The Money Men Chris Bowen (the red fox clan .txt) 📖

Chifley government had successfully transitioned to peacetime while maintaining full employment, the Menzies–Fadden opposition had some potent weapons at its disposal when it came to the economic management debate, and it employed them with considerable political skill. Chifley had cut personal income tax in each of his postwar budgets, but Menzies and Fadden offered substantial further personal income tax cuts. Most potently of all, they offered a firm reassurance that private banking would continue unmolested under their government and that rationing would be brought to an end.

The 1949 election results were emphatic. The size of the House of Representatives was increased dramatically, but the Labor government won only another four seats while the conservative opposition won an extra forty-eight, giving it a very comfortable seventeen-seat majority. After an absence of eight years, Fadden was back in the treasurer’s chair, thus becoming the fourth of five people (to date) who have held the Treasury portfolio more than once. However, many of the promises Menzies and Fadden had made proved problematic to implement once they were confronted by the economic reality of government. The stresses of managing a too-buoyant postwar economy would stretch the new government almost to breaking point within its first two years.

Boom and Bust: Fadden Mark II

Throughout the late 1940s and early 1950s, Australian governments had to deal with a new challenge: boom conditions leading to dangerously unsustainable inflation. Fadden would be the first treasurer in Australian history to be called upon to use Keynesian methods to dampen demand. To do so, he would reduce spending and increase taxation to budget for a surplus. A robust world economy was partly to blame for the situation. In addition, Menzies had been elected on a platform of development, enterprise and immigration. These policies stimulated more economic activity and unleashed pent-up demand in the economy, leading to an increase in inflationary potential.

This inflation tinderbox was lit in a most dramatic fashion by the Korean War, which began in June 1950. The war had an enormous impact on the Australian economy, striking in an environment that was dangerously exposed to an inflationary outbreak. The cost of participation in the war and the demand for clothing for hundreds of thousands of US soldiers led to a dramatic increase in the price of wool, which was still by far Australia’s largest export commodity, representing half of the country’s exports at that time. The combination of a mildly expansionary first Fadden Budget in 1950 (in which he implemented election commitments), an Arbitration Court ruling that increased the base wage by £1 a week, and the flow-on effects of the Chifley government’s 1949 devaluation of the pound all led to a terms-of-trade shock by way of dramatically increased wool prices that would have inflationary reverberations throughout the economy.

In 1949, Australia wool growers could expect to earn 49 pence per pound of wool. Over a relatively short period of time, this price rose to a full Australian pound per pound of weight at the price’s peak in March 1951. Australia’s second-biggest export commodity, wheat, rose almost as dramatically over the same period—the expanding US Army needed to feed its troops as well as clothe them. This all prompted a trade boom that rivalled the gold rushes of a hundred years earlier, and that would not be challenged in terms of national records until the great mining boom of the early twenty-first century. Australia’s terms of trade increased by a massive 64 per cent between 1946 and 1950, and rose another 46 per cent in 1951 alone.

The boom was good for the national income level, and the resultant economic activity drove unemployment even lower than the already low level it had been at for some time. Inflation, however, skyrocketed. In mid-1951, the annual inflation rate was an extraordinary 25 per cent, and the Menzies–Fadden government recognised that drastic action was needed. The decision as to what action to take, however, would cause huge, almost fatal divisions within the government.

The first and most obvious option for dealing with the inflation was to appreciate the pound. In the days before a floating currency, appreciations and depreciations were always available as a lever of governmental economic policy. Depreciations were often unpopular due to the psychological effects of the pound being worth less on international markets. Appreciations, on the other hand, had the effect of making Australian exports less competitive in international markets, and made it easier for imports to penetrate the domestic market.

In 1951, an appreciation of the pound, while adversely affecting exporters, would mean that the increase in the international price of wool would have less of an inflationary impact because the heightened prices would be ameliorated. The prime minister, and the majority of the Liberals in the Cabinet, understood this and accepted the need for appreciation. The treasurer, however, did not. Fadden, being leader of the Country Party as well as treasurer, was not prepared to countenance the impact of an appreciation on the competitiveness of Australia’s primary producers. He insisted that the Cabinet not endorse an appreciation, sparking a raging debate. While Fadden did not directly threaten resignation or the break-up of the Coalition, he’d arranged for two Country Party ministers—Sir Earle Page and Hubert Anthony—to carry signed letters of resignation from the Cabinet in their pockets, to be produced if the government ignored their wishes. Despite the landslide nature of his 1949 election win, Menzies still did not have enough seats to form government without the support of the Country Party, and the break-up of the Coalition would have been fatal to his government.

As it happened, the ministers did not need to open their envelopes: three Liberal members of Cabinet agreed with the Country Party position, and Menzies therefore did not have enough authority to overrule his country colleagues. Fadden would write after his retirement that stopping the appreciation of the pound was his most important achievement in politics.

As alternatives to appreciation were considered, Fadden found he had to be equally aggressive in stopping another measure that