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The Pamphlet Collection of Sir Robert Stout: Volume 70


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When the tide of prosperity flows unchecked, when profits are made easily and to large amounts, and when employment is abundant, very little desire exists to learn anything respecting the laws which govern the movements and the increase of capital, but in a dull time like the present more than usual interest is taken in such questions. For a given period one new community may be making a much more rapid growth than another, and yet may be far behind after the lapse of a number of years. This may mean that that period of rapid growth was simply the outcome of unsound or temporary conditions. If so, during that period there ought to have been evidence of the unsound or temporary character of the causes which were leading up to such results, and to know of what such evidence consists is a distinct gain. Times of depression come to ail communities, and in new communities depressions are often very keen. Any light on the subject is valuable. In nearly all business affairs the unforeseen plays a great part, but it is to be feared that some such phrase is often made to cover events which might have been foreseen liad reasonable notice been taken of the events preceding. It may be that these notes on capital and finance in Australia may be useful in throwing light on various matters on which doubt exists.

The Importation of Capital.

The increase of capital or wealth in Australia is due to internal growth and to importations of capital from the outside world. In the course of these notes it will become necessary to point out the marked distinction that exists between the wealth of Australia and the wealth in Australia. This important distinction is too generally lost sight of. The subject of page 4 the importation of capital is a deeply interesting one. Perhaps it is the one most vital to the prosperity of Australia, and the conditions surrounding such importation are worthy of the closest scrutiny—of far more scrutiny than they have yet received. The prices of all commodities throughout the world are for ever tending to equilibrium. The value of wheat in London and the value in Australia seldom vary more than the difference representing the expenditure needful to carry the wheat to London from Australia. Naturally there is also a tendency towards equilibrium in the value—the interest—of capital throughout the world, but there is no such approach as we fina in the matter of commodities. Of course there are persons whose only idea of capital is summed up in "gold." Such persons would think that the owner of a million pounds receiving £25,000 (2½ per cent.) for the use of that money, in England, should ship out the amount of wealth in gold, and secure at least £50,000 (5 per cent.) in Australia. But the idea is not so simple as it seems. In the first place, the question of proportionate risk at once arises; in the second place, it would be quite certain that Australia would not want the gold, as she produces far more of that metal than she requires. If the capital were to be sent out, it would have to be sent out in such commodities as the people of Australia could use to advantage. It will be seen, therefore, that there is a distinct limit to the power of any country to absorb new capital. Of course a country may borrow enormous sums of money which may be wasted, and, in a given sense, that money may only too truly be said to have been absorbed. There is no limit to the extent of absorption for tie .purposes of waste, but there is a distinct limit to such absorption if the capital is to remain in existence and benefit the community in a lasting manner. If a colonising expedition of a thousand persons were to settle in an entirely new country, bringing with them wealth to the extent of a million pounds, they would find it utterly impossible to put the wealth to advantageous uses, and in 'ten years' time it would be certain that that community would be poorer. If, on the other hand, that colonising expedition possessed hardly anything but the implements of husbandry, the tools of the artisan, and the simple requisites of a new community, it may reasonably be expected that a lapse of ten years would show a pleasing growth in wealth. The line dividing what is an advantageous use of new capital from the mere expenditure or waste of new capital is often difficult to page 5 ascertain; but the resulta of the use of new capital on the wrong side of the line are often of the most calamitous character—that which at first was a benefit becomes a burden. The borrowing and expenditure of one million may be wholly and permanently beneficial, whilst the borrowing and expenditure of two millions may be temporarily beneficial but ultimately permanently injurious. We do not think that the intimate connection that has always, or almost always, existed between times of exuberant prosperity in these colonies and large importations of capital has ever been carefully studied. Certainly the public do not fully recognise that it is an absolute impossibility to borrow in excess without bringing about a time of suffering more or less severe Perhaps we are not sufficiently exact in speaking only of "borrowing in excess," since a large proportion of the new capital that reaches Australia is not borrowed, but is sent out by the owners and invested for their account It might be said that there have been two streams by which capital has been brought to Australia—(1) the borrowing stream, and (2) the speculative stream. The speculative stream often flows in an enormous volume when the borrowing stream rune nearly dry, and vice versa. It is always for our good when the British investor sends money which can be, and is, used in profitable development. But when in blind folly, as recently in the case of Victoria, as we shall see, he rushes millions into mad schemes, then the suffering which he is preparing for himself must assail us also.

Movements of Capital and Customs' Returns.

In the old countries of Europe it is impossible to trace the movements of capital by a mere examination of the returns of imports and exports. The complexities of business are so great, the stocks, shares, debentures and other securities passing from country to country, and between Europe and America, represent such vast sums, that whether capital is flowing in or out of a given country in any year is most difficult to determine. These confusions do not exist to any important extent in Australia, and consequently, our returns of imports and exports are a much simpler study.

The returns of British commerce always show an enormous excess of imports; the returns of Australian commerce generally also show an excess of imports; but the cause in one case is of a reverse character to the cause in the other case. The British excess of imports represents profits on capital lent or invested page 6 abroad; the Australian represents more capital flowing in and increasing the public indebtedness. It is often thought that the big Australian imports means the same thing—that is profit—as the big British imports mean. But the truth is very different. A study of the facts we shall put forward will show in a very marked manner the exhilarating effect of the millions of British capital which have been thrown into Australia from time to time, they will also show the necessity that exists for the moat extreme care in building up prosperity on borrowed capital. We propose to refer at some length to the comparative arrival3 and influence of new capital on the three eastern colonies of Australia, viz., Victoria, New South Wales and Queensland, but before doing so it will serve a useful purpose to examine the case of New Zealand, If a colony owes an aggregate sum which entails a yearly charge of three millions sterling for interest, then, supposing that no new capital were coming out, whatever the exports were, value to the extent of three millions would go to pay interest, and the balance only would be available to pay for imports. If, while having to pay three millions for interest, British investors lent three millions, then the one three millions would balance the other three millions, and money would be available to the full extent of the exports to buy imports. If, while having to pay three millions for interest, British investors lent six millions of new capital, then the whole value of tie exports, and a further three millions would be available to buy imports. Taking an imaginary sum, say twenty millions, as toe value of the exports, the three positions referred to would come out in the Customs returns as follow:—
Exports. Imports. Excess.
£ £ £
(1) 20,000,000 17,000,000 3,000,000 exports
(2) 20,000,000 20,000,000
(3) 20,000,000 23,000,000 3,000,000 imports

While, in actual fact, in the first case the colony exactly pays her way with the outside world, in the second case (though the figures are equal) it increases its indebtedness by three millions, and in the third case (though the excess of imports is only three millions) it yet increases its indebtedness to the extent of six millions. We should bear such facts in mind if we would learn the truth as to the financial position between a colony and the outside world.

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All statements as to the aggregate indebtedness of the whole or of any one of these colonies are only estimates. While we can measure the volume of what we have called the "borrowing stream," we cannot, except in a very approximate manner, measure the volume of what we have called the "speculative stream." Hence it is difficult to say what new capital has been obtained by any of these colonies in a given year; the Customs returns do, however, give a fairly clear idea of the amount of new capital actually imported. If the imports exceed the exports by three millions, it is tolerably safe to affirm that new capital to the extent of three millions has come into the colony, while a further supply sufficient to balance the year's interest charges has also been obtained.

New Zealand.

Persons who resided in England ten years ago cannot have forgotten the extraordinary general interest that had existed there for several years with regard to New Zealand. Its climate, fertility, its natural beauties, its general attractions both for the emigrant and for the capitalist, were well-worn themes. To the careful eye these facts are all reflected in the figures herewith given:—
Table I.–20 Years' Imports and Export.
Year. Population. Imports. Exports.
£ £
1872 279,560 5,142,951 5,190,665
1873 295,940 6,464,687 5,610,371
1874 341,860 8,121,812 5,251,269
1875 375,856 8,029,172 5,828,627
1876 399,076 6,905,171 5,673,465
1877 417,622 6,973,418 6,327,472
1878 432,519 8,755,633 6,015,525
1879 463,729 8,374,585 5,743,126
1880 484,864 6462,011 6,352,692
1881 500,075 7,457,045 6,060,866
1882 515,785 8,609,270 6,658,008
1883 537,556 7,974,083 7,095,999
1884 569,386 7,663,888 7,091,667
1885 575,755 7,479,921 6,819,939
1880 588,720 6,759,013 6,672,791
1887 601,929 6,245,515 6,866,109
1888 604,547 5,941,900 7,767,325
1889 616,559 6,297,097 9,339,205
1890 625,508 6,300,577 9,824,109
1891 634,058 6,503,849 9,566,397
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We give the figures representing the population, since this is a most important element in connection with the arrivals of new capital. A million pounds borrowed by a community of 250,000 persons—an average of £4 per head—will produce & widely different effect to that which would be produced if the population were twenty times as large. In the latter case, the average would be only 4s. instead of £4 per head. In the small community the sum of one million would create very marked results; in the large community it might scarcely stir the commercial atmosphere. The second table which we now give shows the movements of capital into New Zealand as represented by the excess of imports:—

Table II.—Imports of Capital.
Year. Excess of Imports. Excess of Exports. Excess por 1000 Population.
Imports. Exports.
£ £ £ £
1872 .... 47,714 .... 170
1873 854,316 .... 2,817 ....
1874 2,470,543 .... 7,222 ....
1875 2,200,545 .... 5,854 ....
1876 1,231,706 .... 3,087 ....
1877 645,946 .... 1,645 ....
1878 2,740,138 .... 6,328 ....
1879 2,631,459 .... 5,649 ....
1880 .... 190,681 .... 393
1881 1,300,179 .... 2,786 ....
1882 1,951,262 .... 3,781 ....
1883 878,039 .... 1,632 ....
1884 572,221 .... 1,023 ....
1885 659,982 .... 1,146 ....
1886 86,222 .... 146
1887 .... 620,654 .... 1,032
1888 .... 1,825,425 .... 3,016
1889 .... 3,042,168 .... 4,930
1890 .... 3,523,532 .... 5,629
1891 .... 3,062,548 .... 4,830
It could be said with some truth that these figures contain in a concise form the commercial history of New Zealand for twenty years. In 1873 British capital began pouring into that colony at the rate of £2817 for every 1000 of the population, and for the next nine years (excepting a remarkable break in 1880) the flood of wealth continued to flow, with fluctuations. it is true, page 9 but representing an enormous total, and averaging about £4000 per year for each 1000 of the population, or probably not less than £16 to £18 for each male adult In 1883 it was evident that a change was taking place—less capital was coming. By the close of 1887, the stream had run completely dry. In 1887, and more markedly in 1888, it became evident that not only was there no new capital coming out, but that the British investor was not finding enough new capital to balance the colony's indebtedness for interest. The last three years it would appear almost doubtful if the British investor has invested anything in New Zealand, and that that colony has been called upon to pay unaided the whole of the interest on her public and private indebtedness. During the past three years New Zealand has paid an average of £8,200,000 in excess of the value of her imports. The difference that lies between years when £4000 per 1000 of population is flowing in and when £5000 is flowing out, reaches £9000, or about £45 a year for the average family of five persons. Does not everyone, know how that up to about 1882 New Zealand was enjoying a state of extraordinary prosperity? Population increased, towns sprang up, employment was plentiful and well paid, enterprise was everywhere, fortunes in property were rapidly made, companies paid handsome dividends. After 1882 things seemed to go gradually wrong; the summer days faded away, to be followed by the chilly days of autumn, and those by the bitter days of winter. Scarcely an industry, a bank, a company, or business of any kind, scarcely even a private individual who was not subjected to severe strain and painful loss. A glance at the population figures shows the difference of the periods we have referred to:—
No. Per cent.
Growth of population five years ending 1876 132,000 50
Growth of population five years ending 1881 102,000 26
Growth of population five years ending 1886 88,000 18
Growth of population five years ending 1891 45,000 7

During these respectivo periods the increase of population averaged per year 10.0, 5.20, 3.60 and 1.40 per cent. The paltry growth during the past five years indicates how keen the struggle for existence has been. Indeed, since 1885 there has page 10 been a steady exodus from New Zealand, in all no lesa tino 17,600 persons have left that colony in excess of the number of those who have arrived, showing that so far from being able to take new colonists New Zealand has not been able to find work for her own natural increase. Reference to the first table will show with what pluck the New Zealanders met the adverse times. They set resolutely to work, and developing the resources of their magnificent country, they have during 1889, 1890 and 1891 produced, exported and sold to the rest of the world nearly three million pounds' worth of commodities per year over and above their previous average. Though the strain of changed conditions is not yet worn out, the financial position of New Zealand to-day must be infinitely superior to what it ever was in those years of vast borrowings. Viewing now as a whole those years of exuberant prosperity and those of painful suffering, it is plain that it would have been for the best interests of New Zealand if her importations of capital had been on a far smaller scale. They exceeded the absorbing power as far as possibilities for actual development went. New Zealand has completed an experience which carries lessons for all Australia, and, as we shall see, Australia needs the lessons.