The Money Men Read online

  Watt played another key role in the negotiations over federal–state financial relations that marked the expiration of the compact that had determined the distribution of funds between the two. It had been agreed as a grand compromise at the time of Federation that the states would receive two-thirds of the Commonwealth’s customs and excise duty for the next decade, after which Commonwealth–state financial relations would be reviewed. Failure to reach agreement on this issue had very nearly derailed Federation, and now it fell to Watt and his contemporaries to strike a new settlement.

  Initially, Watt strongly opposed a simple per capita payment from the Commonwealth to the states. He saw this as a way of making the states mendicant, and he knew that the customs and excise revenue would continue to grow strongly. The desire of the states to have access to a growing tax revenue base was no less in the first decade of the twentieth century than it is in the twenty-first century. In the end, Watt accepted a per capita payment, but only on the basis that there would be a referendum to ensure that the payments were enshrined in the Constitution and could not be changed at the whim of the Commonwealth. Watt struck this agreement despite the fact that it meant a loss of revenue to Victoria. Unwilling to wind back his commitment to state development, Watt had to develop new revenue sources, leading him to attempt to introduce a land tax in Victoria for the first time; he was also motivated to beat a federal Labor government to this, ensuring that the land tax field was covered by the states and not the Commonwealth. Negotiating the introduction of land tax in a parliament dominated by rural members required considerable political skill, which Watt displayed as he guided the Bill through the Legislative Assembly. But he could not win the day in the Legislative Council, where you still had to be a landholder to be a member. The Upper House killed Watt’s proposal.

  Ultimately, the people also killed the proposal for per capita grants to the states to be enshrined in the Constitution. Despite Watt throwing himself behind the ‘Yes’ campaign, the Australian people were already showing the type of reluctance to approve referenda that they would exhibit for the next century, and the proposal was defeated, including in Victoria. In response, the Commonwealth Government agreed to guarantee a 25-shilling-a-head payment for each state for the next ten years, meaning that the vexed issue of Commonwealth–state financial relations was again put in the ‘We’ll sort it out another day’ basket. In addition, the new federal Labor government under Andrew Fisher imposed a Commonwealth land tax, which made Watt’s push for a state land tax redundant.

  Watt ‘built on his successful management of Victorian finances during this period, and his grasp of national finance as a dominating figure in Commonwealth–state relations’.8 He fiercely resisted attempts by the Fisher government to take over functions of the state governments—interestingly, this resistance would ebb when he became the Commonwealth treasurer—but he did lead discussion at the 1912 Premiers’ Conference about how powers could be voluntarily transferred from the states to the Commonwealth. Watt was a strong supporter of state rights within the federation. He held the view that more powers would and should evolve voluntarily to the federal government over time as the new nation matured.

  Watt successfully introduced preferential voting in Victoria for the first time. He saw this as an important mechanism for the non-Labor forces to be able to work together to ensure the defeat of Labor. He would later be instrumental in its introduction at the federal level, at the behest of the emerging Country Party.

  As premier, Watt also took the initiative on a truly national immigration scheme. Despite the Constitution giving responsibility for immigration laws to the Commonwealth, the administration of immigration was still largely a state affair. Watt convinced NSW premier William Holman to amalgamate the NSW and Victorian immigration offices in Great Britain, from where the vast majority of immigrants were drawn. As Watt’s biographer John Anderson writes:

  this was not only an optimistic first step towards ending the costly competition for immigrant settlers among the various states, but also towards eventual Commonwealth responsibility for immigration. The Victorian Premier could recognise the practical advantages of giving the Federal Government the lead in order to assist the states, however much he remained opposed to Federal activity which weakened them in other spheres.9

  The 1914 Premiers’ Conference was Watt’s last, and ‘in several aspects it was the crowning point of Watt’s career at the state level’.10 He dominated the conference. Watt was instrumental in negotiating the Murray Waters Agreement, which determined the respective rights of NSW, Victoria and South Australia to water from the Murray River. He also proposed a National Debt Commission, which would include two representatives from the Commonwealth and three from the states, and which would manage debt on behalf of the nation’s governments. The idea was rejected by the Commonwealth and the other states, in what was the first substantial clash between Watt and federal treasurer Sir John Forrest. But it did not die—parallels can be seen with the Loans Council established by Sir Earle Page when he was federal treasurer a decade later, which survives to this day.

  Watt came under considerable pressure from his party to transfer to the Commonwealth Parliament, as he was widely seen as the natural successor to Alfred Deakin as leader of the Liberal Party—Watt would be unable to take up the position on Deakin’s retirement unless he was in the federal parliament. So in 1914 he ran for the very safe conservative seat of Balaclava, based in the Melbourne suburb of Sandringham, and easily defeated the then young Labor candidate John Curtin. Nationally, however, Labor easily defeated the government of Sir Joseph Cook, and Andrew Fisher again became prime minister as Australia marched towards World War I.

  From within the opposition, Watt stridently supported the war effort and argued for conscription. He got himself into difficulty by accusing the pacifist Labor MP Frank Brenan of being a ‘pigeonlivered’ coward. Brenan then said he would enlist to fight if Watt would do the same, and subsequently turned up at the recruiting office—Watt did not. This caused Watt a lot of embarrassment, as he was not beyond the age of recruitment and was without ministerial responsibilities. He was only partially saved from charges of hypocrisy when the pro-conscription Holman said that Watt’s most effective contribution to the war effort would be in parliament and not on the front line.

  In 1915 Fisher resigned the prime ministership, feeling the pressure of wartime leadership. His deputy, Billy Hughes, was unanimously elected by the parliamentary Labor Party as his replacement. Hughes was an enthusiastic proponent of the maximum war effort, and in 1916 he reached the view that conscription was a vital element of a total commitment to winning the war. But Hughes could not get parliamentary approval for conscription and therefore called a referendum, which he narrowly lost. Hughes’ fervent support for conscription pitted him against his own party and led to the Labor Party expelling its leader and the sitting prime minister. He initially formed a Cabinet of supporters who followed him out of the Labor Party, but it was clear that a more stable government was needed.

  Watt played an important though not pivotal role in the negotiations between Hughes and the Liberal Party opposition that led to the formation of the Nationalist Party. Despite his misgivings about Hughes’ management style, Watt formed the view that it was best for the incumbent wartime prime minister to continue in the office, and he stared down efforts by former Western Australian premier Forrest, Liberal politician James Cook and former Victorian premier Sir William Irvine to seize the prime ministership for themselves, decreeing that he and his supporters would only join the government if Hughes’ tenure continued.

  Forrest had become famous as an explorer of Western Australia’s interior and had been the state’s first premier, as well as its only premier as a self-governing colony. His ten years as premier had seen Western Australia grow rapidly as he adopted the model of large public works projects and aggressive land release. He was also one of the fathers of Federation, having delivered Western Austral
ian support for it and participated in the constitutional conventions. He’d entered the federal parliament in 1901 and had held a range of portfolios, including that of treasurer three times. So while prime minister Hughes recognised Watt’s abilities and preferred to make him his treasurer, a personality as large and popular as Forrest was too hard for him to resist. Watt had to settle for a lesser role, joining the Cabinet as minister for works and railways. He was responsible for the completion of the transcontinental railway and legislated for its sensible harmonised regulation across state boundaries.

  When Hughes lost a second referendum on conscription, he kept a promise made during the referendum campaign and tendered his resignation to the governor-general, Sir Munro Ferguson, who promptly sought the counsel of senior ministers. Watt advised him not to call on treasurer Forrest to form an administration, despite Forrest making it clear he was available to serve, but instead to ask Hughes and the existing ministers to carry on. The governor-general accepted this advice, and the outgoing members of the Cabinet were all sworn in again.

  By this time, Forrest was ailing and Watt was growing increasingly frustrated with the treasurer’s stewardship of the government’s finances. The two had clashed over the proposed establishment of a National Debts Commission when Watt was Victorian premier as well as on a number of occasions after Watt’s ascension to the Cabinet. So Watt privately urged Hughes to remove Forrest. No doubt Watt knew he would likely be called upon to take the office if Forrest was moved on, but he was also genuinely perturbed at Forrest’s administration of the Treasury portfolio.

  Hughes, with Watt’s agreement, hit upon an ideal solution to this conundrum. On 6 February 1918, it was announced that King George V, on the advice of prime minister Hughes, was elevating the treasurer to Baron Forrest of Bunbury in the Commonwealth of Australia, making him the first of three Australian treasurers to be ennobled—the others were Stanley Melbourne Bruce, who became Viscount Bruce of Melbourne, and Richard Casey, who became Baron Casey of Bengal and Berwick. Forrest resigned the Treasury portfolio and sailed for London to take his place in the House of Lords. He never made it, however, dying of cancer of the temple en route. Watt was subsequently commissioned as federal treasurer in March 1918.

  A Careful Administration

  Watt had been treasurer for a month when Hughes left for Europe to represent Australia in discussions about planning for postwar peace. Hughes would not return for seventeen months, making Watt Australia’s longest-serving acting prime minister. As economic historian John Hawkins points out, Watt’s term in charge of the administration of the nation was as long as the combined period in office of Watson, Reid, Page, Fadden and John McEwen. Because he acted in the role and was not commissioned in his own right, Watt does not have his name recorded on our national list of former prime ministers, and has not been as well remembered as he might have been.

  Watt brought a sense of careful administration to the government. Cabinet meetings became more regular, and there was full discussion of every item and the careful recording of decisions. This was a considerable change from Hughes’ more relaxed Cabinet processes.

  Watt now had to manage the huge increase in costs to the government that had accompanied the war, which would last many years. Watt was deeply worried that the return of thousands of ex-servicemen combined with the end of munitions production would lead to an economic downturn. He was also rightly concerned that the money in the international debt markets would be very tight in the immediate postwar years, and that the funds raised through bond sales during the war would only keep the government financed for a finite period of time. Watt decided that tough fiscal measures were needed. In addition, even though the war was ending, he wanted to keep as many of the wartime economic controls in place as possible, in order to maximise the financial levers at his disposal. The War Precautions Act 1914, with its powers over the pooled marketing of produce and shipping activities, was continued into 1920. The maintenance of restrictions on selling rural produce and of price controls on staples such as meat were significant factors in the rise of the nascent Country Party at this time.

  Watt also embarked on a series of measures to reduce spending and increase revenue. A royal commission into potential expenditure cuts was established in 1918, a forerunner of the modern commissions of audit sometimes called up to fulfil the same role. Meanwhile, Watt imposed tax increases that were punishing by any measure: a 30 per cent increase in personal income tax and a 20 per cent increase in land tax, accompanied by increases in postage charges and customs and excise.

  As Watt dealt with these issues throughout 1918 and 1919, the challenges created by Hughes’ absence were greater than those that would normally be posed by a travelling prime minister. The prime minister and his treasurer quickly came to long-distance blows.

  Hughes vs Watt

  It is clear that a proper conversation did not take place between Hughes and Watt about the processes for managing decision-making during the prime minister’s absence. Hughes was dealing with big issues: he demanded a place for Australia at the peace-negotiations table, rather than being represented by the British Government; he wanted punishing reparations to be paid by the Germans to cover the war costs incurred by the Allies; and he was aggressive in pursuing Australian territorial claims in the Pacific (for example, asserting sovereignty over New Guinea and Nauru). However, while this was the agenda of prime minister Hughes, it was not necessarily that of his Cabinet. There had been no discussion of Australia’s negotiating strategy before Hughes’ departure, and the Cabinet members, led by Watt, were increasingly alarmed about what they read in the press about Australia’s position. In addition, as well as wanting autonomy in representing Australia overseas, Hughes demanded that the Cabinet communicate its decisions to him in London for final approval before implementation. By contrast, Watt took the strong view that apart from policy areas that the Cabinet had specifically considered and decided to delegate to Hughes, all others areas remained his responsibility as acting prime minister, together with the Cabinet.

  Watt’s position in this dispute was partly motivated by his longstanding support for the principle of Cabinet government. As premier and acting prime minister, he was an inclusive and consultative chair of Cabinet. However, it is difficult not to conclude that he was also motivated by a desire for status and a fundamental mistrust of his prime minister’s motives and judgement. It did not take long for the telegram traffic between Melbourne and London to bristle with tension.

  Watt was polite enough at first. He had been suspicious of the fact that Hughes had sailed for England with Sir Denison Miller, governor of the Commonwealth Bank, on board his ship, making him think that Hughes was attempting to conclude some sort of financial deal behind his back.11 On 24 May 1918, he cabled Hughes: ‘Re finance, hope you will not mind me suggesting you not do anything involving finance on a large scale without consulting me.’

  By June, Hughes was expressing frustration that the Cabinet was making decisions without sending them to him for approval. He sent the following message after learning of the Cabinet’s decision to extend Australia’s wool-buying agreement with the United Kingdom to a year beyond the close of the war:

  I have received no cables from you since my departure from America. Should be glad to be kept closely in touch with the Government action and policy. Most embarrassing to learn of the things done by columns in the English press. I suggest, in order we may be able to represent Australia effectively, all important decisions of Cabinet be communicated to me before action is taken unless subject matter is such as precludes delay.

  This was not in Hughes’ remit for the negotiations. For the Cabinet, making such a decision was a reasonable exercising of its powers. However, given the overwhelming importance of wool exports to the Australian economy of the day, and given Hughes was on his way to the United Kingdom when the negotiations were concluded and announced, it does seem remarkable that Watt didn’t even inform Hughes about his inten
tions, let alone consult him.

  Three days later, Watt stopped hiding his frustration with his leader, replying by cable: ‘Astonished at your suggestion that important decisions of Cabinet be communicated to you before any action is taken. I think you must trust myself and other colleagues to tell you of matters if it is considered advisable.’

  Watt’s decision to extend the wool agreement continued to rankle with Hughes, and for some time afterwards he was not backwards in needling his deputy about it. Months later, he cabled Watt to say that ‘wool is the key to whole situation here … if contract had not been extended while I was on my way to England, little or no difficulty would have been met in selling all our other products, metal and c[oal] at satisfactory prices’.

  By September, Watt in turn was expressing frustration that Hughes was not keeping the Cabinet properly informed, echoing Hughes’ earlier complaint that he was finding out too many things for the first time in the newspapers:

  Ministers naturally very pleased with rapid changes in war situation but are obliged to take all our information from the press. Ordinary war cables are generally four or five days old. Can you arrange to keep us posted, so that parliament, which is sitting, may at least receive official confirmation of press cables?

  In November, Hughes cabled Watt to consult with Cabinet on the approach to the peace negotiations, but he didn’t wait for a reply before announcing Australia’s position in Europe, fuelling Watt’s fury:

  Immediately on receipt of your telegram 6th November Cabinet called together. While considering it we were apprised of your utterance on the question, as telegraphed by Herald representative. This greatly embarrassed us, as I understood you would await colleagues’ views before defining any public utterance …