Chapter 28 - A Lesson from the Australian Great Depression

In 1927, Sir Ernest Harvey, Comptroller of the Bank of England, arrived in Australia. He was to advise the Commonwealth Bank on certain aspects of Central Banking. The Commonwealth Bank was to be changed to a central bank operating for the benefit of private banks from a national bank operating for the benefit of the nation.

On the advice of Sir Ernest Harvey, the Bruce-Page Government brought forward a Bill, in 1927, to split the Commonwealth Bank in two. Mr. Charlton stated in parliament that: “it took away the Bank’s cash reserves, which enabled it to compete with private banks, terminated its trading operations, and reduced it to a bankers’ bank ― not a reserve bank, because no bank was compelled to keep its reserves there ― so that it became neither a trading bank nor a savings bank, nor yet a reserve bank, but a thing of shreds and patches, at the mercy of private institutions, and which could be destroyed at any time.” [3] Between December 1927, and June 1928, the Commonwealth Bank sold to the Commonwealth Savings Bank £38,000 000 worth of securities, and called in £4,000 000 of advances, which had the effect of cancelling £42 000 000 worth of currency. [3] This money move was obviously going to create a massive fall in the Money Supply. The bankers had managed to create the same depression in Australia that the banking system had already created in other countries.[3] The sale value of Australia’s exports fell drastically compared to the value of her imports. Overseas debt rose. In October 1929, the Scullin Labor government came to power. The London Banking System promptly ceased to extend any credit to Australia. The Australian private banks followed suit and ceased to extend credit and called in their overdrafts. [1] To demonstrate their unwillingness to maintain the money supply, the banks reduced the Money Supply by selling £4 million securities. This is the opposite of what was done following 2008. It must be remembered that the bulk of the Money Soppy is composed of Bank Credit and very little is Cash Currency. At the time there were stricter rules regarding the ratio of Cash Currency to Bank Credit. The new Scullin government was subjected to unemployment and poverty at home, and possible default in interest payments abroad. This government played some clever moves which took Australia off the gold standard and prevented a hemorrhaging of Australia’s gold stock abroad.

D. J. Amos writes in 1943: “It gave the Commonwealth Bank Board power to commandeer, in exchange for Australian notes, the total gold supply of Australia, whether in private hands or in those of institutions; it forbade the export of gold, without permission of the Board, under heavy penalties.” [3]

The result was that the Commonwealth Bank now had a virtual monopoly over gold and if foreign loans could not be paid using more overseas obtained funds, the loans would default. The foreigners could not bleed Australia of its gold supplies.

D. J. Amos writes in 1943: “Since the establishment of the Bank of International Settlements at Basle, early in 1930, central reserve banks (more or less independent of the Governments of the countries in which they were situated) had been springing up like mushrooms all over the world, amid a chorus of approval from deluded Governments and people whom these banks were intended to reduce into servitude. Why not, reasoned the Scullin Administration, under cover of establishing one of them in Australia, get back into the hands of the Government the powers given away in 1920? ... the consensus of opinion in the ranks of the Opposition was “that the Government intended to use the central reserve bank to supply large sums of money to carry out the schemes of Labor Administrations, both Federal and State.” [4]. That opinion was probably correct; if not, it is difficult to understand why the Bill was brought forward at all.” [3]

It appears that an opposition will push a country under to regain government. The Bank of England, in an act of “assistance”, sent Sir Otto Niemeyer to Australia. Sir Otto Ernst Niemeyer GBE KCB (1883-1971) was an Anglo-Jewish banker who ascended to the post of financial controller at the British Treasury and was a director at the Bank of England.[5] He later became a director of the Bank for International Settlements from 1937-1940. [5] In 1930, Niemeyer recommended a traditional deflationary response of balanced budgets to combat Australia’s high levels of debt and insisted that interest on loans be met. [6] This might nowadays be called “Austerity Economics”. Sir Otto Niemeyer ‘helpfully’ recommended (demanded) the following [2]:

  1. Budgets to be balanced at any cost in human suffering.
  2. Cessation of overseas borrowing until the then short-term indebtedness had been dealt with.
  3. No public works, which would not pay for interest and sinking funds on loans, to be put in hand.
  4. All interest payments to be credited to a special account in the Commonwealth Bank, to be used only in favor of the bond-holders. ...

All of which were dreadful proposals. This has to be some of the worst advice ever. This was all that was needed to change Australia from a land of plenty to a land of despair. The items should read:

  1. Do not try to balance the budget. Where a nation’s money is sourced from debt, the debts can never be repaid, so don’t try to repay them.
  2. There is no need to borrow overseas. A nation should never be short of its own money. Money is a freely created commodity that aids the human transactions essential to civilized life.
  3. Plenty of public works.
  4. Do not try to repay debt. There is more debt than money because of the method of creation of money. Any attempt to pay off debt will destroy the money supply.