Coronavirus: How Australia tackled its huge-post war debts

Ben Chifley (left) and Arthur Fadden helped engineer Australia’s economic recovery in the years after the second world war.

The last Australian Treasurer to see a mountain of debt similar to that being accumulated by Josh Frydenberg was Arthur Fadden.

Fadden took the job of Treasurer of Australia when Robert Menzies won the 1949 election. Fadden’s ALP predecessor was Ben Chifley who combined the post of Treasurer with Prime Minister.

After the second world war Australia’s debt as a percentage of GDP was about twice the level we will reach in 2021, but Chifley brought it down. Fadden then accelerated the process, so by the early to mid 1950s it was down to about what Frydenberg’s 2021 level is likely to be, based on a percentage of GDP.

This week Reserve Bank governor Philip Lowe rejected the idea of printing money to solve the deficit so there is no readily available solution on the table.

The way first Chifley, aided by Arthur Calwell and then Fadden, who had the help of “Black” Jack McEwen solved the problem is totally politically incorrect in today’s environment and I am not recommending it.

But given what is happening around us we may need to call on at least some of the Chifley/Fadden formula. And remember, the Fadden formula was backed by our longest serving prime minister, Robert Gordon Menzies.

I was a youngster at the time, in a family that operated a small business. It was made very clear all of us that our living standard depended on the business prospering so I took an interest in what was happening and experienced some of those historic events.

Fields of dreams

Our house had been built in 1939 and from the property as far as the eye could see there were paddocks. Then came an incredible building boom and the paddocks were filled. The returning soldiers needed houses and Calwell under Chifley had started the massive migration program that was to last until recent times. The migrants needed houses. And in those days the vast armies of bureaucrats that currently delay developments and boost costs simply didn’t exist. The nation had a problem to solve and with military precision set about solving it. Australia funded the war effort partly by issuing large amounts of low interest-rate long term bonds.

Back then nominal taxes were much higher than today but the cash economy was rife as a relic of Chifley’s mistake in leaving war time food rationing in place for too long.

Australia funded the war effort partly by issuing large amounts of low interest-rate, long-term bonds. After the war interest rates remained fixed and although they edged up they were still very low. The currency was set at a fixed rate and was not floating. That way we capped the cost of our debt.

Making our own future

Manufacturing behind high tariff walls was a key part of the post-war recovery plan. Ben Chifley inspects the first Holden 48-215. Picture: NCA Newswire.

Australia discovered in the war how disastrous it can be for an island nation not to have a strong local manufacturing supply chain. During the war and soon after Chifley, and later the Menzies government, driven by Black Jack McEwen, went all out to develop local manufacturing. The first Holden came off the assembly line in 1948 and Ben Chifley was proudly by its side. That developing manufacturing base was protected by tariffs. But it created the jobs required for our migrants and returned soldiers. So here we see the first steps in the Chifley/Fadden debt reduction program: increase the population base to amortise the debt over more people and employ them by boosting manufacturing. Of course Australia was also motivated by fear, because we did not believe we would be able to hang onto the Australian landmass with a small population.

In recent times we completely dismantled the strong manufacturing base, preferring to enter into a globalised world. And Australia benefited from globalisation. But at the moment we depend on overseas fabric, as well as overseas production, to get the masks we need to try to stop the virus’ spread. And that applies to a vast array of other goods, including medicines.

There is now a strong push to restore at least part of the manufacturing base established after the war.

Low rates and wool

Another debt reduction technique used by Chifley and Fadden was a combination of low interest rates and inflation. The low interest-rates were a relic of war time but they remained low well into the 1950s and 1960s. But, inflation in the early 1950s took off and reached levels of around 15 per cent partly created by a shortage of goods, and tariffs but fanned by demands for wage rises. The unions were on the march.

Those holders of long-term low rate war bonds saw their securities reduced in real value by inflation. So we had the debt to GDP ratio also being reduced by inflation and low interest-rates. We also had a wool boom.

In the current environment interest rates are in fact lower than they were in the post-war years, so to that extent we have duplicated Chifley/Fadden. But Australia needed a lever to prevent a total explosion in house prices along the lines that we have seen in recent years. And that lever was credit control. Banks were limited as to how much they could loan and that kept a lid on house prices. In the 1950s, Fadden used a credit squeeze to bring excess inflation down and there were screams from the community. In recent decades we used higher interest rates to curb high inflation. That option is now not available to Frydenberg or his successors because of the high debt.

A different time

But what would happen today if Josh Frydenberg announced that the way he would rescue the economy and reduce the debt burden as a percentage of GDP would be to increase tariffs to restore manufacturing, keep interest-rates low while allowing inflation rise but curb excess inflation using credit controls. Or if he slashed the cost of housing by eliminating multiple planning and other bodies and allowed inflation and higher population accompanied by low rates and higher taxes to solve the problem?

Perhaps Josh would be carted out of the parliament and declared insane. But Chifley, and Fadden and his manufacturing disciple Black Jack McEwen, were heroes in their day. Fascinatingly some of those old policies are now being embraced in the US by both Trump and Biden. I am not suggesting we go back to the policies of Chifley and Fadden but we can learn from the fact that these treasurers faced almost exactly the same challenge facing Josh Frydenberg. And note Australia did not go down the South American path where high debt destroyed the economies.