets and reduce national indebtedness was reassuring. At the end of the meeting, a so-called “Melbourne Agreement” was made in which governments decided to end borrowing and balance their accounts. The announcement had a positive impact in London, but a conference of unions and the ALP in Sydney rejected the approach, called for a moratorium on interest payments, the repudiation of war debts and immediate financial stimulus for the economy. 

Lang and his supporters in the Federal Cabinet called for the repudiation of the Melbourne Agreement and credit expansion in the face of the request by Fenton and Lyons to put the measures to the parliament for approval.

Open warfare had broken out in Cabinet and caucus. The radicals were in the ascendency and carried a motion at a marathon four-day caucus meeting to force the Commonwealth Bank to take up a £28 million loan falling due in December. Even after hearing from Lyons at length about the dire financial situation of the nation and the Niemeyer advice, they moved a motion to reject it. This was a crisis in Australian politics never experienced before. On the second day, a motion was moved to force the Commonwealth Bank to take up the £28 million loan falling due in December, to which Lyons moved an amendment to reassert government policy. Even Ted Theodore, who had returned to parliament, and was locked in a battle with Lang for the control of the NSW Labor Party, had abandoned his earlier support for savings.

By the third day, the caucus rejected the position being put by Lyons, who had emerged as the de facto leader of the government in the absence of Scullin. Undaunted, Lyons cabled Scullin in London, whose reply he read to the caucus the next morning: Scullin supported his Acting Treasurer, stating that the caucus decision would lead to the withdrawal of money from Australia. The radicals were unrepentant. John Curtin proposed that the Ministry meet with the Commonwealth Bank directors to instruct them to take up the £28 million loan or resign, and Frank Anstey proposed a bill be passed by parliament to renew the loan for a year. The motions were passed, although Theodore did not support the latter, believing that it would kill any confidence in the financial affairs of Australia overseas. 

When the meeting finished on the evening of the fourth day, the view of Lyons and Fenton had been rejected. The caucus was willing to repudiate the nation’s debt. The Prime Minister had responded by cable from London: Scullin rejected the caucus decision, and was fully supportive of his Acting Treasurer.

Joe Lyons had faced down the radicals. Had he not done so, with Scullin’s support, Australia’s economic future would have been very different. Scullin and Lyons were not unmindful of the human tragedy playing out across the nation, as total unemployment rose to around 20 per cent and dole queues lengthened by the day. But they believed that the repudiation of our debts, continued credit expansion and a refusal to make the necessary savings would have exposed even greater long term weaknesses in the national economy with a slower recovery from the Depression and ongoing social chaos. 

Lyons’ rejection of debt repudiation was rewarded in December when the loans fell due. Even though the bonds offered a lower interest rate and return, the offer was oversubscribed following appeals to patriotism by Lyons and a concerted campaign by the major newspapers. The appeal was bipartisan, with State premiers (except Lang) and major business leaders joining with Lyons to promote the need for the conversion of the loans as a matter of national interest. Increasingly Lyons was seen as a potential national leader who could unite various individuals and their different interests. A small group, that included the stockbroker Staniforth Ricketson and a young Victorian state MP, Robert Menzies, coalesced around Lyons. It included a former editor of The Age, Ambrose Pratt, and Keith Murdoch, father of Rupert. It would lead to Lyons’ Prime Ministership of the United Australia Party. 

The fall of Labor

Lyons’ success was short-lived as forces of destruction engulfed the Scullin government. Intrigue replaced policy-making, as at least three different factions emerged. Ted Theodore was angling to replace Scullin, adopting a position on the debt that appeared contrary to his earlier statements. Further manoeuvrings came to a head at a caucus meeting on Australia Day 1931 at which Scullin retained the Prime Ministership, but Theodore was reinstated as Treasurer. Believing they had been betrayed by Scullin, Fenton and Lyons resigned from the ministry.

Lyons remained convinced that the new direction of the government, in which Theodore proposed an £18 million credit expansion, would be disastrous for the nation. Things came to a head on 13 March 1931, when Lyons rose to his feet in the House of Representatives to speak on a “Want of Confidence” motion in the government. The debate had lasted a number of days and Lyons was one of the last to contribute. It was to be his final speech as a member of the Labor Party.

Lyons argued why the policy of credit expansion and inflation would increase unemployment, misery and destitution. He repeated the firm position that he was committed to advancing: “We must put our house in order. I know that it is unpopular to talk about cutting down expenses, but we have to do it.” And in an indictment that resonates down the decades, he castigated those who would defend the salary and wages of the employed while ignoring those with no such emoluments – the unemployed.

Volatility reigned throughout 1931. As the economic situation worsened, the government faltered under the pressure of internal divisions. Jack Lang, acting as if there was no depression, defaulted on the interest due to the Commonwealth on NSW loans. Various political movements were springing up in the community and attracting large followings. At least 200,000 people – probably twice that number – had joined political movements such as the increasingly powerful All for Australia League.

As the Labor government of James Scullin clung to power, Ted Theodore, the Treasurer, was locked into a futile attempt to pass his fiduciary note issue bill through the Senate, a proposal that was finally rejected by the upper house on 17 April. To employ a recently coined expression, the Scullin government “was in office, but not in power”. Lyons was formally elected leader of the UAP on 7 May, leading to bitter debates in the House as the new party moved a “Want of Confidence” motion in the Scullin Labor government.

The raw political tensions that had bubbled just below the surface now erupted in the chamber and across the nation. When Lang refused to pay the interest on loans due to the Commonwealth, Scullin and Theodore responded by reducing payments to New South Wales by the default amount. While clinging to a faint hope that his legislation would pass the Senate, Theodore was already at loggerheads with the Commonwealth Bank. When its chairman, Robert Gibson, informed the Treasurer, who was also Chairman of the Loan Council, that it could no longer provide financial assistance to Commonwealth or State governments, Theodore angrily replied that the government would tell the bank what to do, not vice versa. 

Anne Henderson concludes:

[Gibson] did not waiver in his belief that Australia could not afford to inflate the nation’s costs or devalue its currency in the face of steep overseas interest repayments and tight international credit. Debt could not be brought under control by more debt – and Australia was too small a player in financial markets to stand alone or repudiate.

It was against this background that the Premiers’ Conference was convened at the Victorian Parliament House on 25 May. The 1931 meeting went for three weeks! At issue was a proposal to convert an enormous £500 million loan by forcing bondholders to accept a significant reduction in the interest rate. The opposition leaders, Lyons and Latham, who were invited to the Conference for the third week by a weakened Scullin, opposed the compulsion, leading to a compromise provision whereby the offer was voluntary, but could ultimately be forced on bondholders. Although Lyons accepted the compromise plan at first, he later spoke against it, as overseas investors baulked and small bondholders protested the loss of their savings. With the Langites preparing to move against Scullin, the government’s days were numbered. The end finally came on 25 November when the Lang faction crossed the floor to vote against their own Labor Prime Minister.

The 19 December election was a disaster for Labor. The primary vote plunged from 49 per cent in 1929 to just 27 per cent. The United Australia Party won three-quarters of the House seats. Theodore lost his seat and Labor would not occupy the Treasury benches for a decade. The age of Lyons had arrived.

The Lyons UAP government

Lyons faced formidable challenges on coming to office. The outstanding public debt of all levels of government in Australia had grown from 127 per cent of GDP in 1929 to 205 per cent in 1932. Unemployment reached almost 20 per cent of all workers. The Great Depression ravaged the world. Lyons had managed to unite disparate political forces.

At the Premiers’ Conference in February 1932, Lang announced that he would not pay any more interest to British bondholders. The Commonwealth had to step in with the payments, leading Lyons to declare that it would not make any more financial assistance available to New South Wales. Lyons explained:

Our unhappy financial position is largely due to the attempts of governments to provide employment on works constructed out of borrowed money, the interest of which has to be paid by the taxpayers of this country. Too many millions have in the past been expended on unproductive works which have robbed existing works of their reproductive capacity by coming into competition with them.

The passage of the Financial Agreement Enforcement Act and the Financial Agreement Act, required banks to pay the Commonwealth moneys held or received by New South Wales. Lang responded by raiding the holdings of the Bank of New South Wales and the Commercial Bank of Sydney, and transferring the funds to the NSW Treasury. [In the meantime, social chaos was threatening to explode into civilian turbulence and violence as Eric Campbell’s New Guard and separatist movements exploited the turmoil. When the High Court rejected Lang’s case against the Commonwealth Act, Lang instructed his departmental heads to ignore it, forcing the State Governor to sack Lang. Joseph Lyons’ nemesis was wiped out at the subsequent NSW election, with Labor winning just 24 of the 90 seats. pullquote]Lang responded by raiding the holdings of the Bank of New South Wales and the Commercial Bank of Sydney, and transferring the funds to the NSW Treasury.[/pullquote]

The available evidence suggests significant improvements in the Australian economy during the 1930s. The debt was brought down from 205 per cent of GDP to 148 per cent; unemployment fell from 20 to 9 per cent and modest reforms of tariffs were made in a global environment that continued to support the existing trade system. Savings increased and there was no flight of capital. Writing in the Sydney Morning Herald in 1932, John Maynard Keynes supported the Lyons’ policies, concluding that they had “saved the economic structure of Australia”. It is true that Keynes also believed that wage cuts were unnecessary as the nation had already been successful in the program of readjustment. If an international comparison is to be made, Australia climbed out of the Great Depression long before the United States, where unemployment rates remained stubbornly high and capital investment low right through the 1930s. 

By his careful management of the United Australia Party, his attention to the interests and needs of business and workers, his extensive networking, and his ability to communicate his plans to the Australian people, Lyons created the length of time in government necessary to achieve a great deal for Australia. While making the necessary adjustments required of any successful political leader, Joe Lyons remained committed to reducing debt, increasing savings, and creating trade opportunities for the nation.

The dramatic events of the early 1930s illustrate that few things are immutable in the political landscape. In the end, hundreds of thousands of ordinary Australians chose to follow a plain-speaking leader who had a plan and was prepared to make hard decisions, even if unpopular, rather than reward a disunited government. Many of them voted for a party other than Labor for the first time. 

 

Further Reading:

Andrews, Kevin (2016) Joseph Lyons and the Management of Adversity [Connor Court, Redland Bay, Qld]

Henderson, Anne (2011) Joseph Lyons – The People’s Prime Minister [New South, Sydney]