The Money Men by Chris Bowen (superbooks4u .txt) 📕

their thinking. This was particularly important in an era when the Treasury was still primarily staffed with accountants as opposed to economists. There is one economist Theodore consulted whom Lyons almost certainly did not: Richard Irvine.

Irvine was the inaugural professor of economics at the University of Sydney. He built the (to this day, flourishing) economics faculty at the university from scratch. Some years before the Depression, however, Irvine had been obliged to resign his professorship over concerns held by the university about his radical views and issues in relation to his personal life. Irvine was not part of the economic academic establishment; rather, he was somewhat of an outlier in terms of his rejection of economic orthodoxy. Irvine is, in fact, the economist who is most qualified to be termed ‘the Australian Keynes’. Like Keynes, Irvine was a student and admirer of JA Hobson, who had, several decades before, identified the risks of underconsumption in bringing about an economic slump. (Hobson had also been removed from his professorial post, at the University of London, because of the radical nature of his views.) Irvine rejected Say’s Law, the classic economic theory that supply creates its own demand and that economic equilibrium is the natural state, before Keynes did so. He also expressed his views through evidence before the Arbitration Court, arguing against reductions in wages. We know that Theodore sought Irvine out and that they met on several occasions.25 The views that Theodore developed and the plan he proposed would appear to have been influenced by those discussions.

The Queensland politician Bob Katter lionises Theodore as Keynes’ intellectual equal: ‘The depression produced several figures from different countries of towering intellectual stature: Schacht in Germany, JM Keynes in Britain, JK Galbraith in the United States, Theodore in Australia … each made enormous breakthroughs in understanding the causes of a depression and zeroed in accurately on a solution.’26 It would be more accurate of Katter to insert Irvine’s name into this pantheon.

Just as Katter gives Theodore too much credit for the intellectual underpinnings of his plan at the expense of Irvine, other academics have unfairly played down Theodore’s role. DL Clark, for example, has alleged that the plan was really Irvine’s and that Theodore didn’t understand it. This line of argument does not stand up. Clark argues that if Theodore had really supported reflation, he would have blocked the reappointment of the zealously orthodox Gibson as chairman of the Commonwealth Bank.27 However, he ignores the fact that Theodore was on the backbench when Gibson was reappointed, and there is absolutely no evidence that Scullin and Lyons even consulted Theodore about the decision.

In any event, Theodore’s opposition to Lyon’s retrograde plans, and his development of an alternative approach, saw a strong constituency develop in the party that called for Theodore’s return to the Treasury, to give the government one last chance to establish a coherent and effective policy for dealing with the economic slump.

Theodore Redux

In August 1930, just before Scullin had departed for the upcoming Imperial Conference, a group of Cabinet members had begged him to return Theodore to the Treasury portfolio. Up against the ferocious opposition of Fenton and Lyons, Scullin had refused. By early the following year, however, Scullin knew he needed Theodore by his side once more. As Young explains, ‘Scullin returned to Australia in January 1931 bewildered by the financial complexity of the situation and the deterioration within the Party … When the NSW Executive of the Party made a formal request to return Theodore to the Treasury, Scullin did not object.’28

Fenton and Lyons immediately resigned from the Cabinet in protest. Ostensibly, this was because Theodore had yet to be fully cleared of wrongdoing in the Mungana case. We are entitled to conclude, however, that their distaste for his imaginative countercyclical policies was a much bigger motivating factor.

Theodore quickly set about attempting to implement his key new policies. Prime among them was a Bill to see credit expanded through what is now known as expansion in the money supply. The Bill authorised the creation of £18 million in new money, of which £1 million would be used for employment-creation schemes and £6 million would be made available for farm finance. Cabinet approved the Fiduciary Notes Bill in March 1931.

What followed was a robust parliamentary and community debate in which the conservatives ran a scare campaign warning of Weimar Republic–like hyperinflation if this amount of money were to be pumped into the economy, with housewives needing wheelbarrows full of cash for basic transactions. Elements of the media cooperated with the campaign. A newspaper called Country News published a photo of treasurer Theodore with the caption: ‘Mr Theodore is after your money’.

This was all entirely unwarranted. What Theodore was proposing would today be called quantitative easing—it was practised in a more recent (and considerably milder) financial crisis by the US Federal Reserve, and by other central banks where required. As Clark notes, ‘Theodore’s policies did not constitute a scenario for inflationary disaster as his enemies tried to claim … a carefully controlled inflation would have at least reduced the depth of the trough.’29 But the facts did not get in the way of the odd stunt. As Theodore rose in the House of Representatives chamber to move the second reading of the Bill, someone threw a flurry of fake banknotes down from the gallery to represent the ‘funny money’ that Theodore was apparently proposing to foist on the people.

The speech that Theodore gave on that second reading has been judged by some to be the finest speech ever delivered in the House.30 Theodore took every interjection and answered all the questions that were posed. He quoted Keynes’ then recently released A Treatise on Money and predicted that it would be regarded as the pre-eminent text for the next fifty years (which was indeed as long as Keynesianism was the pre-eminent economic theory).

The government’s numbers were enough to see the Bill pass through the House of Representatives. But just as happened with the