The Secretary to the Treasury has forwarded me the following memorandum for advice:

A cablegram has been received from the Right Hon. S. M. Bruce, dated 15th June, dealing with the application of sinking fund moneys in the purchase of securities on the London market.

In the course of this cablegram it is pointed out that in the present circumstances it is not desirable to use funds for the purchase of either 5% or 3¹⁄₂% securities. The 5% stocks are no longer regarded as index securities, while the 3¹⁄₂% stocks are short dated securities which do not materially affect the terms on which future long term conversions can be floated.

Mr Bruce urges that we should concentrate in the future on the 4% 1955/1970 stock. This is a New South Wales security and it is the usual practice to apply the sinking funds of the Government to the re-purchase of securities of that Government. The available sinking funds in respect of New South Wales are limited, and Mr Bruce desires to know whether means can be found for using sinking funds of the Commonwealth and the other States in the purchase of these 4%’s. The following is an extract from his cablegram:

As 4 per cent securities on which we should concentrate in the future are Commonwealth securities issued only on behalf of New South Wales, question arises whether means can be found for using sinking funds of Commonwealth and other States in the purchase of these 4 per cents.

Sub-section 5 of section 18 National Debt Sinking Fund Act and corresponding clause Financial Agreement may be considered to preclude investment of sinking funds of the Commonwealth and States other than New South Wales in these securities. If so, the only possible means of using the sinking funds of the other States for this purpose would appear to be by way of advance of these funds to New South Wales Sinking Fund. Commonwealth Sinking Fund, however, could apparently be used for the purchase and cancellation of these 4 per cents, which, though issued by New South Wales, are Commonwealth securities. This would involve an adjustment of liability for debts between the Commonwealth and New South Wales.

I suggest that these questions be explored with the law officers with a view of finding means for concentrating the sinking funds in my hands on the purchase of 4 per cent securities maturing 1955–1970.

I shall be glad if you will examine the suggestions of Mr Bruce and advise me of the legal position.

The relevant portions of section 18 of the National Debt Sinking Fund Act 1923–1930 are as follows:

1. Subject to this section, the Commission may invest any moneys standing at the credit of the National Debt Sinking Fund in the purchase of any securities of, or guaranteed by, the Government of the United Kingdom, or the Government of the Commonwealth, or the Government of any State, and may at any time sell such securities.
2. The Commission shall not purchase any securities of, or guaranteed by, the Government of the United Kingdom, or the Government of any State, except within three years of the date of their maturity.
3. …
4. …
5. The Commission shall not invest moneys in accordance with this section unless it is satisfied that greater benefit will accrue to the National Debt Sinking Fund by so doing than would be the case if the Commission were to repurchase or redeem Commonwealth securities, or to redeem any other portion of the debt, in accordance with section seventeen of this Act.

Clause 3 of Part III of the Financial Agreement provides for the establishment of sinking funds for the redemption of the debts of the States, or of loans raised by the Commonwealth on behalf of the States.

The sinking fund contributions made under the clause, and redemption funds transferred from a State under the clause, are payable to the National Debt Commission, and paragraphs (o) and (p), which are as follows, provide for the disposal by the National Debt Commission of the sinking fund contributions coming into its hands under the agreement:

(o) Sinking Fund contributions made under this Agreement in respect of the debts of a State and funds of that State transferred to the National Debt Commission under sub-clause (1) of this clause will not be accumulated but (subject to sub-clause (m) and (p) of this clause) will be applied to the redemption of the public debts of that State and of loans raised by the Commonwealth for and on behalf of that State, or to the purchase of securities issued in respect thereof.

(p) If at any time it is deemed inexpedient by the National Debt Commission to apply sinking funds in the manner set forth in sub-clause (o) of this clause, such funds may be temporarily invested in any securities in which the National Debt Commission is from time to time by law authorised to invest moneys.

It will be seen that the sinking fund contributions made in respect of the debts of any State are to be applied to the redemption of the public debts of that State, and of loans raised by the Commonwealth for and on behalf of that State. It is not competent for the Commission under paragraph (o) to use the sinking fund contributions made in respect of the debts of one State for the redemption of the public debts of another State, or of loans raised by the Commonwealth for and on behalf of that other State.

Paragraph (p), however, permits the National Debt Commission, where it is of the opinion that it is inexpedient to apply sinking funds in accordance with subclause (o), to invest such funds temporarily in any securities in which the Commission is authorised by law to invest moneys.

In order to ascertain in what securities the Commission may lawfully invest moneys, reference must be made to section 18 of the National Debt Sinking Fund Act 1923–1930, which is quoted above. The power of the Commission to invest moneys under subsection (1) is made subject to the other provisions of section 18. By subsection (2) the Commission is forbidden to purchase any securities of, or guaranteed by, the Government of the United Kingdom, or the Government of any State, except within three years of the date of their maturity. If it is considered desirable that sinking fund contributions made in respect of the debt of a State other than New South Wales should be invested temporarily in the purchase of Commonwealth securities which were issued in connexion with a loan raised on behalf of the State of New South Wales, it does not appear that subsection (2) is any bar to such action, inasmuch as the securities proposed to be purchased, although having more than three years to run before maturity, are not securities of, or guaranteed by, the Government of the United Kingdom or of a State.

The temporary investment mentioned above is prohibited by subsection (5) of section 18 unless the Commission is satisfied that greater benefit would accrue to the National Debt Sinking Fund by such investment than would be the case if the Commission were to repurchase or redeem Commonwealth securities, or to redeem any other portion of the debt, in accordance with section 17 of the Act.

It therefore appears that if the Commission is satisfied, as specified in subsection (5), sinking fund contributions held by the Commission under the agreement in respect of the debt of a State other than New South Wales may be temporarily invested in securities of the Commonwealth issued on behalf of New South Wales, and may under paragraph (p) of clause 3 of Part III of the agreement be temporarily invested.

I see no authority in the agreement or elsewhere for the Commission to make advances out of the funds in its hands which have been contributed by, or in respect of the debts of, a particular State for the purposes suggested in the cablegram received from the Resident Minister in London.

If sinking funds of the Commonwealth are used in pursuance of section 17 of the Act in redemption of the loans raised on behalf of the State of New South Wales, the securities purchased would require to be cancelled. It would therefore appear desirable, in order that one State should not benefit at the expense of the Commonwealth and other States, that an agreement providing for the necessary adjustments should be entered into between the Commonwealth and that State. Any agreement so made would require ratification by the Parliaments of the Commonwealth and of New South Wales.

[Vol. 26, p. 307]