Reserve Bank of Australia Annual Report – 1961 Introduction

In its Report for 1959/60 the Board drew attention to certain dangers in the economy which were becoming increasingly serious in the closing months of that year. Expenditure, both internal and external, was rising to levels which could not be sustained. The markets for shares and land were becoming disturbingly speculative. Financing methods involving a heavy rate of turnover of bank deposits through non-bank institutions had developed to an excessive degree. To that stage the dampening effect of the increased flow of imports had been insufficient to offset increasing internal demand, and savings were still not growing sufficiently to finance the level of investment needed for stable and steady development.

The upsurge of imports which had followed the measures taken in February, 1960, to lift import restrictions was, however, expected to settle to lower levels, and the policies of restraint in force as 1960/61 opened, together with the drag on banking and private liquidity of large net payments for imports, seemed likely at first to be sufficient to ensure that there would be a check to the growth of the domestic boom and to excess imports. However, these factors had effect slowly, causing concern for domestic price stability and international reserves; there remained the risk that either imports or domestic activity would settle at unacceptable levels even after the checks had taken full effect.

As the months passed, it seemed increasingly likely that if further measures of restraint were not soon applied, the inevitable break in the boom could produce quite a violent internal reaction when it eventually came, and meanwhile reserves could be seriously depleted. In these circumstances additional official measures of restraint were announced in November, 1960. The pressures of restraint on bank lending were intensified; banking interest rates were increased and bond yields rose; legislation provided for interest paid by companies on new issues of convertible notes to be excluded from the expenses deducted in calculating taxable income, and similar interim provisions were made in respect of specified increased fixed interest borrowings by companies; sales tax on motor cars was increased from 30 per cent to 40 per cent; and legislation was proposed to set a lower limit to investment in official securities by life offices and pension funds.

A rather abrupt change in the domestic outlook followed the November measures, and in due course, some of them were modified or withdrawn. Up to November, business judgments were apparently not influenced by the evidence that sales in several fields were in excess of underlying demand, by a slowing of growth rates in a number of indicators, or by the prospect of liquidity pressures later in the year. The effects of the November measures appeared to be enhanced by suddenly increased awareness of these considerations, and a fairly sharp general reaction followed.

Production fell in a number of lines; raisings of fixed interest finance by businesses were sharply reduced; share prices, which had fallen before the November measures, fell further; turnover in real estate markets decreased to much lower levels; and the level of stocks, which had earlier been increasing, seemed in the light of revised business judgments to have become, in many sectors, excessive. In such sectors, pressures for reduction of stocks shifted much of the burden back along the chain of distribution to manufacturers and importers.

The check to the rate of growth in activity in the last quarter of 1960 was accompanied by an actual downturn in a few particular industries. Some of these, like television manufacture, were already experiencing difficulty and appeared to have capacity well in excess of likely longer term demand. Textile manufacture was already being adversely affected by a lull in domestic buying after an earlier upsurge, combined with sharper competition from imports; these difficulties were intensified by the changed conditions. Sales of motor vehicles, which had been very high in the opening months of 1960/61, moved to much lower levels. The home-building industry, which on the basis of an exceptionally favourable combination of supplies of finance had been operating at a level considerably higher than was warranted by long term demand considerations, reacted sharply early in 1961 to lower levels than those considerations would warrant. Official action was taken progressively to counter the reduction in the supply of home-building finance and so increase the level of housing construction.

One factor which contributed substantially to the sharpness of the reaction which took place about the middle of the financial year was an earlier progressive reduction, which had been spread over a period of several years, in the quality of the assets people were accustomed to regard as liquid. Although the total supply of notes and coin, bank deposits, Government securities and other high-grade liquid assets held by the community did not fall sharply during 1960/61, there appears to have been a sharply increased awareness of the advantages of holding cash, and many businesses followed policies designed to increase their cash holdings. Businesses and individuals showed themselves less confident in the ready liquidity of nominally short term commercial issues which they had previously been content to hold. This changed outlook, together with the effects of the fall in bank lending, contributed to a reduced availability of finance in the capital and money markets outside the banking system, to upward movements of interest rates in those markets, and to the pronounced general sense of financial stringency which emerged during the second half of 1960/61.

The easing of the balance of payments pressures took place rather more slowly than the change in the domestic outlook. The first signs of the expected fall in imports were not confirmed until March, 1961, but by June the annual rate of flow of imports, which reached almost £1,140 million in the March quarter, had fallen to about £900 million. In the last few months of the financial year several other factors appreciably improved the balance of payments. These included the £78 million International Monetary Fund drawing in April, large unexpected wheat sales to China, an upward tendency in wool prices, and exceptionally large apparent private capital inflow in the later part of the year.

Despite the changes which were taking place during the year, it was considered desirable to continue the general credit policy of fairly firm restraint. However, as the year developed, opportunities were sought in discussion with the trading banks for means to ease credit policy selectively, and before the end of the financial year moves were made to increase banks' “free” liquidity. Advance policy was also revised to restore to the banks themselves more normal responsibility for allocation of loans.

Although there was rapid change during the year in the nature of the problems confronting the economy, the year closed with a number of difficulties still unsolved. Although some factors had for the moment eased the balance of payments pressures, the improvement did not necessarily imply the attainment of longer term balance of payments stability. The capital market had not reached a stable position, and it was not clear how soon the resumption of fixed interest and equity financing on a scale sufficient to meet the needs of industry and commerce would be achieved. The over-rapid rate of growth in expenditure in the first half of the year had been sharply checked and some resources were under-used. The over-full employment position with which 1960/61 had opened was replaced during the second half of the year by a position of uncertainty, with, by the June quarter, an excess of supply in the labour market. The problem of reconciling external balance with internal full employment and high rates of economic growth remains a challenging one.