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Since it was floated in the early 1980s, the price of the Australian dollar has – usually in fits and starts separated by periods of stability, but occasionally precipitously – fallen vis-à-vis many major currencies. During 2000 this tendency has accelerated; and on a virtually daily basis during the Sydney Olympiad, Australians were awarded gold on the medal podium and the wooden spoon on currency markets. New lows have been plumbed since the Games’ conclusion.
Explanations of the most recent manifestations of this long-term phenomenon, like the dunce male accessories of astute young women, have succeeded one another in swift succession. During the late summer and autumn, conventional wisdom stipulated that Australia’s low growth potential relative to other countries was depressing its currency. During the winter and into the spring, Australia’s low interest rates vis-à-vis the U.S., its correlation with the Euro, the Commonwealth Government’s “just doesn’t get it” attitude towards the IT sector and the current account deficit have been nominated as culprits.
These contentions, it seems to me, miss the obvious point: the price of the $A has decreased simply because the ability and/or desire to sell Australian dollars exceeds the ability and/or desire to buy them. Why? For potentially as many reasons, rational and emotional, as there are buyers and sellers of the currency. An exchange rate, like most other economic variables, is essentially a subjectivist phenomenon.
These conjectures have also focussed upon the short-term and superficial, and thereby ignore more perennial developments which are obscured below the surface. An underlying cause of the Australian currency’s long-run slide, it seems to me, is that during the twentieth century the attitude of Australian lenders, businesses and consumers with respect to credit and debt evolved in a slow but cumulatively dramatic fashion. Institutions were founded and have evolved in a manner which facilitate (if they did not cause) these changes in attitude and practice. A consequence is that debt has ceased to be regarded with fear and suspicion. Indeed, in many quarters it is presently regarded favourably and cavalierly. Because its advantages have been exalted its use has exploded.
Conversely, attitudes towards savings and capital investment have become less favourable, their importance has been downgraded if not denigrated and their magnitudes (relative to credit and debt) have decreased. Less and less of Australians’ spending has thus been financed by their own savings – and more and more was financed by others’ – i.e., foreigners’ – savings. From these fundamental changes in attitude and behaviour and their consequences have arisen potential difficulties and vulnerabilities – such as a depreciating currency – which cannot easily be eradicated.
Once Were Savers
Before the Second World War this change of attitude was very slow, perhaps imperceptible, and was halted if not reversed by the bankruptcies, unemployment, liquidation of debt and economic hardship which occurred during the Great Depression.
The experience of the 1930s scarred a generation and reinforced longstanding practices and dispositions. Accordingly, before the 1950s both the demand for and supply of both business and consumer credit was, by today’s standards, astonishingly modest. Its terms, reflecting borrowers’ morals, fears, impoverished upbringings and straightened circumstances – to say nothing of lenders’ strong aversion to risk – were stringent enough to put a modern-day Puritan to sleep. Natural rates of interest tended to be high; the ethical animus against default was still higher; and lengths of repayment were correspondingly short.
Loans for the purchase of motor cars, for example, were typically payable within two years, and for most people the 30-year home loan was an alien notion. Not surprisingly, commercial debt and credit in Australia tended during the first half of the twentieth century to be phenomena restricted to the bigger end of the business scale and the wealthier end of the socio-economic scale. Bankers bore a reasonable facsimile to James Stewart’s character in It’s a Wonderful Life; and banks’ operations were not very dissimilar to the Bedford Falls Savings and Loan which he managed. Even if they had existed, which they basically didn’t, the tenor of the times precluded leveraged buyouts and junk bonds. One therefore looks in vain for an antecedent to a Bond, Elliott, Holmes à Court, Spalvins or Skase.
Two Habits Are Born
During the third quarter of the twentieth century, however, credit in Australia gradually became much more readily available to smaller enterprises and people of modest means. This ‘democratisation of debt’ was spurred by the security and prosperity wrought by the long post-war economic boom and the fading memories of the Great Depression. It was also facilitated by the experience produced by rapidly-rising levels of home ownership; the convenience created by hire credit, debit cards and the like; and the implicit example set by increasingly-profligate governments.
Underpinning these surface developments were two deeper ones. First, as an inevitable result of the establishment of the Reserve Bank of Australia, the natural rate of interest ceased to prevail and thereby to reflect individuals’ time preferences. The rate which displaced it (the ‘money rate’) was distorted by politicians, the RBA and the commercial banks. If the money rate is set lower than the natural rate, as it often seemed to be, then the pace of credit creation quickens: seeing that it is profitable to borrow (i.e., the cost of credit is less than what can be earned on a new investment) businesses and consumers will demand loans.
The second development was the thoroughgoing conversion, during and immediately after the Second World War, of most Australian economic thinking and policymaking to the ideas of Lord Keynes. The creation of credit by the banking system and steadily easier access to credit by consumers, with which these ideas were readily compatible, was understood to facilitate the sale of another (n’th) product to one more (n’th) consumer. Such a transaction facilitates the expansion of the debt industry and creates the rationale for a subsequent relaxation of lending standards. It was also understood to enlarge GDp – then and now regarded as a key measure of economic growth and well-being. Most importantly, leveraged transactions also steadily denigrated the old culture dedicated to savings, investment and the accumulation of capital; and in time it substantially replaced the old ethos with a coalition devoted to credit, consumption and the accumulation of debt.
Hence beginning in the 1950s and persisting thereafter, inflation appeared in the supply of Australian money, credit and market for loans. In response to these factors – and in no small measure underwritten by the relaxation of banks’ lending standards, which made possible home loans and credit cards to the masses – consumers’ and small businesses’ fear of debt began to recede. The stigma attached to debt also ebbed and thereby reinforced the demand for more and more varied forms of and generous terms of credit.
Given the presence of various government regulations and prohibitions, however, the supply of consumer and small business credit generally did not match the growth of its demand. This state of affairs had two consequences. First, given Australians’ rate and pool of savings, money rates of interest were higher than they might otherwise have been. Second, credit was rationed. As late as the 1970s, for example, banks not infrequently declined mortgage applications from middle-class people with secure, well-paying jobs and long histories of meeting their financial obligations.
Two Habits Harden Into Addictions
The full ‘democratisation’ of credit and debt in Australia (and, for that matter, New Zealand) occurred during the 1980s. The liberalisation of these countries’ financial systems and institutions enabled the supply of consumer credit to increase markedly. And the continued relaxation of lending standards (almost anyone with an address, whether or not they are creditworthy in the traditional sense of that term, could now obtain a charge card), together with the fading cultural animus against debt and default, increased still further the demand for commercial credit. Not surprisingly, over the past twenty years the debt creation industry (usually described by the euphemism ‘financial services industry’) has grown rapidly and has become one of Australia’s biggest and most profitable industries. Interestingly, it remains one of Australia’s most prominent protected industries.
The liberalisation of financial systems and institutions under the aegis of a central bank (James Grant has dubbed its counterpart in the U.S. the ‘welfare state of credit’) had two immediate – and seemingly unintended but nonetheless permanent and directly related – consequences. First, consumers and businesses tended to borrow more and more; second, they tended to save less and less. Financial institutions which once refused to extend mortgages to creditworthy customers now filled the airwaves and stuffed the post boxes with information about debit cards, credit cards, higher card limits, debt consolidation loans, fixed-rate mortgages, variable rate mortgages, hybrid mortgages, negative gearing, margin lending and other forms of personal and business borrowing.
Consumers and businesses began and have continued to borrow as never before. So completely were the old prejudices against debt weakened that henceforth the typical Australian’s balance sheet would show him to be a debtor and his income statement would show him to be a spendthrift. (During the late seventies household debt stood at approximately 40% of household income, and today it is slightly more than 100%. Household savings rates have fallen in a roughly comparable fashion). Bankruptcy, too, lost much of its odium: just as it was fine to borrow it was also becoming excusable to renege on one’s financial obligations. Declarations of personal and business insolvency, despite the long boom, thus increased during the 1990s. Aggregating these developments to the saving and spending habits of Australians as a whole, less and less of Australians’ spending was financed by their own savings – and more and more was financed by others’–i.e., foreigners’–savings.
A Malevolent Legacy Is Transmitted
The development of Australia’s financial system during the twentieth century, and the attendant ‘democratisation’ of credit and debt, have had some undeniably important and lasting benefits. They have vindicated something that was a radical notion one hundred years ago: that smaller enterprises and people of modest means are sufficiently moral and responsible to repay long-term financial obligations. Whereas at Federation many Australians died without significant financial assets to their name, Australia is today one of the world’s great home-owning (and, more belatedly, share-owning) nations. Experience has demonstrated that financial responsibility is by no stretch of the imagination restricted to Collins Street, Martin Place and the wealthy suburbs. Nor, indeed, is it found disproportionately in those locations. A case can thus be made that consumers (considered as a whole) have been a much better credit risk than corporations (considered individually), and that the cautious and intelligent use of debt has enabled a significant number of Australians to improve their material standard of living.
Yet those companies and individuals which can least afford debt are often precisely the ones which borrow most and most recklessly. More generally, increases in the demand and supply of credit in the Antipodes, together with a cumulative relaxation in borrowers’ standards and creditors’ attitudes, have also left a more gradual, equally permanent and (by my way of thinking) malevolent legacy. Something which had hitherto been morally and ethically suspect has now become not just broadly acceptable but desirable and in some instances celebrated. This Something, which had hitherto been regarded as a risky pursuit best left to the well-to-do (who presumably could afford the losses inherent in risky actions, and who deserved their comeuppance if they couldn’t), has gradually become regarded as a passé yet necessary accoutrement of a middle class standard of living. Its associated techniques – initially regarded as ‘loopholes’ which one government closed but later re-opened in the face of widespread uproar – have become entrenched in tax law. More than that: this Something has hardened into a pillar of the Australian Way of Life. It occupies a place on a par with Australians’ easy-going tolerance, sporting prowess, laconic conversation, larrikin behaviour and punting at the races.
What is this malevolent legacy? The axiom that The Way To Wealth Is Debt....
continued in Part II
 
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